Latest Government of Canada Procurement Scandal Belies the Very Principles Associated with Effective Purchasing Practices

Posted on February 3, 2010

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In the opening comments from a recent segment of the PI Window on Business Show in which I had interviewed government contracting expert and author Mark Amtower, I had made reference to the famous Louis Pasteur quote that “Chance favors the prepared mind.”

I would of course have to admit that I found myself reflecting on its validation as an axiom during a conversation with one of the top investigative reporters in the country, Kathryn May regarding a story that “broke” yesterday on the pages of the Globe & Mail.

Specifically, a headline that yet again reads (okay sounds) like the proverbial broken record in which a senior level bureaucrat has been accused of some form of malfeasance relating to favoritism.  Now at any given time, it is not unusual to have several of these balls of discontented chagrin floating about within the realms of public sector procurement practices.

In fact these kinds of accusations are often reminiscent of the school yard ravings that “my dad is bigger than your dad,” and “just wait till recess” admonitions that have more bravado than they do substance.

When it comes to public sector procurement, I am often contacted by the various denizens of the traditional media estates seeking my input regarding the at-the-time dramatic occurrences within the world of government contracting.

In some instances, such as when the Senior Legislative Analyst from the Commonwealth of Virginia called me asking for input on the then ongoing Joint Legislative Audit and Review Commissions’ efforts to determine the impact of the government’s eVA procurement initiative on small business, the exercises can be both warranted and useful.  Just as a side note, my participation ultimately led to a 5-part series here on the Procurement Insights blog, 2 radio shows and a page dedicated to my coverage on the Commonwealth’s website.  I still find humble amusement in the appearance of my name and findings in official legislative documents from the numerous discussions in the Commonwealth’s House.

Unfortunately, and more often than not in this country, said “investigations” are little more than self-serving, blood-letting exercises tied more to personal differences and non-related conflicts than to any meritorious pursuit of transparent justice.  Now don’t get me wrong, there are certainly ambiguous transactions that warrant investigation along the lines of what is being pursued in this particular story.  However, they are the exception rather than the rule.

In fact, the contentious issues cited in the Globe & Mail in terms of favoritism and pre-existing relationships being at the heart of contract awards are, in reality, a by-product of the way people naturally do business.  More to point, people buy from people they “know, like and trust.”

When you add into the mix factors such as attrition within the public sector procurement workforce through retirement, this human inclination takes on even greater importance given the aversion to risk that permeates the government in general.

Think about it logically for a moment . . . the larger the expenditure, the greater the perceived risk and desire to succeed (or avoid failure).  In a situation like this with whom are you more likely to do business?  A known and proven entity by way of the relationships you have established over your lengthy career or, the new supplier with whom by comparison, there has been little if any meaningful contact beyond the RFP exercise itself?  Or to put it in more everyday terms, if your taxes are being audited by the government are you more inclined to deal with an accountant you know well, or are you going to scan through the equivalent of being on a standing offer yellow pages?

Before you get the impression that these are merely personal musings, let’s look at some statistical reference points such as a report prepared under the Ontario Buys program that found that the majority of purchasing people tend to limit their procurement to 4 or 5 known vendors as they did not want to take the risk of engaging a supplier with whom they are unfamiliar.

This problem with expanding the total number of suppliers is in and of itself a contradictory pursuit on many levels starting with the long held belief that vendor rationalization (that’s right, a focused and intended reduction in the number of vendors in an organization’s supply base), and transactional reduction lead the way to untapped savings.  In other words, and this is taught in the majority of procurement certification courses, the idea is to limit the number suppliers thereby lowering your administrative costs while simultaneously leveraging volume discounts.

Other factors that are problematic relative to engaging an “expanded” supply base is, as we have discovered in the current 7-Part PI Window on Business Series on winning government contracts with Washington-based expert author Judy Bradt, linked to the fact that on average it takes a supplier between 18 to 24 months to win their first government contract.  During which time as Bradt explained, they had better have a good friend in their banker because there will be zero revenue flow.  In a down economy such as the one in which we presently find ourselves, this problem is further exacerbated by the fact that the cash flow from private sector clients that would normally be used to fund the investment in pursuing government opportunities is dramatically reduced.  Tune in to the PI Window on Business July 29th Virginia call-in show to hear actual suppliers talk about the impact that the economy has had on their interests in pursuing government contracts.

