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National Audit Office Won’t Sign Off UK Dept. of Health Accounts

The UK’s National Audit Office recently refused to sign-off the accounts of the Department of Health and Social Care (DHSC) for 2021-22.

“A lack of sufficient, appropriate audit evidence and significant shortcomings in financial control and governance” meant that NAO head Gareth Davies was unable to provide an audit opinion on the accounts of the UK Health Security Agency (UKHSA).  Even taking the “challenging context” into account, Davies called the UKHSA’s inability to produce auditable accounts “unacceptable”.

UKHSA replaced Public Health England in October 2021. That was a challenging time because of Covid, but even so, the financial management of the new organisation appears to have been chaotic.  

“UKHSA was unable to provide the NAO with sufficient evidence to support balances relating to £794m of stock, and £1.5bn of accruals from NHS Test and Trace, which were transferred from DHSC, or to support £254m of stockpiled goods transferred from its predecessor organisation, Public Health England (PHE). DHSC had not resolved issues with its management systems, financial controls and records, which the C&AG reflected in his report on DHSC’s 2020-21 accounts”.

Internal controls were lacking; there weren’t even effective bank reconciliations, something the smallest business would expect to have in place. “Shortcomings in the introduction of a new accounting system, combined with a reliance on temporary staff, meant that UKHSA was not able to provide the NAO with evidence to support key balances and transactions in the accounts”. So goodness knows what was happening in terms of errors or even fraud at that time.

Moving on to the wider Department, NAO “was unable to obtain the evidence needed to support £1.36bn of stock, due to issues related to inventory management”.

DHSC did not carry out end of year stock counts to check items including PPE (personal protective equipment) and Covid lateral flow tests, “as it was unable to access 5 billion items (which cost £2.9bn) that were stored in containers”. Whilst that might be excusable, or at least understandable, there was also a lack of adequate processes to check stock in warehouses, which is less so.

There was also a write-down of £6bn in terms of pandemic related purchases. £2.5bn of that is items already purchased but no longer usable, or where the market price is now way below what was paid. £3.5bn was a write-down on PPE, vaccines and medication which DHSC has committed to purchase, but no longer expects to use.

“Taken together with the £8.9bn written-down in its 2020-21 accounts, over the last two financial years, DHSC has now reported £14.9bn of write-down costs related to PPE and other items”. 

And if you are thinking, well, at least that’s it, there is more salt to rub into the wounds.

“DHSC estimates that ongoing storage and disposal costs for its excess and unusable PPE will be £319m. At the end of March 2022, the estimated monthly spending on storing PPE was £24m.”

So that’s £15 billion of taxpayer’s money gone. It has been in effect a huge transfer of wealth from the UK economy and citizens to a range of largely non-UK manufacturers and of course to a whole bunch of crooks, conmen, exploitative agents and middlemen, many with political connections, and the occasional genuine business person, all involved in the supply chain somewhere.  Every issue of Private Eye seems to have more examples – taken from the company accounts that are now emerging – of firms making huge margins, often 50% or more, on the PPE, tests and so on that were supplied during the pandemic.

We’ve discussed the reasons for this disaster many times over the last couple of years A failure to prepare and mis-management of the emergency PPE stocks; catastrophically bad demand planning which led to huge over-ordering;  incompetence in terms of drawing up specifications; a lack of even basic negotiation, cost analysis and supplier due diligence; political interference and nepotism; these drivers all feature. But as the NAO lays out the cold, hard numbers, we can say with confidence that when we construct the league table for the all-time costliest failures in UK public procurement, this is right at the top.

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Would You Employ These Men?

Assume you are a CPO recruiting for a senior procurement role.  The person will have some power in terms of choosing suppliers and negotiating contracts, although others will be involved too (because you understand the corruption and fraud risks around concentrating that sort of power in a single person).

You then discover that this individual recently paid a fine of several million pounds to the tax authorities because of a transaction from a few years ago. The tax authorities found that the individual had managed their affairs in a manner that crossed the line from “tax avoidance” into “tax evasion”, even if it was not deliberately criminal evasion.  But when you tackle the person about it, they explain it was simply “careless” and they had no intention of doing anything illegal.

I mean, they tell you, we’ve all done it. You just carelessly set up a new business but then register the shares in your father’s name, offshore of course, then set up a complex process so that you can still benefit personally from the value of those shares. And when they’re sold, you avoid capital gains tax. Just careless.  (You also discover he made a lot of money working for two oil companies that had an “interesting” history, including senior management fraud and corruption – although he wasn’t involved in that personally).

