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Babylon’s Burning… the Story of the Failed “AI” Health App

The Sunday Times has really got into its investigations recently, and after its excellent expose of the UK’s HS2 rail programme, last week it looked at another issue with a definite “Bad Buying” angle.

Babylon Health, set up in 2013, was going to revolutionise healthcare. Ali Parsa, the founder, is a serial entrepreneur whose previous venture, Circle Holdings, also had some issues (he stepped down from Circle before he set up Babylon). Circle ran Hinchingbrooke Hospital in England, the first fully outsourced hospital. Initially, it seemed to go well, and Parsa was a highly visible cheerleader for the operation, but after a couple of years, Circle pulled out leaving the NHS to pick up the pieces.

But with Babylon, Parsa seemed to have a real product that could benefit everybody. It was an AI powered diagnostic platform that could tell you what health problem you had after a short online consultation. The “app” scored better than doctors on medical tests, Parsa claimed, and could provide excellent diagnosis and care at a fraction of the current cost. For the permanently hard up health services in the UK and US, it seemed too good to be true – and of course it was. However, Parsa used political connections to win business, as the Times reported. Between 2015 and 2022, the company had 22 meetings with government ministers.

“Babylon’s deals with the NHS, which saw it receive at least £22 million over the past three years alone and helped it to woo investors, were in part due its links with the Conservative Party and the backing of Hancock, the health secretary from 2018 to 2021. The Tories received more than £250,000 in donations from individuals and companies with stakes in Babylon Healthcare, including Hancock, whose failed Tory leadership bid in 2019 received £10,000.”

However, the newspaper’s investigation found high-pressure sales techniques and some claims for the product that were simply false. For example, at the Royal College of Physicians in 2018, Parsa showed how Babylon’s AI used a phone’s camera to analyse the facial expression of a female patient to pick up subtle cues that a doctor might miss. This is how the Times describes it.

“This is a real consultation,” Parsa said on stage. “This is what we have built. None of this is a show.”

It was a show. The facial-analysis tool, a prop for a demo, never made it to market. The “patient” in the video was an executive assistant at Babylon… This sleight of hand was a small example of a culture fixated on form over substance, a trait common in Silicon Valley but dangerous in healthcare.” 

Indeed, the much vaunted AI was little more than a decision tree written in Excel based on doctors’ knowledge. Soon, sceptics began testing it and found that it could easily mistake a heart attack for a less serious panic attack, or an ingrowing toenail for gout. I remember various people on Twitter talking about how dangerous it was and calling out Babylon as a con.

But the firm managed to raise $1.2 billion from investors between 2013 and a stock market float in 2021, and at one point Babylon was valued at some $4.2 billion. But after that float, some badly judged deals started affecting the firm’s finances, just as more expert voices also pointed out the technical failings. For instance, the Royal Wolverhampton NHS Trust signed a ten-year deal for a digital-first GP service that would allow patients to use Babylon’s digital tools. But Babylon cancelled the contract in 2022, saying it just could not afford to invest in the service.

Finally in August this year, the firm collapsed into administration and the remnants were picked up by a couple of trade buyers. Parsa has pretty much disappeared, as has most of his own fortune.

It all reminds me a little of the Theranos scandal – the fake blood testing equipment launched by Elizbeth Holmes (who is now in a US jail). Babylon was not as fake as that, and Parsa is not accused of wrongdoing, but the principal of something that everyone wanted to work, but really was built on sand, is the same. And there is also FOMO – the “fear of missing out”. This is an extract from the Bad Buying book section on Theranos.

“Buying failure come into this because retailer Walgreen’s spent $140 million with Theranos over seven years, hosting around 40 blood-testing centres in their stores. They got very little benefit from that and recovered some $30 million after a lawsuit and settlement following the eventual disclosure of the issues.  Amazingly, as Bad Blood reports, Walgreens’s own laboratory consultant, Kevin Hunter, had seen early on that something wasn’t right with Theranos. But the executive in charge of the programme at Walgreen’s said that the firm should pursue the pilot because of the risk that CVS, their big competitor, would beat them to a Theranos deal.

Again, buyers wanted to believe that something was real, even in the face of mounting evidence that it wasn’t. This relates back to comments around believing the supplier … it is easy for a naïve or gullible buyer to be sucked into believing what the supplier wants them to believe.

