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Top German Broadcaster Resigns After Bad Buying (and more…)

In many countries, the image we have of German business and management is one of efficiency, formality and organisation. My view was shaken a few years back when I experienced the chaotic programme of work on the railways in and around Berlin, with chaos in stations and no help or communication apparent for confused travellers. Then we had the Brandenburg Airport fiasco, one of the best case studies in my Bad Buying book! It finally opened last year, 10 years behind schedule and billions over budget after a whole spectrum of incompetence, bad planning, fraud, and financial mismanagement had been demonstrated during its construction.  

Another more recent story shows that less than perfect side of German management. Patricia Schlesinger was the €300K a year the director (CEO) of Berlin-based RBB, one of nine regional public broadcasters in the country funded by the taxpayer. But she resigned this week after a series of accusations about money wasted, conflicts of interest and improper procurement – in fact, the word “embezzlement” is even being used.  Berlin’s public prosecutor is looking at accusations she used RBB funds to pay for lavish dinners at her home and private use by her husband of her company car and chauffeur.

Wolf-Dieter Wolf (crazy name, crazy guy…), chairman of the RBB board, also stood down. He is linked to some of the accusations and is seen as being complicit in her behaviour.  Perhaps most extravagant was the €658,112 spent on refurbishing her office, according to The Times – shades of Fred Goodwin, the ex-Royal Bank of Scotland head. When the new RBS HQ opened in 2005 there were reports of over-the-top office furnishings and his own “scallop kitchen” (denied by his lawyers, we should say)!

In Berlin, the parquet flooring for Ms Schlesinger’s office cost a mere €16,783, and (here comes a Bad Buying link) complaints by the internal compliance department that no other quotations for the work had been sought were overridden.

The accusations began in June with a report by the news site Business Insider that Schlesinger’s husband, Gerhard Spörl, a journalist, had been awarded a consultancy contract by the state-owned trade fair company Messe Berlin. That contract was allegedly signed off by the company’s supervisory board chief, the same Wolf-Dieter Wolf. Was this an example of nepotism and favouritism? Then other consulting-type contracts emerged with little evidence of proper procurement, with accusations of Schlesinger and / or Wolf in effect favouring their friends.

Of course, this apparent arrogance and disregard for rules is something we see frequently and is not limited by geography, sector or type of role. (The Bad Buying book has quite a few examples, as you might expect). The boundaries between disregard for the organisation’s money or rules and outright fraud are also sometimes difficult to define exactly. However, there seems to be a character trait that means some people just feel they deserve more, they deserve to be treated differently and the rules don’t or shouldn’t apply to them. Boris Johnson comes to mind, as does Carlos Ghosn, now an international fugitive after running Nissan and being accused of using corporate expenditure for his personal benefit.  

But back to the German broadcaster case, and I’m trying to think of a good way to close this article. I mean, if only there was a word for that feeling of pleasure we get from someone else’s misfortune, particularly when they think they’re better than you…!

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M&S Buys Logistics Supplier – Why?

 Supply Management reported this week that retailer Marks and Spencer (M&S) is buying Gist, a logistics business.  Gist apparently do much of the food logistics work for M&S, but clearly all has not been well. M&S said its food supply chain “remains less efficient and, we believe, higher cost to serve than our competitors”.  Stuart Machin, the CEO, said “M&S has been tied to a higher cost legacy contract, limiting both our incentive to invest and our growth”. 

But it seems a rather strange move to buy the firm rather than perhaps;

  1. Negotiating a better deal with Gist so that performance and cost is more in line with that achieved by M&S’s competitors; and / or
  2. Finding alternative suppliers if Gist can’t or won’t meet those requirements.

I know that changing suppliers is not easy when it is clearly a large and strategically important contract. But it is not impossible.

Let’s dig into the transaction more deeply than Supply Management did. Gist is currently owned by Linde – the largest industrial gas company in the world.  But how did Linde end up as owners of a transport firm? According to Wikipedia,

“In 1969, the BOC Group acquired GL Baker, after it expressed interest in its use of liquid nitrogen in chilled containers. The company was renamed BOC Distribution Services in 1991, before being rebranded as Gist Limited ….  Gist was acquired by Linde as part of its 2006 acquisition of BOC.  Following the group’s merger with Praxair to form Linde plc, Gist continues to operate as a separate entity under Linde”.

