Simon Steele, CEO, PMMS Consulting Group (United Kingdom) @ TOCICO International Public Sector Effectiveness Conference 2013 Vilnius - Not all categories of spend are equal. - Cost does not equal price. - A tender is not an exciting thing to receive. - Why bidding does not always deliver the lowest price. - You will need the best suppliers more than they need you. - When to pay for results and when to pay for effort. - Competition sometimes leads to higher cost and worse performance. What is the alternative? More information - http://pse.lt

1. Achieving Value from Procurement
‘Exposing the Myths’
Simon Steele
+44 7876 652050
simon.steele@pmms-group.com
24th October 2013
www.pmms-group.com
Consultancy · Negotiation · Skills Development · Executive Sourcing
© PMMS Consulting Group. All rights reserved, 2011 www.pmms-group.com

2. About PMMS
• 100% focused on equipping and enabling procurement talent
– We improve business performance through intelligent and practical
solutions; committed to developing our profession through intellectual
capital
• Wide range of services in consulting and in skills development
– Transformation, benchmarking, process development, project
support, skills development, accredited learning
• People located across five continents and delivery in 11 languages
• Over 1,500 workshops annually to 10,000 professionals and
assess around 2,000 people annually
• Developed much of the intellectual property in strategic sourcing
• Well established relationships with Professional Institutes
© PMMS Consulting Group 2011. All rights reserved
www.pmms-group.com

3. Perceptions of Public Sector Procurement
• Adversarial and bureaucratic – disabling, not enabling
• History of delivering poor value – cost overruns, scrapped projects
• Procedures have created fear in buyers and encouraged caution
– Suppliers feel able to legally challenge awards on technicalities
– Procedures interpreted and used with caution
• Tail wagging the dog – big suppliers are too influential
• Does not support SMEs – too difficult and the barriers too high
© PMMS Consulting Group 2011. All rights reserved
www.pmms-group.com

4. Case Study 1
• Public Procurement is increasingly ‘outcomes’ based
– In the private sector this starts with the ‘problem’ and a set of needs
– In the public sector ‘outcomes’ often mean a solution supporting
governmental policy. This leads to pre-determined solutions
• Example – Congestion Charging Scheme in London
– Stated outcomes were to reduce congestion and pollution in London
– Other options included a new tax on cars or on fuel, marketing to
reduce car use, increased expenditure on public transport and
regulation
– Reducing congestion/pollution requires traffic bans, pedestrianizing
cities, investing in public transport and green technology
– Studies suggest no change to congestion and more on the perimeter
© PMMS Consulting Group 2011. All rights reserved
www.pmms-group.com

5. Exposing the common myths
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Not all categories of spend are equal
Cost does not equal price
A tender is not an exciting thing to receive
Why bidding does not always deliver the lowest price
You will need the best suppliers more than they need you
Competition sometimes leads to higher cost and worse
performance
These myths exist in private as well as public sector!!
© PMMS Consulting Group 2011. All rights reserved
www.pmms-group.com

6. Not all categories of spend are equal
• Supply markets vary in nature and require a differentiated approach
– What is the best way to engage with suppliers and the supply market?
• The level of spend in a category and its importance and impact to
the business vary enormously and drive different strategies
• Buyers tend to use ‘routes’ they are comfortable with without really
asking which will solicit the best response
– How would you buy if you were told you could not use a tender or run
an e-auction?
– The available ‘routes’ do not align well with suggested approaches
using Kraljic and Supply Positioning principles
© PMMS Consulting Group 2011. All rights reserved
www.pmms-group.com

7. Cost does not equal Price
• The common myth is cost + fair margin = price
– Research says less than 40% of companies use cost as the basis to
set price
– What is an appropriate level of profit? What measure of profit?
• Tendering processes tend to favour a ‘price’ only comparison
– Simple price comparisons tell you very little and can encourage
dangerous assumptions
– The processes do not encourage a thorough exploration of cost
• In many public sector organisations ‘negotiation’ is actively
discouraged and not allowed!
– Discourages a challenging mind-set to understand cost and drivers
© PMMS Consulting Group 2011. All rights reserved
www.pmms-group.com

8. Case Study 2
Energy & Transport – HS2 and Nuclear Power
• UK Government intends to spend £40bn on high speed rail line
– New line will save 20 minutes on from Birmingham to London
– Economic case uncertain with winners and losers
• Third party has agreed investment of £17bn in a nuclear power
plant with government guarantees to procure electricity at twice
the current wholesale price
– UK is facing a shortage of capacity within next 8 years
• In procurement terms, why would you put the ‘strategic’ asset in
the hands of the supply market and the ‘tactical’ one in
government ownership?
• Where’s the ‘value for money’ test?
© PMMS Consulting Group 2011. All rights reserved
www.pmms-group.com

