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Incentivising Suppliers Properly Isn’t Easy – Doctor’s Appointments Provide a Great Example!

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

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

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

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

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

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

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

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

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

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

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

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Are You a “Typical” Procurement Fraudster?

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

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

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

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

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

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

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

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

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

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Blood Tubes – Is This the Latest NHS Bad Buying Case Study?

Last year, Personal Protective Equipment (PPE) hit the headlines when shortages threatened the lives of health workers and patients in the early months of the pandemic. That demonstrated how a spend category that was traditionally seen as low risk and suitable for “leverage” type approaches to procurement could become highly strategic, critical and even politically sensitive.

We now have another example with a similar change in perception for what seems like a pretty standard item, a simple ”commodity” even.  GPs (“family doctors”) in the UK National Health Service have been told to stop performing most blood tests until mid-September. Hospitals have also been instructed to cut their number of tests by 25%, all due to a shortage of blood tubes (sometimes known as sample bottles).

NHS England wrote to doctors and hospital leaders, telling them that “the supply position remains constrained and is forecasted to become even more constrained over the coming weeks.  While it is anticipated that the position will improve from the middle of September, overall supply is likely to remain challenging for a significant period.”  That is thought to mean months rather than weeks.

The shortage has arisen apparently because Becton Dickinson (BD), the main supplier of blood collection tubes to the health service, just has not been able to keep up with demand.

This is obviously a hugely concerning issue. Blood tests help determine whether patients have particular conditions or illnesses, provide warning signs and monitor overall health. A reduction in capacity here will almost certainly cost lives. 

So what has caused this problem? There appears to have been an increase in demand, perhaps because of the pent-up health issues now being exposed as people go back to doctors surgeries after avoiding them for many months because of COVID. But the company also said it was facing issues transporting the tubes, for example, challenges at the UK border. That has been picked up by some as an example of post-Brexit supply chain issues around customs, tariffs and so on, issues that are affecting many businesses.

But with our Bad Buying perspective, might this also be a case where the procurement strategy is partly to blame for the problem?  Is BD the only supplier of this product?  That seems unlikely, but it is possible that the NHS has taken an aggregation and leverage approach to this item, as it did to many others, including PPE prior to the pandemic. Is BD a sole supplier because they offered a great deal for the whole NHS volume?

Maybe that is not the case, but you do wonder why other suppliers are not being mentioned, although the NHS has said new providers will come on stream soon. But it may be this is another example of over-aggregation creating unhealthy dependence on one supplier.  It doesn’t even always add to better prices, too. Here is a short extract from Bad Buying (the book) where I talk about the risks of supplier dependence and how it is created by poorly considered procurement approaches.

“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 your needs. Buyers might insist that suppliers must service every office or factory across the US, or Europe. Smaller firms and start-ups, which 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…”

In this case, it would be fascinating to know just how the NHS has ended up with shortages of such a fundamental item. But in the meantime, just hope that you don’t need a blood test anytime soon!

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Don’t Assume You Can Always Find a Good Supplier Out There!

I met an old friend – and consummate procurement professional – this week for the first time in several years. He is working in a very important and sensitive area of government, and this article is in his honour!

It is an extract from Bad Buying –  How Organisations Waste Billions Through Failures Frauds, and Fu*k-ups, where I discuss an approach we’ve seen quite regularly in the public sector. Sometimes private sector firms make the same mistake, but often I have to say it is politicians who make the assumption that there will always be a supplier out there who can successfully deliver the services (or goods) they require. Unfortunately, that is not always true…

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“In the government sector, many failures can be tracked back to an assumption that there will always be a range of credible suppliers who can execute the contract, whatever the organisation looks to buy. But that may simply not be true. If the buyers’ requirement is unique, as government work can often be, a market may need to be created from scratch. Even if there is some capability already, a sudden increase in demand, from a major government programme for instance, will put pressure on the market and it may take considerable time to reach a viable state.

