SpendMatters / Achilles White Paper: Is Your Supplier Qualification Process a Competitive Disadvantage?


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Slides from the Achilles and SpendMatters Executive Breakfast Event 11th July 2012.

For further information contact Dan via: dan.quinn@achilles.com

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SpendMatters / Achilles White Paper: Is Your Supplier Qualification Process a Competitive Disadvantage?

  1. 1. Is your supplier selection process a source of competitive disadvantage? Peter Smith Managing Editor Spend Matters UK/Europe June 2012services for professional procurementwww.achilles.com
  2. 2. Best practice in pre-qualification processesA Spend Matters White Paper sponsored by AchillesExecutive summaryPre-qualification. Not the most exciting topic in We describe here how pre-qualification can helpthe world is it? And yet consider those firms who – or hinder – your efforts to improve procurementend up as our suppliers who generate reputational process and performance as an important part ofor operational risk; firms who get into financial the overall procurement or sourcing process.trouble; who aren’t actually capable of doing what It does not always get the attention it deserves, yetthey claimed they could. Firms who maybe aren’t carrying out pre-qualification processes effectivelyeven allowed (in a legal or regulatory sense) to do and efficiently is vital:the work we’ve employed them to do. Those firms ■■ To ensuring that the organisation ends up withwe should have weeded out from the selection appropriate suppliers to deliver the goods andprocess long before we even got close to awarding services required.them the contract. ■■ As a key element of supplier and supply chainThen, there are those potential suppliers who risk management; identifying those potentialnever made it. Those suppliers we rejected on suppliers who may generate inappropriate riskthe grounds their turnover wasn’t large enough for the buying organisation, and eliminatingto get over our pre-qualification hurdle, or who them from the procurement process, is clearlystruggled answering our trick questions about of value to buyers and buying organisations.quality certifications for instance. Perhaps in theprocess overlooking a supplier who actually could ■■ As an important element of the selectionhave come up with a stunning, innovative idea that process; determining a sensible number ofwould have provided real competitive advantage? the best suppliers to take through to the finalWe’ll never know. tendering stage of the procurement process.As well as the sheer cost of the In this paper, we will explain the differentpre‑qualification process, and the time purposes of the pre-qualification process, whyrequired, it can be either a positive part of it is important and how it can add value. We willthe procurement process or a source of look at how to construct and manage an effectivecompetitive disadvantage. pre‑qualification programme, and the different stages involved in the process. We will also comment on the cost of the process, and the options, benefits and issues around using third parties to assist in the process, which can save significant time and money.Spend Matters is a leading procurement advisory, analyst and publishing firm, commenting on issuesof importance to procurement and supply chain practitioners and solutions providers. Although we aresponsored by a number of organisations who operate in our field, we write independently based on our manyyears of experience as senior procurement executives, analysts and writers. 2
  3. 3. This Spend Matters research paper considers the pre‑qualification process as a key element within the procurement cycle. The paper is sponsored by Achilles, one of the world’s leading managers of supplier information, and draws on research work previously carried out by Achilles, but it is written from a wholly independent perspective. Background and context to the pre-qualification process What is pre-qualification? The pre-qualification process is an important key tool for pre-qualification, and PQQ is often element in what is, in many cases, the standard discussed, although a pre-qualification process procurement / tendering process, shown in does not always necessarily make use of a Figure 1. PQQ. So we will use the term pre-qualification Most similar process maps will show the process through this paper unless we are pre‑qualification process as the first significant talking about the specific PQQ document. We part of our engagement with suppliers who should also note that there are differences are interested in winning our business. The between the usual processes in the public and “pre-qualification questionnaire” or PQQ is a private sector; but the principles are consistent. Identify Receive & Plan the potential Issue evaluate PQQ process suppliers PQQ’s responses Choose shortlist & issue tender Final Choose Receive & AWARD negotiations/ prefered evaluate tender CONTRACT contracting supplier(s) responses Fig.1 – A typical procurement process3
