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

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

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

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

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

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

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

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

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

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

William Hague in The Times agreed.

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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PPE Dumped – An Unhappy Reminder

There was an unhappy reminder of the pandemic and the PPE Bad Buying saga recently when several hundred pallets of PPE (mainly aprons, it seems) were discovered apparently dumped in Calmore, near Testwood Lakes Nature Reserve in the New Forest (near to Southampton). No-one knows how it got there…

Some of the material involved was identified as coming from a supplier caller Full Support Group (FSG). Now there is an interesting story about that firm. It was relatively late in the PPE saga when it became public that it was in fact the largest single supplier of PPE in the UK into the health system, with estimates that close to £2 billion had gone to FSG to buy huge quantities of PPE.  It was not immediately apparent though because the firm was already a major supplier to the NHS pre-Covid, so the pandemic purchases were made using existing framework contracts, which did not show up on registers of new contracts.  (That’s a weakness of the transparency rules by the way, but let’s save that for another day).

I had some personal communications with the founder and CEO of the firm, ex-nurse Sarah Stoute, and I’m still not really clear whether FSG and its leaders are amongst the heroes of the pandemic or the villains. In terms of heroes, the owners took huge risks when they saw the pandemic starting, and committed to buy PPE mainly from China at their own risk in late 2019 and early 2020 as prices started rising. That could have literally bankrupted the firm if the market had moved the wrong way but those stocks helped the NHS get through the crisis – and of course prices went up and up, benefiting the firm’s bottom line.  

The owners also tried to advise the NHS and the PPE buyers about the suitability or otherwise of some of the new sources of PPE that started coming on board. Now that might be seen as self-serving – “buy from us rather than these unsuitable new suppliers”. But Stoute was proved right on some occasions where (as we now know) the government bought PPE that was unsuitable or didn’t meet specifications – or was bought from firms that turned out to be run by crooks, basically.

The counter argument basically runs that the owners made huge profits as shortages grew and bought themselves a Caribbean villa for £30 million, an equestrian centre and a country mansion in the south of England for £6 million.  As I say, they took substantial risks, but maybe buying villas wasn’t the most tactful thing to do quite so quickly. I think I might have waited a couple of years at least!

But back to this dumping of stock. Clearly that was nothing to do with FSG or with the NHS or individual NHS trusts. However, we do know that the NHS some time ago appointed firms to help with disposal of unwanted PPE, most of which was sitting in shipping containers around the country (some was still being held by suppliers to).

So the most likely explanation is that someone was contracted to dispose of PPE, they probably then passed on the task to another firm, and maybe another one again, util it ended up with a bunch of criminals who offered a cheap price for disposal then simply dumped it.

Sara Stoute has also said that the reason this stock is surplus is that it wasn’t stored correctly – their lawyer said, “the PPE became unusable because of the way it was stored after delivery, not due to wrongdoing on their part”. If that is true, that is another indictment around the whole story of mismanagement we’ve seen unfortunately from the beginning of this saga.  As well as the money (and time) wasted, the disposal issue highlights the “wasted” carbon emissions embedded in the product and now the pollution and waste disposal risks and costs around it.  Not a happy tale, all in all.

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Disqualifying Suppliers from Government Contracts

It feels like the new UK Procurement Bill has been moving through Parliament for years – it is only a year in fact, although before that there was an extended period of consultation.

One of the themes of the Bill is that it should be easier for the contracting authority (CA) to “bar” or disqualify suppliers from bidding altogether. That has been possible for many years if the supplier or one of its directors had committed certain criminal acts, but the new legislation includes exclusion for poor performance for the first time.  There is also exclusion for “improper behaviour” which has led to a supplier gaining an unfair advantage in the competitive process.

However, the authority will also have some flexibility. The new rules mean that the existence of a mandatory or discretionary exclusion ground is not enough in itself to throw the bidder out of the process.  The CA has to first decide if the circumstances giving rise to the exclusion are likely to happen again. That’s quite a difficult and potentially controversial assessment to ask the buyer to make, in my view. There is also going to be a centrally-managed list of firms that have been barred.

