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Professional Services – Procurement Has Failed

Unfortunately, procurement as a function has failed.  Not everywhere, not in every organisation, but across some huge and important markets, we have failed.

Reports last week in the Evening Standard – and elsewhere – lead to that unfortunate conclusion.

“UK partners at accountancy and consulting firm PwC were paid an average of more than £1 million for the first time last year. The London-based giant said consulting revenues were up by a third reflecting “exceptional clients demands to challenges and opportunities on multiple fronts”.

Group profits grew 24% to £1.4 billion in the year to end June and profit per partner averaged £920,000, up 12%. This was topped up by an average of £105,000 per partner in the firm of a distribution from the sale proceeds of PwC’s global mobility and immigration arm …”

And there are almost a thousand partners in the UK; 944 to be precise earning this huge amount. But they’re not entrepreneurs. They have not built a business, they don’t run a business and most of them are looking after relatively small teams, not the thousands of people many CEOs manage. They might create some value for clients, but I don’t think you can compare their work to being CEO of even a fairly small business, or being a business owner and entrepreneur trying to build a successful enterprise. Yet somehow, they are extracting a million each, every year, from the economy.

Fiona Czerniawska and I wrote “Buying Professional Services – How to get value from  consultants and other professional services providers” back in 2010. It remains I believe pretty much the only book focused on that specific area of procurement. Our focus was consultancy, audit and legal services, and we tried to lay out how buyers could achieve better value in these tricky markets. Procurement has a relatively short history in these spend areas – 30 years ago there was little procurement involvement in these categories even in the largest organisations. So you would hope that the more recent involvement of the profession would have helped make these markets more competitive and we would see better value for users.

But year after year, we see audit scandals, unsatisfactory consulting work, and yet the earnings of partners seems to just go up and up.  Surely, if procurement had really got to grips with these spend categories, we wouldn’t be seeing this? It is even more startling in the legal world, with Freshfields partners hitting the £2 million mark this year.

Clearly, there must be market issues here as well as questions of competence.  In the audit area, the greater regulation of that profession, put in place with good intent to raise quality, has succeeded in also raising the barriers to entry. So it has been very difficult for smaller firms to challenge the big four.

In the consulting and legal world, there are more complex factors at work. I believe that many CEOs and CFOs are happy to pay high fees and see partners earning so much, because it helps them justify their own salaries.  The executive remuneration consultants ( another highly questionable branch of the professional services world) can say to a Board, “if a PWC partner earns a million, you better pay your CEO at least that”.

Another problem is that procurement often comes up against the user of professional services who doesn’t want to see competition and just wants their favourite law or consulting firm, probably engaged on a day rate basis so the user doesn’t have to think too hard about outcomes or deliverables.   But we all know how important competition is to moderate costs; too often we still don’t see that in this world. And ongoing “contract management” of assignments is often dreadful or non-existent. How much of a partners’ earnings can be traced back to “land and expand” strategies, for instance, or projects that run on and on beyond their supposed delivery dates?

The hollowing out of businesses (and public sector bodies) over the years in the cause of efficiency is another factor. Downsizing and outsourcing has left organisations unable to resource new projects or anything out of the ordinary – so the consultants get called in.  For instance, PWC partners must be delighted to hear that the UK Tory government wants to cut civil service numbers by 25% – that will mean yet more lucrative work for them!  Which will no doubt be based on a Crown Commercial Services framework contract with consulting firms that when put in place made little attempt to drive real competition or push the firms into offering better value. 

The growing complexity of the business world is another driver, and we can’t blame the providers for that. Whether it is leading-edge technology or international patent law, organisations face more and more complexity and it is not surprising that external expertise has become more critical to success.

But even given that caveat, it seems clear that we have failed to get to grips with professional services procurement.

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

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

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

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

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

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

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

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

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NHS Procurement Platform – Was it Bought Properly?

The UK National Health Service is one of the largest organisations in the world in terms of number of employees and its running cost. Whilst it is a single organisation in some senses, really it is made up of thousands of smaller organisations, many with considerable levels of autonomy. Even when we think about hospital trusts, each still has its own Board and is set up as an independent entity from a legal perspective, although that is slowly changing with the introduction of the regional Integrated Care System model.

