Market Management & Sourcing – NAO Insights Report (Part 3)

By Allan Watton on

This article focussing on market management and sourcing, is the latest in a series of seven tasked with reporting and commenting on the findings of the NAO’s 2016 report on insights and emerging best practice in commercial and contract management.

Twenty issues were raised and grouped under seven headings – Commercial Strategy, Commercial Capability, Market Management and Sourcing, Contract Approach, Contract Management, Contract Lifecycle, and Transition and Termination – and our articles on each focus on the warning indicators and emerging best practices identified by the National Audit Office.

This article looks into the four issues related to Market Management and Sourcing.

Issue #6 of 20: Be an ‘attractive client’

While there is a certain benefit to being a supplier to the government, it must be recognised that this status alone is not always enough to encourage the right supplier to take up a contract. And, as your selection of supplier has a fundamental part to play in the success of a project, it is important to make yourself look like an ‘attractive client’.  An attractive client is one that seeks to establish a fair agreement, one that rewards the supplier for their best efforts, that looks to establish a long-term relationship, and that looks to work collaboratively. Unfortunately, there are still too many clients that prioritise short-term wins and weighted agreements over truly partnering with their suppliers.

Warning Indicators

  • Doing activities hastily without clear pre-planning and an appropriate impact review – this puts at risk long-term commercial sustainability.
  • Suppliers not having sufficient information during procurement – this means they will not fully appreciate what they are getting themselves into.
  • Shortsighted commercial decisions – these contribute to unfair, non-profitable contracts and will impact market sustainability.
  • Insufficient time allowed for supplier due diligence.

Emerging Best Practice

  1. Before – Early Market Engagement

It is vital that you utilise the skills and knowledge freely available out there in the marketplace before developing a procurement strategy. Gather your view of the outcomes and expectations you wish to achieve from in-house stakeholders, then go out to the market to sense-check your assumptions and beliefs, ask suppliers to identify weaknesses and suggest solutions so you can form a more real-world-ready perspective ahead of procurement.

  1. During – Procurement

Detailed information clearly communicated at all times throughout the procurement process will ensure that your suppliers have the best opportunity to present accurate and well-considered bids for your attention. Ambiguity at this stage risks misunderstandings that could reverberate throughout your project, impacting on a supplier’s ability to live up to their promises to you at procurement. Allow as much time as necessary for bidder due diligence.

  1. After – Live Running

As your project matures so must your agreement. Make sure that any material changes to the way you expect your supplier to work, or changes in direction, speed or demands are all built into your contract, which should be reviewed at least twice a year throughout your relationship to ensure that it remains up to date.

Issue #7 of 20: Be an ‘intelligent client’

An intelligent client is one that has conducted all the research necessary to determine with clarity what outcomes they are seeking from the contract and why. The NAO report found that, all too often, government departments did not fully appreciate the ‘what’ and the ‘why’ of their procurements, putting them at greater risk of failure – failure in the task of selecting the appropriate supplier and setting them on the right road, failure in monitoring progress and identifying when costs are getting out of hand, and failure to be able to recognise whether a project has reached its successful conclusion or not. Without clear and strong control over costs and a laser-like focus on an outcome, mistakes can cause serious damage to the budget.

Warning Indicators

  • Incomplete, inaccurate and broad input specifications leading to requirements not being delivered or significant costs being incurred to amend the specifications.
  • Ineffective challenge of the assumptions that underlie bids.
  • Misunderstanding of the cost drivers and incentives through, for example, a lack of modelling.

Emerging Best Practice

An ‘intelligent client’ is one that not only knows their own reasons and costs, but the reasoning behind why a supplier has costed the work in the way they have. By understanding the motivations of your supplier you can better coordinate your relationship with them.

  1. Cost

Early market testing will give you a good idea of what the various elements in your agreement should cost; template each element so you can see where there are discrepancies to discuss between your estimations and your suppliers and between bidding suppliers.

  1. Examples of how it can be used

A detailed and structured cost analysis framework will enable you to not only compare bids against one another with consistency, but to drill down to the individual cost elements to determine where opportunities for negotiation exist.

  1. Specification

If a supplier’s costs stretch your expectations, it’s important to benchmark against others in the marketplace to determine whether initial perceptions were accurate or not. Such additional research will also provide you with the data you need to areas for discussion with suppliers.