It will be interesting to see whether there will really be any significant change of behaviour in this area. In truth, CAs are very cautious about barring firms, fearing I suspect legal challenge and endless argument getting in the way of running the actual procurement process. I’m not sure that will change.

An interesting example of this unwillingness was reported recently on the Nation Cymru website. Campaigners have accused a National Health Service Trust of ignoring anti-fraud regulations by allowing two firms that have been convicted of bid-rigging to form part of a consortium to build a new cancer centre in South Wales. The Acorn Consortium is the preferred bidder for constructing the new Velindre Hospital in Cardiff. That project has faced strong opposition on environmental and medical grounds, and it is those against the construction who have raised this issue.

Nation Cymru has described how two of the consortium members – the Kajima group and Sacyr – have been found guilty of fraud offences in Japan and Spain respectively. As the website reported,

“Kajima was sentenced for bid-rigging in March 2021, with one of its executives receiving a suspended prison sentence and the company itself being fined 250 million yen (around £1.53m) for its role in the scandal, which involved a number of firms colluding with each other on the construction of a railway line to maximise their profits. Sacyr received a penalty of €16.7m in July 2022 for its part in creating a cartel aimed at aligning bids for government contracts”.

When asked why this had not led to exclusion, a Velindre University NHS Trust spokesperson responded: “The robust procurement process has been undertaken in line with procurement law, UK and Welsh government policy and all required due diligence has been undertaken.” 

I’m not sure that’s a good enough explanation really. When the spokesperson was asked to explain in more detail why “regulation 57” (which covers this sort of thing) did not apply or was over-ruled here,  they “did not offer an explanation”.  I do think they should say more.

But conceptually it’s a tricky one. With my buyer’s hat on, do I really want to kick out what presumably is my best bidder because two possibly quite minor consortium members did something bad hundreds or thousands of miles away? On the other hand, we do have regulations for a purpose. 

In terms of the justification, having had a quick read of “regulation 57” (it’s some time since I studied “the regs”), I suspect the answer lies in the famous “self-cleaning” clause. That says, “Any economic operator that is in one of the situations referred to in paragraph (1) or (8) may provide evidence to the effect that measures taken by the economic operator are sufficient to demonstrate its reliability despite the existence of a relevant ground for exclusion”.

So basically, if a supplier can show that it has taken lots of steps to make sure it will never, ever get involved in bid-rigging again, or any of the other reasons for mandatory OR discretionary exclusion, and the buyer is naïve enough – sorry, I mean if the buyer analyses those declarations and decides they are valid, then the supplier is back in the game.

You can see the logic in this, but it is a bit of a “get out of jail” card really. It’s also another reason why in practice, we so rarely see suppliers barred. It will be interesting to see whether anything changes once the new Bill has been implemented – but I have my doubts. Barring is potentially just so fraught with hassle and risk.

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Huge Ship, Tiny Error, Major Problem

Picture: LPhot Alex Ceolin, UK MOD© Crown copyright 2019

You may know the expression “don’t spoil the ship for a ha’pworth of tar*”, but we have a case now where the ship most certainly has been spoiled – or at least put out of service for some considerable time – because of a tiny error in manufacturing. The impact of this has also led to a tricky contract management situation.

In August 2022, the British aircraft carrier Prince of Wales broke down just one day after departing its Portsmouth base for training exercises off the US coast. That was hugely embarrassing for the Navy given the ship had cost some £3.1 billion and this wasn’t the first problem since initial launch in 2019. This time, the issue was traced to a starboard propeller shaft fault and an installation error. Responding to a recent parliamentary question, Ben Wallace, the UK Defence Minister, said that based on “initial reports” the shaft was misaligned by 0.8 – 1 millimetre. That is a tiny mistake, but apparently caused a huge problem.

As well as the operational issues this caused, the question of who should pay for the error is also complex. Construction and delivery of the warship was carried out by a consortium of three firms under the banner of the now defunct Aircraft Carrier Alliance. BAE Systems, Babcock and Thales were all involved, which makes it complex to assess liability. Will the Ministry of Defence (MOD) end up paying or will they be able to pin the responsibility onto one or more of the firms?

