“Give Us More Money” – Handling Professional Services Fee Demands

I was talking to a friend who is (very) close to the professional services market recently, and he told me some horror stories about suppliers demanding huge price increases in response to the inflationary environment. Proposed fee rises of 20% or even more are being proposed. In one case – a pretty unusual situation perhaps – the supplier was looking to more than double their rates!

So how do you respond in that sort of situation?

  1. If you have a contract in place, make sure you understand what that says. A contract that covers professional services input to a long-term project or programme might for example have included some price adjustment clauses. Make sure you know what they say before you get into negotiations!
  2. Remember that the opening proposal from any supplier is often a case of positioning or anchoring, as behavioural psychology guru Daniel Kahneman would put it. If a firm is suggesting a 30% fee increase, they may well be hoping that they end up achieving 10% – which a naive buyer might see as a success for them given the starting point. You might even get in first on the anchoring front and suggest a 10% fee reduction given the difficult economic times your organistion is facing…
  3. Suppliers will also stress the most extreme cost drivers when they justify their proposed increases. Even professional services firms will be moaning about the dramatic increases in energy costs. But that probably represents only a couple of percent of the cost base for most firms in that sector.
  4. Staff costs are of course the biggest single element of the total cost picture for firms in this sector. But inflation here is at least partly self-inflicted. If I was negotiating with PWC right now, I would be saying, “look, you chose to give your staff a 9%+ pay increase, that’s not my problem!”
  5. The other issue I would be introducing into the negotiation is the earnings of partners (or equivalent) in the firms. The proposed increases in reality are all about sustaining the income and the lifestyle of partners who are accustomed to making £700 – 900K a year (the big consulting / audit firms) and well over a million in the magic circle law firms and probably some of the top boutique / strategy consulting firms. That’s what we are paying for as customers.
  6. As in the case of any other spend category, the strength of your negotiation position depends on your options and alternatives. If you are in a position where “our CEO will only work with McKinsey and Linklaters”, then you have a problem. But this might be a suitable time to raise the issue with the CFO, and ask the question – “are we always going to be prepared to pay whatever these firms demand”?  If the answer is “yes” then you will simply get ripped off forever.

I know this isn’t easy – as a CPO I’ve been told politely to f*** off by a big firm consultancy partner when I tried to negotiate rates. “Your MD has already signed this, what makes you think you can change our agreement”?  

But you need to try and resist these inflationary demands. Remember, every extra pound, dollar or euro you give away is a reduction in your own organisation’s shareholder value, or less in the taxpayer’s pocket in the case of the public sector. And it is another step on the way to the next Ferrari, cottage in Tuscany or bottle of Latour 1945 for the professional services partners.

/0 Comments/by
, ,

CMA Report on Social Care for Children Highlights Market and Procurement Issues

Life goes on despite the temptation to doomscroll Twitter and Facebook all day for the latest news on Russian atrocities.  But there hasn’t really been much else to cheer, and some news that should have generated more attention in normal times passed almost unremarked.

The Competition and Markets Authority (CMA) published a report last week on the provision of children’s social care (fostering and children’s homes) to UK local councils.  The CMA looks at issues from an economic point of view rather than as procurement experts, but their worrying findings in this case clearly indicate some major procurement (and market) issues.

The final report “found there is a shortage of appropriate places in children’s homes and with foster carers, meaning that some children are not getting the right care from their placement. Some children are also being placed too far away from where they previously lived or in placements that require them to be separated from their siblings. This shortage also means that high prices are often being paid by local authorities, who are responsible for placing children in appropriate settings, with these costs picked up by taxpayers”.

The CMA also commented on the risk of providers going bust – and yet in some parts of the market, providers are making what we might call “excess profits”, with margins of 20%.

“For the children’s homes providers in our cross-GB data set we have seen steady operating profit margins averaging 22.6% from 2016-20, with average prices increasing from £2,977 to £3,830 per week over the period, an average annual increase of 3.5%, after accounting for inflation”.

As an example of the sort of supplier that plays in this market (accepting of course that not all are of this nature), the Guardian recently featured a report about Robert McGuinness, who was paid £1.5m by two local authorities between 2015 and 2020. He owned a “community interest company” (CIC) which provided vocational training to children from 14-16, excluded from mainstream schools.

“The owner of a children’s home in Bolton shut down for “serious and widespread failures” spent thousands intended for educating marginalised children on drinking, foreign trips and his pub business, the Guardian can reveal”.