So it is not surprising that over the years, there has always been tension in procurement between the urge to centralise and control more from “the top” (whatever structures might be defined in that way) against the desire for local autonomy and power.  Now no-one would argue for total centralisation (everything needed by every hospital bought from a huge central office somewhere) or total decentralisation (every doctor or hospital negotiating its own deals for pharmaceuticals!)

But getting the balance right has proved difficult. For instance, Ministers persist in claiming “the centre” did a good job in terms of pandemic PPE procurement. But the truth is that pre-pandemic central procurement strategy proved inadequate, and local action was needed to maintain supply in many hospitals. And whilst once the pandemic was underway some central activity was necessary, mandated central buying cost the UK billions in waste and super-profits for suppliers.

The new Chief Commercial Officer for the NHS, Jacqui Rock, who sits in NHS England HQ, recently launched a Central Commercial function for the NHS. A key strand of that is a technology initiative that is designed to help the manage procurement better across the system. The aim is to have a more common approach to procurement, and to start enabling better access to spend data across the whole network. That is a very sensible aim – gathering data does not mean in itself a more central approach to category strategies, and however you want to approach procurement, having good data is essential.

The mechanism for achieving this has raised some eyebrows though. Via Crown Commercial Services, all trusts, integrated care boards and other NHS entities can now use a software platform provided by Atamis, with CCS funding that to the tune of £13 million over three years (it is not clear if CCS has actually “pre-bought” licences here, which could be a risk in itself).

Atamis is a procurement and tendering platform with spend analysis functions as well as tools for managing programmes, tenders, contracts, and supplier relationships. It was chosen for use by NHS England and the central Department two years ago, although NHS Supply Chain chose software firm Jaggaer for their similar requirements.However ,this new contract with Atamis was put in place using the government’s Digital Marketplace, a set of frameworks that gives the public sector access to thousands of suppliers. And it appears that no competitive process was used to choose Atamis. They were simply awarded the contract. Now there are rules (laws) about when you can award a contract in that manner without seeking proposals from other firms also listed in the Marketplace. And I cannot see in this case how a “single tender” can be justified, when there are other firms on the framework who provide similar products and indeed supply many Trusts already.

I should say that I have no axe to grind with Atamis or their product. When I worked at Spend Matters, I had contact with the founder of Atamis and liked him and the business. But the firm was sold to a Canadian software company last year, and the NHS could represent a considerable proportion of their business.  There are also questions about what happens once the 3-year CCS funding ends, dependence (the Atamis product is built on the Salesforce platform) and “lock-in” to Atamis.

When the initiative was announced, there were a whole host of interesting comments from readers of the HSJ (Health Service Journal). This extract from one probably encapsulates much of the content.

“Why has the centre decided to create a monopoly situation, by endorsing, promoting and funding this only provider for, say contracts management? What happens to other providers with better value solutions? Should UK Tech Plc pack up and shut shop? Are these other solution providers now out of the whole NHS market? Why”? 

For me, the most fundamental question is whether it was legal and commercially appropriate to award the contract to Atamis without competition. (There are “business issues” too of course). The new central function should set a good example, and surely competition is the most fundamental principle of good procurement. But given the way the contract was let, I would not be surprised if we see challenges to that process from other suppliers who are clearly at a competitive disadvantage now, with Atamis being available “free”.  

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M&S Buys Logistics Supplier – Why?

 Supply Management reported this week that retailer Marks and Spencer (M&S) is buying Gist, a logistics business.  Gist apparently do much of the food logistics work for M&S, but clearly all has not been well. M&S said its food supply chain “remains less efficient and, we believe, higher cost to serve than our competitors”.  Stuart Machin, the CEO, said “M&S has been tied to a higher cost legacy contract, limiting both our incentive to invest and our growth”. 

But it seems a rather strange move to buy the firm rather than perhaps;

  1. Negotiating a better deal with Gist so that performance and cost is more in line with that achieved by M&S’s competitors; and / or
  2. Finding alternative suppliers if Gist can’t or won’t meet those requirements.

I know that changing suppliers is not easy when it is clearly a large and strategically important contract. But it is not impossible.