How do you feel as CPO? I would suggest this person would not be employed. There would be questions about their personal ethics and whether they could be trusted with the organisation’s money, let alone the reputational risk to the organisation and indeed to you if the CEO finds out who you are employing. 

Now let’s consider another case. Another senior procurement executive is about to award a contract to a single consultant to carry out a very sensitive strategic assignment at Board level. There are a handful of individuals – from different firms – in the running. Your executive makes the choice and the consultant starts work. You then discover that a few weeks before the appointment, your executive asked the chosen consultant if they could help him get a loan of £800,000. The consultant was indeed helpful, and linked your exec up with someone who could make that loan.

Where do we start with this? As the CPO, you might wonder first of all why your exec needs that loan – they’re paid a decent six figure salary, after all. That rings alarm bells. A gambling / drug habit to finance, maybe? Blackmail? Not good for someone in a responsible position handling the firm’s money.

But on the core issue, I think you would fire them, or at the very least put them on a final warning (if the internal policy is not strong enough to support a dismissal). It was totally inappropriate to ask a potential supplier for favours at any time, in particular when you are in the process of making a contract decision. Personally, I would not be able to trust this individual again, so sacking would be my preferred option.

You might have a little more sympathy with the consultant. They were put in a difficult position, and all they did was make a connection – it is not like they handed over cash. (However, you do feel a little awkward when you discover the consultant previously donated a lot of money to help restore your firm’s sports and social club …)

But you have to tell the supplier that the competitive process will need to be run again and unfortunately they will be excluded. They should have politely declined to help and really should have blown the whistle on the exec and come to you as the CPO with the story.

The case studies here are of course parallels to the stories of Nadim Zahawi, Conservative party chairman, and Boris Johnson, ex-Prime Minister, and his dealings with the Chairman of the BBC, who he appointed after asking him to help Johnson get a loan. To make matters worse, Zahawi was actually Chancellor (finance minister) at the time he was being fined. He was the ultimate boss of the tax authorities!

So we’ve got into a situation in the UK where the people who are running the country have ethical standards that we would not tolerate in a mid-level procurement manager. The feeling that the rules do not really apply to them, personal disregard for ethical behaviour (remember the long history of Johnson’s many children, deserted wives, and lovers having abortions), a lack of care about conflicts of interest – they are all character traits that would make us run a mile if we saw them in a potential recruit.

This is not just a rant against these individuals. The wider issue is that it sets a terrible example. Young – and not so young – business people, including those involved in procurement, look at the standards of behaviour and think “well, if that’s OK for our leaders, surely I can accept a trip to the Grand Prix from that IT firm who want our business”.  Or perhaps feel it’s OK to award a contract to a firm on the basis of a nod and a wink that there’ll be a nice job next year in that business on twice the salary.  

Once standards start slipping in an organisation or country, it’s tough to turn things around. My feeling at the moment is that the UK is rapidly sliding down the league table in terms of national corruption, ethics and standards of behaviour in public life. When we see this sort of thing going on in Nigeria, Turkmenistan or Myanmar, we shake our heads and say, “what a corrupt, backward country that is – look at the crooks and chancers they have in charge!” 

Well, here we are.

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Supercomputer – Not Very Super Procurement

We started the New Year with an expensive error made in UK government procurement. Atos, the large French technology firm, were paid £25 million after the firm complained about the decision to award Microsoft the £850 million contract for a new Meteorological Office super-computer. Most of the cash was paid by the government’s Department for Business Energy and Industrial Strategy with the Met Office itself stumping up the rest.The language is often the same when this sort of case drops into the public domain. No-one is to blame. “There was no admission of liability”, said the government here.

That begs the question of course – why pay £25 million if you didn’t do anything wrong? Clearly, the government’s legal advisers must have thought there was a very high probability that Atos would have won if the case had come in front of a judge, and might have been awarded substantially more in damages.

The best description of the dispute I found is on The Register website. A fairly technical and technological issue around the specification of the computer and the solution proposed by Atos led to the French firm receiving a score of 0/5 for several evaluation questions and their bid being declared in effect “non-compliant”.  Then, as the Register reported, “It was also alleged the government was “disproportionate” in ruling its bid non-compliant without seeking further clarification on the architectural equivalence of the Atos system”.

