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.