A report on the “Breaking Defence” website said that the MOD “declined to comment on why the repair bill liability decision has not been made yet, nor when a decision is likely to be made”.  But MOD did say that repairs were likely to cost some £25 million, and that an investigation was looking at how to ensure the failure was not repeated. Well yes, one would hope that the same won’t happen again!

John Healey, the Labour Party’s shadow defence secretary pointed out that since the ship entered service in December 2019, it had spent 411 days in dock for repairs, compared to just 267 days at sea. A previous deployment also ended in embarrassment and a quick return to base in Portsmouth after an internal flood left the engine room and electrical cabinets submerged for 24 hours. The current repairs were supposed to be completed at the Rosyth dockyard in Scotland by February, but at time of writing (May 2023) still seem to be going on.

We could draw analogies here between our (literal) flagship and the wider state of the UK. Still pretending to be a significant global power, but incapable of actually doing anything to live up to that fantasy and all that sort of thing. But keeping to the facts, in a more mundane fashion it does highlight the importance of absolute clarity in the contract whenever you are buying from a consortium of any kind – and that doesn’t just apply in the military world of course.

Don’t assume a consortium will act as one entity if something goes wrong. It’s just as likely that each party will fight to protect their own position, which can leave the buyer in a difficult position, as we may be seeing here. So a strong and clearly written contract, including a definition of what will happen if there are issues after the formal consortium is dissolved, is essential.

And you can see why the UK Treasury (finance ministry) is not too keen on increasing the MOD’s budget for spending on more equipment, even given the present Russian threat. Cases like this (as well as high-profile failures such as the Ajax armoured vehicles) all add to a lack of confidence that such money would be spent well.

* A bit of research suggests that the expression was originally about sheep rather than ships! I didn’t know that…

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TSB Systems and Contracting Failure- CIO Fined

In my Bad Buying book, I wrote about the IT disaster that affected millions of TSB bank customers back in 2018. Here is the story from the book.

“In 2015 Sabatell acquired TSB, a UK-based retail bank, formally part of the Lloyds TSB Group. TSB at some point needed to move onto its own IT platform, rather than continuing to use the Lloyds  group systems, as they were now competitors to their former parent company. But the move, in April 2018, turned into a disaster.

Account holders couldn’t use mobile or Internet banking, and some reported seeing accounts details from other account holders. Customers struggled for weeks to make mortgage and business payments, as the new TSB systems failed to function properly. The issue was serious enough to be raised in the British Parliament, and in September 2018 TSB’s CEO, Paul Pester, resigned.

In March 2019 The Sunday Times reported that an investigation into the affair put much of the blame onto the IT firm that handled the transition.13 However, the twist was that this firm was SABIS – which is part of the Sabatell Group itself. So although it has a separate identity, this was in effect the internal IT function of the group that owned TSB.

Reports suggested a range of technical and programme management issues around the deployment of new software, rather than problems with the underlying infrastructure. But whatever the cause, the whole episode cost TSB £330 million,14 and there is a  ‘provisional agreement’ (according to the firm’s annual report) for SABIS to pay TSB £153 million. In November 2019 an independent report from law firm Slaughter and May concluded that the issues arose because ‘the new platform was not ready to support TSB’s full customer base’ and, second, ‘SABIS was not ready to operate the new platform’.

Questions have to be asked about the choice of ‘supplier’ here. Was SABIS the right choice to carry out this challenging task? It certainly doesn’t appear so, in retrospect. Did TSB have a choice, or was the firm told by top Sabatell management that it had to use SABIS? Would a firm with a wider and broader experience of banking systems than SABIS have done better? And why didn’t TSB accept the offer of help from Lloyds, which was made as soon as news of the problems broke?”

Now, five years later, there is an interesting postscript. Carlos Abarca, who was the TSB chief information officer, has been fined £81,620 by the Prudential Regulation Authority (PRA), the body that provides oversight of the UK banking system. In their 35 page report, they explain how Abarca’s failure caused a debacle that might have threatened financial stability more widely.

