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Incentivising Suppliers Properly Isn’t Easy – Doctor’s Appointments Provide a Great Example!

How do you go about incentivising suppliers within a contract to perform in the manner you REALLY want them to?

The complications tend to come in contracts for services, rather than goods. Where you can write a specification that clearly defines the item you are buying, then it is enough “incentivisation” usually to say “supply that precise thing and you will get paid”.

But if you are buying a service, particular a more complex service, such as consultancy, outsourced customer handling, software development, or even facilities management, then making sure the supplier acts in the way you really want them to can be challenging.

An example of this has been much discussed in recent weeks in the UK media.  Our GPs, the “family doctors” who are the first line of contact for most medical problems, moved most of their consultations online when the pandemic struck last year. Now they are being criticised for not getting back to in-person appointments quickly enough, and generally for making it difficult for patients to get appointments at all. But GPs are actually private contractors. Many people in the UK see them as part of the National Health Service, which they are operationally, but they actually work for the NHS under what is in effect a contract for services. They are suppliers.

In reality, there are a number of factors driving this appointments problem. This is a very stressful job, and the proportion of women working as GPs has grown dramatically in recent years. So for both their own health and for work-life balance reasons, more GPs are working part-time, so the capacity of the system is arguably not high enough. There is also a backlog of medical problems that weren’t sorted out during the worst of the pandemic, so there is more demand on the system than ever.

But certain newspapers, and the Minister for Health, Sajid Javid, have decided that there is capital to be made by blaming the doctors themselves for being “lazy”.  Aside from the issue of whether the buyer (Javid) should be having a go at a “key supplier” (the doctors) in public, there is much  discussion around how GPs are paid and incentivised. 

An article in the Daily Mail recently suggested that instead of being paid in the main based on how many people are on the GP’s “list”, they should be paid based on how many appointments they actually carry out.

“It may be time to move from a bulk payment per patient to a per appointment funding structure, to encourage doctors to actually see patients as quickly as possible”.  That was the quote from Matthew Lesh, head of research at the Adam Smith Institute (the free-market-promoting thinktank),  who from his LinkedIn profile would seem to be a very bright young man. Yet it doesn’t take too long to see the incentivisation flaw in his argument.

A per-appointment system would encourage less scrupulous doctors to pack in as many appointments as possible. Currently most people only get ten minutes or so with the GP, but that could be squeezed further if some doctors were tempted by a direct increase in revenue from that approach. And for doctors with a conscience, who want to take the time necessary to get a diagnosis right, you are placing their ethics into direct conflict with their bank balance.

Now that’s not to say that the payment by list size is necessarily the best option., and there is no simple, magic solution here.  Arriving at an appropriate mechanism is challenging; for instance, the same size list of patients in socially and economically deprived Blackpool might generate a lot more work than the same in Wokingham. And of course throughput has to be balanced with the rigour of the doctor’s work. But we might imagine a set of KPIs (key performance indicators) which might be combined in some way to drive GP payments.

In any case, this all reinforces that getting incentivisation right is tricky. That applies whether we are talking about an outsourced customer service call centre, roads maintenance contracts (see examples of both of these services going wrong in the Bad Buying book) or getting our front-line doctors to contribute in the best possible way to the health of the nation. So beware simplistic solutions.

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How Free (and Perfect) are Your Supply Markets?

There was a cri de coeur from Matthew Parris in  today’s Times newspaper (behind the paywall). He was concerned about the British public’s expectations that the government could sort out all and any of our problems. As he put it;

“Even we lucky British will sometimes encounter shortages and gluts. Is it now the government’s business to smooth them out for us? Increasingly, that is the assumption”.

We’ve seen in recent weeks issues with supply of food to supermarkets (although I can’t say I have noticed much of a problem), stories that Nando’s were short of chicken, then we’ve had genuine shortages of carbon dioxide and a petrol “crisis” caused mainly by politicians telling us there wasn’t a crisis. Parris sees this expectation that the government should solve every problem as a slide leftwards politically. He is a believer in the free market, which is why he originally became a Conservative supporter and MP, and thinks the government should stand back more often.

“I believed in the free market, in Adam Smith’s Invisible Hand, and the quiet, patient but unstoppable power of price in regulating demand and stimulating supply. I believed that if you’re short of applicants for a job you raise the wage. I laughed at government attempts to control prices as a way of keeping down inflation. I knew you couldn’t buck the market”.

