cipfa.

org

Welcome to

Business and Change Management – Session 8

Procurement

We will start in a few minutes


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Insert image
of trainer here
A bit about me…

… and a bit
about logistics

How can we talk? Chat panel

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By the end of the session you will be able to…

 Discuss, evaluate and apply techniques to procure
the goods, works and services required by a
business

WB Ref: 4 4
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WB Ref: 4.14 5
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Procurement

The process of acquiring goods, works or services from, usually,

external providers and managing these through to the end of the
contract.
Securing those services required to meet user’s needs is an intrinsic
part of the commissioning cycle. Specific service providers must be
found, chosen and contracted with and their performance must then be
monitored and action taken should it fall below the required standard.

procurement is not simply a stage in commissioning but an essential

business function for all organizations. In many businesses, the
strategic activities involved in the procurement process are part of the
function known as supply chain management.

WB Ref: 4.15 6
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Procurement

 Aspects of this function:

 Drawing up a procurement
strategy
Strategic activities  Analysing supply market
 Category management

 Supplier selection
 Tender process
Tactical activities  Contract negotiation
 Contract monitoring

WB Ref: 4.15 7
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Principles of Procurement System

However before we look in detail at the activities involved in the
procurement process we will first consider some of the principles which
apply to all procurement systems:
 Ensuring integrity in the process
 Procuring sustainably

Ensuring integrity in the procurement process

Any organisational system may be vulnerable to abuse, but
procurement activities are often seen as being at particular risk.
The OECD (Organisation for Economic Co-operation and Development)
estimates that public procurement accounts for 16% of GDP, on
average, in OECD member countries. This is channelled through public
sector organisations purchasing goods, services and works from
contractors.

WB Ref: 4.16 8
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Principles of Procurement System

However, it also claims that public procurement is the government
activity most vulnerable to waste, fraud and corruption due to its
complexity, the size of the financial flows it generates and the close
interaction between the public and the private sectors. Risks include:

 Fraud and theft of resources, for example through product

substitution in the delivery which results in lower quality materials;

 Corruption including bribery, kickbacks (money paid to those who

assist in frauds), nepotism (favoring relatives), cronyism (favoring
friends) and clientelism

WB Ref: 4.16 9
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Principles of Procurement System

 Abuse and manipulation of information and discriminatory treatment
in the public procurement process
To enhance the integrity of public procurement, it states that the
following four fundamental principles should be upheld:

 Transparency
 Good management
 Prevention of misconduct, compliance and monitoring
 Accountability and control

WB Ref: 4.16 10
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Procuring sustainably
A process whereby organisations meet their needs for goods, services,
works and utilities in a way that achieves value for money on a whole
life basis in terms of generating benefits not only to the organization,
but also to society and the economy, while minimizing damage to the
environment.

Selecting contractors on the basis of sustainability means that in

addition to the two key selection criteria of price and quality a third is
added: third-party consequences. These consequences can be broken
down into:
 Social consequences
 Environmental consequences
 Economic consequences

WB Ref: 4.17 11
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Procuring sustainably
The importance of sustainability
A wide variety of stakeholders have a vested interest in the activities of
private and public sector organisations. One of the consequences of this
is that organisations are often held responsible for the sustainability not
just of their direct activities but of their entire supply chain.
 Financial benefits
− Buildings are designed to have lower through-life operating
costs.
− Better demand management reduces costs via
recycling,reusing and standardisation.
− Products acquired are more efficient in their use of energy and
other resources and cheaper to dispose of.
 Clear environmental imperatives on issues such as reducing carbon
emissions and waste going to landfill are supported by national and
international targets.
WB Ref: 4.17.1 12
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 Socio-economic benefits in creating training and employment

opportunities for the long-term unemployed and people with
disabilities.
 Coordinated demand across the public sector, engaging with key
suppliers at a strategic level, should harness public purchasing power
to stimulate product and process innovations that deliver improved
environmental performance and further savings.

WB Ref: 4.17.1 13
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Achieving sustainability

Sustainable procurement and commissioning involves collaboration and

engagement between all the parties in a supply chain. For the procuring
organisation this means only entering into arrangements with
organisations which can establish their sustainability credentials.

This is a form of social accounting; communicating the third party

consequences of their actions to particular interest groups and society
at large as part of their larger corporate social responsibility (CSR).

WB Ref: 4.17.2 14
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Corporate Social Responsibility

A continuing commitment to behave ethically and contribute to
economic development while improving the quality of life of the
workforce and their families as well as of the local community and
society at large.

