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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.   

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UK Politicians Not Impressed with Army Ajax Programme

We wrote about the UK Ministry of Defence (MOD) Ajax armoured vehicle fiasco almost a year ago.  Now, the Public Accounts Committee (PAC), made up of politicians from all parties, has urged MOD to either fix or scrap the scheme by the end of 2022.

The programme has been running for 10 years and has failed to deliver a single usable vehicle. By December 2021, the Department had paid the supplier, General Dynamics, £3.2 billion, although Ministers now say there will be no more payment until problems are resolved. Noise and vibration problems proved to be a health hazard for soldiers during testing, and there were other performance issues too. The initial design had some 1,200 “capability requirements” and both buyer and supplier under-estimated the complexity of what they were trying to build. In their report published recently, the PAC said this.

“The Department’s management of the programme was flawed from the outset as the programme was over-specified and the Department (MOD) and General Dynamics did not understand the scale of the technical challenge. We have seen similar failings again and again in the Department’s management of its equipment programmes. The Ajax programme also raises serious concerns about the Department’s processes and culture for testing whether new equipment is safe to use”.

The MOD still appears to have no idea when, if ever, the vehicles will go into service and will not commit to a target date. And assuming this does not end well in term of delivering adequate vehicles, we can expect a serious legal battle – unless the MOD just caves in and pays up, of course. As the PAC report says, “because of programme delays and missed milestones, the Department estimates that it owes General Dynamics £750 million for completed work, but has not paid anything since December 2020, and the parties remain in dispute”.

The PAC comments follow a report from the National Audit Office in March 2022 which went into more detail, and there were several points in that report that I found particularly shocking. For example:

“The Army’s policy of regularly rotating posts means that the programme has had a high turnover of senior personnel, with five senior responsible owners (SROs) since November 2011, and four   programme directors and six project managers since September 2013. Defence Equipment & Support (DE&S) replaced the programme manager who had negotiated the reset immediately after the contract was updated in May 2019, affecting the programme’s corporate knowledge. It also replaced other senior programme personnel after the new director general was appointed in December 2019”.

That issue is largely within the control of the MOD, and the “revolving doors” staffing policy has been identified before as an issue; yet it still happens. And some senior roles were not even full-time before 2021! Then we have the Ajax Programme Office, responsible for running programme.

“The programme management office, which supports the SRO, has remained small for a programme of this scale and complexity. In 2016, six of the eight posts were vacant …  By April 2019, it had filled these vacancies to manage the contract renegotiation in 2018, but then reduced resources – at a time when the programme was missing milestones. In July 2020, the programme management office had dropped to four posts…”

What madness is this? A huge, critical and failing programme, and you reduce the programme management resources? Why? Would nobody take the jobs because they knew it was a doomed programme? Or did senior people want it to fail? Or did they think that a lack of resources might be a good excuse when the proverbial hit the fan?  Anyway, it is a shame the PAC didn’t pick up on this issue.

The NAO report identifies many other issues, from poor programme governance to specification issues, and really it is a textbook example of how not to run a major equipment procurement programme. It will certainly deserve its own chapter if and when “Bad Buying Part 2” emerges …

We are looking at increasing defence spending in the UK for obvious reasons following Russia’s invasion of Ukraine. That is fine; but as a taxpayer, I don’t want to see a penny more of my money going to MOD until I see a detailed and convincing plan laying out how the organisation will ensure it doesn’t waste more billions on equipment.  Ajax isn’t the first disaster of this nature; it just happens too often.

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Why is the USA Running Out of Baby Formula Milk?

Quite a few stories of procurement and supply chain failure we hear (and quite a few of those included in my Bad Buying book) have at least an element of humour about them. KFC running out of chicken wasn’t very funny for the senior management there, and the customer who phoned the police to complain that he couldn’t get his fried chicken obviously took it seriously.  But for most of us, we probably had a chuckle. Government failings are annoying when it is taxpayers’ hard earned money being wasted; but it is rare to see a case of supply chain failure that actually has the potential to cost the lives of babies.

