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Too Soon for 30% Weighting for Social Value in Tenders

I spoke recently at the UK Universities Procurement conference and as usual, had some interesting conversations around the margins of my session. In one such discussion, a sustainability person from a major university told me that his organisation was looking to increase the percentage of marks awarded to “social value” in tenders from 20% to 30%.  I must admit this surprised me, and I am certainly not in favour of this at the moment. It feels like we are heading for another new category of Bad Buying stories – where firms win tenders based mainly on their social value proposals rather than on their capability and the real “value” of their offering.

I have been consistently in favour of including social value in public procurement. But we haven’t been doing it for long, and I have not seen much analysis of exactly how successful it has been to date. So it seems too soon to be putting quite so much emphasis on that at the expense of cost, wider quality or service issues, supplier innovation and so on.  I would personally like to see 10-15% of the marks allocated to social value until we have more evidence.

One key concern is that organisations in my experience sometimes don’t really understand their own evaluation processes. My question to anyone thinking of moving to 30% is this. Given the evaluation methodology you are using, how much more are you prepared to pay for a proposal that scores 100% on social value creation as against one that scores 50%? Because that is what your evaluation scheme actually determines.

Some might say “ah, but social value has a real financial benefit too”.  In general, that is simply not true – certainly for the contracting authority itself. Read my article from a year ago here if you want more to support my claim). A quick extract – “In almost all cases, this is not real money. “Wooden dollars” as someone described it to me recently. It does not show up on the buyer’s P&L or balance sheet. You can’t spend these “financial” benefits on more road maintenance, a new operating theatre, or re-opening a drop-in centre for vulnerable people. No cash appears in the CFO’s hands.

The other big problem is that where there are benefits from social value, they often don’t go to the actual buyer. So if a university is accepting something like “employing more apprentices” as a positive social value factor, then how exactly does that benefit the university itself? Maybe it is good for society more generally, although big firms always employ apprentices so whether this is real incremental benefit from this contract is often questionable. We are also building in a barrier for smaller suppliers when we do this.

If we go down the 30% route, I can see some scandals emerging where contracting authorities end up paying way over the odds for goods or services, and their defence is “but the social value was great – look, the supplier painted a scout hut”. Yes, but was that worth the extra million you paid to a supplier who turned out to be not very good at the core work?  Look at the Scottish ferries fiasco if you want an example of what can happen when a basically incompetent supplier wins a contract for non-value for money reasons.

I don’t want to become an “anti-social value” campaigner, but I really don’t like the idea of 30% of evaluation marks going on social value until we understand a lot more about best practice and how we can get the most out of this initiative for the taxpayer. And we’re not there yet.

However, there is one more innovative option. You could specify a fixed price and then evaluate on service, social value and other factors. I have heard of this being done and it has some merits. So you might say “we are prepared to pay £500K for this service – now tell me how you will do it and what social value you will provide”. In that case, I’m open to a 30% weighting.

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Yet Again, a “Sophisticated” Fraud Hits the NHS

The UK’s National Health Service has for years been a “good” source of Bad Buying fraud and corruption stories.  There are several reasons for that. Firstly, it is huge organisation, employing some 1.3 million people. Secondly, it actually has a pretty good counter-fraud unit, and when fraudsters are discovered, they are often prosecuted, so the news becomes public domain, whereas private sector firms often hush up embarrassing cases. But it has to be said – the cases I’ve seen over the years often also suggest that too many NHS organisations have very weak policies and processes around procurement and payments.

The latest case reported in the media recently saw Thomas Elrick, 56, jailed for 3 years and 8 months.  He was assistant managing director for planned and unscheduled care at Harrow Clinical Commissioning Group (CCG) where he had the authority to approve invoices up to £50,000. That organisation is a purchaser rather than a direct provider of healthcare – so it buys services from providers on behalf of the local citizens. 

Elrick created a company, Tree of Andre Therapy Services Limited, using the name of his husband (who knew nothing about it) as the owner, and invoiced the Trust for services that were never provided. Between August 2018 and December 2020 he authorised payments totalling £564,484. To cover his tracks, he also sent an email from the account of his dead wife which claimed to show details of patients the firm had “treated”.

Elrick spent over £100,000 on holidays to Dubai, Hong Kong, the Maldives, Singapore and Switzerland, and also spent just under half a million on shopping, with Amazon, Apple and David Lloyd gyms. But eventually a smart colleague decided to look up the Care Quality Commission accreditation for this firm and found of course that it did not have one, and then the connection to Elrick was found.

There is an interesting angle here in terms of his response. In a statement after he was sentenced, Elrick said “I wish I could turn back the clock but I know that I cannot and I sincerely apologise…  I am not a bad person. I believe that I am fundamentally a good person who made bad decisions, for which I take sole responsibility.” 