I also share his fondness for free markets. However, the problem is that very few markets are truly “free” in the theoretical sense and certainly few function perfectly. Indeed, that is something most procurement people understand from their own bitter experience. For instance, a perfect free market is open to new entrants, and indeed it is easy for existing players to withdraw. It is unregulated except perhaps for fundamental criminal laws (don’t poison people with your beer or sell cars with no brakes).

But for a number of reasons, it feels like fewer and fewer markets really are anywhere near perfect or free. Take the shortage of lorry drivers – something that is hitting the UK particularly badly, but is an issue elsewhere in Europe too. (It does appear however that Brexit is a contributing factor in the UK, according to the industry expert view).

In a truly free market, thousands of people would be rushing to change jobs to earn the £50K per year plus now on offer for driving trucks. But we insist that new drivers (not unreasonably, I should say) go through extensive testing. That is a time and cost related barrier to entry. We have restricted free movement of people into the UK post Brexit, closing another “free market” option.

In other areas, the government has attempted to create dynamic new markets, but it is not as easy as it seems. Take the domestic energy market. We have seen plenty of new market entrants, but with increasing regulation and price control from the government, it has moved far away from the vision of a truly free market. That whole market is now unwinding and collapsing with the increase in wholesale gas prices. (There is also what feels like an increasing tendency for con artists and scammers to get involved in these quasi-markets – maybe that is a topic for another day, but it feels like the UK is becoming steadily more susceptible to business-related fraud and corruption).

And during the pandemic, the government “interference” in how markets operate was even more extensive. The government stopped tests for new lorry drivers because of social distancing rules, for instance. We might understand why that was the case, but it has been a contributing factor towards the current shortage.

Indeed, coming back to Parris and his complaint, the government has “interfered” so much in our lives during the pandemic, I think increasingly people do feel that the government can and should sort out every problem.  Those in charge told us where we could go for a walk and who we could visit, so why not expect that they can guarantee my Nando’s will be available and make sure there are enough lorry drivers to go round? That might not be an appropriate view, but I suspect it is quite prevalent.

What does all this mean for procurement professionals? Aside from many now operating in fire-fighting mode, simply focusing on securing immediate supply into their own organisations, it points out the importance of truly understanding how your own key supply markets work. Are they genuinely free markets that respond quickly to changes in demand, with new entrants, innovation and dynamism? Or are they controlled or restricted in some way – by government or by other barriers to entry (it wasn’t regulation that led to Facebook’s domination of its market, for instance).  

The pandemic shock has highlighted vulnerabilities in supply chains and exposed markets that already had inherent issues and weaknesses. So to avoid “bad buying”, understanding how your key markets really operate must be a priority.

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Theranos and FOMO as a Cause of Bad Buying

(Two posts in a row about blood – that’s a bit weird)!

Earlier this month, Elizabeth Holmes went on trial in San Jose, California, accused of six counts of fraud.  That relates to the blood-testing firm she founded and ran, Theranos, which was claimed to use unique technology to perform a range of tests with just a small sample of blood. The claims were later revealed to be largely nonsense and in some cases the results might even have proved misleading or dangerous to the user. When one of the Theranos laboratories was inspected in Newark, California, in November 2015, the inspectors concluded that “the deficient practices of the laboratory pose immediate jeopardy to patient health and safety.”

The cautionary tale has been turned into a best-selling, award-winning and definitive book, Bad Blood by John Carreyrou and is going to be the subject of a film with Jennifer Lawrence playing Holmes.  But in real life, it seems that her defence during the trial may claim she was under the influence of her older and more experienced business partner and one-time boyfriend, Ramesh Balwani.  They may also claim that she really did believe in the product and it was others within the firm who misled her about the actual way it worked (or didn’t).

Although some experts warned from the early days of Theranos that there were questions to be answered about the product, Theranos raised hundreds of millions in investment from famous people such as Henry Kissinger and Rupert Murdoch.  Perhaps they were dazzled by this confident, smart young blonde woman, who seemed to be particularly effective at persuading older men to stump up large investments!

But as well as the investment aspect to the story, there was also a Bad Buying link to the events. Here is how I described it in my book (“Bad Buying – How organizations waste billions through failure, fraud and f*ck-ups)”.

