Tender Irony: Barrier to Innovation is Innovation?
How Public Sector Procurement for Innovation is Stifling Innovation Expensively
In recent years, I’ve been looking at procurement in a whole different light. I’ve sat on both sides of the tendering divide and one thing I have to admit to growing to hate is reading or writing tender submissions.
This isn’t to say that they are unnecessary, just that they are extremely inefficient and typically done in such a convoluted, exhausting and time consuming way for everyone involved. So much so, the private sector often refuses to engage with the process altogether. Indeed, SMEs mostly don’t bother at all, which in itself, doesn’t do anything to help the government reach its target if 33% of public sector spending being directed to SMEs.
The Procurement Chair
Procurers typically have to decide what it is they need; build all the documentation, including any instruction and requirements for the ITT; form scoring matrices/scorecards (oddly I am a fan of these); choose whether they wish to approach it using lowest price or most economically advantageous tender (MEAT) and of course, determine the appropriate approach given the threshold. Then they have to prepare further inordinate documentation for the ITT (Invitation To Tender) and PQQ (Pre-Qualification Questionnaire) depending on the threshold, as well as a full requirements specification, then send this out into the wild and manage the responses.
Once responses are received, PQQs (if applicable) are scored against criteria such as current account balance, director or organisational fraud, policy etc. and tenderers failing to meet these criteria, are excluded on mandatory or discretionary grounds. Anyone in that place doesn’t get their bids read, which is a waste of their time in submission.
The bids themselves are read by a panel of usually 3 people. They all read and score non-disqualified bids, then short-list to typically 3. The unsuccessful bidders are informed at that point that their bids will not be carried forward and given feedback on why.
The 3 short-listed bidders are often invited to present their solution to the panel, and after a Q&A, further score and select based on this submission. The successful candidate is then selected and informed. There is a contract negotiation phase, where the terms of reference are also agreed. Perhaps a mandatory freeze for a week, before the work commences.
At all points, feedback is available to the unsuccessful bidders, which means a member of the panel writing it and submitting each individual reply.
Overall, it is not uncommon for more than 100–200 person-hours to be spent by the panel solely forming, running and evaluating the bid process.
The Bidders Chair
For bidders, the process is equally tedious. Expressions of interest are drafted and submitted to the tenderer. Luckily, these days it’s electronic and automatic, however, that’s optimised just 1% of the process. The worst is still to come.
Sensible suppliers will score the bids available themselves using a bid/no-bid matrix to decide whether any mandatory or difficult criteria would mean it would be pointless to enter. For example, if there is a requirement to have a policy or a certain level of insurance, or perhaps an amount of money in the bank, then the bidder may choose to self-exclude. This is especially common with SMEs who have looked at it and indeed, it has been stated by some public sector procurers in the past, that this is a way to filter out SMEs, since they present some level of risk.
Once a bidder decides to bid, they then have to complete the PQQ, checking the requirements if necessary, the carefully read and form the bid, carefully making sure they address all points of the tender, including the requirements, do the math to check it is financially viable, present a substantial amount of solution architecture (but not so much the tenderer can do it themselves), and a written narrative, then pay to triplicate and post the submission (if hard copy is required — luckily this is also on the decline) which in itself takes 60+ hours to do. It’s not uncommon for it to take just as long to write as the procurer takes to construct the tender, depending on the requirements [matrix] supplied in the ITT.
For SMEs, this is a huge undertaking. Indeed, it’s not uncommon for the smallest suppliers to find the tender process itself loses them money ‘twice’. Once for the time taken on the bid, which cannot be used on client work, the other when they lose. After all, there can be only one.
A Macroscopic View
It’s not uncommon to have 10 to 30 bidders for a tender (depending on the market sector). So the likelihood is each one will not win the tender. 60 hours of work if your income is some £3,000 a fortnight, means you lose £2,250 in lost income, plus perhaps £100 printing and postage costs and if you don’t win, you never get that investment back. It’s a wasted £2,350.
Around 1 in 14 tenders are won by SMEs on average, but this is highly variable (many win way more than the average and each win improves your chances of winning again). So you can expect an SME to lose 14 x £2,250 = £32,900 before winning a single tender. Hence, if the tender the SME is looking to win is not worth that value by the end of the 14th tender, including the time and cost they’ll spend delivering it, it’s not worth them even trying for it.
Plus, each loss means you have to make more up in your other bids, unlike winners, the SME needs to win bigger and bigger contracts to cover the number of losses they will incur. The chances of winning these bigger contracts diminishes significantly as the value of them increases, especially if there is a PQQ requirement on liquidity. After all, it’s a gamble and there are bigger fish who swim in that pond when it gets that big.
Run each loss of £2,350 across say, 20 bidders on average and you have £47,000 in lost income and if each bids on 10 a year on average, that’s £470,000 in lost income for all 20 bidders. [UPDATE] Most contracts awarded aren’t for that amount of money. So overall, it’s a continually lossy mechanism. [/UPDATE]
In addition, on the procurement side, 100 hours each tender consuming 3 panelists time at an average salary of £30,000 per person salary is £4,326.92, which if they would normally be making 3 times their salary for the company per capita, means the company loses £12,980 in lost income, which is a total of £17,307.69 in negative position just for this one tender. Multiply this by the 10 tenders and in that block alone, it’s £173,076.92.