  4. 4. Best practice in pre-qualification processesA Spend Matters White Paper sponsored by AchillesWhat exactly do we mean by the pre- It is clear that many of those failings could bequalification process? driven by a poor pre-qualification process. By the “wrong” supplier, we mean one who doesFirstly, why is this process “pre”? not offer the best value for money, or has a shortfall in their capability to actually carry out the requiredThat suggests it must come before something, work, or (potentially even more seriously) one whowhich indeed it does. It is “pre” the final stage creates supplier risk such as reputational damage.of selecting the supplier, whether that selection Such suppliers should, we would argue, beis made via a formal tendering process, a less identified and eliminated at pre-qualification stage.formal request for proposal, an electronic auction,or whatever route chosen to ultimately select the Recent independent research conducted by IFFsuccessful supplier(s). Research on behalf of Achilles found that CPOs at 71% of businesses, rising to 80% in largerWhat about the “qualification”? businesses, considered pre-qualification veryThat means ensuring that whichever supplier important. But there were large variations in theis ultimately selected at the end of the sourcing time taken to pre-qualify suppliers and the numberprocess is actually an appropriate organisation, of sourcing events each procurement was requiredcapable of delivering the goods, services or works to undertake. And in our experience, the cost ofthat we require. In other words, they are qualified to pre-qualification is not always well understood orwin our business. analysed – that’s a subject we’ll return to later.So the pre-qualification process is the means by The tender stage is often perceived as the mostwhich we establish that it is reasonable to allow a important within the overall sourcing process, butsupplier to tender, safe in the knowledge that, it if the wrong suppliers are included on the shortlist;they do happen to win the tender, they should be or if the risk profile of the shortlisted suppliers iscapable of carrying out the work, In addition, we not appropriate; or if they don’t have the requiredcheck that they are firms with whom we’d be happy experience, accreditation or capability, then theto work – some may be capable, but inappropriate final tender might look competitive and successful,in other ways. but the chances are that contract delivery willWhy bother with pre-qualification? bring problems because the wrong suppliers wereWithin the whole sourcing process, pre-qualification included in that final stage.is often seen as the ugly sister to the exciting, Why should pre-qualification be “pre”?glamorous tendering phase. That final element of Even if we accept the value of these activities, whychoosing the supplier, negotiating the contract, or would we carry out process before the final stagerunning a dramatic auction or sourcing event – that (which we’ll call the tender stage for simplicity)?all seems a lot more exciting than the process of Can’t we just qualify those suppliers we invite togathering information and assessing your initial tender at the same time we execute that stage?range of potential suppliers in order to select a Well, we could. But the likelihood is that, for manyshort-list list for the final stages. contracts, we will end up with large numbers ofBut of course a tender, and the final contract, is suppliers bidding if we don’t use pre-qualificationonly as good as the suppliers who are competing to reduce the numbers. Then many of thesefor it. And if the pre- qualification process is not tendering suppliers may turn out to be unsuitableeffective, the major risk is that you end up with a to deliver the work – they may not be qualified inshortlist – or even a final supplier – that does not some way to do our work. If we only discover thatmeet your needs. The wrong supplier wins the at tender stage, we run the risk of wasting theircontract, because their failings were not identified time and ours, when a pre-qualification would havethrough the process, or because a better supplier quickly ruled them out of the running.was eliminated or did not win the final competition. 4
  5. 5. Interestingly, the UK government has been Directors turned out to be serial bankrupts; or they encouraging a one-stage process for lower value don’t have the right quality accreditations that you contracts. They talk about eliminating the PQQ – would have expected. but in practice, that new process combines what If the answer to that type of question is “that we might see as the regular pre-qualification wouldn’t worry me too much”, then there may element – registration and qualification questions be a case for ignoring pre-qualification as an – alongside the tender element of the process. So issue. Move straight to a simple tender and we would argue that the pre- qualification process accept the risk. has not disappeared – only the PQQ document. But that simple approach is usually restricted to And often, the supplier’s tender or proposal is very low value, relatively simple or commodity only considered if they “pass” the pre-qualification based procurement exercises. In the case of element contained within the single document. So most procurement activities, for most major arguably, this is increasing the workload for many organisations, the risk element means that we do suppliers whose full tender will not even be read. want to know, in advance of them tendering for We could even wait until we’ve chosen our work, that our potential suppliers are appropriate preferred supplier before carrying out the pre- and can meet our needs. qualification activities. But the obvious risk then is that they then fail the qualification process – and we potentially have to start the entire process again to find an alternative supplier who is qualified! When is pre-qualification NOT appropriate? However, there are certainly times when it is not appropriate to use pre-qualification processes. If you can define very clearly what it is you want, and there is limited risk in terms of supplier failure or reputational risk issues, then a simple one-stage process can be enough. So let’s say you were buying 100 cases of Campbell’s Tomato Soup. You might, through an auction or similar, allow any supplier to simply submit their best prices. The specification and requirements are very clear, so price might be the only factor to consider. There may still be some risk involved – what if they don’t actually deliver once you’ve ordered the soup? But the consequences of that might be limited. After all, there are plenty of other suppliers around who can quickly step in if your first choice lets you down. So you may take the risk of omitting a pre-qualification in return for the benefit of a simple tendering process. The key factor to consider here is risk. Think about the consequences if the supplier turned out not to have the capability they claim; or if they went out of business half way through the contract; or their5 2. Horses for Sources. The undisputed facts about outsourcing. May 2011
