2022 – How Was It For You, CIPS?

The Chartered Institute of Procurement and Supply (CIPS) has had a troubled couple of years. We saw major arguments about changes to governance, then implementation of a new Oracle technology platform to manage membership, exam bookings, events – pretty much everything really – has been a disaster. The CEO, Malcolm Harrison, left at the end of March in circumstances that weren’t altogether happy, I understand. The Institute did manage to publish its accounts on time, and you can now examine the document on the Charities Commission website here. They run up to October 31st, 2022, so we’re already two-thirds of the way though the subsequent financial year.

The headlines – CIPS Group turnover in FY22 was £30.2 million with net income of £2.4 million before investments and pension scheme movements. The turnover was below budget expectations, but still represents an increase 11% above FY21, and operating profit was above budget despite the revenue shortfall. Reserves were down on plan but not dangerously low.  

There are a number of wider points of interest in the report. I liked the focus on volunteers; I don’t think I have ever seen information provided before on number of volunteers, where they are and so on. The report is pretty honest about the problems caused by the system failure; there is talk of staff having to go above and beyond to keep the show on the road, workarounds and more.  But the report makes this claim.

“A programme is now in place to resolve the issues with the platform and to remove all workarounds. However the impacts have been significant with membership, exam bookings, revenue and profits all being negatively impacted.”  But clearly the issues were not resolved by the end of March when Harrison went – I’m not convinced all is sorted even now in July.   

But there is no simple number provided in terms of what the programme has cost or what more it might still cost to get the platform up and running.  However, there is a table that gives figures for “Intangible Fixed Assets. “Assets under development” stood at £4.9 million in November 21 and a further £2.6 million was spent in 2022. The assets under development were “brought into use” during 2022 – if all of this was the new platform, that means some £7.5 million had been spent by November 22.

Maybe some of this was other development though, but it is not clear. I was told a while ago that the budget was in the £5-6 million area so this would represent a major overspend by last November, with more since then. We’ll have to see what the number is in this year’s accounts, and maybe next year’s too! But it seems quite possible that CIPS will end up spending the best part of £10 million.

There have been other impacts too driven by these problems. MCIPS membership is down some 700 on the year, and the blame for that is put at the door of the system. Examinations revenue was up, although there was also mention of system issues there, so maybe it should have been even better. Some of the impact is not really financial but still matters. Talking to a Fellow the other day, it is clear that the issues have made even organising basic events much more difficult. The Fellows group has been one of the success stories of recent years; it would be a shame if it lost momentum simply because of a technical issue.

Looking at those membership numbers, and where revenue comes from, I think it is fair to say that CIPS is no longer primarily a membership organisation. Its two “core businesses” are student education and examinations; and corporate training and development. In terms of the latter, CIPS does not say how much of that revenue comes now from NGOs, governments and charities who provide grants to CIPS to help develop procurement in the developing world. The Bill Gates Foundation is mentioned, and the work in the health system in Africa sounds very worthwhile. Such revenue is not reliable year after year of course, but my feeling is once you get a decent reputation, there are a lot of funds out there for delivering these “good works”.

But 17,000 MCIPS members means membership fee revenue of around £4 million, only some 13% of total revenues. And it is hard to see that growing much, to be honest. As I’ve said before, so much of what used to be the CIPS membership proposition is now replicated by other organisations, from Procurious to the Sustainable Procurement Pledge, by tech and consulting firms or even by individual “influencers” in the profession, who together provide a huge among of insight, IP, networking opportunities and more – free of charge. Why pay CIPS if that is what you value?

So – wild idea – maybe CIPS should make membership free?

You would still need to do the exams or go through a rigorous non-examination route to get your MCIPS, but the “affiliate” status could be developed further for those who don’t want that. And just think how much more the CIPS membership list would be “worth” if it was five times the size it is now!  CIPS also needs to get better at working with software firms, consultancies etc – there is a lot more potential revenue there if CIPS gets its act together. But an expanded membership list would be a huge benefit.  And the credibility CIPS has in terms of winning corporate work or NGO and charity funded projects would also be far greater with more members.

The alternative is for MCIPS numbers to stagnate at best, and the organisation becomes that training and education body as I suggested earlier, with more and more focus on Africa and the Middle East  in the main.  But there are issues with the overseas approach too; the US was a disaster last year, losing over £230K after revenues fell and costs rose quite dramatically.  I’m also not totally sure about the ethics of doing so much work in Saudi Arabia. I guess our government and our football clubs don’t worry too much about that so there is no reason why CIPS should. 

In summary; CIPS had a difficult year, but to be clear, it is not about to go bust. However, the new system has cost millions more than planned and has caused other problems. Some of the overseas operations also look problematical. There is a new Chair and a new CEO (who has solid IT and procurement experience but has never run a business or a P&L before) just getting their feet under the table.  Core membership is static or declining, but education and training activities are going pretty well, with grant funded work in particular showing a lot of potential.