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

Again, buyers wanted to believe that something was real, even in the face of mounting evidence that it wasn’t. This relates back to comments around believing the supplier– those earlier examples weren’t demonstrating fraudulent behaviour, but the principle is similar. It is easy for a naive or gullible buyer to be sucked into believing what the supplier wants them to believe.

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

So the message is – treat claims made by suppliers about their products with caution, maybe even with a touch of cynicism if they seem unique, outlandish or truly earth-shattering! And don’t let FOMO take you into the realms of Bad Buying.

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Blood Tubes – Is This the Latest NHS Bad Buying Case Study?

Last year, Personal Protective Equipment (PPE) hit the headlines when shortages threatened the lives of health workers and patients in the early months of the pandemic. That demonstrated how a spend category that was traditionally seen as low risk and suitable for “leverage” type approaches to procurement could become highly strategic, critical and even politically sensitive.

We now have another example with a similar change in perception for what seems like a pretty standard item, a simple ”commodity” even.  GPs (“family doctors”) in the UK National Health Service have been told to stop performing most blood tests until mid-September. Hospitals have also been instructed to cut their number of tests by 25%, all due to a shortage of blood tubes (sometimes known as sample bottles).

NHS England wrote to doctors and hospital leaders, telling them that “the supply position remains constrained and is forecasted to become even more constrained over the coming weeks.  While it is anticipated that the position will improve from the middle of September, overall supply is likely to remain challenging for a significant period.”  That is thought to mean months rather than weeks.

The shortage has arisen apparently because Becton Dickinson (BD), the main supplier of blood collection tubes to the health service, just has not been able to keep up with demand.

This is obviously a hugely concerning issue. Blood tests help determine whether patients have particular conditions or illnesses, provide warning signs and monitor overall health. A reduction in capacity here will almost certainly cost lives. 

So what has caused this problem? There appears to have been an increase in demand, perhaps because of the pent-up health issues now being exposed as people go back to doctors surgeries after avoiding them for many months because of COVID. But the company also said it was facing issues transporting the tubes, for example, challenges at the UK border. That has been picked up by some as an example of post-Brexit supply chain issues around customs, tariffs and so on, issues that are affecting many businesses.

But with our Bad Buying perspective, might this also be a case where the procurement strategy is partly to blame for the problem?  Is BD the only supplier of this product?  That seems unlikely, but it is possible that the NHS has taken an aggregation and leverage approach to this item, as it did to many others, including PPE prior to the pandemic. Is BD a sole supplier because they offered a great deal for the whole NHS volume?

Maybe that is not the case, but you do wonder why other suppliers are not being mentioned, although the NHS has said new providers will come on stream soon. But it may be this is another example of over-aggregation creating unhealthy dependence on one supplier.  It doesn’t even always add to better prices, too. Here is a short extract from Bad Buying (the book) where I talk about the risks of supplier dependence and how it is created by poorly considered procurement approaches.

“Buyers aggressively aggregate their own spend, believing they’ll get better deals if they offer bigger contracts – until in some industries only the largest can meet your needs. Buyers might insist that suppliers must service every office or factory across the US, or Europe. Smaller firms and start-ups, which often offer real innovation, flexibility and service, are shut out of the market.

Buyers assume economies of scale, that ‘bigger is better ‘and bigger deals mean lower prices. But that is not necessarily true; the price curve may flatten after a certain volume, with further increases in volume not generating any further price reduction. There are even cases where you see dis-economies of scale– the buyer pays more as the they spend more…”

In this case, it would be fascinating to know just how the NHS has ended up with shortages of such a fundamental item. But in the meantime, just hope that you don’t need a blood test anytime soon!

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Marble Arch Mound – Monstrous Mountain Misuses Money

I still don’t know if there will be a “Bad Buying Returns” book or perhaps an updated edition of the first volume, but the stories keep on coming in terms of case studies for potential inclusion.  The latest at least has an element of humour, which is a change from most of the pandemic-related bad buying we’ve seen over the last 18 months. It is, of course, the “Marble Arch Mound”.

Westminster council commissioned a mound or small hill to be built in London, at Marble Arch. It was to be a tourist and visitor attraction, designed to get people back into the West End of London and to shop in Oxford Street. The temporary 25-metre-high artificial hill, built on the corner of Oxford Street and Hyde Park, was supposed to be aesthetically beautiful and a great viewing point over London.  