Gist declared profits of £24.3M on 2020 revenues of £472M (2021 results are not yet published). The M&S website tells us that “M&S is acquiring the entire share capital of Gist for an initial consideration of £145m in cash. A further amount of £85m plus interest will be payable in cash from the proceeds of the intended onward disposal of freehold properties or, at the latest, on the third anniversary of completion”. 

Another £25M might be payable under certain conditions and somewhat confusingly, “M&S has the ability to retain the freehold properties should it wish to do so in which case the full amount of £110m plus interest will be payable.” So I assume the basic deal does not include the freeholds.  

The big question is how M&S got into this position in the first place. It is a pretty dramatic step to spend over £200M to get out of a logistics contract! I can’t think of a similar case. Going back to the original M&S strategy here, you can imagine why a firm might go for the “strategic partnership” option in this spend category, rather than either insourcing or using a more dynamic multiple-supplier strategy. “Playing the market” might give the buyer more competitive leverage when it comes to negotiation, but might have some less positive practical implications compared to a longer-term partnership.

But how on earth do you get into a  situation where you are apparently locked into “a higher cost legacy contract which expires in 2027”? The M&S announcement also says this.

“The Gist business being acquired generated a proforma EBITDA of c.£55m in the year ended December 2021, with the majority of profit reflecting management fees recharged to M&S under contractual arrangements, which will be eliminated upon consolidation to M&S”.

So “the majority” of Gist’s profits come from M&S.  You would think the firm would therefore be in a powerful position to re-negotiate this onerous contract?  But you can also see that Linde may not have had much interest in owning a non-core logistics business – perhaps they just said, “we’re not moving on the contract, but if you want to buy Gist, we’ll do you a good deal”.

And in the short-term, it does look like a pretty good deal, if you can pick up £55M EBITDA for £230M!  But the downsides of owning your own logistics firm need considering. Some analysts would consider it a distraction from the M&S core business – as a retailer of food,  clothing and homeware. What makes the top management think they can run a logistics business, and how much attention and time might it divert from that core business?  

Secondly, Gist may well find that other retailers do not want to use a firm owned by their retailing rival. It’s hard to see Tesco, Sainsburys or Waitrose rushing to Gist’s door.  Might M&S ownership cause an exodus of other customers, which could be an issue even if they aren’t as important as M&S itself?

I have no personal interests here, but I see this as a worrying sign. It must have been a pretty bad deal with Gist, or M&S was incapable of managing the contract to their own satisfaction.  Neither gives you much confidence in the firm’s commercial nous. I’d also worry about the distraction factor going forward. So unless M&S can explain better what they are up to, I’d put this down as a (potential) Bad Buying case study.

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Thurrock Council Comes Up with a New Type of Bad Buying

Having spent several years researching, writing and now promoting the Bad Buying book, I thought I’d heard pretty much everything in terms of public sector organisations finding ways of wasting taxpayers money through incompetent or corrupt procurement, investment and spending.

But there is always something new, and the case of Conservative-run Thurrock Council in Essex and their investments in bonds linked to solar power is unique and astonishing. You can read the full story here – it is great work by Gareth Davies of the Bureau of Investigative Journalism, supported on this story by the Daily Mail.

Thurrock has invested in solar farm businesses owned by an individual called Liam Kavanagh. Now I suspect most procurement professionals are inherently suspicious of people who haven’t been around for long, or whose businesses are only recently established, but who buy multiple fancy cars / fancy homes. In the case of Kavanagh, “his jetset lifestyle included the use of a private jet, a fleet of super-cars and a Hampshire farmhouse with a swimming pool, wine cellar, home cinema and steam and hot tub room”.

As the Mail reported; “Cash-strapped Thurrock Council in Essex borrowed £655million of public money – the equivalent of triple what it spends on services each year – to invest in 53 solar farms across the UK. It agreed a series of deals with globe-trotting businessman Liam Kavanagh, whose integrity was later questioned by a High Court judge over £5million his company banked in ‘commission’.”

And now there appears to be some £130 million of Thurrock’s money that has “disappeared”, with questions over even larger sums owed to the council. Kavanagh has liquidated companies that took money from Thurrock and has re-arranged his financial affairs, leaving the council with concerns over up to £200 million that it is owed. Incredibly, much of the investment was made by borrowing from other local authorities, who could be in trouble if Thurrock then default!

Davies reports this.  “In an interview at the time, Clark (Thurrock’s CFO) described a bizarre arrangement, involving dozens if not hundreds of short-term loans, many as short as a month in length, with the effect that the council was in a perpetual state of borrowing from one local authority to repay another. Piecing together data in obscure spreadsheets revealed Thurrock had borrowed from at least 150 other councils”.  Thurrock also borrowed some £350 million from a Treasury-run lending body.