Eliminating a serious bidder on a complex specification issue is rarely a good idea in my experience. You need to be absolutely sure the bid really does not meet your spec, and I would certainly have wanted “further clarification” from Atos before I took the drastic step of kicking them out of the competition. Poor judgement at the very least on the buy-side. Or maybe somebody just didn’t want Atos to win and was looking for an excuse to disqualify them (yes, that does happen…) 

There was then an interesting debate on Twitter about the case too. Duncan Jones, the highly respected expert who led who led the procurement practice at research firm Forrester until he “retired” last year, was rather angry about this money ending up with Atos. If a company is on the wrong end of a bad piece of procurement by a private sector firm, the disappointed bidder doesn’t get recompensed, he said. So why should it be different in the public sector, with our money going straight into the profits of Atos (and others).

It is a fair point. But my argument is that you must have some way for bidders to highlight when there has been incompetent or even corrupt public sector procurement. And if they have lost millions because of that, why shouldn’t they be able to get something back? Otherwise I do think we would see more nepotism and even criminality in public procurement, with politicians, advisers and public officials acting in their own interests rather than those of the taxpayer. If the procurement rules did not have the “teeth “ provided by bidders’ right to challenge decisions, I think we would see lots of cases that would make the UK pandemic PPE procurement experience look like a model of probity and effectiveness!  

However, I think Duncan made a fair point about how much compensation should be payable in cases like this. Working out “loss of profit” is an inexact art, and many suppliers make very low margin on big government contracts. So £25 million does sound on the generous side; but as I say, the lawyers must have felt the amount could have been a lot more if the dispute has continued.

At the early stages of development of the new UK Procurement Bill, I seem to remember that there were some major changes proposed around supplier challenges, compensation and so on. Introducing the scope for a less legalistic dispute resolution process was one idea I liked (some countries have a “procurement ombudsman” which is an interesting idea), alongside less scope for big supplier pay-outs. The proposals seemed interesting, but I believe most of those have gone now from the draft legislation, and the Bill is not going to drastically change the current situation. 

Finally though, the point to remember is this. If an unhappy potential supplier ends up being paid lots of money, it is ALWAYS because there has been a failure in the procurement process. Don’t blame the supplier – look at what went wrong on the buyer side. In the case of this Met Office supercomputer, it may have been something rather complex around the specification. But it was still a failure, another case of Bad Buying, and one that has cost us £25 million.

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What’s In Store for Bad Buying in 2023?

As we enter 2023, what do the prospects for Bad Buying look like? No doubt, we will continue to see regular procurement and contract related fraud and corruption. It will be greeted on discovery by the CFO explaining that “it was a very sophisticated fraud”. Usually, that is simply not true.  What the CFO (or CPO) means is “our processes were rubbish and wide open to criminal exploitation, but I can’t say that because you might question why I’m paid a six or seven figure salary to manage this shambolic process”.

Talking of fraud, the long-running controversy over PPE procurement in the UK will continue in 2023, with an announcement this week that the government is going to court over the supply of gowns from supplier PPE Medpro. One paragraph in the Guardian report on this leapt out at me.

“The legal claim states that the DHSC had paid PPE Medpro the full £122m for the 25m gowns by 28 August 2020. This was before any of the gowns had been inspected in the UK, and before all the gowns had arrived. Health officials rejected the gowns after a first inspection at the NHS depot in Daventry on 11 September 2020”.

I know the situation was desperate back in 2020, but to pay the full contracted amount before inspecting the product at all – it just seems incredible that any procurement professional would agree to that. Anyway, more to come on PPE this year, no doubt with more discussion of links to politicians, dodgy suppliers and billions of wasted money.

Moving on from PPE, the public sector (in every country) will continue to struggle with complex and technologically complex procurement in areas such as Defence and major IT programmes. We can hope that the UK Ministry of Defence sorts out the long-running Ajax armoured vehicle fiasco, another programme with potentially billions of pounds on the line.  The latest comments in December during a House of Lords debate seemed a little more positive but let’s wait and see. It’s not just the UK of course. Just before Christmas, we saw reports in the German press and on the Jane’s website about some of their army’s vehicles following a major training exercise.

“Germany suspended procurement of the Puma infantry fighting vehicle (IFV) on 19 December after 18 of the vehicles broke down in an exercise preparing for their first assignment to the NATO Response Force Very High Readiness Joint Task Force (VJTF) in January, when Germany takes over command of the force”.

But the UK MOD seems to have issues with low tech procurement too. Recent reports suggest that the organisation still hasn’t got to grips with maintenance of military housing, a long-running example of Bad Buying on several counts. It started with a dreadful PFI programme that cost the taxpayer billions, and now the relatively new contract for looking after the homes is not delivering satisfactory outcomes for those who live there.  A contract management failure maybe?