The marketing drawings showed quite sizeable trees and shrubs covering its contours. However, when it opened a couple of weeks ago, there was dismay from visitors, who were annoyed at paying at least £4.50 for what one described as “London’s worst attraction”.  Instead of beautiful greenery, early visitors were greeted with sights of rubble, building works and scaffolding from the viewing platform, which was covered in brown turf. A tidy row of wheelie bins was arranged at its foot.

This episode seems to illustrate several of the drivers of “bad buying” that I discuss in the book. There is the tendency for politicians to like “vanity projects” – spending money where a business case in weak, but the politicians feel that they are creating a “legacy” or something that will make them more popular. Our Prime Minister Boris Johnson is of course a past exponent of this, with his ridiculous Garden Bridge (let’s blame actress Joanna Lumley as well for that), which wasted over £50 million and also saw some truly appalling procurement. There was also the costly Thames Cable Car and his crackpot ideas for a floating airport and a tunnel (or was it a bridge?) between Scotland and Ireland. 

In the case of the Mound, there seems to have been an arrogant attitude from a few council leaders who pushed the scheme through. There was no real consultation, and it was apparently not voted on by all councillors. That attitude again is often a precursor to bad decisions – witness my local council wasting millions on badly timed property purchases in Camberley, with decisions made by a small cabal without involving most of the elected representatives, let alone taxpayers.

But there also seems to have been a failure in more prosaic terms here around the specifications for the Mound, and tying down the cost of the construction. In May, the council reported the total build and operating costs would be £3.3m and £2m would be recouped largely through ticket sales to visitors. But now, costs are expected to be at least £6m, and it is not clear as yet exactly why that is the case. Amid all the light-hearted comments about the fiasco, the council’s deputy leader, Melvyn Caplan, has resigned and the political ramifications are growing.

However, the Mound is now free to visit, and ironically it has become busy as visitors flock to see if it is really as bad as the reports suggest … and let’s face it, Madame Tussauds still rakes in the cash so perhaps there is hope for the Mound after all.

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Procurement Fraud in the NHS – Could It Happen In Your Organisation?

One of the most annoying aspects of writing Bad Buying was reading dozens of fraud and corruption cases that came to court. Whilst the cases were often fascinating, the comments from the CFO or CEO of the organisation that suffered the fraud were always predictable. This is what I said in the book.

“But again and again, I see organisations failing to take basic precautions, and then once fraud is discovered, claiming that “this was a very sophisticated fraud”. In most cases, that remark is nonsense and is a fig-leaf for an embarrassed CFO or CEO who didn’t have basic fraud prevention measures in place.

Indeed, one way that fraud could be reduced globally is if CFOs in particular were told that their jobs are on the line. If a fraud takes place on their watch, that could have been prevented through simple actions, then they’ll be fired for incompetence. Implement this, and there will be a measurable drop in such cases very quickly”.

In recent weeks, a fraud committed by an IT manager in the UK’s National Health Service hit the headlines. Barry Stannard of Chelmsford in Essex, was “head of unified communications” for the Mid Essex Hospital Trust, which has since been merged into Mid and South Essex NHS Foundation Trust. He defrauded his employer of £806,229, which came out of the trust’s IT budget. He created two “fake companies” that he controlled, and then authorised payments against invoices from these firms – invoices he obviously produced himself.  He failed to declare any interest in these firms (obviously), no products or services invoiced were ever actually provided to the NHS, and he was sentenced to 5 years and 4 months’ imprisonment on June 30th.

At least the hospital did eventually spot this fraud. According to the Digital Health website, “Concerns first arose after the trust ran a data matching exercise on its payroll and accounts payable records, alongside Companies House records. After a comprehensive initial investigation by the Local Counter Fraud Specialist provider (RSM), the investigation was escalated to the NHS Counter Fraud Authority’s National Investigation Service”.

Stannard also charged VAT, which was never paid onwards to the tax authorities, so that was a further fraudulent element.  All of the hundreds of invoices submitted by his companies to the trust were individually for less than Stannard’s personal authorisation limit so he got away with it for some time.   