Local authorities seem to be a hotbed for financial waste, incompetence and fraud. There are many questions still being asked about Croydon’s property “business” – that council went bust and Whitehall had to send in “commissioners” to run it. The same has happened in Slough – dodgy property investment there too.

Nottingham Council decided to get into the energy business and its “Robin Hood Energy” firm stole from the taxpayer to give to … well, tens of millions in losses disappeared anyway. Gloucester tried something similar and failed.  My own local council, Surrey Heath, invested some £120 million in buying commercial property just before the bottom dropped out of that market. The valuation is now more like £50 million.

So the problems cover councils run by Labour (Slough, Liverpool) and the Conservatives (Surrey Heath, Thurrock). It does often seem to be council officials who are the driving force behind reckless investments and spending, while the councillors are not informed or don’t have the intellect or power to intervene. In the case of Thurrock, Davies reported that officials kept elected councillors in the dark for months and have not given full access to the details (as well as blocking FOI requests and questions).

Whilst Davies has to be careful in his reporting – “While there is no suggestion that any rules were breached….” he says, we must wonder whether in some of these examples, corruption was involved, although it is hard to prove. Do external parties (suppliers, property developers etc.) say to their inside-the-council enabler “look, I can’t give you anything now, but in five years’ time when the heat has died down, there’s a million for you”.  

Anyway, if it is not corruption, then we are seeing far too many examples of gross incompetence from our councils. And it is costing taxpayers many, many millions.

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Good Tender Documents – More Important Than You Might Think

You may have read about the recent UK hospital trust tender that hit the media because of its questions about diversity and transgender issues. It turned out that the questions should not have been included in the document; it was human error rather than anything else.

I recently got involved with another National Health Service tender – we’re talking about a “collaborative buying” framework here, potentially worth hundreds of millions.  A consulting firm I’ve worked with over the years asked me to look at the tender documents, because they could not work out how on earth the buyer could possibly differentiate between the various bidders. Basically, there were no evaluation questions that actually asked the bidders to explain their core technical capability!

I read it and agreed that is was a very odd document.  No selection outcome could possibly have stood up to legal challenge, for a start. Luckily, I knew a senior procurement person in the buying organisation, so I called and explained the issue. A few days later, the tender was pulled. Pure human error again.

I was reminded of these cases during an Oxford POGO session last week. (POGO is a very worthwhile knowledge sharing club – more details here). The topic was capability in public procurement, and there were a number of interesting speakers. But it was Steve Schooner, Professor of Government Procurement Law at the George Washington University Law School in Washington, USA, who brought up the issue of writing tender documents.

Too often that was seen as a pretty unimportant task, but he said (quite correctly) that is a key skill if you want to get the best potential suppliers, the best proposals and ultimately the best outcomes from your procurement and suppliers.

He also said that “no-one should be allowed to write a public sector tender document until they have sat supplier side and responded to a tender”!

I think that is a great idea and maybe should be a core training activity for developing public procurement professionals. Over the last decade or more, I’ve occasionally supported clients who were responding to (usually public sector) tenders. It has given me a lot of insight into what good procurement practice looks like – and more depressingly, what bad practice looks like. I’ve also worked buy-side of course and tried to help buyers to get it right! It is not always easy, but it is always important.

As well as the contribution of this stage in the process in terms of final outcomes, there is another factor to consider. The tender documents you issue are probably the most direct and often the most widely-read manifestation of your procurement function’s competence.  

You can claim to be a world-class team, you can win lots of awards, but if potential suppliers read your tender and think “what a load of old rubbish this is”, then more than anything that will be what informs their view of you. The same often applies with internal stakeholders. If there are non-procurement colleagues involved in a procurement process, and they see that the procurement professional doesn’t know how to produce good material, or (even worse) the stakeholder starts to get calls from frustrated potential suppliers, then this is very bad news for your internal reputation.

Going back to the beginning, I spoke to a senior person involved in the “controversial” case of the diversity questions. We’ve learnt two things, he said. Firstly, we need more and better training for all our staff who are involved in producing tender documents. And secondly, “we need better quality assurance before material goes out of the door”.

Often top procurement executives feel they are too busy to read tender documents, or that it is  a low-value task for someone of their seniority, skills and experience. Below their pay grade, as it were. But if that is your view, just remember – a lousy tender document has the potential to trash your team’s reputation more widely and faster than just about anything else.   