But that is the situation in the USA, where shortages of formula milk for infants is threatening the health or even the survival of very young children. But why is this happening, in one of the wealthiest, most technically advanced nations in the world, where capitalism has over the decades brought a high standard of living (in global terms) and abundant supply of almost everything and anything to its people?

It is a complicated situation, and I’m only giving an overview here. The shortages appear to be driven to a considerable extent by manufacturing plant shut-downs, driven in part by quality issues identified by the US Food and Drug Administration (FDA). FDA (food and drugs administration).  As Sky News reported, “Abbott Laboratories was forced to shut its site in Sturgis, Michigan and recall a number of its powdered formula products after four babies who had been given formula developed bacterial infections”.  No firm link has been proven but the Michigan factory has been closed for weeks.

Even when the factory re-opens, it will take 8 – 10 weeks to get product back on the shelves, the company says. And once shortages emerge, panic buying inevitably exacerbates the situation, and there may be a bit of a baby boom going on in the US too. The U.S. government also has pretty rigid trade policies, making most formula imported from Europe illegal to buy in the United States. Tariffs act as another deterrent.  Maybe that is genuinely for health reasons; or maybe it is at least in part a nice bit of protectionism to suit the manufacturers.

But from a procurement point of view, this market concentration and the inflexibility of government-funded schemes for lower income people have contributed to the problem. Two companies – Abbott and Reckitt Benckiser – dominate the industry with about 80% national market share.  Nestlé, which sells under its Gerber brand, controls another 10%.

Part of the reason for these firms’ success is that they are the only makers approved by the US government to provide baby formula through the Special Supplemental Nutrition Program for Women, Infants and Children, known as WIC, which supports low-income families. It appears that most States, who fund these schemes, have negotiated deals with just one provider.

The Guardian reports; “ Nearly half of baby formula in the US is bought under the Wic program, aimed at helping low-income women, infants and children. States give exclusive contract rights for this formula to one company under a bidding process. Abbott provides formula to about half of the babies receiving Wic benefits. When these products disappeared, families were left scrambling to find alternatives”.

This has driven what has proved to be an unhealthy level of market concentration, as it also seems that production is also pretty concentrated within firms in terms of the number of production plants. Now procurement can’t always control market dynamics; but could government as well as buyers (in retail chains for instance) have done more to encourage new suppliers and a more competitive market?

So the old principle of consolidation, aggregation and leverage that procurement has lived by for decades has been driving behaviour here. But once shortages kick-in, recipients of the WIC benefit have been unable to find the approved supplier’s product, leaving them in a desperate state – and an example of the unintended consequences of what must have seemed like a sensible procurement strategy. The U.S. House of Representatives has now passed bills to try and address the shortage. One would waive certain requirements that limit brands and quantities of formula recipients of the special supplemental nutrition for women, infants, and children can purchase, according to CBS News.

Again, supply chain and procurement risk and resilience has not been considered as it should have been here, with cost driving the decisions. We’ve seen over the years so many examples where procurement behaviour has driven dependence on a few suppliers – or even just one (there’s an interesting example featuring VW cars in the book, for instance). It rarely ends well. So next time someone says, “we should rationalise our supply base and dramatically reduce the number of suppliers”, do remember that strategy can have benefits, but also caries risks. Be aware of that and develop the strategy accordingly.

Back to the highly concerning baby milk story. I’m sure more will emerge, and if you want a fuller explanation, I can recommend Kelly Barner’s excellent podcast here, in which she goes into more detail in terms of what has been going on.

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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.  

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“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”.

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Doctor Accused of Fraud Against Medicare

Two fraud cases in a row here … but a new (for me) angle today.

Procurement related fraud and corruption has interested me for many years, long before I started collecting case studies specifically to include in my Bad Buying book. So it is unusual to see a new type of fraud, but I came across a US case recently that was somewhat different to any I‘ve seen before.

At the heart of it, the scam is that an organisation ends up paying for goods that are not really needed (or maybe aren’t even delivered).  An internal budget holder creating their own company, setting it up as a supplier, then creating and authorising invoices and payments to themselves is the typical case. But here, it was more complex, as the fraud was against the US publicly-funded Medicare system.

