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Theranos and FOMO as a Cause of Bad Buying

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Don’t Assume You Can Always Find a Good Supplier Out There!

I met an old friend – and consummate procurement professional – this week for the first time in several years. He is working in a very important and sensitive area of government, and this article is in his honour!

It is an extract from Bad Buying –  How Organisations Waste Billions Through Failures Frauds, and Fu*k-ups, where I discuss an approach we’ve seen quite regularly in the public sector. Sometimes private sector firms make the same mistake, but often I have to say it is politicians who make the assumption that there will always be a supplier out there who can successfully deliver the services (or goods) they require. Unfortunately, that is not always true…

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“In the government sector, many failures can be tracked back to an assumption that there will always be a range of credible suppliers who can execute the contract, whatever the organisation looks to buy. But that may simply not be true. If the buyers’ requirement is unique, as government work can often be, a market may need to be created from scratch. Even if there is some capability already, a sudden increase in demand, from a major government programme for instance, will put pressure on the market and it may take considerable time to reach a viable state.

The UK government decided in 2013 to outsource much of its probation services work, despite warnings from experts that it would be “highly problematic”. The work included the management and rehabilitation of offenders, combining an element of punishment, such as monitoring the conditions of prisoners’ release, with the desire to reduce re-offending and help the offender make a useful contribution to society. The Ministry of Justice, then under the command of minister Chris Grayling, created 21 Community Rehabilitation Companies (CRCs) to manage offenders who posed low or medium risk, and in February 2015, the CRCs were transferred to eight, mainly private sector, suppliers working under contracts that were to run to 2021-22.

However, a National Audit Office (NAO) report from March 2019 reported that implementation was rushed, there was little of the innovation that was promised from suppliers and, while the number of offenders has reduced, 19 of the 21 companies ultimately involved failed to meet targets for reducing the frequency of re-offending. Probation services have clearly not been transformed, and in July 2018, the Ministry announced it would terminate its contracts with CRCs 14 months early, in December 2020.

Suppliers didn’t do well either. The NAO report estimated cumulative losses of £294 for the firms if contracts continued to the end date, and Working Links, one of the providers, collapsed into administration in February 2019 because of its probation contracts.  Finally, David Gaulke, by now the Minister in charge, announced in May 2019 that the contracts would not be offered to private firms – probation services was in effect re-nationalised after one of the highest profile UK buying failuresin recent years.

There were clearly many problems here, but fundamental is the issue of an entirely new “market” being created, without real understanding upfront of what the work involved, what capabilities would be needed by the winning firms, how the right commercial models would be constituted or how competition could be maintained and stimulated.  The organisations that won CRC contracts ranged from those with experience in vaguely associated areas (Sodexho was a catering firm originally) to new partnerships such as Purple Futures, which involved Interserve, an outsourcing firm which eventually entered administration in early 2019 after financial problems, along with charities such as Shelter.

“If you build it, he will come”, the tagline from the legendary film Field of Dreams, seems to be how some governments think when it comes to creating markets. And generally, some entities will emerge from the undergrowth, bidding to carry out pretty much whatever government asks them to  – drawn by the potential rewards, of course. But this does not create vibrant, sustainable, successful markets in itself”.

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

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

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

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

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

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

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

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

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

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

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

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Children’s Social Care – A Broken Market

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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The Post Office and Fujitsu Horizon Case Shows Bad Buying at Its Worst

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

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

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

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

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

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

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

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

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PPE Scandals hit Italian & German Business and Politics – Will the UK Follow?

There have been interesting developments in terms of procurement of PPE in several European countries.   Last month, the Times reported that magistrates in Italy had ordered the seizure of property worth more than €70 million (£60 million) including a yacht, a Harley-Davidson motorbike, watches and several apartments from eight middlemen.  They are accused of exploiting the desperate shortages of PPE last year at the height of the pandemic.

The allegation suggests that a group of businessmen earned commissions worth €72 million on the purchase of 800 million facemasks from China. Those masks cost the Italian government some €1.2 billion. The suspects are accused of “illicit influence trafficking, receipt of stolen property and money laundering”. There is some cronyism involved here too. One of the accused is Mario Benotti, 56, a journalist and general director of two technology companies, and someone who knew Domenico Arcuri, 57, the Covid commissioner.  But Benotti says that he intervened to help his country and because Arcuri asked him to.  He acknowledges getting €12 million but says he earned it.

It has to be said that a margin or commission of €72 million sounds a lot. But on a spend of over a billion, that is “only” 6%.  Is that really exploitation?  A BBC Panorama programme this week suggested that firms such as Ayanda Capital made significantly more than that supplying the UK with PPE – a margin of 15.8% according to Tim Horlick, the boss. But in any case, if 800 million masks cost €1.2,  that is €1.5 per mask, which shows just how crazy the market got last year.