I gave up my membership last year after the governance shambles – but I wish the Institute well and hope 2023 proves a better year than 2022. I suspect some innovative thinking is necessary though.

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Why Isn’t Competition Working in the UK Petrol Market?

Why are prices so high in many countries, including the UK? Global forces and events are part of it, but there is increasing evidence that firms providing goods and services are increasing profit margins at the expense of the consumer. This week’s report on petrol prices in the UK from the Competition and Markets Authority (CMA) was an example of this. Calculations show that margins have increased over the last three years and we are all being ripped off to the tune of some 6p per litre. Competition was “not working as well as it should be” said the CMA.

But surely, in a dynamic, capitalist society, excess profits leads to new market entrants, who compete on price and undercut the current providers, whilst still making an adequate return?  The economists would agree that this is the case – but only in a perfect market. And you need certain conditions for that, including that it must be reasonably easy for new entrants to establish themselves.

That is the problem here and in many other markets. For a number of reasons, there are so many things we all buy where we just don’t see real, strong competition, because it is almost impossible for new entrants to break into a market.  Look at petrol retailing. Finding new sites and getting planning permission would be a nightmare. The capital cost of building the premises would be huge, with all the legislation (quite rightly) around petrol storage and handling adding to the burden.

Look at how difficult it has proved for new retail banks to break into a market still dominated by firms that have been around for centuries – even though most consumers don’t rate those providers very highly.  We haven’t had any new supermarket chains in the UK for some 30 years now since Aldi and Lidl (who were already long established elsewhere) started here. Again, the barriers to entry, from planning issues to up-front cost, as well as the financial power of the incumbent firms, all make it very tough.

So we have the cost of entering a market, legislative burdens and incumbent power as key barriers to entry. Geography is another; I’m not going to drive another 10km each way to buy slightly cheaper petrol, and lose all my “savings” on the extra mileage!

But particularly when we come back to corporate procurement, some of the market dominance we see has been caused in apart by the actions of customers and indeed of procurement professionals. I gave five examples of the ways in which this happens in terms of corporate procurement in the Bad Buying book. Here are the first two.

1. Buyers aggressively aggregate their own spend, believing they’ll get better deals if they offer bigger contracts – until in some industries, only the largest can meet our needs. Buyers might insist that suppliers must service every office or factory across the US, or Europe. Smaller firms and start-ups, who often offer real innovation, flexibility and service, are shut out of the market.
Buyers assume economies of scale, that “bigger is better” and bigger deals mean lower prices. But that is not necessarily true; the price curve may flatten after a certain volume, with further increases in volume not generating any further price reduction. There are even cases where you  see dis-economies of scale – the buyer pays more as the they spend more.


2. Buyers value consistency above innovation and experimentation. At times, you should value tried and tested solutions over exciting new ideas. “Ladies and gentlemen, welcome to the flight, this is the very first plane to be fitted with an exciting new automatic pilot system, and we will be turning it on once we’re airborne”.  You might not want to hear that!
But take caution too far, and you help create markets dominated by a few large suppliers, with increased risk of buyers suffering from dependence. That’s relevant in private firms and perhaps more so in government, where risk aversion from employees and politicians means companies get into dominant positions because buyers “know” they’re a safe choice. That doesn’t always work out – Serco and Capita seemed to be safe for major UK government work, until both ran into severe financial difficulties. More willingness to engage with other initially smaller suppliers over the years could have created a more dynamic market.

Whilst we may not be able to do anything much personally about the supermarkets dominance of the petrol (and groceries) markets, we can take actions to mitigate the risk that we accidentally help to create monopolies or oligopolies in our business (procurement) lives. We should aways be thinking about how we can contribute to dynamic, competitive markets, with new entrants regularly arriving to put pressure on established firms. That’s the healthy situation that we should hope for and work towards where we can.

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Disqualifying Suppliers from Government Contracts

It feels like the new UK Procurement Bill has been moving through Parliament for years – it is only a year in fact, although before that there was an extended period of consultation.

One of the themes of the Bill is that it should be easier for the contracting authority (CA) to “bar” or disqualify suppliers from bidding altogether. That has been possible for many years if the supplier or one of its directors had committed certain criminal acts, but the new legislation includes exclusion for poor performance for the first time.  There is also exclusion for “improper behaviour” which has led to a supplier gaining an unfair advantage in the competitive process.

However, the authority will also have some flexibility. The new rules mean that the existence of a mandatory or discretionary exclusion ground is not enough in itself to throw the bidder out of the process.  The CA has to first decide if the circumstances giving rise to the exclusion are likely to happen again. That’s quite a difficult and potentially controversial assessment to ask the buyer to make, in my view. There is also going to be a centrally-managed list of firms that have been barred.