Given the above, the reality of eroding supply bases is a significant problem that limits the pool of potential “qualified” suppliers.

Now let’s examine the other side of the proverbial transaction table.

After investing a significant amount of money and resources in order to respond to a bid, the winning supplier is usually engaged for a period of several years during which time they are going to form strong working relationships with government employees at all levels of the public sector hierarchy.  The greater the expenditure of funds combined with the complexity of the service requirements associated with a contract like real estate (can anyone say Royal LePage relocation services?), the deeper and more significant these relationships must become to ensure the that the required level of service is achieved.

Think of it this way, you go to see your doctor because you are not feeling well.  He or she asks you about the symptoms, and you say I am not going to tell you.  It’s confidential.  Will the doctor be able to effectively treat you?

Communication builds a rapport that leads to trust and yes the natural formation of a relationship.  You cannot ultimately succeed in any endeavor if communication, trust and a relationship are not established.

In addition to the above referenced relationship building that takes place over a multi-year contract, the now incumbent supplier as a result of winning and servicing the contract over a period of many years has, for all intents and purposes, been taken out of the game in terms of pursuing other business opportunities.  As one senior director from a large ERP vendor so eloquently put it, if we win we will have to tie up significant resources so that we will be able to service the contract.  However, no longer having said resources at our disposal we will not be in a position to pursue other contracts to the same degree.  Basically, winning comes at a deep cost (think Pyrrhic victory), meaning that the contract you have just won better be lucrative enough to make such a sacrifice worthwhile.

Now stay with me, because this is an interesting train of thought that will take an even more interesting turn when we get to the KPMG audit.

What we have so far is a eroded supply base that is the result of buyer hesitation to engage a larger pool of suppliers for even the most rudimentary goods or services.  You also have a supply base that usually has to make an 18 to 24 month investment (although with expert guidance from someone like a Judy Bradt, this time line can be cut in half), in which there will be zero revenue flow and no guarantee of business at the end of the road.  Sounds promising so far, doesn’t it?

Now throw in the natural aversion to to risk within the public sector bureaucracy, especially in those instances where there is considerably more on the line in terms of financial exposure, and you have the perfect convergence of circumstances that lead to the establishment and maintenance of long-held trusted relationships.  Relationships I might add, that have in the past delivered to your requirements.  By the way I still haven’t heard of any charges being made that services which were provided by the supplier in this instance were somehow inferior or unsatisfactory.

Enter KPMG!

There is an important truth in terms of supply base erosion that often eludes those who cry foul or favoritism.   Simply put, as the pool of active suppliers diminishes so too does your market intelligence pool.  Basically, with fewer suppliers submitting bids, an artificially narrowed funnel of data flows into the buying organization.  The narrower this funnel becomes, the less likely it is to reliably reflect where you are relative to your current pricing and service levels and those that are available from the real-world, real-time market.

If I had a dollar for each time I heard a story about a government buyer having to go back to their suppliers to obtain spend intelligence, my childrens’ collective college tuition would already be paid in full (and then some).

Engaging KPMG is not going to provide any earth shattering insight because consultants have generally failed to accurately analyze historic spend in terms of determining if fair value was in fact obtained at the time of the actual acquisition.  The reason is simple in that you cannot accurately equate value if the point of reference is either incomplete or limited starting with supply base erosion.  By the way, has anyone bothered to look into KPMG’s engagement?

I want to once again reiterate the fact that no one can at this point say with any certainty that the senior bureaucrat in question engaged in any conduct in which favoritism in its truest sense was a factor in the awarding of contracts to this particular supplier.  Hence the reason for KPMG’s involvement.

This being said and, based on an in-depth understanding of how the government procurement apparatus functions, the likelihood of any wrongdoing is minimal at best.  While we may never really know the true reasons behind this latest volley of accusations of wrongdoing, chances are pretty good that it comes down to ruffled feathers of self-interest dressed up as a charge up the hill of righteousness.