Commercial Design

Much More Than Just Procurement

The public sector, more than the private sector, has suffered from a lack of commercial savvy:

Over years many public bodies established a procurement function — all about process and compliance — which they found culturally natural. But procurement is simply the process of buying stuff legally and fairly.

Procurement does not address wider commercial issues such as intellectual property rights, sustaining value beyond the point of purchase, recognising non-commodity services, or maintaining an ability to change quickly. And in these organisations, such issues fell between Finance (giving money) and Procurement (spending money) and got lost.

So What is Commercial Intelligence?

Commercial intelligence is about sustaining long term value. That’s it.

But “long term value” is an easy phrase to repeat, so what’s underneath it?

• Sustained choice and feasible ability to change beyond the point of initial procurement or implementation.
• Sustained competitive tension to keep suppliers enthusiastic even after the initial contract award.

You can’t continue to get get good value from a market if you don’t have choice, and critically, the ability to enact that choice. But choice by itself isn’t enough, you need competitive forces to keep those choices on their toes.

How Do We Do It?

Choice and competition doesn’t just happen by itself. We must actively and strategically steer our organisations to ensure we stay as close to those parts of the market that are subject to most competition and commoditising forces.

This navigation avoids, for example, proprietary dead-ends, bespoking away from the market, and putting up barriers to cost effective suppliers. Sometimes active intervention is needed to open up markets, by creating public open data for example, or using open technical standards as another example.

Such navigation allows us to know when to pay more in the short term, for longer term better value: “Free — but at what cost?”

This short article can’t possible cover all specifics, but a good set of principles can guide this active steering and strategic navigation, and inform the questions we ask.

Principle 1: Diverse Supply

We must be open to the best value solutions from a wide range of suppliers. This means being open to different types of supplier business model (some of which might not be businesses in the traditional sense) and different types of technology.

For example, we should be striving to remove cost and risk barriers for SMEs, adapting to work with open source technologies with its different development ecosystem, and being creative enough to exploit public cloud services.

Diversity of different kinds of suppliers and solution types ensures dynamism and healthy competition inthe markets we buy from. Today, most of the best value and interesting innovation is not developed by the globally large high-revenue companies.

As a good illustration, one public body developed a useful shared-pain model for suppliers, which had an “exchange rate” to match the size of the supplier. As such SMEs faced penalties proportionate to their size, with large suppliers facing much larger penalties.

Principle 2: Disaggregation

Large contracts which cover several service or technology domains have numerous problems.

They suffer from a lack of transparency into component costs with the resultant inability to benchmark or compare costs. They shield such components from competitive forces.

Building several components into a single contractual envelope makes it difficult to independently change those parts — lockin can be contractual, not just technical.

Furthermore, suppliers which have gained extensive control over a customer’s infrastructure potentially have undue influence on both business and technology beyond their contractual and proper remit.

A benefit of smaller and shorter contracts, which we can think of as commercial commitment, is that the risk and impact of failure is reduced. It is better to have a small thing fail than a big one. It is better to have made an incorrect short term decision than a long term one.

Aggregating risk into a big contract is not palatable to all but the largest of suppliers, and excludes the long tail of medium and smaller sized suppliers — many of whom operate with greater agility, lower costs and with better domain expertise. In fact, many large suppliers use these smaller suppliers down their own supply chains, but we pay the overhead and lose out on the benefits.

A useful indicator of the appropriate granularity of disaggregation is to reduce the contractual scope until there is a healthy market of competing offerings. There isn’t much competition for an ambulance routing application, but there is for its constituent parts such as connectivity, hosting, interface design, and so on.

Principle 3: Autonomy

It is important that we are in control of our own strategic journeys. That is, our choices and direction of travel should not be unduly influenced by suppliers. Suppliers would love it if we followed their product roadmaps, but that’s not necessarily best for us.

Taking charge of strategic direction means being clear what we outsource and what we don’t. In many private sector organisations the crude but meaningul rule of thumb is to outsource the “boring” stuff and keep in-house the functions which contribute to competitive advantage. A common challenge to public sector bodies is their use of external consultants to tell them their strategy, undertaken without the recognition that the success of the client is not aligned to the success of the consultants.

It is important that we assert proper ownership of the intellectual property we pay for, and recognise its value. Too often, we pay for useful assets and intellectual property to be created, only for it to be sold back to us and other public bodies. Even worse, some suppliers exploit these assets globally in the commercial markets too. Today public bodies are better at asserting their rights, insisting on either public accessibility to publicly funded IP for example, and non-exclusivity over the supply, or services around, those assets.

Principle 4: Transparency

A dynamic market of competition and choice only works if consumers in that market are informed. A lack of transparency means a place to hide bad performance, inefficiencies and less-than-best pricing.

Despite supplier protests, there is nothing commercially sensitive about the price being charged for services offered to a public body. What service, and at what price, should be public information. This transparency, with insight into the actual transactions, means there is no need to insist on so-called “open book accounting” which intrudes inside a commercial company and is subject to accounting obfuscation anyway.

Transparency applies to resultant performance and outcomes, not just input contracts and pricing. Performance and outcomes should also be a matter of public record, available to citizens and other public bodies to inform their own commercial decisions.

Transparency can be uncomfortable, but there is little doubt that the direction of public policy is towards ever wider and more detailed transparency, irrespective of which party wins a general election.

Summary

Long term value is made possible by choice and competition, and intentional strategic navigation to maintain these as both the customer and the market evolves and changes. Supplier diversity, disaggregation, autonomy and transparency are key ingredients to support this.

It is no coincidence that a more sophisticated approach to commercial design, shares with the agile agenda, the desire to minimise commitment, sustain ongoing choice and adaption — as a feature, not an inconvenience.