At a federal court in Brooklyn Elemer Raffai, an orthopedic surgeon, was charged last month with health care fraud in connection with a $10 million scheme. He allegedly submitted false and fraudulent claims to Medicare and Medicare Part D plans. Raffai was arrested and was due to make his initial court appearance in the United States District Court for the Northern District of New York.

“In exchange for kickbacks from telemedicine companies, Dr. Raffai allegedly submitted millions of dollars in false and fraudulent claims to Medicare on behalf of beneficiaries without even examining them or based on conversations on the phone that lasted less than three minutes,” stated United States Attorney (Breon) Peace.

Dr. Raffai purported to practice “telemedicine” (phone or Zoom I assume) with the AffordADoc Network and other telemedicine companies. He was paid approximately $25 or $30 per patient consultation.  Between July 2016 and June 2017, he allegedly signed prescriptions and order forms for medical equipment, including orthotic braces, that were not medically necessary, simply based on a short phone call. Some $10 million in false and fraudulent claims were made to Medicare for that equipment and Medicare paid more than $4 million on those claims.

Presumably the “patients” were in on the alledged scam as well, and were recompensed for making the call to the doctor and playing their role in the process. And (again presumably) it was the manufacturers or sales agents for this equipment who were the masterminds behind it all. They received funding from Medicare for goods that either weren’t needed by the “patients”, or perhaps that equipment was never actually supplied. That isn’t clear from the information made public so far.  We might also hope that those firms have been or will be charged with fraud, as well as the doctor.

This type of fraud where different parties are colluding can be very difficult to detect – think of the famous Sainsburys potato example, which went on for years and was only detected in the end by the supplier’s external auditor. The buyer worked with a potato supplier that charged the firm over the odds, which funded bribes to the buyer. But one positive for those trying to fight fraud is that the more people are involved, the more likely it is that someone involved will “crack” and expose what is going on.  I wonder if that is what happened in this Medicare case, where many people must have known what was happening?

Another positive is that technology will increasingly be called into play to fight fraud. AI (artificial intelligence) can look at huge amounts of data, and perhaps in this case could have worked out that this doctor had a prescribing pattern that was out of line with his contemporaries.  I know organisations are using tools to examine payment records and look for anomalies; for instance, someone who always places orders with a value just below the threshold for further approvals.

Anyway, this is an interesting case and we will keep an eye on it to see what happens to Doctor Raffai.

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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.

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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.

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CMA Report on Social Care for Children Highlights Market and Procurement Issues

Life goes on despite the temptation to doomscroll Twitter and Facebook all day for the latest news on Russian atrocities.  But there hasn’t really been much else to cheer, and some news that should have generated more attention in normal times passed almost unremarked.

The Competition and Markets Authority (CMA) published a report last week on the provision of children’s social care (fostering and children’s homes) to UK local councils.  The CMA looks at issues from an economic point of view rather than as procurement experts, but their worrying findings in this case clearly indicate some major procurement (and market) issues.

The final report “found there is a shortage of appropriate places in children’s homes and with foster carers, meaning that some children are not getting the right care from their placement. Some children are also being placed too far away from where they previously lived or in placements that require them to be separated from their siblings. This shortage also means that high prices are often being paid by local authorities, who are responsible for placing children in appropriate settings, with these costs picked up by taxpayers”.

The CMA also commented on the risk of providers going bust – and yet in some parts of the market, providers are making what we might call “excess profits”, with margins of 20%.

“For the children’s homes providers in our cross-GB data set we have seen steady operating profit margins averaging 22.6% from 2016-20, with average prices increasing from £2,977 to £3,830 per week over the period, an average annual increase of 3.5%, after accounting for inflation”.

As an example of the sort of supplier that plays in this market (accepting of course that not all are of this nature), the Guardian recently featured a report about Robert McGuinness, who was paid £1.5m by two local authorities between 2015 and 2020. He owned a “community interest company” (CIC) which provided vocational training to children from 14-16, excluded from mainstream schools.

“The owner of a children’s home in Bolton shut down for “serious and widespread failures” spent thousands intended for educating marginalised children on drinking, foreign trips and his pub business, the Guardian can reveal”.

