Good Practice
NAO on Commercial & Contract Management – Keep Up Competitive Tension

At the end of last year, the UK’s National Audit Office issued a very useful document titled “Commercial and contract management: insights and emerging best practice”. We did provide an initial overview of it here, and now we are into a more detailed review of its content and findings. For each area the NAO has covered, we will look at their content and then give any additional analysis or thoughts we would add to the mix. Today, we will take a look at number 9 of the NAO insights (as they call them) – Keep up competitive tension. This falls under their “market management and sourcing” wider heading.

The NAO points out quite rightly that “ensuring that there are sufficient, credible bidders during procurement” is not enough. Of course competition is critical at the bid stage but “this alone will not provide value for money”. So this “insight” is all about maintaining that sense of competitive tension throughout the contract.

NAO’s warning indicators given here include negotiations slipping until after contracts are signed (when clearly buyer leverage has all but gone). That sounds like an obvious point, but there have been recent high-profile examples of that issue causing real problems (including the collapse of a major healthcare contract in the UK, where the two parties were still holding fundamental and tense negotiations months after the contract had been signed).

Maintaining the tension means thinking innovatively about contract structures that might help to drive competition through the delivery period; keeping bidders involved for as long as possible and looking at benchmarking and other measures once the contract is running. Organisations can learn from others; for example, defence, where contracts are often “single source” so traditional competitive tension cannot apply. (However, NAO says little about just how Ministry of Defence and others in that field do maintain competitive tension – that might have been useful.)

But the case studies that are provided are interesting, and several tell a story that is neither wholly positive or negative. In the Department of Work and Pensions Work Programme, “using two or three prime suppliers in each region helped sustain competitive tension. The Department could shift referrals between suppliers if performance differences exceeded a certain level … Eventually it could terminate their contracts, with a range of experienced suppliers able to take their place”.

However, sometimes the good intentions don’t quite work out. NAO goes on to say that in practice, “the benefits of this approach have not been fully realised as the contractual performance structure made it more expensive to terminate poorly performing suppliers”.

Or take this example. HM Revenue and Customs negotiated cost savings on the huge Aspire IT contract but “in doing so conceded safeguards designed to preserve competitive pressure. For example, it gave the Aspire suppliers greater exclusivity and suspended its right to benchmark services, thereby losing its ability to assess how well the suppliers were performing against commercial comparators”. However, HMRC got some of those concessions back in a further negotiation a few years later!

Public Spend Forum Comments

Another good and very sensible point here from NAO. Too often, in the private as well as the public sector, procurement sees its job as running the tendering process, choosing one or more suppliers and then moving onto the next project. But assuring supplier commitment and performance throughout the entire delivery period is vital for the success of the contract, and one way of driving that is by maintaining that competitive tension.

Some points made here are apparently obvious yet examples show they need re-stating, such as getting all the key negotiations complete and documented before signing the contract. It is amazing how many times I have had to stress that to contracting authorities during my consulting career!

Clearly, NAO only had so much space to cover each of their “insights”, but we might have expanded a little more on the aspect of maintaining competitive tension during lengthy tendering phases, which has often been a problem in major and sensitive government contracts.

What happens is that the pre-qualification phase ends up with four or five bidders, which seems fine, but before the final supplier selection is made, there are drop-outs. In the worst case (and we have seen examples of this), the buyer is left with just one bidder, giving no choice at all and the bidder is very much in the position of power. Competitive dialogue procurements seem particularly vulnerable to this happening – in part because of the high level of time and resource commitment usually needed from the bidders, and also perhaps ironically because drop-outs are more likely when the bidders really understand what is wanted by the buyer, as tends to happen when this procedure is used.

It is not easy to address this risk, but there are things that can be done – some simply around the way bidders are treated during the process – and perhaps NAO could have expanded on that a little. But all in all, this is another helpful and thought-provoking “insight” from NAO.