It will be interesting to see whether there will really be any significant change of behaviour in this area. In truth, CAs are very cautious about barring firms, fearing I suspect legal challenge and endless argument getting in the way of running the actual procurement process. I’m not sure that will change.

An interesting example of this unwillingness was reported recently on the Nation Cymru website. Campaigners have accused a National Health Service Trust of ignoring anti-fraud regulations by allowing two firms that have been convicted of bid-rigging to form part of a consortium to build a new cancer centre in South Wales. The Acorn Consortium is the preferred bidder for constructing the new Velindre Hospital in Cardiff. That project has faced strong opposition on environmental and medical grounds, and it is those against the construction who have raised this issue.

Nation Cymru has described how two of the consortium members – the Kajima group and Sacyr – have been found guilty of fraud offences in Japan and Spain respectively. As the website reported,

“Kajima was sentenced for bid-rigging in March 2021, with one of its executives receiving a suspended prison sentence and the company itself being fined 250 million yen (around £1.53m) for its role in the scandal, which involved a number of firms colluding with each other on the construction of a railway line to maximise their profits. Sacyr received a penalty of €16.7m in July 2022 for its part in creating a cartel aimed at aligning bids for government contracts”.

When asked why this had not led to exclusion, a Velindre University NHS Trust spokesperson responded: “The robust procurement process has been undertaken in line with procurement law, UK and Welsh government policy and all required due diligence has been undertaken.” 

I’m not sure that’s a good enough explanation really. When the spokesperson was asked to explain in more detail why “regulation 57” (which covers this sort of thing) did not apply or was over-ruled here,  they “did not offer an explanation”.  I do think they should say more.

But conceptually it’s a tricky one. With my buyer’s hat on, do I really want to kick out what presumably is my best bidder because two possibly quite minor consortium members did something bad hundreds or thousands of miles away? On the other hand, we do have regulations for a purpose. 

In terms of the justification, having had a quick read of “regulation 57” (it’s some time since I studied “the regs”), I suspect the answer lies in the famous “self-cleaning” clause. That says, “Any economic operator that is in one of the situations referred to in paragraph (1) or (8) may provide evidence to the effect that measures taken by the economic operator are sufficient to demonstrate its reliability despite the existence of a relevant ground for exclusion”.

So basically, if a supplier can show that it has taken lots of steps to make sure it will never, ever get involved in bid-rigging again, or any of the other reasons for mandatory OR discretionary exclusion, and the buyer is naïve enough – sorry, I mean if the buyer analyses those declarations and decides they are valid, then the supplier is back in the game.

You can see the logic in this, but it is a bit of a “get out of jail” card really. It’s also another reason why in practice, we so rarely see suppliers barred. It will be interesting to see whether anything changes once the new Bill has been implemented – but I have my doubts. Barring is potentially just so fraught with hassle and risk.

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Twelve Tips for Presenting to a Procurement Audience

As we are in the midst of the late spring conference season, I thought I would re-visit and update an article I wrote some years ago for the Spend Matters website. This is aimed primarily at solution providers who are speaking to a procurement audience, rather than procurement practitioners who might be speaking, although much of the advice is still applicable.

My definition of a “successsful” session is that the presenter gets across whatever message they aim to communicate, be that education, information, or a sales proposition, and the audience finds it worthwhile, ideally in terms of both enjoyment and usefulness in some sense.  Some direct or indirect leads resulting from the session would be even better. So here are my suggestions, based on my many hours of enjoyment and probably an equal amount of suffering at these events.