  6. 6. Best practice in pre-qualification processesA Spend Matters White Paper sponsored by AchillesThe purpose of the pre-qualification processWe outlined in the last section the context to the pre-qualification process and why it is important ingeneral terms. In this section we will look in more detail at the objectives that we seek to achieve throughpre-qualification, so we can design the process better for our specific requirement. The four purposes ofpre-qualification are as follows.1 2Identifying potential suppliers Gathering supplier information(search) (registration)The first element of the pre‑qualification process is Buyers need to have administrative, factualwhat we might call supplier search or discovery; it information in place about their suppliers. Thisis not always seen as part of the process but there is to cover the basic need to engage with them,are reasons for considering it under this heading. pay them, and satisfy any regulatory demands.Its importance and complexity depends heavily Increasingly though, buyers want to know more thanon the nature of the purchase: identifying potential the basic data; they’re interested in certificationssuppliers for some rare or novel component or raw or accreditations that the supplier holds; what sortmaterial might take a lot of time and effort, and may of business they are (an SME, minority / woman /well be considered as a totally separate element of veteran owned) and so on. As we said above, it isthe overall procurement process. In other cases, it possible to delay collecting this information until theis much more part of the pre‑qualification process. tender stage, but that can make the tender stageFor instance, if an existing database of already unwieldy and time-consuming. Or you can waitpre‑qualified suppliers is used as the population until a contract has been awarded before collectingfrom which to select the tender list, then the the full set of necessary information. While thatpre‑qualification process has in effect also defined has some advantages, it does require a furtherthe process for supplier search. set of questions and responses to and from the supplier, so there is much to be said for collecting the key information once at the same time and at a stage when the supplier is keen to conform and co‑operate (i.e. during the selection process). Of course, circumstances change, and collecting information at this stage is not the end of things. It is also important to have processes in place to update information, and reflect new initiatives or requirements. But that takes us onto a different set of processes and issues. Clearly, collection of information is also linked to the next purpose – qualification. It is pretty much impossible to qualify a supplier without gathering information about them! And as we explained earlier, the risk of not carrying out these activities early in the overall procurement process is that suppliers who are not capable end up tendering or even winning the contract before we realise they are not equipped to carry out the work. 6
  7. 7. 3 4 Supplier capability and risk assessment Choosing suppliers to tender (qualification) (selection) This is the core of the pre-qualification process – The final purpose of the pre-qualification process is determining whether the suppliers are appropriate, one that often causes confusion or anger amongst capable and qualified to carry out the work for which the supplier community. They often assume that they are competing. Do they pass the ‘threshold’ every supplier who is “qualified” (as in point 3 of competence to carry out the work? As a above) should, and will, go through to compete at fundamental principle, suppliers who are not able to the tender stage. And often that is true. If only a carry out the work to your desired standard, or have small number of suppliers are qualified; or if there is other attributes which mean they are not firms with going to be a tender that is relatively simple and low- whom you wish to work, should be eliminated before effort, then it may well be possible to take through all tender stage (as we explained above). the qualified suppliers. This should be a key element of any organisation’s But if you are a major organisation looking for a wider procurement and supply chain risk supplier of printed brochures, or office furniture, management approach. Ensuring that firms with or scaffolding services, there may be dozens or whom you do business are capable, qualified, are even hundreds of potential suppliers who could not breaking laws or regulation - these are basic and meet your needs and are “qualified” in that sense vital considerations for an effective risk strategy. to compete and win your business. It is simply not feasible or cost effective for buyers or suppliers to It is sometimes tempting to take a supplier through run anything other than very basic tender processes to the tender stage, even though they may not