Of course, it isn’t just the public sector that demonstrates Bad Buying, although the private sector is better at keeping failures hidden. I would argue that the professional services market (audit, consultancy, legal services) demonstrates a long-term failure of markets, procurement and buyers generally. Last month, the 100 Group, which represents the Finance Directors of some of the UK’s biggest firms, wrote to the “big four” audit firms to complain about rising fees. To which we might respond – well, you are the clients, why don’t you do something about it?

In truth, there is an oligopoly in the audit market. So the firms can get away with saying they are “investing in audit quality,” whilst in practice the extra revenue is channelled into paying their partners more and more each year – £1 million plus now in large firms. EY also increased the salaries of its junior accountants by 13% recently – nice for those people no doubt, but we all know that it is the clients who will pay for that generosity.

To some extent, legal service and strategy consulting has gone the same way – higher and higher salaries for firm’s partners in particular, whilst clients get exploited. Yet too many buyers are unwilling to use approaches that might mitigate cost increases, such as applying real competitive pressure, negotiating hard and skilfully, managing individual assignments more carefully, or looking at alternative suppliers to the top (and most expensive) firms.

Anyway, I’ll leave you with four thoughts for the New Year – maybe they could form the basis of some procurement new year resolutions for your organisation!

  • Check that you have everything in place to minimise the risk of fraud and corruption in your procurement activities. You can’t make it 100% criminal-proof, but you can make wrongdoing much more difficult by applying reasonably basic processes, systems and policies.
  • Competition is still the best mechanism invented to drive positive outcomes and outputs from suppliers and contracts. Use it well and widely.
  • Be a little cynical – well, maybe more than a little – about what suppliers promise you and the claims they make about their products and services, particularly in areas such as technology.
  • Organisations that are “good at procurement” don’t just focus on the skills and knowledge of their procurement teams – they understand that a wide range of people in the organisation need to understand their own role in the end-to-end process. They must also have the right commercial skills to play their part in procurement success.
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Gareth Davies, NAO Supremo, On Efficiency, Standards (and Procurement)

Last week, Gareth Davies, head of the UK’s National Audit Office, gave a speech to members of parliament and civil servants. He drew on the experience of NAO in carrying out dozens of reviews over the last three years to highlight “three big lessons for public spending in large scale emergencies”.  All three have implications for and are related to procurement in some sense.

“Firstly, the importance of maintaining basic standards of public accountability even in a crisis, and restoring normal controls as soon as possible. 

Secondly, the central role of good quality data in responding quickly and targeting resources accurately. 

And thirdly, the need for a new approach to improving the country’s resilience to large scale emergencies, which minimises the impact on current and future taxpayers”.

Under the first heading of basic standards, he accepts that there wasn’t time to carry out full and normal processes in areas such as PPE procurement or furlough loans. But there was then no excuse for government failure to apply the safeguards of transparency, for example in terms of large PPE contracts.

“It was therefore a concern to see significant delays to government publishing the details for some (often very large) contracts that had been awarded without competition. It is not an onerous task to publish this information promptly, and it is a vital one”.   

Timely accounting is also key, and he points out the worrying situation in local government where a third of councils at the end of September 2022 had still not published their accounts for the year ended March 2021! Given the waste of money / fraud /massive incompetence that is now coming to light in councils such as Thurrock, Croydon and Slough, timely accounting is “critical to protecting taxpayers and maintaining trust in public spending”.

Under the good quality data headline, he praises some aspects of the NHS App as a good example of the benefits that data can bring, but government has to do more, and progress has been too slow. There are three key issues that can help drive greater efficiency:

  • Data standards: essential for efficient use of data, held in a consistent way
  • Data quality: for accurate and reliable results and maintaining public confidence 
  • Data sharing: so that citizens don’t have to repeat themselves 

Finally, resilience – “how is government ensuring that our country is resilient enough to withstand costly crises, without placing an unaffordable burden on taxpayers? And what will good value for money look like in future pandemic planning?”

We need more flexible approaches, he says, but above all we need a more considered approach to risk. For instance, given climate change, there are major issues around water supply, but NAO found no convincing plans to stop the south of England running out of water by 2040! (That’s a worry for a vegetable grower like me even with 8 rainwater butts / bins dotted under various drainpipes and around the garden…)

“To be truly resilient, government must plan for scenarios that it previously dismissed as extreme, and revisit its assessments of how likely they are to happen. This is crucial if we are to achieve value for money, not just in the short term, but for future generations.” 

