I’ve recently had some recent discussions regarding the Construction Sector Transparency Initiative. The purpose of which is to promote increased transparency and accountability in publicly financed construction projects around the world. It does this through the public disclosure of information – such as publishing government contracts online.
I profess no experience in the degree of corruption in construction (or any really) contracts in developing nations. But if someone is advocating for the process stewards, is anyone worrying about the business outcome?
This trade-off is inherent in every public procurement process everywhere. Officials become obsessed with a sound process. Is running a fair, open and transparent process to pick a vendor that under-delivers, resulting in wasted time and money fair? Wouldn’t this scenario qualify as a misuse of public funds as well?
In Canada I believe we have a 3rd way. It’s called Fairness Advisory. This is a specialized service with growing application in the Provinces of Ontario, Manitoba, and Alberta.
Fairness Advisors are engaged at the beginning of a project. In this way they ensure that the fair, open and transparent process actually achieves the desired business outcome.
This is in stark contrast to process auditors or the publishing of contracts, which are backwards-looking solutions.
Here’s how I think it should work: the sponsors require that procurements are certified by a Fairness Advisor. The sponsors then develop a short-list of qualified Fairness Advisors from which buyers may choose from. If the government does not abide by the recommendations of the Fairness Advisor during the procurement, they risk it being documented in the Fairness Report. The Fairness Report documents the entire process from start to finish.
Under this scenario, everyone wins. The public gets appropriate stewardship of their monies, while gaining some assurance of sound business decision-making. Politicians, although still accountable, get a form of insurance on the process and the business outcome by way of the Fairness Advisor’s report. Lastly, bidders can be assured that the procurement process is free from bias, and that the best bidder under the given rules will win.
We launched a new kind of eAuction format just under a year ago… A multi-directional eAuction.
Multi Directional Reverse eAuctions are useful when you have some elements you want suppliers to bid down (e.g. unit cost) and others you want to bid upwards (e.g. a rebate, marketing money etc). Without multi-directional eAuctions you have to find some complicated way of calculating net prices and having suppliers input those net prices into the auction. With multi-directional eAuctions this is all taken care of by the system.
The first live ones happened in November, one in Europe and one in the USA. One of the eAuctions was for Mobile Telecoms (tariffs being bid downwards, hardware credits being bid upwards) and the other was for Furniture (price for new furniture being bid downwards, price for buying back existing furniture being bid upwards).
Very cool.
[By the way if you are confused about the terms "reverse" and "multi-directional" - remember that a Forward Auction is a selling auction and a Reverse Auction is a buying auction. Depending on what you are buying and how you are buying it, bids can go upwards or downwards in a reverse auction. I know it's confusing. But not much I can do about the terminology]
First, let’s start from the beginning. Why is it that sustainable procurement in a public sector context is a big deal? The short answer is that the sum total of all government expenditures in Canada is often quoted to be $100 billion. With that kind of clout, suppliers may have the impetus they need to make sustainable goods and services their default offering, rather than a custom offering.
But what does sustainable procurement mean? ICLEI is the authority on this subject. They suggest that sustainable procurement is an approach to public purchasing that takes into consideration the environmental, economic and societal impacts of goods and services being purchased.
This is contrasted against green procurement, of which we hear most about, that focuses on the environmental impact of goods and services over the full lifecycle.
Time will tell how sustainable principles manifest themselves in procurement transactions. As business leaders are concerned with getting the required business outcome and procurement professionals are concerned with conducting fair, open and transparent processes – who will be the steward for the sustainability goals?
Organizations that are leading the charge for the implementation of sustainable procurement practices set their own sustainability goals before imposing them on their suppliers. This is not only good leadership, but establishes the metrics to which suppliers will be evaluated.
Some great resources that are available:
I am not a big fan of reverse Dutch auctions on the internet, from either the buyer’s or the seller’s point of view.
Dutch auctions were initially invented and adopted to speed up the sale of flowers in Amsterdam. Potential flower buyers would sit in a room which contained a clock. The clock would initially show a very high price - much higher than any flower buyer would be prepared to pay. The price shown on the clock would then tick downwards until it reached a price that one buyer was happy with. The buyer would press a button to “stop the clock” and could buy as many lots of flowers as they wanted at the price shown on the clock. If more flowers remained to be sold then the clock would continue downwards until all the flowers had been sold.
Software providers have adapted this kind of auction to internet procurement auctions, but the practical implementation leads a lot to be desired.
In a reverse dutch auction the price starts very low and gradually increases until a supplier “stops the clock” and offers to supply at the price shown on the clock. Apparently, the faster the clock, the more excitement and the higher prices would be (i.e. better for the auctioneer).
Of course, on the internet, you can’t legislate for the speed of bidders’ internet connections. So all implementations of online reverse Dutch auction that I have seen allow the bidder to place their best bid before the auction starts and then have the system work out when to stop the clock. The system gradually ticks upwards and eventually reveals the winning supplier’s bid to the buyer.
In other words, they aren’t auctions at all. There is no competition, no unleashing of those “animal spirits”, no nervous energy. In short, nothing of what makes auctions the best tool for allocating goods and services in a market.
As if that isn’t bad enough, the buyer only ever gets to see one supplier’s bid - so if there are any quality or other issues with that supplier the buyer is not able to switch to another supplier.
In fact, I am aware of one major retailer which has been updating its Dutch auction software to reveal all the suppliers’ bids. In other words they are turning Dutch auction software into Sealed Bid software.
The moral of the story - think carefully before running a Dutch auction on the internet. You’ll be running a second-class sealed bid. 9 times out of 10 the real solution would be to use a Japanese auction …. but that is a different story post.