The UK government decided in 2013 to outsource much of its probation services work, despite warnings from experts that it would be “highly problematic”. The work included the management and rehabilitation of offenders, combining an element of punishment, such as monitoring the conditions of prisoners’ release, with the desire to reduce re-offending and help the offender make a useful contribution to society. The Ministry of Justice, then under the command of minister Chris Grayling, created 21 Community Rehabilitation Companies (CRCs) to manage offenders who posed low or medium risk, and in February 2015, the CRCs were transferred to eight, mainly private sector, suppliers working under contracts that were to run to 2021-22.

However, a National Audit Office (NAO) report from March 2019 reported that implementation was rushed, there was little of the innovation that was promised from suppliers and, while the number of offenders has reduced, 19 of the 21 companies ultimately involved failed to meet targets for reducing the frequency of re-offending. Probation services have clearly not been transformed, and in July 2018, the Ministry announced it would terminate its contracts with CRCs 14 months early, in December 2020.

Suppliers didn’t do well either. The NAO report estimated cumulative losses of £294 for the firms if contracts continued to the end date, and Working Links, one of the providers, collapsed into administration in February 2019 because of its probation contracts.  Finally, David Gaulke, by now the Minister in charge, announced in May 2019 that the contracts would not be offered to private firms – probation services was in effect re-nationalised after one of the highest profile UK buying failuresin recent years.

There were clearly many problems here, but fundamental is the issue of an entirely new “market” being created, without real understanding upfront of what the work involved, what capabilities would be needed by the winning firms, how the right commercial models would be constituted or how competition could be maintained and stimulated.  The organisations that won CRC contracts ranged from those with experience in vaguely associated areas (Sodexho was a catering firm originally) to new partnerships such as Purple Futures, which involved Interserve, an outsourcing firm which eventually entered administration in early 2019 after financial problems, along with charities such as Shelter.

“If you build it, he will come”, the tagline from the legendary film Field of Dreams, seems to be how some governments think when it comes to creating markets. And generally, some entities will emerge from the undergrowth, bidding to carry out pretty much whatever government asks them to  – drawn by the potential rewards, of course. But this does not create vibrant, sustainable, successful markets in itself”.

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Procurement Fraud in the NHS – Could It Happen In Your Organisation?

One of the most annoying aspects of writing Bad Buying was reading dozens of fraud and corruption cases that came to court. Whilst the cases were often fascinating, the comments from the CFO or CEO of the organisation that suffered the fraud were always predictable. This is what I said in the book.

“But again and again, I see organisations failing to take basic precautions, and then once fraud is discovered, claiming that “this was a very sophisticated fraud”. In most cases, that remark is nonsense and is a fig-leaf for an embarrassed CFO or CEO who didn’t have basic fraud prevention measures in place.

Indeed, one way that fraud could be reduced globally is if CFOs in particular were told that their jobs are on the line. If a fraud takes place on their watch, that could have been prevented through simple actions, then they’ll be fired for incompetence. Implement this, and there will be a measurable drop in such cases very quickly”.

In recent weeks, a fraud committed by an IT manager in the UK’s National Health Service hit the headlines. Barry Stannard of Chelmsford in Essex, was “head of unified communications” for the Mid Essex Hospital Trust, which has since been merged into Mid and South Essex NHS Foundation Trust. He defrauded his employer of £806,229, which came out of the trust’s IT budget. He created two “fake companies” that he controlled, and then authorised payments against invoices from these firms – invoices he obviously produced himself.  He failed to declare any interest in these firms (obviously), no products or services invoiced were ever actually provided to the NHS, and he was sentenced to 5 years and 4 months’ imprisonment on June 30th.

At least the hospital did eventually spot this fraud. According to the Digital Health website, “Concerns first arose after the trust ran a data matching exercise on its payroll and accounts payable records, alongside Companies House records. After a comprehensive initial investigation by the Local Counter Fraud Specialist provider (RSM), the investigation was escalated to the NHS Counter Fraud Authority’s National Investigation Service”.

Stannard also charged VAT, which was never paid onwards to the tax authorities, so that was a further fraudulent element.  All of the hundreds of invoices submitted by his companies to the trust were individually for less than Stannard’s personal authorisation limit so he got away with it for some time.   

