After the crisis: let’s fix procurement.
By: Alastair Parvin
Tags: Government, Politics, Covid-19, Design, Systems Thinking

How do you solve a problem like procurement?

So, if we were to redesign procurement for the 21st century, to try to imagine a system that is faster, cheaper, more effective, more competitive, more open, gets better public value and provides better protection against corruption, what might that look like?

Well, I don’t know. But if you’ve read this far, you’re probably interested enough in this problem that you might have some ideas. These are mine:

Digital platforms

The first and most obvious move is to use the web to solve the bandwidth problem. It’s what the web does best. Government can learn from the effectiveness of platforms like Amazon, Ebay, AirBnB, Alibaba and the App store; all made possible by standardised template agreements, simple protocols and well-designed digital interfaces that aim to get the transaction costs as close as possible to zero. The Digital Marketplace and GCloud framework are a first step towards this. The objective should be to create truly open markets – that is, markets where any new entrant can join and quickly prove themselves capable of delivering. As far as possible, these could shift from filling in long application documents, towards a more ‘ratings’ like approach, where a supplier can easily get a small first order and prove themselves. The real proof is always in the pudding, and even the smallest portion tells you more than whole books of recipes. Right now, a busy, stressed, NHS care trust executive should be able to get online, and order 200 face shields each from 10 companies, in less than 10 minutes.

However, what makes web platforms effective is not just the frictionless digital infrastructure, that lets buyers connect with sellers and vice versa. Their success lies in the power of the platform owner to shape the market: to set standards and enforce rules of engagement. Uber do it. What if government did too?

2. Rules-based procurement

This ability to aggregate the public sector’s combined purchasing power to set the rules of the market is the single most powerful tool that government is not using.

Let’s return to the example I mentioned earlier, of IT contracts. A year or so ago, in collaboration with Connected Places Catapult, Tech UK and with contributions from a range of experts and suppliers, we drafted a checklist of 15 simple but robust basic checks for any local government IT contract. It included things like a customer’s right to extract their own data at any time, and a ban on any contract longer than 2 years. We realised that if government were to make all public sector IT contracts conditional on meeting those 15 rules, government could prevent most, if not all, of the kinds of market failure we see across public sector IT every day, where government ends up paying millions for rubbish, outdated software. In other words, there is no such thing as ‘The Market’. There are many possible markets, and government has more power than it thinks it has to shape markets where it is almost impossible for them to go too far wrong. I would argue that not only does government have an opportunity to use its platform power more effectively, it in fact has a moral obligation to do so.

Of course, there were some (not as many as you might think, I should add) murmurs from the old suppliers who said ‘if you make the rules of the game too stringent, we won’t play’. But that’s the whole point of competition. If the old companies aren’t willing to play, they leave the market open to younger , smaller, hungrier, more innovative companies who will. And believe me, they will. I’ve written about this before under the concept of ‘Democracy as a Platform’.

(Additional note: In other domains, this could go further. For example, in cases where a contract will inevitably create a temporary monopoly, or where there is a particular urgency to move fast in a crisis, bids could be limited to non-profit companies (no profits to shareholders) with wage ceilings.)

3. Open, modular contracting

Another approach we’ve been exploring, particularly in relation to procurement of buildings, is to shift away from the practice of bundling everything together (R&D, finance, delivery, risk etc) into a massive contractural black box, and instead doing the exact opposite: breaking everything you want to buy into small, separate, predictable, transparent modules, each of which is documented for all to see, and can be procured from any (or several) of a range of suppliers at any time.

Let me give an example from our work on WikiHouse. In recent years, if a council wanted to build social housing on a site, they might go to a single contractor to do the whole thing. Of course, there are a limited number of construction firms capable of taking on a task and risk of this scale, so the bids come in high. All the design IP, costings, task data etc is black-boxed, kept by each contractor whose costs are largely based on guesswork. So when the next project comes along, nothing gets much better, cheaper or more predictable. Councils are stuck in groundhog day, re-tendering to the same group of construction firms, and starting every project from scratch.

Digital manufacturing allows us to change this, because it allows construction to be broken into clear, predictable tasks, that almost anyone can do.

So what if, instead of going out to tender, the council were to start by paying an R&D team to develop a customisable house type design, with an IP agreement that allows them to use that design as many times as they please (this might be a open source, or a commercial licence). Every component, every task is predictable and separately documented, all recorded in spreadsheets and assembly manuals that everyone can see. Prospective suppliers (who might be small shop-fitting companies down the road) then provide rules of thumb for the costing of each task (eg ‘£200 per day’ or ‘£21 per sheet of plywood’). These rules of thumb are their ‘bid’ that can be used to cost a task. If the customer offers them the job, they don’t get to change their bid, they only get to say ‘yes’ or ‘no’. If they do accept, they are obliged to measure as they go and feed–back into the design and documentation, so the predictability of cost and timescales gets better and better over time, for everyone to see. This also means that instead of being stuck with the same old large suppliers, the council can grow an open network of SMEs capable of delivering the same product or service, and switch between them at any time. Continuous competition, continuous collaboration and continuous agile innovation.

This approach has the additional benefit that, by taking on additional risk (and then using feedback to reduce it) the customer also regains control over design quality. The contractors’ incentive to drive-down quality has been politely removed from the equation.

This approach may not work for everything, but I suspect it could be applied to a huge variety of procurement tasks. It could certainly be used in the case of the COVID-19 PPE.

(Update: After I posted this, Richard Pope shared with me this post on pioneering work done by 18F on Modular Contracting. It’s very much worth a read.)

5. Flat pricing

The final idea — which certainly won’t apply to every situation, but might apply to some — involves flipping the game of bidding itself upside-down.

The traditional contracting mindset is that you invite bids on price from different suppliers in order to ‘let the market find the price point’. You then pick one (often the second-to-lowest bidder). The trouble with this, as we have already explored, is that it creates a strong incentive for suppliers to bid low to win the job, then immediately engage in a race-to-the-bottom on quality or resilience. In the end, the money saved by getting suppliers to bid-low often turns out to be a false saving.

But in many situations it may increasingly become possible to use shared data to predict roughly what the price point should be, or what the customer can viably afford for it to be. So what if, instead of getting suppliers to bid on price, we were to fix the price across all potential suppliers, but then invite them to outbid each other on quality or performance. In effect, to trigger a race to the top on quality and other social or economic outcomes. It’s a way of extending an open invitation to all possible suppliers, including new entrants, and saying ‘here’s the money that’s on offer, what could you do with it’?

Of course, if no suppliers step forward, then the price would have to be raised until several companies offer their services.