Oct 30

Corruption – Procurement’s Elephant in the Room

This article was published in the November 2016 edition of ‘In-Procurement’, a leading UK procurement magazine

Post GFC, international procurement became a welcome contributor to corporate profits revelling in the upcycle it has long aspired to. Populated by a growing army of graduate practitioners and led by senior executives with a seat at the table, procurement is now full of prize fighter self-importance. If you’re in doubt about that, just ask them! But be sure to also ask their supplier counterparts and the old adage ‘self-praise is no praise at all’ might come to mind.

Despite the veneer, procurement maturity is still very much under question, notably in the indirect space. Direct fares better, yet people involved in the acquisition of organisational goods and services continue to make fundamental mistakes, particularly when dealing with anything that’s not straightforward.  Evidence of this exists in two essential components.

1.  The Interpretation of Value
2.  Bid Evaluation

First let’s consider what things look like from the standpoint of interested observers from the inside and the outside.  A recent IBAC survey reported that corruption is perceived to be rife in public sector procurement.  The four main segments identified to be a problem by those who have worked in these areas are shown here in Figure 1.

Corrupt Stats

Including Construction, which is concerned mainly with direct procurement, the perception of corruption in the procurement process is at face value, disturbing. These are huge numbers, and whilst they represent perceptions and not actual instances of corruption, they point squarely to ingrained mistrust in the application of the rules and the people applying them.

The commission reports that (Government) agencies must be able to attract quality bids from the best suppliers of goods and services in order to provide best value for money.   In IBAC’s view “…corruption can undermine a procurement process by causing suppliers to alter their approach to government procurement, to the detriment of the public interest. This could include seeking favourable treatment, inappropriately offering or being pressured to provide gifts and benefits, or simply deciding not to bid for work because of lack of confidence in the soundness of the procurement process”  

It goes on to say that procurement is vulnerable to corruption at various stages including the bidding process, the selection of service providers, deliveries, payments and contract management – all but the entire function.

Is Procurement Really Corrupt ?
Our view derived from eight years’ experience in multi-sector procurement and three decades in sales is that capital C corruption does exist, as we’ve seen in some recent high profile exposés, but observers and participants are not witnessing endemic corruption, rather the misguided practices of operatives at every level who follow largely subjective and highly interpretative processes that are wide open to personal prejudice. Couple this with the absence of procedural scrutiny (audits happen after the fact and can be manipulated) and many decisions are driven purely by self-interest. From the outside this certainly smacks of corruption, but from what we see inside, it is better characterised as dangerous complacency. Any way you cut it, this is not good for business.

Getting back to the two essential components – Value and Bid Evaluations…

Value
The Victorian Government’s primary procurement policy directive is the consideration of Value for Money which it describes as “A balanced judgement of a range of financial and non-financial factors, taking into account the mix of quality, cost and resources; fitness for purpose; total cost of ownership; and risk” This aspiration goes largely unfulfilled because it may not be compatible with Government’s own policies and procedures and is therefore not immune from unscrupulous interpretation. The danger is that true value-based offers can be ignored resulting in the perception of corruption.

Value is difficult to express, even more difficult to objectively evaluate. To optimise value, countries like Japan limit the use of formal requests for Tender and Proposals in their procurement methods. Outcomes are planned, suppliers are partnered and commercial arrangements are agreed between mature buyers and equally mature sellers. This way, value can be derived for both parties. Here value is not buyer centric, it is shared proportionately with the supplier in the same way that risk is borne by both.

Why is the Perception of Corruption so Prevalent ?
Imagine being a prospective supplier watching a tender unfold where you ‘know’ what you have offered is unlikely to be beaten. When you’re told that your competitor provided better value, given how poorly most procurement teams communicate, it’s not going to make much sense. So, when you consider how you lost the business with the best response, a logical conclusion is that a corrupt decision has been made. This is a non-sequitur. We’ve observed a more probable and less sinister reason than blatant corruption – commercial immaturity.

Faced with complexity beyond their abilities, procurement people tend to seek out easier, safer (albeit incorrect) decisions that, subject to scrutiny, are difficult to justify. Compound this with poor supplier communications and the avoidance of tough conversations, and you can start to appreciate what is actually happening.

Evaluations
There are many evaluation methods with prescribed methods for arriving at the right decision. In determining outcomes in commodity supply categories, organisations often do have the ability to evaluate, but in the absence of clear evaluable pricing and when asked to interpret ‘Value’ and not only price, the task becomes much more demanding.

We recently observed a number of senior stakeholders trying to agree on weighting certain response criteria prior to a Tender evaluation. The group was considering the value of Corporate Social Responsibility in the overall outcome. Following a long and emphatic discussion about the importance of CSR, it was deemed ‘very’ important, then amazingly only 5% of the available score was apportioned. Given that CSR had very little opportunity to influence the outcome, this was nonsensical. The group then went on to quickly allocate 50% of the available score to price. The message to suppliers; good luck submitting the best price if you’ve invested heavily in CSR !

Outcomes are certainly being reached, but in truth they are no more than cost-based determinations masquerading as ‘Best Value’ decisions. A common approach in the public sector which avoids the issue of value altogether, is to set up supplier panels. This appeals to the lower ranks of procurement who get a significant, if slightly restricted, choice yet retain the authority to select suppliers without even considering value.

What the Experts Say About Value
Information provided by CIPS on the subject of value for money in evaluations states; “A challenge of Best Value is to develop marketplaces to take advantage of contemporary advances in relationship thinking and e-commerce. Stakeholders, such as suppliers and service providers, need to embrace other issues like equal opportunities, e-commerce, true partnering and economic development of a local area, in order to support Best Value”  This is one of many points apparently designed to educate the procurement function by urging it to incorporate these factors into evaluations.

Really? How can this stuff be properly assessed and by whom..?

The reality is that the more elaborate the description of value, the harder it becomes to evaluate. Not only does the complexity of evaluations (even when supported by expert advice) fuel poor practice, it evidently leaves potential suppliers confused and unsatisfied about how decisions are made and worse, why they were not selected, which can be construed as corruption. Add to this poor and sometimes non-existent post-tender interviews and it is understandable that so many responded negatively when surveyed.

What Can be Done About the Perception of Corruption ?
The unpleasant truth is that if the overwhelming majority of participants and onlookers perceive widespread corruption, they see us in the procurement community as corrupt. We must therefore ensure that processes are workable, well communicated and trustworthy. Above all we must be diligent in recognising and preventing immature, complacent or reckless actions in our own ranks that fuel the fire of perception.

In and of itself, corruption is a suitcase term and not a prosecutable offence,  but in procurement it’s an unwelcome indictment that persists despite the strict policy framework in this highly regulated environment. As foreboding as the stats are, our considered opinion is that corruption, the elephant in the procurement room, is a baby one.