Where a supplier can provide evidence of their record on sustainability,

it is a less complex task for the procuring organization to ensure the
integrity of their supply chain. However, social accounting is not yet
fully established, and even where it is used, KPIs may not be directly
comparable between organizations.

WB Ref: 4.17.2 15
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Sustainability Reporting
UK public sector organisations are also reporting on sustainability’ using
the framework developed by CIPFA. Woking Borough Council which lists
amongst its sustainability themes:
 Use of energy, water, minerals and materials
 Waste generation / sustainable waste management
 Pollution to air, land and water
 Factors that contribute to climate change
 Protection of and access to the natural environment
 Travel choices that do not rely on the car
 A strong, diverse and sustainable local economy
 Meet local needs locally
 Opportunities for education and information
 Provision of appropriate and sustainable housing
WB Ref: 4.17.3 16
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Strategic Procurement Activities

Procurement Link procurement to the organisation’s strategic aims
Strategy
should:
Clarify the role and remit of procurement within the
organisation structure

Clearly explain the application of all relevant procurement

policies and procedures including regulatory frameworks

Be linked to a detailed procurement guide to be followed by

all staff

Set out arrangements for ensuring continuous improvement

WB Ref: 4.18.1 17
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Now you try…

Explain the purpose of a procurement strategy and

benefits of having a procurement strategy.

Include a summary of the contents of a procurement

strategy

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Solution
Procurement strategy is a formal document that sets out an organisation’s approach to
procurement activities
The purpose of a procurement strategy can be summarised as follows:
- Identifies risks in the procurement process
- Ensures all staff follow an agreed process
- Leads to cost savings through economies of scale
- Acts as a central information source for procurement
- Good practice
Contents of a procurement strategy:
1. Link procurement to the organisation’s strategic aims
2. Clarify the role and remit of procurement within the organisation structure
3. Clearly explain the application of all relevant procurement policies and procedures
including regulatory frameworks, sustainability policies and ethical considerations
4. Be linked to a detailed procurement guide to be followed by all staff
5. Set out arrangements for ensuring continuous improvement

WB Ref: 19
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Supply market analysis

The gathering of facts, data, observations and trends about the
marketplace in which suppliers conduct business

Conducting research
 Current suppliers

 Other selected suppliers

 Buyers from other organisations using similar products or services

 Trade bodies

WB Ref: 4.18.2 20
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Supply Market Analysis

The aim at this stage is not to enter into a contract with a supplier but
to build a picture of how the supply market operates i.e. to determine:
 The existence of a market for goods or services which will meet
organisational needs.
 How the market is structured
 The maturity and capacity of the market
 The basis on which it competes
 The willingness of suppliers to work with the organisation
 The factors which influence supplier’s costs and how these can be
minimised
 Whether there are other, more innovative ways of meeting the
organisation’s needs.

WB Ref: 4.18.2 21
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Category Management
The practice of segmenting the main areas of organisational spend on
bought-in goods and services into discrete groups of products and
services according to [their] function … to mirror how individual
marketplaces are organised.

Categories could include items which can be sourced:

 From the same supplier or type of supplier (office supplies, bedroom
furniture, travel arrangements)
 From the same region (food or wine imports)
 Using the same delivery mechanism (chilled or frozen foods)
 From the same part of the supply chain (producer, wholesaler,
retailer)

WB Ref: 4.18.3 22
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Tactical Procurement Activities

Supplier Tender Contract Contract

selection process Negotiation Monitoring

WB Ref: 4.19 23
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Supplier selection

Selection of suppliers should be carried out in a way which ensures

genuine competition; providing transparency and fair treatment for all
potential bidders.

Many countries institute regulations which apply to the tendering

process within public bodies and produce standard templates for every
stage to simplify and standardise the procedures used to select
suppliers.

WB Ref: 4.20 24
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Supplier selection
Competitive negotiation

Competitive dialogue

Restricted procedure

Open procedure

WB Ref: 4.20 25
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Competitive negotiation – discussions with a single supplier or a few

selected bidders leading to award of the contract
Competitive dialogue procedure – used for complex contracts where
the organisation has identified a need but is not sure of the best way to
meet it.
Restricted procedure – an advert is placed and the firms that respond
are sent a pre-qualification questionnaire (PQQ). The PQQ is used to
draw up a short list of suitable suppliers which are then invited to
tender for the work.
Open procedure – any interested party is invited by advert to tender
for the contract and there is no short list stage. All contracts are
evaluated on an equal basis

WB Ref: 4.20 26
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Preferred Suppliers
Many organisations prefer not to be limited to a choice of just one
supplier to satisfy their day to day procurement needs as this would
make them vulnerable if that supply failed. Instead they draw up a
preferred supplier list from which an individual supplier may be selected
when a specific procurement need arises.