He siphoned money out of the CIC through a “director’s loan”  to invest in another of his businesses (running a bar).  The bar has since gone bankrupt and the liquidator says “there is currently no prospect” of the CIC settling the £100,000 loan repaid.  He also drives a Lamborghini – just the sort of public-spirited person you’d want to see running sensitive social services for youngsters.

The market failure evident in this sector has a number of causes. One ironically arises from the attempts to regulate the market. Even though that is well-meaning and certainly necessary to some extent, it creates more barriers to entry. Well-functioning markets see new entrants coming in and competing all the time, and also firms can exit the market relatively easily. Buyers can also switch suppliers easily in well-functioning markets; not the case here given the nature of the services.   

There are other barriers to entry in this case, such as the need for capital investment.  Over the past 20 years or so, the amount of public sector provision of such services has disappeared, replaced by private provision. One reason has been the need for investment in council-owned facilities. Rather than finding the money for that, as central government grants to local government have declined, councils have increasingly closed down their own facilities such as children’s homes and care homes  and bought those services from private providers.

That has weakened competition further. Then we can see a failure of procurement and contract management too. Do buyers know what margins are being made by their providers?  And how well are providers managed? I suspect because the users of the service are kids, there isn’t a lot of connection between the providers, the users and the commissioners (and budget holders) for the services.  Councils have seen headcount reduced in areas such as contract management too as income was squeezed.  The report on the gov.uk website agrees that something needs to be done.

“The CMA’s analysis finds that the main reason for this is the fragmented system by which services are commissioned, which means that local authorities are not able to leverage their role as the purchasers of placements or to plan properly for the future”.

To address these issues, the CMA recommends that the UK Government, Scottish and Welsh Governments, “create or develop national and regional organisations that could support local authorities with their responsibilities in this sector. These would improve commissioning by carrying out and publishing national and regional analysis and providing local authorities and collective bodies with guidance and by supporting them to meet more placement needs in their local area”.

I am no lover of aggregation of spend and centralisation of public sector procurement.  But this does seem like an area where a national “category strategy” and some serious procurement talent needs to be brought to bear.  

/0 Comments/by

CIPS Members’ Survey – Results Show Overwhelming Concern About Proposed Changes

Thanks so much to everyone who responded to the CIPS members’ survey I launched on Monday. We had 100 responses by 3pm on Monday and I closed it last night with around 180 replies. Here are the basic results. I will comment on them more in a further article. However, the main reason for doing this was to check whether other members felt as strongly as I do about the changes being proposed. It seems pretty clear that my views are not unique!

More to follow, as I say, including “comments on the comments”, as it were – respondents made many interesting remarks in the free text part of the survey!   And thanks again for your participation.

Do you agree that the elected Congress should be replaced by an appointed Membership Committee directly reporting to the Board of Trustees?

Yes                                                                  6%

No                                                                  76%

Not sure / need more info                          15%

Don’t care – no strong view                         3%

Are you happy with members losing their democratic vote and the chance to choose at least some of the people involved in the running and governance of  CIPS?

Yes                                                                    2%

No                                                                  94%

Not sure / need more info                           3%

Don’t care – no strong view                         2%

Are you comfortable with the Board of Trustees appointing the Nominations Committee, which then appoints members of the Board of Trustees (with no elected members on either body)?

Yes                                                                  2%

No                                                                  92%

Not sure / need more info                            5%

Don’t care – no strong view                         2%

Do you agree that the role of CIPS President should be abolished?

Yes                                                                  3%

No                                                                  71%

Not sure / need more info                         21%

Don’t care – no strong view                         6%

On a scale of 1-10, how well do you think CIPS has engaged with and communicated to members in terms of these proposed (and implemented) changes?  (1 = not impressed at all,  10 = delighted)

Score 1  66%

2              22%

3              7%

4              1%

5              1%

9              1%

10           1%

The sample was heavily weighted towards more senior members of CIPS, with no less than 28% Chartered Professionals (and MCIPS / FCIPS of course). 26% were MCIPS and the same percentage exactly were FCIPS.  Over 80% were UK based.

/4 Comments/by

CIPS Implements Major Structural Change Without Member Communication or Agreement

The Chartered Institute of Procurement and Supply (CIPS) is currently making major changes to how the Institute is run, its governance and structure. Unfortunately It is implementing the changes after only limited consultation with selected members, and without communicating openly what it is doing, let alone asking for members’ approval to the changes. The most significant change would remove members’ voting rights; a disenfranchisement of 20,000 CIPS full members.