In Germany, the scandal is deeper and more shocking. Several leading politicians have been forced to resign because of the money they made personally from the pandemic shortages. Earlier this month, two members of the parliament and of Angela Merkel’s ruling CDU party resigned this week because of the scandal.

It appears that Georg Nüßlein and Nikolas Löbel both personally profited from government contracts for face masks. Löbel is alleged to have received €250,000 in payments for brokering a deal between a Chinese supplier of masks and the German cities of Heidelberg and Mannheim. Nüßlein is accused of making €660,000 through a consultancy firm for lobbying the government on behalf of a supplier. Mark Hauptmann, from the eastern state of Thuringia, is the latest to go. He is stepping down due to his alleged links concerning medical supplies and Azerbaijan. It all seems somewhat opaque, but Hauptmann has admitted that Azerbaijan and other countries paid for adverts in a newspaper he publishes.

Coming back to the UK, we also don’t know if any of our politicians took their cut for promoting PPE suppliers onto the “VIP” path, which greatly enhanced the firms’ chances of winning contracts. We still don’t know how Ayanda Capital and others were chosen to be awarded contracts, or why each got the size of contract they did.  This week, the BBC Panorama programme looked at how some very odd firms won huge contracts or acted as facilitators, such as an upmarket dogfood business! It also exposed that details of some contracts awarded last spring and summer have still not been published.

But there only four possible options in terms of the process used in the UK to select suppliers.  

1. There was an actual selection process. I don’t mean the due diligence assurance which was carried out once a firm had been chosen – I mean the process for choosing which firm would get which volume. But if there was such a process, we still don’t know what it was.

2. It was random. All the names in a hat …

3. It was literally first come, first served. The first firms that got their offers in won the work, until all the volume needed was covered.

4. It was fundamentally corrupt.  

We still don’t know which of these is the most accurate explanation, and until we do, we can’t rule out the possibility of more scandal emerging in the UK, as we have seen in these other nations. This story isn’t dead yet.

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UK National Audit Office Looks at PPE Again – Just Why Did We Buy So Much?

The second UK National Audit Office report on pandemic procurement was issued recently. Titled “The supply of personal protective equipment (PPE) during the COVID-19 pandemic” it focuses entirely on PPE. It has received less media coverage than its predecessor, which looked at wider procurement issues, although it too had a lot of PPE-related content.

That reduced attention was probably because it lacks some of the obviously newsworthy headlines the first reported generated, around contract awards to firms such as Ayanda Capital and Pestfix, who have been in the news for a while, and discussions of potential conflict of interest at Ministerial level. But that’s a shame, because there are some very interesting findings in the more recent report too, although it still leaves a couple of key questions outstanding.

The report gives more visibility of the process as the pandemic struck in the spring. It clarifies some of the failures we saw around the existing pandemic stockpile, which was a combination of sheer incompetence and a more forgivable lack of preparedness for this type of virus.  Once it became clear that the normal NHS channels, such as Supply Chain on the procurement side and Unipart for delivery couldn’t cope, we saw Lord Deighton getting involved, bringing in people he knew (including HR support through another questionable contract).  We know Clipper won a huge distribution contract, also without any competition, although they seem to have done a pretty good job all in all.

The Parallel Supply Chain buying operation was set up in late March, with one team looking at extending UK manufacturing and another sourcing PPE globally. McKinsey supported the Department in putting together a demand model to predict how much PPE was going to be needed. The teams then went off and agreed contracts with some of the thousands of suppliers who had expressed interest – some of whom came though the “VIP route”, already exposed previously.

That takes us into our three big outstanding issue though.

  1. We still don’t understand the process by which suppliers were selected from those that put themselves forwards. Why did Ayanda Capital win a contract for £250 million? Why not £50 million? Or indeed £500 million? Why did 47 suppliers win contracts, with value ranging from less than a million to the hundreds of millions – was there an overall strategy of some sort, or was it literally the buyers accepting the first offers that were made that got through the approval process?  We know that process was flawed early on by the lack of real due diligence, but we’ll park that for the moment. But the process used for selecting suppliers and determining quantities per contract is still opaque.
  •  Why has the demand model turned out to be just so inaccurate? We are now in a situation where, as NAO says, if the recent rate of use of PPE continues, then the 32 billion items that had been ordered by the Parallel Supply Chain by 31 July could last around five years (with variations across the different types of PPE). The Parallel Supply Chain’s initial estimate of the PPE that would be required nationally anticipated an enormous increase compared with pre-pandemic use, but actual use has been lower than this (although still far higher than pre-pandemic use). What went wrong?
  • There is still some doubt over how much PPE is unusable or at least does not meet original specification. From the report – “The Department (of Health and Social Care) told us that it had identified 195 million items which were potentially unsuitable, which was equivalent to around 1% of the items it had received to date. However, it has not provided us with sufficient information to be able to verify these figures because, it told us, this would compromise its ability to resell the PPE”.   In other words, NAO can’t be sure the Department isn’t fibbing.