At least here nobody used the “sophisticated” word in describing the fraud, which is just as well because it wasn’t.  It was a pretty basic fraud and pretty basic best practice was not followed. That means there is a good case for sacking the CFO – and perhaps even the Procurement Head.  They certainly should answer these questions.

  • Why was there no proper “onboarding check” before a new supplier was first paid? Basic Companies House and Dun & Bradstreet checks would have shown a firm with Stannard as Director and presumably no other income.
  • Why was there no “separation of duties”? You should never have the same person able to choose a supplier, sign off the purchases, and approve the invoice (which includes confirmation of receipt of goods / services)?
  • Why did his boss not question the expenditure? Actually, it is not clear whether the budgets were his own or belonged to other managers (in which case why didn’t they query these costs for non-existent products)?

It all looks very negligent by the Trust and smacks of a poor attitude to spending taxpayers’ money, which unfortunately we’ve seen before in the case of public sector fraud of this nature.  So whatever your role, do think about whether such a fraud would be possible in your organisation.  If you wanted to extract money, how would you do it? Would you need an accomplice or could you do it yourself, as in this case.  If you do find gaps, then tell the CFO, CEO or equivalent. 

I reckon every organisation needs a few creative, cynical but trustworthy employees who can put themselves in the shoes of wrongdoers and have evil thoughts – for the greater good, of course!

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The Worst Tank in the World?

(This picture is not the Ajax vehicle we’re discussing here of course. It is my photograph of one of the earliest tanks ever made, now in the Museum of Lincolnshire Life in Lincoln, the city where the world’s very first tank was designed, in a meeting room at the White Hart hotel).

The story of the Ajax armoured fighting vehicles (small tanks, if you like), bought for the British Army from US defence firm General Dynamics, looks like it will be a lengthy case study if I do produce a follow up to my first Bad Buying book.

Wasting a fortune as in this case is by no means a unique occurrence for the military, and we have seen similar disasters in many countries, as equipment turns out to be far more expensive than planned or fails to provide the capability that was desired. Sometimes, both of those failings are present. 

In the case of Ajax, the General Dynamics solution was chosen in 2010 and the contract agreed in 2014. The first vehicles should have been delivered in 2017, and the first British Army squadron should have been using them by mid-2019. However, problems emerged during testing. For instance, the vehicles were so noisy that crews were required to wear noise cancelling headphones and be checked for hearing loss at the end of operations.

The Times reported expert opinion that problems with Ajax were so serious, the government should consider cancelling the £5.5 billion deal to buy 589 of the vehicles. So far, the vehicles have cost £3.2 billion despite only 14 being delivered — all without a turret and of odd sizes.  A leaked report by the Government’s own Infrastructure and Projects Authority, which reports to the Cabinet Office, says that the problems with the Ajax vehicle do not seem to be manageable or resolvable within the agreed costs and timescale.

Recently it was revealed that trials of the Ajax armoured vehicle were halted from November 2020 to March 2021. Then trials were paused again in mid-June on “health and safety grounds” amid concerns that mitigation measures put in place to protect soldiers — including ear defenders — were not sufficient.  Excessive vibration and noise meant crews suffered from nausea, swollen joints and tinnitus, and soldiers were only allowed 105 minutes inside the vehicle, with a maximum speed of 20 mph (32 km/h).

Not very good in a real-life conflict, really. “Could you stop shooting at us, we have to let our chaps out for a bit of a rest now, they’ve been in there almost 2 hours!”  Amazingly, suspension issues also mean that the turrets could not fire while the vehicle was moving, and vehicles were unable to reverse over obstacles more than 20 cm high. I think even my Kia could manage that – we’re getting into the territory of “you have to laugh really, or you would cry”.

Another element of the Ajax story which would be amusing if the whole programme weren’t such a huge waste of public money came last week when the public announcement of the latest problems was made during the England versus Germany football match! Talk about timing a bad news story to avoid public focus.

Tobias Ellwood, chairman of the defence select committee, said that the vehicle’s weight had ballooned to 42 tonnes after many redesigns. It was now “heavier than any tank during the Second World War”, he said.  Some observers have suggested senior officers in the army may have hidden the extent of the problem over recent months to prevent it being axed as part of the government’s Integrated Defence Review.