Internal suppliers
In some instances, it is another part of the organisation which currently
provides the service in-house and is asked to tender for the work in
competition with external firms. This may occur where management
considers that an element of competition will improve the efficiency and
effectiveness of the service.

WB Ref: 4.20.1/4.20.2 27
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Tender process

Evaluating
tenders
Estimating
likely cost
Determining
pricing basis
Drawing up to be used
contract or
service
specification

WB Ref: 4.21 28
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Contract / service specification

Purchaser’s
objectives in Details of the Pricing basis to be
procuring goods / provision required used
services

Identify any income

Performance that may be derived
Contract conditions
measures from consumers of
service

Guidance to
tenderers to ensure
all prepare their bids
in a comparable
manner

WB Ref: 4.22 29
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Now you try

A local authority has decided to undertake a

competitive tendering exercise in order to appoint a
contractor to undertake the cleaning of its office
buildings
Requirement
Describe what information do you think the authority
should include in the contract specification which will
be given to contractors expressing an interest in
tendering

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Solution:
The following list gives examples of the kind of information that the prospective bidders would want
to help them decide whether to bid, and subsequently to prepare their bids:
• The locations and floor areas of the buildings to be cleaned
• The hours during which cleaning is required to be carried out
• An indication of the standard of cleanliness required for different types of areas
• The equipment, storage areas and other facilities to be made available by the client for the
contractor’s use
• Any staff related requirements such as equal opportunities policy, training certificates, uniforms
• The proposed method and frequency of payments
• Contract period
• Frequency of price reviews
• Arrangements for monitoring contractor performance
• Penalties for non-compliance with contract requirements
• Contract termination arrangements

WB Ref: 31
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Pricing Basis

Lump sum contract Schedule of rates Lump sum contracts

supported by bills contract

WB Ref: 4.22.1 32
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Lump sum contract supported by bills of quantities

These contracts are common in construction projects.
The organisation produces a bill of quantities. This specifies the specific
number needed of each of the items to be supplied. In a construction
contract this may be the number of roof tiles, bags of cement, standard
windows etc.
Schedule of rates contracts
This is an ‘open-ended’ contract used when the nature of work is known
but the amount that is required cannot be quantified at the outset.
Indicative quantities may be given to tenderers but do not form part of
the contract. In the absence of an estimate, suppliers quote unit rates
for each of the items required.
This pricing basis may be used:

WB Ref: 4.22.1 33
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 Where there is considerable uncertainty in the overall demand for the

service
 Where the organization wishes to make internal departments aware
of the cost of a service to encourage efficient use

This method can cause problems for suppliers. Uncertainty over

quantities makes it difficult for them to estimate the economies of scale
they will achieve. They may therefore be tempted to produce higher
tender offers to cover themselves against low demand. This can be
avoided by agreeing percentage additions or deductions to tendered
rates depending on the final work volume.

WB Ref: 4.22.1 34
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Lump sum contracts

This is generally the most suitable pricing basis for service contracts.

The specification details the job to be done or service to be provided.

The tenderer submits a lump sum price, sometimes referred to as a
bulk estimate, for delivery of all the work specified. Outputs or
outcomes are incorporated into the contract, to ensure quality is
maintained.

WB Ref: 4.22.1 35
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Cost Estimates
Having specified the pricing basis to be applied, the organisation will
need to produce a realistic cost estimate for the goods or services to be
provided. The estimate

 Allows it to ensure that the quantity of goods or level of services it is

requesting will be affordable within the current budget
 Should be used as a benchmark to evaluate the price quoted by the
suppliers in their tenders.

WB Ref: 4.22.2 36
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Now you try

Owing to a significant increase in the local

population of Letworth, the Council has recognised
the need for a second secondary school which is to
be built in the east of the town and it has been
decided that catering should be outsourced to a yet
to be chosen external provider.
Required
When selecting a catering company to supply school
meals recommend a pricing policy for Letworth to
specify in the contract and the basis on which they
should evaluate the tenders submitted
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Solution
There are two pricing options Letworth could specify in the catering contract:

 A schedule of rates: where the contractor is asked to specify a price per meal provided. This
would be of particular value if the council is not yet sure how many children will be catered for
under the contract, or the specific types of meal required.

 A lump sum contract: where the contractor would be asked to specify the cost for the entire
service (the nutritional content of the meals may be specified in advance). This would be most
useful if the council already knew exactly what it required.