At least here nobody used the “sophisticated” word in describing the fraud, which is just as well because it wasn’t.  It was a pretty basic fraud and pretty basic best practice was not followed. That means there is a good case for sacking the CFO – and perhaps even the Procurement Head.  They certainly should answer these questions.

  • Why was there no proper “onboarding check” before a new supplier was first paid? Basic Companies House and Dun & Bradstreet checks would have shown a firm with Stannard as Director and presumably no other income.
  • Why was there no “separation of duties”? You should never have the same person able to choose a supplier, sign off the purchases, and approve the invoice (which includes confirmation of receipt of goods / services)?
  • Why did his boss not question the expenditure? Actually, it is not clear whether the budgets were his own or belonged to other managers (in which case why didn’t they query these costs for non-existent products)?

It all looks very negligent by the Trust and smacks of a poor attitude to spending taxpayers’ money, which unfortunately we’ve seen before in the case of public sector fraud of this nature.  So whatever your role, do think about whether such a fraud would be possible in your organisation.  If you wanted to extract money, how would you do it? Would you need an accomplice or could you do it yourself, as in this case.  If you do find gaps, then tell the CFO, CEO or equivalent. 

I reckon every organisation needs a few creative, cynical but trustworthy employees who can put themselves in the shoes of wrongdoers and have evil thoughts – for the greater good, of course!

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The Worst Tank in the World?

(This picture is not the Ajax vehicle we’re discussing here of course. It is my photograph of one of the earliest tanks ever made, now in the Museum of Lincolnshire Life in Lincoln, the city where the world’s very first tank was designed, in a meeting room at the White Hart hotel).

The story of the Ajax armoured fighting vehicles (small tanks, if you like), bought for the British Army from US defence firm General Dynamics, looks like it will be a lengthy case study if I do produce a follow up to my first Bad Buying book.

Wasting a fortune as in this case is by no means a unique occurrence for the military, and we have seen similar disasters in many countries, as equipment turns out to be far more expensive than planned or fails to provide the capability that was desired. Sometimes, both of those failings are present. 

In the case of Ajax, the General Dynamics solution was chosen in 2010 and the contract agreed in 2014. The first vehicles should have been delivered in 2017, and the first British Army squadron should have been using them by mid-2019. However, problems emerged during testing. For instance, the vehicles were so noisy that crews were required to wear noise cancelling headphones and be checked for hearing loss at the end of operations.

The Times reported expert opinion that problems with Ajax were so serious, the government should consider cancelling the £5.5 billion deal to buy 589 of the vehicles. So far, the vehicles have cost £3.2 billion despite only 14 being delivered — all without a turret and of odd sizes.  A leaked report by the Government’s own Infrastructure and Projects Authority, which reports to the Cabinet Office, says that the problems with the Ajax vehicle do not seem to be manageable or resolvable within the agreed costs and timescale.

Recently it was revealed that trials of the Ajax armoured vehicle were halted from November 2020 to March 2021. Then trials were paused again in mid-June on “health and safety grounds” amid concerns that mitigation measures put in place to protect soldiers — including ear defenders — were not sufficient.  Excessive vibration and noise meant crews suffered from nausea, swollen joints and tinnitus, and soldiers were only allowed 105 minutes inside the vehicle, with a maximum speed of 20 mph (32 km/h).

Not very good in a real-life conflict, really. “Could you stop shooting at us, we have to let our chaps out for a bit of a rest now, they’ve been in there almost 2 hours!”  Amazingly, suspension issues also mean that the turrets could not fire while the vehicle was moving, and vehicles were unable to reverse over obstacles more than 20 cm high. I think even my Kia could manage that – we’re getting into the territory of “you have to laugh really, or you would cry”.

Another element of the Ajax story which would be amusing if the whole programme weren’t such a huge waste of public money came last week when the public announcement of the latest problems was made during the England versus Germany football match! Talk about timing a bad news story to avoid public focus.

Tobias Ellwood, chairman of the defence select committee, said that the vehicle’s weight had ballooned to 42 tonnes after many redesigns. It was now “heavier than any tank during the Second World War”, he said.  Some observers have suggested senior officers in the army may have hidden the extent of the problem over recent months to prevent it being axed as part of the government’s Integrated Defence Review.