  1. The procurement audience is not really interested in the history of your business (unless it is REALLY fascinating), how many factories or offices you have around the world (particularly if you are speaking to managers who only operate in one city), or even the detail of your latest financial results. We will check out those things if and when we start to work with you.
  2. So keep the general background on the firm brief – when it was founded, approximately how big it is, what you do. Two minutes. The same applies to you personally. Two or three sentences about your background is enough. I’ve seen speakers spend half of their valuable time giving background that I guarantee no-one in the audience cares about.
  3. The audience does understand that you are there to promote your own firm, so don’t feel shy about doing so. But there are ways of making that interesting for the audience.  Detailed product / service descriptions are rarely a good use of time. Similarly, actual demos (of software for instance) often lose much of the audience and can easily go wrong. A few screen shots can be useful though.  If you have an exhibition stand at the event, you can offer to show delegates the product there.
  4. Think of the presentation in a similar way to the wider sales process. What is the problem or issue that the target audience is facing, and how does your offering help to solve that? Describe the issue, put it in context, explain why it matters, then outline how you can help. A little bit of looking to the future can be included and adds interest – “our new product, out later this year, will do this even better…”
  5. Don’t be afraid of making direct comparisons with your competition – but be honest of course. Even if a procurement executive sees the need, they will be wondering why they should buy your product and not someone else’s.  Don’t criticise the competition too directly, but feel free to say, “our product does this and this which no other competitor can provide”.  And there is nothing wrong with saying “we also have the lowest cost product on the market” if that is one of your selling points!
  6. If you work with many organisations on the buy side, you have an overview that each buyer may not have individually. That puts you in a good position to talk about broader issues, or the best practice you have observed, or provide “war stories” about positive or indeed negative things you have seen. Often, speakers only get into this when it comes to the questions, but that broader view can bring insight to the audience during the presentation.
  7. Surveys, reports and similar that your organisation has done or contributed to can provide interesting content – but be careful of the “so what” factor. The number of times I’ve heard a speaker saying “43% of procurement directors say they don’t have the right technology…”  Well yes, but so what? Check that anything of that nature is relevant to your message and genuinely interesting to the audience.
  8. The question and answer session should be key. Debate is good, you can reinforce some of your key points, and even find out if you have interested prospects in the audience. So leave enough time. In a 30-minute session, I suggest 5 minutes for the introduction (you will inevitably start 2 or 3 minutes late), 15 minutes of core content and 10 minutes for Q&A. Have a question you can put to the audience in case no-one volunteers – “I mentioned the issues with managing stakeholders in the health service –  has anyone found a good way of involving senior clinicians in these decisions”?
  9. Humour is fine if you can pull it off, but obviously be careful! Getting some involvement or reaction from for the audience early on is another tactic which increases participation and focus (personally, I find it also relaxes me as a speaker). If you don’t have a joke (a mildly amusing remark about something in the news can often work), maybe ask a question just to get some early engagement, relevant to your topic of course. “How many people here have sustainability as a key objective this year”? 
  10. Do a timed run through (even if it means talking to yourself on the train on the way to the event) to check the timing. There is nothing more frustrating than a speaker who says, “I’ve only got a few slides, I’ll speak for 10 minutes then we can have a good discussion” and then waffles on for half an hour.  Running out of time is amateurish and speaks of a lack or regard for the audience.
  11. Any slide that is on the screen for less than a minute or so is usually worthless (unless it is a clever, quick visual joke or something similar!) Equally, a slide with so much content packed onto it – words, charts, tables, diagrams – that no-one beyond the first row can read it is a waste of time too. If you have anything of a complex nature that you really want to communicate, put it on a hand-out. It is a personal thing, but I would tend to use between 8 and 10 slides for a 15-minute session. Trying to fit 30 slides into 15 minutes rarely works well.  Not using slides is fine too, but you need to be a really good and confident speaker to pull that off.
  12. Presenting does not come easy for everyone. But do try and bring some energy and enthusiasm to the session. You are in effect entertaining the audience as well as imparting something useful. If you look or sound like you don’t want to be here with us, or it is clear that you haven’t put much effort into the session, why should the audience bother listening or engaging?

If you have thought clearly about your session, prepared and rehearsed well, you will feel better and more confident. And that means the audience will have a better experience too. Good luck!

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Huge Ship, Tiny Error, Major Problem

Picture: LPhot Alex Ceolin, UK MOD© Crown copyright 2019

You may know the expression “don’t spoil the ship for a ha’pworth of tar*”, but we have a case now where the ship most certainly has been spoiled – or at least put out of service for some considerable time – because of a tiny error in manufacturing. The impact of this has also led to a tricky contract management situation.

In August 2022, the British aircraft carrier Prince of Wales broke down just one day after departing its Portsmouth base for training exercises off the US coast. That was hugely embarrassing for the Navy given the ship had cost some £3.1 billion and this wasn’t the first problem since initial launch in 2019. This time, the issue was traced to a starboard propeller shaft fault and an installation error. Responding to a recent parliamentary question, Ben Wallace, the UK Defence Minister, said that based on “initial reports” the shaft was misaligned by 0.8 – 1 millimetre. That is a tiny mistake, but apparently caused a huge problem.

As well as the operational issues this caused, the question of who should pay for the error is also complex. Construction and delivery of the warship was carried out by a consortium of three firms under the banner of the now defunct Aircraft Carrier Alliance. BAE Systems, Babcock and Thales were all involved, which makes it complex to assess liability. Will the Ministry of Defence (MOD) end up paying or will they be able to pin the responsibility onto one or more of the firms?

A report on the “Breaking Defence” website said that the MOD “declined to comment on why the repair bill liability decision has not been made yet, nor when a decision is likely to be made”.  But MOD did say that repairs were likely to cost some £25 million, and that an investigation was looking at how to ensure the failure was not repeated. Well yes, one would hope that the same won’t happen again!