involving large numbers of bidders. So numbers meet your qualification threshold, because you need to be reduced at the pre‑qualification stage think they may be able to put in an “interesting” or through a selection process. perhaps low price bid. But if they are basically not qualified to meet your required standards, then this Even if the number of qualified bidders is not that is rarely advisable. Whilst the public sector under large, it may still need to be reduced further. If you EU Regulations perhaps over-complicates these are running a complex outsourcing project, there issues, the basic principle that they apply is sound may only be ten potential qualified suppliers; but – the pre-qualification stage establishes whether the complexity of the final selection process could a supplier is capable of doing the work; then the suggest that even that number is unmanageably tender stage establishes which supplier has the best large to handle through the tender stage. So that ten solution or proposal to meet your particular needs. may need to be cut to four or five. So generally the principle should be that only truly In these cases, the pre-qualification process also capable suppliers make it through to tender stage, needs to contain an effective element of selection and suppliers who represent a risk – whether that is – whittling down the number of suppliers and financial, operational, reputational, or policy related identifying, as far possible, those who are likely to – should be eliminated from the process. be the serious competitors at tender stage, and ultimately, the best suppliers.7
  8. 8. Best practice in pre-qualification processesA Spend Matters White Paper sponsored by AchillesRunning a pre-qualification processPlanning the processOnce we have a good understanding of what we At this point, another key decision presents itself.are trying to achieve – for instance, do we need to Should the buyer start the process with a blankinclude an element of “selection” in the process sheet of paper; or make use of an existing internal– we can move on to the actual execution of the pre-qualified list or database; or use an externalpre-qualification process. provider who can offer a similar service? We willAside from the technical aspects of pre-qualification, look at the external option in the next section,the project management requirements must not although we will touch on some of the issues asbe under-estimated. We’ve seen a pre-qualification we describe the core process here. But our basicprocess fail because suppliers who expressed assumption in this section will be that the buyer isinterest in a tender didn’t receive a PQQ as they running a pre-qualification process from scratch.should have because of simple administrative How then can we design the pre-qualificationerror. The process then had to be aborted and process to meet our objectives in an efficient andre-started later. So like all parts of the procurement effective manner? Here is the process flow that weprocess, this needs to be run in an organised and would typically recommend.professional manner, using project managementdisciplines. Identify Issue PQQ potential Gather to interested suppliers information supliers Verify information Communicate Selection of Qualification to suppliers tender list and Risk Analysis Fig. 2 Running the pre-qualification process 8
  9. 9. Identifying potential providers As we explained earlier, this stage may or may A small contract for a repetitive low risk service not be considered as part of the pre-qualification may not require any new search at all – the process. If a third party is used, then they may well buyer may feel that a tender between “the usual have a large number of suppliers and the buyer suspects” is good enough to get a reasonable may feel this is enough of a population to work competition and a decent result. But a high value, with. Some private sector firms may hold lists of high risk contract deserves some effort to be put suitable potential suppliers, or carry out research to into identifying a range of potential suppliers who identify them. In the public sector, there will often can then go through the pre-qualification process. be a need for some sort of open advertising or Once the potential suppliers have been identified – publication of opportunities. often through those firms submitting an expression There are numerous other ways in which potential of interest – then a pre-qualification questionnaire suppliers can be sought. Advertising through is generally issued to them for completion. Their old or new media routes; using organisations responses will form the basis of our supplier own websites; trade bodies or other business information gathering, qualification and selection associations; all of these and more can be used. for tendering. The scale of the search should be proportionate to the size, risk and criticality of the contract opportunity.9