But there is some debate about the underlying causes of this fiasco. There are claims that there was a “anyone but BAE Systems” view in the military when the supplier was being chosen.  Private Eye and The Times also suggested that General Dynamics just said “yes” to everything the Army wanted, without really being able to provide it. “They went to General Dynamics and said ‘Can you do it?’ and they said yes”.

But others see the fault sitting with the military, with the specification being continually changed and made more complex over the years, leading to that issue with the weight of the vehicle, as Ellwood pointed out.

Bernard Gray, who was Chief of Defence Material from 2011-16, has published some interesting comments on Twitter recently.  He suggests that the initial contract was fine, which might be understandable as his team must have been very involved in that phase. But changes to the specification driven by the Army after contract signature, on what should have been a fixed price, fixed spec contract, are behind the problems, he suggests. Gray said this;  “I don’t think that’s true if the product was not fit for purpose. The problem was, how much had MoD deviated from the 2014 contract by 2019… that’s what we need to explore”.

If that diagnosis is correct, it may prove hard to recover money from General Dynamics. If the firm has simply done what it was asked or required to do by the customer, we can hardly blame it if the end product doesn’t work.

Another thread on Twitter related to the decision by the Australian army not to select the Ajax product. Apparently, that was because when they took up references from the British army in 2019, they were told to avoid it.

It is all a huge mess anyway, not just financially but also operationally, as this is a pretty essential and fundamental piece of kit for our soldiers. As usual, the taxpayer takes the hit, and as usual we will never find out exactly who should carry the can for this in the military, civilian MOD or political worlds, or indeed on the supply side. Will anybody get fired? You must be joking. Strangely enough, it always seems impossible to place the responsibility for Bad Buying in the public sector on anyone in particular.  

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Procurement Ethics – Dealing with Conflicts of Interest

Conflicts of interest as a ethical topic has always been relevant in procurement, both public and private sector. Here is a quick quote from my book, Bad Buying.

“At a local level, I’ve worked with organisations whose top management didn’t even want to put in place a clear “conflict of interest” policy. That would mean staff having to disclose any interest they (or close family / friends) have in another business that might be a supplier or a customer of the organisation for which they work. But there’s usually a reason for that hesitancy.  Where you see organisations that won’t support anti-corruption activities, then you might draw obvious conclusions”.

Conflict of interest is a key issue within the fight against procurement-related fraud and corruption. We want buyers and everyone involved in the process to select suppliers, negotiate and manage contracts without being biased because they have an external interest that affects their behaviour.

We’ve seen these issues come up a number of times over the last 18 months through the pandemic with spend on products such as PPE (personal protective equipment) being in the public eye. So some recipients of huge contracts for PPE have had links with politicians and other powerful people, which has led to suggestions that decisions were impacted by these conflicts of interest.

The standard approach when developing procurement policies and practices is to ask those involved in the process to declare any potential conflicts upfront. Somebody can then decide if that is significant, and if so, how to handle that. At the extreme, I’d suggest it might eliminate a potential supplier from consideration completely. That doesn’t happen often, but appointing a small consulting firm to do a procurement review when that firm is run by the Procurement Director’s wife might not be a good idea.

But more frequently, it is a case of making sure the person with the conflict does not play a central role in key stages of the process, such as selecting the supplier or negotiating the contract. Suppose a senior executive who has an interest in the service being purchased discloses that their sister is a senior manager in one of the bidding firms. I would not expect that firm to be disqualified, but the executive should not be involved in the key aspects of the procurement. There are potential issues of confidentiality as well as bias of course – so if the exec is going to have access to confidential information, then they need to understand that any breach will lead to disciplinary action! Or you may simply choose to keep such information away from them.

There are questions however about how far we can and should go. That came to mind with the revelations around Mathew Hancock, the UK Health Minister who resigned because he broke covid rules with his ”friend”. But another part of that report claimed that his friend’s brother runs a firm that has won NHS contracts.

