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The public sector and value

| Jan 23, 2018

For decades, the UK’s public sector procurement policy has been governed by EU directives which set out to guarantee fairness and openness across the EU. In theory this means that British and European firms can bid for any contract opportunities in any of the EU nations (as they are all published in the Official Journal of the EU – OJEU) and must be considered on a level playing field.

More broadly than this though, EU directives resulted in the UK government enacting legislation that governs the entire commercial activity of the UK public sector, not just in relation to OJEU activities.  These rules cover more than just ensuring a level playing field across the EU, they aim to ensure that all procurement activity in the UK public sector is run openly and fairly.

While the principles of this are sound – who wouldn’t want government to spend public money openly and following competitive processes – the problem is that these regulations drive less than favourable behaviors. My earlier blog on the importance of value over cost (“When the CFO comes calling”) sets out the importance of strong, long term relationships with key suppliers. In the public sector it is far more difficult to build these relationships as contracts must be formally reviewed/market tested without any favour being given to an incumbent. This therefore removes the customer’s ability to take into consideration prior experience or behavior.

What incentive is there then, for a supplier to go the extra mile and deliver innovation and performance improvements if it has to start from scratch in two to three years’ time?

Even if the customer took the service improvements and innovations and baselined them into its requirements, it would have to publicly describe the innovations that its incumbent supplier had developed, giving away that supplier’s hard-won competitive advantage, and opening up the possibility that a competitor could undercut them (having not incurred the development costs).

How motivational is that to a supplier? Knowing that it could work really hard, deliver an outstanding service, innovate and build a strong relationship with its public sector customer, only to give it all away at the next formal review. It is unsurprising therefore that the public sector generally doesn’t benefit from the same level of innovation and development that the private sector achieves.

It is my view that the formulaic and controlling nature of the public procurement regime is not good for forging strong, long term supplier relationships, which results in lower levels of innovation and service development. This is why the public sector generally lags behind private sector in getting best value despite its substantial spending power.

A benefit of leaving the EU might be the opportunity to revamp the public procurement rules, perhaps by empowering public sector procurement teams to put in place the most appropriate supply solutions for their organizations in line with broad value statements, rather than regulating their activity to such a degree that procurement becomes almost transactional? Whether this will be possible – and whether our politicians have an appetite for such a change – remains to be seen; and a lot will depend on whether the UK negotiates a quasi-membership of the EU on exit, tying itself in to EU regulations as part of a trade agreement, or whether it achieves the freedom to do as it pleases.

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