What, you may ask, has been going on with CIPS and the debate about the proposed changes to governance of the esteemed Chartered Institute of Procurement and Supply? (Start here if you are new to this topic).

You may remember I raised concerns about the way members were losing their right to vote (directly and / or indirectly) for members of the Global Board of Trustees (GBT), who ultimately bear responsibility for the Institute. That followed the abolition of Congress and its replacement by a Membership Committee – a step that, whatever you think of its merits, was not particularly well handled or communicated. Under the proposed model, Trustees would be appointed following an application and interview process, run by the Nominations Committee (NC).

As well as the issue of member democracy, many of us were also concerned about the power these changes vested in the NC, which did not appear to have the independence required if it was to play such a key role.  (I didn’t agree with the abolition of the President role either, but I didn’t feel so strongly about that).

I ran a quick survey that showed many other members shared my concerns, but then I had positive discussions with CIPS leadership on these topics in December. Critically, we agreed there would be a genuine and open consultation with members on the voting issue. That led to the Chair, Paul Thorogood, sending me an email in mid-December, laying out what he and the team had agreed would be the next steps. He agreed on a consultation in late January, which would address a number of issues, including, “The mix of trustees – appointed vs elected – on GBT and the process for appointing/electing members”. He also said that “Options will be proposed for each, together with pros and cons.  Members will be asked to select their preferred option in each case”.

I was happy with that, and backed off from my campaign whilst the consultation was being prepared; hence my silence on the issue recently.

I was therefore surprised – and annoyed – when I saw the communication from the CIPS CEO (Malcolm Harrison) to members last week and the new message on the website. That extolled the benefits and virtues of the process for appointing Trustees based on an application and interview process. It did reflect our discussions about the NC at least – but made no mention of member voting being retained.

Hang on, I said to Paul and Malcolm, that’s not what we agreed you would do.   Sorry, they said, the consultation is coming soon, this was just a communication about what is already happening now that Congress has been abolished – so new appointments to the GBT in recent months have gone through the interview process.  And we didn’t mean to go back on our agreement, they said, we didn’t think this communication was anything to do with the forthcoming  consultation.

The problem, as I pointed out, is that members would read the new note and feel the interview route and resulting dis-enfranchisement of members was a fait accompli. You’ve said all these positive things about the interview option – that is not exactly the level playing field we had agreed for the consultation.   

So in this week’s communication – mainly about ambassadorial roles – it was good to see some acknowledgment of that, as Malcolm says this about the Trustee issue.  

“In my message to you last week, I covered the proposals to open up the recruitment process for the trustees on our Global Board of Trustees which we had already communicated last year…. We wish to consult with members on several options, not just the proposal which we communicated last year. These options will be laid out in the consultation document which will be issued by the end of January”.

Confused? So just for the avoidance of doubt, the consultation, when it comes, is still important. If you feel strongly about preserving democracy in some form as a CIPS member, please make your voice heard. Personally, I would go for a mix of directly elected and appointed members for the GBT – but I accept that members may choose to support the 100% appointed route. No other major Institute has done this, as far as I can see, but CIPS could be a pioneer.  My main interest through this whole process has been to give the full membership a proper voice in the discussion, rather than just see a small group driving vital decisions.

The changes already made and proposed to the democratic process, to Congress, the Presidency and the GBT are really fundamental and change the whole nature of CIPS as it is currently described in our Charter. So it’s vital that CIPS does take governance – and the views of its members – seriously.

In early December the UK Government Cabinet Office published its response to its consultation on proposed new UK public procurement regulations. I was hoping to see what the real experts (Arrowsmith, Telles, Sanchez-Graells etc) thought of the response before going into print, but let’s give it a shot anyway! 

These new regulations in the UK will supersede the previous EU Regs, and will define the way that over £300 billion a year is spent by public sector organisations. The rules may seem unimportant to the average citizen, but getting value for money from this huge spend (£6,000 per year for every adult in the country), and avoiding fraud and corruption are fundamental issues – they have a direct impact on how much tax we all pay, for a start!

The first point to make about the Government’s response is that those who participated in the consultation exercise weren’t wasting their time.  We’ve seen past consultations in different areas of policy where the government seemed to be just ticking the box (“we’ve consulted”) and showed no real desire to change initial proposals or listen to advice. But in this case, credit to the Cabinet Office procurement policy folk – and their political masters – for taking on board many of the most significant points raised by respondents.