Is that a worry?  If your friend’s brother is bidding for a contract with your organisation, do you need to declare that as a potential conflict of interest?  That probably depends on just how close the “friend” is. If they are in effect a partner (legally or secretly) then it probably should be declared. But frankly, I would very rarely have known what any of my friends’ siblings did for a living!  So we have to be reasonable in terms of how meaningful the risk is.

A similar argument applies to shareholdings. Most of us hold shares indirectly through pension schemes or investment funds and we may well have direct holdings too. We can’t be expected to know exactly where “our” money is invested in every case. But what about if I have just a couple of hundred pounds worth of shares held directly in a potential supplier? I’d suggest that it is sensible to declare that, but I would not necessary exclude someone from the process for that level of “conflict”. However, if it were several thousand pounds worth, or if we were considering share options in a start-up that could prove valuable one day, the position might be different.

These are tricky issues.  The key is to impress on everyone that if they are in any doubt, it is better to declare the potential conflict and let others decide how serious it is. That is much better than having to plead later on that “I didn’t realise it mattered”. 

And if you want to hear more about this and related topics, I’m speaking as part of a CIPS (Chartered Institute of Procurement and Supply) webinar on July 13th, 2021, at 12.30 pm. It is all about ethics and is titled “50 shades of Procurement – an Ethical Perspective”.  It should be interesting – and it is open to CIPS members AND non-members, so anyone can book here.

(The picture shows my cycling friends enjoying an outing with me last year – no contracts were awarded!)

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Children’s Social Care – A Broken Market

Sometimes Bad Buying stories are amusing, or we can learn from events without feeling too emotionally involved. But reports last week about the procurement and management of children’s care services brought just rage and sadness.

These are children who don’t have parents to look after them, or have been placed in care. Many have behavioural issues, or addiction problems.  So keeping them safe and providing an environment where they can learn and thrive is far from easy, and perhaps that is why public sector bodies (local councils) have over the years increasingly outsourced provision of residential facilities and care. The work goes to private sector firms, ranging from very small (individual foster parents at the extreme) to larger firms, including those funded or owned by private equity.

The Times reported problems both with the performance of some firms plus what looks like a rip-off in terms of the prices charged. The average cost per week is now £4,130 per child, and there is evidence that through the pandemic, new “get rich quick” firms have come into the scene, providing poor care and facilities but taking advantage of the lack of physical inspections by the regulators.

The Times highlighted cases reported by Ofsted (the regulator):  

  • Children were able to steal knives from one home and take them to school.
  • Staff dropped a young person off at the home of a drug dealer despite being warned by police to avoid the area; at another run by the same company a child was discovered riding a bike on a motorway hard shoulder.
  • A young person at a third home was found weaving through traffic and high on drugs. On another occasion inadequately trained staff locked themselves in a car when a resident became violent. One of the three people who set up the home was a scaffolder prosecuted for having an eight-inch knife behind the sun visor of his van.

A government review of children’s social care services is underway, and an interim report was also issued last week. The review is being chaired by Josh MacAlister, the founder of Frontline, a charity that has developed a scheme for fast-tracking bright graduates into children’s social work – similar to the Teach First scheme in the education world. I have worked with Frontline a number of times, and MacAlister is one of the most impressive people I have ever met. If anyone can address these seemingly intractable issues, it is him.

However, I did smile at his comment last week (made in a conference speech) when he appealed for large firms to moderate their prices and margins.

“I would implore those of you who are owners of private children’s homes, particularly large groups, to act with responsibility to bring down costs and reduce profit-making and to be responsive to the needs of children. It is better that plans to make this happen are started now”.

Asking firms with private equity behind them to reduce profits is like asking a spider to stop making webs or a fish to stop swimming.  Josh, it’s what they do. I think we can confidently predict that his appeal will have no effect at all.

In his speech, MacAlister also cited figures published in 2020 by the National Centre for Excellence in Residential Child Care (NCERCC) and Revolution Consulting, which identified a 40% rise in independent children’s home prices from 2013-19. The 20 biggest independent children’s social care providers were making combined annual profits of £265m, at a margin of 17.2%. However, the private sector argues it provides care that is as good as that provided by councils directly, at a lower cost.

