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Want Some Cheap Consulting? How the Big Firms Game the Supplier Selection Processs

Psssttt! Wanna buy a cheap consultant? Top quality, only £20 a day. Or, tell you what, you can have some for a tenner if you like. Yeah. Just £10 a day!

The UK’s central government procurement arm, Crown Commercial Services, has various frameworks in place that enable users to select and engage from a list of management consulting firms.  So how was it that the rate card for the different levels of consultants on certain “lots” includes the bargain rate of £10 a day for a junior consultant from one of the world’s very biggest and most highly regarded strategic consulting firms? Or how about the same rate for a junior and only £30 a day for a senior consultant from one of the big four audit / consulting giants?

What’s going on here? Well, it is almost certainly related to how the firms “gamed” the evaluation process in order to win a place on the framework list of approved suppliers. CCS has had some unhappy experiences with consulting frameworks, including having to pull an entire exercise in 2017 when it became clear that the big firms weren’t going to make it onto the list!

Generally, when price is evaluated in the tender (along with quality and other service factors), the buyer asks for day rates for the different levels of consultant – perhaps junior, senior, manager, director, partner. Then there is some sort of adding up process, maybe weighted to reflect different likely use of the different levels, to arrive at an overall cost.

So let’s suppose your rates are something like this,

Junior                    £1000

Senior                   £1200

Manager              £1400

Director                £1800

Partner                 £2400

Let’s also suppose that the buyer is weighting each at 20% to arrive at a composite average rate – in our case here, that would be £1560 per day.

I might worry as a bidding firm that such a number could be on the high side. So how can I adjust that, without actually reducing my profit margins (and hitting my £600K a year partner’s salary)? Well, we are unlikely to be putting many Partner level people into these projects, particularly for government work. So we can take a bit of a hit on that rate. And as for juniors – well, let’s just work on the basis that when the Department for Internal Affairs comes looking for a proposal, we’ll say we haven’t got any available. Let’s face it, clients don’t really want the graduate trainees who can barely run a spreadsheet anyway.

But we might want to up the middle levels a bit to recover the lost margin on Partners, as that is where we really will be supplying people. So how about this?

Junior                    £0 (free!!)

Senior                   £1300

Manager              £1500

Director                £1800

Partner                 £2000

Our average rate now is £1320. That’s a 15% improvement in overall pricing and a lot more marks when it comes to the evaluation. And in reality, the likely revenues if anything might be a touch higher.

So why did CCS allow this to happen in this particular case? Well, it might have been difficult to stop – you can reject “unfeasibly low” bids under EU procurement regulations but the overall prices aren’t unfeasible. And of course CCS desperately wanted these firms on their list, so users will access the contract and CCS will make their margin, which funds the organisation.

Maybe all this doesn’t really matter, but it is worth remembering the lengths and the creativity that the partners in these firms will go to in order to protect their £500,000 – £1 million+ annual salaries. But do think carefully about your evaluation process if you want to avoid this sort of game-playing.

Finally, if you want to hear more interesting stories about buying professional services, positive and negative, I’m a keynote speaker at a (free) virtual conference on that topic organised by Matrix MM on Tuesday next week, 21st July. More details here!

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July 2023 – NAO Report Calls Sunak’s Home Insulation Scheme “A Fraudster’s Paradise”

In an unusually hard-hitting report dated July 10th, 2023, the UK’s National Audit Office criticised the home insulation scheme introduced in 2020 by the then-Chancellor, Rishi Sunak. 

The first problem, says the report, was that the huge increase in demand for the services such as roof and cavity wall insulation caused “significant inflation in the market”.  That could have been foreseen; just as the massive leap in demand for PPE (personal protective equipment) during the Covid-19 pandemic caused prices to rise by a factor of 10, the money flowing into the insulation scheme had similar (if not quite such dramatic effects). That “could easily have been predicted”, says NAO, and in itself cost the taxpayer hundreds of millions.  

But the bigger problem was fraud carried out by the building firms involved, sometimes independently of their customers and sometimes with the two parties collaborating to rip off the government.

In many cases, the firms quoted far more than the fair market price of the work, telling the customer not to worry because the government would pay, and the installer would then make a payment to the householder as a “thank you”. The firms then relied on the government not having either the resource or the skills to check whether the price quoted was reasonable or not.

