, ,

Purchasing Cards – Open to Fraud or Better than Purchase Orders?

An interesting procurement story emerged recently, but it got somewhat lost in the focus on the UK “not-a-budget-just-a-financial-statement” a couple of weeks back, which gave tax cuts to deserving premiership footballers, bankers and professional services firm partners.

The Labour Party investigated the use of corporate purchasing cards in the UK’s Foreign Office, the government department that was until recently run by Liz Truss, now our esteemed Prime Minister. That threw up all sorts of interesting expenditure, and Emily Thornberry, shadow minister, send a long letter outlining the issues and questions. At least one purchase appears to have been fraudulent and is under investigation. But Rayner highlighted an overall increase in card spend of 45% and various other items that on the surface look dodgy.

As Sky News reported, “The Foreign Office spent more than £4,300 of public money on two trips to the hairdresser and nearly £1,900 at the Norwich City FC shop when Liz Truss was at the helm, documents show”.

I can’t comment on whether transactions were legitimate of course. But there is a history of misuse of cards in the Department, as I featured in the Bad Buying book.  In 2019, a Foreign Office employee appeared at Southwark Crown Court in London. She was accused of blowing nearly £20,000 on government credit cards in a month-long “gambling binge”.  Laura Perry was alleged to have made almost 250 transactions over 30 days with an online casino, using Foreign Office purchasing cards.  She also allegedly used a card for a personal restaurant meal. She had been given the cards to book travel tickets, pay for accommodation and make payments for other costs incurred by government and visiting dignitaries. 

She claimed she had accidentally mixed up the card with her own – which can be done – but ultimately, she pleaded guilty to stealing £2,223. But she was cleared on the £20,000 accusation relating to the gambling, claiming it was her ex-boyfriend who used the card for that purpose.

However, cards do have advantages, not least in that they provide a better audit trail than expenditure made via requisitions, purchase orders, or simply the old “phone call to the supplier” method! Ironically, card spend gets a bad press in part because it is transparent, and we have to be careful before jumping to conclusions. Any major card scheme will see some exmaples of inappropriate purchases, but that does not invalidate their use and benefits. Here is an extract from “Bad Buying”.

“Some years ago, I talked to a logistics manager based in the UK Ministry of Defence’s Head Office. He told me he had not long returned from Afghanistan, where he was working as a logistician in a big military camp there. 

We talked about the need for buying processes to be flexible and for buyers and logistics people to be able to react quickly in military situations. The use of the Purchasing Card came up, and he explained there had been a bit of an internal furore when finance had looked at expenditure on the card in use at the Camp. One invoice related to expenditure on a range of golf equipment. That looked very strange, possibly fraudulent.

But it wasn’t. He explained that opportunities for rest and relaxation were limited for the troops in Afghanistan. Not many friendly bars, you couldn’t just go off for a run through the hills or take a trip to the beach. So, someone had the bright idea of buying some golf equipment and rigging up practice nets. Even non-golfers were getting into it, with more expert players offering lessons. The golf kit showed up on the Card bill, and looked odd, but most people would agree it actually was an appropriate and intelligent use of public money.

As a corporate executive, and on behalf of the firm, I’ve bought retirement presents, flowers for staff to celebrate a wedding or birth, strange items to be used on corporate away-days, booze, and many items that would have looked odd on that card bill. But all were justified and for the organisation’s benefit, not mine. Another case saw a government body chastised for spending money at a horseracing venue. But that was explained as the fees for a legitimate business meeting, booked in the hospitality suite on a day when no racing was taking place”.

So P-cards can be used positively in the public sector. Thornberry’s other issue is that the Foreign Office refused to answer some of her questions about the spend, saying the information could “only be obtained at disproportionate cost”. That is not acceptable – but we shouldn’t throw the P-Card baby out with the bathwater. Managed properly, cards have a useful role to play in the procurement armoury.

/0 Comments/by
, ,

Professional Services – Procurement Has Failed

Unfortunately, procurement as a function has failed.  Not everywhere, not in every organisation, but across some huge and important markets, we have failed.

Reports last week in the Evening Standard – and elsewhere – lead to that unfortunate conclusion.

“UK partners at accountancy and consulting firm PwC were paid an average of more than £1 million for the first time last year. The London-based giant said consulting revenues were up by a third reflecting “exceptional clients demands to challenges and opportunities on multiple fronts”.