Let’s dig into the transaction more deeply than Supply Management did. Gist is currently owned by Linde – the largest industrial gas company in the world.  But how did Linde end up as owners of a transport firm? According to Wikipedia,

“In 1969, the BOC Group acquired GL Baker, after it expressed interest in its use of liquid nitrogen in chilled containers. The company was renamed BOC Distribution Services in 1991, before being rebranded as Gist Limited ….  Gist was acquired by Linde as part of its 2006 acquisition of BOC.  Following the group’s merger with Praxair to form Linde plc, Gist continues to operate as a separate entity under Linde”.

Gist declared profits of £24.3M on 2020 revenues of £472M (2021 results are not yet published). The M&S website tells us that “M&S is acquiring the entire share capital of Gist for an initial consideration of £145m in cash. A further amount of £85m plus interest will be payable in cash from the proceeds of the intended onward disposal of freehold properties or, at the latest, on the third anniversary of completion”. 

Another £25M might be payable under certain conditions and somewhat confusingly, “M&S has the ability to retain the freehold properties should it wish to do so in which case the full amount of £110m plus interest will be payable.” So I assume the basic deal does not include the freeholds.  

The big question is how M&S got into this position in the first place. It is a pretty dramatic step to spend over £200M to get out of a logistics contract! I can’t think of a similar case. Going back to the original M&S strategy here, you can imagine why a firm might go for the “strategic partnership” option in this spend category, rather than either insourcing or using a more dynamic multiple-supplier strategy. “Playing the market” might give the buyer more competitive leverage when it comes to negotiation, but might have some less positive practical implications compared to a longer-term partnership.

But how on earth do you get into a  situation where you are apparently locked into “a higher cost legacy contract which expires in 2027”? The M&S announcement also says this.

“The Gist business being acquired generated a proforma EBITDA of c.£55m in the year ended December 2021, with the majority of profit reflecting management fees recharged to M&S under contractual arrangements, which will be eliminated upon consolidation to M&S”.

So “the majority” of Gist’s profits come from M&S.  You would think the firm would therefore be in a powerful position to re-negotiate this onerous contract?  But you can also see that Linde may not have had much interest in owning a non-core logistics business – perhaps they just said, “we’re not moving on the contract, but if you want to buy Gist, we’ll do you a good deal”.

And in the short-term, it does look like a pretty good deal, if you can pick up £55M EBITDA for £230M!  But the downsides of owning your own logistics firm need considering. Some analysts would consider it a distraction from the M&S core business – as a retailer of food,  clothing and homeware. What makes the top management think they can run a logistics business, and how much attention and time might it divert from that core business?  

Secondly, Gist may well find that other retailers do not want to use a firm owned by their retailing rival. It’s hard to see Tesco, Sainsburys or Waitrose rushing to Gist’s door.  Might M&S ownership cause an exodus of other customers, which could be an issue even if they aren’t as important as M&S itself?

I have no personal interests here, but I see this as a worrying sign. It must have been a pretty bad deal with Gist, or M&S was incapable of managing the contract to their own satisfaction.  Neither gives you much confidence in the firm’s commercial nous. I’d also worry about the distraction factor going forward. So unless M&S can explain better what they are up to, I’d put this down as a (potential) Bad Buying case study.

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Thurrock Council Comes Up with a New Type of Bad Buying

Having spent several years researching, writing and now promoting the Bad Buying book, I thought I’d heard pretty much everything in terms of public sector organisations finding ways of wasting taxpayers money through incompetent or corrupt procurement, investment and spending.

But there is always something new, and the case of Conservative-run Thurrock Council in Essex and their investments in bonds linked to solar power is unique and astonishing. You can read the full story here – it is great work by Gareth Davies of the Bureau of Investigative Journalism, supported on this story by the Daily Mail.

Thurrock has invested in solar farm businesses owned by an individual called Liam Kavanagh. Now I suspect most procurement professionals are inherently suspicious of people who haven’t been around for long, or whose businesses are only recently established, but who buy multiple fancy cars / fancy homes. In the case of Kavanagh, “his jetset lifestyle included the use of a private jet, a fleet of super-cars and a Hampshire farmhouse with a swimming pool, wine cellar, home cinema and steam and hot tub room”.

As the Mail reported; “Cash-strapped Thurrock Council in Essex borrowed £655million of public money – the equivalent of triple what it spends on services each year – to invest in 53 solar farms across the UK. It agreed a series of deals with globe-trotting businessman Liam Kavanagh, whose integrity was later questioned by a High Court judge over £5million his company banked in ‘commission’.”