He apparently ignored early signs that the migration was not going well before the big switchover. He “did not ensure that TSB formally reassessed Sabis’s ability and capacity to deliver the migration on an ongoing basis”. Sabis told Abarca that they were migration ready and that subcontractors had given written confirmation that their infrastructure was fit for purpose. but the Authority felt this was not enough because the statements were caveated with comments about outstanding tasks. Abarca also did not obtain a written updated confirmation of readiness from Sabis when he told his own Board everything was ready for the transition.

The PRA said, “Mr Abarca’s failings undermined TSB’s operational resilience and contributed to the significant disruption TSB experienced to the provision of critical functions and potentially impacting on financial stability”.

This might be the first time a senior executive has been fined and disgraced for a failure in contract and project management. Now clearly in most industries, there is no equivalent of the PRA to  carry out this sort of investigation and take such action if someone screws up in a similar manner. But if you are in the financial services industry in the UK, it is a warning. If you are responsible in some way for operations, and that includes some procurement and contract management activities, then you must be very careful and must conduct your work with considerable diligence. And make sure you cover your back carefully at every point if a supplier tells you, “yes, everything is fine, don’t worry”!

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Committee Takes Aim at MOD Procurement

The UK government’s Public Accounts Committee (PAC) which keeps a beady eye on government spend trained its attention on the Ministry of Defence last week. And PAC, made up of members of parliament from different political parties, was not impressed with what it saw. The PAC gets most of its ammunition from National Audit Office reports and investigations. It can then call “witnesses” to question in person. Sir Geoffrey Clifton-Brown, Deputy Chair of the Public Accounts Committee said this as the committee’s report was published.

“If the MoD does not act swiftly to address the fragility of its supply chain, replenish its stocks, and modernise its capabilities, the UK may struggle to maintain its essential contribution to NATO. The 2022-2032 Equipment Plan is already somewhat out of date. It doesn’t reflect the lessons emerging from Ukraine, more than a year in. And every year it’s the same problems – multi-billion-pound procurement problems. Equipment arrives in service many years late and significantly over-budget, and some of it just isn’t arriving at all. The MoD still does not have or seem to be able to attract the skills it needs to deliver the Plan”.

The MOD does not have a great track record when it comes to major capital spend for equipment in particular. The latest disaster (which we’ve covered here previously) is the £5 billion Ajax armoured car programme. Delivery of vehicles from the supplier, US manufacturer General Dynamics, is years late, there have been problems with soldiers suffering from hearing problems after using the test vehicles, and the MOD is in a commercial dispute with the supplier.

As usual, many people are keen to offer simple-sounding solutions. Clifton-Brown speaking on Sky News said that MOD should bring in more private sector procurement people. But many of the (huge) current procurement team in MOD do have private sector backgrounds, and frankly buying MOD kit is not really very similar to anything the private sector does. Indeed, high profile and extremely smart private sector folk such as Bernard Gray have tried to fix defence acquisition and largely failed. The problems are far deeper and more intractable than a bit of a capability shortfall.

To be clear, a lack of skills in procurement is an issue (but probably even more true for contract management and project management capability), but there are other harder-to-fix problems in terms of MOD acquisition, such as these.

  • A conspiracy between MOD, Treasury and the supply side to consistently under-estimate the cost of new equipment at business case stage in order to get it approved.
  • Competition between the services (Army, Air Force, Navy) which means bidding for new investment is competitive rather than collaborative – this plays into the previous point about misleading plans and budgets.
  • Cosy relationships between industry and MOD staff, bordering on the corrupt at times, with a “revolving door” which often makes MOD people cautious about “upsetting” firms that might one day be their own employer.
  • The desire to keep changing specifications post contracts – driven by the rapidity of technological advances and also the desire of MOD senior leaders to have “the latest kit”.
  • Perpetual uncertainty about the highest level strategies around maintaining the UK’s manufacturing and maintenance capability, and setting that against the concept of buying the best value for money kit off the shelf from whoever makes it.
  • Unwillingness of the best staff to go and work on what are perceived to be failing programmes.