The tenders can be evaluated either on the basis of the lowest cost or the best value which
incorporates considerations of quality. Given the potential variability in a cooked meal, taking a
lowest cost approach is unlikely to be appropriate and Letworth would be advised to take a best value
approach

WB Ref: 38
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Evaluating tenders

Lowest Price Best Value

tender tender

WB Ref: 4.22.3 39
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Evaluating tenders
Lowest price tender
Historically successful contractors were chosen on the basis of cost
alone where the successful contractor is the one that submitted the
lowest tender offer.
If this basis is used the organisation must be aware of:
 Price escalation formula
 Total costs of ownership
 Predatory pricing.

WB Ref: 4.22.3 40
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Price escalation formula

Since many tenders are for the provision of services over a number of
years it is common to include a price escalation formula to take account
of inflation. Care must be taken to evaluate the impact of the formula
on the overall cost of the contract when comparing bids.

Total costs of ownership

It is essential when comparing costs that the total costs of ownership

(TCO) over the whole period of the contract are taken into account
including:

WB Ref: 4.22.3 41
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 The total cost of the initial acquisition including administration,

delivery, checking, making ready, setting up of associated supply
chains etc.
 Using the service or goods or operating the asset including the costs
of support services, maintenance and repair costs incurred over its
life
 Ending the provision or disposing of an asset
Predatory pricing
Often prospective contractors will form a view of the price needed to
win the contract, and will then work backwards to see how they can
fulfil the contract at that price, taking into account labour and material
input and so on.
The organisation should be alert to the risk of predatory pricing where a
very low price is quoted to win the contract.

WB Ref: 4.22.3 42
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Best value tender

Using cost alone is not always the best method of choosing between
bids. Whilst price is important, quality is also a key aspect of many
contracts and so tenders are usually evaluated on the basis of which
provides the best value.
This can include consideration of aspects such as quality, price,
technical merit, aesthetic and functional characteristics, environmental
characteristics, running costs, cost effectiveness, after sales service,
technical assistance, delivery date and delivery period and period of
completion.
Quality will often be judged not just from the contents of the tender
document but by obtaining references from a contractor’s previous
clients.
A point-scoring system weighting the importance of the different
aspects of the bids is normally used to evaluate a tender.

WB Ref: 4.22.3 43
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Contract negotiation

Scope for negotiation

Successful contractor Contract awarded – price and delivery
chosen
requirement

WB Ref: 4.23 44
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Contract negotiation
Once the successful contractor has been chosen, the contract (or SLA)
must be negotiated and drawn up.

Where the contract has been awarded on the basis of a tender bid, the
price will have been included in the tender and the terms of the contract
will be based on the contract specification against which the supplier
originally tendered.

It is important that the negotiation process is not seen as an

opportunity to drive a really hard bargain and get the lowest possible
price at any cost.

WB Ref: 4.23 45
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Gain or reward sharing

• Agree baseline to calculate gains / outcomes
Strategy
• Provide details to supplier
successful
• Measure and agree gains achieved

• Incentivise supplier to improve quality of

goods / services
Benefits • Deliver innovative solutions
• Track savings
Overcome situations

• Easy gains / earn disproportionate sum

• Supplier focused on maximising own gains
Drawbacks • Long standing collaboration between supplier
and organisation

WB Ref: 4.23.1 46
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Retention clause

A provision in a contract which allows the purchaser to withhold part of

the contract price until a particular requirement has been satisfied.

It is argued that the development of long-term collaborative supplier

relationships should eliminate the need for such clauses, as the supplier
will wish to correct any problems in order to preserve the relationship
and its professional integrity.

WB Ref: 4.23.2 47
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Contract monitoring system

Ensure the contractor is complying with the terms and conditions
of the contract

Prevent non-compliance by identifying and resolving potential

problems in a timely fashion

Identify ways of improving contractor performance

Monitor costs

Ensure progress is made towards the contract’s expected

outcomes

WB Ref: 4.24 48
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Effective Contract Monitoring

• Training in contract monitoring
• Communicating clear expectations
Communication • Regular supplier meetings
• On-site monitoring visits

Measurement / • Payments clearly linked to satisfactory performance

measures
Performance • Clear incentives for good performance

• Rolling contract administration plan

• Contingency plan
Procedures / • Facility to review & audit relevant contract records
Plans • Written policies & procedures
• Dispute resolution procedures
• Formal closeout procedures

WB Ref: 4.24.1 49
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Now you try

Describe the main purposes of a contract monitoring

system
Solution:
 Once a contract is awarded it is important to ensure that it is carried out properly in
accordance with the terms and conditions laid down in the contract.