That includes for instance retaining the “light touch” regime (with some improvements) for certain procurements, an approach that was seen as helpful by many local authorities and health bodies. Whilst the specific Utilities Regulations will still go, that sector will be able to continue with some of the special “flexibilities” buyers there find useful – the original proposal would have abolished those.

The central governance of the new regime has been watered down after many who commented (including me) expressed concern about an over-powerful new Cabinet Office unit sitting in judgement over buyers, with the ability to intervene or effectively even take over a procurement function that stepped out of line. The new proposals pull back from that, looking instead to build on current powers, although there will be “a duty for contracting authorities to implement recommendations to address non-compliance of procurement law, where breaches have been identified”, which seems reasonable.

The proposal to cap damages where buyers break the rules and get sued by bidders has been dropped – to me, that seemed to be largely addressing a non-existent problem in any case. But the government is still looking at “other measures aimed at resolving disputes faster which would reduce the need to pay compensatory damages to losing bidders after contracts have been signed”.

Transparency is a key issue. The proposals certainly should help in some areas – for instance, by increasing disclosure when contracts are extended or varied.  Following consultation, “we intend to ensure the transparency requirements are proportionate to the procurements being carried out and are simple to implement”. That is hard to argue with, and of course focusing on the most significant contracts is understandable.

But I do still worry that the barriers provided by exemptions from Freedom of Information rules could make it difficult for spend to be properly scrutinized. The reluctance of politicians recently to tell us what went on across a whole range of pandemic-related contracts shows why this is so important. We can’t let UK public procurement slip into the morass of cronyism and corruption that many countries around the world experience, and the last two years have shown we are not immune to that threat.  

Perhaps the biggest question about the proposed changes is around the basic strategy of freeing up contracting authorities from highly structured processes, Instead, buyers will have more scope to design their own processes, within certain broad parameters around fairness and (to some extent) transparency. But that might increase the burden on suppliers if they have to cope with many different approaches and processes when they want to bid for government work, rather than just a handful of set procedures.

However, I don’t think in practice that politicians would have accepted a UK regime that was largely unchanged. “We need to show that we can do things better than the EU” would have been the (not unreasonable) objective behind the new rules. So that additional freedom was always likely to be part of the package – whether it “reduces bureaucracy” or increases it (from the supplier perspective) remains to be seen.

Similarly, we will have to see whether that freedom leads to more commercial approaches to procurement, better use of negotiation and ultimately better value for the taxpayer. Or will it mean  more corrupt procurement, with the flexibility used to give contracts to friends, relatives, cronies, attractive blond American IT experts and random pub landlords? 

That uncertainty means we won’t know for several years whether the new regulations are a success or not. And that leads to a final question – how will we know?  What are the critical success measures, the results, outputs or outcomes that would lead us to say, “yes, the new procurement regulations really have made a difference”?   I’ll leave that question for another day.

Two more awards today.

UK (Private sector): The UK Water Industry

Not spending enough money (and failed regulation…)

There were a number of long-running procurement-related scandals which continued to rumble on this year, notably the investigations into the Grenfell tower disaster, and the Horizon Post Office scandal.  Both showed appalling behaviour from various suppliers along with failures on the buy-side. Procurement weakness allowed supplier failings to translate into tragic consequences for those affected by the Grenfell fire and those who lost their livelihoods or wrongly went to prison in the case of the Fujitsu / Post Office Horizon IT system. The judges were also tempted to look into the causes behind the global shortage of chips (electronic, not potato), which affected supply of all sorts of items. But they decided that was all a bit too complicated …

So the multiple winners here are the private water and sewage companies. Research by the Financial Times showed that they slashed investment in critical infrastructure by up to a fifth in the 30 years since they were privatised.  That reduction in spending came about despite bills going up 31% in real terms – and some £372 billion has been paid out in dividend payments to parent companies and investors. In 2019, only 16 per cent of England’s rivers and seas met the minimum “good or better” ecological status as defined by the EU’s water framework directive. And 2021 saw reports of raw sewage being regularly discharged straight into rivers and the sea whenever it rained hard. My friends who swim in the Thames thought it was algae coating their skin after their river swimming this autumn … 

Of course, this is a regulated industry so we might call it a joint public / private sector award as the government must share the blame for inadequate regulation and what is in effect a market failure. But this is a case where the “bad buying” failure is in not spending enough (rather than overspending). So we will hold our proverbial noses whilst awarding the water industry the Bad Buying UK (Private Sector) Award.