  10. 10. Best practice in pre-qualification processesA Spend Matters White Paper sponsored by AchillesGathering information taken on trust; for a multi-million value contractMost pre-qualification processes will require more checking and verification is likely and ispotential suppliers to provide information about recommended. Self-verification is almost alwaysthemselves, usually by responding – electronically part of the package; it is rare for the buyer toor in hard copy – to a pre-qualification check every detailed provided as part of thequestionnaire. That information may cover pre-qualification. But there are obvious risks, soadministrative, technical, regulatory, capacity or for higher value contracts and critical areas ofcapability details. questioning, some independence in the process isThe information should be relevant and in most advisable.cases will support the qualification and selection That verification may be carried out throughprocesses, so the requests made of the supplier paper based means – for instance, checking ashould relate clearly to how you intend to qualify firm’s financial position through use of Dun &and select suppliers. Bradstreet or similar services. But it may involve actual inspections, visits, or testing of samples. Key pointers: For instance, a major food company may inspect, ■■ Avoid double-entry of data where possible – assess and accredit the facilities of key raw if the supplier can submit information directly material suppliers (dairies or processing plants) and electronically into your systems, or in a before that supplier is even allowed to tender for manner that it can be imported easily, then actual business. Or specialist firms (including that improves efficiency Achilles) can carry out tasks such as professional ■■ That is especially useful if the information on-site validation, auditing of management can be easily updated, and even more so if it systems, and legislative compliance. can be re-used across a wider user base Key pointers: ■■ Make sure the information you ask for is ■■ Verification should be proportionate to relevant to your needs, particularly your the overall risk in the contract and the qualification and selection process significance of the area being verified ■■ Be clear and unambiguous in your requests, ■■ Think about the balance between self- particularly where you ask for capability or verification and buyer or third party checks capacity related information ■■ Verification can take place at a later stageVerification (post PQQ) – or can be outsourced eitherVerification of PQQ information (checking that directly to external service providers orwhat the supplier declares and describes on their through the use of third party platforms andPQQ is accurate) can be considered as a separate databases.process to the basic collection of the required Verification may also be carried out by a thirdinformation. It is critical to the achievement of party accreditor (TPA) or similar organisation.the pre-qualification objectives; if we cannot be Registration and usually qualification type datasure that the information provided by a supplier is in such cases collected by the TPA and mayis accurate or truthful, then how can we make be verified in some manner. Where a portal oran appropriate supplier qualification or selection platform is used, verification may take place whendecision? a supplier first registers, when they specificallyVerification is in most cases carried out by express interest in a contract, or not at all.the buying organisation, although it can be It can also be delayed until later in the process –outsourced, and a risk and cost based approach you may choose to carry out a supplier visit onlyis advisable. PQQ information provided by a once they have reached the final tender shortlistbidder for a low value, low risk contract may be for instance. That can reduce the workload at PQQ 10
  11. 11. stage but of course runs the risk that they then that potentially very strong suppliers have been prove to be unsuitable, which may cause other eliminated before they get a chance to bid for the issues to your process if it is only discovered at work. that late stage. Key pointers: Qualification and risk analysis ■■ When using a “yes / no” process, don’t Qualification is essentially a “yes / no” decision, exclude suppliers too readily or (for most pre-qualifications), a series of yes / no ■■ Make sure you are using appropriate criteria decisions. For example: based on the specific contract - excluding a ■■ Does the bidder have enough capacity to do bidder on your legal services tender because our work? they don’t have the best health and safety ■■ Do they know how to do our work – can they certification is probably not sensible or provide their capability? appropriate. But excluding them for lack of professional insurance would be justified ■■ Are they honest people to deal with – what is the track record of their management / owners? ■■ Take a risk-based approach to the qualification process and focus on those ■■ Do they have the correct regulatory or areas that are critical to delivery of the professional approvals and qualifications? contract ■■ Are their finances sound, both historically and looking into the future? Selection While responses can be marked (as in the In many cases, the buyer will find that more “selection” section below), it is often more relevant potential suppliers pass the threshold and qualify to take a simple binary decision in terms of the than they wish to tender for the contract. (Our supplier’s answer to that type of question. We advice in most cases is that, for a single contract, qualify them or disqualify them directly based on no more than 6-8 bidders should be asked to their answers. If the answer to any of the above tender.) This leads to a manageable tender example questions is “no” for instance, we may process for the buyer and avoids excessive and decide that is enough to disqualify the supplier unreasonable effort from the supply market. from any further consideration. Indeed, if you ask a large number of firms to tender, some will refuse based on their assessment A common criticism of buyers is that they exclude of their likely chance of winning set against the bidders too readily on factors such as the turnover workload. The buyer may well therefore need to of the bidding firm. There is a point of course apply selection processes at this stage. at which an organisation is just “too small” to carry out a particular contract, but often the