Group profits grew 24% to £1.4 billion in the year to end June and profit per partner averaged £920,000, up 12%. This was topped up by an average of £105,000 per partner in the firm of a distribution from the sale proceeds of PwC’s global mobility and immigration arm …”

And there are almost a thousand partners in the UK; 944 to be precise earning this huge amount. But they’re not entrepreneurs. They have not built a business, they don’t run a business and most of them are looking after relatively small teams, not the thousands of people many CEOs manage. They might create some value for clients, but I don’t think you can compare their work to being CEO of even a fairly small business, or being a business owner and entrepreneur trying to build a successful enterprise. Yet somehow, they are extracting a million each, every year, from the economy.

Fiona Czerniawska and I wrote “Buying Professional Services – How to get value from  consultants and other professional services providers” back in 2010. It remains I believe pretty much the only book focused on that specific area of procurement. Our focus was consultancy, audit and legal services, and we tried to lay out how buyers could achieve better value in these tricky markets. Procurement has a relatively short history in these spend areas – 30 years ago there was little procurement involvement in these categories even in the largest organisations. So you would hope that the more recent involvement of the profession would have helped make these markets more competitive and we would see better value for users.

But year after year, we see audit scandals, unsatisfactory consulting work, and yet the earnings of partners seems to just go up and up.  Surely, if procurement had really got to grips with these spend categories, we wouldn’t be seeing this? It is even more startling in the legal world, with Freshfields partners hitting the £2 million mark this year.

Clearly, there must be market issues here as well as questions of competence.  In the audit area, the greater regulation of that profession, put in place with good intent to raise quality, has succeeded in also raising the barriers to entry. So it has been very difficult for smaller firms to challenge the big four.

In the consulting and legal world, there are more complex factors at work. I believe that many CEOs and CFOs are happy to pay high fees and see partners earning so much, because it helps them justify their own salaries.  The executive remuneration consultants ( another highly questionable branch of the professional services world) can say to a Board, “if a PWC partner earns a million, you better pay your CEO at least that”.

Another problem is that procurement often comes up against the user of professional services who doesn’t want to see competition and just wants their favourite law or consulting firm, probably engaged on a day rate basis so the user doesn’t have to think too hard about outcomes or deliverables.   But we all know how important competition is to moderate costs; too often we still don’t see that in this world. And ongoing “contract management” of assignments is often dreadful or non-existent. How much of a partners’ earnings can be traced back to “land and expand” strategies, for instance, or projects that run on and on beyond their supposed delivery dates?

The hollowing out of businesses (and public sector bodies) over the years in the cause of efficiency is another factor. Downsizing and outsourcing has left organisations unable to resource new projects or anything out of the ordinary – so the consultants get called in.  For instance, PWC partners must be delighted to hear that the UK Tory government wants to cut civil service numbers by 25% – that will mean yet more lucrative work for them!  Which will no doubt be based on a Crown Commercial Services framework contract with consulting firms that when put in place made little attempt to drive real competition or push the firms into offering better value. 

The growing complexity of the business world is another driver, and we can’t blame the providers for that. Whether it is leading-edge technology or international patent law, organisations face more and more complexity and it is not surprising that external expertise has become more critical to success.

But even given that caveat, it seems clear that we have failed to get to grips with professional services procurement.

/0 Comments/by
, ,

M&S Buys Logistics Supplier – Why?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

/0 Comments/by
, , ,

Thurrock Council Comes Up with a New Type of Bad Buying

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

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

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

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

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

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

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

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

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

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

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

/0 Comments/by
, , , ,

Good Tender Documents – More Important Than You Might Think

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

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

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

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

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

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

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

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

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

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

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

/0 Comments/by
,

Transformative or Tedious? The New UK Procurement Bill

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

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

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

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

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

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

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

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

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

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

/0 Comments/by
, ,

Fairness in Procurement

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

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

…..