The more sophisticated fraud saw builders and homeowners putting in claims, and then splitting the money without the work actually been done, or after much lower value work was carried out.  Whilst the government claimed that it would be carrying out spot-checks, “in practice, so few were done that this did not prove to be a serious deterrent”, says the NAO.  Some checks were carried out by email or phone, “making it easy householders to obscure the truth”.  It took the NAO’s own highly-trained mobile squad of unarmed-combat-expert investigators to “extract the truth” as the report puts it, assuring us that there were very few serious injuries to the team or to citizens.

In other cases, homes already had insulation, so even with inspection it was difficult to prove whether or not the work had not been done as part of this programme.  There were also several cases of “insider fraud”, where the staff handling the voucher scheme (working for the outsourced service provider) colluded with outsiders to fraudulently obtain money.

The Treasury and the Department for Home Insulation responded saying that “the scheme was largely successful, and over 2 million households have benefited from it”. But there has been no measurement of the effect on emissions or on costs for homeowners because the scheme did not “baseline” the starting point, another failing highlighted in the NAO report.  At Prime Minister’s Questions today, Boris Johnson described the scheme as a “spiffing great success”, and said “ we can celebrate that the unprecedented toasty warmth of the Englishman’s house and home has been assured for the centuries”.

OK, this is fantasy of course. But my cynical, suspicious mind looks at schemes like the new home insulation grants, announced by Sunak yesterday, and immediately starts looking for the holes that might allow fraud and corruption. (And if you don’t think governments ever get this sort of thing wrong, do check out the Northern Irish Renewable Heat Incentive scandal).

It’s all about incentivisation really – how the firms and the householders perceive the incentives that influence their behaviour. And if there are incentives for behaving badly (committing fraud), then you have to put in place measures to stop that, because people do respond to incentives.

Indeed, I have a whole chapter on that in my new book, Bad Buying – How Organisations Waste Billions Through Failures, Frauds and F**k-ups (to be published in October by Penguin Books).  So  I do hope the government doesn’t rush into this without getting a few cynical bas**ds like me to look for the loopholes and the opportunities for fraud! The scheme is not necessarily a bad idea, but there’s a lot of taxpayers’ money at stake here.

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Do You Need a Helicopter, Mate? I Can Do You a Deal…

Is that expensive “sea bass” in the restaurant, or that you buy as “Category Manager – Fish” for a frozen food manufacturer –  really sea bass? Or is it a cheaper product? Or even something that should not be sold at all, an endangered fish species perhaps. What about those electrical components? Are they genuine, made by the reliable firm whose name is on the case, or are they counterfeit, bad quality products from an obscure plant in an obscure country?

There is a whole category of procurement-related fraud that is based on buyers not getting what they thought they were paying for, and you won’t be surprised to know that a chapter in my forthcoming book  “Bad Buying: How Organisations Waste Billions Through Failures, Frauds and F**k-ups” covers that very topic.

There are some pretty surprising cases too. Even bulk oil shipments can lead to issues, as there was a court case some years back based on a very large firm shipping oil that was apparently lower grade than the specification agreed with the buyer. So as in that case (or indeed the sea bass example), it can be very difficult to know if you are getting something genuine. Understanding the provenance of what you are buying is key – but not always easy.

However, a story this week from Moldova made even my jaw drop. The “counterfeit” goods in this case are … helicopters! Balkan Insight website reported this.

“The Moldovan Prosecutor’s Office for Combating Organised Crime and Special Cases and investigators from the Police General Inspectorate closed a clandestine factory in the Criuleni area near the Dniester river in the east of the country on Tuesday that was producing copies of Kamov KA-26 Soviet-type helicopters”.

The helicopters were destined to be illegally exported to other ex-soviet countries, and were “produced without the necessary permits and documents of origin for the parts and equipment used.”

 It is not clear whether the buyers knew they were getting unauthorised machines (but presumably at a lower price than the “real thing”) or whether they though the items were genuine. It also raises questions of safety of course. Were they actually made to the right specification, but the manufacturer was acting without the right permissions, or might the helicopters have proved dangerous as well as dodgy?