His final remarks on efficiency in government spending more generally focus mainly on evaluation and evidence. Basically, government spends money and has little idea of whether it does what it was supposed to (or achieves anything at all in some cases). Here’s a shocking fact. In 2019,  – “out of the government’s 108 most complex and strategically significant projects, only nine were evaluated robustly. Seventy-seven of them had no evaluation arrangements at all”.

There are other good points around efficiency. Understanding and managing demand for services is key; and we need more and better investment in digital services (with the caveat that projects are consistently over-optimistic about implementation in the public sector).  Davies wants more focus on the nuts and bolts of efficiency. “We have seen too many high-level ambitions fail to be translated into concrete plans, adequately resourced and tightly-managed. The skills and organisational discipline required for this are well understood, but they are not always valued and prioritised in government.” 

Indeed. I still wait to see the first appointment of a Permanent Secretary who has risen through roles in procurement, commercial, project management and delivery, rather than the traditional policy and private-office-heavy route. That would be a real indicator that government is taking these messages seriously!

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A Mone About PPE (Again!)

Reports in the Guardian last week suggested that Michelle Mone, business woman and member of the British House of Lords, benefited directly from PPE contracts which the government awarded during the pandemic.

Mone and her husband had denied that they gained personally from £200 million worth of PPE contracts, following disclosures that they lobbied politicians including Michael Gove for PPE Medpro to be awarded the business. That enabled the firm to secure a place on the government’s “VIP lane”, which prioritised certain companies that were offering to supply PPE. Many of the firms in that group were recommended by politicians, although others came via recommendations from civil servants, advisers or other prominent people.

Mone’s lawyer last year said she “did not benefit financially and was not connected to PPE Medpro in any capacity”.  But already there was evidence that she was involved, and now leaked documents produced by the bank HSBC appear to show that her husband, Douglas Barrowman, was paid at least £65 million from PPE Medpro. Funds were then distributed via offshore accounts and trusts, and some £29 million of that ended up in a trust benefitting Mone and her children.

Separately, PPE Medpro is being investigated for fraud by the National Crime Agency. It is not clear if that is linked to the government’s dispute with the firm over the quality of gowns supplied as part of the contract, which did not meet quality standards (according to the NHS).

Leaving aside the specifics on Mone and Barrowman, who appear to encapsulate the moral bankruptcy of many of the PPE “middlemen” and agents who exploited the pandemic to make excess profit, the case does highlight again some of the weaknesses in PPE procurement. It is easy to be wise after the event of course, but with billions made by some very dodgy people, it is not unreasonable to ask what went wrong. Here are a few of the key issues – we have previously discussed much of this of course!

  1. The PPE procurement team was slow to ensure that the specifications provided to suppliers were exactly what NHS users needed. That meant it was not the suppliers’ fault that some unusable goods in the early days of Covid did meet those specifications. In other cases, it may be that the supplier was at fault, but the waters are muddy. And whilst time was of the essence, surely samples of items should have been provided before huge consignments were shipped and paid for. It also took a while to get basic supplier due diligence in place.
  • The idea of having some sort of prioritised potential supplier system to evaluate offers was in itself reasonable, given so many firms were approaching the buyers. But it should have been a totally transparent process, with the “rules” in the public domain, and it should not have been based primarily on “knowing the right people”.  A simple pre-qualification process with a handful of questions would have worked better than what was put in place. I am also amazed that no senior civil servant spotted that the focus on MPs’ mates would look unfair or worse once exposed. The “Private Eye” test (how will this look on the front page of the Eye / Guardian / FT)  should have highlighted the issue here.
  • Again, whilst acknowledging the pressure to secure supply was incredible, I don’t understand why buyers didn’t delve a little deeper into the cost structures of the suppliers and establish how much margin was being made by those intermediaries. That would have enabled at least some attempt at negotiations to moderate the margins. The lack of curiosity there fuels the conspiracy theories that the buy-side was complicit in helping firms and individuals to rip off the public purse. Just saying “oh, we paid the market price” – which was in effect itself determined by whatever price was offered by those exploitative firms – was not good enough really.

Finally, I have still seen no real explanation of why the estimates of PPE requirements early on were so far out and led to the huge over-ordering of stock, with at least £4 billion worth wasted. That is still costing us now, as PPE is sold off cheaply, or even burnt, whilst we still pay millions for storage. It may be that there was nothing malicious or incompetent behind that, but it would be good to understand how we went so wrong. After all, that was a clear error, one that cost the taxpayer billions.

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Waitrose Denies that New Systems are Causing Stock Issues

We write pretty regularly about public sector procurement disasters, probably more than we cover private sector failures. When I was researching and writing the Bad Buying book, I found it easier to find stories about government entities than those featuring major private sector firms.

