Risk, Transparency, and the Procurement Cycle

When the public thinks about public procurement, much of the talk focuses on equity and efficiency. Is it fair? Is the government getting the best price? The presumption is that an open, transparent process, hidebound by statute, rules, and custom, is the best way to ensure both. For the public, it comes down to a question of trust.

But, for the officials making the procurement decision, while cost-benefit analysis certainly comes into play, such considerations are derivative to a broader characterization of the problem. Their job is to minimize the risk associated with a purchase where risk manifests in multiple dimensions: the risk of having a losing bidder contest the decision, the risk of an investigative journalist making an accusation of bias, the risk of having a procurement spill into the political realm. The risk of embarrassment, generally. The risk of losing one’s job. The risk of picking the wrong solution. The risk of delay.

This minimization of risk is a constrained optimization problem doomed to fail because there are too many constraints to resolve. The officials’ job is to minimize risk while purchasing a solution above a certain threshold of quality, within a reasonable period of time, and subject to a presumed constraint on cost, all while satisfying myriad other demands such as spreading the spend around to targeted geographies, to strategic industrial development, and to spending with identified constituencies. It is an insoluble problem; something must suffer.

Given the array of risks confronting the buyer and the stereotype of public officials as risk averse, one might think that the easiest thing to do is to hide the procurement from the scrutiny of the public. This has been the case historically in many jurisdictions, despite a general sense of the policy value of openness. Movements like the Open Contracting initiative are attacking this problem, globally. Here is a British cabinet member, Francis Maude, speaking in 2013, at an early Open Government Partnership conference:

“’Governments need to move from a default setting of being closed and secretive, to a default setting where the presumption is, you’re open,’ said Minister Maude.”

Indeed, transparency is getting better, seemingly monotonically. There are several reasons for this improvement.

First, the maturation of relevant technologies is driving procurement officials and politicians into transparency.

It seems routine to talk now of data analytics and artificial intelligence as useful tools for making better decisions. These require data as input, not just to expose the mustier corners of global government purchasing on which activists might focus, but to help us identify ways in which we can improve the current way of doing things.

Second, another expression of risk aversion is the way in which officials traditionally have approached the vendor community. Instead of telling potential suppliers what the problem is that the government is trying to solve and working with them on developing a solution, officials cover themselves by specifying a solution. Here is Emilio Franco on the problem:

“When we write detailed requirements, we end up defining the solution to our problem and let’s face it, we are often not the best people to do so. It takes a long time to do it, we often get it wrong (asking for things that are out of date or impossible to do) and the traditional open Q&A process of public tenders is generally ineffective at raising and resolving these types of issues.”

Layering on requirements for an individual procurement may seem like a conservative approach, but it leads to a sub-optimal solution, potentially at a higher price, by not leveraging leading practices and technology.

New methods, particularly in IT procurement, referred to as agile procurement or negotiated RFPs, require government officials to communicate frequently and directly with potential suppliers. Not only is the cost of transparency lower than many might fear, but there may be substantial benefits to openness.

Here is Franco again:

“With agile procurement, we start with a problem and immediately take it to industry (no spending 2 years in a backroom writing a 200 page requirement). We abandon traditional statement of work templates and large, inflexible, and detailed specifications in favour of short problem statements. We focus on high level outcome based statements that rely on working with industry to collaborate on potential solutions, test them, refine, finalize the details and move quickly to award.”

The only thing we have to fear is fear itself.

Another corollary implication of agile procurement is the ability to chop a project into discrete parts, moving away from monolithic procurement which … reduces project risk.

By transforming to a more collaborative, 21st century procurement process that relies on open communication between vendors and government buyers, we can address many of the obstacles that vendors face, as well. These were highlighted in a 2014 Science Direct article written by researchers at the UN and in the United Kingdom.

“The main barriers reported by suppliers refer to the lack of interaction with procuring organisations, the use of over-specified tenders as opposed to outcome based specifications, low competences of procurers and a poor management of risk during the procurement process. Such barriers are perceived most strongly by R&D intensive organisations. Our results also indicate that certain organisations, particularly smaller firms and not-for profit organisations, encounter greater difficulties with innovation arising from the procurement process, for instance in relation to contract size, lack of useful feedback and communication of opportunities.”

EdgeworthBox is building a platform to make it easier for companies to do business with government and for governments to get what they need, when they need it, with the best value-for-the-money. Our platform provides the network with the tools to collaborate and the data to improve processes.