9. A tender is not an exciting thing to receive
• Does it motivate the supplier? Is it a ‘cold’ opportunity?
– Is it real? Can we win it? Do we want it?
• Often asks questions which are irrelevant whilst failing to ask
pertinent questions
• Often sets unreasonable requirements with little correlation to the
requirement or assessment of capability
• Tenders written in such a way as to restrict competition
• Is arms-length in nature; does not generate discussion
• Many awards made on the basis of the customer having never
undertaken an on-site appraisal
© PMMS Consulting Group 2011. All rights reserved
www.pmms-group.com

10. Why bidding does not always deliver the
lowest price
• Assumes suppliers are motivated to offer their lowest possible
price
• Assumes the best suppliers are motivated to respond!
• May not encourage someone to propose their best ideas or
innovations
– These cannot easily be judged comparatively and there is a fear this
will have a negative consequence
– The ideas may be ‘borrowed’ and passed onto others
• Rarely takes account of the fact that choosing a time to go-tomarket has a significant influence
• There are often ‘hidden’ costs
© PMMS Consulting Group 2011. All rights reserved
www.pmms-group.com

11. Case Study 3
Professional Services & Consulting
• Often procured on the basis of rate cards
• Day rates are lower but fees and prices are often higher
– Driven by changes, reviews, approvals, decision making, delays,
level of account and program management required
• Suppliers are often motivated to add ‘complexity’ and time
• Day rates are often pro-rated based upon a standard 8 hour day
– Consultants often work 12-14 hour days
• Fixed price proposal based upon a scope of work with input as to
the most effective/efficient way of delivering it may be better
© PMMS Consulting Group 2011. All rights reserved
www.pmms-group.com

12. Competition sometimes leads to higher cost
and worse performance!
• Competition tends to focus on price rather than cost
– Typically this means a focus on squeezing margin which might
only make up 10-20% of the price at most
• Most competition is not genuine
– Most buyers use ‘benchmarking’
– Tendency to renew contracts with the existing suppliers
• Competition needs to focus on
motivating suppliers; suppliers
have to believe it is real and
they can win!
© PMMS Consulting Group 2011. All rights reserved
www.pmms-group.com

13. Case Study 4
Schools and Hospitals Procurement
• PPP projects - Competitive Dialogue uses a 7 stage process
– Timescales can easily be two years
• Bidders have consistently raised concerns to government about
bid costs, protection of intellectual property/commercially
confidential information and timescales
• Evidence suggests bid costs of £4-5m on a typical school build of
£40-50m (winning bidder only)
• Evidence of potential bidders withdrawing from the process as
stages progress to minimise bidding costs
– Significant effort into ‘management’ of stakeholders and decision
makers to influence the process
© PMMS Consulting Group 2011. All rights reserved
www.pmms-group.com

14. You will need the best suppliers more than
they need you
• Suppliers segment their customers in the same way procurement
teams segment spend
– They make choices as to strategy, approach and how much you pay!
– They decide how much time to spend on an account, what resources
they deploy, what products and ideas they offer
• How do you make yourself attractive?
• Buyers need to be wary of building barriers to entry through
bureaucratic buying processes
• Organisations need to be wary of working with suppliers in such a
way as to create barriers to exit
– Suppliers work to build ‘brick walls’ around their business with you!
– How do you minimise bidding costs and barriers to entry?
© PMMS Consulting Group 2011. All rights reserved
www.pmms-group.com

15. New Proposed Rules
• Appear better in principle
– Will hopefully address the problems with the current Directives
• Should measure whether they really deliver the desired
outcomes
– Fairness, transparency, accountability, reducing corruption
• Need to be able to deal with the unintended consequences
– Need to be able to prove or change quickly
© PMMS Consulting Group 2011. All rights reserved
www.pmms-group.com

16. Summary
• Buyers need to stop and think about what they’re doing
– Procurement knowledge and skills are still very poor
– Stop following like ‘sheep’ to pre-determined formulaic solutions
• Really understand costs and move beyond ‘price’ comparisons
• Use competition or collaboration effectively and appropriately
– Avoid ‘pretend’ competition and benchmarking
– Avoid ‘warm and fuzzy’ collaborative relationships
• Imagination, creativity and time are more powerful than volume
and leverage
© PMMS Consulting Group 2011. All rights reserved
www.pmms-group.com