Selection can be made based on the suppliers’ limits used are arbitrary and unnecessary and responses to two types of question. There reduce the potential pool of capable suppliers. are those where the answer can lead to the For instance, a capacity issue based on the size disqualification of the supplier, along the lines of a manufacturing facility, which is costly and previously described. That is obviously a simple time-consuming to overcome, is very different to form of assessment and selection (or de-selection capacity in the professional services field, where to be accurate). Then there are questions which more consultants or software developers can be can be marked with some degree of differentiation added easily to a firm’s capacity if they win a large rather than simply on a yes / no basis. These contract. Again, considering risk is the key factor are often key to effective selection. Often, many here. suppliers will “pass” based on the basic yes / no questions, which leave these scored questions There are parallels in most of the other yes / no as the key to choosing your shortlist for tender qualification areas. Caution, common sense, and purposes. It is therefore important to select proportionality must be applied or you will find11
  12. 12. Best practice in pre-qualification processesA Spend Matters White Paper sponsored by Achillesthese questions carefully. The focus should be Finally, it is good practice to communicate theon elements of the contract that are the most results of the pre-qualification process, not onlyimportant or differentiate clearly between suppliers. (obviously) to those suppliers who have beenThere are many different marking schemes. A successful, but also to those who have not. Thatsimple one uses a 0-5 scale. A response that “fully will help them understand better why they weren’tmeets all our requirements in this area” scores successful, which will either make them betterfive, a “no response” scores zero. Marks can then bidders next time, or indeed help them understandbe summed across the questions to arrive at the why perhaps they should not have bid at all, whichranked list of potential suppliers. The top 3, 6, 8, or saves all parties time and money in the long term.whatever number required, are then taken throughto tender stage. Costs of pre-qualification and usingOne common mistake here is to simply use size third partiesand experience as the selection factors. If the The cost of pre-qualificationselection consists solely of questions such as It is unusual for buyers to identify clearly the cost“how many consultants do you have”? Or “what of different elements of the procurement process,is your total annual manufacturing capacity”, you including any pre-qualification stage. That cost willwill simply end up selecting the largest players largely involve internal time and resources; and ofamongst the bidding population. So look for course there is a cost for the market or supply sidequestions that get at the real capability you are as well.seeking. Asking for examples, or case studies isoften a good way of achieving this. But in our experience, procurement professionals and others involved with the process often under-In the public sector in many countries, there are estimate the complexity, the importance and theparticular regulations around how pre-qualification cost of the pre-qualification process. The recentand indeed procurement processes in general research undertaken by Achilles highlightedshould be handled. That also includes issues such that 71% of businesses rated the pre‑qualifyingas how much information you should provide to of suppliers as “very important”, and for largerbidders in terms of your evaluation process. We businesses, with turnovers above £1 billion, thatdon’t have space here to feature that level of detail, figure grows to 88%. Yet in our experience,but do ensure that your pre-qualification process very few would be able to tell you the cost ofis in line with any regulations or guidance under running pre-qualification, how much resourcewhich you are operating, and of course your own goes into it, and what the implications are ofinternal procurement policies and process. the time required to run such processes. Key pointers: So the costs, resource and time implications can ■■ Use a small number of well-thought out be significant. Designing the pre-qualification questions for selection purposes process; then getting approval or buy-in from the ■■ Ensure the questions really address the key internal stakeholders; the process of inviting most important issues and capabilities that or selecting the potential bidders; communication will determine the ultimate success of the with the market; all these take time and effort. supplier and contract Then once pre-qualification responses are ■■ Don’t ask questions that simply reward size received back from potential bidders, the process or current market share of assessing, verifying and marking can be ■■ Be fair and transparent in how you assess extremely time-consuming. It is not unusual for and mark the responses, and retain an audit a major procurement to receive several hundred trail of that process responses, and each might be dozens of pages in length. A recent UK public sector tender has 12