Anyway, this certainly qualifies as a prime case of Bad Buying, and one of the more interesting cases of what we might call “provenance fraud”. It also has confirmed my personal vow never to step into a helicopter again. I did once, from the centre of New York out to the airport, and while it was an “interesting” experience, it was also a “never again” moment!  

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Spend £5B with Private Hospitals? Hang on a Minute, Treasury says…

We’re seeing so many interesting procurement and supply chain issues during the pandemic, but focus tends to shift week by week. We’ve had the challenge of finding more ventilators, which has more or less disappeared as medics have found that such treatment isn’t advisable for many patients. Then we had global shortages of PPE (personal protective equipment) – that issue certainly hasn’t disappeared, and we’re now all very interested in how a tiny pest-control business in England could win a contract for over £100 million of PPE supply.

But there’s another “spend category” that could make £100 million contracts look trivial. According to the Guardian today (June 18th), the UK’s National Health Service is considering a huge deal with the private hospital sector to use the private facilities in order to help clear the backlog  of non-Covid treatments that re urgently needed. (The NHS has effectively taken over the private hospital sector since March, but there is evidence that many of their facilities have not been heavily used up to now).

The newspaper says that “Matt Hancock, the health secretary, and NHS bosses are pushing for a £5bn-a-year deal to treat NHS patients in private hospitals and tackle a spiralling backlog amid the coronavirus pandemic”.

However, the Treasury (the UK finance ministry) has refused to sign off the deal, and has told the health department (DHSC) to “get more detailed commitments from private firms about the number of patients who will be treated every month in return for the payments”.

Well done, the Treasury!

I’d like to think that some sensible procurement professionals are involved in those discussions, although I am surprised that those procurement experts who sit in the DHSC (and there are a few…) didn’t get everything in line before the deal went to Treasury. It does also suggest that Sir Simon Stevens, who leads the NHS, and was apparently about to announce the deal, maybe doesn’t really “get” procurement. That is something we have suspected for a while and was reinforced by his choice of a Chief Commercial Officer last year who had no procurement experience whatsoever.

In any case, throwing £5 billion at some private firms without knowing exactly what they will do for the money wouldn’t be sensible and would indeed be “Bad Buying”.  It may be that the view was to set up some sort of “cost plus” or “time and materials” arrangement with the private firms, rather than having very clear deliverables, payment based on outputs and so on. But those mechanisms, where payment to suppliers is based on their costs rather than what they actually do, has some major disadvantages. Here is a short extract from my forthcoming book, “Bad Buying – How organisations waste billions through failure, fraud and f*ck-ups” (to be published by Penguin in October). I’m talking about construction contracts here, but the principles are absolutely the same.

“How about ‘time and materials’? In that type of agreement, the builder keeps a record of all materials they buy for the project, and the time that staff – bricklayers, carpenters, labourers and the like – spend on the work. The buyer agrees to pay those actual costs, plus some sort of margin to cover overheads and profit. Traditionally, many such agreements were based on a ‘cost plus’ model. So, you might agree to pay your builders all their costs, plus 20 per cent on top.

But you can see the incentivization problem here. Not only does the firm have no incentive to buy bricks as cheaply as possible, but they actually have an incentive to spend more on material and to make the work go on as long as possible, as they recover all those  costs back, plus 20 per cent on top of that! You could put a cap on the profit / overhead element, but that doesn’t fully address the incentivization issue on the materials or labour”.

Anyway, it is right that the government takes its time and applies all the skills it has at its disposal to get these contracts right. We’ve got blasé about large amounts of money being spent through the pandemic, but this is £5 billion we’re talking about. (“A billion here, a billion there… pretty soon you’re talking real money”, as the phrase goes).

I’d also hope that best practice contract and supplier management principles are going to be adopted here too. But that’s another whole story …

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Public Procurement in the Pandemic – Is it Who You Know, or What You Know?

Yesterday, The Times published a long article looking at how PPE (personal protective equipment) has been supplied to NHS hospitals and other locations during the pandemic. Unlike most articles on this topic, it presented a rosy picture – well, rosy at least once the Army and Clipper Logistics got involved. Indeed, it could not have been more positive about those two organisations if it had been written by their PR people.

Everything was great – everyone got all the PPE they needed, the famous eBay portal worked fine (it didn’t), and the Army plus Clipper rescued the incompetent NHS procurement system. It is a little surprising to see one part of the public sector dumping so publicly on another, but perhaps that is a foretaste of spending battles to come in the UK government through the recession, battles which the NHS is likely to win over the armed forces. Perhaps the military are getting their retaliation in first?