Issue #8 of 20: Properly evaluate bids

Evaluating bidding suppliers to determine the one best suited to the task ahead is an art, but the NAO report recognises that not only does the procurement process go wrong on occasion with wide-reaching negative results, but practitioners also told them “they felt that the right bidder does not always win”. This is down to their ability to not only evaluate a bidder against a set list of criteria, but to have the insight to determine, beyond the promises and paperwork of procurement, whether a bidder has the capability of achieving a project’s goals.

Warning Indicators

  • Process weaknesses, such as errors in the assessment criteria or these being inconsistent or unclear.
  • Competition structured in a way that rules out desirable bidders such as small and medium enterprises.
  • Evaluation criteria not aligning to the outcomes required.
  • Bids evaluated on the basis of promises, rather than an assessment of a capability to deliver that promise.

Emerging Best Practice

  1. Assessment of Capability

Clear, agreed measures and outcomes are the key to determining capability, maintaining it and assessing results throughout the relationship. The first step to ensuring that your supplier will live up to their promises is to be clear with what they are promising to achieve.

  1. Assessment Against Outcomes

Historical evidence – gathered in complete compliance with procurement regulations – should be included to determine how suppliers have fared in similar circumstances in the past to help determine how they may work on your contract

  1. Assessment of Risks

An analysis should be carried out on the risks inherent in a supplier not delivering on their promises in order to evaluate the domino effect of such a scenario and how to mitigate that risk.

  1. Have Predetermined Thresholds Been Breached?

For a swifter procurement process, it is important to determine a lower threshold for consideration. Should a supplier fall below this threshold they cannot be considered for the contract. This should extend from costs to capabilities.

Issue #9 of 20: Keep up competitive tension

Value for money can be best achieved when there is competitive tension in the air. It keeps everyone on their toes, pushing just that little harder. Vital at procurement stage, such competitive tension can also be incredibly useful to creating the right environment between parties throughout a contract so suppliers are encouraged to always give their best, to strive for innovative approaches, and to achieve value for money.

Warning Indicators

  • Elements of negotiations slipping until after contracts are signed leading to a loss of competitive tension.
  • Over-reliance on initial competition to maintain tension throughout the contract with, for example, a lack of consideration of benchmarking and other ways of securing competitive pressure.
  • Contracts being perpetually renewed because competition is not considered or sustained throughout a contract.

Emerging Best Practice

  1. Pre-Bid

When you go out to the market, pre-procurement, it’s important to highlight all information gathered from other sources so suppliers do not become complacent in a belief that they are the only ones you are talking to.

  1. Bid Stage

Where possible, keep enough bidders in the process to maintain a competitive edge between them for as long as possible, and make sure that key contractual terms are not only discussed, but agreed and understood before seeking signatures.

  1. During Contract

While the hope is that you will never have to use them, it makes sense to have a supplier backup plan. Relationships do break down, and if collaborative partners lose trust in one another they may decide to go their separate ways. Do not be caught unawares. It is perfectly acceptable to maintain a healthy relationship with the supplier marketplace for benchmarking and wisdom gathering; this connection will not only help you to determine potential replacements should things go awry, but also to keep your current supplier on their toes in the knowledge that, in extreme circumstances, you may be prepared to go elsewhere.

Market Management & Sourcing Conclusion

Throughout your relationship with your supplier, from pre-procurement to contract management, it is important to ensure that you are creating the right environment for contract success. Thorough research, detailed information evaluation, clear and unambiguous communication and understanding of expectations, an intuition about a supplier’s ability to go beyond a promise to effective delivery, and maintaining a healthy level of competitive tension are all key to creating that environment.

Previous articles of ours have focused on several of the 20 fundamental issues highlighted within the NAO’s ‘Commercial and contract management: insights and emerging best practice’ report. These issues are grouped under seven key judgements for commercial relationships. So for a full and detailed picture of these issues, click on the following links to be taken to the relevant article (They are being completed in order, so if a link does not exist watch out for the additional article over the next few weeks) – Commercial Strategy, Commercial Capability, Market Management and Sourcing, Contract Approach, Contract Management, Contract Lifecycle, Transition and Termination.

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