Suppliers will take advantage of this tendency – whether it is the relatively innocent “yes, we can install this new IT system in six months” or the more dangerous “this equipment will find hidden bombs”.  And FOMO – the fear of missing out to the competition – is something else suppliers will use, and that can lead to bad decisions.  It’s not just physical goods either. The top consulting firm selling its latest “strategy toolkit” will mention that the potential client’s biggest rival is also very interested”.

One day, there is little doubt that a real AI-powered system will be really useful in the world of medical diagnoses. So maybe Parsa was just ahead of his time?  But that is two of his “innovative” businesses that have cost health services time and money without much benefit in return. So I’d be very careful next time he announces he has a great idea…

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We Need a Review of HS2

Last week the Sunday Times ran an expose of the UK’s HS2 rail project. The programme is being severely curtailed now due to massive over spending against the budget.

Over several pages, the Times laid out a culture of overspending and bad financial forecasting, with those who tried to point out the problems often forced out or removed if contractors. The accusation is that senior managers knew that budgets were unrealistic but covered up the facts for as long as possible. Presumably that was to keep their lucrative jobs, and keep ministers happy. The thinking may have been that If the programme got to a certain point, then it could not be cancelled.

There was more in yesterday’s edition of the Sunday Times, including an interview with Stephen Cresswell, one of the whistleblowers.

This first phase was expected to cost £21 billion and yet his calculations suggested a fairer assessment was £30 billion — a huge discrepancy. “There were problems with the way the figures had been calculated and it was likely to cost an awful lot more,” he says. “I did the calculations pointing this out but I was told to concentrate my efforts on something else.”

Unfortunately this good piece of reporting did not get much discussion on national TV news certainly, perhaps unsurprisingly given the disaster unfolding in Israel and Gaza.  The report did say that the internal audit function at HS2 is looking into the allegations – but that isn’t good enough. We really need a detailed external review of what happened in HS2, to understand that specific case but more importantly, to see what lessons can be learnt that apply to other large capital programmes in the UK.  Maybe that is best done by the National Audit Office, although several ex-employees have written to the SFO (Serious Fraud Office) accusing HS2 of mismanagement of public funds, so maybe this will all turn more “criminal”. 

If no action is taken quickly, then we will have to see if Labour will have the appetite for driving a review if they do form the next government. After all, it was Labour and Lord Adonis, then Transport Minister, who kicked off HS2 and Adonis was a non-exec of HS2 for some years. But we really do need a review. We can’t allow huge expenditures where the people involved and responsible are pursuing their own goals rather than the taxpayers’ best interests. As Cresswell put it: “Costs, risks, timescales and benefits are being manipulated to suit individuals or organisational goals rather than the public interest”.

Another interesting point the Sunday Times highlighted last week is that Ministers appear to have lied to Parliament – or at best “misled” the house. Chirs Grayling was one, but a junior Minister is also accused.

“ On June 7, 2019, Cook sent a first draft of his report to Grayling. It suggested HS2 was billions of pounds over budget and years behind schedule.….  In July, the minister for transport, Nusrat Ghani, fielded questions during a Westminster Hall debate on HS2 before the Commons final vote on the bill to approve the Birmingham to Crewe phase two leg.  She said: “I stand here to state confidently that the budget is £55.7 billion and that the timetable is 2026 and 2033.” She repeated her assurances five days later, during the third reading debate in the Commons.

An FOI request exposed that she had been told 3 months earlier that the programme would breach its budget – so doesn’t that sound like lying to Parliament?  

It was good to see the shadow Chancellor, Rachel Reeves, announcing that a “covid corruption commissioner” will look into PPE procurement during the pandemic and the waste of billions of public money. In terms of waste, HS2 is at least on that scale, so surely that also deserves a very thorough and independent look at what happened there?

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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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How Competitive is UK Public Procurement?

A few weeks ago, the UK National Audit Ofice issued a report titled “Competition in public procurement – lessons learned”. 

Unlike most of that organisation’s reports, it wasn’t looking at a specific project within one Department, but rather looked across central government at how procurement “competition” is working to help “support efficiency, innovation and quality in public services”. As the NAO says, when competition is lacking or ineffective, other safeguards need to be pursued otherwise the end results can be negative for the taxpayer. 