Anyway, the aspect of the article that grabbed my attention was the revelation that the choice of Clipper was made by Neil Ashworth, “a civilian working in the British Army’s Engineering and Logistics Staff Corps and a former supply chain director at Tesco”.  It is not clear quite how and why Ashworth was involved with the Army but The Times says “It was then that the Ministry of Defence made contact with Mr Ashworth to get the ball rolling. He recommended Clipper, a fast-growing logistics group that specialises in online retail, to his MoD contacts and they told him to recruit the company”. Ashworth then called Tony Mannix, the boss of Clipper Logistics, and off they went.

I suspect Ashworth was also behind the choice of eBay for the PPE portal, based on comments made by Eb Mukhtar, the army reserve logistician who has been the public face (or at least the public name) behind this exercise up to now.

But how did Ashworth choose Clipper? Was there an analysis of alternative options? Is there any audit trail to support that decision? Did anyone ask whether Ashworth personally had any conflicts of interest here?

Now I’m not suggesting for a moment that the team should have taken 3 months to run a formal tendering exercise. Neither do I think that Clipper slipped Ashworth a brown envelope stuffed with currency – his cv is impressive and he clearly knows this area.  But even in these “difficult times”, we need to be on our guard against fraud and corruption in its widest sense. And my definition of “corruption” includes corruption of the proper process.

So even when there is urgency, we need to know that public money is being protected. In this case, we need some transparency about exactly how these decisions were made, and what checks and balances were in place. The same applies to some of the rather odd looking contracts for PPE itself that are emerging.

In my new book, Bad Buying – How organisations waste billions through failures, frauds and f*ck-ups”, (to be published by Penguin Business in October), there are some amazing stories of fraud and corruption. But the sad fact is that it can spread quickly if there are opportunities or process weakness, as it did in the US Navy during the “Fat Leonard” affair. Or as it has in South African public procurement and through their government owned businesses, to the point where the country is close to being declared a “failed state”.   

The reason it spreads like a virus is explained in my book – here is a key excerpt.

“Finally, this matters because it has wider effects beyond the organisations directly involved, as  corruption can distort normal business and even social practices and priorities. For instance, if firms know that bribing government officials is the best way to win public contracts, a firm will focus its resources and efforts into doing that effectively. They will worry less about writing a good bid, developing better products or services or performing the work well. 

The knock-on effect is that decent firms start thinking “what’s the point”?  They either move over to the dark side and start on the bribery route, or withdraw from the market, customer or even country altogether. This can lead to a downward spiral, where supplier performance gets worse and worse, and corruption becomes endemic…”

You might think that we are somehow immune from that unhappy situation in the UK and other developed countries. We are not. If firms start thinking that “who you know” is more important in terms of winning government contracts than “what you can deliver”, then we will be on a very slippery slope. And that’s why we shouldn’t absolve those involved in public procurement during these “difficult times” from the need for process, propriety and transparency.   

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The Chris Grayling Probation Services Farewell Tour Rumbles On ….

The Guardian newspaper reported yesterday: “Ministers are considering renationalising the entire probation service in England and Wales, the Guardian understands, in the latest twist in a long-running saga to unwind Chris Grayling’s disastrous changes to the sector”.

You may not be surprised by that, or shocked to learn that the probation services outsourcing is a case study in my forthcoming book, Bad Buying – How Organisations Waste Billions Through Failures, Frauds and F**k-ups.

The analysis sits in a chapter that looks at failures caused by the buyer failing to understand a market or markets. Or, as in this case, having a foolish belief that entirely new markets can be created by sheer willpower – and throwing some government cash at the private sector, of course.

A bit of history first. The UK government decided in 2013 to outsource much of its probation services work, despite warnings from the well-respected Institute of Government that it would be “highly problematic”. The work included the management and rehabilitation of offenders, combining an element of punishment, such as monitoring the conditions of prisoners’ release, with the desire to reduce re-offending and help the offender make a useful contribution to society.