  13. 13. seen its process slip by several months from the multiple users. A buyer may then directly access, published timetable – over 800 PQQ responses for instance, a pre-qualified list of potential were received, and the procurement team was not suppliers for a particular industry who have a geared up to handle such a number in the time defined capability, with appropriate certification originally allowed. if required, a healthy financial situation, no nasty Given this, it is important to ensure your pre- surprises in terms of legal or regulatory issues, and qualification process is appropriate to the listed by country or region. And that can be done size and risk for the contract in question. We very quickly. mentioned earlier that there may be some Please find three firms (to whom I can then occasions where it is not necessary at all, but issue a tender), fully qualified and certified even if you decide it will add value, that doesn’t to carry out underwater oil-rig maintenance mean the pre-qualification process should be work off the coast of the Philippines, with at the same no matter what you are buying and for least three years’ experience, a stable financial every procurement exercise. If the contract is low position and strong environmental awareness risk, a few basic questions for qualification may and policies in place be enough, with a handful of selection questions requiring a short response from the supplier to It’s easy to see how much time and effort a enable a tender list to be selected. buyer might have to exert in order to answer that question. But if it came from an internal senior At the other extreme, selecting a contractor to stakeholder, who is in a situation of some urgency, carry out critical and high risk work – perhaps a the buyer may not have the luxury of time. sensitive construction or maintenance project of an intrinsically high risk nature - requires a detailed However, an existing database, with verified and approach to pre-qualification, with carefully thought accurate information, provided by a third party out questions, potentially some independent who specialises in this sort of work, could provide verification and a strong selection element, in order an answer instantly. And that can be achieved to ensure you choose a supplier who really can without any compromise on the risk element of the carry out the work properly and offer goods value process. Indeed, a reputable third party is likely to for money. put more effort into the verification element of the process than individual buyers generally have the There is often a balance with time here. Urgent time or resource to do. procurement requirements, almost by definition, are often high risk. In an emergency situation, it Some organisations operate what we might call a is quite likely that a supplier will be carrying out “hybrid” model for pre-qualification. That means sensitive or high risk work for you. So there may be they use third parties for some categories of a temptation to cut corners – but that of course can spend, but not for others, where they may run their lead to even bigger problems if the supplier turns own processes. Or the buyer may use an external out to be inappropriate or incapable of meeting database to arrive at a long-list of suppliers, but your needs! then issue some selection type questions (as we described earlier) to these firms in order to reduce Third-party providers – an option worth the field further to a suitable number for the tender. considering? So in the case above, if the database turned up The cost of the process, and the time required twelve firms who met the requirement in terms of to run proper pre-qualification is one reason for oil-rig work, rather than three, a short questionnaire the growth of third party services in this field. with three or four questions, perhaps looking There are obvious economies of scale in a single in more detail at some specific aspects of their organisation carrying out some combination of experience, might enable the buyer to quickly registration, verification, qualification and selection, choose three or four to take part in the final tender. then making the results of that work available to13
  14. 14. Best practice in pre-qualification processesA Spend Matters White Paper sponsored by AchillesThird-party providers can therefore offer a way procurement or pre-qualification exercise that isof reducing cost, shortening timescales and necessary; but in the appropriate circumstances,increasing the efficiency of the pre-qualification they are an option worth serious consideration.process, in some cases by working across industry Here is a decision chart that can help determinesectors and collaborative user groups. They the appropriate route to take if you are consideringcan also offer a strong risk management focus. using a third party database, platform or similarThey are unlikely to meet your needs for every pre-qualified supplier population. Does third-party database cover my needs? Yes No Does Advertise for qualified list potential of suppliers suppliers need further selection? Yes No Run simflified PQQ / Run pre-qual selection process process Choose ISSUE Choose tender list TENDER tender list Fig.3 – Using a third-party pre-qualification database 14
  15. 15. Critical success factors for the PQ process Conclusions In this section, we will briefly discuss some of So, finally, let’s sum up what we’ve described in the over-arching success factors for an effective this paper. pre‑qualification, including issues that don’t fit We have explained why the pre-qualification neatly into our previous headings. process is important, and why it is likely to be an ■■ Appropriate processes and minimising the burden important element of the procurement process on suppliers – we touched on this issue earlier, for most – but not all – of our procurement but it is important to consider suppliers and their requirements. Pre-qualification has four key view of the pre-qualification process. If suppliers purposes, identifying suppliers, registration, perceive the process is onerous relative to their qualification and selection – and it is likely outcome, then they