Category Archives: Public Sector

The Public Sector is Giving Procurement Integrity A Bad Name … Can the Private Sector Fix It?

A recent article over on Global Government Forum on Procurement Integrity: A Big Problem That’s Worse Than Most Organizations Think, pointed out that errors, fraud and abuse in procurement cost governments and organizations millions of dollars every year, and even though recent headlines in the US (TriMark, Booz Allen Hamilton), UK (NHS, Royal Mail), and Canada (ArriveCan) are starting to shine the light on the extent of (public sector) procurement fraud, the problem is still bigger than you think. Much bigger.

Current estimates are that organizations, across the public and private sectors, lose 5% per year due to procurement errors, abuse, and fraud. Given that Global GDP is about 85 Trillion dollars, at 5%, that’s 4 TRILLION dollars estimated to be lost annually to errors, abuse, and fraud. And that’s probably a low-ball estimate due to the fact that we just calculated that Over One TRILLION dollars will be wasted on IT software and services due, primarily, to lack of knowledge and/or outright stupidity (and not malicious intent, but if it’s easy for consultancies and third parties to considerably over bill for legitimate goods and services that you need, imagine how much they are fleecing you for goods and services that you don’t need and may not even receive).

It’s highly likely that the true cost of errors, abuse, and fraud (internal, collusion, and external) is closer to 10% of total GDP, or close to EIGHT TRILLION. That’s at least twice the GDP of every country on the planet except China and the United States. That’s a BIG PROBLEM, which is definitely not being helped by the 100M to Multi Billion Procurement Frauds being reported almost monthly across major western economies — and multi-million dollar fines don’t repair the damage. (They don’t even come close.)

This is damage which Procurement needs to repair — because Procurement is the only department that has any hope of putting proper procedures, processes, and platforms in place to minimize the errors; training the organizational employees on proper procedures and monitoring the implementations to prevent abuse; and putting in place proper detection systems to detect, and prevent, potential fraud and quickly identify and track it when it happens.

Unless all the bucks go through, and stop at, a modern Procurement department run by a CPO who puts in place proper people, processes, and platforms, loss is going to continue to run rampant. Which means that while the public sector is failing us daily, the Private sector has to step up and restore the integrity of Procurement. It can start by utilizing some of the the techniques in the linked article, and continue by continually learning and implementing the best technology and processes it finds to not only uncover significant savings in inflationary times, but return integrity and trust into big business, and give governments who have lost their way a model to follow.

And for more details on Bad Buying to avoid, and how to achieve Procurement with Purpose, the doctor suggests you start by following the great public procurement defender, Peter Smith.

Agile Procurement Can Work in the Private Sector … but the Public Sector?

A recent article over on the Public Spend Forum on Agile Procurement for the Public Sector – A Primer noted that Agile Procurement might just be what is needed to solve the complex challenge of public Procurement and solve the problem of the myriad of rules, processes, policies, and templates that became more and more complicated over time in the public sector.

According to the article, the answer is to adopt the best practice of agile development and move away from contract-oriented competitive Procurements to approaches that provide more flexibility for competitive dialog and negotiation (allowing requirements to be discussed, clarified, further defined, developed, and improved) using the iterative, collaboration, and change-oriented aspects of agile development.

This sounds great in theory, but we have to remember why we have a i>myriad of rules, processes, policies, and templates that became more and more complicated over time. As the author notes, Procurement mistakes would lead to trade complaints and lawsuits, and so more rules would be added, more contingencies, more processes layering on top of one another to reach where we are today.

Just imagine what would happen if all the rules were dropped in a flexible environment where the requirements of the contract could change each round. Since the changes would likely always favour one bidder over another, or at least be more aligned with the suggestion of one bidder over another, imagine the trade complaints and lawsuits that would arise. It would be chaotic! In order for an agile Procurement process to work, we’d need to revise not only our procurement principles across all levels of government, but also our legal system that made the requirements for filing trade complaints very restrictive.

In other words, agile Procurement for the public sector is a great theory, but the doctor doesn’t think it will be a reality for quite some time. However, there’s absolutely no reason to avoid it in the private sector. It’s a great way to get the best proposal(s) for the organization, and as long as your organization is open and transparent about the process it intends to use, quite resistant to legal challenges, as private organizations, unlike public organizations, can pretty much do what they want, especially if they are transparent about it and don’t break any laws. (And being collaborative vs. combative, in most jurisdictions, does not break any laws.)

So, if you’re private, be agile. If you’re public, be careful. You can be agile in your market research, but once you start the formal Procurement process, you better be traditional … at least for the time being.

First Clue that the New Public Procurement Policy is Going to Cost Everyone Money

Effective immediately, our policy is to only buy “Made in X”, where “X” is the local country or state.

