Scalability of Interactive Procurement Processes

InteractiveInteractive procurement processes open up the channels of communication between supplier and buyer. They enable both sides to get a better understanding of the requirements and the solution that allows better deals to be brokered, bigger pies to be baked if you like. They also allow the gap between what the customer thinks they are getting and what the supplier is able to give to be narrowed. But often these processes are seen as complex and expensive exercises that require extended periods to execute. What if they could be adapted to allow any size procurement benefit from improved communication between the buyer and the seller.

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So what’s the problem…

Historically, procurement has been an antagonistic process conducted at arms length, particularly in the public sector due to the heightened demand for probity in when spending public monies under scrutiny. Requirements are developed in isolation from the market under a veil of secrecy with the aim of ensuring nobody gets an advantage in learning the requirements earlier than the rest of the potential market. Sure, you might run a request for information or expression of interest type process and/or hire some subject matter experts, but engaging directly with the suppliers has been out of the question though due to the risk of potentially providing an unfair advantage to a sub-group of suppliers or simply leaking away all the commercially sensitive information and competitive advantage. So once the requirements are developed, they are issued to the market and the vendors are expected to develop the perfect solution, once again, in isolation. Often the only concession to communication is the limited ability to exchange clarification questions, in writing. Some procurement processes can end up with hundreds of clarification questions through a desperate attempt to understand the real requirements and the depth of a proposed solution.

The advantages of this arms length approach is that it is easily controllable, the process can be very “fair”, in that all parties are treated equally badly, and the chances of painting the opposition into a corner for a win/lose deal are improved because suppliers can be surprised with aspects of the requirements that they had not seen or understood. The challenges with this approach are that the two parties never really engage to shared knowledge, build a relationship and the engagement in the early stages is often between the procurement team and the sales team. The sad outcome is that a large majority of these processes end in a lose/lose outcome and the parties don’t even realise.

So what is an interactive procurement process anyway…

An interactive procurement approach is one where an opportunity and environment is implemented that allows the key players to interact, not the sales and procurement teams, but the builders and the users. The people who will develop and deploy the solution engaging directly with the people who will have to use and work with the solution.

“Inconceivable!” I here you cry, but to that I say “I don’t think you know the meaning of that word”. Some readers are now shaking their heads at the lunacy of opening such a wide gate of communication during a procurement process, but hear me out, this isn’t a free for all invitation to chat. There is a systematic approach that must be planned and executed carefully, but the benefits are enormous.

The basic concept is to undertake discussions at a time when competitive tension is at its peak, to encourage the competitors to out do each other and to leverage ideas and knowledge from multiple capable suppliers.

The construction industry and other public private partnership procurement’s have implemented forms of interactive procurement to great advantage. Frequently this approach is implemented after initial bids and really become a sophisticated form of parallel negotiations. This is a great approach where there is a limited level of competition in the market and innovation is in ideas within a regulatory restrictions. In this example, the building industry is controlled by a raft of standards that, rightly, limit the level of variability possible. Generally speaking, people involved in infrastructure procurement also know their requirements and the market well. So this approach allows the use of some competitive tension to enable efficient negotiations. But there are limitations in this approach. The initial bids are in, so the range of movement becomes more restricted, requirements must remain largely within the scope of the original invitation. Negotiations are more labour intensive, so often these approaches drop to only two proponents as soon as possible, so the pool of knowledge is reduced early. Intensive negotiations also tend to involve more input from the buyer, therefore the importance and difficulty in ensuring all parties get the same information is significantly increased. The approach is very effective, but can it be adjusted to better serve other procurement’s that require greater flexibility, such as technology buys?

Roots in complex procurement’s…

The interact procurement methodologies have grown out of the need to improve the success of large and complex procurement’s, particularly in technology and infrastructure procurement’s and is equally effective for complex engagement models such as public and private partnerships. In the highly regulated European Union environment, where being allowed to negotiate a new contract required a significant approval process, an approach called Competitive Dialogue was developed that, while on the surface appears very similar to the construction industry approach, has a critical differentiation. The interactive phase is employed before the proponents submit there detailed and final bids. The objective is for the engagement with the proponents to allow the buyer to develop their requirements, in ever increasing detail, with input from the market. To a degree, it is somewhat incidental, but very important, that the proponents are also developing their solutions to the requirement at the same time.

The thing that appears to confuse people the most around the interactive procurement process is that the it begins with an invitation for proponents to submit some form of proposal to allow a smaller number to be selected and invited to participate in the interactive phase. This aspect feels like a standard multi-stage procurement process, where, for example, a technical solution may be requested first then the pricing, or and EOI issued and then a request for tender. However, the initial invitation for an interactive process takes on a different function, it sets a starting point, not a finishing or a check point. Somewhat more confusing is that the starting point established can vary significantly from project to project. It can range from a very broad concept designed to identify organisations with the capabilities required to deliver a vague concept, through to a near complete proposal. For example, the buyer may require a new solution to help manage public housing, but wants it tightly integrated into social media for communication and leveraging technologies such as geo-fencing and augmented reality to capture and distribute digital records. Don’t have a clue what that last sentence means? Well maybe the buyer doesn’t either, and maybe the market can interpret that requirement many different ways. So the starting point to buy such a solution may be little more than such a statement, requiring potential providers to describe their interpretation of that concept and how they could deliver it.

At the other extreme, the buyer might be replacing a core business system that they understand the requirements for inside and out. In that case the initial invitation may look like a normal invitation to offer and the starting point would be one of greater detail. The key is to make it very clear to the market that it is a starting point and that it is expected that the process will alter the requirements, potentially significantly, but the outcome needed will remain largely the same.