I know this has been a difficult time for all organisations, and I’m sure the CIPS Board believe they are doing the right thing. But as a member for 30 years, a Fellow and a Past President, I do not think this approach has been appropriate, and CIPS could lose a large number of members if it does not handle this well. So it feels like time for an open debate about exactly what has been going on here “behind closed doors”.  

There is undoubtedly a need for some review of CIPS structures; for instance, I don’t believe that the Congress has established a clear role since it was formed.  But change must be managed properly, and members must be involved and treated with respect. 

The major changes in progress

  • The Congress, which advises the Board, and is elected by members voting on a regional basis, has already been abolished – without communication to members. In its place, a global Membership Committee is being appointed, reporting into the Global Board of Trustees (GBT), which is the ultimate governing body of CIPS. The Membership Committee will be appointed following applications and interviews carried out by the Nominations Committee (NC), which itself is a sub-committee of the GBT.

  • Currently, half the members of GBT are appointed by the NC and half are elected by Congress from amongst Congress members. This means all full members have at least an “indirect” say in GBT membership – we vote for Congress representatives, and Congress elects half the Board from its own membership. Under the new proposals, the NC will appoint all members of the GBT following an interview-type process.  There will be no member voting.

  • The position of President is being abolished – a move which in my opinion seems to be based as much as anything on the last Presidential appointment not working out as well as was hoped.  

What does this mean?

  • CIPS members will no longer have a democratic vote of any kind to elect the people who run CIPS.  We will only be a “membership” organisation in the sense that the AA is a vehicle recovery “membership organisation” – we will simply be consumers of a service. That will be a different model from pretty much every other professional Institute as far as I know. All that I have checked retain some sort of membership democracy.   

  • There is a worrying ‘circularity’ in that the Global Board of Trustees (GBT) is appointed by the Nominations Committee (NC), but the NC itself is appointed by the GBT and largely consists of GBT members anyway. This does not appear to represent any sort of good governance.  I appoint you, you appoint me, I appoint you, and so on and so on!  

  • Making appointments purely via the NC and eliminating all democratic voting could easily lead to cliques, “chumocracy” and conflicts of interest.  Such a move seems unlikely to give members a greater sense of ownership, belonging or commitment to CIPS.

  • In terms of the Presidency, there will no longer be a professional leader for the Institute, a respected professional who can speak on our behalf. The CEO takes on some of those responsibilities but we can’t always guarantee that the CEO will be a credible procurement professional themselves (as our last two have been) and their core role is pretty demanding in itself.  There has been vague talk about “regional ambassadors” being appointed but no concrete proposals for replacing the President.

In conclusion

In my opinion these changes have not been fully considered, members have not been properly consulted, and I believe the disenfranchisement of members is simply wrong.  I fear the changes could lead to many members leaving the Institute.  If we want to get formal about matters, proposals and indeed actions already taken also appear to be in breach of CIPS Regulations and Charter.  Finally, the lack of communication to members so far is disturbing. If the Board has a case to make for the changes, it should make it openly and in consultation with members. And members must be given a vote on any proposals that fundamentally change the way a 90-year-old, globally respected and influential professional Institute is run and governed.

Survey

So, in the absence of CIPS consultation, I believe it might help move this situation forward if members follow the link below and complete a brief survey form. It will only take 5 minutes and will be strictly confidential. The results may prove me wrong – perhaps members think all of the ideas are fine and democracy is over-rated. I will happily shut up if that is the case. I have tried to make the questions unbiased, and I know some members, including a couple of Past Presidents I have spoken to, just don’t really care, so I have included that as an option for responses.

I will publish the results (anonymised of course). Please follow the link and give your views now. In the absence of CIPS pro-actively involving members in these important decisions, this approach seems like a sensible option to test views and indeed to provide some feedback to the CIPS Board. 

Link –

https://www.surveymonkey.co.uk/r/7C7NGYD

SURVEY NOW CLOSED – THANKS TO EVERYONE WHO REPLIED!

/10 Comments/by
,

Covid Tests Failure – More Questions About Pandemic Procurement

Another UK pandemic-related supplier appointed in haste without competition (and perhaps without proper due diligence) appears to have failed in performance terms.

Immensa Health Clinic is being investigated scrutiny after the UK Health Security Agency (UKHSA) found at least 43,000 people may have been given a “false negative” Covid test result.  That has serious consequences – if those people carried on working and mixing with others, when they were actually suffering with Covid, they may have passed on the virus to others.