And now there appears to be some £130 million of Thurrock’s money that has “disappeared”, with questions over even larger sums owed to the council. Kavanagh has liquidated companies that took money from Thurrock and has re-arranged his financial affairs, leaving the council with concerns over up to £200 million that it is owed. Incredibly, much of the investment was made by borrowing from other local authorities, who could be in trouble if Thurrock then default!

Davies reports this.  “In an interview at the time, Clark (Thurrock’s CFO) described a bizarre arrangement, involving dozens if not hundreds of short-term loans, many as short as a month in length, with the effect that the council was in a perpetual state of borrowing from one local authority to repay another. Piecing together data in obscure spreadsheets revealed Thurrock had borrowed from at least 150 other councils”.  Thurrock also borrowed some £350 million from a Treasury-run lending body.

Local authorities seem to be a hotbed for financial waste, incompetence and fraud. There are many questions still being asked about Croydon’s property “business” – that council went bust and Whitehall had to send in “commissioners” to run it. The same has happened in Slough – dodgy property investment there too.

Nottingham Council decided to get into the energy business and its “Robin Hood Energy” firm stole from the taxpayer to give to … well, tens of millions in losses disappeared anyway. Gloucester tried something similar and failed.  My own local council, Surrey Heath, invested some £120 million in buying commercial property just before the bottom dropped out of that market. The valuation is now more like £50 million.

So the problems cover councils run by Labour (Slough, Liverpool) and the Conservatives (Surrey Heath, Thurrock). It does often seem to be council officials who are the driving force behind reckless investments and spending, while the councillors are not informed or don’t have the intellect or power to intervene. In the case of Thurrock, Davies reported that officials kept elected councillors in the dark for months and have not given full access to the details (as well as blocking FOI requests and questions).

Whilst Davies has to be careful in his reporting – “While there is no suggestion that any rules were breached….” he says, we must wonder whether in some of these examples, corruption was involved, although it is hard to prove. Do external parties (suppliers, property developers etc.) say to their inside-the-council enabler “look, I can’t give you anything now, but in five years’ time when the heat has died down, there’s a million for you”.  

Anyway, if it is not corruption, then we are seeing far too many examples of gross incompetence from our councils. And it is costing taxpayers many, many millions.

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Good Tender Documents – More Important Than You Might Think

You may have read about the recent UK hospital trust tender that hit the media because of its questions about diversity and transgender issues. It turned out that the questions should not have been included in the document; it was human error rather than anything else.

I recently got involved with another National Health Service tender – we’re talking about a “collaborative buying” framework here, potentially worth hundreds of millions.  A consulting firm I’ve worked with over the years asked me to look at the tender documents, because they could not work out how on earth the buyer could possibly differentiate between the various bidders. Basically, there were no evaluation questions that actually asked the bidders to explain their core technical capability!

I read it and agreed that is was a very odd document.  No selection outcome could possibly have stood up to legal challenge, for a start. Luckily, I knew a senior procurement person in the buying organisation, so I called and explained the issue. A few days later, the tender was pulled. Pure human error again.

I was reminded of these cases during an Oxford POGO session last week. (POGO is a very worthwhile knowledge sharing club – more details here). The topic was capability in public procurement, and there were a number of interesting speakers. But it was Steve Schooner, Professor of Government Procurement Law at the George Washington University Law School in Washington, USA, who brought up the issue of writing tender documents.

Too often that was seen as a pretty unimportant task, but he said (quite correctly) that is a key skill if you want to get the best potential suppliers, the best proposals and ultimately the best outcomes from your procurement and suppliers.

He also said that “no-one should be allowed to write a public sector tender document until they have sat supplier side and responded to a tender”!

I think that is a great idea and maybe should be a core training activity for developing public procurement professionals. Over the last decade or more, I’ve occasionally supported clients who were responding to (usually public sector) tenders. It has given me a lot of insight into what good procurement practice looks like – and more depressingly, what bad practice looks like. I’ve also worked buy-side of course and tried to help buyers to get it right! It is not always easy, but it is always important.