The UK Ministry of Justice, then under the command of minister Chris Grayling (who, you may also not be surprised to learn, crops up several times in my book), created 21 Community Rehabilitation Companies (CRCs) to manage offenders who posed low or medium risk. In February 2015, the CRCs were transferred to eight, mainly private sector, suppliers working under contracts that were to run to 2021-22.

But the implementation was rushed, there was little of the innovation that was promised from suppliers and 19 of the 21 companies ultimately involved failed to meet targets for reducing the frequency of re-offending. In July 2018, the Ministry announced it would terminate its contracts with CRCs 14 months early, in December 2020.

Suppliers didn’t do well either. The National Audit Office estimated cumulative losses of £294M for the firms if contracts continued to the end date, and Working Links, one of the providers, collapsed into administration in February 2019.  Finally, David Gaulke, by now the Minister in charge, announced in May 2019 that the contracts would not be offered to private firms.

Most probation services were in effect re-nationalised after one of the highest profile UK public sector buying failuresin recent years. At that point, some minor services such as the provision of unpaid work and accredited programmes were to be offered up to the private and voluntary sectors. But that now appears to have been abandoned too.

There were clearly many problems here, but fundamental is the issue of an entirely new “market” being created, without real understanding upfront of what the work involved, what capabilities would be needed by the winning firms, how the right commercial models would be constituted or how competition could be maintained and stimulated. 

“If you build it, he will come”, the tagline from the legendary film Field of Dreams, seems to be how some governments think when it comes to creating markets. And generally, some entities will emerge from the undergrowth, bidding to carry out pretty much whatever government asks them to  – drawn by the potential rewards, of course. But this does not create vibrant, sustainable, successful markets in itself.

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Are We Seeing Pandemic-Related Bad Buying?

The pandemic crisis broke just as I was signing off the proof copy for my new book, “Bad Buying – How organizations waste billions through failures, frauds and f*ck-ups“. I thought briefly about adding some pandemic-related stories, but quickly decided there wasn’t time to do it justice without delaying publication this autumn – which neither Penguin nor I wanted.

But I may well want to write something substantial about the procurement issues connected with the pandemic, because it is clear already that there are many. Not all of these by any means are “bad buying”, I would stress. I’m sure we will find that there is some great work going on, in the centre of government, in hospital trusts, in the NHS Supply Chain network, and indeed across many other organisations in local government, social care sector and so on. If I do write a book, I hope and expect that there will be as many stories of great procurement work and even heroism, as well as some failures and issues to report.

Certainly, there are enough stories emerging that will require further investigation. The mis-management of the “pandemic stockpile” of PPE (personal protective equipment) is one. Although this has had some media attention, it looks to me like a bigger failing than has really been exposed so far. How was so much of the stock allowed to get out of date, for a start? What about the “lost” items – a failure of stock control and information, or something more criminal?

PPE generally has had plenty of coverage in the media, and some of it has not been fair. Once the pandemic took hold, the global demand for PPE shot up to an extent that supply problems were inevitable. But there will be questions asked about whether the UK was agile, flexible and fast enough in its response – and no doubt other countries will ask the same thing. That will lead on to interesting debate about the whole structure and strategy for NHS procurement.

Then there is the UK’s “ventilator” challenge, in which various firms were asked to produce ventilators – with varying degrees of success. There was also the very odd decision to ask eBay to build a marketplace for PPE, which did not go well, when others such as Basware and Proband could have done it in hours based on existing capability.

That last point highlights a real frustration. There is just no transparency around how and why certain firms are being awarded contracts. Of course, we understand you can’t spend months running an “OJEU” compliant procurement process in the middle of the crisis. But it is not unreasonable for us to want to know something about how and why firms like Clipper, eBay, Palantir, Deloitte and others are being chosen, and the terms of the contracts they are working under.

If the silence continues, then we might start thinking that these decisions haven’t been taken for the right reasons. I doubt very much whether brown paper envelopes have exchanged hands, but there  are other forms of “corruption”.

I’d argue any supplier selection decision that is influenced by factors  other than objective business reasons is corrupt to some extent – that includes simple laziness (“I can’t be bothered to do the research or analysis so I’ll just give this random firm I’ve heard of the contract”), nepotism (“giving the contract to your mate”), or choosing a firm based on the fact that you rather fancy getting a job with them one day in the future.