But the overall findings given in the report do not paint a reassuring picture.

“Our review of competition in public procurement has found that government cannot show how well competition is working, and that the structures to encourage and support the use of competition are not all working as intended. Departments are unclear how to engage with the market before they let a contract, and do not consistently follow central guidance. For example, they routinely extend contracts rather than retendering them. The Cabinet Office provides guidance but does not take advantage of the data it collects to understand more about competition and gain further benefits”.

Extending contracts can be done for good reasons, but often it is just the lazy option. It may be happening more often because of a shortage of staff today but that is no excuse really. The need for some further analysis of this and action from Cabinet Office is even more pressing when you read this.

“Government procured 72% of its large contracts through frameworks in 2021-22 compared to 43% in 2018-19. Frameworks are designed for procuring common goods and services to allow departments to access economies of scale, but they are not always the way to achieve the best competition. Guidance produced by government states that where the goods or services are not common, a full procurement process should be undertaken.”

I found that genuinely shocking. I’m not surprised use of frameworks has risen, and used properly, they can be an excellent mechanism. However, to see that growth, almost a doubling of the number of contracts awarded in that manner over just 3 years, is quite shocking. It really does require some serious analysis as to why this has happened and what the consequences might be. NAO didn’t look at how often “direct awards” are made from frameworks unfortunately.  Those awards are obviously much more anti-competitive than running a proper “call-off competition” from a framework (although even that does of course shut out non-framework participants). 

The NAO makes some sensible recommendations, suggesting Cabinet Office should work with Departments to improve data and published information, drive better early market engagement and look more carefully at the frameworks issue. But there seems little doubt that competition in central government procurement has declined dramatically in recent years. If like me you believe that competition is THE most fundamental driver for value for money, as well as an essential element in the fight against fraud and corruption, that has to be worrying.

My feeling is that too many people, from politicians to senior budget holders to some commercial / procurement people themselves, are happy for frameworks to be used and contracts extended. That is both to save time and money on running procurement processes, and in many cases, so they can fundamentally choose which supplier they want to use and just put a veneer of governance around that. Occasionally that choice is driven by corruption , but usually it is people who genuinely think they are doing the right thing. But it is fundamentally anti-competitive.

There is no doubt that Gareth Rhys Williams, (government’s Chief Commercial Officer), Crown Commercial Services and the GCO have done some good work in terms of the “inputs” to government procurement. The focus on people and training, and the various impressive “playbooks” are evidence of this. But certainly from the outside, there is less evidence of the tangible outputs that have resulted from this work, other than somewhat  spurious “savings” numbers that are produced.

Indeed, on that note, the NAO says this in the recent report. “Government monitors savings from individual frameworks by comparing their prices to estimations of prices charged by suppliers outside the framework”.  That’s not exactly rigorous, is it? Particularly when the procurement process for one of the largest frameworks (the management consulting example I analysed here) was explicitly designed to allow the big firms to win a place without needing to submit particularly competitive pricing.  (I should say that I believe Simon Tse has done a great job running the operational arm of Crown Commercial Services in terms of meeting that organisation’s objectives in recent years. I might question some of those objectives however!)

But more competitive government supply markets surely must be a fundamental objective for government procurement. The NAO report suggests that it has not been achieved over recent years.

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HS2 Rail Programme Rated as “Undeliverable” by Government’s Own Experts

I’ve decided that I’m going to win the 100 metres sprint at next year’s Paris Olympics. I believe the benefits for the UK economy will be huge and I will inspire millions with my efforts. My wife has pointed out that my best time for the event was 13.8 seconds, recorded at Houghton School some years ago (many years ago to be honest). I need to beat that by some 4.5 seconds next year, but I am quietly confident.

However, in her annual report on my planned activities, Jane has had the temerity to rank my chances of success as “red”.  That red rating indicates that “successful delivery of the project appears to be unachievable.” That means “there are major issues with project definition, schedule, budget, quality and/or benefits delivery, which at this stage do not appear to be manageable or resolvable”.

I am disgusted by this lack of positivity. My gold medal will lead to transformational benefits for generations to come, improving connections and helping grow the economy. And I have already spent billions on food supplements, very expensive training programmes and massages, so you wouldn’t want to waste that money, would you?

