Good Practice
Trade-offs in Public Procurement – Leverage Versus the Needs of the Customer

We wrote here about the trade-offs that we see in public procurement. Whether it is the balance between “policy through procurement” initiatives and more basic value for money, or the trade-off between flexibility and anti-corruption based processes, many aspects of government buying require consideration of those factors.

For each of the trade-offs, we are going to look in more detail at the nature of the potential conflict, then suggest some steps that public procurement professionals can take to minimise the potential for real issues and problems. The nature of these trade-offs means that there are no magic solutions, but there are ways to reduce the risks. Today, a trade-off that certainly in the UK has been implicit in the recent strategy for central government procurement.

Leverage and aggregation versus the needs of the customer

There is a belief that bigger is better, that larger contracts and centralised procurement and negotiation will drive lower prices and better deals. But what does this do in terms of the needs of individual users, budget holders or buying organisations?

The concept of economy of scale means that producing more of a product lowers the average cost per unit produced. It came to the fore in the early days of mass production, when Henry Ford brought the price of a car down to levels that the average worked could afford. Certainly in many areas, the concept is still valid.

In procurement terms, it concept supports the idea that if we aggregate requirements, and standardise as well, then we can approach the market with a larger standard order that will attract lower prices. Again to some extent this is true, but the basic concept needs to be treated with caution for a number of reasons.

Firstly, the economy of scale curve is not the same for every product. In some cases, economies of scale are very limited – that is often true in services spend areas, whether it is management consulting or cleaning services.

Secondly, new manufacturing methods have made “mass customisation” much more common and cost-effective. So going back to Henry Ford, not every car needs to be pointed black now. Modern production lines can handle many different finishes for the car without greatly adding to the cost structure.

Finally, and this is where we come to the core trade-off, seeking economies of scale can have some negative impact on both the user of the product and indeed the market. We have seen cases when end-users or budget holders have been provided with goods or services that really do not meet their needs in the interests of aggregation and standardisation. That can apply in the case of a laptop that does not have the capability to run complex apps the user requires, or a professional service where the “preferred supplier” just does not have the necessary expert capability.

So procurement executives must be aware of these trade-offs and act sensibly when it comes to balancing them.

Points to note

Here are our suggestions to help contracting authorities balance these trade-offs between economies of scale and meeting the needs of the internal customer / stakeholder.

–  Understand the economy of scale curve for the goods or services that are being purchased. If that curve does not indicate real benefits from larger purchases, think carefully about whether aggregation is the right approach.

–  There may be good reasons for aggregation other than just apparent economies of scale, such as reducing the number of procurement “events” or making the best use of scarce expert resources to run procurement competitions, for example. But think carefully about why an aggregation approach is being followed.

–  Ensure that stakeholders are considered in these decisions and that their desire for variation is examined carefully. Sometimes it is not justified (“I want a blue laptop”) but sometimes it is (“my job takes me to large construction sites and I need a very robust laptop that can withstand rough treatment”).

–  The core message here is that procurement should take a thoughtful and analytical approach to this sort of trade-off. Every case and category needs to be considered on its merits. Don’t assume that aggregation and standardisation is always the right answer – even if it quite often will be.

First Voice

  1. Les Mosco says:

    Good to see the debunking of the fallacy that aggregation will always yield benefits. There is a simplistic belief that buying in bulk is always cheaper. As you say, in some cases it will, but not always. I well remember a case where my organisation was a high volume purchaser of company cars. When we asked for an increased volume, the manufacturers told us the discount off list price would have to be reduced. Previously we were filling their marginal unused manufacturing capacity. But our additional volume would eat into core capacity. So one can get too big. But just as important is that aggregation often means common standards and specifications; that’s good where there are unnecessary and inefficient variations in standards, but that’s not always the case and one size doesn’t necessarily fit all users. In short, aggregation needs careful thinking through, it’s not a silver bullet.