Competition in public procurement is essential to make our cities work. Bid numbers are notoriously low in local government — averaging somewhere between 2 and 3 bids per procurement — with all too many transactions resulting in just one bid. Bid numbers are also an excellent indicator of competition, procurement quality, and trust in government. Citymart data shows that today, on average, 97% of qualified vendors will not bid for a contract opportunity.
In this post, I’ll try to demonstrate not only that more bids are better, but estimate the value of each additional bid we receive.
Data on this subject remains all too scarce. Municipalities generally do not publish data on the number of bids they receive per procurement or their pricing spread (shout outs to the City of Montreal which stands out as a notable exception!). Instead, I am using data collected by us through Citymart BidSpark, which has been used 100 municipalities around the world to run procurements across all municipal service categories. Using our data I will attempt to place a value on each additional bid on a municipal procurement.
What is the value of a bid?
First and foremost, each bid on a procurement is an opportunity to reduce costs. Yet increased cost savings isn’t the only path to better procurement value. Best value contracting allows us to take into account factors like vendor capacity, social and environmental impact or whether local and disadvantaged groups are involved in production. In addition, we should always be mindful of the risk that a procurement may not deliver the desired impact in our community.
Hence, our understanding of the value of a bid is a combination of lower cost + best value factors + good outcome.
Bids are not just the result of a vendor’s ability to produce a great proposal, but are constrained by the type of tender or procurement they respond to. Most procurements are tightly prescriptive about the product, work or service to be provided. Vendors have limited room to compete on more than price or best value dimensions.
Buyers can significantly increase competition and choice by designing more open procurements that put outcomes first. For example, a detailed specification for a traffic light on the wrong street corner will deliver a predictably poor outcome. Ask vendors to compete for the best way to make that street crossing safer, and you will get a spread of solutions competing not just on price but on their ability to get the desired safety result (good outcome).
The matrix below is a simplified overview of the value added by a bid that takes into account not just savings and the likelihood of a bid to deliver good outcomes, but also considers the openness of a procurement — that is, a city’s openness to different ways of getting the desired outcomes and flexibility regarding financing and partnership models.
As you can see, the value of an additional bid grows as we open procurements up to competition not just on price, but on scope. One thing is clear: We should not aspire to maintain the status quo of 2–3 bids per procurement when there’s a whole universe of vendors out there that can give us so much more value through an additional bid. Procurement organizations should invest in measures to increase bid numbers and feel confident about the return on investment (ROI) they stand to gain.
In the following sections I will explain how we approach cost savings, best value and good outcomes and will focus on scenarios where we increase the bid numbers by a factor of two or three. This is a reasonable goal that we are achieving day-to-day across a broad range of procurements with our municipal customers using Citymart BidSpark TM .
Projecting cost savings per additional bid
In order to calculate cost savings in procurement, we look at at three types of procurements. Type 1is a typical procurement offering a detailed fixed scope, spec or requirement to be met by the market. The bulk of procurements are of this type. Type 2is an outcome-based procurement where vendors can compete by offering different products, solutions, scopes or services to achieve the desired results. Type 3 applies to procurements that are open to different approaches and different financing or partnership models.
Type 1: Savings on fixed scope (e.g. construction, specified services)
Economists have done some studies that focus mainly on cost savings in construction contracts and arrive at the conclusion that each additional bid in a procurement leads to cost savings of three to four percent
Accordingly, on a $1,000,000 contract the increased competition by six instead of two vendors would save $110,000.
Type 2: Savings on defined outcomes with flexible scope (e.g. keep buildings clean, collect waste when full)
Instead of a detailed specification, procurements can request an outcome and provide vendors the flexibility to propose their preferred approach to achieve those outcomes.
Many municipalities use this approach to contract waste collection services. Vendors compete on the price for emptying a waste container. Competing bidders will then try to find the most cost effective way to achieve this specified outcome, which can include the use of advanced routing algorithms, electric vehicles or other automation. They may also compete on added value through noise reduction, reliable tracking of activities for more accurate billing.
We have analysed over a hundred outcomes-based procurements run through Citymart, looking at the spread in lifetime costs to arrive at an average saving of 8% from each additional bid.
In a $1,000,000 procurement the cost-saving through increased competition by six instead of two vendors would be $280,000.
Type 3: Savings through variation in business / financing models
These are procurements that, in addition to allowing vendors to present different methods to deliver an outcome, also allow for different financing models to keep solutions financially sustainable. Type 3 procurements can have the most transformative impacts.
For example, the City of Long Beach ran an RFP for an entrepreneurship hub to support its growing start-up and small business community. Long Beach called for proposals to develop and operate a startup hub and offered to make city assets, such as buildings, available on request. Five bids were submitted offering a range of solutions such as expert consulting and service contracts to run the hub. The winning proposal stood out because it proposed to use a city owned building at fair market rates with a sustainable business model over 10 years, delivering the desired outcomes at next to no cost for the city.
The Long Beach example is representative of a growing number of procurements with wide spreads in costs due to flexible financing models in almost every municipal service category.