He siphoned money out of the CIC through a “director’s loan”  to invest in another of his businesses (running a bar).  The bar has since gone bankrupt and the liquidator says “there is currently no prospect” of the CIC settling the £100,000 loan repaid.  He also drives a Lamborghini – just the sort of public-spirited person you’d want to see running sensitive social services for youngsters.

The market failure evident in this sector has a number of causes. One ironically arises from the attempts to regulate the market. Even though that is well-meaning and certainly necessary to some extent, it creates more barriers to entry. Well-functioning markets see new entrants coming in and competing all the time, and also firms can exit the market relatively easily. Buyers can also switch suppliers easily in well-functioning markets; not the case here given the nature of the services.   

There are other barriers to entry in this case, such as the need for capital investment.  Over the past 20 years or so, the amount of public sector provision of such services has disappeared, replaced by private provision. One reason has been the need for investment in council-owned facilities. Rather than finding the money for that, as central government grants to local government have declined, councils have increasingly closed down their own facilities such as children’s homes and care homes  and bought those services from private providers.

That has weakened competition further. Then we can see a failure of procurement and contract management too. Do buyers know what margins are being made by their providers?  And how well are providers managed? I suspect because the users of the service are kids, there isn’t a lot of connection between the providers, the users and the commissioners (and budget holders) for the services.  Councils have seen headcount reduced in areas such as contract management too as income was squeezed.  The report on the gov.uk website agrees that something needs to be done.

“The CMA’s analysis finds that the main reason for this is the fragmented system by which services are commissioned, which means that local authorities are not able to leverage their role as the purchasers of placements or to plan properly for the future”.

To address these issues, the CMA recommends that the UK Government, Scottish and Welsh Governments, “create or develop national and regional organisations that could support local authorities with their responsibilities in this sector. These would improve commissioning by carrying out and publishing national and regional analysis and providing local authorities and collective bodies with guidance and by supporting them to meet more placement needs in their local area”.

I am no lover of aggregation of spend and centralisation of public sector procurement.  But this does seem like an area where a national “category strategy” and some serious procurement talent needs to be brought to bear.  

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NHS Digital Breaks the Rules, Shows Naivety

The vexed question of conflict of interest in public sector procurement came up the other day with reports that a senior executive in the National Health Service digital team had been doing rather well out of that organisation.

The HSJ reported that NHS Digital (NHSD) paid over £3 million to a small technology firm, Axiologik, one of whose owners was working as a Board-level interim director in the organisation.

“The money was paid to Yorkshire-based tech support company Axiologik, whose co-founder and director Ben Davison also served as NHS Digital’s executive director of product delivery – for which he received annual pay of £260,000, working as a contractor, in 2020-21.”

A number of issues arise from the HSJ investigation. Firstly, it appears that no other candidates were considered for the position when Davison was appointed. That seems odd, to say the least.

Then nine months after his appointment, Axiologik was appointed to provide programme management support for the Covid booking service, followed by more work (according to HSJ)  “to lead NHSD’s “tech and data workstream” which involved “portfolio level executive leadership across citizen-facing digital services” run by NHSD such as the NHS App, NHS.uk website and 111 Online”.

In the current year, turnover of the firm is set to grow from £6.5 million to £15m, not surprisingly. NHSD say that they put measures in place to avoid conflicts of interest – Davison had no involvement in the procurement process, or delegated authority for contracting or spend approvals. But as a top-level interim executive, how could he hold a supplier to account in any meaningful way if he was also a director of that supplying firm?  

Another issue arose because Davison was paid in the £260,000 – £265,000 band in 2020-21 according to the NHSD accounts, making him the highest paid person in the NHS.  But there is more. The Treasury then got involved because his appointment broke the rules on getting approval for contractors who work for more than six months!  (The engagement of two other NHSX contractors also broke the rules). That led to Treasury withholding £645,000 of allocated funding to NHSD because they have been such naughty boys and girls.

But perhaps the most important question is this. Was Axiologik appointed after a competitive process?  The HSJ does not make that clear – presumably because they do not know – although they report that the firm was appointed from the government’s G-Cloud framework.