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Transformative or Tedious? The New UK Procurement Bill

The new UK public procurement legislation has been laid out in a Bill now which is being discussed and revised in the House of Lords. Leaving aside political comments, most independent experts, particularly the procurement academics and lawyers, see it as being somewhere in the range between “mildly disappointing” and “mildly positive”.  (Read an excellent assessment from Professor Sanchez-Graells here and a useful set of proposals for improvement from the UK Anti-corruption Coalition here).

I suspect that is inevitable. Public procurement aims to meet several different objectives, but sadly these are not all congruent – we can’t have it all. Public procurement has to balance:

  • Achieving fundamental value for money in what is being purchased – getting the right blend of quality and cost that enables the taxpayer to feel their money is being spent carefully and sensibly to generate the desired policy outcomes.
  • Minimising the chances of fraud or corruption by making such actions difficult or easily detected.
  • Encouraging innovative, dynamic, competitive markets – not just to help achieve future value for money in public spend, but because that will help the wider economy too.
  • Contributing towards wider UK government and societal objectives – economic, social, environmental or, as we now see, more overtly “political” in nature. (Using public procurement to support the government’s “levelling up” agenda for example is the type of political objective we’ve never really seen before in public procurement). 
  • Doing all of this in manner that keeps the transactional cost for both buyer and supplier to acceptable levels.

The problem is that these objectives can be conflicting. Simplify processes and deregulate, and you may reduce transactional cost and stimulate markets, but it will inevitably increase the chance of fraud and corruption. Focus more on the “social value” benefits, and if you are not careful, you will jeopardise basic value for money. And so on.

So it is impossible to keep everyone happy with regulations, and this is why it is difficult to assess the long-term effects of the new Bill. It will be at least two years before we see how the different objectives are being met or not met.

Perhaps the element that has most potential for transformation, but is also a major area of uncertainty, is the freedom for contracting authorities (CAs) to design new procurement processes. Will we see innovative and effective new ideas emerging, including innovative use of technology? Or will CAs quickly default to the “recommended” standard options that Cabinet Office are going to provide?

No doubt we’ll be writing further about this topic as the Bill proceeds into law, and there are some key areas where I’m not clear yet about the likely implications. The proposals on the role of technology, and the whole transparency area both have some positive aspects, for instance, but the devil is in the detail. However, here are a few predictions to be going on with.  

  1. The Cabinet Office standard processes will look pretty similar to the previous EU procedures, but with a bit more “negotiation” added in. But there will be so many caveats and warnings about (e.g.) equal treatment for suppliers that CAs will only use negotiation very cautiously…
  2. … unless they are running a corrupt procurement, where somebody in a powerful position wants a particular supplier to win. But of course that NEVER happens in the UK(!!)  I’m afraid we will see increasing corruption in public procurement, not just because of the greater freedoms, but because moral and ethical standards in the country are eroding from the top down.  
  3. Some lawyers are getting excited about the new rules on exclusion (mainly because of their complexity) that enable buyers to ban firms from bidding. But they will prove to be largely theoretical and decorative. I can’t imagine many hard-pressed procurement directors looking at the really complicated regulations for exclusions and saying anything other than “OK, let’s forget about this”.  (See Pedro Telles on this).
  4. Within a year or two, we will see suppliers complaining that the new rules don’t seem to have simplified public procurement.  I’m not criticising the Cabinet Office policy folk here – I’m just not sure it is possible to really simplify matters whilst trying to meet all those different goals. And no, I don’t have amazing transformative ideas myself, to be honest.
  5. Many older / less flexible public procurement professionals will retire or move out of the sector. “I’ve done things this way for 10/20/30 years, I just can’t be bothered with the hassle of learning all this new stuff now”.  I’m already hearing of that issue, and we will see a staffing crisis in public procurement (unless we go into a major recession that releases private sector professionals!)
  6. Given points 1 and 5, we will see more and more use of frameworks let by collaborative buying organisations, (Crown Commercial Services, YPO, NHSSC etc).  Unfortunately this is probably not good news for supply chain resilience in general, or for local, smaller or innovative suppliers. However, the “new” central procurement unit won’t have much impact.

Finally, there are metrics that will prove whether these predictions come to pass. If they do, we will see more single tender procurement exercises (only one bidder or a “direct award”).  We’ll see further growth of the buying aggregators. There will be a very low number of exclusions.

If I am wrong, we will see happy suppliers, more bidders per contract, fewer single supplier tenders, growth in contracts to local, smaller suppliers, social enterprises and so on. There will be fewer Private Eye-type scandal and corruption stories, and a decent number of dodgy suppliers excluded … So I hope I am just being a grumpy old pessimist! 