But there is some debate about the underlying causes of this fiasco. There are claims that there was a “anyone but BAE Systems” view in the military when the supplier was being chosen.  Private Eye and The Times also suggested that General Dynamics just said “yes” to everything the Army wanted, without really being able to provide it. “They went to General Dynamics and said ‘Can you do it?’ and they said yes”.

But others see the fault sitting with the military, with the specification being continually changed and made more complex over the years, leading to that issue with the weight of the vehicle, as Ellwood pointed out.

Bernard Gray, who was Chief of Defence Material from 2011-16, has published some interesting comments on Twitter recently.  He suggests that the initial contract was fine, which might be understandable as his team must have been very involved in that phase. But changes to the specification driven by the Army after contract signature, on what should have been a fixed price, fixed spec contract, are behind the problems, he suggests. Gray said this;  “I don’t think that’s true if the product was not fit for purpose. The problem was, how much had MoD deviated from the 2014 contract by 2019… that’s what we need to explore”.

If that diagnosis is correct, it may prove hard to recover money from General Dynamics. If the firm has simply done what it was asked or required to do by the customer, we can hardly blame it if the end product doesn’t work.

Another thread on Twitter related to the decision by the Australian army not to select the Ajax product. Apparently, that was because when they took up references from the British army in 2019, they were told to avoid it.

It is all a huge mess anyway, not just financially but also operationally, as this is a pretty essential and fundamental piece of kit for our soldiers. As usual, the taxpayer takes the hit, and as usual we will never find out exactly who should carry the can for this in the military, civilian MOD or political worlds, or indeed on the supply side. Will anybody get fired? You must be joking. Strangely enough, it always seems impossible to place the responsibility for Bad Buying in the public sector on anyone in particular.  

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Children’s Social Care – A Broken Market

Sometimes Bad Buying stories are amusing, or we can learn from events without feeling too emotionally involved. But reports last week about the procurement and management of children’s care services brought just rage and sadness.

These are children who don’t have parents to look after them, or have been placed in care. Many have behavioural issues, or addiction problems.  So keeping them safe and providing an environment where they can learn and thrive is far from easy, and perhaps that is why public sector bodies (local councils) have over the years increasingly outsourced provision of residential facilities and care. The work goes to private sector firms, ranging from very small (individual foster parents at the extreme) to larger firms, including those funded or owned by private equity.

The Times reported problems both with the performance of some firms plus what looks like a rip-off in terms of the prices charged. The average cost per week is now £4,130 per child, and there is evidence that through the pandemic, new “get rich quick” firms have come into the scene, providing poor care and facilities but taking advantage of the lack of physical inspections by the regulators.

The Times highlighted cases reported by Ofsted (the regulator):  

  • Children were able to steal knives from one home and take them to school.
  • Staff dropped a young person off at the home of a drug dealer despite being warned by police to avoid the area; at another run by the same company a child was discovered riding a bike on a motorway hard shoulder.
  • A young person at a third home was found weaving through traffic and high on drugs. On another occasion inadequately trained staff locked themselves in a car when a resident became violent. One of the three people who set up the home was a scaffolder prosecuted for having an eight-inch knife behind the sun visor of his van.

A government review of children’s social care services is underway, and an interim report was also issued last week. The review is being chaired by Josh MacAlister, the founder of Frontline, a charity that has developed a scheme for fast-tracking bright graduates into children’s social work – similar to the Teach First scheme in the education world. I have worked with Frontline a number of times, and MacAlister is one of the most impressive people I have ever met. If anyone can address these seemingly intractable issues, it is him.

However, I did smile at his comment last week (made in a conference speech) when he appealed for large firms to moderate their prices and margins.

“I would implore those of you who are owners of private children’s homes, particularly large groups, to act with responsibility to bring down costs and reduce profit-making and to be responsive to the needs of children. It is better that plans to make this happen are started now”.

Asking firms with private equity behind them to reduce profits is like asking a spider to stop making webs or a fish to stop swimming.  Josh, it’s what they do. I think we can confidently predict that his appeal will have no effect at all.

In his speech, MacAlister also cited figures published in 2020 by the National Centre for Excellence in Residential Child Care (NCERCC) and Revolution Consulting, which identified a 40% rise in independent children’s home prices from 2013-19. The 20 biggest independent children’s social care providers were making combined annual profits of £265m, at a margin of 17.2%. However, the private sector argues it provides care that is as good as that provided by councils directly, at a lower cost.