These issues should be addressed, but its not all going to be sorted out by recruiting a few more decent procurement professionals from Unilever or Toyota.

Then we also saw stories last week about another MOD dispute with a supplier. Babcock is building a new low-cost (in theory) frigate, which will not only be used by the British navy but will be sold to other countries. However, MOD and Babcock are now arguing about the commercial details of the contract for 5 Type 31 general purpose vessels. Babcock has warned investors it could lose up to £100 million on the contract and there is an argument as to who picks up the bill for the escalating costs. It appears to be related to inflation increasing far more than expected, putting pressure on the supplier as the cost of steel and other items rises.

So the question seems to be this. Who in the contract agreed to take “inflation risk”?  Now I would have expected this to be laid out very clearly – if it was not, then that was both Bad Buying and Bad Selling! Or just bad contracting. Then the problem may have arisen if Babcock foolishly agreed to take that risk, not thinking that we might see inflation at 10%+.  MOD would be perfectly within their rights to tell the firm to just get on with it, but perhaps there is something more nuanced in the contract, as the parties are now apparently going to a dispute resolution process. We’ll watch with interest to see what comes out of that.  

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What’s Wrong with the Auditing Market?

The consultancy group PwC was hit recently with a £7.5m fine over a string of errors while auditing the engineering company Babcock’s accounts, including creating a false record of documents for a sensitive government contract.

In one case, there was no evidence that PwC’s audit team had actually bothered to review a 30-year-contract worth up to £3bn, and in another, the team (none of whom spoke French) had failed to check a €640m (£570m) contract written entirely in French.  There was no evidence PwC tried to translate the documents to confirm the terms of the deal.  PwC’s auditors were also found to have “created a false record” of the audit evidence they had actually gathered in relation to a sensitive government contract.

Yet profit per partner for PWC last year was £920K  Are audit partners in the big firms really worth best part of a million a year? They are not entrepreneurs who have built a business, or indeed CEOs running a major organisation. And it’s not just PWC – KPMG was fined £14.4 million last year for its failings in the audit of Carillion, the construction firm that went bust in 2017. Second-tier firm Grant Thornton messed up over the Patisserie Valerie audit, after the firm collapsed because of alleged internal fraud in 2019.

Meanwhile in the US, Ernst & Young LLP (EY) EY got a massive $100 million fine from the Securities and Exchange Commission (SEC) and agreed to various measures to address ethical issues. The firm was charged for “cheating by its audit professionals on exams required to obtain and maintain Certified Public Accountant (CPA) licenses, and for withholding evidence of this misconduct from the SEC’s Enforcement Division during the Division’s investigation of the matter.”

What is wrong with auditors?  You would think in a well-functioning market, firms that behaved like this would fail and be replaced by better players.   But this is an oligopoly, and the barriers to entry are huge, and perhaps insurmountable. Ironically, the more rules and governance imposed by governments on auditors, then the harder it is for new market entrants to break in – we haven’t seen a significant new player really during my entire working life. The “switching costs” are high for clients too, and the big firms build very close relationships with senior corporate executives which helps to reduce the chance of competition.

The end result is that clients are paying too much, and often not getting good work in return. Although professional procurement involvement in buying these services has increased somewhat in recent years, frankly that does not seem to have had much impact. 

Close to home for me, the Surrey Heath Council accounts for 2019/20 are still in draft form and have not been signed off by the auditor, BDO.  In an election leaflet pushed through our door the other day, the ruling Conservatives say this – “FACT: Our accounts are ready but our auditors BDO continue to miss deadlines (including for Lib Dem councils). We are working hard to find new auditors and increase transparency”.

At least the draft accounts report is available for public inspection, which reveals that the author does not know how to use apostrophes  (“the Council has managed to deliver substantial saving’s on interest payable …)

But if this delay is down to the auditors, surely this is gross incompetence and mismanagement from BDO?  Is this not worthy of a wider barring of the firm from public sector work?  Or (I know this is hard to believe), might a political party be publishing misleading information? I honestly don’t know the answer to that question – but seriously, if auditors are incapable of getting a council’s accounts signed off three years after the end of the year in question, then they shouldn’t be doing this sort of work at all.