As well as the contribution of this stage in the process in terms of final outcomes, there is another factor to consider. The tender documents you issue are probably the most direct and often the most widely-read manifestation of your procurement function’s competence.  

You can claim to be a world-class team, you can win lots of awards, but if potential suppliers read your tender and think “what a load of old rubbish this is”, then more than anything that will be what informs their view of you. The same often applies with internal stakeholders. If there are non-procurement colleagues involved in a procurement process, and they see that the procurement professional doesn’t know how to produce good material, or (even worse) the stakeholder starts to get calls from frustrated potential suppliers, then this is very bad news for your internal reputation.

Going back to the beginning, I spoke to a senior person involved in the “controversial” case of the diversity questions. We’ve learnt two things, he said. Firstly, we need more and better training for all our staff who are involved in producing tender documents. And secondly, “we need better quality assurance before material goes out of the door”.

Often top procurement executives feel they are too busy to read tender documents, or that it is  a low-value task for someone of their seniority, skills and experience. Below their pay grade, as it were. But if that is your view, just remember – a lousy tender document has the potential to trash your team’s reputation more widely and faster than just about anything else.   

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Transformative or Tedious? The New UK Procurement Bill

The new UK public procurement legislation has been laid out in a Bill now which is being discussed and revised in the House of Lords. Leaving aside political comments, most independent experts, particularly the procurement academics and lawyers, see it as being somewhere in the range between “mildly disappointing” and “mildly positive”.  (Read an excellent assessment from Professor Sanchez-Graells here and a useful set of proposals for improvement from the UK Anti-corruption Coalition here).

I suspect that is inevitable. Public procurement aims to meet several different objectives, but sadly these are not all congruent – we can’t have it all. Public procurement has to balance:

  • Achieving fundamental value for money in what is being purchased – getting the right blend of quality and cost that enables the taxpayer to feel their money is being spent carefully and sensibly to generate the desired policy outcomes.
  • Minimising the chances of fraud or corruption by making such actions difficult or easily detected.
  • Encouraging innovative, dynamic, competitive markets – not just to help achieve future value for money in public spend, but because that will help the wider economy too.
  • Contributing towards wider UK government and societal objectives – economic, social, environmental or, as we now see, more overtly “political” in nature. (Using public procurement to support the government’s “levelling up” agenda for example is the type of political objective we’ve never really seen before in public procurement). 
  • Doing all of this in manner that keeps the transactional cost for both buyer and supplier to acceptable levels.

The problem is that these objectives can be conflicting. Simplify processes and deregulate, and you may reduce transactional cost and stimulate markets, but it will inevitably increase the chance of fraud and corruption. Focus more on the “social value” benefits, and if you are not careful, you will jeopardise basic value for money. And so on.

So it is impossible to keep everyone happy with regulations, and this is why it is difficult to assess the long-term effects of the new Bill. It will be at least two years before we see how the different objectives are being met or not met.

Perhaps the element that has most potential for transformation, but is also a major area of uncertainty, is the freedom for contracting authorities (CAs) to design new procurement processes. Will we see innovative and effective new ideas emerging, including innovative use of technology? Or will CAs quickly default to the “recommended” standard options that Cabinet Office are going to provide?

No doubt we’ll be writing further about this topic as the Bill proceeds into law, and there are some key areas where I’m not clear yet about the likely implications. The proposals on the role of technology, and the whole transparency area both have some positive aspects, for instance, but the devil is in the detail. However, here are a few predictions to be going on with.  