may choose to withdraw, important to understand these, and which you weakening the market. This can be another benefit want to focus on, when you’re designing your of the outsourced or collaborative pan-sector model. pre-qualification process. While in some cases there may be a cost to the The various steps in the process can then be supplier, they will save through not having to submit structured to meet those needs. At all times, bear information, often duplicated, time after time, for in mind the risk element of the process; when it multiple tenders and buyers. comes to issues such as how much verification ■■ The importance of ensuring a competitive market you want to carry out, that should be directly – of course, much of the benefit of a well-run and proportionate to the inherent risk in the contract in sensible pre-qualification process will be wasted question. if you don’t start with a strong range of potential The cost of the process, including the time suppliers. Going back to the same group of regular taken and resource required, should also be suppliers, tender after tender, may bring some considered and again should be proportionate benefits of familiarity, but may mean you miss to the risk. Third party providers, who can take interesting new market entrants. So whether you run advantage of economies of scale and expertise the process internally or use a third party, make sure to offer a collaborative service to multiple buying you start with a competitive field of potential bidders, organisations, are increasingly important in this and consider wider advertising if you are worried this field. They can help accelerate the process, lower is not the case. the cost and potentially even reduce supplier risk. ■■ Ensuring fairness and transparency – there are two It may not be a suitable option for every spend key reasons why pre-qualification processes should category, and buyers may still need to run some be fair and as transparent as possible. Firstly, in order selection elements of the process, but it is an to avoid any hint of fraud or corruption, whether that option worth considering, particularly for unique or is driven by internal or external forces. An open and sector specific supply needs. transparent process, with objective selection criteria, Finally, remember the supplier’s viewpoint in this. is a strong bulwark against biased or fraudulent Processes that are proportionate, well-structured, supplier selection. Secondly, if we expect suppliers fair and transparent help them, and that will, in the to compete actively to help us achieve competitive long run, lead to stronger supplier relationships, markets, they need to see that they have a genuine more dynamic supply markets and better suppliers chance of winning business; a fair process is part willing to bid for your work. of that. Making the methodology by which you will Peter Smith qualify, verify and select suppliers as transparent and efficient as possible therefore encourages suppliers. June 2012 Buyers will often now publish in some detail those processes, so suppliers can see exactly how they will be judged. That is, in our view, to be recommended.15
  16. 16. About Achilles About the Author - Peter SmithAchilles offers a pre-qualification and supplier Managing Director, Spend Matters UK/Europeinformation management solution to provide Peter has 25 years’ experience in procurementbusinesses with one source of accurate, up- and supply chain as a manager, procurementto-date and validated supplier information. The director, consultant, analyst and writer. He editssolution encompasses everything from finding Spend Matters UK/Europe, and with Jason Busch,and selecting potential suppliers, through to pre- the founder of Spend Matters in the US, hasqualifying, evaluating and monitoring performance. developed it into a leading web-based resourceEach of these is an important step towards the for procurement and industry professionals.continuous management of risk throughout the Peter is also Managing Director of Procurementsupply chain. Excellence Ltd, a leading specialist consultingThousands of buyers use Achilles every day to gain firm, and is recognised as one of the UK’s leadingvisibility of their suppliers, and with operations in 26 experts in public and private sector procurementcountries and 20 years’ experience, they can do so performance improvement. Peter has an MA inwith confidence whilst unlocking tangible benefits Mathematics from Cambridge University, is aof cost reduction, increased process efficiency and Fellow and was 2003 President of the Charteredrisk reduction. Institute of Purchasing and Supply, and his first (co-authored) book, “Buying Professional Services”, was published by the Economist Books in June 2010*. Before moving into consultancy, he was Procurement Director for the NatWest Group, the Department of Social Security (the DSS), and the Dun & Bradstreet Corporation, and held senior positions in the Mars Group. Spend Matters is thankful for the support of Achilles, our sponsor for this paper. Spend Matters sponsors have no additional opportunity to influence the content or research of Spend Matters material or products relative to other software or services providers. Further information on this topic and others can be found at the website www.spendmatters.co.uk, or we can be contacted at psmith@spendmatters. com. Reproduction of this publication in any form without prior written permission is forbidden. *Buying Professional Services (Czerniawska and Smith, Economist Books, 2010). Achilles Group Limited 30 Park Gate, Milton Park, Abingdon, Oxon, OX14 4SH, UK T: +44 (0)1235 820813 F: +44 (0)1235 821093 E: marketing@achilles.com W: www.achilles.com 001-07/2012