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!

(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.  

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.

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.

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!  

Many of the Bad Buying stories featured here or in my book have an element of levity to them. Some are decidedly humorous even. But sometimes there is a case where it is impossible to feel anything other than horror, anger and amazement at the behaviour of the parties involved.

The case of the Post Office, their postmasters and the Fujitsu Horizon IT system is a case in point. Last month,  39 people had their criminal convictions quashed in the High Court, the latest in a series of legal cases which have finally ended up clearing these individuals and exposing the appalling actions of Fujitsu and the Post Office.

Without going through all the details, the Horizon system appeared to show discrepancies in the finances of Post Office branches. That was blamed on the people running those branches – they were accused of stealing money or at best mismanaging post office funds. Many of those accused dipped into their own pockets to make up the supposed shortfalls. Eventually, the Post Office prosecuted hundreds of post office managers for theft – many went to prison. Some were ostracised by friends and neighbours; at least one committed suicide.

And all the way through this the Post Office and Fujitsu insisted that the Horizon system could not be wrong.  But eventually, after investigations and court actions, it became clear that the system was flawed and could well make the errors that led to the numbers not adding up. Even then the Post Office keep fighting for years, putting the postmasters through more pain.

There is a chapter in my book which is all about “believing the supplier”, and how Bad Buying can result from exactly that. That seems to have been one problem here. The Post Office initially at least believed Fujitsu when the supplier said the system was foolproof. No doubt there were careers and sales bonuses on the line for senior Fujitsu staff. Then when the integrity of the technology was called into doubt, we saw greed, fear, arrogance and stupidity from Post Office management, who refused to admit they might have been wrong. Instead, they continued to harass and prosecute innocent people, failing to take responsibility until the very end. 

So Bad Buying on the Post Office side, a poor product from Fujitsu and morally bankrupt behaviour from many of those involved on both sides of the supplier/buyer relationship. Fujitsu witnesses were also made to look stupid in court as they defended their system. Indeed, as Computer Weekly reported, after a 2019 hearing, “The Director of Public Prosecutions (DPP) has referred information to the police relating to a High Court Judge’s concerns about the accuracy of evidence given by Fujitsu staff in criminal trials”.

The least the firm – along with the Post Office itself – can do now is offer a large sum of money to compensate those affected. (Fujitsu has continued to win huge government contracts, by the way). There may be charges of “malicious prosecutions” to be brought against Post Office executives too.

Well done to Alan Bates, the postmaster who initially took on the Post Office,  Computer Weekly and Tony Collins, the first to pursue the technology aspect of the story, and to Private Eye magazine which regularly investigated and reported on the whole affair over the years. It’s a lot more than simply bad buying and the story of another dodgy IT system of course – and it all adds up to one of the most distressing stories about corporate behaviour that I’ve heard in a long time.

Readers of the Financial Times (or the Sydney Morning Herald) will be well up to speed with the events at Greensill Capital, a leading provider of supply chain finance funding and solutions. Other broadsheet newspapers and websites are also getting increaingly interested in the story.

Lex Greensill is the son of an Australian watermelon farmer. After an early career at Morgan Stanley and Citibank, he made a big impact in the UK as a “crown commercial representative” in Cabinet Office and supply chain finance tsar for David Cameron’s government. When Cameron stepped down, Greensill made him an adviser with (allegedly) a barn-full of share options.

Greensill also recruited Bill Crothers, government’s Chief Commercial Officer (the top procurement man) from 2012-15. Crothers was deputy chairman of Greensill for a while but resigned as a director in February, and has perhaps sensibly dropped all reference to Greensill now from his LinkedIn profile. Greensill also incomprehensibly got a CBE from the Queen in 2017, whilst Crothers got a CB in 2013, the equivalent award for civil servants.

However, in a few short months, Greensill Capital has gone from planning a flotation that would have valued the firm at $7 to basically going under. We don’t have the time or space to go into all the details here, but broadly, the Greensill proposition was this. A firm such as Vodafone might offer suppliers payment terms of, say, 60 or 90 days. But the suppliers have another option. Instead of waiting for payment, they can get immediate cash from Greensill – at a small discount. So if Vodafone owes you £10,000, then you can get paid now by Greensill for perhaps a 2% discount (£9,800).

Then of course Vodafone pays Greensill the £10K after 60 days, so Vodafone benefits from a cash flow perspective. Greensill makes its money on that margin (the £200).  Nothing wrong with this conceptually or ethically. Another version of this sees the finance provider making their offer to a supplier (rather than a buyer). So the finance might cover immediate payment against a wide range of invoices that the firm has issued.

Where does the cash come from?