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Why is the USA Running Out of Baby Formula Milk?

Quite a few stories of procurement and supply chain failure we hear (and quite a few of those included in my Bad Buying book) have at least an element of humour about them. KFC running out of chicken wasn’t very funny for the senior management there, and the customer who phoned the police to complain that he couldn’t get his fried chicken obviously took it seriously.  But for most of us, we probably had a chuckle. Government failings are annoying when it is taxpayers’ hard earned money being wasted; but it is rare to see a case of supply chain failure that actually has the potential to cost the lives of babies.

But that is the situation in the USA, where shortages of formula milk for infants is threatening the health or even the survival of very young children. But why is this happening, in one of the wealthiest, most technically advanced nations in the world, where capitalism has over the decades brought a high standard of living (in global terms) and abundant supply of almost everything and anything to its people?

It is a complicated situation, and I’m only giving an overview here. The shortages appear to be driven to a considerable extent by manufacturing plant shut-downs, driven in part by quality issues identified by the US Food and Drug Administration (FDA). FDA (food and drugs administration).  As Sky News reported, “Abbott Laboratories was forced to shut its site in Sturgis, Michigan and recall a number of its powdered formula products after four babies who had been given formula developed bacterial infections”.  No firm link has been proven but the Michigan factory has been closed for weeks.

Even when the factory re-opens, it will take 8 – 10 weeks to get product back on the shelves, the company says. And once shortages emerge, panic buying inevitably exacerbates the situation, and there may be a bit of a baby boom going on in the US too. The U.S. government also has pretty rigid trade policies, making most formula imported from Europe illegal to buy in the United States. Tariffs act as another deterrent.  Maybe that is genuinely for health reasons; or maybe it is at least in part a nice bit of protectionism to suit the manufacturers.

But from a procurement point of view, this market concentration and the inflexibility of government-funded schemes for lower income people have contributed to the problem. Two companies – Abbott and Reckitt Benckiser – dominate the industry with about 80% national market share.  Nestlé, which sells under its Gerber brand, controls another 10%.

Part of the reason for these firms’ success is that they are the only makers approved by the US government to provide baby formula through the Special Supplemental Nutrition Program for Women, Infants and Children, known as WIC, which supports low-income families. It appears that most States, who fund these schemes, have negotiated deals with just one provider.

The Guardian reports; “ Nearly half of baby formula in the US is bought under the Wic program, aimed at helping low-income women, infants and children. States give exclusive contract rights for this formula to one company under a bidding process. Abbott provides formula to about half of the babies receiving Wic benefits. When these products disappeared, families were left scrambling to find alternatives”.

This has driven what has proved to be an unhealthy level of market concentration, as it also seems that production is also pretty concentrated within firms in terms of the number of production plants. Now procurement can’t always control market dynamics; but could government as well as buyers (in retail chains for instance) have done more to encourage new suppliers and a more competitive market?

So the old principle of consolidation, aggregation and leverage that procurement has lived by for decades has been driving behaviour here. But once shortages kick-in, recipients of the WIC benefit have been unable to find the approved supplier’s product, leaving them in a desperate state – and an example of the unintended consequences of what must have seemed like a sensible procurement strategy. The U.S. House of Representatives has now passed bills to try and address the shortage. One would waive certain requirements that limit brands and quantities of formula recipients of the special supplemental nutrition for women, infants, and children can purchase, according to CBS News.

Again, supply chain and procurement risk and resilience has not been considered as it should have been here, with cost driving the decisions. We’ve seen over the years so many examples where procurement behaviour has driven dependence on a few suppliers – or even just one (there’s an interesting example featuring VW cars in the book, for instance). It rarely ends well. So next time someone says, “we should rationalise our supply base and dramatically reduce the number of suppliers”, do remember that strategy can have benefits, but also caries risks. Be aware of that and develop the strategy accordingly.

Back to the highly concerning baby milk story. I’m sure more will emerge, and if you want a fuller explanation, I can recommend Kelly Barner’s excellent podcast here, in which she goes into more detail in terms of what has been going on.

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Fairness in Procurement

Most people see government buying as something rather dull and bureaucratic, but get it wrong and it can cost the taxpayer a fortune.  So everyone should be interested in the new Procurement Bill published last week, which will define the regulations for UK public procurement.  We will have more on that here when I’ve read it properly and also considered what people smarter than me think of it!

