Collaborative Procurement in the Public Sector – Five Benefits and Five Negatives

By Peter Smith posted 03-20-2017 21:50

  
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One major trend over the past twenty years in public procurement has been the greater centralization of procurement activity. Conceptually and practically, collaborative procurement is seen as being a good thing. We have seen national procurement organisations being created, or existing bodies strengthening their position in many European countries. There are also regional or local collaborative bodies covering part of a country, and those who are focused on helping organisations in particular sectors, such as health, police or local government.

In some countries, the national collaborative bodies have gained a strong mandate in terms of some organisations being “forced” to use them; in others, it is still very much a voluntary option for users, but in general, more contracting authorities than ever, we suspect, are using such collaborative bodies.

What are the pros and cons of this development? First, we will look at the positives as they are usually assessed, and then we will take a more critical look and examine some of the negatives around this strategy.

The Benefits of Collaborative Procurement

1.  There should be – or perhaps we can say may be – economies of scale by bringing together multiple organisations and their purchasing requirements. This is the obvious reason that the general media and politicians are usually positive about collaborative ventures. “Why is every public organisation doing a separate deal for copier paper? If we just had one deal we would get a much better price,” is what we hear. If we bring together spend from multiple organisations, and approach the market with that aggregated requirement, then we should have more buying and negotiating power and be able to obtain a better commercial deal.

2.  There should be a saving in the overall effort and therefore in the cost incurred to carry out the procurement work; the whole tendering process from early market engagement to tender and contract award. Simply, collaboration means we are running one single procurement exercise on behalf of (say) 10 organisations, rather than 10 organisations each running a separate procurement. That should generate an obvious benefit in terms of the resource needed to do that.

3.  That efficiency saving is also replicated on the supplier side, leading to lower costs for the market. Instead of potential suppliers having to bid many times, completing many PQQs or ITTs, which of course may all require different answers, data and input, they only have to do this once. (The issue of a lack of standardization in terms of processes such as pre-qualification is a particular dislike for many suppliers!)

4.  Particularly where the contract covers relatively complex goods, services or works, there is the opportunity to develop procurement-related expertise in the collaborative body in a way that is difficult for each single organisation to do themselves. So it is unlikely that every town council can afford to have a really skilled energy buyer; but an organisation that is buying on behalf of 50 or 100 towns can afford to invest in that expertise, which should generate benefits for the users of that contract.

5.  There may also be the opportunity to use the collaboration to drive standardization, which can then have another range of benefits. Those benefits can range from a reduced need for total stockholding (stock can be shared between different entities) or less need for staff training. So if different Police Forces collaborate around (for instance) protective equipment, and agree to common specifications, then that equipment can be used by different police forces, and there is no need for training if a police person moves from one Force to another.

These benefits can be significant. In our experience, many people assume that the economy of scale argument is the most powerful as a driver for collaborative procurement. We disagree based on observations over the years. The benefits from standardization and from having deep expertise in the collaborative body can often outweigh the economy of scale benefit, we would suggest. 

The Negatives of Collaborative Procurement

Now 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.

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 centralize 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.

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