John Healey, the Labour Party’s shadow defence secretary pointed out that since the ship entered service in December 2019, it had spent 411 days in dock for repairs, compared to just 267 days at sea. A previous deployment also ended in embarrassment and a quick return to base in Portsmouth after an internal flood left the engine room and electrical cabinets submerged for 24 hours. The current repairs were supposed to be completed at the Rosyth dockyard in Scotland by February, but at time of writing (May 2023) still seem to be going on.

We could draw analogies here between our (literal) flagship and the wider state of the UK. Still pretending to be a significant global power, but incapable of actually doing anything to live up to that fantasy and all that sort of thing. But keeping to the facts, in a more mundane fashion it does highlight the importance of absolute clarity in the contract whenever you are buying from a consortium of any kind – and that doesn’t just apply in the military world of course.

Don’t assume a consortium will act as one entity if something goes wrong. It’s just as likely that each party will fight to protect their own position, which can leave the buyer in a difficult position, as we may be seeing here. So a strong and clearly written contract, including a definition of what will happen if there are issues after the formal consortium is dissolved, is essential.

And you can see why the UK Treasury (finance ministry) is not too keen on increasing the MOD’s budget for spending on more equipment, even given the present Russian threat. Cases like this (as well as high-profile failures such as the Ajax armoured vehicles) all add to a lack of confidence that such money would be spent well.

* A bit of research suggests that the expression was originally about sheep rather than ships! I didn’t know that…

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TSB Systems and Contracting Failure- CIO Fined

In my Bad Buying book, I wrote about the IT disaster that affected millions of TSB bank customers back in 2018. Here is the story from the book.

“In 2015 Sabatell acquired TSB, a UK-based retail bank, formally part of the Lloyds TSB Group. TSB at some point needed to move onto its own IT platform, rather than continuing to use the Lloyds  group systems, as they were now competitors to their former parent company. But the move, in April 2018, turned into a disaster.

Account holders couldn’t use mobile or Internet banking, and some reported seeing accounts details from other account holders. Customers struggled for weeks to make mortgage and business payments, as the new TSB systems failed to function properly. The issue was serious enough to be raised in the British Parliament, and in September 2018 TSB’s CEO, Paul Pester, resigned.

In March 2019 The Sunday Times reported that an investigation into the affair put much of the blame onto the IT firm that handled the transition.13 However, the twist was that this firm was SABIS – which is part of the Sabatell Group itself. So although it has a separate identity, this was in effect the internal IT function of the group that owned TSB.

Reports suggested a range of technical and programme management issues around the deployment of new software, rather than problems with the underlying infrastructure. But whatever the cause, the whole episode cost TSB £330 million,14 and there is a  ‘provisional agreement’ (according to the firm’s annual report) for SABIS to pay TSB £153 million. In November 2019 an independent report from law firm Slaughter and May concluded that the issues arose because ‘the new platform was not ready to support TSB’s full customer base’ and, second, ‘SABIS was not ready to operate the new platform’.

Questions have to be asked about the choice of ‘supplier’ here. Was SABIS the right choice to carry out this challenging task? It certainly doesn’t appear so, in retrospect. Did TSB have a choice, or was the firm told by top Sabatell management that it had to use SABIS? Would a firm with a wider and broader experience of banking systems than SABIS have done better? And why didn’t TSB accept the offer of help from Lloyds, which was made as soon as news of the problems broke?”

Now, five years later, there is an interesting postscript. Carlos Abarca, who was the TSB chief information officer, has been fined £81,620 by the Prudential Regulation Authority (PRA), the body that provides oversight of the UK banking system. In their 35 page report, they explain how Abarca’s failure caused a debacle that might have threatened financial stability more widely.

He apparently ignored early signs that the migration was not going well before the big switchover. He “did not ensure that TSB formally reassessed Sabis’s ability and capacity to deliver the migration on an ongoing basis”. Sabis told Abarca that they were migration ready and that subcontractors had given written confirmation that their infrastructure was fit for purpose. but the Authority felt this was not enough because the statements were caveated with comments about outstanding tasks. Abarca also did not obtain a written updated confirmation of readiness from Sabis when he told his own Board everything was ready for the transition.

The PRA said, “Mr Abarca’s failings undermined TSB’s operational resilience and contributed to the significant disruption TSB experienced to the provision of critical functions and potentially impacting on financial stability”.

This might be the first time a senior executive has been fined and disgraced for a failure in contract and project management. Now clearly in most industries, there is no equivalent of the PRA to  carry out this sort of investigation and take such action if someone screws up in a similar manner. But if you are in the financial services industry in the UK, it is a warning. If you are responsible in some way for operations, and that includes some procurement and contract management activities, then you must be very careful and must conduct your work with considerable diligence. And make sure you cover your back carefully at every point if a supplier tells you, “yes, everything is fine, don’t worry”!

