Doing Market-Making Doesn’t Mean You’ve Made a Market

By Peter Smith posted 12-27-2017 05:06


building-674828_1920.jpgMarket-making is an activity or process that is a relatively new element within the procurement periodic table. It started being used in the public sector in the UK perhaps 15-20 years ago, although arguably something resembling it has no doubt been going on for longer.

It applies when an organisation wants or needs to buy goods or services from the external supply market, but there is little or nothing available currently in the market to satisfy that identified requirement. So, market-making involves working to develop suppliers who can meet the needs, forming what is in effect a new market. The aim is for that market to be populated with enough suppliers to form a dynamic, competitive landscape, with enough capability and competence to satisfy the needs and lead to continuous innovation and performance improvement.

There are many ways this can be achieved. Existing suppliers with whom the buyer already has a relationship might be persuaded to extend their capability into the new area. Or a study might look to identify suppliers who are already doing something similar to the required product or service, who might then extend their product range relatively easily. Or maybe a global search might find firms in other parts of the world, already providing this type of product or service, who can expand geographically to carry out the work.

The aim is not just to find one firm who can become a credible supplier, but to establish enough capability in different organisations such that a competitive market is created, leading to great value for money for the buyer and strong supplier performance.

However, we’ve seen many examples of a flaw in this process. Organisations have assumed that because they have gone through a market-making process, then they have created a market. Clearly, that is not the case. Despite the best efforts of the buyer – and this can occur even if they genuinely have been impressive efforts – it may be that there still aren’t enough capable suppliers to create that viable market.

Yet the temptation is to carry on with the process with fingers crossed and the hope that adequate supply will be found. We’ve particularly seen this in the public sector (maybe because the examples are more likely to be in the public eye), for instance with rehabilitation services, or with the private rail operating companies. It seems clear that moving this work into the private sector has not been a success, despite a certain amount of “market-making” having taken place before the competitive process commenced.

But just doing the market making does not mean that you end up with multiple firms, all ready and able to execute these services successfully. The way some of those markets have behaved in recent years is far from what we might expected from genuinely competitive and dynamic markets.

The answer is to have an explicit process step after the core “market-making” activities that asks, “has the market-making been successful” before any programme or procurement goes further. If the answer is “no” then other actions need to be considered – that might be carrying on with further market-making, or it might mean developing capability internally or even abandoning a programme or initiative.

But just because you’ve ticked the market-making boxes does not mean you have actually made a market - that is clear from the UK experience in recent years.


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