Tag Archive for: Suppliers

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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Scoring Supplier Bids and Proposals – Yes, Even That Can Lead to Bad Buying!

Evaluating bids and tenders is not perhaps the sexiest topic within the buying world, and perhaps because of that it does not get the attention it deserves. I remember a few years back, the UK government issued a detailed 100-page guide to running public procurement competitions, but pretty much the entire section on evaluation read, “now evaluate the bids”!

And yet, if the evaluation process is not structured and executed properly, it can lead to problems – selection of the “wrong” supplier that will not best meet your needs perhaps, or unhappy suppliers and legal challenge in the public sector.

One seemingly minor but important point relates to how bids are scored. For major purchases, it is usual to have multiple people on the buy-side reading and scoring the suppliers’ proposals. So there might be three of four people all reading and scoring the same answers to questions like “explain how your quality processes will help to ensure you meet our needs….” 

I was recently advising a firm on how they could compete better for public sector business. I looked at tender documentation from a bid they had lost, and whilst the feedback from the buyer to the firm was somewhat ambiguous, it looked like the individual scores of the bid evaluators had been averaged. That is, in my opinion, the wrong approach, and this is why.

Let’s imagine you have three people doing that work, and that the scoring system is a basic 0-5 scale where 5 is a brilliant response and 1 is pretty rubbish. Evaluator A scores 1 out of 5 against that question. Evaluator B scores 5 out of 5, and C scores 3 out of 5. The average is therefore 3.

But we know that there is a very good chance that 3 is not the appropriate score. We also know that A and B have seen the supplier response VERY differently. One of them might be right in their scoring; but we really need to know why there is such a difference. They can’t both be right!

So we need a process of moderation. Someone, and I usually advise that the moderator should not score the bids themselves (although they do have to read them), chairs a discussion to arrive at an agreed moderated score.

It may be that scorer A has identified a major flaw in the response that the other two missed. Or A has herself missed a key part of the answer (I have literally seen a marker not notice a key project plan attached to the document). Perhaps B just loves this bidder, and needs talking down from his over-enthusiastic marking.  And if you only had two scorers who marked it 1 and 5, then 3 would almost certainly be the wrong answer!

We need to arrive at a single agreed score, which could in this case feasibly be anything from 1 to 5. Maybe it will end up as 3; but not via an averaging process. I’d also strongly suggest that in the public sector, you don’t document any initial individual marking; you record the key points of the discussion, which is important if the end result is ever challenged, and the end result.

So in our case, if the score ends up being 4, you might note that scorer A initially had some concerns but was reassured when she was pointed to the project plan in the appendix (or whatever). When I chair moderation meetings, I ask the participants to come along with their initial view of their scores, but I don’t want those in advance and I don’t want them formally recorded.

That’s not being devious; it is just recognising that we are going to do the scoring on a moderated, team basis. And yes, I admit, I don’t want a disgruntled supplier saying, “how come the CIO initially gave us a mark of 5 on that response, but we only ended up with a 3”?

Anyway, this might seem like a fairly technical aspect of potential Bad Buying, and indeed it is. But there have actually been some very expensive legal challenges that hinged to some significant extent on dodgy scoring and suspect averaging or moderation processes. There is a great example in my book actually, one that cost the UK taxpayer over £100 million believe it or not.  (Pre-order the book now… out on October 8th).

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