…….

UK (Public sector): Covid Test and Trace Programme

Incompetence in Managing Consultants

The judging panel had a difficult task in this category, with continued overspend on HS2 (and every other rail project), and more revelations about PPE expenditure. Social care is experiencing a sort of market failure, whilst the MOD Ajax armoured vehicles programme was particularly unfortunate not to win the prize given the various elements of that particular fiasco. And the panel argued long and hard about whether the crazy regulatory structure of the energy market which ended up with dozens of firms going bust might count as “bad buying”.

But ultimately, for a clear waste of money through inappropriate procurement and even worse ongoing contract management, the UK pandemic Test and Trace programme was finally declared the narrow winner.  

The programme kicked off during the first wave of Covid in early 2021, and we could understand why initially consulting resource was needed to make things happen quickly. But for 18 months now, various officials in the Department of Health and Social Care (DHSC) have promised that the number and cost of consultants was going to be dramatically reduced. But nothing appears to have happened, as hundreds of millions have been spent with the big consulting firms.

David Williams, then the DHSC second permanent secretary, assured Parliament’s Public Accounts Committee back in January that there was a plan in place to “reduce markedly” the number of consultants from Deloitte who were working on the programme. (Williams has since become permanent secretary at the Ministry of Defence – that bodes well for sorting out waste in that area!)  But at the time he claimed there were “around 900” staff from the consultancy working on Test and Trace, who he expected were costing £1,000 a day each – meaning the daily total was close to £1 million just for one firm.  Some Deloitte staff were charged at a rate of over £6 a day too.

Dr Jenny Harries, chief executive of the UKHSA which now runs NHS Test and Trace, said in July 2021 that there was a ‘very detailed ramp-down plan’ to reduce the number of contractors. But 1,230 consultants were still employed at the end of October, figures showed. At the sort of rates paid, that was still costing over £1.3 million A DAY.

This is not “consulting” in the true sense of the word. It is “warm reasonably intelligent bodies sitting at desks / at home on their laptops”. It is staff substitution, not consulting, and those people should not be costing £1000+ a day.

DHSC has had 18 months to actually recruit people on fixed term contracts at maybe £50K a year to replace the £250K a year consultants.  The profit for Deloitte partners (and indeed those of other firms who have been involved on the programme) is enormous, all based on undeserved income from the public purse. And it is not even as if the programme has been a great success … but let’s not get into that.

Despite the tough competition we are confident that this case is a worthy winner as it represents a basic old-fashioned lack of concern for spending public money with consultants – something that is far too common, unfortunately.  So the Test and Trace programme wins the Bad Buying UK (Public Sector) Award.

Look out for the final two awards tomorrow!

Welcome everyone and yes, it is time for the inaugural Bad Buying Award Ceremony – virtual of course.  Over the next three days we will announce the six winners of these prestigious awards, given to those who have demonstrated truly Bad Buying.

Our definition of Bad Buying incorporates a number of different but linked topics. Obviously, it includes failure in procurement (poor performance on the buying side of the table). It can also relate to a contract that goes badly wrong because of supplier performance, failure or fraud that is not properly managed or mitigated by the buyer, client or customer. Or it can be a more general fraud linked to the procurement process, such as fake invoice scams or corrupt collusion between buyers and sellers.

So today, we will start with our two international awards.  

International (Private Sector): Kraft Heinz

Awarded for Creative Use of Supplier Contracts

Food giant Kraft Heinz (KH) was charged by the US Securities and Exchange Commission (SEC) with mis-stating its accounts following the merger of Kraft and Heinz in 2015. The firms said the deal would deliver cost savings of $1.5bn a year, and procurement savings-related targets were set for staff. But after 2017, savings proved hard to find,  As the SEC said, management “pushed procurement division employees to come up with ideas to generate additional immediate, same-year savings”.

The dodgy accounting practices were then based around manipulation of supplier-related payments. For instance, buyers negotiated “prebates” (!!) – a sugar supplier gave KH $2 million up front in return for a 3-year contract, with the agreement that the money would be recovered by the supplier through the contract. Or  suppliers might reduce prices in the short term in return for a longer-term increase. These schemes when recorded as current-year “savings” and added immediate profit, rather than being accounted for properly.