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An Interesting Fraud – – Maybe Bad Supplying Rather then Bad Buying?

There are a number of very common procurement frauds; well covered of course in the Bad Buying book.  “Inside jobs” based around a corrupt employee take a number of forms but often consist of someone internal diverting spend to fake companies that they control or have a stake in, or to companies that are paying them a bribe. Fraud from outsiders often means submission of fake invoices, or diverting invoice payments away from genuine suppliers to the fraudster.  However, most frauds could be prevented by some sensible and standard policies and processes.   

So having collected examples of fraud and corruption in a fairly serious manner for over a decade now, it is rare for me to see a new variant. But a recent case in the US was quite unusual, in that it was based on buyer impersonation, which we don’t see very often. I’m sure it has happened before, but this was certainly not a common or garden case. Indeed, it was quite impressive in a way, with the fraudster showing impressive attention to detail, and a good understanding of how procurement works. And the failing was not actually with procurement policy or people; it was the suppliers who were conned and whose processes let them down.

Fatade Idowu Olamilekan,  a citizen of Nigeria, was extradited from Nigeria to the US (with good cooperation between the authorities in each county) and recently sentenced to five years in prison in the US in connection with a scheme to fraudulently obtain and attempt to obtain millions of dollars.

From 2018 to 2020 he obtained details of various procurement executives in the US government sector. In particular, during the pandemic, he impersonated the Chief Procurement Officer of New York State to fraudulently obtain medical equipment, including defibrillators.  He set up email addresses that were as close as possible to the correct ones for the relevant people and organisations. He then contacted suppliers, principally those already working with New York, and said he was looking for quotes for items.

After they submitted quotes, he told the suppliers that they had been successful and won the contract, and issued them with fake purchase orders (POs). The goods were to be delivered to warehouses that he nominated, and from there he shipped them to locations in the UK, Australia and Nigeria.  The payment terms on the POs was 30 days, which is pretty standard, so didn’t raise any alarms. But of course that gave him 30 days to move the goods somewhere else once they were delivered, before the supplier started looking for their money. Presumably, when their cash didn’t arrive, the supplying firm eventually got through to the real buyer, who would then explain that they knew nothing about this order.

All very clever, although getting goods rather than direct cash via a fraud leaves you with the problem of disposing of the stolen goods. Criminals rarely get anything like the real value of their ill-gotten gains (so the bloke in the pub trying to flog me a laptop said).  So that’s a downside of this type of activity. 

Whilst this wasn’t really a very hi-tech fraud, it does raise some interesting questions as we move into the AI world.  A single phone call from the supplier and conversation with a real procurement manager from New York would have put an end to this within minutes.  So as transactions and even sourcing processes become more and more automated, you can imagine a situation where a clever fraudster uses a fake AI bot to place orders, which will then be processed by the suppliers’ AI powered bots. How long would it be before the supplier bot realises it has been conned?

This is not something I’ve thought about too much, but as we enter the ChatGPT era, there’s going to be a whole new world of Bad Buying fraud and corruption to think about and look out for!

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Committee Takes Aim at MOD Procurement

The UK government’s Public Accounts Committee (PAC) which keeps a beady eye on government spend trained its attention on the Ministry of Defence last week. And PAC, made up of members of parliament from different political parties, was not impressed with what it saw. The PAC gets most of its ammunition from National Audit Office reports and investigations. It can then call “witnesses” to question in person. Sir Geoffrey Clifton-Brown, Deputy Chair of the Public Accounts Committee said this as the committee’s report was published.

“If the MoD does not act swiftly to address the fragility of its supply chain, replenish its stocks, and modernise its capabilities, the UK may struggle to maintain its essential contribution to NATO. The 2022-2032 Equipment Plan is already somewhat out of date. It doesn’t reflect the lessons emerging from Ukraine, more than a year in. And every year it’s the same problems – multi-billion-pound procurement problems. Equipment arrives in service many years late and significantly over-budget, and some of it just isn’t arriving at all. The MoD still does not have or seem to be able to attract the skills it needs to deliver the Plan”.

The MOD does not have a great track record when it comes to major capital spend for equipment in particular. The latest disaster (which we’ve covered here previously) is the £5 billion Ajax armoured car programme. Delivery of vehicles from the supplier, US manufacturer General Dynamics, is years late, there have been problems with soldiers suffering from hearing problems after using the test vehicles, and the MOD is in a commercial dispute with the supplier.

As usual, many people are keen to offer simple-sounding solutions. Clifton-Brown speaking on Sky News said that MOD should bring in more private sector procurement people. But many of the (huge) current procurement team in MOD do have private sector backgrounds, and frankly buying MOD kit is not really very similar to anything the private sector does. Indeed, high profile and extremely smart private sector folk such as Bernard Gray have tried to fix defence acquisition and largely failed. The problems are far deeper and more intractable than a bit of a capability shortfall.