In total, this is £625,076.92. Two thirds of a million pounds in lost income just on those 10! Never mind that there are around 100,000 local authority and central government tenders every year in the last few years. This means around £6.25 billion is wasted each year.
The irony is, for the tax man, who would expect his 30% pound of that flesh, which is £1.875 billion of tax. They lose out on it! This money is essential s we leave the EU.
Public sector procurement, in its current guise, loses the government money hand over fist and of course, limits the participation of SMEs. The more of it is done, the more it creates a losing position. It’s little wonder SMEs wont generally engage, though things have changed in recent years to allow participation on open marketplaces such as G-Cloud.
What About Innovation?
Innovation is a funny thing in this context. As of 2015, we started to see many more contracts appear wanting ‘agile’ skills, ‘cloud computing’, ‘DevOps’, ‘SaaS’ or ‘Internet of Things’ etc. etc. but the one thing that remains constant is the procurement process.
Many commentators before me have critiqued it, exclaiming how fundamentally ‘un-agile’ it is and how such procurement kills innovation. The irony is that we’ve also seen many contracts which have stated the preference for innovation, but the staid procurement method naturally biases against the most innovative bidders. For us, and many agile practitioners, this includes the delivery of the procurement process itself.
The way classic PQQs are written, and are required to be completed, including the problem of large capital reserves in bank balances (not needed with opex structures), provide a platform biased against the concept of innovation. Since companies who can work predominantly in an opex way (i.e. their capital expenditure needs are low), don’t need huge reserves, especially if the client is happy the pay in much smaller, much less risky chunks or milestones, as per scrum/SAFe; BDD/consumer driven contracts or some other agile way. If you see one of those, run a mile! Don’t even think about applying, as you’ll deliver work and it’ll be up to 9 months before you get paid for it, even though that’s discouraged.
However, the further irony is that innovative organisation that submit a PQQ, are then excluded because their innovative stance on payment for tasks is too innovative. i.e. because they don’t need to run with large reserves, they have a low bank balance, which excludes them at PQQ stage. Because tenders are not read after that exclusion, the most innovative bidders often don’t get a look in nor do the tenderers become aware of the more agile methods of delivery those providers use. For such bidders, innovation work in public sector isn’t really worth it, since the likelihood of winning innovative work is less likely for them than the most non-innovative companies overall. Hence it’s so extremely remote, it’s not worth it to even play the game. So the companies left are naturally the least innovative. The Dead Sea Effect organisational anti-pattern rears its ugly head again.
What Can Be Done?
It’s actually quite simple. Procure within its delegated authority. The issue is how to draft that authority such that it doesn’t fall foul of all these bits of work being a single requirement (which is typical in OJEU requirements). That’s also pretty easy, since it’s a single end-to-end business need.
Method & Benefits
- Segment the work along a series of primary scenarios, identifying all secondary scenarios in that line. That’s an end-to-end BDD feature, for those in the tech space.
- Give one requirement to each interested provider, who has submitted an expression of interest. If they deliver, great! If they don’t, don’t use them again. This naturally filters out bad providers by using real work, whcih also allows you to vet how well both organisations work together. But at least everyone gets a small piece of work, for which they are paid and don’t therefore lose out unless they don’t deliver.
- Keep the value of each spend well under the delegated procurement threshold. For example, a departmental budget that finance aren’t too bothered about as long as it’s accounted for. This also means you can work with preferred suppliers, without a public advertising nor competitive tender process, and all the systemic wasted time and effort this creates all round.
- This also means the supplier has to maintain a high standard of work across the entire length of the partnership, since this model allows the procurer to assess the performance of the supplier in relation to the others. If they are outstanding, they get more and more of the work.
There will be positions where competitive tenders will be needed. However, this is certainly not required for IT contracts, since the amount of money in each requirement is well under public sector procurement thresholds. Indeed, it’s become such a hot topic in central government, that G-Cloud, the government’s digital marketplace, has been created to massively simplify the process of procurement at that level.
This new Lean RFP process is a huge mind-shift for many. It massively reduces the level of waste generated in the overall system and positively encourages SME participation. It’s a process I helped employ at Northern Gas Networks last year. Everyone earns something and the money is naturally put back through the tax feedback system instead of lost to the tax man altogether. It’s also significantly less risky, since you might only lose £1,000 to a provider and any poor performers and are naturally filtered out over time. There is no gamble, aside from the skill game of who wins biggest!
Ethar Alali is CxO and Chief EA at Axelisys Ltd, specialising in providing innovative agile enterprise advice to blue-chips and SMEs. Formed in 2011, Axelisys works with some of the biggest household names in the UK and across the world, delivering effective, robust, valuable, agile and lean enterprise thinking. Ethar is a lifelong programmer, still faithfully carrying around the BBC Master Compact 128 that made him the man he is today.