Kraft Heinz had to restate its accounts, correcting a total of $208m in wrongly-recognised cost savings. The CPO, Klaus Hoffman and the COO Eduardo Pelleissone were accused of violating anti-fraud provisions, failure to provide accurate information to accountants and violating accounting controls.

Without admitting or denying the allegations, in September Pelleissone agreed to pay a civil penalty of $300,000.  Rather than addressing risks after being made aware of issues, “he pressured the procurement division to deliver unrealistic savings targets”. Hofmann agreed to pay $100,000 and was barred from serving as director or officer of a public company for five years. KH agreed to a penalty of $62m, also without admitting or denying the findings.

This was a very interesting and unusual case, which demonstrated approaches that the judging panel had not previously seen in their many years of procurement service. Given that creative application of supplier negotiation and contractual mechanisms, this was a very worthy winner of the Bad Buying International (Private Sector) Award.

………

International (Public sector): Balfour Beatty Plc

Awarded for Over-invoicing of US Defence Clients

In December 2021, the US housing management subsidiary of UK engineering and services firm Balfour Beatty agreed to pay fines and restitution of $65 million after admitting over-charging US defence clients for some years. Under the terms of the plea agreement, Balfour Beatty Communities agreed to make the payment  after a federal investigation into its scheme to claim performance bonuses by submitting false information to various clients. 

The issues came to light when living conditions at US Air Force bases were found to be unsatisfactory. The company’s homes did not meet fire safety codes and had mould, rodents, pests, radon gas, and other defects. An investigation then found that the firm maintained two sets of maintenance records at some bases. One included the issues of mould, asbestos, and leaks that were not promptly fixed, whilst the other showed fake quick repairs that allowed the company to claim contractual bonuses from the Pentagon.  As always in these cases, the company blamed a few rogue individuals who have presumably now left.  It also appears that the firm is still engaged on the contract which seems a little surprising.

In cases like this, it is arguably not so much “bad buying” as a “bad supplier”. However, where the issue runs for some time, it usually indicates a failure of contract management, as well as bad behaviour by the supplier. At least the client did eventually identify the issue and take action – but it is an interesting case study in supplier behaviour, and on that basis, Balfour Beatty and its affected clients win the Bad Buying International (Public Sector) Award.

Two more prize winners tomorrow!

So the eastern arm of the high-speed rail programme HS2 from London up to Leeds, has been cancelled. Well, what a surprise. The biggest money pit dug in the UK for a long, long time has become too deep even for this spendthrift government. As Construction News reported,

“The eastern leg of HS2 phase 2b between Birmingham and Leeds has been scrapped by the government as part of its Integrated Rail Plan (IRP) for the Midlands and the North. The cost-cutting on HS2, which the government estimates will save around £18bn, was unveiled … by transport secretary Grant Shapps alongside pledges to upgrade local and intercity rail links in the regions. The £96bn investment package will cut journey times between many towns and cities, and increase the capacity of the rail network, Shapps said”.

I wrote here and here about HS2, with some thoughts on why huge programmes fail and how it sometimes seems that everyone involved with such programmes has an incentive to mislead the public – and often some of the decision makers – about the true costs. 

Most of the press commentary about the recent decision has focused on the “betrayal” of the north of England and what this means to the Prime Ministers supposed “levelling up” agenda, which is aimed at spreading wealth from the south of England to the north.  But surely a bigger question is whether the rest of HS2 should be going ahead, given the costs and a business case that look weaker and weaker as time goes by.  I pointed out a year ago that the initial business case was, in effect, a fiddle or a fix, designed to justify the programme.  As I said then:

“The business case for HS2 was always highly questionable. It relied on ascribing a value to the extra 20 minutes or so the passengers would have because of their somewhat faster journey from London to Birmingham. It assumed that the journey time was “wasted” from a benefit point of view, which is clearly not true (have they never heard of smartphones or laptops?), and also assumed that passengers wouldn’t use the extra 20 minutes by staying in bed a little longer!”

Now the new issue of Private Eye magazine has pointed out that the initial business case also made it clear that the whole programme would only offer value for money if it was all completed. The full benefits of “Northern Powerhouse Rail”, some of which is still going ahead, were also conditional on the HS2 leg to Leeds.

