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Collaborative Buying in the Public Sector – Five Benefits and Five Negatives (part 2)

In part 1 we looked at the major trend over the last twenty years in public procurement for collaboration between organisations and in effect greater centralisation of procurement activity.

What are the pros and cons of this development? In part 1 we looked at the undoubted positives, but today we will look at some the negatives or issues with this approach. Not all of these are as well understood as most of the positives, we would suggest.

The Negatives of Collaborative Buying

1.  In part 1, we discussed the potential economies of scale that can be achieved by aggregating spend volume as a positive in our previous article. However, we believe that these economies are often over-estimated by collaborative initiatives (and indeed by procurement people generally, including in the private sector)!   Actually, it is not hard to think of markets and situations where there are even dis-economies of scale, and certainly even where they exist, the major economy of scale benefits can be achieved at relatively low volumes in many spend areas – you don’t need to aggregate the entire national spend to achieve that. This is a huge topic in itself, but we have seen little hard analytical work from the public sector to consider the economy of scale assumption that often underpins the business case for collaboration.

2.  Collaborative contracts can have very negative effects on the market. In some cases, a collaborative contract becomes the only way a supplier can win government work. If they do not succeed to win a place on a framework, or win some work outright, they can be locked out of the public sector marketplace for years. Long-term contracts also stifle innovation and make it hard for new firms to break into the market if spend is highly concentrated. The criticality of some collaborative contracts to suppliers also makes it more likely that disappointed bidders will challenge the procurement decision and process. That is because where the impact of not succeeding is severe, they will try anything to win! Indeed, that might even increase the risk of corruption.

3.  Collaborative buying can lead to a disconnect between the procurement function and process and the actual user of what is being bought. Procurement is distant from the internal customer (or the external client in the case of much “commissioning” work in government). It is somewhat ironic that whilst private sector procurement leaders increasingly see this stakeholder management as vital for their success, in the public sector we are moving in the other direction, with more centralised procurement, often remote from the end customer.

4.  There is a danger that collaborative buying can lead to a loss of capability at organisational levels. Now it may not matter in terms of the standard collaborative purchase areas, but it can mean that the front-line organisation loses critical procurement mass, and will then struggle to perform adequately in terms of buying the goods and services that it still needs to do individually i.e. what is not bought collaboratively. We are seeing some evidence of this in the UK, with “hollowed out” procurement functions in some government departments following the push to centralise common spend categories.

5.  Collaborative buying and contracts can become simply unmanageable due to their size and complexity. This issue in itself could be broken down into several aspects. Deriving and agreeing common specifications can be a huge problem. Then the tendering process itself can be incredibly difficult because of the sheer size – of documents, of the number of bidders, the whole evaluation process and so on. If the collaborative contract is the “only game in town” in its spend area (see the “effect on the market” point above) then it becomes a huge exercise. And contract management can be similarly challenging.

Now these negatives do not mean that collaborative buying is a bad idea. (The London Universities Purchasing Consortium, whose conference is pictured here, is an example of collaboration that in the main works very well). We have many examples of successful collaborative activities in many sectors and countries.

But the strength of the negatives does suggest some careful thought is needed, and we would argue that trying to over-centralise or collaborate is likely to make some of these negatives actually outweigh the positives. Exactly where the dividing line is between good collaboration and bad needs to be worked out case by case; but that is something procurement leaders in the public sector around Europe should be thinking about as one of their key strategic questions.









Voices (5)

  1. Reta Blod says:

    Very good points. Centralisation and collaborative buying have some advantages and benefits, but also serious downsides. Its over-simplistic use can cause more harm than good. Aggregation can work to a point, but there is a tipping point, if it drives to lowest common denominator specifications, one size does not fit all, remoteness from the end user increases, and the centralised buying organisation thinks it knows best. And suppliers also loose out if centralisation isn’t very carefully handled, driving some out of business and others to complacency once they’ve won the centralised contract.
    Stalin’s 5 year plans didn’t work either!
    So there are pros and cons, and the correct answer is almost always a blended approach, requiring thought and balanced arguments, neither complete centralisation nor complete decentralisation.

    1. Sarah Hurrell says:

      IMHO: Regular aggregated competitions for pure commodity items makes sense, if there is regular demand & it meets user need – as this prevents buying too soon or in too small volumes.

      It requires an intelligent buyer to determine when (if!) it is successful to aggregate non-commodity items. One real risk is blocking out the SMEs.

      I agree with Reta. Long term frameworks are rarely going to drive the right outcomes – particularly in my area (Technology).

      Last year, in Tech, we introduced an exceptional approval for any commercial agreements over 2 year initial term.

      We’ve still got a way to go but we are actively working to improve (& simplify) the commercial vehicles/frameworks. Our focus includes ensuring alignment with digital agenda, GDS & Tech Leaders’ needs, regular discussions with buyers & suppliers (large, small & representative organisations such as Tech UK & PSNGB), introducing more flexibility in agreements to allow innovation and encourage SME suppliers, reducing overlapping vehicles, appropriate aggregation & increasing “direct buy” / self serve options.