There are a number of reasons for that. Some areas of government spending – such as defence – are just very difficult and complex.  So it is a challenge in any and every country to execute that type of  procurement well. There is also the political factor, politicians who want to leave a “legacy” for instance, or who want to pursue a certain policy despite the fact that there is no procurement solution that is likely to work.

But the biggest reason is probably just the nature of government, meaning there is a higher probability that a disastrous IT system implementation will get into the public domain. So we find out about numerous tech failures in the UK public sector, going back to the DSS ICL “Benefit Card” fiasco, to the ongoing Home Office/Police Airwave failure.

So it was interesting and unusual to see a high profile private sector firm mentioned in the press recently for a significant IT problem. According to the Times, Waitrose, the upmarket supermarket chain and part of the John Lewis Group, has seen problems with stock management in recent months, which is being blamed on the implementation of a new Oracle / JDA ERP system.

But it is an odd example, because although the Times report was quite detailed, Waitrose has strenuously denied that there is a problem. So the newspaper says, “The idea is to replace the partnership’s antiquated systems with the Oracle system. But during the switchover, when the two systems have to temporarily “talk” to each other, the Oracle system has been producing incorrect numbers. Every time a new part of the system is introduced, more problems emerge… “

The report says that product availability has slipped from 3/94% to around 91%  compared to an industry average of 92%. Well, to be honest, that does not sound like a major problem, although many readers did comment on the article to back up the claim, complaining about lack of product in their local stores. Particularly cheese …

Waitrose then denied that there is a particular problem or that there are system issues, claiming that their product availability is still better than several major competitors. But one point which did make me wonder was the statement that the implementation has been ongoing for 6 years now. That does seem like a long time – even given Covid – to get a new system in place.  

Coincidentally, I heard from a friend the other day about another organisation in a very different industry (but one that will be well-known to most readers here) that has had major Oracle implementation problems this year. Now clearly many ERP implementations do succeed, or Oracle and SAP would not have grown to be two of the largest tech firms in the world. But it is also clear that things can go wrong.

I included a salutary tale in the Bad Buying book, all about FoxMeyer, a US pharma distributor. That ERP implementation appeared to set off a train of events that ended up with bankruptcy, and illustrated a number of common failings in IT disasters. The case study seemed to show defining the requirement wrongly; relying too much on external consulting-type expertise for the implementation; several suppliers sharing unclear accountability and blaming each other when things went wrong; trying to integrate different systems that did not really want to integrate; and poor programme management. We all probably recognise some of those warning signs.

So whatever the truth about Waitrose, if your organisation is planning or going through a major systems implementation, be very careful. Get the right expertise lined up, including at a minimum, some internal “intelligent client” resource even if you are using consultants for much of the work.   Be cautious, do your risk management properly, define accountabilities, never assume different systems will integrate easily (e.g. consider the data architecture), plan carefully, put the governance and reporting in place….

It is a long list, so good luck!

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Supplier Collusion (Part 2) – Which Industries Are Vulnerable?

In part 1, we started discussing the presentation from Zac Trotter of the US Department of Justice at the recent NPI conference in Atlanta. He’s an attorney who specializes in searching out, investigating and prosecuting cases of supplier collusion (what a fascinating job!)

We talked about the types of collusion in part 1, but here are Trotter’s thoughts on what makes a market, product or sector susceptible to collusion. These factors will increase the likelihood of such supplier behaviour.

  • Few sellers – that makes it easier for suppliers to get together and fix the market.
  • Limited number of qualified bidders – there may be markets with many suppliers but if only a few are qualified perhaps to bid for particular government work, that will make it easy for them to collude.
  • Difficult for new competitors to enter the market – new suppliers are less likely to be part of existing collusion and can break the stranglehold of the conspiracy.
  • Few substitute products – if buyers can’t easily switch, they may have to accept higher pricing or limited competition.
  • Standardized products – if the buyer is content with products from all the firms involved, it is easier for suppliers to rig bids or allocate business between them.
  • Repetitive or regularly scheduled purchases – again, this helps suppliers allocate work and plan an effective conspiracy.
  • Rush or emergency work – this type of work is likely to be awarded via a less rigorous procurement process, and it is also easier for a supplier to “no bid” without raising suspicions, which can help to allocate work around the colluding firms.