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Remember the Procurement Basics!

Not a Wetherspoons to be honest – the picture shows my favourite pub in the world, the Strugglers Inn in Lincoln

No matter how much we like to talk about sustainability, complex strategies and supplier relationship management, procurement has some basic elements that cannot and must not be forgotten.  A couple of recent cases act as a good reminder of that.

The first is a dispute between Wetherspoons, the leading UK pub chain with 843 branches, and AB InBev, the world’s largest brewer (they produce Budweiser, Beck’s, Stella, and also some beers that aren’t tasteless).  In November 2021, Wetherspoons agreed to make AB InBev their lead brewer (“preferred supplier”) of mass-market lager, replacing Heineken. ‘Spoons, as it is affectionately known, sells a good range of real ales and interesting cask beers but still offers the standard products too for the less discerning drinker.

But the dispute relates to disagreement over who is going to pay to install the T-bars (the branded fittings that include the keg beer taps) in all the Wetherspoons pubs. The argument has gone to the UK high court now, to decide which company should be responsible for carrying out the works needed to fulfil a contractual requirement for pubs to display a set number of AB InBev beers on their T-bars. Wetherspoon claims that both parties believed the brewer was responsible, in line with standard industry practice. AB InBev denies this, saying the work should be subject to a sperate agreement.   

For two such large and apparently professional firms to be arguing over this seems incredible really. Presumably there is a formal contract between them, and surely that would include a clear allocation of responsibility for costs associated with the change.  If that was not included in the contract, then that represents both Bad Buying and Bad Selling, I would argue.

So the first of today’s two key learning points is this. A contract must detail the responsibilities that each party is expected to meet in order to uphold the legal agreement.  Now in very large or complex contracts, there might be some minor details that don’t get captured up front, but in particular, any activities that have an associated cost must be clearly laid out. Otherwise, there is a high probability of arguments later, as Wetherspoons and AB InBev have discovered.  I know this seems obvious, and yet there they are, in the high court.

The second case is both serious and quite amusing. Metal traders at Stratton Metals sold 24 tonnes of nickel to a German customer recently. Nickel is a valuable metal, increasingly used in batteries for electric cars, so much in demand. It is sold as briquettes, packed into 2-Tonne sacks. But when the customer took delivery and opened the sacks, they discovered that half contained worthless stones rather than nickel!

This was highly embarrassing for the London Metal Exchange (LME), which facilitated the contract and is Europe’s only remaining “open outcry” trading floor – rather than sitting in front of computer screens, traders literally shout at each other to arrive at buying and selling prices. The LME also operates through a network of 464 warehouses around the world which hold metals in stock, although LME does not own or manage these facilities. The dubious sacks were in a Rotterdam warehouse.    

Nickel seems to be a bit of a favourite for dodgy dealings at the moment. Last month, Trafigura, the Singapore-based commodities firm, took a hit of $577 million to its accounts when it discovered a huge fraud involving missing cargoes of nickel – although it is not clear that is linked to this recent stones substitution.  Trafigura is taking court action against Prateek Gupta, an Indian metals tycoon, over the missing metal.

Anyway, we might draw two wider procurement lessons from this. The first is very simple. Always check that you have been supplied with what you have paid for. Actually, that is not too difficult when it comes to physical metals – it is considerably more difficult when it comes to complex services, for instance. But the principle and the risk for the buyer is the same. You said you would provide this, I contracted to pay on that basis, and you have delivered something else.

Secondly, the nickel case shows that trust is still an important part of doing business. Despite the comments above about the importance of a robust contract, even a good example will not always protect you against corrupt, criminal or fraudulent behaviour. Trust does matter; so if you have a supplier you can trust, remember that is worth quite a lot. Nobody wants to find stones instead of nickel in their warehouse, literally or metaphorically.

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What’s Gone Wrong with CIPS Systems? Part 2 – Advice to Help Avoid Similar Issues!