      The good news of working for the Public Sector is that there are never a shortage of people who are delighted to comment on what you’re doing wrong / non-optimally!

      So as long as we keep up to date with user needs & the market; continue to listen & work as a public sector team involving all the stakeholders (customers, suppliers, GDS, Crown Reps, legal, industry experts, best practice, policy & press etc); take sensible risks and learn by our mistakes; we should be well placed to continue to improve our offerings 🙂

      Please note: this is my personal view, not a Cabinet Office / CCS statement

      1. Secret Squirrel says:

        Sarah,

        To pick up on “continue to listen & work as a public sector team involving all the stakeholders (customers, suppliers, GDS, Crown Reps, legal, industry experts, best practice, policy & press etc); take sensible risks and learn by our mistakes; we should be well placed to continue to improve our offerings”

        That’s all true if that’s what actually occurs. What you get from CCS and Cabinet Office instead is a GDS driven agenda. G-Cloud, Digital Marketplace and the broader ‘digital’ agenda are the only real games in town and delivering what other parts of the public sector want and need plays very much second fiddle. You say that yourself here with “digital agenda, GDS & Tech Leaders’ needs” coming before anything else.

        To be successful, CCS and your area in particular, needs to look wider and think about what the customer is trying to do, why and how. If you use hosting services as an example, organisations will be looking to put up critical delivery systems. When they get told the answer is G-Cloud and it’s got a two year call-off limit, you start to wonder to whether CCS understand what’s involved in transitioning a large enterprise system from one place to another. You’ve got environment build, migration, testing, disaster recovery planning, business continuity planning, changes to your internal working, cutover planning and execution.

        No, not all of this is ‘in line’ with GDS policy but you should have some skin in that game and have the confidence and expertise to challenge back but organisationally, it’s sorely lacking.

  2. Stephen Allott says:

    Peter, you have started a ground breaking debate here. Well done.

    My thoughts

    1. Collaboration in buying is, prima facie, illegal as a breach of competition law. Here is Article 81 of the Treaty of Rome.

    (a) directly or indirectly fix purchase or selling prices or any other trading conditions;

    http://ec.europa.eu/competition/legislation/treaties/ec/art81_en.html

    Section 2 of the UK Competition Act says the same http://www.legislation.gov.uk/ukpga/1998/41/section/2

    What is the legal basis for the public sector thinking it is exempt from these rules when separate legal entities are involved?

    Exemptions have to be applied for http://www.legislation.gov.uk/ukpga/1998/41/section/4

    I haven’t met a single competition lawyer in the 4 years I have spent in this role.

    2. Digital changes everything. Prices are often cheaper on Amazon because Amazon has more scale. I often benchmark framework prices against Amazon by copying in the part code. I found an HP printer cartridge for £220 on Amazon with free delivery when the CCS framework price was £270.

    3. Buying tools is different from buying fixed specification production parts. Tool buyers (and your PC is a tool for example), want the right new stuff. Aircraft carriers not battleships. People call this access to innovation. Procurement people have grown up buying fixed specification production parts where, by definition, innovation is not a lever. What % of central Government procurement is tools and what % fixed spec production parts?

    4. Mission criticality of the service: sole sourcing a mission critical service could be most unwise. Diversity delivers robustness.

    5. Economies of scale in manufacture: there are plenty of common goods and services that do not benefit from economies of scale and you can tell that by looking at the industry structure. Lots of SME hairdressers because there are no economies of scale.

    6. Concentration in the supply base: different skills and practices are needed to get full value from SME suppliers compared to large vendors.

    7. Is the requirement for a commodity (such as petrol or paper) or not? Few things are genuine commodities.

    8. Diversity of customer requirements: does every user want the identical thing? Digital enables access to the long tail.

    Aggregation by default may soon be come to be seen as a mistake.

  3. There are some good points being made here. I agree with the author that economies of scale are often over vaunted, they work, to a point then cease to have an effect in terms of the price that can be commanded.
    Possibly more important (and I would hold the mechanism that makes Amazon work) is that scale enables an enterprise to invest in the technology that facilitates high performance, i.e. the costs can be amortised across a large amount of transactions. This does not mean that ever larger, consolidated, contracts have to be let however.

    There are benefits in such approaches, properly managed they can speed up the procurement / competitive process, badly managed they can impose significant levels of bureaucracy on all the stakeholders.

    One of the side effects of such procurement approaches is that they can lead to a tendency to treat everything as a commodity, hence I suspect why Sarah state that they do not always drive the right outcomes. This is a failing we see frequently in my sector, Defence, where the “most economically advantageous tender [MEAT] all to often translates into “cheapest compliant tender”. The real world is not that simple, particularly so for SME’s offering specialist, niche, services or products. This approach allows little opportunity for the procurer to take account of quality, innovation or overall cost effectiveness, (I am not aware of anyone ever submitting a non-compliant tender during my time in business).

    Sarah, one reason you have so many people willing to point out the error of your ways, is that the actions, even apparently small ones taken by public sector procurement organisations, can inflict considerable damage on an SME’s business; people tend to get passionate in such circumstances.

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