That has led to operations at the firm’s privately run laboratory in Wolverhampton being suspended.  The NHS test and trace operation said about 400,000 samples had been processed by that lab, most of which will have been negative results, but around 43,000 people, mainly in the south of England, may have been given incorrect negative PCR test results between 8 September and 12 October. It doesn’t appear to be the kits but rather the analysis at fault – a people problem rather than an equipment issue, by the sound of it.

Immensa was only founded in May 2020 by Andrea Riposati, a former management consultant and owner of a DNA testing company. He is also the founder of Dante Labs, which is under investigation in the UK by the Competition and Markets Authority over its PCR travel tests.  But within three months of Immensa’s birth, it won a £119m PCR testing contract awarded by the Department of Health (DHSC).  That was awarded without being put out to tender, like so many contracts we have seen though the pandemic, some genuinely urgent and others less so.

Back in January this year, the Sun on Sunday newspaper found that workers at the Wolverhampton lab appeared to be sleeping, fighting, playing football and drinking whilst “working”.  (Pretty much like life in the civil service, really). The government said then it would speak to Immensa as it took “evidence of misconduct extremely seriously”.  Despite this, Immensa won another contract for £50 million in July.

We haven’t seen any suggestion of corruption, officials or politicians on the make, or Immensa doing anything dodgy. But again, there will be reasonable questions asked about lack of competition, lack of robust contract management, and why even after the warning signs, further work was given to the firm.

Which brings me on to the recent report, Coronavirus: Lessons learned to date, from the UK parliament’s Health and Social Care Committee and the Science and Technology Committee, and elected members from all parties.  The report is rightly very positive about the vaccine procurement programme.

The procurement model deployed by the Vaccine Taskforce of making decisions at risk, outside conventional procurement procedures, proved highly effective. Lessons from this success should be applied to other areas of Government procurement.

I’m in agreement with looking at useful lessons learnt, but we can’t be naïve about this. This quote about the way vaccines were bought also comes from the report.

Dominic Cummings said: “Patrick Vallance and his team were saying that the actual expected return on this was so high that even if it does turn out to be wasted billions, it is still a good gamble in the end.”

This is absolutely true, and highlights the key issue of risk and reward.  The fact is, there are very few other purchases by government where the balance is similar to the vaccine example. Getting vaccines faster certainly saved thousands of lives and (possibly) billions of pounds in government expenditure.  But taking risks in procurement of other goods or services just does not have the same potential.  Who would seriously place orders for five different armoured vehicles, IT systems or management consultancy firms just in the hope that one or two of them worked out well?

There may well be learnings around how the vaccine team was run, but talk of getting rid of procurement process, rules and so on is unwise and will lead to waste and, unfortunately, to more fraud and corruption. More transparency would help alleviate some of those risks (see my paper for Reform here), but I suspect some of those in favour of radical procurement change are thinking more of the millions they, their chums and associates can extract from the public purse.    

/0 Comments/by
,

BBC Panorama Looks Into the Greensill Affair

Returning to the Greensill supply chain finance (SCF) scandal, the excellent BBC Panorama programme earlier this month dug further into the affair, including the role of ex-Prime Minster David Cameron.  It is well worth watching and gives a clear explanation of how the Greensill business model “worked” and eventually unwound. Panorama exposed how deeply involved Cameron was with the Greensill business, and says that he allegedly made $10 million for two and a half years of part-time work with the firm.

Cameron told Panorama he knew nothing about the dodgier aspects of Greensill, but if he didn’t know quite how flaky Greensill’s business model was, then he was naïve, as well as greedy. If he did know, and Panorama suggests he was aware of some of the key issues, then maybe he will end up in court alongside others who I’m pretty convinced will end up there. 

At the core of Greensill’s model was the ability to attract finance by claiming that his SCF loans were low risk because they were based on issued invoices that would be paid by the customer. Some of Greensill’s finance came from the bank in Germany that the firm owned – Panorama suggested that up to £2.5 billion might be lost from that source.  Greensill also raised vast amounts of cash via bonds issued through Credit Suisse – some $10 billion. Again that was presented to investors as very low risk, as loans were backed by invoices, so the cost of raising that money was low for Greensill.

It now transpires that some of the “invoices” that money was advanced against were not invoices at all in the way that any procurement or finance person (or frankly any sensible person) would recognise.  Rather, they were just vague expectations or hypothetical transactions concernign future income from customers of the firms to whom Greensill was lending money.  The Gupta steel firms in particular raised huge amounts of money from Greensill on the basis that they would at some point sell “some stuff” to “some companies”! The BBC suggests that other invoices were simply fake.

So this was totally unsecured lending to firms such as those in the Gupta group, rather than lending backed by real transactions and future income flows.  And guess what – much of the money Greensill lent is now not being repaid.

