Procurement usually contributes to the creation of monopolies by accident. But there are specific steps that can be taken which will make it less likely that the organization will end up in a vulnerable situation. Here are three of the key risk areas and suggestions of what can be done to guard as far as possible against formation of monopolies:
1. Be cautious about any purchase where there is product “lock-in”
The classic example is software. Any organization that has SAP or Oracle installed as a corporate-wide single ERP platform, or indeed Microsoft on the desktop, has created in effect its own personal monopoly supplier. What is your freedom of choice when it comes to upgrades, add-ons or even development work? Now that’s not to say that buying such systems is always a bad idea, but be conscious of the dangers and think about mitigating strategies. For instance, getting as much as can be possibly negotiated upfront while you still have negotiating leverage is vital. There are other examples. Even printers with toner cartridges that over the lifetime of the equipment cost a hundred times the initial capital cost. These are all examples of suppliers creating product lock-in and effective monopoly.
2. Avoid specifications that are supplier-specific or super detailed and restrict the market
Clearly, specifying an Apple product will create your own Apple monopoly supply situation. But overly detailed specifications can lead to the same end result. (And there are other dangers – corruption in global defence procurement is often disguised behind highly detailed functional specifications). In most cases, specifications based on outputs or outcomes open up the market to more suppliers and also leave the possibility of switching later on. So use that type of specification wherever possible.
3. Think carefully about switching costs and feasibility when contracting
In a sense, this captures a number of these points and more. For instance, bundling services under a single prime contractor can be an attractive option. But it can restrict the future supply market and again make switching suppliers more difficult, costly, and time-consuming. It’s not a discipline that many organizations follow, but a contract management plan (which of course we should have for any major contract) should include the plan for exit and/or switching. If switching looks close to impossible, there’s probably something wrong with the strategy.