In both cases, Greensill has to find the money to pay out up front to suppliers. Historically, the banks have offered this sort of service, because they have easy availability of money. But Greensill had to find a way of raising the cash. So they packaged up the offering into bonds, offering investors a decent rate of return, in return for providing the funding for the scheme. If you can turn over that funding 6 times a year based on 60 days payment cycle, making 2% each time, that is 12% – plenty to offer bond holders a decent return and make millions for Greensill too.

Just to make it even safer, the bonds were insured, so an investor knew that even if Greensill somehow didn’t get all the money owed to them back from the buyers, they were protected. So what went wrong?

The unravelling started with Greensill’s insurer refusing to continue covering that risk. The firm failed to find an alternative – so no insurance meant they couldn’t raise finance and could not continue to offer the service.  But the big unanswered question is this. Exactly WHY did insurance companies refuse to provide insurance? I mean, blue chip clients such as Vodafone aren’t going to renege on their agreement to pay Greensill (which for Vodafone is in effect simply the equivalent of paying their suppliers)?

So there must be more to it. Maybe Greensill has offered the service to buyers or suppliers who were less solid and secure than Vodafone, so the risk of default was greater. The position also gets murkier if you consider this possibility. What if the buyer / supplier relationship at the heart of the transaction was an inter-company relationship?  So one part of my business supplies another, and the supply side gets the payment from Greensill based on those invoices. But what if my sister company doesn’t really have the cash on the buy-side to then repay Greensill? It could be a way of raising money for a struggling firm, but maybe the underlying transactions aren’t even genuine?

One client of Greensill in particular has cropped up as a concern, and represents a pretty large proportion of the total business – do a bit of Googling and you can read more (it’s NOT Vodafone, I should stress)!  That might have got the insurance firms worried, to say the least. Then there was the alleged extravagance from Greensill. For what was still a pretty young business, running four corporate jets seems a little questionable.

So we will see what emerges in coming weeks, months and probably years. The reputations of Greensill, Crothers and Cameron are on the line, as well as potentially real jobs and businesses. There is nothing wrong with supply chain finance per se – but we might see the accountants and regulators looking harder at how firms report on their use of the technique.  And in the next edition of Bad Buying, will this go down as a failure, a fraud or a f**k-up? Time will tell.

(I asked CCS if they wanted to comment on this article and they said no).

The Crown Commercial Service (CCS) is the central buying organisation for the UK government – particularly used by central departments, although any other public body (councils, hospitals, universities etc.) can use their contracts and frameworks too. It does some good work and employs a lot of hard working, smart procurement people. But sometimes it gets it badly wrong, as it has with the new management consulting procurement process.

Bids from potential suppliers are now in for the latest iteration of their Management Consultancy Framework, MCF3 as it is known. It is split into 10 Lots, ranging through general “business”, functional areas including procurement, and high-level topics such as “strategy”. Suppliers can bid for all or any of the Lots.

I have looked at the way the Lots and evaluation process are structured, and the way it is designed looks at first sight very strange. However, if you believe that it is aimed at meeting four key objectives, then it is quite sensible. Those objectives do not, unfortunately, include “delivering value for the taxpayer”.  

Instead, they appear to be:

  1. Make sure the big firms (McKinsey,  Deloitte, BCG, PWC etc) win a place on the more “strategic” Lots 2, 3 and 4 for strategy, finance and transformation work.  Why is it essential that these firms are successful?  Simply because Ministers and senior civil servants want to use those firms, and CCS itself relies on the commission it gets from sales through its frameworks to fund itself. If they weren’t available via CCS, budget holders would find another way to engage those firms and CCS would lose revenue.  
  2. Make sure those firms get onto the framework without having to offer particularly competitive prices, so they will be happy to put senior people onto government work without worrying about the rates.  
  3. Ensure that there are a large number of “SMEs” (smaller firms) who win a place on the MCF. Ministers can then supposedly support the small business agenda and announce that “over 50% of the firms selected are small firms”.
  4. But also make sure there is no need for any government department to actually use any of these small, lower cost firms.

So if these are indeed the objectives, how has CCS given itself the best chance of achieving this?

A Dodgy Price Evaluation

The way price is evaluated is a major factor here. So Lot 1 is general “business”, and up to 75 suppliers will be appointed to this Lot. Here, when the bidders “price” is evaluated, it is weighted at 90% of the total marks available. But the other 10% is just a tick box to say you will deliver the services (which is odd in itself – why would I be bidding otherwise?)

Price is calculated as the median of the prices offered for the 6 grades, from junior consultant up to Partner level. So basically, this is purely a price selection. The cheapest firms, which will be small firms that few of us will have ever heard of, will win a place. And because no-one has heard of them, and (in some cases at least) they are not very good, which is why they are cheap, they won’t be used much. But CCS and Ministers will have lots of SMEs on the list to boast about.