 By monitoring the progress being made towards the expected outcomes, the
commissioning organisation can provide the contractor with regular feedback and
identify and resolve potential problems before they result in non-compliance by the
contractor or cause costs to escalate

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Now you try

A local authority has decided to undertake a

competitive tendering exercise in order to appoint a
contractor to undertake the cleaning of its office
buildings
Requirement
Explain how the authority should go about monitoring
the contract once it is operating

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Solution

• The monitoring of the contract will depend largely on how the contract
requirements are specified. If the contract specifies inputs then periodic
checks are needed to ensure, for example, that the required number of staff is
present. At the same time checks of the standard of cleanliness are also
required. These checks should be made regularly and documented.
• Any failures by the contractor to comply with contract requirements should be
notified to them in writing, with penalties imposed where permitted by the
contract.
• The contract invoices should be approved by the person managing the contract
and checked against the agreed contract price

WB Ref: 4.24.1 52
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E-procurement

the means by which a supplier can place bids for a

E-auction contract via the internet

• undertaking tasks such as:

• advertising the requirement for goods or services
• registering suppliers
E-tendering • issuing and receiving tender documents via the
internet
• automating the evaluation of responses to a
tender

• work in a similar way to credit cards and can be

Purchase cards used to purchase goods or services
or p-cards • The transaction value and type of expenditure can
be controlled in advance

WB Ref: 4.25 53
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Why E-procurement matters

E-procurement is important both to meet government targets and because
of the direct benefits gained.
Government targets
 Targets related both to the use of electronic methods of doing business
and to the speed with which transactions must take place have made e-
business a high priority across the public sector.
Benefits
The benefits that accrue from e-procurement include
 Less work (because less staff time is needed as tasks are automated or
eliminated)
 Cost and efficiency savings
 Better management information
  More robust audit trails
  Increased compliance with regulations
WB Ref: 4.25.2 54
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Potential drawbacks of e-procurement

 The major drawback is the cost associated with buying, installing and
operating the software necessary to operate the process
 It can be difficult to persuade staff to use the process when they are
used to dealing with suppliers by phone or e-mail
 Potential suppliers may be put off applying because the process is
perceived as too complex
 The lack of personalization can make it difficult for potential suppliers
to tailor their offer to the specific requirements of the buyer
 Unfamiliarity with the e-process can lead to errors in the orders
 Some promised efficiencies fail to materialize because the software
used does not support the full range of client requirements

WB Ref: 4.25.3 55
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Reverse or e-auctions
An e-auction allows an organization to set up a scheduled event where
companies can bid against each other to win contracts against a
published specification. They are also known as reverse auctions
Buyer and suppliers access the event via the web. They can log in and
out of the event to view and place bids. The event can last from two
hours to a few days.
Benefits of using e-auctions:
 Elimination of paper and streamlined processes
 Short negotiation cycle
 Better value for money procurement resulting from increased
competition
 Increased transparency of the contract award process

WB Ref: 4.25.4 56
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Effort and cost involved in the e-auction process

 The main effort is in setting up the auction process. E-auction service

providers can provide assistance as required in:
 Setting up the e-auction site
 Preparing detailed specifications
 Supporting potential suppliers in understanding and using an e-
auction site

WB Ref: 4.25.4 57
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E-tender process

Workflow
Staff can
functionality can ITT published via
collaborate on line
be used to route e-tendering
to create invitation
ITT document to system
document
all parties

Once tender
Suppliers respond Supplier of winning
deadline has been
to ITT by sending bid can be
reached users can
their bids using automatically
view tenders and
secure e-mail to e- notified of aware
evaluate submitted
tendering system via system
bids

WB Ref: 4.25.5 58
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Benefits of E-tender process

 Reduced tender cycle-time
 Fast and accurate pre-qualification and evaluation, which enables the
automatic rejection of suppliers that fail to meet the tender
specification
 Faster response to questions and points of clarification during the
tender period
 Reduction in the labour intensive tasks of receipt, recording and
distribution of tender submissions.
 Reduction of the paper trail on tendering exercises, reducing costs to
both councils and suppliers
 Improved audit trail increasing integrity and transparency of the
tendering process
 Improved quality of tender specification and supplier response
 Provision of quality management information
WB Ref: 4.25.5 59
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Areas we covered

1 2 3

Procurement process

Strategic and tactical procurement activities

E-procurement

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Homework

 Try Exercise 4.6 and 4.7

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Any questions?

What can I help you with?

What topics did you find the most challenging today?
What would you like to go over in a tutorial?