Four Days to Bad Buying Launch – Incentivising Suppliers and Sheer Stupidity
OK, I misspoke yesterday when I said it was six days until publication of Bad Buying – it was five. So today, not surprisingly, it is 4 days to go, and we’ll look at a few more of the chapters – the full contents list is here, at the end of yesterday’s post.
One of the most enjoyable and interesting sections in the book to research relates to supplier incentivisation and why it can so often go wrong. Take a simple example, one I saw in my own work. If you outsource back-office financial management, including accounts payable, you might agree to pay the outsourced service provider per invoice that they process.
But then if one of your key suppliers comes up with a smart idea to reduce the number of invoices, and they ask the firm doing the processing to adapt to a new process, they may well say “no”, because it will reduce their income. You really should be incentivising that supplier to help reduce invoice numbers – but that’s surprisingly tricky to do contractually.
And how do you incentivise construction firms? That’s been a long running challenge for buyers. Agree a fixed price, and you risk the supplier cutting corners on quality of work or materials; agree to pay on a “time and materials” basis and the project may never finish. That’s led to all sorts of interesting contract variants, such as the “NEC3 Engineering and Construction Contract option C (target contract with activity schedule)” which was used with considerable success on the London 2012 Olympic constucion programme.
Away from traditional procurement, there are fascinating cases such as the Colombian government, who in trying to get farmers to switch away from growing coca, actually introduced an “incentive” that made them grow more of that crop!
There is more on that in the book, and another chapter picks up those cases that I couldn’t neatly categorise as having an underlying cause based on lack of capability or knowledge. So I called it “stupidity” although sometimes “arrogance” might be a better term actually. Yes, political stories do feature here, as too many politicians think they know best (even if the professionals are telling them something isn’t going to work) or want to build a monument to their own vanity.
The EU does get a mention here, with their programme to build airports in places that quite frankly nobody wanted to fly into. Kastoria in Greece cost €7.7 million to build and generated revenues of €176,000 in seven years… then of course we have the somewhat crazy UK Brexit-related ferry contract with the company that didn’t own any boats. Another big success for ex-Minister Chris Grayling there.
But it is not just the public sector that suffers from this madness at times. Carlos Ghosn, the ex-Nissan and Renault chairman, is on the run from Japanese prosecutors in the Lebanon now. But whatever happens next, hiring Versailles for a party costing €635,000, supposedly to celebrate a business alliance but holding it on his own 50th birthday, and (allegedly, I should quickly add) inviting mainly family and friends, hardly smacked of humility and a deep concern for shareholder funds.
There are also cases in this section that might tip over into the fraud and corruption section. I get into the murky world of defence contract “offsets”, and if you don’t know about this mechanism, it is another fascinating aspect of our procurement and buying world. With offsets, the supplier agrees to spend a portion of the contract value in the country of the buying organisation. So, for example, if India buys fighter jets from France, they might insist that the supplier spends 20% of the contract value with Indian firms. Unfortunately, that leads too often to decisions that are just wasteful and inefficient, or outright fraudulent – offsets are a very handy way of concealing bribes to the politicians or defence officials who placed the contract.
So I hope this has given you a further flavour of the book. There is still time to order and get delivery on publication day – check out the links here. There is also a Bad Buying podcast now (“Peter Smith’s Bad Buying podcast”) and the first two episodes are available on most podcast platforms. There is also a Bad Buying playlist on Spotify (all my section titles are also song titles …) It is a “diverse” playlist, as my daughter described it, but I’ll take that as a compliment! You can make your own judgment on that.
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