One of the key principles of the new regulations is to give buyers more flexibility and freedom. But I do have a fear that could lead to more corruption if it allows crooks (whether politicians or public servants) to run dodgy procurement processes to favour their preferred supplier. However, the new approach will I believe still require contracting authorities to consider basic issues such as “fairness”. That is where a lot of the biggest failures in the past have arisen – such as described in the following extract from the Bad Buying book, describing a particualr case that cost the taxpayer over £100 million because of obvious bias and unfairness in the procurement process.  

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“The case involved a 2016 legal challenge by Energy Solutions Ltd., the incumbent supplier for a huge contract to clean up de-commissioned UK nuclear power stations. They lost the tender, run by contracting authority the Nuclear Decommissioning Authority (NDA) in 2014, to a Babcock Fluor consortium (CFP).  But there were a number of mistakes made during the procurement process.

One related to “pass / fail thresholds”; areas where the NDA defined up-front that failure to meet certain conditions would lead to instant disqualification for the bidder. However, once bids were scored, it became clear that one supplier had failed to meet the threshold. But instead of chucking them out of the competition, the NDA decided to let them stay. Now this may all seem a little technical, but it is clearly unfair; and public procurement regulations really don’t like unfair buying processes.

As the judge said in his statement, you cant change your mind about the rules once you get into the buying process.  After a bidder has failed to meet a defined threshold, you can’t ask “was that threshold Requirement really that important?”, arrive at the conclusion that it was not, and then use that conclusion to justify increasing the score to a higher one than the content merited (or to justify failing to disqualify that bidder)”.

To disguise the failure of that firm, the NDA team also adjusted original scores given to the bidders during the marking process. But they failed to provide any audit trail or justification for these changes, a fact that became obvious through the trial. The NDA announced that CFP had won – which promoted the legal challenge. There were other issues too, and the final outcome saw the judge finding in favour of Energy Solutions, and the NDA agreeing to pay the firm (and their consortium partners Bechtel) almost £100 million to settle the legal claim for their loss of profit on the contract.

It is impossible to know what went on behind the scenes in cases like this.  Was it sheer ignorance of the rules? Was someone very senior determined a particular supplier should or should not win the contract? With other failures in previous chapters, a lack of understanding or knowledge caused the problem, but I’m left somewhat baffled here.

Certainly, a number of basic buying principles seemed to be forgotten. Treating bidders fairly is a good principle, whether you work for a government body that must do that legally, or for a private firm. Keeping sensible documentation to explain your decision is vital. That’s so you can explain to bidders why they won, or didn’t, but it is also a basic precaution against corruption and fraud, one that all organisations should take. If no-one can explain logically why my firm won a particular contract, then maybe it was because of the bulging brown envelope I was seen handing over to the senior buyer”.

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Doctor Accused of Fraud Against Medicare

Two fraud cases in a row here … but a new (for me) angle today.

Procurement related fraud and corruption has interested me for many years, long before I started collecting case studies specifically to include in my Bad Buying book. So it is unusual to see a new type of fraud, but I came across a US case recently that was somewhat different to any I‘ve seen before.

At the heart of it, the scam is that an organisation ends up paying for goods that are not really needed (or maybe aren’t even delivered).  An internal budget holder creating their own company, setting it up as a supplier, then creating and authorising invoices and payments to themselves is the typical case. But here, it was more complex, as the fraud was against the US publicly-funded Medicare system.

At a federal court in Brooklyn Elemer Raffai, an orthopedic surgeon, was charged last month with health care fraud in connection with a $10 million scheme. He allegedly submitted false and fraudulent claims to Medicare and Medicare Part D plans. Raffai was arrested and was due to make his initial court appearance in the United States District Court for the Northern District of New York.

“In exchange for kickbacks from telemedicine companies, Dr. Raffai allegedly submitted millions of dollars in false and fraudulent claims to Medicare on behalf of beneficiaries without even examining them or based on conversations on the phone that lasted less than three minutes,” stated United States Attorney (Breon) Peace.

Dr. Raffai purported to practice “telemedicine” (phone or Zoom I assume) with the AffordADoc Network and other telemedicine companies. He was paid approximately $25 or $30 per patient consultation.  Between July 2016 and June 2017, he allegedly signed prescriptions and order forms for medical equipment, including orthotic braces, that were not medically necessary, simply based on a short phone call. Some $10 million in false and fraudulent claims were made to Medicare for that equipment and Medicare paid more than $4 million on those claims.