Coming back to Bad Buying though, this strikes me as both market failure and a failure of procurement strategy. When we look at which services can most sensibly be outsourced, we should consider factors such as:

  • Are the services strategically critical for our organisation?
  • Is there a healthy, dynamic market out there to buy from, open to new entrants?
  • Could we move our business between suppliers or back in-house if we needed too?
  • Will there be a reasonable power balance between us and our suppliers, enabling us to exert  some negotiation leverage?

If we carried out this analysis on these services, I’d argue that this is basically not a suitable spend category to outsource. It is very sensitive, it is difficult to switch suppliers, with limited supply in some parts of the country. Once a child is being cared for, the provider has the upper hand in negotiations, as changing suppliers is difficult.  

I don’t know whether there has ever been a national procurement strategy here, or whether every council has developed its own. I suspect the current situation has just evolved, and now we have the taxpayer spending £500,000 a year per child in some cases, and not even being sure the service is up to scratch.

There is also a market study into children’s social care provision underway, led by the Competition and Markets Authority (CMA). Maybe that – as well as the MacAlister review – will lead to a new approach to the procurement issues around children’s care. This really does need some serious thought and a national strategy. That doesn’t necessarily mean big national contracts, I would add, but it does need considering strategically, rather than dozens of individual councils trying to do their best individually.

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Why Doing Public Procurement Properly Matters

The court found this week that Michael Gove, Cabinet Office Minister, broke procurement law when a contract was awarded without competition to Public First, a research and communications agency. As the BBC reported, “The government acted unlawfully when it awarded a £560,000 contract to a firm run by former colleagues of Michael Gove and the PM’s adviser Dominic Cummings, the High Court has ruled”.

This goes back to the Dominic Cummings era in the initial pandemic days of early 202. Some will feel that speed was everything at that point – but it is not like contracting for a series of market research focus groups was a matter of urgent life and death, unlike maybe PPE or ventilator procurement.

But in this case, the court found the contract award appeared to show favouritism as Public First had worked with Gove and Cummings previously, and the judge said this; “The defendant’s failure to consider any other research agency, by reference to experience, expertise, availability or capacity, would lead a fair-minded and informed observer to conclude that there was a real possibility, or a real danger, that the decision-maker was biased.”

One founder of Public First formerly worked as an adviser to Mr Gove and for Mr Cummings, and co-wrote the Conservatives’ 2019 general election manifesto. The other had worked alongside both men in the Department of Education. However, the judge rejected two other claims – that the direct award of the contract was “unnecessary” and that the 6-month contract length was disproportionate. So both sides can claim victory here.

Cummings thinks procurement rules are ridiculous and damaging.  Indeed, many senior people – official, special advisers and politicians – feel that they are bureaucratic and can slow down necessary actions.  There is some truth in that, and some of these people also genuinely believe that their own judgment is quite enough to make decisions on which suppliers can best carry out work.

The problem is that this approach shows at best a considerable degree of arrogance, quite a large degree in some cases. And it would be helpful if everyone understood better exactly why we have rules in public procurement. There are three good reasons.

  • The most obvious perhaps is the danger of fraud and corruption. I doubt very much whether anyone received brown paper envelopes stuffed with cash in this case. But if we don’t have processes, with openness and transparency, then the dangers of that becoming more common will rise.
  • Public procurement processes are also designed to help achieve the best possible outcome for the citizen and taxpayer. Competition is the key driver of that.  We will never know if other firms could have done as good a job as Public First for half or a tenth of the price – or a much better job for the same cost. When you don’t have competition, you can’t look at alternatives and you don’t have competitive pressure in terms of value. Even if the requirement is urgent, some competition, even if limited and rapid, is much better than none.
  • The final point is the least understood driver for proper public procurement – that it encourages healthy markets and successful economies. If firms know they will always have a chance of winning public sector contracts, they are encouraged to invest, to innovate, to provide better service. But if public markets are closed, or corrupt, or based on who you know rather than what you can do, then what is the point of trying to be better? Don’t spend a million in improving your product – spend it on getting an ex-Minister as a “consultant” to open doors, or on “research trips” to California for officials and advisers, or simply on bribes.

