Issue Archives - Page 8 of 16

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.

August 25, 2022/0 Comments/by Peter Smith

Failure & F**k-Ups

Top German Broadcaster Resigns After Bad Buying (and more…)

In many countries, the image we have of German business and management is one of efficiency, formality and organisation. My view was shaken a few years back when I experienced the chaotic programme of work on the railways in and around Berlin, with chaos in stations and no help or communication apparent for confused travellers. Then we had the Brandenburg Airport fiasco, one of the best case studies in my Bad Buying book! It finally opened last year, 10 years behind schedule and billions over budget after a whole spectrum of incompetence, bad planning, fraud, and financial mismanagement had been demonstrated during its construction.

Another more recent story shows that less than perfect side of German management. Patricia Schlesinger was the €300K a year the director (CEO) of Berlin-based RBB, one of nine regional public broadcasters in the country funded by the taxpayer. But she resigned this week after a series of accusations about money wasted, conflicts of interest and improper procurement – in fact, the word “embezzlement” is even being used. Berlin’s public prosecutor is looking at accusations she used RBB funds to pay for lavish dinners at her home and private use by her husband of her company car and chauffeur.

Wolf-Dieter Wolf (crazy name, crazy guy…), chairman of the RBB board, also stood down. He is linked to some of the accusations and is seen as being complicit in her behaviour. Perhaps most extravagant was the €658,112 spent on refurbishing her office, according to The Times – shades of Fred Goodwin, the ex-Royal Bank of Scotland head. When the new RBS HQ opened in 2005 there were reports of over-the-top office furnishings and his own “scallop kitchen” (denied by his lawyers, we should say)!

In Berlin, the parquet flooring for Ms Schlesinger’s office cost a mere €16,783, and (here comes a Bad Buying link) complaints by the internal compliance department that no other quotations for the work had been sought were overridden.

The accusations began in June with a report by the news site Business Insider that Schlesinger’s husband, Gerhard Spörl, a journalist, had been awarded a consultancy contract by the state-owned trade fair company Messe Berlin. That contract was allegedly signed off by the company’s supervisory board chief, the same Wolf-Dieter Wolf. Was this an example of nepotism and favouritism? Then other consulting-type contracts emerged with little evidence of proper procurement, with accusations of Schlesinger and / or Wolf in effect favouring their friends.

Of course, this apparent arrogance and disregard for rules is something we see frequently and is not limited by geography, sector or type of role. (The Bad Buying book has quite a few examples, as you might expect). The boundaries between disregard for the organisation’s money or rules and outright fraud are also sometimes difficult to define exactly. However, there seems to be a character trait that means some people just feel they deserve more, they deserve to be treated differently and the rules don’t or shouldn’t apply to them. Boris Johnson comes to mind, as does Carlos Ghosn, now an international fugitive after running Nissan and being accused of using corporate expenditure for his personal benefit.

But back to the German broadcaster case, and I’m trying to think of a good way to close this article. I mean, if only there was a word for that feeling of pleasure we get from someone else’s misfortune, particularly when they think they’re better than you…!

August 10, 2022/0 Comments/by Peter Smith

UK, Public Sector, Failure & F**k-Ups, Fraud and Corruption

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.

July 20, 2022/0 Comments/by Peter Smith

Public Sector, UK, Failure & F**k-Ups, Private Sector, US

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.

July 2, 2022/0 Comments/by Peter Smith

Failure & F**k-Ups

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.

June 8, 2022/1 Comment/by Peter Smith

Failure & F**k-Ups, Private Sector, US

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.

May 23, 2022/by Peter Smith

Failure & F**k-Ups, Public Sector, UK

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”.

May 15, 2022/0 Comments/by Peter Smith

Fraud and Corruption, Health, US

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.

May 2, 2022/by Peter Smith

UK, Fraud and Corruption, Private Sector

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.

April 22, 2022/0 Comments/by Peter Smith