To be clear, a lack of skills in procurement is an issue (but probably even more true for contract management and project management capability), but there are other harder-to-fix problems in terms of MOD acquisition, such as these.

  • A conspiracy between MOD, Treasury and the supply side to consistently under-estimate the cost of new equipment at business case stage in order to get it approved.
  • Competition between the services (Army, Air Force, Navy) which means bidding for new investment is competitive rather than collaborative – this plays into the previous point about misleading plans and budgets.
  • Cosy relationships between industry and MOD staff, bordering on the corrupt at times, with a “revolving door” which often makes MOD people cautious about “upsetting” firms that might one day be their own employer.
  • The desire to keep changing specifications post contracts – driven by the rapidity of technological advances and also the desire of MOD senior leaders to have “the latest kit”.
  • Perpetual uncertainty about the highest level strategies around maintaining the UK’s manufacturing and maintenance capability, and setting that against the concept of buying the best value for money kit off the shelf from whoever makes it.
  • Unwillingness of the best staff to go and work on what are perceived to be failing programmes.

These issues should be addressed, but its not all going to be sorted out by recruiting a few more decent procurement professionals from Unilever or Toyota.

Then we also saw stories last week about another MOD dispute with a supplier. Babcock is building a new low-cost (in theory) frigate, which will not only be used by the British navy but will be sold to other countries. However, MOD and Babcock are now arguing about the commercial details of the contract for 5 Type 31 general purpose vessels. Babcock has warned investors it could lose up to £100 million on the contract and there is an argument as to who picks up the bill for the escalating costs. It appears to be related to inflation increasing far more than expected, putting pressure on the supplier as the cost of steel and other items rises.

So the question seems to be this. Who in the contract agreed to take “inflation risk”?  Now I would have expected this to be laid out very clearly – if it was not, then that was both Bad Buying and Bad Selling! Or just bad contracting. Then the problem may have arisen if Babcock foolishly agreed to take that risk, not thinking that we might see inflation at 10%+.  MOD would be perfectly within their rights to tell the firm to just get on with it, but perhaps there is something more nuanced in the contract, as the parties are now apparently going to a dispute resolution process. We’ll watch with interest to see what comes out of that.  

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Procurement “Transformation” and Supply Base Reduction

I’ve had a couple of abortive attempts at writing a book about “procurement transformation”. Perhaps one day it will happen. But my feeling over the years is that often presentations at conferences that claim to be about “transformation” are nothing of the kind. They might be about upskilling the function; or implementing a new piece of software; or launching a category management programme; but the ideas they describe are not really transformative. And in some cases, the central aim or achievement of the programme appears to be simply a reduction in supplier numbers.

There is no doubt that many organisations do have a supply base which is too large to achieve optimal performance or value.  So a reduction in supplier numbers can be beneficial – but the point is that it is usually not appropriate to consider supplier reduction as an end in itself. Rather it should be seen as one of the outcomes of a wider procurement improvement or transformation programme.

An excessively large supply base usually develops because of a lack of procurement spend visibility, control or influence. Budget holders decide where and how to allocate their money, leading to fragmented and un-coordinated spend. Hence getting such situations under better management will bring a number of benefits, and an effective procurement programme, probably category management based, will be needed to address matters. And even today, most organisations, in most categories, will find that the result of a well-planned and executed sourcing programme is fewer suppliers in that area.

So supplier reduction as an outcome of an appropriate programme can indicate real benefits have been achieved. Fewer suppliers means more concentrated spend, and there can be benefits from this aggregation. Although economies of scale are over-estimated in many industries and sectors, it is clear that when most organisations look carefully at a category, and find dozens or hundreds of suppliers, they derive benefits when they come to negotiate with a view to reducing that number.

But in some cases, the “right” answer once a spend category is considered will be more suppliers, not fewer. If the analysis shows that the organisation is worryingly dependent on certain suppliers, then that should be the desired approach, for instance. My personal baptism in procurement was a role where I was at the mercy of a monopoly supplier of a vital raw material. It was not a good place to be and I longed for “supplier increase” rather than supplier reduction!

Or even if risk is not the issue, there may be value opportunities through taking a more aggressive and tactical approach to a market, with frequent supplier switching. We should not be afraid of strategies that lead to more suppliers – as long as the benefits are weighed against the true costs of supplier management into account. So here is a summary of key points to consider.