That last idea was suggested to me as a reason for some of the tech decisions we’re seeing – “the techies in government all want to work for someone sexy like Google, Apple, or Amazon, so they find ways of working with them in their current jobs and hope to get noticed” was the suggestion.  Mind you, that doesn’t stack up with the route chosen on the tracking app…

I’ve always tended to go with the cock-up rather than the conspiracy theory when things go wrong in government. But we need some visibility around all this “emergency procurement”, or we might start thinking the worst.

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Have You Heard the One About the Irish Government Printer?

The state-of-the-art, whizz-bang, latest technology printer that the Irish government bought in 2018 was going to produce wonderful documents at, one assumes, a competitive cost. The Komori equipment is highly rated, but there was only one problem for the government. 

When it arrived in Dublin, in December 2018, it simply didn’t fit into the building where it was supposed to be housed.  It had to be shipped off to a storage unit at Ballymount Industrial Estate, where it languished until September 2019 at a cost of €2,000 a month while building works were carried out – to “tear down walls and embed structural steel” to make room for the behemoth.  Now a report on the fiasco by Dail (the Irish parliament) clerk Peter Finnegan has revealed the cost of the episode, which seems to grow every time it is reviewed.

€230,000 (excluding VAT) was spent on “unanticipated renovations to the printing room” because the equipment just wouldn’t fit, because “ the requirements of the building and other regulations in relation to ‘head height’ were neither understood nor examined during the early critical stages of the project”. The cost of the printer itself and associated equipment reached €1,369,605.

There have also been reports that staff haven’t been happy about the new equipment, asking for further training and (rumours say) more money for operating it. The Register also reported that the “IT department is hesitant to grant access to the printer, making it difficult to print documents from official government computers”.

All in all, this is a great example of Bad Buying caused by failing to check in detail the specifications for what you’re buying and how that relates to the environment around what you’re buying.  And remember, even in the case of complex equipment, it is not just the technical specifications that matter – mundane issues such as size can cause just as many problems as some obscure technological flaw or failure!

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Grenfell Tower – Procurement Rules were Circumvented

The public inquiry into the tragic Grenfell Tower fire in London, which killed 72 residents in June 2017,  has heard that procurement rules were circumvented to avoid an open tendering process. Bruce Sounes, who was the lead architect on the Tower refurbishment, told the inquiry that the Kensington and Chelsea Tenant Management Organisation (KCTMO) asked the architect, Studio E, to defer some of their fees so that the cost looked like it was under the EU procurement threshold that requires a competitive process.

He told the inquiry: “I understood that this limit was the maximum contract value permissible under EU procurement regulations, above which KCTMO would have to follow a compliant procurement process in selecting consultants”. So 50% of the fees were deferred to keep the among billed below £174K.

That would have taken more time, and it was also likely that the favoured supplier, Studio E, would not have won the bid as it had little relevant experience, having not “been involved in high-rise residential, heating renewal nor the overcladding of occupied buildings.”

This artificial manipulation of contract value is almost certainly illegal under EU and UK regulations.  Buyers are not allowed to “artificially disaggregate” contracts to avoid the thresholds, for instance by breaking up a large requirement into multiple smaller ones purely to get around the rules. Deferring fees is somewhat different but arguably is an even more blatant method for avoiding the formal process.

It is a myth however that a contract value under the EU threshold means you don’t need to worry about competition. Whilst you don’t need to jump through all the hoops, buyers are still bound by principles of transparency, openness and fairness, and should show that they have used appropriate competitive processes given the size and risk of the contract. Clearly, that didn’t happen here. But just because a contract is “only” worth £170K, it doesn’t mean you can just give it to a supplier without competition.

The other puzzle here is exactly why KCTMO were so keen on Studio E winning the work. Richard Millett QC, counsel to the inquiry, said that after the firm had designed the neighbouring Kensington Aldridge academy, selecting them was “cheap, convenient, quick, even though Grenfell Tower was a completely different kind of project with different challenges”.  So, there is no hint of corruption there, although it was at best a poor decision, and an illegal one, as we’ve said.

Whilst we can’t say that the Grenfell disaster happened purely because of this open and shut case of bad buying, it is at the very least an indication of the tragic consequences that can result from poor supplier selection decisions. It is also a lesson that avoiding procurement regulations sometimes seems an easy way out; but it can have major consequences.    

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