Much investment has been made to centralize procurement and purchasing within organizational boundaries. Yet, much work remains to wring out savings across organizational boundaries.
The challenges with collaborative procurement are not insignificant. One must worry about the selection of appropriate goods / services, demand planning, allocation of risk and liability, establishing acceptable standards / specifications, effect on local economies, etc.
The best way to tackle these challenges is to collaboratively develop and implement a prescribed approach to sourcing, selecting and managing suppliers. This will not only make it easier to evaluate prospective goods and services for collaborative procurement but will also make it easier for new jurisdictions / organizations to join the program.
Now, not everyone is going it alone. In the US, collaborative purchasing is well established. The US Communities Government Purchasing Alliance (www.uscommunities.org) describes itself as such:
“U.S. Communities Government Purchasing Alliance is a nonprofit instrumentality of government that assists local and state government agencies, school districts (K-12), higher education, and nonprofits in reducing the cost of purchased goods through pooling the purchasing power of public agencies nationwide. This is accomplished through competitively solicited contracts for quality products through lead public agencies.
Today more than 32,000 public agencies utilize U.S. Communities contracts and suppliers to procure 1 billion dollars in products and services annually. Each month more than 400 new public agencies register to participate. The continuing rapid growth of public agency participation is fueled by the program’s proven track record of providing public agencies unparallel value.”
Many buying groups, of course, exist in the Canadian public sector as well. Recent research conducted by The Procurement Exchange (www.procurementexchange.com) suggests that the use of buying groups is more common as the size of an organization grows. What is not clear however, is what proportion of spend is accounted for by these buying groups. Given my experience in public procurement, I would venture: very little.
Procurement professionals don’t have it easy. Not only are they responsible for managing transaction risk, but they must also advise on structuring the transaction to get the desired business outcome.
A good guide to assessing whether your Request for Proposal (RFP) will achieve the desired business outcome is to apply a risk-based test. Generally, risks may be considered to be an adverse event that negatively affects the business outcome for the project.
In a risk based test, all the major risks that have the potential to adversely affect the project are documented and categorized. These categories become the Key Components, which define the structure of the evaluation.
When you see RFPs structured such that proponents are required to respond according to the structure of, for example: Design & Construction, Operations, Financing, Management, etc . – this is risk-based structuring at work.
A schematic for this process is provided below.
By using this as a guide, and supplementing with additional evaluation criteria as required, you’re on your way to having more successful procurements.
The District of Columbia is proving that the use of Web 2.0 tools can bring greater transparency, efficiency and competition to a procurement – at virtually no cost. And the tools are simple enough that anyone with moderate internet skills would be able to implement them.
This week I had the pleasure to speak with Vivek Kundra, CTO of the District of Columbia. One of Mr. Kundra’s objectives is to review and apply popularized Web 2.0 tools such as wikis, YouTube videos, and Google Apps to a variety of government functions, including procurement.
As we’ve discussed in previous posts, the first test of these tools was the use of a free, open source MediaWiki (popularized by Wikipedia) for the District’s Evidence Warehouse project. The wiki contains the call documentation, video recordings of key events, the Q&A, and other key pieces of information. The content for this project can still be found at:
Given the positive wiki experience, the District evolved their projects into a Google Sites page. Google Sites allows you to create a group workspace without having to know any HTML code. You simply pick the functions that you would like to add to your website.
This allowed the District to add more sophisticated calendar functionality, document downloading, and a much improved user interface. Below is a site for the new Information Technology Staff Augmentation project.
According to Mr. Kundra, undertaking projects in this manner has been positively received by all stakeholder groups as project transparency and efficiency has been improved. These tools not only reduce the number of paper-based information hand-offs required during a procurement, but also provide a single source for up-to-date content.
Continuing along the same vein of interesting applications of Web 2.0 technologies in procurement is the Evidence Warehouse project for the District of Columbia. For this project, the District has posted all communications including documents and video to a Wiki. There is even a Q&A section available for everyone to see. The Wiki can be seen here:
It has been reported that this process enabled the District to reduce the process from 6 months to 3 to 4 months. I have to imagine that this also furthered the public procurement maxims of openness and transparency.
Another interesting development I’ve become aware of is the use of YouTube in procurement. For instance, there is a great video that provides and overview of the eVA e-procurement system.
A few years back we did some work with Oxford University. They were interested in how procurement auctions fitted into the bigger auction picture. We were interested in finding out how in line with auction theory we were. I was looking through my old material from that study and I want to share a neat graph from that work that models how expected savings rise the more suppliers you include in an auction.
If you assume that all suppliers in a marketplace have a price evenly distributed between a low price and a high price then, on average, the savings you would get increase as shown in the graphic above. This helps emphasise that 4 bidders is a good number for a reverse English auction, as I have often said. But one thing to clarify: this is a model - you can do better than the model by ensuring that when you select potential suppliers that you are selecting suppliers who have a lower price rather than selecting suppliers at random from the marketplace.
An interest of mine is evaluating opportunities to apply some Web 2.0 technologies to the procurement environment.
Recently, I discovered a service provided by Ning. This service allows you to create “social networks” (a la Facebook) for different community groups.
Most procurement communities are closed shops. They are regionally based associations that charge membership dues. Now, granted, they provide more service than I envision - but what about a free service to allow us to connect?
Furthermore, I have a hypothesis that the Water Dept. in NYC has more in common with the Water Depts. in Dubai and Melbourne than with the other departments in NYC. Shouldn’t someone bring these people together?
So, The Procurement Exchange Community can be found at procurementexchange.ning.com or via the home page of The Procurement Exchange.
I will leave it as open as possible so that members can create groups, start discussion threads, etc.