  1. The Cabinet Office standard processes will look pretty similar to the previous EU procedures, but with a bit more “negotiation” added in. But there will be so many caveats and warnings about (e.g.) equal treatment for suppliers that CAs will only use negotiation very cautiously…
  2. … unless they are running a corrupt procurement, where somebody in a powerful position wants a particular supplier to win. But of course that NEVER happens in the UK(!!)  I’m afraid we will see increasing corruption in public procurement, not just because of the greater freedoms, but because moral and ethical standards in the country are eroding from the top down.  
  3. Some lawyers are getting excited about the new rules on exclusion (mainly because of their complexity) that enable buyers to ban firms from bidding. But they will prove to be largely theoretical and decorative. I can’t imagine many hard-pressed procurement directors looking at the really complicated regulations for exclusions and saying anything other than “OK, let’s forget about this”.  (See Pedro Telles on this).
  4. Within a year or two, we will see suppliers complaining that the new rules don’t seem to have simplified public procurement.  I’m not criticising the Cabinet Office policy folk here – I’m just not sure it is possible to really simplify matters whilst trying to meet all those different goals. And no, I don’t have amazing transformative ideas myself, to be honest.
  5. Many older / less flexible public procurement professionals will retire or move out of the sector. “I’ve done things this way for 10/20/30 years, I just can’t be bothered with the hassle of learning all this new stuff now”.  I’m already hearing of that issue, and we will see a staffing crisis in public procurement (unless we go into a major recession that releases private sector professionals!)
  6. Given points 1 and 5, we will see more and more use of frameworks let by collaborative buying organisations, (Crown Commercial Services, YPO, NHSSC etc).  Unfortunately this is probably not good news for supply chain resilience in general, or for local, smaller or innovative suppliers. However, the “new” central procurement unit won’t have much impact.

Finally, there are metrics that will prove whether these predictions come to pass. If they do, we will see more single tender procurement exercises (only one bidder or a “direct award”).  We’ll see further growth of the buying aggregators. There will be a very low number of exclusions.

If I am wrong, we will see happy suppliers, more bidders per contract, fewer single supplier tenders, growth in contracts to local, smaller suppliers, social enterprises and so on. There will be fewer Private Eye-type scandal and corruption stories, and a decent number of dodgy suppliers excluded … So I hope I am just being a grumpy old pessimist! 

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Why is the USA Running Out of Baby Formula Milk?

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

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

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

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

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

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

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

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

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

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

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

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Fairness in Procurement

Most people see government buying as something rather dull and bureaucratic, but get it wrong and it can cost the taxpayer a fortune.  So everyone should be interested in the new Procurement Bill published last week, which will define the regulations for UK public procurement.  We will have more on that here when I’ve read it properly and also considered what people smarter than me think of it!

One of the key principles of the new regulations is to give buyers more flexibility and freedom. But I do have a fear that could lead to more corruption if it allows crooks (whether politicians or public servants) to run dodgy procurement processes to favour their preferred supplier. However, the new approach will I believe still require contracting authorities to consider basic issues such as “fairness”. That is where a lot of the biggest failures in the past have arisen – such as described in the following extract from the Bad Buying book, describing a particualr case that cost the taxpayer over £100 million because of obvious bias and unfairness in the procurement process.  

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“The case involved a 2016 legal challenge by Energy Solutions Ltd., the incumbent supplier for a huge contract to clean up de-commissioned UK nuclear power stations. They lost the tender, run by contracting authority the Nuclear Decommissioning Authority (NDA) in 2014, to a Babcock Fluor consortium (CFP).  But there were a number of mistakes made during the procurement process.

One related to “pass / fail thresholds”; areas where the NDA defined up-front that failure to meet certain conditions would lead to instant disqualification for the bidder. However, once bids were scored, it became clear that one supplier had failed to meet the threshold. But instead of chucking them out of the competition, the NDA decided to let them stay. Now this may all seem a little technical, but it is clearly unfair; and public procurement regulations really don’t like unfair buying processes.

As the judge said in his statement, you cant change your mind about the rules once you get into the buying process.  After a bidder has failed to meet a defined threshold, you can’t ask “was that threshold Requirement really that important?”, arrive at the conclusion that it was not, and then use that conclusion to justify increasing the score to a higher one than the content merited (or to justify failing to disqualify that bidder)”.

To disguise the failure of that firm, the NDA team also adjusted original scores given to the bidders during the marking process. But they failed to provide any audit trail or justification for these changes, a fact that became obvious through the trial. The NDA announced that CFP had won – which promoted the legal challenge. There were other issues too, and the final outcome saw the judge finding in favour of Energy Solutions, and the NDA agreeing to pay the firm (and their consortium partners Bechtel) almost £100 million to settle the legal claim for their loss of profit on the contract.

It is impossible to know what went on behind the scenes in cases like this.  Was it sheer ignorance of the rules? Was someone very senior determined a particular supplier should or should not win the contract? With other failures in previous chapters, a lack of understanding or knowledge caused the problem, but I’m left somewhat baffled here.