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

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

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

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

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

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

/0 Comments/by
, ,

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

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

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

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

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

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

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

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

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

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

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

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

/0 Comments/by
, , ,

Will My Supplier Deliver? Lotteries, Camelot and Challenges

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

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

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

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

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

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

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

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

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

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

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

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

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

/0 Comments/by
,

Camelot Challenges UK Lottery Decision – Highlights Key Issue of “Confidence”

Over the weekend, we saw reports that Camelot, the current operator of the UK National Lottery, is going to challenge the government’s decision to award the contract for management of the Lottery to a different firm, Allwyn, headed by a Czech tycoon. That decision follows a lengthy and no doubt exhaustive “procurement” process. This is from The Times (behind the paywall unfortunately).

The Czech bid, led by Sir Keith Mills, the man behind the London 2012 Olympics, and the former J Sainsbury boss Justin King, was deemed to have had an inferior business plan but managed to pip Camelot at the post by promising to deliver a much higher sum for good causes. There are suggestions that Allwyn’s bid was based on a forecast that it would raise £38 billion over the ten-year licence, which starts in 2024. This is believed to be a much higher figure than the forecast included by Camelot … Bidders were asked to supply a detailed forecast of how much they expected to raise, but with no obligation to achieve it or any form of penalty for failing to do so.

So this may come down to an issue that sits behind one of the common causes of “Bad Buying”.  In my book of that title it has its own chapter – “Believing the Supplier”.

That can relate to suppliers actually lying or deliberately misleading the buyer. It’s the tech firm that says they can develop and install the new software for you in six months, when they know its going to be more like 18.  Or the consulting firm that tells you they have lots of experience running M&A studies in Spain, when in fact they have one junior analyst in the London office who has a girlfriend in Madrid.

But more often it is suppliers whose intentions are good, but make promises and offers that they can’t really deliver on. They really do believe that software will be ready in six months; but they don’t actually have the experience or expertise to make it happen.

This leads to a particular issue in public sector procurement. Because that relies on formal tendering processes (for larger contracts anyway), we see a real difficulty for buyers in assessing two different aspects of the proposals received. They have to evaluate the apparent value of the solution proposed, which is what the legal procurement framework focuses on. But they should also assess the credibility of the proposal – the confidence the buyer can have in its actual delivery.

You might remember the “scandal” back in 2008 when the UK’s Qualifications and Curriculum Authority (QCA), which managed the school ‘national curriculum’ and associated testing process, terminated a contract it had put in place with ETS Europe to deliver tests for schoolchildren.  ETS failed to meet agreed timescales and the whole thing was a bit of a shambles.

The case illustrated a central challenge in many buying situations – how the buyer can assess whether proposals can actually be delivered by a potential supplier, even if they sound credible. It is relatively easy to write a convincing proposal to carry out services-type work or even to deliver certain physical items. I might tell you in beautifully written prose that my firm can supply you with the finest cocoa beans, or handle your outsourced pension administration absolutely brilliantly. Or even build a nuclear submarine … But how do you know I can actually do it? Here is an extract from Bad Buying that explains what went wrong with ETS, following an independent review into the case. 

“The Sutherland Review found that in many ways the procurement (buying) process in this case wasn’t run badly– the authors called it ‘sound’. ETS won with the lowest price, but also scored better than the alternative bidder on non-cost factors. The ‘Gateway reviews’ undertaken by the Office of Government Commerce were in general positive, too. However, the contract and the supplier clearly failed to deliver what was required. Why was that?

Issues were identified by the report around governance, the contract- management approach, some legal issues in the contract and specifications. But the report suggests that the weakness in the selection process came from two key factors. First, the QCA and the consultants running the process did not fully check out the history of previous contracts delivered by ETS. That might have picked up warning signals, as there had been issues with contracts in the United States. Basic financial health checks were done, but not an extensive reputational and performance due diligence.

Second, the buying process did not check that the assumptions about capacity made by ETS in their bid were realistic and accurate. The firm should have been challenged more strongly on its staffing plans. There were also concerns about the ‘end-to-end’ solution proposed and whether the firm really understood how different elements needed to fit together. Those issues appear to have been at the heart of subsequent problems.”

So it is this “confidence in the supplier’s ability to deliver” that has to be assessed somehow, and whether the supplier’s assumptions and plans are “realistic and accurate”. It is not just their conformance to the specification, the elegance of their proposed solution, or indeed the apparent financial benefits they might be offering.  

Going back to where we started, it is this issue that may come to the fore in the UK National Lottery case, assuming the decision is challenged. More on that in part 2.

/0 Comments/by