Private Eye also points out that economic growth in the UK has been slower than the figures used in the 2015 business case, which reduces the return further. And of course, the pandemic has driven a major drop in rail usage, and it is far from clear at the moment whether pre-Covid traffic levels will return, given what appears to be a seismic change in working habits and the growth of hybrid home /office working patterns. 

So we are now in the crazy situation where the government is subsidising existing rail companies and lines by billons a year because of the lower levels of usage, whilst spending £60+ billion on the western arm of HS2. Think what that money could do to improve the creaking railway system in the north of England, the trans-Pennine routes, commuter services into Manchester, Liverpool or Leeds, getting Sunderland connected properly… I am not anti-rail, I should say, but I do not believe HS2 is a good use of public money in such huge quantities.

I also have doubts about the HS2 programme’s ability to avoid Bad Buying in terms of how it spends money with suppliers, but that’s another issue altogether!

Thanks to Supply Management website for drawing my attention to a new e-book, which is a  collection of chapters from different academics and researchers, all around the theme of public procurement in times of emergency.

Procurement in focus – Rules, Discretion and Emergencies is published by the Centre for Economic Policy Research (CEPR), a network of over 1600 research economists based mainly in European universities, and it is edited by Oriana Bandiera, Erica Bosio and Giancarlo Spagnolo. It can be downloaded here (free of charge).

It is somewhat academic in nature, as you might expect, but it has interesting and useful commentary on issues related to emergencies and corruption – and indeed more general insight into public procurement issues. The chapter on procurement competence, for instance, applies more widely than simply during a crisis.

The authors start by defining this “problem” with public procurement.

The procurement of public goods and services is a textbook example of moral hazard: an agent buys goods that he does not use with money he does not own. The agent’s goal is typically set to achieve ‘value for money’ for the taxpayer, but value for money is hard to measure and often not entirely under the control of the agent. The latter makes the contract between the state and its procurement agents incomplete and, for economists, very interesting.

This issue of moral hazard and “agency” leads to a fundamental issue with public procurement. As the authors say:

The core theme that runs through the book is the fundamental tension between rules and discretion. Rules limit agents’ ability to pursue their private interests at the expense of the taxpayers, but discretion allows them to use their knowledge of the context and react quickly to unforeseen changes. 

During the pandemic, and at other times of disaster or emergency, procurement regulations are often suspended or more flexible approaches are allowed. That increases the speed and flexibility with which important procurement activities can be delivered, but it also increases the chance of fraud, corruption and waste. How to balance those two aspects is tricky, to say the least, as the furore in the UK over PPE procurement last year has shown.

There is no doubt that buyers had to move quickly to save lives; but did that speed and lack of process regulation allow corruption or at best “cronyism” to thrive? It certainly did cost the UK taxpayer billions, as more PPE than was really needed was bought, at hugely inflated prices compared to those that were usual in the steady-state market.   

From a Bad Buying viewpoint, corruption is often hard to identify and therefore hard to measure in an academically rigorous way.  So researchers generally use “proxy measures” – for example, looking at the number of contracts awarded without competition, single bidding situations, or very short deadlines for bids. Clearly, we saw more of this behaviour during the first emergency period of the pandemic. However, in some cases, emergency procedures are still in place, and the book questions why this continued higher risk of corruption is being allowed to continue now, given that in most cases, supply is no longer quite so emergency in nature.

The chapter by Mihaly Fazekas, Shrey Nishchal and Tina Soreide, titled “Public procurement under and after emergencies” is particularly relevant to what we have seen in the last 18 months or so. It acknowledges that procurement must be handled differently in times of emergency, and makes these sensible recommendations:

  • Preparations for emergency situations should include defining crisis-ready contracting procedures, outlining fundamental principles of crisis response, putting in place effective ex post controls and setting out a risk-based sanctions framework. Controls should be targeted at high-risk procurement without disruptive, wide ranging monitoring frameworks.
  • Monitoring and controls are best reoriented towards outputs and results rather than procedural correctness because deviations from standard open tendering processes (e.g. short advertisements) are unavoidable in times of crisis (Fazekas and Sanchez 2021).
  • Strengthening non-bureaucratic controls of public procurement outcomes may counter-balance loosened ex ante procedural checks. For example, greater attention from civil society and the media may contribute to stronger political accountability, which is likely to increase the cost of corruption in emergency spending.
  • While many of the corruption risks in emergency procurement are hard to avoid and control, ringfencing emergency rules both in time and by market is crucial. Obviously, if emergency spending is needed in healthcare, there is little justification for relaxing the rules for building football stadiums, for instance.