That is pretty much the situation with HS2, the high-speed rail programme that is going to link London with other cities in England. The latest report from the Infrastructure and Projects Authority (IPA), which sits within the government’s Cabinet Office, has given the first two phases (1 and 2a) of the HS2 programme an unachievable “red” rating, defined as above.

There is no mention of HS2 anywhere in the report’s various narrative sections, despite the fact it is the biggest single programme in the UK in terms of cost.  In the table that list all 250+ projects, all it says next to the red rating is this. “A new railway connecting the country’s biggest cities and economic regions enabling rebalancing and regional growth in the Midlands Engine and Northern Powerhouse – through a high capacity, high speed and low carbon transport solution”.

And the Department for Transport’s response is also pretty much as above.

“Spades are already in the ground on HS2, with 350 construction sites, over £20bn invested to date and supporting over 28,500 jobs. We remain committed to delivering HS2 in the most cost-effective way for taxpayers. HS2 will bring transformational benefits for generations to come, improving connections and helping grow the economy”.

That really is treating us as idiots. No attempt to actually respond to the undeliverability issues, or explain how “red” will turn to amber and green, just that they’re committed to it and we’ve spent a sh** load of money already, so hey, let’s spend another £50 billion or so. At least.  

Clearly, all those supposedly super-clever people in Treasury and Department of Transport have never heard of the sunk cost fallacy. Well, of course they have heard of it but this is politics. Civil servants just have to do what their masters tell them, but you can be sure HS2 will be disappearing from a lot of senior peoples’ cvs on LinkedIn in a few years’ time. This is just a terrible, disgraceful and ridiculous waste of public money, from the beginning when the business case was manipulated to appear positive, and my daughter’s generation will be asking questions for years to come about just how we allowed this to happen.

William Hague in The Times agreed.

“If I were still in government, I would be climbing the walls about this. I would want to stop all work on HS2 today, but I know I would be told that the contracts signed for its construction make that impossible. I would want to fire somebody senior, but I would be informed that the chief executive of HS2 Ltd already quit last month so that satisfaction would be denied me.

Then I would say that if we can’t cancel it we should at least make sure that the bits that haven’t been abandoned will work well, but I would be told that the cost of making it start in Euston has doubled recently, that no one could decide how many platforms they wanted to build, that this crucial part is currently unaffordable and that the transformational, high-speed connection of Birmingham to central London might not even reach the latter. And then I would want to scream”.

Indeed, the IPA report is generally disappointing. It is full of case studies of successful projects and programmes (244 now in the portfolio), with little or no discussion on the problems. And I’m not sure how the rapid charging fund for EVs can be seen as a success when you read this. Most of the case studies have a few initial issues but are turned round thanks to the IPA to deliver success.  It reads in the main like a marketing document from a consulting firm. (I actually wonder whether privatisation is on the cards?)  I suppose we shouldn’t be surprised, at the end of the day, the IPA is not truly independent, it is part of government, so it does have to toe the party line.

It is also noticeable that so many projects are rated amber – no less than 80%. That can be a bit of a cop-out rating really. It says there are issues, but nothing too much to worry about. I think when the IPA or its predecessor first started, there were amber/red and amber/green ratings too, but I suspect that put too many projects into the (at least partially) red bracket, which is embarrassing for the government. But really having 80% of the projects ranked at the same level reduces the usefulness for any external scrutiny.  

Anyway, in the couple of hours it has taken me to write this, another £4 million or so has been spent on HS2. What a waste.

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Always Check Those Invoices!

The US Government Department of Justice recently issued a news release.  

“Booz Allen Hamilton Holding Corporation has agreed to pay the United States $377,453,150 to resolve allegations that it violated the False Claims Act by improperly billing commercial and international costs to its government contracts. Booz Allen, which is headquartered in McLean, Virginia, provides a range of management, consulting, and engineering services to the Government, as well as commercial and international customers”.

I do love the precision of the final $150 on that number! Couldn’t they have rounded it slightly?

The accusation was that between 2011 and 2021, the consulting firm charged costs to its government contracts and subcontracts that should instead have been billed to its commercial and international contracts. That particularly applied to some indirect costs. So the government was allegedly paying for activities and services that had nothing to do with the work the firm was actually doing for government organisations.