Lex Greensill told Panorama that he “did not mislead any investor, depositor or customer”. He said the predicted sales were “future receivables which are commonplace in the financial services market”. The loans were based on future trade that was likely to occur from current customers.  In fact, even this wasn’t true, as firms who were listed as “current customers” simply weren’t, according to Panorama.  Greensill then explained they didn’t even have to be current customers. He made all the right disclosures to Credit Suisse, he says ….

But back to the statement that this approach – lending money on predicted future invoices – is commonplace. It is not. Supply Chain Finance technology is covered well by Spend Matters and whilst it wasn’t my personal core area of interest, I met enough players in that market over my years editing Spend Matters to know that it was almost always based on actual invoices.

There were firms that were looking to base financing on invoices that had been received by the buyer but not yet approved, or invoices that would be issued in the future but were for agreed work (e.g. stage payments), with the buyer irrevocably committing to pay.  But even those approaches were seen as somewhat risky and daring because of the lending risk (what if the buyer didn’t approve the invoice?)

Nobody I ever spoke to was talking about payment against some totally imaginary future invoices, whether identified with current customers or not. So Greensill is talking nonsense when he suggests that lending against future receivables is some sort of common practice. But then he always talked a lot of nonsense.

On a related note, the Boardman “Review into the development and use of supply chain finance (and associated schemes) in government” came out last month.  It looks into how Greensill worked within government and the access he had to senior civil servants and ministers. I’m still getting to grips with that, so I may be back to this issue again.

/0 Comments/by

Welcome to Bad Buying

Organisations waste time, money and resources buying goods and services they don’t really need, or they buy the wrong products, or pay more than they should. Sometimes they don’t even receive anything in return for their cash, when we look at the most extreme cases of incompetence or fraud. 

In businesses or government bodies of all shapes and sizes around the world, money is being lost, wasted, spent inappropriately, defrauded or stolen. What is the cause of this epidemic? Let’s just call it Bad Buying, because at its simplest, that’s what it is.  

These issues are truly global, and no industry or country is immune from bad buying; it exists in every country in the world, and in almost every organisation. When Kentucky Fried Chicken runs out of chicken, to the horror of its customers, or a firm such as Skandia pays large sums of money to fraudsters through invoice mis-direction, we can see the result of bad buying practices or processes. 

An estimate in 2012 suggested that all the businesses in the world had a combined revenue of $64 trillion. Increase that by 20% to allow conservatively for growth and inflation since then, which gets us to $77 trillion. Lets say conservatively that 50% of that is used to buy from other organisations. That gives some $38 trillion of “buying spend”.  It would take an economist to determine exactly what the effect would be if that expenditure could be executed more effectively and efficiently.  But clearly, even a small “saving” of a couple of percent on that huge number would bring major benefits to organisations and would improve the overall efficiency of the global economy.  

A recent estimate puts the total global public sector procurement spend at $13 trillion.  A 5% improvement in the value obtained from this money would release another $650 billion every year. That is money that could be used by governments to alleviate hunger, cure diseases, or improve education in the developing world. And 5% is not unrealistic, given the scale of fraud and corruption in many countries, as well as the opportunities from improving conventional buying performance.  

Given just how much money is being spent with suppliers, it is perhaps not surprising that it goes wrong occasionally. But sometimes it goes VERY wrong. In fact, at times it can bankrupt the company, or in the case of government, can lead to political turmoil, front-page news or even revolutions and resignations.  So with this website, we aim to highlight the stories that show how and why organisations, public and private, waste billions through bad buying. We will look at cases where it is down to simple incompetence – laziness, a lack of knowledge, understanding or information – but the end result will have a cost to the organisation, sometimes a significant one. 

Occasionally, bad buying has darker, criminal motivations. Ranging from the clerk who creates a fictitious company as a “supplier” and channels a few thousand into their own bank account, to huge multinational scandals that have led to Prime Ministers, admirals or CEOs languishing in prison, we will uncover the fraud and corruption at the heart of many buying scandals.  And of course, with a more positive intent, we will look at how you can avoid bad buying, and the principles, processes, technology and skills that will reduce your own risk of buying failure. 

We hope our readers will contribute, with your own stories of bad (and good) buying, and above all, we hope you enjoy the Bad Buying website, and find it useful, informative and stimulating!  And watch out for the book, to be published in October 2020 by Penguin Business, titled “Bad Buying – How organisation waste billions through failure, fraud and f*ck-ups”.

/0 Comments/by