Much of the book is well worth reading for anyone interested in the fundamental principles and issues of public procurement. It is also very relevant at a time when the UK is putting together its new post-EU public procurement regulations – and we hope to feature more discussion around that here shortly too.  

Emergencies | Regulations | Academic

You may have seen the email from Malcom Harrison, CEO, and the information on the CIPS (Chartered Institute of Procurement and Supply) website concerning some of the governance changes being enacted and proposed by the Institute.

It is good to see CIPS communicating like this and the note does answer many of the questions about the replacement of Congress by the Membership Committee. It was good to understand more too about the Volunteer Engagement Group – and to see some contrition for the variable  communication of the changes over recent months.

The “Q & A” section in that communication also briefly addressed the President issue, although again it talks about other ambassadorial roles, which we have seen little evidence of in recent times.

The big gap was the lack of mention of the Global Board of Trustees (GBT) and Nominations Committee, and how abolishing Congress also means that CIPS members at the moment have no vote and no influence on those two central governance groups. That also brings about the issue of the “circularity” I highlighted previously, with those two committees nominating each other, which I still think is unwise and unsatisfactory.

However, I do understand GBT is actually discussing (as we speak, as it were) whether there might be some alternative approach here that would preserve democracy. So I’m going to hold off the trouble-making for a few days and see if white smoke and some alternative proposals emerge from the Easton chimney. If not, I’ll be back on the campaigning trail shorty, with the aim of preserving some sort of democracy for CIPS and its members.

In the meantime, do make your views known to CIPS directly, using the address they have set up for that purpose – haveyoursay@cips.org. I have passed on the comments I received when I ran our quick survey last week, but if you feel strongly about this, then obviously it would help for you to express your views directly – whether about Congress, the potential disenfranchisement, the Presidency or whatever!

I would stress though that I don’t believe the changes are down to CIPS management, which some of you have suspected. It is the Board of Trustees who are making these decisions; the senior team at Easton may not disagree with them, but we should be clear that these issues fall firmly into the Board’s area of responsibility.

How do you go about incentivising suppliers within a contract to perform in the manner you REALLY want them to?

The complications tend to come in contracts for services, rather than goods. Where you can write a specification that clearly defines the item you are buying, then it is enough “incentivisation” usually to say “supply that precise thing and you will get paid”.

But if you are buying a service, particular a more complex service, such as consultancy, outsourced customer handling, software development, or even facilities management, then making sure the supplier acts in the way you really want them to can be challenging.

An example of this has been much discussed in recent weeks in the UK media.  Our GPs, the “family doctors” who are the first line of contact for most medical problems, moved most of their consultations online when the pandemic struck last year. Now they are being criticised for not getting back to in-person appointments quickly enough, and generally for making it difficult for patients to get appointments at all. But GPs are actually private contractors. Many people in the UK see them as part of the National Health Service, which they are operationally, but they actually work for the NHS under what is in effect a contract for services. They are suppliers.

In reality, there are a number of factors driving this appointments problem. This is a very stressful job, and the proportion of women working as GPs has grown dramatically in recent years. So for both their own health and for work-life balance reasons, more GPs are working part-time, so the capacity of the system is arguably not high enough. There is also a backlog of medical problems that weren’t sorted out during the worst of the pandemic, so there is more demand on the system than ever.

But certain newspapers, and the Minister for Health, Sajid Javid, have decided that there is capital to be made by blaming the doctors themselves for being “lazy”.  Aside from the issue of whether the buyer (Javid) should be having a go at a “key supplier” (the doctors) in public, there is much  discussion around how GPs are paid and incentivised. 

An article in the Daily Mail recently suggested that instead of being paid in the main based on how many people are on the GP’s “list”, they should be paid based on how many appointments they actually carry out.