So then how does CCS make sure that the big firms succeed? For Lots 2, 3 and 4, price is only weighted at 10% of the total marks.  The rest come from essay-type questions in which the firms have to show extensive capability. There is plenty of scope for some flexibility in the marking too, and given the low weighting, price barely matters.   I would bet my mortgage that the “usual suspects” will all win places here.  

But just to make sure that those firms don’t have to worry about not making enough money, the price on which marking is based is not calculated as the average (the mean) of the 6 grades, which would seem to be a logical approach, or a weighted average rate based on likely frequency of use of each grade. Instead, it is the average of just two grades, the two “middle” ones (senior consultant and principal consultant / associate director). Actually, that would seem to be the same as the “median” price which is how Lot 1 is defined – it is not clear why different terminology is used.

So that means you don’t have to worry much about the price you put in for Partner. There is one more constraint in that for each grade, the price must be between 10 and 50% lower than the grade above.  But that isn’t too much of a hardship – for instance, you could put in this bid:

FIRM A

Partner                               £6000 a day

Director                              £3000

Principal consultant        £1500

Senior consultant             £1300

Consultant                          £1150

Analyst                                £1000

Your score would be based on the average of £1300 and £1500, so that is £1400, which is probably not too out of line with many bids. But once you win a contract, you can legitimately put your Partners in at £6K a day!

This is an “Illegal” Evaluation Methodology

There is also a technical/legal issue here, in that your evaluation score could be the same as another bid that puts in much lower rates for the top two grades (or indeed the lowest two), as long as you offer the same rates for those two in the middle. That seems to break fundamental rules of public procurement, that you have to make “value” your selection factor and you have to show you have a “fair” process.  So Firm B (below) scores fewer points in the evaluation than firm A, even though their pricing is much better value overall!

FIRM B

Partner                               £2000 a day

Director                              £1750

Principal consultant        £1500

Senior consultant             £1320

Consultant                          £900

Analyst                                £600

I can think of no reason why the average of the 6 grades has not been used – other than to help the big firms charge a fortune for their Partners. Unless I’ve missed something here, it feels like either a real error or there is something odd going on. I’m not a conspiracy theorist, but you do sometimes wonder if there is some sort of plan for certain firms to suck as much money as possible out of the public purse at the moment?   

This is the Argos Catalogue, not a “Framework”

Finally, there is another somewhat technical issue, in that users of the framework who want to choose a supplier for an individual project should (to be legally compliant) in most cases invite all the suppliers listed in the Lot to bid. But if you have to ask 75 firms (Lot 1) or even 30 firms (Lots 2 to 6 ) to put in proposals, that is quite a workload to manage and evaluate.

So I suspect CCS assumes that many users will just choose their favourites from the list, even if this technically breaks the regulations. We’re going back to the old days when I worked in government in the 1990s and that was how frameworks were generally used. Budget holders just picked their favourites from a preferred supplier list. The approach didn’t deliver value for money for the taxpayer then, and it doesn’t now.

But again, having such extensive lists of suppliers ensures that there is plenty of choice on the framework for users, so CCS maximises its own revenues. I’m afraid that looks like a major driver here, along with keeping Ministers, budget holders and the big firms happy.

What Does the Lord Think?

I do also wonder what Lord Agnew, the Cabinet Office Minister, thinks of this, or if he is even aware of what is going on. It was Agnew who wrote to senior civil  servants last September telling them to “rein in spending on consultants” and that Whitehall was being “infantilised” by their over-use. 

But when you see headlines in a year or two about “firms charging £6K a day for consultants”, you know why. Basically, the government, through Crown Commercial Service, has designed its procurement process to allow that. This is all very disappointing, given the undoubted talent of the people in CCS involved in this exercise.

PS  Buying consulting services based on a “day rate” model is almost always the wrong way to do it, anyway. More on that another day.

PPS There is no mention of “social value” in the tender either.

Bad buying takes many forms, and there is a risk we might see a new driver for poor procurement emerging in the coming months and years. The problems are avoidable, but we need to be aware of the risks.

Social value has become a very hot topic in the public sector in many countries. Recently, I wrote two articles (here and here) on the topic for our Procurement with Purpose website.  That is my other major interest at the moment, alongside “Bad Buying”, and we might consider those aspects two sides of the procurement coin. Procurement with purpose is all about how (if we are smart) the money organisations spend with suppliers can contribute to environmental, social and economic improvements that go beyond the specific contract. That is exactly the same as “social value” in the public sector.

So we are now seeing public contracting authorities incorporating social value factors with quite significant weightings in the evaluation process. Indeed, this is not just relevant to the public sector. Vodafone announced recently that they were going to use similar factors in their supplier selection models. Choosing a supplier is then not just about price, service and quality, but can also incorporate a range of other factors, from emissions, to employment of disadvantaged people, to support for local sub-contractors.

