Good Practice
When To Use a Prime Contractor – Thoughts from MOD & Steve Morgan

Steve Morgan is the UK’s Ministry of Defence Commercial Director. He sits in the MOD head-quarters in London, but has functional leadership (but not line management) for all aspects of procurement work around the huge organisation, including Defence Equipment and Support, where most of the money is actually spent.

He is also the Chair of the National Procurement Service for Wales. That organisation, in effect a shared service for the Welsh public sector, is set up with a board to oversee strategic direction, with Morgan in the hot seat. It hadn’t occurred to me (stupidly) that with a name like his, there is a Welsh heritage, although he is Canadian. His family at some stage in the past moved to “a small island off the coast of Wales – North America”, as he joked in Cardiff at the recent Procurex Wales Live event.

steve-morganWe thought he might speak at that event about procurement in Wales, but instead he focused on MOD. However, what he had to say was interesting in any case, as he spoke about the procurement initiatives he and the team are taking, particularly in the area of encouraging competition, both generally and specifically through trying to get more small firms into the supply chain. 47% of MOD procurement spend is still “single source” (i.e. only one supplier available / used, so no competitive process) but he has a target to get that down to a third over the next couple of years.

He believes that smaller suppliers can offer lower costs, they can be hungrier and more supportive than larger firms. However, it is worth saying that we’re unlikely to see lots more SMEs acting as prime contractors for MOD – much of the potential growth is for smaller firms working in the wider supply chain. But Morgan made a very interesting point that applies to anyone who is using a prime contractor model – in any organisation and in any spend category.

He said that often the Prime “is not adding any value and it is the second tier firm that is doing so”. In which case, the question is – why not engage directly with the second tier provider? Or, he said, in other cases “the Prime is actually doing things themselves that would be better done by using another firm”. I guess that applies whether the other firm still works though the Prime (perhaps for reasons of integration) or works directly to the buyer.

There is a lot to think about in those apparently simple remarks. It comes down to structuring our supply chains, and strategic thinking about why and when we might want to use Primes (or indeed other mechanisms that mean we don’t engage directly with providers when we could).

In many organisations, it can be a lazy decision in the sense that it seems the easy and simple thing to do. Using a Prime means we don’t have the transactional costs of working with more firms. It may mean we avoid having to run further formal and regulated procurement processes. It gives us “one throat to choke” as the somewhat unlovely expression has it. If something goes wrong, we kick the Prime rather than having to allocate blame and manage actions across a number of firms.

There are also reasons for using a Prime that are generally valid and make such approaches eminently sensible. If a number of capabilities, goods or service activities have to be integrated to provide a service or product for the final buyer, it may well be sensible to give one party the overall responsibility for that and make them truly accountable.

Equally, if there is a reason why the Prime can manage the transactional costs of dealing with a complex supply chain better than the ultimate buyer, then that too can make sense. And the cost of running compliant public procurement processes does sometimes come into play – it is tempting to pass responsibility to a prime who is not bound by the rules. I confess I have done that myself.

But it comes at a price and the point is that we need to consider each case carefully on its merits. The decision about using a Prime is an important one, as it has implications for the market and competition, as well as more direct operational and financial implications.

So, coming back to Morgan, it was good to hear him talking about these issues and even if we only got the headlines from him, it is re-assuring that MOD with its £20 billion a year procurement spend is considering such issues.  He talked about other initiatives too in terms of encouraging competition – we will have another article on the Spend Matters UK/Europe website with more on this topic.

First Voice

  1. Peter Stuttard says:

    Absolutely on the nail, I couldn’t agree more, so:

    – Why is DE&S (the MoDs procurement agency) proactively disengaging from SME’s?
    – Why has the MoD’s direct spend with SMEs declined so dramatically over the last 5 years?
    – Why are DE&S enabling contracts, most recently and most notably FATS 5, being structured so as to restrict the numbers who can qualify and in a manner that is patently designed to disadvantage SMEs?

    Rhetoric delivers an expectation: but if your actions are diametrically opposed to that rhetoric this delivers frustration, disillusionment and complete loss of trust.