There are many frameworks used in the public sector covering a wide range of goods and services. They enable users to bypass much of the formal “legal” public procurement process and can be very useful when used properly, retaining the ability to achieve value for money but simplifying the process. The Cabinet Office’s Crown Commercial Services (CCS), which runs G-Cloud, is the biggest manager and promoter of such contracts.

But too often, frameworks are being used today to award contracts without any real competitive process, leading to potential shortcomings in terms of value or even corruption.  In most cases, for example, users should (legally) run some sort of competitive process between at least some of the firms on any given framework to select the supplier that can provide best value. But in practice, users at times just pick their favourite and justify it on spurious grounds that “they are clearly the best…”

Some framework managers don’t really have an interest in whether the process is run properly either. They make their money as a percentage of the spend through their frameworks paid by the supplier, so CCS for instance is targeted on increasing its “sales”. If they put controls on usage, or police this issue of further competition too strongly, then users might just switch to another framework and CCS loses income. Indeed, the funding of CCS and other major framework managers leads to a range of perverse incentives in terms of ultimate taxpayer value – something I’ve been saying for many years.

Anyway, to be fair, we don’t know whether Axiologik was engaged without a competitive process, so maybe all this is irrelevant here. But in any case, someone at NHSD was very naïve about conflict of interest issues, and very ignorant when it comes to Treasury rules on interims. So definitely a contender for the next volume of Bad Buying!

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Buyer / Supplier Collusion – A Difficult Fraud To Spot

What is the most difficult type of procurement-related fraud to detect? In my book, Bad Buying, there are plenty of examples of different fraud, some related to dodgy invoicing, fake suppliers or invoices, purchasing card fraud and more. But perhaps the hardest to detect are around collusion between a buyer (or someone else with power “on the inside”) and a supplier, with “backhanders” being paid in return for favours or preference shown to the supplier.  

Last month a case that goes back some 10 years finally came to its conclusion. Not only did it have that sort of collusion at its heart, but it was also interesting to us because the victim was a firm well known in the procurement world – services firm Achilles, who run supplier qualification, risk and information services across industries including construction, transport, and energy.

Back in 2011, their interim head of IT, Brian Chant, led the process for choosing an IT supplier to whom Achilles would outsource significant work.  However, the firm that was successful in winning the work, with Chant’s endorsement, also paid him some £475,000, according to the evidence presented in court. As the Register website explained,

“Unknown to Achilles was the fact that Chant, of Andover in Hampshire, had quietly approached the eventual winner beforehand to hand-hold them through the procurement process – and to arrange a hefty secret margin straight into his wallet”.

Chant left Achilles and joined Hampshire Police as its head of IT in October 2014 – a post he held until his arrest in 2016. But only now has the case been resolved. It seems that the criminal activity was discovered by the tax authorities initially, who were looking at VAT claims made by the IT company relating to invoices from Chant’s consulting firm.  That led on to the criminal investigation, and finally to Chhant being sent to jail for 6 years.

What makes this type of fraud so hard to spot? Well, particularly if the contract is in a specialist area, it may be difficult for others in the buying organisation to realise that the fraudster is pushing the supplier selection decision in a particular direction. It may even be that the favoured supplier is not a bad choice (outside the corruption issue), and there may be no obvious losses to the organisation on the buy-side.  

You also don’t have the ongoing potential evidence and chance of discovery that exists if, for instance, fake invoices are being submitted for payment, or someone is spending money outside policy on a purchasing card. Unless the payments from the supplier to the crook are picked up, then it is hard to gather evidence of this sort of behaviour.

What seems odd in this case is that the supplier and the people involved at that firm have not been named or – as far as we can see – prosecuted. I’m curious how they have avoided that. It’s hard to see really how they could have thought these were legitimate payments to Chant’s firm.  It feels like other customers of that firm deserve to know its identity, apart from anything else.

So what can you do to try and avoid this sort of fraud? A strong procurement function (or even a single person for smaller firms) can help ensure that supplier selection processes are structured and as objective as possible. Involving multiple people in the analysis and the decision-making also helps, and of course, you should also ask those involved in procurement if they have any conflicts of interest. However, someone who is capable of fraud probably won’t worry about lying at that point!

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