That’s fine, and we applaud the concept. But one fear is that we could see firms being selected based more on their social value offering than on their actual ability to do the job.

Scotland has led the way in many senses in terms of applying social value, and we interviewed one of the key leaders in that effort, Julie Welsh, for the Procurement with Purpose website a while back. But there is another side to the story. The Ferguson Shipyards case is an example of a firm that was supported with public contracts, in part with a view to supporting Scottish business and employment. Unfortunately, it appears that the shipyard may have been incapable of building the two ferries for which the government contracted, and costs to the taxpayer will run to over £100 million more than planned.

Reports suggested that the bid “was the highest quality bid received, in other words the highest specification, but also the highest price” of all the six yards competing for the job.  It seems likely that a high mark for social value contributed to the shipyard being the top score on “quality” and winning the bid – yet in fact, it failed to actually do the work, as well as being the most expensive bid. Without knowing the full story here, it does illustrate the need to maintain proper procurement processes and a commercially sensible approach. Suppliers must not win work on social value alone. 

That means social value weightings must be proportionate, and not outweigh what is the core goal in all public (and indeed private) sector procurement – finding the best supplier to meet our needs and provide the best overall value. Incorporating social factors in that “value” is fine, but it should not  come before the supplier’s capability to do the work properly and cost effectively.

Another key issue is how we can ensure that the social value offered is meaningful.  It should not become skewed by politics, or relate to factors that are immaterial to the contract or the needs of the buying organisation. It should also be capable of some sort of tracking and measurement to ensure the supplier does deliver on their promises; a focus on social value makes the need for effective contract management stronger than ever.   

There is also a risk that fraud and corruption could emerge as social value becomes more important in terms of winning contracts. I won’t go into that here, but it is discussed in my articles on the Procurement with Purpose website.

So all in all, incorporating social value or procurement with purpose factors into supplier selection  has the potential to be good news. On the other hand, if it isn’t handled with care, it could actually drive more “bad buying”. Our advice therefore is to implement with care and thought.

Just before the end of 2020, the UK government issued a Green Paper on the future of public procurement regulations post Brexit. I know, it sounds dull, but before you stop reading, this matters to every taxpayer and citizen in the UK. The government spends some £300 Billion of our money every year with suppliers, so getting that right has a huge impact in terms of value for money, the economy, as well as the services provided to UK citizens.

One of the themes in the Paper is around proposed changes to the way that unhappy bidders can complain about and challenge procurement decisions.  Without going into all the gory details here, pretty much everyone involved would agree that the current process is slow, cumbersome, and often leaves the bidders feeling unhappy. It can be a real problem for the buyer, even if they haven’t done anything wrong.

So this is an area where change is needed. But has the Green Paper got it right?

One controversial proposal is to cap the damages that a bidder can receive to one and half times the bidding costs plus legal fees, except in some exceptional circumstances. Critics of that idea say it will greatly reduce the incentive for a supplier to challenge, even when there has been bad or unfair procurement.

I have very mixed feelings on this issue, and there are some tricky balances here. In my Bad Buying book, I tell the story of a disastrous Nuclear Decommissioning Agency (NDA)  contract.

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 … 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”.

You can’t change your mind about the rules once you get into the buying process.  As the judge said, 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 one bidding 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 judge found that the procurement did break the rules – an unsurprising outcome because it was one of the most blatantly unfair, incompetent tender evaluation processes I have ever seen.  The NDA agreed  to pay the firm (and their consortium partners Bechtel) around £100 million to settle the legal claim for their loss of profit on the contract. And an inquiry into the fiasco still hasn’t appeared, unfortunately.

Now that doesn’t really seem like a fair solution for the UK taxpayer, however bad the procurement process was. £100 million is a lot of money! But equally, firms should have the right to recover something – and probably more than 1.5 times bid costs – if they miss out on a contract because of incompetent, unfair or illegal procurement.

The failure to publish the report into the NDA affair is another common problem. In another case, Virgin Health received a settlement rumoured to be in the millions because of a botched procurement run by six clinical commissioning groups (CCGs) in Surrey, Surrey County Council (my home county) and NHS England. But the settlement and case details were subject to a non-disclosure agreement, so we never found out what happened, and that means other contracting authorities cannot learn from the expensive mistake.

So that was “Millions out of the health service and into the pockets of billionaire Richard Branson” – at least that is how some saw it, although Virgin defended their action.  Again, I would support the right of firms to challenge and get some reward if they are truly victims. But more thought probably needs to go into the Green Paper recommendations, and I would also make it compulsory for both parties to disclose full details of the challenge publicly. No more of these Bad Buying cover-ups please.