Certainly, a number of basic buying principles seemed to be forgotten. Treating bidders fairly is a good principle, whether you work for a government body that must do that legally, or for a private firm. Keeping sensible documentation to explain your decision is vital. That’s so you can explain to bidders why they won, or didn’t, but it is also a basic precaution against corruption and fraud, one that all organisations should take. If no-one can explain logically why my firm won a particular contract, then maybe it was because of the bulging brown envelope I was seen handing over to the senior buyer”.

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How will CIPS measure the success of its big changes?

A few weeks ago now, CIPS (the Chartered Institute of Procurement and Supply) announced the result of the consultation process on proposed governance changes. It proved to be a vindication and a victory for the Board of Trustees, with over 75% of those who responded agreeing with the Board’s recommendations. That means no more democratic voting for members to elect Congress and (indirectly) Trustees, and no more CIPS Presidents.

I campaigned for a proper consultation to be held, as it looked at one point that CIPS might just force through the  changes – and indeed had already made some (such as abolishing Congress) which it should not have done without such consultation. I wanted to retain some democracy, which I genuinely thought would be the result of the consultation. I also wanted CIPS to retain the President’s role, which I thought might be a close call in terms of wider opinion.  I “lost” convincingly on both those counts.

One learning from this is to beware of the positive reinforcement or “echo chamber” effect. The vast majority of people I spoke to – and who responded to my quick survey I ran here – agreed that democracy should be retained. I can only assume they were generally people similar to me, perhaps a lot of older members, Fellows or perhaps just liked-minded folk –  which is why they read my stuff here or on LinkedIn. But I really thought I would “win” on that point, only to find a clear majority disagreed with me.

What is really disappointing is that only one person ever debated with me publicly and was prepared to discuss the issues a little on LinkedIn. So either those who voted with the Board don’t hold very strong views or are terrified of my amazing debating powers… who knows! But my point is that it’s easy to think that “everyone agrees with me”. We must be careful not to fall into that trap when it comes to important business decisions too. Look for the contrary view, for the person who doesn’t agree with you.

So, CIPS members, you no longer have a vote. CIPS is similar now to your gym or the AA, where your “membership” means you are a customer with a right to use the service, not the National Trust or CAMRA (just to take two organisations I’m a member of) where you have a vote and hence play a (minor) role in the running and governance of the organisation.

Nothing wrong with that, but you might feel differently when you don’t have that role. You certainly expect a good product (service) from the gym or the AA – you act like a buyer, not a “member”, I suspect.  So this change might just focus CIPS members’ minds on what they get from the Institute, which would not be a bad thing.  

And CIPS faces a challenging competitive situation. There have never been as many options for professionals wanting to feel part of a community, or to access useful intellectual property, information and knowledge, or to participate in events.  Much of what is available in those areas is free to users too. Even on the qualification side, which is CIPS’ main area of competitive advantage, new options are emerging.

The other point I’ve been considering is how will the CIPS Board measure the success of these changes? Here are some suggestions.

  1. The new appointment process will lead to better people sitting on the Board, says CIPS. OK, that is somewhat subjective, but lets compare the Board membership in 2 years’ time with where it was in 2021. But I’d also want to know how active Board members are. How many meetings or  CIPS events (both large-scale and branch type meetings) did they attend? It is no good having high profile global CPOs as Board members if they never turn up or actively support CIPS and its members.
  2. CIPS will appoint a range of people to fulfil representational roles instead of a President, they say. So let’s measure media coverage of CIPS “representatives” as a reasonable proxy for activity.  In my opinion, CIPS really missed out by not having a Presidential figurehead as a spokesperson during the pandemic.  The CEO did his bit, but he had a business to run in difficult circumstances too.  
  3. Another aim of the new structures is to improve member engagement. So let’s see the number of branch and other meetings organised by or for members, including virtual gatherings of course, and number of attendees – those seem like good measures. Plus perhaps number of “projects”, task forces, groups or whatever set up for particular purposes or to carry out a piece of work.
  4. Ultimately, the best measures are probably the core metrics – full members of CIPS and total revenues.

We won’t be able to judge whether the changes have paid off for a while, so let’s see where the Institute is in two years’ time. Put May 2024 in your diary. Whether I will still be interested enough in procurement matters to be writing about it then is another matter altogether!

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