Presumably the “patients” were in on the alledged scam as well, and were recompensed for making the call to the doctor and playing their role in the process. And (again presumably) it was the manufacturers or sales agents for this equipment who were the masterminds behind it all. They received funding from Medicare for goods that either weren’t needed by the “patients”, or perhaps that equipment was never actually supplied. That isn’t clear from the information made public so far.  We might also hope that those firms have been or will be charged with fraud, as well as the doctor.

This type of fraud where different parties are colluding can be very difficult to detect – think of the famous Sainsburys potato example, which went on for years and was only detected in the end by the supplier’s external auditor. The buyer worked with a potato supplier that charged the firm over the odds, which funded bribes to the buyer. But one positive for those trying to fight fraud is that the more people are involved, the more likely it is that someone involved will “crack” and expose what is going on.  I wonder if that is what happened in this Medicare case, where many people must have known what was happening?

Another positive is that technology will increasingly be called into play to fight fraud. AI (artificial intelligence) can look at huge amounts of data, and perhaps in this case could have worked out that this doctor had a prescribing pattern that was out of line with his contemporaries.  I know organisations are using tools to examine payment records and look for anomalies; for instance, someone who always places orders with a value just below the threshold for further approvals.

Anyway, this is an interesting case and we will keep an eye on it to see what happens to Doctor Raffai.

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Fraud at Coca-Cola Enterprises- a “Basic” Example

There was major “Bad Buying” fraud case in the media last week. Perhaps the most surprising element of the story was that the offences were discovered in 2013, and related to some years before that, yet the case only came to court in 2022. Did it take than long to gather evidence? Is the Crown Prosecution Service really working on that sort of timescale? It’s a concerning issue in itself.

But back to the case and I’m afraid it was a “classic” fraud, a pretty basic case of an internal decision maker colluding with suppliers in return for payment. At Southwark Crown Court, Noel Corry, a former electrical and automation manager at Coca-Cola Enterprises Ltd (CCE), pleaded guilty to five counts of corruption and was sentenced to 20 months in prison, suspended for 21 months, plus 200 hours of unpaid work.

He accepted cash bribes, free tickets to events as well as sponsorship for his local football club, Droylsden FC near Manchester. A total of £1.5m was paid by Boulting Group Limited (now trading as WABGS Limited), Tritec Systems Limited, and Electron Systems Limited. The firms that paid the bribes were also fined – the first time the Met has prosecuted firms for failing to prevent bribery. That sets an interesting and good precedent. WABGS Limited was fined £500,000 – between 2007-13 the company benefited from contracts with CCE worth over £13m. Tritec Systems and Electron Systems were each fined £70,000 plus costs. Individuals at those firms also received suspended sentences.

Part of Corry’s job  was choosing suppliers to carry out work. Over some years, he favoured certain firms in return for cash payments. He could spend up to £50K without others getting involved, so I assume he made lots of small payments or contract awards to these firms.  “The court previously heard how Corry was given bribes through payments for “bogus” contracts for Coca-Cola, in which work was never carried out, or had Coca-Cola pay more than the actual amount charged for real work and was sent the difference”, as the Shropshire Star reported.

But in 2011, the firm changed the policy and the professional procurement team started getting more involved and a more structured process was implemented (hooray!)  They started getting suspicious as some firms changed their bids late in the process, and suspected that someone on the inside was tipping off firms about competing bids. That led to discovery of evidence which eventually led to prosecution. (Tip – if you’re committing fraud, don’t have a spreadsheet on your laptop called “Slush”)!

It’s all rather sad in some sense – of course it is good that he was caught, but his wife divorced him and their son has mental health issues now, according to the reports. And Corry eventually repaid £1.7 million to CCE.  So if you are ever tempted, just remember that it probably will ruin your life.

What are the lessons here for organisations? Well, I gave 7 key anti-fraud principles in the Bad Buying book, and several are relevant to this case – proper supplier selection processes, for example. But perhaps the most pertinent is this principle (taken from the book).

“Opportunities for collusion between suppliers, and between suppliers and buyers, must be minimized – Many frauds rely on collusion between buyer (or budget holder) and seller, so reducing the opportunity of this reduces the chances of fraud. Organizations should ensure there is always more than one person involved with any major purchase and in signing- off work with suppliers. Moving staff regularly is another option, so there is less time for the relationship, and perhaps the fraudulent plans, to mature. Some organizations have a policy that no one in a decision-making buying role will  stay for more than three years in that same job role, for this very reason.