Coming back to Bad Buying though, this strikes me as both market failure and a failure of procurement strategy. When we look at which services can most sensibly be outsourced, we should consider factors such as:

  • Are the services strategically critical for our organisation?
  • Is there a healthy, dynamic market out there to buy from, open to new entrants?
  • Could we move our business between suppliers or back in-house if we needed too?
  • Will there be a reasonable power balance between us and our suppliers, enabling us to exert  some negotiation leverage?

If we carried out this analysis on these services, I’d argue that this is basically not a suitable spend category to outsource. It is very sensitive, it is difficult to switch suppliers, with limited supply in some parts of the country. Once a child is being cared for, the provider has the upper hand in negotiations, as changing suppliers is difficult.  

I don’t know whether there has ever been a national procurement strategy here, or whether every council has developed its own. I suspect the current situation has just evolved, and now we have the taxpayer spending £500,000 a year per child in some cases, and not even being sure the service is up to scratch.

There is also a market study into children’s social care provision underway, led by the Competition and Markets Authority (CMA). Maybe that – as well as the MacAlister review – will lead to a new approach to the procurement issues around children’s care. This really does need some serious thought and a national strategy. That doesn’t necessarily mean big national contracts, I would add, but it does need considering strategically, rather than dozens of individual councils trying to do their best individually.

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Why Doing Public Procurement Properly Matters

The court found this week that Michael Gove, Cabinet Office Minister, broke procurement law when a contract was awarded without competition to Public First, a research and communications agency. As the BBC reported, “The government acted unlawfully when it awarded a £560,000 contract to a firm run by former colleagues of Michael Gove and the PM’s adviser Dominic Cummings, the High Court has ruled”.

This goes back to the Dominic Cummings era in the initial pandemic days of early 202. Some will feel that speed was everything at that point – but it is not like contracting for a series of market research focus groups was a matter of urgent life and death, unlike maybe PPE or ventilator procurement.

But in this case, the court found the contract award appeared to show favouritism as Public First had worked with Gove and Cummings previously, and the judge said this; “The defendant’s failure to consider any other research agency, by reference to experience, expertise, availability or capacity, would lead a fair-minded and informed observer to conclude that there was a real possibility, or a real danger, that the decision-maker was biased.”

One founder of Public First formerly worked as an adviser to Mr Gove and for Mr Cummings, and co-wrote the Conservatives’ 2019 general election manifesto. The other had worked alongside both men in the Department of Education. However, the judge rejected two other claims – that the direct award of the contract was “unnecessary” and that the 6-month contract length was disproportionate. So both sides can claim victory here.

Cummings thinks procurement rules are ridiculous and damaging.  Indeed, many senior people – official, special advisers and politicians – feel that they are bureaucratic and can slow down necessary actions.  There is some truth in that, and some of these people also genuinely believe that their own judgment is quite enough to make decisions on which suppliers can best carry out work.

The problem is that this approach shows at best a considerable degree of arrogance, quite a large degree in some cases. And it would be helpful if everyone understood better exactly why we have rules in public procurement. There are three good reasons.

  • The most obvious perhaps is the danger of fraud and corruption. I doubt very much whether anyone received brown paper envelopes stuffed with cash in this case. But if we don’t have processes, with openness and transparency, then the dangers of that becoming more common will rise.
  • Public procurement processes are also designed to help achieve the best possible outcome for the citizen and taxpayer. Competition is the key driver of that.  We will never know if other firms could have done as good a job as Public First for half or a tenth of the price – or a much better job for the same cost. When you don’t have competition, you can’t look at alternatives and you don’t have competitive pressure in terms of value. Even if the requirement is urgent, some competition, even if limited and rapid, is much better than none.
  • The final point is the least understood driver for proper public procurement – that it encourages healthy markets and successful economies. If firms know they will always have a chance of winning public sector contracts, they are encouraged to invest, to innovate, to provide better service. But if public markets are closed, or corrupt, or based on who you know rather than what you can do, then what is the point of trying to be better? Don’t spend a million in improving your product – spend it on getting an ex-Minister as a “consultant” to open doors, or on “research trips” to California for officials and advisers, or simply on bribes.