Instead of foregoing revenue and spending millions of dollars operating a wireless network, NYC has guaranteed revenues of $500m over 12 years leveraging outdoor advertising
Instead of funding and operating secure bike parking, the winning bid combines user-fees with bulk insurance and smart physical bike parking
Instead of spending hundreds of thousands annually on services, the winning bid operates a sustainable business service for 10 years paying fair market lease
Instead of spending millions retinotherapy a smartphone app offered as a national subscription automates diagnostics of the disease, reducing costs by 50%
Analysing our data on procurements with flexible financing models across transport, broadband, economic development, healthcare, education and civic engagement led us to calculate the average savings from each additional bid at around 15%.
In a $1,000,000 procurement, the cost savings from six instead of two vendors would be $540,000.
Getting the ‘Good Outcome’
It is notoriously difficult to measure outcomes. Instead of trying to quantify how much better an outcome gets, we will instead describe the likelihood that a bid offers a “good outcome”. A good outcome is a winning contract that succeeds in achieving the desired outcome and that has a positive, secondary impact on the community.
Type 1.5: Best value contracting (identical scope)
Contracts can be awarded using criteria beyond just price. Additional criteria may include qualifying characteristics like capability and diversity of vendors, different methods of delivery, or sustainable materials.
For example, User Voice, an innovative social enterprise providing services to reduce recidivism in the UK is not just offering a scope of proven services to help offenders re-entering communities, but is doing so by being an organization founded and run by offenders that manage to build a more effective relationships with their target community as well as providing local employment to such former prisoners.
In evaluating best value contracts run with Citymart, we have found that one additional bid on a contract increases the likelihood of a good outcome by 5%.
Type 2: Outcomes-based procurement
Putting outcomes first can lead to significant increases in vendor quality and impact. Governments are able to compare (and even test) different solutions to a desired outcome in order to settle on the strongest value proposition. The more approaches compete, the greater the chance to find a solution that truly works.
For example, San Francisco’s RFP to upgrade its 18,000 streetlights offered flexibility in its scope in order to get an open-source wireless network and software. The city hoped to deploy a single open network that would eliminate the need to procure eight other wireless networks for different city services. Initially, the city prepared a detailed scope but failed to attract any bids. By turning to an outcomes based procurement and incorporating a pilot stage into the process, the city attracted 59 bids — mostly from technology vendors that had not previously worked with municipal government. The savings potential stood at $25M, to say nothing of the value provided by a significantly more beautiful streetscape cluttered by 80% fewer antennas.
Fixed-scope (Type 1) procurements run a high risk of closing out solutions that can deliver the intended results. Our analysis of outcomes-based procurements run with Citymart we have found that one additional bid on a contract increases the likelihood of a good outcome by 20%.
Type 3: Better outcomes through flexible financing and partnership models
Let’s return to Long Beach’s entrepreneurship hub RFP, in which the potential impact of the five submitted solutions varied greatly. Some solutions offered a remote team of experts to consult on a plan and strategy for a project to be developed. The winning solution charged no fees for such an effort and instead offered a proven, detailed method to engage and network local entrepreneurs building lasting relationships. This was made possible by a partnership of a community college, a university, and a co-working space operator. The entrepreneurship hub will be self-sustainable at no operational cost to city hall for at least 10 years leasing a previously underutilized public building.
Allowing vendors to combine their expertise and flexibility with regard to financing and partnership can not only help optimize capital deployment but promote sustainable and entrepreneurial approaches. Oftentimes, such deals come about as unsolicited proposals that may not be sufficiently competitive. Vendors competing for such partnerships will choose carefully when to bid and submit competitive, risk sharing proposals. We have found that one additional bid on a contract increases the likelihood of a good outcome by 35%.
Raising the bid numbers in public procurement matters. In order to create tangible value in both money and outcomes we should consider what steps we can take to increase bids.
Five steps to get more bids and better value for your procurements
1. Better market opportunities to a broader vendor community
Many procurement teams found that online procurement portals are not enough to reach new and diverse vendors and attract more bids. Systematic marketing will help you reach and recruit bids from new vendor groups. Your goal should be to validate and calculate the return on investment (ROI) for such marketing effort — for example “every $1 spent on marketing a procurement should give us $6 in savings through more competition”
2. Reduce barriers to participation in procurements
Even when you notify a vendor a very low percentage will bid. Track the break-points and collect feedback from vendors that choose not to bid to get insights into what improvements you can make to be attractive.
3. Use market intelligence to design better procurements
Many procurements accidentally exclude great vendors or solutions by using constrictive specifications or terms. Use market research and quick RFIs to learn more about different solutions as well as what you can do to excite diverse vendors, like MWBE or start-ups to bid.
4. Create the capacity to run Type 2 & 3 procurements
Running an outcomes-based procurement is often new, but doesn’t have to be hard. As a procurement team you should experiment with running the kind of procurements that can give you truly transformative results by specifying the outcome rather than the solution.
5. Make your procurement team a force for government transformation!
What is the mission of your procurement team? Step back for a moment to realize how transformative your skills and services are to helping improve government. Dare to have a vision for change and be a proactive partner to transform the services of your city.
I would love to hear from you, so please feel free to reach out with your comments, critique and any resources you have that could help us get a better grip on the value of additional bids in procurement. We are always happy to collaborate to further the practice, evidence and assumptions that can drive improvements in public procurement!
Originally published in 2018