  • Supplier reduction should be a potential outcome from doing procurement well.  It is rarely sensible as an objective or end in its own right, and it is not the most appropriate strategy for every occasion.
  • Understanding the starting point or baseline is important for any major procurement improvement initiative. And if supplier reduction is part of the business case, it is vital to have a clear and accurate view of the baseline. Supplier numbers are often overstated, though duplication or mis-categorisation, so a spend analysis maybe required as a starting point.
  • Similarly, if the savings from supplier reduction are going to form part of the business case for a procurement programme, the true cost of managing suppliers needs to be assessed, as well as realistic savings form any re-negotiations, so any savings can be calculated with realism and as much accuracy as possible.
  • For any category, and certainly before any supplier reduction initiatives are set in train, procurement must ensure that there is a good understanding of the markets, suppliers and associated risks that are being addressed.
  • Supplier reduction can be a sensitive issue amongst stakeholders and budget holders, who may see their favourite suppliers disappear. The benefits of rationalisation programmes may not be very visible to stakeholders either. So it is important to get the buy-in of your key stakeholders and engage them in the process, particularly if you are trying to make dramatic change.

That last point is important but often disregarded. Managing the internal stakeholder dimension is often more challenging for procurement than managing external markets, and needs significant focus. That is always true, but particularly applies when a major change in the supply base is likely. Indeed, I’ve seen that point in itself be enough to kill procurement change or transformation programmes stone dead.

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Remember the Procurement Basics!

Not a Wetherspoons to be honest – the picture shows my favourite pub in the world, the Strugglers Inn in Lincoln

No matter how much we like to talk about sustainability, complex strategies and supplier relationship management, procurement has some basic elements that cannot and must not be forgotten.  A couple of recent cases act as a good reminder of that.

The first is a dispute between Wetherspoons, the leading UK pub chain with 843 branches, and AB InBev, the world’s largest brewer (they produce Budweiser, Beck’s, Stella, and also some beers that aren’t tasteless).  In November 2021, Wetherspoons agreed to make AB InBev their lead brewer (“preferred supplier”) of mass-market lager, replacing Heineken. ‘Spoons, as it is affectionately known, sells a good range of real ales and interesting cask beers but still offers the standard products too for the less discerning drinker.

But the dispute relates to disagreement over who is going to pay to install the T-bars (the branded fittings that include the keg beer taps) in all the Wetherspoons pubs. The argument has gone to the UK high court now, to decide which company should be responsible for carrying out the works needed to fulfil a contractual requirement for pubs to display a set number of AB InBev beers on their T-bars. Wetherspoon claims that both parties believed the brewer was responsible, in line with standard industry practice. AB InBev denies this, saying the work should be subject to a sperate agreement.   

For two such large and apparently professional firms to be arguing over this seems incredible really. Presumably there is a formal contract between them, and surely that would include a clear allocation of responsibility for costs associated with the change.  If that was not included in the contract, then that represents both Bad Buying and Bad Selling, I would argue.

So the first of today’s two key learning points is this. A contract must detail the responsibilities that each party is expected to meet in order to uphold the legal agreement.  Now in very large or complex contracts, there might be some minor details that don’t get captured up front, but in particular, any activities that have an associated cost must be clearly laid out. Otherwise, there is a high probability of arguments later, as Wetherspoons and AB InBev have discovered.  I know this seems obvious, and yet there they are, in the high court.

The second case is both serious and quite amusing. Metal traders at Stratton Metals sold 24 tonnes of nickel to a German customer recently. Nickel is a valuable metal, increasingly used in batteries for electric cars, so much in demand. It is sold as briquettes, packed into 2-Tonne sacks. But when the customer took delivery and opened the sacks, they discovered that half contained worthless stones rather than nickel!

This was highly embarrassing for the London Metal Exchange (LME), which facilitated the contract and is Europe’s only remaining “open outcry” trading floor – rather than sitting in front of computer screens, traders literally shout at each other to arrive at buying and selling prices. The LME also operates through a network of 464 warehouses around the world which hold metals in stock, although LME does not own or manage these facilities. The dubious sacks were in a Rotterdam warehouse.    

Nickel seems to be a bit of a favourite for dodgy dealings at the moment. Last month, Trafigura, the Singapore-based commodities firm, took a hit of $577 million to its accounts when it discovered a huge fraud involving missing cargoes of nickel – although it is not clear that is linked to this recent stones substitution.  Trafigura is taking court action against Prateek Gupta, an Indian metals tycoon, over the missing metal.

Anyway, we might draw two wider procurement lessons from this. The first is very simple. Always check that you have been supplied with what you have paid for. Actually, that is not too difficult when it comes to physical metals – it is considerably more difficult when it comes to complex services, for instance. But the principle and the risk for the buyer is the same. You said you would provide this, I contracted to pay on that basis, and you have delivered something else.

Secondly, the nickel case shows that trust is still an important part of doing business. Despite the comments above about the importance of a robust contract, even a good example will not always protect you against corrupt, criminal or fraudulent behaviour. Trust does matter; so if you have a supplier you can trust, remember that is worth quite a lot. Nobody wants to find stones instead of nickel in their warehouse, literally or metaphorically.

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