Now allocating overheads can be a tricky issue, as many of us know. And Booz Allen issued a statement, as you might expect.

“Booz Allen has always believed it acted lawfully and responsibly. It decided to settle this civil inquiry for pragmatic business reasons to avoid the delay, uncertainty, and expense of protracted litigation. The company did not want to engage in what likely would have been a years-long court fight with its largest client, the U.S. government, on an immensely complex matter. The company fully cooperated with the government and is pleased to move forward.”

So there is no admitting liability or guilt here. I can understand why the firm does not want a long, expensive fight – on the other hand, if you were 100% sure of your position, many firms would choose to take it further rather than handing over quite such a large amount of cash.

The most amazing element of this story is this. The investigation was sparked by a whistleblower, a former Booz Allen employee, Sarah Feinberg, who tipped off the authorities about the alleged misconduct from 2011 to 2021. And now she will receive no less than $69,828,832 as a thanks (it’s that precision again…)  

$69.8 million!  Good grief, I’m going to have a good think now about every firm I’ve ever worked for and whether they might have done anything “naughty” in their dealings with the US government …  

The moral of thee story is simple. Check your billing from professional service firms. I once took on a senior interim commercial/procurement role in government with an organisation that had around 100 consultants from one firm working on its major programme. That was £500K A WEEK we were paying this firm (it better be nameless…)  

I took a look at the invoices – incredibly there was no contract manager for this contract – and found that amongst other things, we were being billed for the senior partner’s assistant. The partner was only working about a day a week on our project, but we appeared to be paying a grand a day, every day, for his PA. We were also billed for the whole day for the whole team when I knew they had stopped work at lunchtime for their office Christmas Party! “An unfortunate error” I was told.  I saved £50K with one phone call there…

Of course, if you can structure any professional services assignment on a fixed price basis, most of these issues are avoided. That approach is usually – although not always – better for the buyer and actually arguably for the provider too. That is another question in this Booz Allen example. Why was so much government work being done on what sounds like a pretty loose “time and materials” basis?

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Support to Disadvantaged Suppliers Attracts Fraudsters

Programmes to support minority owned businesses, smaller firms, social enterprises and the like via public sector procurement have become increasingly popular over recent years in many countries. The Social Value Act in the UK in 2012 made this sort of action more prevalent in the UK, but the USA is probably where such schemes are longest established.

However, the irony is that the more successful such programmes are in terms of actually directing spend towards such suppliers, the greater the temptation for fraud and corruption to spring up. Genuine firms that need support might lose out to unscrupulous criminals and conmen/women.

One mechanism for that is basically using what we might call “non-value for money” evaluation criteria to award contracts to a supplier that doesn’t really deserve them. That can lead to distortion in the selection of winning bidders. “This firm’s bid wasn’t the cheapest but they are a small firm / owned by a women / promise to employ lots of disabled local people. That gave them lots of marks for “social value” in the bid evaluation”.  What isn’t made public is that the firm is also owned by the budget holder or decision maker’s sister-in-law.

The other quite common fraud is where a firm is apparently owned by a person or people who qualify as a “minority” but in fact, control rests with non-minority owners. We have seen that a lot in the USA and also in countries such as South Africa which have had schemes to give preference to black-owned businesses in public procurement.  I gave several examples of this in the Bad Buying book from both of those countries.

But this is still going on – a recent report in the Chicago Tribune highlighted a current case. It is not clear yet which of those two mechanisms is suspected here; is it disguised ownership or the use of minority programmes to favour a firm for improper reasons?  But federal prosecutors are “investigating possible minority-contracting fraud involving a series of Chicago government contracts worth hundreds of millions of dollars, including many with ties to a clout-heavy trucking and recycling company owner, according to sources and documents obtained by the Tribune”.

James Bracken and his wide Kelly own several companies engaged in construction, waste management and transportation. Investigators have asked city agencies for copies of bid documents and more relating to several contracts and for information relating to the city’s women and minority owned “set aside” programmes.