It may be time to move from a bulk payment per patient to a per appointment funding structure, to encourage doctors to actually see patients as quickly as possible”.  That was the quote from Matthew Lesh, head of research at the Adam Smith Institute (the free-market-promoting thinktank),  who from his LinkedIn profile would seem to be a very bright young man. Yet it doesn’t take too long to see the incentivisation flaw in his argument.

A per-appointment system would encourage less scrupulous doctors to pack in as many appointments as possible. Currently most people only get ten minutes or so with the GP, but that could be squeezed further if some doctors were tempted by a direct increase in revenue from that approach. And for doctors with a conscience, who want to take the time necessary to get a diagnosis right, you are placing their ethics into direct conflict with their bank balance.

Now that’s not to say that the payment by list size is necessarily the best option., and there is no simple, magic solution here.  Arriving at an appropriate mechanism is challenging; for instance, the same size list of patients in socially and economically deprived Blackpool might generate a lot more work than the same in Wokingham. And of course throughput has to be balanced with the rigour of the doctor’s work. But we might imagine a set of KPIs (key performance indicators) which might be combined in some way to drive GP payments.

In any case, this all reinforces that getting incentivisation right is tricky. That applies whether we are talking about an outsourced customer service call centre, roads maintenance contracts (see examples of both of these services going wrong in the Bad Buying book) or getting our front-line doctors to contribute in the best possible way to the health of the nation. So beware simplistic solutions.

I presented last week as part of an event run by CIPFA –  the Chartered Institute of Public Finance and Accountancy. As you can imagine, their live events are notorious for wild behaviour and partying, but this was online, luckily for me. (OK, just my little public sector accountancy joke there…) Anyway, I talked about Bad Buying, particularly in the public sector context and with a focus on corruption and fraud which I thought would most interest accountants.

One of the other speakers, Mohamed Hans, a lawyer and public procurement adviser, talked about the “typical” profile of a corporate fraudster. Most work within the organisation, and apparently, he – and more often than not it is a “he” – is most likely to be middle aged, with quite a few years of service, well-respected internally, and in a management position.

I guess that all makes sense. You need to have some authority generally to commit fraud – in the procurement space, it really helps if you are a budget holder or can sign off expenditure in some way. If you have been around a while in the organisation, you are more likely to understand the systems and processes, and how to get around them to commit your fraud. All of that points to someone of a certain age, seniority and length of service.

That fits with my personal experience. Probably the closest I came to a major case was when a senior procurement executive who had a “dotted” reporting line to me was prosecuted for a fraud where he appeared to be in league with some very unpleasant “Russian gangsters”, according to the police. My firm was not aware of the fraud but the police spotted odd transactions at the gangster end of things, which it emerged came from our villain signing invoices for non-existent furniture purchases, with the payments going to the gangsters. He was in his forties, in a senior role, and had been with the firm for at least a decade, so he fit that archetype perfectly!

Other cases in my Bad Buying book include a mid-level executive for Toys ‘R ‘ Us at Maidenhead in England. He was a  “typical middle-aged accountant to colleagues, living in a semi-detached house near Reading and driving an old Vauxhall car. But actually he lived a double life and was stealing millions from the firm, spending money on sports cars, prostitutes and even an estate in Nigeria for his secret mistresses! He was ordered to repay £3.6 million when he was finally caught, as well as being jailed in 2010 for seven years. (His jail term will increase if he doesn’t pay the money back.)

His fraud was simple. He created a fictitious toy manufacturer, a ‘supplier’ to the firm, and then made regular payments of £300,000 a month over more than two years to that account, which of course he controlled. When this was reported in the press, one reader’s comment was amusing: ‘so he spent £2.4 million on call girls and sports cars – and wasted the rest’!  But it’s not really funny; this was shareholders’ money, and sympathy is due to his wife and family, who knew nothing about it and did not benefit in any way”.

Just to show it isn’t only men, the (female) interim director of operations at Ealing Hospital NHS Trust stole more than £200K back in 2008 to pay for (among other things) horse semen, needed for her stud-farm business. She fraudulently signed off payments, which went into her own bank accounts rather than to genuine suppliers. The judge said that she was, ‘a woman of very great ability and up to this point of very high character. The difficulty and sadness of cases such as this is only people of high ability could get themselves in a position where they can defraud people and the NHS of the amount of money you took.’