After we published part 1, there were some interesting comments on LinkedIn from readers. One suggested that detecting collusion might turn out to be a practical and productive use for AI. We might imagine how AI could analyse a large quantity of data around responses to tenders and look for evidence of suspiciously high bidding, bids with similar wording, or other suspicious patterns of behaviour from suppliers that might indicate potential collusion.

Clearly, you would need a lot of information available to be analysed – so maybe it is something that would apply more perhaps to a government that could interrogate tenders from many different buying organisations rather than it being feasible for an individual business. But an interesting thought.  

Finally, here is a short case study taken from the Bad Buying book, which illustrates the type of market that can be open to collusion and fraud of this nature. Incidentally, six years on from the European commission imposing fines, the truck cartel described here is still facing huge claims from buyers of trucks. Damages in the billions of euros are likely to be awarded when the case finally goes through the courts.

“Which markets are most vulnerable? It’s clear that it is easier to set up, control and sustain a cartel in markets with a relatively small number of players. But geography also comes into play here. The construction market in most countries includes many firms, yet that sector has seen cartels thrive on a limited geographical basis or in a specialist sub- market, where the number of players is smaller.

One cartel in a relatively tight market was formed by six huge European truck manufacturers. Daimler, MAN, Volvo / Renault, DAF, Iveco and Scania are facing billion-dollar damages claims from their customers, mainly logistics and transportation firms, for illegal price- fixing.

By April 2019 more than 7,000 transport companies from twenty-six countries had filed more than 300 claims in the German courts. That follows fines of €2.9 billion on four truck manufacturers imposed by the European Commission in 2016/17.  The Commission found that between 1997 and 2011 the truck manufacturers exchanged information about prices, price increases and when new emission technology would be launched. They also passed on associated costs to their customers”.

So don’t assume that your organisation could not possibly be experiencing supplier collusion – as Trotter said, it happens in a wide range of different industries, from manufacturing to financial services, from airlines to construction. Keep an eye out for suspicious supplier behaviour, in bidding (or not bidding), pricing or sub-contracting.  If you’re in the US, you have the Department of Justice to support you; the European Commission plays a role in the EU, and the Competition and Markets Authority is the body to speak to in the UK.

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Supplier Collusion on the Agenda at NPI Conference

At the National Procurement Institute conference in Atlanta earlier this month, delegates (public sector, mainly from US cities) heard an interesting presentation from Zac Trotter, a Trial Attorney from the Antitrust Division at the US Department of Justice. He stressed that his comments were not representative of the Department, which I guess he has to say, but he gave a very clear and engaging explanation of his fascinating area of expertise – fighting against supplier collusion. His focus was on the mechanics of collusion, with additional comments on how procurement professionals can look out for it.

Competition is key to getting value for money, he said, something we can all agree with. But collusion does happen, and because of its secretive nature, can go on for years, or even decades, without being discovered. And public procurement is a big target for fraud of this sort because of the amounts of money involved. As a US judge recently said, “Like bears to honey, white collar fraudsters are drawn to billion-dollar federal programmes”!

In US law, the Sherman Act of 1890 (Section 1) defines the attributes of the collusion offence as:

  • Agreement or conspiracy to restrain trade (that is subject to interpretation and clarification as it is a very broad definition)
  • Participants knowingly joined – and intended to agree (as conspirators)
  • Interstate or foreign commerce (a “technical” provision)
  • Statute of limitations is 5 years

Prosecutors need to establish agreement between two or more people for a case. Interestingly, juries are more inclined to convict if there is evidence that conspirators knew what they were doing is wrong. But there doesn’t always need to be “hard” documented agreement to collude. A “course of conduct” can show guilt – for instance, if one firm always bids low, whilst two bid high but become sub-contractors to the winner. If that keeps happening, it might provide strong circumstantial evidence for prosecution. For buyers, consistent high bidding from the same firm should be a “red flag” for procurement – why would the firm bother if they keep losing, unless there was something else in it for them?

The three types of collusive behaviour were described by Trotter as;

  1. Allocation agreements
  2. Bid rigging agreements
  3. Price fixing agreements

Allocation agreements mean suppliers colluding to “divide the pie” in a particular manner. That might be based on splitting business by markets,  geography, customer (big, small), or products. Watch out for when a supplier doesn’t bid when you might expect them to. (e.g. they bid for a men’s uniform contract but not for  women’s uniforms). Or perhaps a competitor pulls out of a market for no obvious reason.