Self-delusion is an amazing thing, isn’t it?  I stole half a million from the NHS but I am “fundamentally a good person”.  The mind of a fraudster is often interesting, I suspect.   

But we have to ask how on earth this fraud was possible?  In my Bad Buying book, I give seven key anti-fraud precautions every organisation should follow and this case study and organisation broke several of them. There was no check on the onboarding of a substantial new supplier, which had no trading record, no CCG listing and a conflict of interest in the ownership (although that might not have been easily spotted). There was no check apparently that services paid for were actually received; and of course most fundamentally one person could conduct the whole pseudo-procurement process and authorise payment of large invoices without anyone else being involved or approving the spend. “Separation of duties” and all that.

This was not a sophisticated fraud. It was enabled by an incredibly weak process that was wide open for exploitation by anyone with a modicum of intelligence (and a lack of morals).  Personally, I would fire the CFO and the Procurement Director at the Trust for allowing this money to be stolen so easily.  But this is the case in so many organisations and so often – basic precautions against fraud are simply not put in place. Is it ignorance, laziness, or maybe a management team that wants to leave the door open just in case they want to do something dodgy themselves? Who knows.

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Asahi Centralises Procurement – Will It Work?

Japanese brewer Asahi is setting up a new global procurement operation in Singapore, according to the Food Navigator Asia website. The target is to save $100 million a year from 2024. The new CEO of the operation is Tomas Veit, who told the publication, “the key focus is currently on creating a strong and capable team to provide efficient and effective services”.

But the bigger issue is the internal dynamics in the firm. What worries me here is this statement from Atsushi Katsuki, President and CEO, quoted in the company’s press release.

“Asahi Global Procurement is the first functional organization of the Asahi Group to be integrated globally. We view this as an initiative to elevate our management to a new level and promote the advancement of overall management. We expect the consolidation of category management and sourcing functions on a global scale to not only create group synergies, but also contribute to solving various issues in the global environment and society, leading to the promotion of sustainable procurement.”

So procurement is the “guinea pig”,  the early adopter of a new corporate strategy of more centralisation. I understand why firms often see procurement in that way – it looks like an “easy” area to start the centralisation journey and show rapid savings. But any business school or CIPS course would suggest that procurement strategy must be aligned with corporate strategy. In cases like this, the corporate strategy isn’t changing, and countries or regions still have considerable autonomy. However, the procurement strategy is now mis-aligned, so it is an outlier or an experiment in effect.

That is not to say it cannot work. But Veit will have to be prepared for considerable push-back from those who hold power locally. They won’t just be concerned about losing some power to choose suppliers and make procurement decisions – they will see this as the thin end of the wedge, a wedge that could lead to much more significant power loss if procurement is successful.

There is also the supplier side to consider. Many years ago, I was trying to set up a Eruopean procurement capability for the Dun & Bradstreet Group (when it included about 10 different businesses). We spent a fortune on car hire, so that looked like a fairly easy quick win. I negotiated a great deal with Avis for all the major European countries, leveraging our spend across the continent. The senior European account director for Avis assured me she had given me the very best pricing.

After a few months, I asked our businesses if they were using the deal. No, said our Spanish operations. They weren’t. So which supplier were they using, I asked?  “Oh, we’re using Avis, we just get a better deal from the local operation”, they said. That taught me a good lesson – sometimes suppliers aren’t set up to implement global or regional deals. So that’s something for Asahi to consider.

There is also an interesting dilemma for the CPO. I am sure that there is significant value that a central function can bring. That includes areas such as developing skills across the function, potential harmonisation of systems and data, support in specialist areas such as commodity price forecasting, and of course developing strategic and long-term initiatives with the most important global suppliers. It is interesting that sustainability is mentioned explicitly in the press release above; that is certainly an area where I can see some strong potential actions and benefits.

However, the new central team might struggle to show direct “savings” arising from this type of work. Because of that, there may be a temptation to look for those apparently obvious quick win, leverage-based, price-focused savings – my car rental deal, for instance. And those projects can be exactly those that will run into local opposition.

My advice to Veit therefore would be to look for a few large potential quick wins in areas that are not too contentious. Major IT contracts perhaps – some global licence deals or a major deal with a hosting service? Or areas where you are not even asking people to change suppliers. A global set of route deals with Japan Airlines maybe? Then combine that with delivering longer-term value in terms of the longer-term imperatives. Work hard to get the local or regional barons on your side (they can get you fired if you don’t).  And remember that bigger deals aren’t always better deals.

But Veit does have one major advantage – several years’ experience already with the firm. That gives him a much higher chance of success than a CPO brought in from outside with what might turn out ot be a controversial mandate. We wish him luck and success. 

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