However, in most cases, fraud can be prevented quite simply. The most basic advice includes that no single person should be able to “create” a new supplier, and onboarding checks must be made. Then again, no one individual should be able to authorise a payment (e.g. by signing off an invoice) to any supplier, without some sort of check from another person.  It is not unknown for two or more people to collude in frauds, but in my experience establishing that sort of basic control reduces the probability of fraud by a significant factor. Carrying out a fraud alone is one thing; asking another person to collude with you brings another level of risk for the fraudster.

And don’t assume someone couldn’t possibly be a fraudster because they are respected, have worked in the organisation for years, are senior, go to church, are kind to animals …. Criminals come in all sorts of shapes, sizes and disguises!

There was a cri de coeur from Matthew Parris in  today’s Times newspaper (behind the paywall). He was concerned about the British public’s expectations that the government could sort out all and any of our problems. As he put it;

“Even we lucky British will sometimes encounter shortages and gluts. Is it now the government’s business to smooth them out for us? Increasingly, that is the assumption”.

We’ve seen in recent weeks issues with supply of food to supermarkets (although I can’t say I have noticed much of a problem), stories that Nando’s were short of chicken, then we’ve had genuine shortages of carbon dioxide and a petrol “crisis” caused mainly by politicians telling us there wasn’t a crisis. Parris sees this expectation that the government should solve every problem as a slide leftwards politically. He is a believer in the free market, which is why he originally became a Conservative supporter and MP, and thinks the government should stand back more often.

I believed in the free market, in Adam Smith’s Invisible Hand, and the quiet, patient but unstoppable power of price in regulating demand and stimulating supply. I believed that if you’re short of applicants for a job you raise the wage. I laughed at government attempts to control prices as a way of keeping down inflation. I knew you couldn’t buck the market”.

I also share his fondness for free markets. However, the problem is that very few markets are truly “free” in the theoretical sense and certainly few function perfectly. Indeed, that is something most procurement people understand from their own bitter experience. For instance, a perfect free market is open to new entrants, and indeed it is easy for existing players to withdraw. It is unregulated except perhaps for fundamental criminal laws (don’t poison people with your beer or sell cars with no brakes).

But for a number of reasons, it feels like fewer and fewer markets really are anywhere near perfect or free. Take the shortage of lorry drivers – something that is hitting the UK particularly badly, but is an issue elsewhere in Europe too. (It does appear however that Brexit is a contributing factor in the UK, according to the industry expert view).

In a truly free market, thousands of people would be rushing to change jobs to earn the £50K per year plus now on offer for driving trucks. But we insist that new drivers (not unreasonably, I should say) go through extensive testing. That is a time and cost related barrier to entry. We have restricted free movement of people into the UK post Brexit, closing another “free market” option.

In other areas, the government has attempted to create dynamic new markets, but it is not as easy as it seems. Take the domestic energy market. We have seen plenty of new market entrants, but with increasing regulation and price control from the government, it has moved far away from the vision of a truly free market. That whole market is now unwinding and collapsing with the increase in wholesale gas prices. (There is also what feels like an increasing tendency for con artists and scammers to get involved in these quasi-markets – maybe that is a topic for another day, but it feels like the UK is becoming steadily more susceptible to business-related fraud and corruption).

And during the pandemic, the government “interference” in how markets operate was even more extensive. The government stopped tests for new lorry drivers because of social distancing rules, for instance. We might understand why that was the case, but it has been a contributing factor towards the current shortage.

Indeed, coming back to Parris and his complaint, the government has “interfered” so much in our lives during the pandemic, I think increasingly people do feel that the government can and should sort out every problem.  Those in charge told us where we could go for a walk and who we could visit, so why not expect that they can guarantee my Nando’s will be available and make sure there are enough lorry drivers to go round? That might not be an appropriate view, but I suspect it is quite prevalent.

What does all this mean for procurement professionals? Aside from many now operating in fire-fighting mode, simply focusing on securing immediate supply into their own organisations, it points out the importance of truly understanding how your own key supply markets work. Are they genuinely free markets that respond quickly to changes in demand, with new entrants, innovation and dynamism? Or are they controlled or restricted in some way – by government or by other barriers to entry (it wasn’t regulation that led to Facebook’s domination of its market, for instance).  

The pandemic shock has highlighted vulnerabilities in supply chains and exposed markets that already had inherent issues and weaknesses. So to avoid “bad buying”, understanding how your key markets really operate must be a priority.