The last point is very evident in the countries that have the greatest corruption problems. Why would any start-up bother trying to win public sector work fairly in Venezuela, Somalia or Yemen (choosing three of the back-markers in the Transparency International Corruption Perception index)? You invest in corrupt practices to succeed.

We may think that the UK, US and other developed nations don’t have similar problems, but that would be naïve (read Bad Buying for a few examples…)  So whilst many will dismiss the Public First case as a storm in a £500K teacup, we need to hold politicians and others to account, and continue to emphasise that there are very good reasons for doing public procurement properly.

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PPE Procurement in Court, NAO Report and Radical Transparency (my thoughts)

The UK National Audit Office has published a report titled “Initial learning from the government’s response to the COVID-19 pandemic”. It draws on the various reports NAO has conducted over the last year or so, including those related to ventilator and PPE (personal protective equipment) procurement, and covers quite a range of topics including risk management, data, workforce issues and – most relevant to our interests – “transparency and public trust”.

It is timely, not least because the Good Law Project and EveryDoctor UK are currently in the midst of a court case concerning PPE procurement. Those organisations are challenging the way government awarded contracts to suppliers, with a particular focus on a handful of suppliers including Ayanda Capital and Pestfix. They also want the government to publish the full list of suppliers and (where relevant), disclose who put them forward to the “VIP list” that gave firms accelerated access to the procurement process.

Some startling information has already been disclosed in the court case. For instance, it appears that Ayanda did NOT pass the initial “due diligence” process, but somehow were still awarded contracts worth over £200 million. It is also clear that influential people were badgering the professional procurement staff to favour certain firms. 

In the case of Pestfix, evidence suggests that their executives told the government buyers that some of the payment was being used to bribe people in China to make sure supplies got through to the UK.  (Pestfix denies this but the emails seem pretty clear!) I’ve always suspected that was one reasons why the government didn’t want to deal directly with producers but involved agents and middlemen. Ministers and officials didn’t want to get their own hands dirty in what was a vicious battle to secure supply at the height of the shortages.

It is well worth keeping up with the developments in the case, but let’s revert to the NAO report and transparency. One of the main NAO learning points is the importance of transparency and clear documentation to support decision-making when measures such as competition, are not in place.

In more detail:

“ Transparency, including a clear audit trail to support key decisions, is a vital control to ensure accountability, especially when government is having to act at pace and other controls (for example, competitive tendering) are not in place. On the ventilator programmes, we found sufficient record of the programmes’ rationale, the key spending decisions taken, and the information departments had to base those on. However, in the procurement of personal protective equipment (PPE) and other goods and services using emergency direct awards during the pandemic, we and the Government Internal Audit Agency found that there was not always a clear audit trail to support key decisions, such as why some suppliers which had low due diligence ratings were awarded contracts”.

That due diligence issue relates back to Ayanda (and others) of course. As well as the lack of documentation, government was also slow to publish information.

“… many of the contracts awarded during the pandemic had not been published on time. Of the 1,644 contracts awarded across government up to the end of July 2020 with a contract value above £25,000, 75% were not published on Contracts Finder within the 90-day target and 55% had not had their details published by 10 November 2020. The Cabinet Office and DHSC acknowledged the backlog of contract details awaiting publication and noted that resources were now being devoted to this, having earlier been prioritised on ensuring procurements were processed so that goods and services could be made available for the pandemic response”.

We can have some sympathy here, as staff were under huge pressure, but given the large number of people (many of them expensive consultants) working on PPE procurement, it should have been possible to do a bit better than this.

In terms of transparency, I recently wrote a briefing paper with the Reform think-tank, titled Radical transparency: the future of public procurement.  The message is that the time is right for a step-change in transparency around public sector procurement. That is not just about public trust, important though that is. I believe the even bigger issue is that buyers, budget holders and commissioners in the sector have very limited visibility of what each other are doing.

That means knowledge about great ideas and amazing supplier performance is not shared – and neither is the learning when something goes wrong. Radical transparency is the answer. The recent government Green Paper on public procurement makes a few comments in this direction but really does not go far enough. As soon as you see the rules on Freedom of Information quoted as a basis for disclosure you know there is no intention of getting anything really interesting into the public domain!

If you have a few minutes and you are at all interested in public procurement, do have a look at the Reform paper. I’d love to hear your comments and thoughts on the concept that transparency can be an effective antidote to public sector Bad Buying!  

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