The programmes started in 1990 with the aim of awarding at least 25% of the total value of all city contracts to minority businesses and 5% to women-owned operations. But there have been accusations of fraud from the beginning. Company owners, chasing multimillion-dollar contracts, have put up phony “frontpeople” to get certified as minority or women-owned. Another route is to claim that a high percentage of work will got to minority subcontractors. In my experience, that is the sort of claim that rarely gets checked once a contract is operational!

A lot of this comes down to procurement carrying out the appropriate due diligence and checking out firms at the bidding stage, managing contracts well once they are operational, and of course keeping an eye out for conflicts of interest and other potential drivers of corruption. It is a constant battle between the forces of good (procurement, usually) and evil (certain dodgy potential suppliers and general low-life scum!)

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Why Isn’t Competition Working in the UK Petrol Market?

Why are prices so high in many countries, including the UK? Global forces and events are part of it, but there is increasing evidence that firms providing goods and services are increasing profit margins at the expense of the consumer. This week’s report on petrol prices in the UK from the Competition and Markets Authority (CMA) was an example of this. Calculations show that margins have increased over the last three years and we are all being ripped off to the tune of some 6p per litre. Competition was “not working as well as it should be” said the CMA.

But surely, in a dynamic, capitalist society, excess profits leads to new market entrants, who compete on price and undercut the current providers, whilst still making an adequate return?  The economists would agree that this is the case – but only in a perfect market. And you need certain conditions for that, including that it must be reasonably easy for new entrants to establish themselves.

That is the problem here and in many other markets. For a number of reasons, there are so many things we all buy where we just don’t see real, strong competition, because it is almost impossible for new entrants to break into a market.  Look at petrol retailing. Finding new sites and getting planning permission would be a nightmare. The capital cost of building the premises would be huge, with all the legislation (quite rightly) around petrol storage and handling adding to the burden.

Look at how difficult it has proved for new retail banks to break into a market still dominated by firms that have been around for centuries – even though most consumers don’t rate those providers very highly.  We haven’t had any new supermarket chains in the UK for some 30 years now since Aldi and Lidl (who were already long established elsewhere) started here. Again, the barriers to entry, from planning issues to up-front cost, as well as the financial power of the incumbent firms, all make it very tough.

So we have the cost of entering a market, legislative burdens and incumbent power as key barriers to entry. Geography is another; I’m not going to drive another 10km each way to buy slightly cheaper petrol, and lose all my “savings” on the extra mileage!

But particularly when we come back to corporate procurement, some of the market dominance we see has been caused in apart by the actions of customers and indeed of procurement professionals. I gave five examples of the ways in which this happens in terms of corporate procurement in the Bad Buying book. Here are the first two.

1. Buyers aggressively aggregate their own spend, believing they’ll get better deals if they offer bigger contracts – until in some industries, only the largest can meet our needs. Buyers might insist that suppliers must service every office or factory across the US, or Europe. Smaller firms and start-ups, who often offer real innovation, flexibility and service, are shut out of the market.
Buyers assume economies of scale, that “bigger is better” and bigger deals mean lower prices. But that is not necessarily true; the price curve may flatten after a certain volume, with further increases in volume not generating any further price reduction. There are even cases where you  see dis-economies of scale – the buyer pays more as the they spend more.


2. Buyers value consistency above innovation and experimentation. At times, you should value tried and tested solutions over exciting new ideas. “Ladies and gentlemen, welcome to the flight, this is the very first plane to be fitted with an exciting new automatic pilot system, and we will be turning it on once we’re airborne”.  You might not want to hear that!
But take caution too far, and you help create markets dominated by a few large suppliers, with increased risk of buyers suffering from dependence. That’s relevant in private firms and perhaps more so in government, where risk aversion from employees and politicians means companies get into dominant positions because buyers “know” they’re a safe choice. That doesn’t always work out – Serco and Capita seemed to be safe for major UK government work, until both ran into severe financial difficulties. More willingness to engage with other initially smaller suppliers over the years could have created a more dynamic market.

Whilst we may not be able to do anything much personally about the supermarkets dominance of the petrol (and groceries) markets, we can take actions to mitigate the risk that we accidentally help to create monopolies or oligopolies in our business (procurement) lives. We should aways be thinking about how we can contribute to dynamic, competitive markets, with new entrants regularly arriving to put pressure on established firms. That’s the healthy situation that we should hope for and work towards where we can.

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