Coming back to the demand issue, did the model assume that the absolute peak of PPE usage in March / April would continue forever, and that there would be no reduction in cases as we went into lockdown? Was it the move away from putting patients on ventilators, as clinicians learnt more about optimal treatment pathways?  Were contingencies built on top of contingencies? I understand that the model did initially include the devolved countries (Scotland, Wales, N Ireland) who then went their own way on PPE, but that factor isn’t enough to explain the huge quantities ordered. It’s a shame the NAO report didn’t dig onto this issue a little more deeply, I feel.

By the time that the PPE team was “professionalising” through the summer and bringing in more people with real public procurement experience, I’m told that it wasn’t really a buying job any longer. The vast majority of the contracts were placed in May and June. Through the autumn, teams have been focused more on how to manage this huge over-ordering situation. That’s one of the reasons why UK ports are struggling – they are clogged up with billions of items of PPE, ordered earlier but for winter delivery.

My prediction is that soon, there will be stories of suppliers being paid off – they’ll get the majority of the contract value paid but be told not be bother supplying what is not yet delivered.  There is also a very serious problem here, as a range of new UK- based manufacturers were encouraged to move into this market. But if there is 5 years’ worth of stock (or committed orders) already, who needs more from these possibly expensive UK manufacturers?

I do have sympathy with the people involved here. Predicting demand in the peak of the pandemic must have been a difficult task, that is undeniable. But how did smart civil servants and McKinsey consultants (charging a fortune, no doubt) get it so wrong?  That demand model has cost the taxpayer billions. We have bought far too much stock, and even if it does get used eventually, it was bought at the top of the market, at prices several times the norm in many cases.

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Look Who’s Talking – FACT360 AI Detects Potential Fraud

The fraud section in my new book was great fun to write. I know you can’t and shouldn’t call fraud “fun” in any sense, but the case studies I researched were interesting, and often quite astonishing.

In one case I saw personally (which I couldn’t mention in any detail in the book) we discovered a fairly senior colleague, who everybody thought was a lovely, capable person, was actually involved in approving six-figure invoices from a fake supplier. The police thought this “firm” was probably linked to the “Russian mafia”, and we only found out about the fraud when the police discovered this gang was receiving large payments from my firm (and told us)!

Anyway, buying-related frauds can involve just internal staff, as in the case of fiddling your expenses or using the company charge card wrongly, or can be purely externally driven, as in the case of many “invoice misdirection” cases, or might involve both internal and external players. That third category is perhaps the most common and includes classic frauds such as overpayments to suppliers or biased supplier selection in return for bribes or inducements to the buyer.

But technology, artificial intelligence in particular, is helping to pick up some frauds through its ability to analyse huge amounts of data and spot trends, patterns, inconsistencies and oddities. I remember a presentation from two or three years back which talked about using AI to search through corporate payments or approvals. The idea was that you might find for instance a budget holder who always submitted an invoice for approval or payment on a Friday afternoon, when it might be scrutinised less carefully! Or someone who always makes purchases with a value of £9,999 if the cut-off for approval is £10K.

But more recently, I learnt of another interesting approach. In this case, the AI focus is on emails and documents that flow within the organisation and to external third parties. It has been developed by a firm called FACT360, which is led by Paddy Lawton, who founded, ran and then sold spend analytics software firm Spend360 to Coupa in 2017. I spoke to Lawton and fellow director Andy Slater to get a quick overview of what they’re up to.

Of their three core products, AI Forensics  is most relevant to buying-related fraud work. It analyses documents and emails and produces a network “map” of who is talking to who within an organisation and across organisational boundaries, including to suppliers, for instance. It generates insights from that communication flows as well as from the content of the messages themselves.

So for example, if you apply the analysis to Enron’s data, before that firm’s crash and disgrace, you can see that one particular person was at the centre of a major web of communication within the firm, even though he wasn’t apparently very senior. It turned out he controlled one of the technology “marketplaces” that enabled Enron to falsely claim to be making money on transactions. This analysis of what FACT360 calls “prestige” can tell you a lot about what is going on within an organisation, and who is really important or powerful. 

“And there are subtle changes in communication behaviour that occur and can be detected when actors plan and engage in covert activity” according to Slater.