Bid rigging – here, suppliers raise the price of products or services above a true “market” value, effectively setting an artificial price. There may also be pre-determined winners and losers of contracts. Bid rotation is a technique where suppliers agree to a defined pattern of different firms winning work, or divided up in other ways (clearly, this is linked to the ”allocation” technique). Then we see “cover bids”, where suppliers submit deliberately expensive bids to make it look like there is competition, or “bid suppression”, where suppliers refuse to bid in order to reduce competition. So buyers should watch out for firms saying, “we’re too busy to bid”.

Price fixing – means the customer has no genuine way to negotiate, as firms fix or otherwise determine the price at which products are sold. That might mean coordinating price increases, or setting price floors, or a new surcharge that everyone in the industry implements together.  

There are big penalties now in the US for this behaviour. Participants can go to jail and there are potentially very large fines. Penalties of up to $100m have been imposed fairly recently on sectors  from canned tuna to cancer treatments. The courts can also award “restitutions” to those affected, suppliers can be barred from government contracts and there have been civil lawsuits too. Nevertheless, collusion continues in many industries.

(Part 2 to follow)

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Why Did Apple Sack Top Procurement Guy?

Tony Blevins was sacked as Apple’s VP of procurement recently. He was at a car event in Pebble Beach with his Mercedes-Benz SLR McLaren when he was approached by TikTok creator Daniel Mac, who asks the owners of expensive cars what they do for a living. Blevins answered “ ‘I have rich cars, play golf and fondle big-breasted women, but I take weekends and major holidays off. Also, if you’re interested, I got a hell of a dental plan.’ 

That’s an approximate quote from the 1981 comedy movie, Arthur, where Dudley Moore says ‘I race cars, play tennis and fondle women, but I have weekends off and I am my own boss.’  So it wasn’t an original comment, which doesn’t really excuse him – also, if you are going to say something some might consider offensive, at least make sure its funny!

Anyway, the video hit the Internet, staff at the firm complained to Apple HR, and he went. He apologised, telling Bloomberg, “I would like to take this opportunity to sincerely apologize to anyone who was offended by my mistaken attempt at humor”.  

Blevins reported to either the CEO Tim Cook or COO Jeff Williams. He was known as the Blevinator and had a reputation as a fearsome, tough negotiator, with stories of his tactics reported in the press – including getting FedEx to hand-deliver his rejection of a price proposal to their rival, UPS!  To be fair, some of his tactics seem pretty smart. Running what was in effect a real-life reverse auction by going from supplier to supplier in their hotel rooms, negotiating to drive down price on glass for the new Apple office seems a reasonable approach to me. He also rotated staff every couple of years to avoid them forming close relationships with suppliers – again, many firms do that and to some extent it is not a bad idea from a complacency or indeed corruption poot of view.

But we might wonder why Apple needed to take such a tough line with suppliers given their very healthy profit margins. The simplest answer is – because they can. Power is still the basis of commercial relationships, as Professor Andrew Cox always told us. Where Apple hold that power, why wouldn’t they use it with their suppliers? We could argue however that sacrificing a little margin in order to develop stronger relationships with key suppliers would be worth it in the longer run. And if Blevins tough negotiation actually drove suppliers out of business or out of Apple’s supply base, then it certainly wasn’t sensible.

So there are three reasons why Apple might have got rid of the Blevinator. The most obvious is the (arguably) offensive nature of his comment, and perhaps what it might indicate about his general attitude. Tim Cook, CEO of Apple, has spoken about the need to get more women into tech roles so his CPO making such comments is not the best support for that objective.

The second might be that Apple wants to move away from the old-fashioned leveraged approach to procurement and become more collaborative, working in a more harmonious manner with suppliers. Blevins might have stood in the way of that, representing as he did that previous tough approach.

And finally, in many firms, a CPO driving a supercar might ring some alarms. I remember a Ministry of Defence procurement official in the UK years ago who earned maybe £60K a year (in current terms), yet lived in a multi-million pound mansion in the Thames Valley. Surprisingly, no-one asked the key question – where did he get the money from? The answer of course was “bribes paid by suppliers”.

Now I’m not accusing Blevins of anything of that nature – I’m sure he earned plenty from Apple. Finding the odd half-million for his car wasn’t a problem for him given his likely stock options. But perhaps driving that sort of car just isn’t the sort of image a CPO should project.  And a supplier might well think, “Apple can afford to pay me a bit more for my product if its VPs are driving supercars!”

Anyway, this is a “Bad Buyer” story rather than bad buying, but fascinating, nonetheless. And if you want to learn more about it, do listen to Kelly Barner’s excellent podcast on this topic at Supply Chain Now  – it’s a very enjoyable, informative and interesting 20 minutes during which time she goes into more detail on Apple’s approach to suppliers – and how that might be changing.

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