Why is this going to cost you money?

First of all, it’s going to eliminate competition. And we all know what happens when competition goes away. Suppliers, who know they don’t have to worry about being replaced, as there’s only a few alternatives, and they’re already in your door, stop working as hard to be as cost competitive, innovative, or valuable to your organization.

But if that was the worst that could happen, it wouldn’t be so bad.

The reality is that as soon as a “buy local” policy comes into effect, suppliers are going to also (pretend to) “buy local”, which of course is going to raise their costs, because their suppliers are going to also stop working as hard to be as cost competitive, valuable, or innovative because the market is small, they’re in the door, and they know their competitors will also be content to maintain the status quo so they won’t have much competition. And this will continue down to the raw material supplier.

But if this was the worst that could happen, it still wouldn’t be so bad.

The reality is that once a supplier knows that it’s effectively the only game in town, it’s not going to worry about cost increases. In fact, it’s not only going to stop asking how much it has to raise costs to cover its increased costs and ensure it maintains nice, fat margins, it’s going to ask how much it can raise prices and just how fat its margins can get. It’s borderline corruption.

But if this was the worst that could happen, it might still be something that could be grudgingly accepted and dealt with.

The reality is that not all suppliers will be content to inflate their margins. In locales where corruption is common, this is only going to encourage more corruption. As per the public defender‘s post on how “Made in Nigeria” Public Procurement Policy Will Simply Lead To More Corruption, this sort of policy provides the perfect cover for both parties in a typical corrupt procurement transaction. How so? Read the public defender‘s post. Simply put, the buyer can now get away with saying “I had to buy local, and this looked like the best choice” and use it as a defence when caught.

RIP, PER

Fifty-Five (55) years ago today, the Pacific Electric Railway, once the largest electric railway in the world in the 1920s, ended operations.

It was a sad day in history because despite the perceived infrastructure cost, electric transportation can be a lot a cheaper than gas-transportation with the regular, repeated, rises in oil that have been happening over the past 40 years, especially when you consider improvements in electricity generation from sustainable sources including sun, wind, and water power that is almost free once the infrastructure has been paid for.

As this isn’t an engineering or energy blog, we won’t dive into pages of discussion as to why clean, smog-free electric streetcars are much preferable to the gas-guzzling busses of today, but simply mourn the passing of the streetcar and the great networks that used to power the great cities of North America.

Consumer Sustentation #71: Government

As per our damnation post, everyone, or at least everyone in sales, wants the government as a customer because once you’re in, you’re in, and it’s almost impossible to get thrown out unless you do something really, really egregious because the process to replace you is so long, arduous, and painstaking that no one wants to do it, especially since management will likely┬áchange half-way through the process and put all projects on hold until a new assessment is done. They sign the contract, sit back, and rake in the commission year-after-year as the evergreen renewals keep coming in.

But Procurement doesn’t have it so rosy. Not only can government customers be very demanding, and require you to work extensively with Engineering, Manufacturing, IT, and the Supply Chain to design custom solutions to meet their needs, but they can be quick to pass on the blame to your company even if it’s not your fault. Plus, now many government agencies mandate that you provide bill of material data, shipping manifests, country of origin determinations, quality inspections, and other information with every product that you provide the government so they can meet their accountability mandates. And if that’s not enough, if the government runs out of budget and can’t get agreement to run a deficit, there can be an indefinite spending freeze while the situation is resolved.

Governments can be your organization’s best and worst customer and Supply Management’s biggest point of leverage and largest risk. So what can you, as a Procurement organization, do?

1) Regulatory Compliance

It is critical that you can show you were in full compliance with all of the requirements when you bid, when you signed the contract, and when you delivered the goods and services — at any time. The day after signing. The year after signing. Two years after delivering the last product. You never know when someone is going to rain down fire upon you to deflect the blame from themselves.

2) CRM and Communication Management

Make sure all interactions and communications with the government customer are logged, project and changed plans signed off on by the appropriate authority, and full audit trails always accessible. This is the key to good relations and problem avoidance.

3) Complete Supply Chain Visibility

The key is to always know:

a) what comes from where, all the way down through the components and sub-components down to the raw material (for labelling and country of origin)
b) CSR and Sustainability monitoring for all suppliers in the government product supply chains so that you can insure you are always in compliance to the best of your ability

4) SCF: Supply Chain Finance

Your suppliers need cashflow, so be sure to do your best to arrange Supply Chain Finance / invoice factoring that they can take advantage of any time that they need it.

5) Contract Completeness

Be sure to have any services you deliver deemed as “essential” in the contract as many spending freezes will exempt “essential” services.

And, above all, maintain good relations with the stakeholders at all times.