One of the interesting corruption cases in my Bad Buying book tells the story of the Sainsbury’s supermarket potato buyer, who conspired over some years with a major supplier to pay over the odds for potatoes in return for bribes. Might Fact360 artificial intelligence have picked this up?  Probably, says Slater. It is likely that emails between the main players would have been more frequent than for other similar suppliers, or show different patterns in terms of timing or even use of language. There might have been more obvious clues in the content too.

Of course, knowing that your email trail could be used in his way might discourage fraudsters from using that medium, but there is always going to be some record of contact, unless the participants are using real secret service tactics! And the beauty of these emerging AI technologies such as FACT360 is that the user doesn’t need to know or define what they are looking for – the system will highlight where it finds potential “unknown unknowns”, as Donald Rumsfeld famously put it. 

We’re still at the early stages of understanding just how AI is gong to affect our lives, and it may be that some implications will not be positive for many of us. But using it to detect and deter fraud and corruption in our organisations – and reduce Bad Buying – must be one of the more positive aspects of this fascinating technology.

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More on the NAO Pandemic Procurement Report – Failure in the Cabinet Office

The NAO report on UK government procurement through the pandemic came out recently and we wrote about it here, focusing mainly on the PPE (personal protective equipment) issues it identified and analysed.

Today, we’ll look at some of the other non-PPE contracts that the NAO investigated. It’s worth highlighting that the auditors looked at 20 contracts and did not find problems with all of them by any means. So their list includes examples from the Department of Work and Pensions and different bodies within the health sector for instance, and in most cases, there were no serious issues identified.

However, the real villains sit in Cabinet Office, where three contracts were examined and each was a case study of (certainly) incompetent and (arguably) unethical procurement. That is ironic, as that Department also houses the HQ of the Government Commercial Organisation and Gareth Rhys-Williams, the government’s Chief Commercial Officer. His role is to promote better procurement across the whole of central government and his influence runs even more widely. But it appears to be a case of, “listen to what I say, don’t look at what we actually do in the Cabinet Office” if the NAO report is anything to go by.

The three contracts were for £3.2 million with Deloitte, the consulting firm, for support to the PPE programme. The second was a contract for a maximum of £840,000 with Public First, for running focus groups around the pandemic – although there were stories initially that there was some link with Brexit work too. Then the third was worth £1.5 million and was awarded to Topham Guerin for “publicity campaign coordination services”.    

The first problem is that in all three cases, the supplier was engaged and indeed started work some months before a contract was actually put in place, without any form of competitive process to support the choice of supplier. Work started in March but contracts weren’t in place until June or July.  

I suspect anyone reading this will understand why this is bad news; if you haven’t formally agreed what the supplier is going to do, how they will be rewarded, how any risks will be managed (from confidentiality to termination provisions), then you shouldn’t be starting the work really. We can only assume our old friend “urgency” is again the excuse here. But doing a few focus groups or a bit of publicity is hardly the same level of urgency as finding life-saving PPE.

Then we have faults that are familiar from our previous article covering the PPE issues in the NAO report. There was no documentation available in each of the three cases to explain why and how the supplier was chosen. The cynics amongst you might say the answer is clearly “because they were our mates” but I couldn’t possibly comment. Again, it is bad practice at best, and something more sinister at worst.

Then we have the conflict of interest issues. Topham Guerin and Public First have previously worked with Cabinet Office Ministers such as Michael Gove and advisers including Dominic Cummings. According to the Guardian, Public First “is owned by the husband-and-wife team James Frayne, previously a long-term political associate of Cummings, and Rachel Wolf, a former adviser to Gove who co-wrote the Conservative party manifesto for last year’s election”.  But in that case, the NAO “found no documentation on the consideration of conflicts of interest, no recorded process for choosing the supplier, and no specific justification for using emergency procurement”.

So procurement process, policy and propriety in the Cabinet of Office, at the centre of government, has been corrupted. It appears that somebody senior – that could be a Minister, a special adviser, or a civil servant – either just engaged supplierd themselves with no procurement input, or told procurement to “JFDI”.  Either procurement is not in the loop and doesn’t even know what has happened till after the event, or the function and procurement leadership is too weak to say to the budget holder, “that’s not the way we should do things”.

In either case, it does not speak well of the Cabinet Office’s own procurement team, I’m afraid. Even more embarrassingly, we have the fact that the department is supposed to be showing the rest of government how procurement should be done. But Rhys-Williams, the government’s Chief Commercial Officer, is going to struggle now I suspect when he tries to tell other departments how they should be doing procurement. Yes, they’ll say, we’ll follow the best practice guidelines – just like your lot did on that Public First contract …

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