This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
With fiscal cliffs looming on the horizon, public institutions are attempting to leverage their group purchasing power through federal standing offers, provincial vendor-of-record arrangements, regional and sector-based purchasing co-ops, and external shared services bureaus. This discussion addresses the challenges of properly achieving cost saving efficiencies, while navigating a fragmented administrative environment and unclear regulatory landscape.
An Unclear Regulatory Landscape
Public procurement rules, which include trade treaties, statutes and regulations, and a multitude of government directives and guidelines, generally support group purchasing in principle. However, they tend to be silent on the details of proper implementation. Collaborative purchasing, even within institutions, typically requires the use of prequalification processes and the creation of master agreement frameworks that permit multiple assignments and often result in a roster of prequalified suppliers. When creating these contracting frameworks, public institutions must typically avoid supplier discrimination based on geographic origin or biased or branded specifications. They must also avoid the use of closed or perpetual source-lists that exclude new suppliers. At the same time, they must ensure open and transparent competition for contract awards, including open and transparent second-stage selection processes for assignments under master agreements. These procurement rules, which were created to apply to individual public institutions, were not originally designed to be applied to the complexities of multiple-institution group-purchasing initiatives.
The Universal Challenge of Implementing Group Purchasing
Public institutions face significant reputational risk if they fail to properly achieve what are often overly optimistic group purchasing targets. For example, in February 2012, the Ontario government released a report entitled Public Service for Ontarians: A Path to Sustainability and Excellence, also known as the Drummond Report, which claimed that $1 billion (CAD) in savings could be achieved in the Ontario health sector by expanding group purchasing. The report’s failure to adequately address relevant and well-documented past failures in group purchasing dampens the credibility of its cost-saving projections. Examples of high-profile failures include the Ontario Auditor General’s 2009 review of the Ministry of Finance’s OntarioBuys initiative. That report found that OntarioBuys failed to establish business cases that realistically identified potential savings before creating broader public sector shared services organizations. It found that substantiated cost savings only amounted to about 13.5 percent of what was spent on OntarioBuys initiatives ($20 million in shown savings, $128 million in program spending (amounts in CAD)) while 40 percent of the consulting contracts awarded to support the initiative breached competitive procurement requirements. In a subsequent 2010 report, the Ontario Auditor General also found widespread procurement infractions in the retention of consulting services across the health sector, including 75 percent non-compliance with sole-sourcing rules within the Local Health Integration Networks (LHINs), the same entities that were recommended in the Drummond Report as the location for expanding group purchasing to achieve the $1-billion-target in health sector savings.
These Ontario audits foreshadowed some of the challenges inherent in implementing group purchasing. More recently, in its June 2014 report Establishment and Use of Multi-Use Lists, Australia’s Auditor General stated that “the arrangements applying to [multi-use lists (MULs)] are not so well understood and, in most cases, greater consideration needs to be given to whether a MUL is most suited to an agency’s particular procurement objectives.” The report noted common breaches of procurement rules, including instances where agencies approached too few suppliers for contract award competitions, failed to provide sufficient time for suppliers to respond to bid requests, and failed to treat suppliers consistently. The report concluded that the MULs failed to meet the government’s fair competition duties or its value-for-money objectives.
Similarly, in its May 2014 report entitled A review of collaborative procurement across the public sector, the United Kingdom Auditor General noted a widespread failure to implement proper group purchasing practices, which was attributed to a lack of procurement management information, a lack of understanding of enduser requirements, and a lack of knowledge of collaborative purchasing options. This served to amplify a prior March 2013 report, where the UK Auditor General found that the central government’s “light touch” approach to local administration undermined its attempts to achieve procurement cost savings across 43 local police forces. In sum, like the Ontario reports, the Australia and UK reports found that government bodies were not maximizing their group purchasing potential and needed to co-ordinate their efforts more effectively in order to achieve desired results.
The Devil in No Detail
While senior governments have been quick to proclaim the cost saving advantages of group purchasing, they have been slow to properly support these initiatives with sound, central administration and clear implementation protocols. Realizing the full potential of group purchasing will ultimately require stronger future leadership.