The last point is very evident in the countries that have the greatest corruption problems. Why would any start-up bother trying to win public sector work fairly in Venezuela, Somalia or Yemen (choosing three of the back-markers in the Transparency International Corruption Perception index)? You invest in corrupt practices to succeed.

We may think that the UK, US and other developed nations don’t have similar problems, but that would be naïve (read Bad Buying for a few examples…)  So whilst many will dismiss the Public First case as a storm in a £500K teacup, we need to hold politicians and others to account, and continue to emphasise that there are very good reasons for doing public procurement properly.

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Here it Comes – How to Avoid Inflation-Driven Bad Buying!

Have you seen the price of compost this spring? I reckon it has close to doubled – three large bags from Longacres garden centre last year cost £10 (for 180 litres). Now, you will get just 100L for the same price.

Talk to a local builder, or gardener, or fencing expert, and they will tell you of shortages in markets such as timber, cement and other basic but vital materials. In another market altogether, farmers are complaining about a lack of workers to harvest crops, and restaurants of a lack of waiting and kitchen staff. Some are having to increase wages or other benefits to attract staff.

Without going into all the causes (Brexit, pandemic, lockdown-influenced career decisions), there is one very likely outcome here – inflation. There are already some warning signs, and consumer prices in the US jumped 4.2% in the 12 months through to April, up from 2.6% in March and marking the biggest increase since September 2008.  That seemed to take inflation from warning mode into “this is actually happening”.  But many economists believe the effect will be short-term, a blip rather than anything that becomes established.

But we can’t be sure of that. One test is whether price rises for materials and commodities then drive wage inflation, which can result in the sort of inflationary spiral we have seen in the past. But in any case, it seems likely that many procurement professionals will be facing a difficult time in terms of the cost of what they are buying. And for the younger members of the procurement community, this might be the first time they have faced suppliers coming in with demands for significant, maybe double-digit price increases.  

Those of us of an earlier vintage may even remember the days of the mid-70s, during which UK retail prices doubled over about 5 years. After moderating slightly, inflation picked up again and in 1980, my first full year as a graduate trainee with Mars Confectionery, inflation hit 18%.  Great for making your pay rise look impressive, less good for buyers. Suppliers often demanded massive price increases, and buyers would go to their boss and say, “good news, I’ve negotiated a great deal – the price is only going up 10%”!

If inflation does take off, it will also put pressure on all those procurement functions that aren’t really that capable, but have had an easy time over the recent years of low inflation, when claiming “savings” has been relatively easy. However, “cost avoidance” is never a totally convincing argument and will be even harder in an inflationary world when the CFO can see real bottom line costs spiralling.

There will also be a dilemma around locking in prices. If you think inflation has further to run, this might prove to be a very good time to negotiate long-term contracts and lock-in prices now with suppliers. On the other hand, if this is a “blip”, agreeing £5 a bag for compost now might look really silly if it is back to £3 by Christmas!  There is no right or wrong answer to this – but you will need to think carefully about the right approach, which in many case means balancing risk, cost and security of supply.

So this will be a real test for many procurement people and teams. If you want to avoid inflation driven “bad buying”, then here are three quick tips. There is much more that can be done of course, but these strike me as useful and sensible whatever your situation.

  • Market and supplier research is more important than ever in this situation. Suppliers will tell you all sorts of “facts” about the market, prices and so on. You need to be as well informed as them (better, if possible) so you can respond and understand what the real situation is.
  • Think carefully about your negotiation strategy – and if negotiations get tough, go back to basics. As well as research, look carefully at your BATNA (best alternative to a negotiated agreement), try and improve it quickly if it is week, and look at the range of negotiation preparation and approaches that might work. You don’t have to accept price increases – but you need to know how you would respond if your hard-ball negotiation really ends up with the supplier walking away.
  • That includes looking beyond price – are there other benefits you can offer the supplier maybe in return for better pricing? Or if you end up accepting some price increase, can you agree some other wins for your organisation (payment terms, additional services, etc).

There is a lot more we could say, of course, but that’s a start at least and might stimulate some thinking. Meanwhile I’m redoubling my efforts to create home-made compost. (We do have no less than four large compost bins and two “heaps”)!

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