In part 1 of this discussion, we talked about the issues CIPS (the Chartered Institute of Procurement and Supply) has faced in implementing its new systems. Moving away from the CIPS specifics now, here are some lessons related to this field, based on both personal experience and wider research.

  1. Nothing wrong with Oracle software, but small clients (and CIPS are small in the greater scheme of things for a firm like Oracle) sometimes struggle to get the attention that a Unilever, Barclays or Toyota might receive as customers of any software giant. In many sectors, including procurement software (which is not what CIPS has bought, I should say), I’ve always felt there is a lot to be said for smaller organisations choosing smaller suppliers.  
  2. Optimism bias is often an issue too. Suppliers are almost always likely to tell you that “yes, our product can do this” and “yes, it can be up and running in six months, no problem”. They might not be lying – but they omit to mention the conditionality. “Yes our product can do this as long as the data is in this format…” Or “yes, six months is feasible – as long as a, b, c, and d all apply…”  
  3. My understanding is that CIPS went for the “big bang” approach with the Oracle software. An alternative might have been to look at different aspects of the requirement – the student and exam booking element, core membership management, conferences and events, etc – and perhaps gone for a staged approach, with a more “best of breed with good inter-operability” approach to the software products chosen too. Whilst this might have looked somewhat more expensive and less rapid in theory, incremental approaches do tend to de-risk programmes like this.  
  4. The US example in Bad Buying mentioned in part 1 was undoubtedly made more complex by the involvement of several parties. I do understand why Oracle “don’t do implementation”, but immediately you have potential for dilution of responsibility when another party or parties are involved. Most senior buy-side people tell me they would always prefer “one backside to kick”, if you pardon the language. It’s not always possible, but having real clarity about who is responsible and accountable for what on the vendor side is vital. That’s true not just in technology, I should say, but in many other areas including construction, outsourcing projects, etc.  
  5. The Enigen statement (see part 1) is interesting in its mention of “evolving and additional requirements”. The very first chapter of Bad Buying is all about getting the specifications right. It’s the first chapter because it is the most fundamental cause of failure – if you get the spec wrong, nothing else matters. For complex technology projects, and that includes something like the Army’s disastrous Ajax armoured car programme as well as digital tech, changing specifications once work is underway will almost always cause problems. In terms of a software project, a client that starts saying, “oh, could we have that functionality as well please, sorry, forgot to mention it earlier…” is asking for trouble. Suppliers like to say “yes” of course, but not only can it lead to delays, it muddies the water in terms of accountability.  
  6. Software implementation that involves a systems transition – rather than a totally new system / functionality – is often difficult because problems with (for instance) transferring data don’t always come to light until you’re well into the project. It is easy to say that thorough due diligence before choosing a supplier or starting the programme is the answer, and of course that is important. But sometimes issues do emerge from the woodwork (or from the silicon, we should say) only once you are actually pressing that “go live” button!  is It is often a sensible move to look at cleansing data, perhaps using a real specialist in this area, as part of the pre-contract award market engagement process and planning.  
  7. On the client side, effective programme management is absolutely key. One would hope CIPS recognised that, but there might be questions now about factors such as the programme manager, governance, reporting, stakeholder and risk management. Now you can have a brilliant programme manager and still end up with a failed programme, but I’d hope the CIPS Board would be insisting on a detailed review of what has happened (if they haven’t done that already).  
  8. Expanding on that point, clients MUST understand they are reputationally, contractually and commercially on the hook for leading the implementation. You can’t just hand this off to software providers, SIs (systems integrators) or consultants. Programmes must have the right level of senior people involved and fully engaged from programme inception, and involved in governance of the project throughout. A lack of appropriate senior input is the root cause of many implementation disasters – leaders must ensure early decisions are made and do not get missed. Small issues can fester into multi-million pound disputes  requiring un-picking, and causing cost, delays and disruption.  

In November 2021, CIPS net assets (excluding the defined benefit pension fund notional surplus) were about £6 million. The accounts up to November 2022 should be out in the next couple of months – it will be interesting to see if the systems issues have visibly affected the financial position. For the sake of next year’s membership fee inflation, I hope not!

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