It is not just professional buyers (procurement staff) to whom this applies. Indeed, it can be stakeholders such as budget holders or service users who by the nature of what is being bought find themselves getting too close to suppliers. I once discovered that my firm’s major IT equipment supplier was sponsoring our internal IT budget holder’s expensive car- racing hobby!

It may be very innocent, but when a marketing or IT manager makes it clear they don’t want professional procurement or finance colleagues involved in ‘their’ relationship with a key supplier, that can be a warning sign that it isn’t totally innocent. Organizations should look at discouraging closeness that goes beyond the need to work well with a supplier to get a job done. This should influence the organization’s policy on hospitality, gifts and entertainment, which should be clear and should err on the side of caution”.

So well done to CCE for eventually discovering this, but a better policy would have perhaps made it less likely in the first place. And if you work for a large organisation that allows budget holders to spend thousands without anyone else being involved, I can pretty much guarantee that one or more of your colleagues is committing exactly this type of fraud at this very moment.

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Will My Supplier Deliver? Lotteries, Camelot and Challenges

In part 1 here I discussed the reports that Camelot, the current operator of the UK National Lottery, is going to challenge the government’s decision to award the contract for management of the Lottery to a different firm, Allwyn, headed by a Czech tycoon. That decision follows a lengthy and no doubt exhaustive “procurement” process.

There are suggestions that Allwyn have offered to make more money for charitable causes than Camelot included in their proposal. According to reports, that amount is not contractually  guaranteed, but may have played a major role in the selection decision.  Which leads us into the question of confidence – how do we know that supplier really will deliver what they promised?

There was a great comment on LinkedIn related to the part 1 article. The writer told of a major NHS procurement where a US supplier came in with a knockout bid, which led to other potential suppliers simply pulling out. Then, literally on the day the new service was due to go live, “At the eleventh hour the supplier had withdrawn, admitting that they couldn’t deliver the brief and make the savings claimed”.

There is a huge difference between what suppliers (some suppliers at least) will claim they can do and what they actually can deliver. There are no magic answers to this, but in my book “Bad Buying” I suggest thinking about “analyse, reference, test”.

Analyse means looking into the firm, the product or service that you’re going to buy, doing your research on the supplier and on whatever you are buying. The amount and depth of research needs to be proportionate to how much you’re spending and how critical what you’re buying is.

Reference means asking other customers of your potential supplier or users of the product or service you are buying about their experience. It’s an obvious step, yet it is amazing how many organisations don’t bother with this step. I was asked for input on a legal case in 2018 where an incumbent supplier challenged the decision by a large government body to award a contract to several other firms, meaning that the incumbent was going to lose all its business. This was a really sensitive service; if it went wrong, you might well see reports on newspaper front pages.

Yet when the incumbent firm asked questions about how the procurement decision was made, it became clear that the government organisation had done virtually nothing to check out what other suppliers were claiming in their bids. They had not researched the track record of the firms; they had not taken up references from other customers; they did not even seem to have checked whether the directors of bidding firms had criminal records! The buyer was simply believing the bidders and hoping for the best. The competition was eventually re-started as I assume the lawyers told the contracting authority they were going to lose in court.

Test means using techniques such as pilot programmes or small-scale rollouts that enable you to get a sense of the supplier and their capability, without immediately betting the farm on a particular approach. In a large organisation, you could run a geographical experiment with a new supplier or product. Give it a try in an area, region, an office or a factory, rather than moving immediately to handing over your entire business. Or you might initially use a supplier on a relatively unimportant piece of work.

In the case of the lottery, I assume that Allwyn’s references have been thoroughly checked out. Perhaps most critical – if this comes to court – will be how the projections of the money to be made for charity have been developed and verified. I’m sure the buyer would be expected to analyse Allwyn’s assumptions and proposals very carefully to assess the level of confidence in their figures. If they did not, that could spell trouble.

The final point to make here is that one report quoted Camelot as saying the evaluation had not been carried out as described in the tender. Now if that is the case, the lottery folk are in real trouble.

In terms of public sector tender evaluation, not doing what you told the bidders you would do is in most cases enough for a challenge to succeed.

You simply can’t introduce new factors once bids have been received evaluation; or even use factors that aren’t explicit. Don’t make assumptions. You can’t mark down a bidder for not providing a detailed quality plan if your question simply said, “tell me how you will deliver this work”. If the quality plan matters, tell them to provide it.

Enough of my ranting about evaluation processes (a favourite topic of mine, and we haven’t even got onto evaluating and scoring “price”). We will await the next stage of the Camelot story with interest.

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