Procurement should not be about beating the other guy into submission, a process that adds value is one that engages with the market and leverages their knowledge and their skill to develop and buy the best possible solution for the organisation.

The next thing that confuses many, is why would you bother using the approach in the later case? We know what we want, we know what the market can do, where’s the benefit? Here’s the thing, as much as you think you know what you want, you often don’t, and as much as you think you know the market, they can often surprise you. Defining complex requirements is a difficult undertaking. It is difficult to assemble them and even harder to articulate them in a way that is universally understandable. Sometimes the desired outcomes are not even possible in the current market, or they may be possible, but will result in a larger, hidden and unexpected cost or risk to the project that only the suppliers can identify. Equally, it is very difficult to know the market capability to it’s full extent. From the suppliers perspective, interpreting a detailed specification with hundreds (if not thousands) of requirements is also very difficult, and communicating back the solution can  border on impossible.

The risk is that a great solution may be missed because the proponent didn’t interpret the requirements as the buyer expected, or the buyer doesn’t interpret the proposal as it was intended. What a waste to go through all that effort and miss the golden opportunity because you maintained your highest standards of probity! Equally, contracts can often be signed before either party fully understands other party’s position or expectation, and that will present long lasting challenges to the project and the customer/supplier relationship.

Procurement should not be about beating the other guy into submission, a process that adds value is one that engages with the market and leverages their knowledge and their skill to develop and buy the best possible solution for the organisation. The buyer is not the expert in the solution, the solution developer is not the expert in your organisation, there is a clear separation of roles and significant risk to successful delivery if these facts are not recognised and the roles interfaced effectively.

The buyer is not the expert in the solution, the solution developer is not the expert in your organisation, there is a clear separation of roles and significant risk to successful delivery if these facts are not recognised and the roles interfaced effectively.

What about the little jobs…

The likelihood of misunderstanding is clear in highly complex procurement’s, but misunderstandings are equally likely in relatively small and straight forward sourcing processes. Errors occur in engaging temporary contractors, minor installations can go wrong and delivery of professional services will sometimes waste time and money because the supplier and buyer didn’t clear up details before the contract was signed. Tremendous damage can be done to a company’s reputation when a poor procurement processes engages them badly and the project fails. If you have ever set aside a proponent because you saw that they had a failed project within your organisation, or elsewhere, then you have probably penalised them for a previous poor procurement process. If a business is still in business, then they can’t be failing everywhere, something else has to be the cause.

So what can we do to alleviate these issues?

Large, complex processes require a lot of planning and strategy to make sure the process covers all bases and remains fair. This is discussed in our blog around what we can learn from competitive dialogue, I won’t cover that off again here. Instead, I want to look at how we can implement these broad concepts into smaller procurement’s in a way that will not impose a high cost on participants, but deliver significant benefit to the process.

The Core Concept…

The core concept is that the invitation to the market is not issued as the final position. This is immediately a challenge for traditional procurement mindsets, particularly in public sector procurement where probity is such a major concern, but here is something to consider. When an invitation  to offer is issued to the market, the proponents are permitted to ask clarification questions. In responding to these clarification questions, we are, in reality, adjusting the requirements that have been published to the market. The problem is that often this adjustment is artificially restricted to a narrower scope than it needs to be by the constricted communications channels and fear that changes to scope will “break the process”. Most conditions of offer terms used by both the public and private sector will include some form of “reservation of rights” clause that will have statements the the customer “reserves the right to change requirements”, “reserves the right to add sub-criteria”, “reserves the right to change the process”. Change is not the problem, how you manage the change is the key.

If it is handled correctly, changing requirements based on what you learn from the market during the process is not damaging to the process, doesn’t treat vendors unfairly, and more often that not, will also benefit the market. You must manage the change in a way that allows the market to adjust their position and allows the evaluation team to assess the proposals against the actual requirements of the business.

Scope for change…

The scope for change is really dependent on how clever you can be with the requirements and the evaluation model. Shifting the playing field in a way that is changing how the proponent will respond and how the panel will evaluate is frustrating and time consuming for all involved. An evaluation model that focuses on inputs will kill a process like this, for example, evaluating a solution based on the specification of a pump will be more challenging that evaluating on the output requirement that it must be able to empty an Olympic sized swimming pool in 8 hours to fit into the cleaning time frame. The output requirement is less likely to change than the input requirement. Evaluating the pump based on pumping capacity is more restrictive to innovative solutions than evaluating the solution to emptying the pool in sufficient time.

Scope for change is completely up the the project and should be driven by a decision around what the benefit will be to the organisation. The objective must be to get the best deal for your organisation. Don’t avoid change to conform to a perceived artificial requirement for compliance. If a deal is not the best deal you can build, don’t sign the contract. Focus on the outcomes and outputs when developing the requirements and the evaluation model, let the market drive the inputs with their solution.

Focus on outcomes and outputs when developing the requirements and the evaluation model, let the market drive the inputs with their solution.

What to be wary of…

The biggest risk in implementing an interactive procurement process is that you may inadvertently steal or leak a proponents intellectual property or confidential information. This is no small thing and should be taken very seriously. The process and the people in the process, must be geared to protect the proponents and their information. If a proponent does not feel confident that their information is being handled appropriately, then the level of sharing and engagement you will achieve will be limited.

Look to implement a model that provides a clear separation between the information that the proponent is providing as part of their proposal and the information they are providing to help develop the requirements. Make it clear that nothing from the proposal will be shared, but any requested adjustment to the requirements will largely be public. What do I mean by largely? This type of approach can result in a proponent delivering an innovative approach that is unique and provides them with a market advantage. This should not be shared. There is potential for more than one set of requirements to be developed and be in play.

What!! Did the world just tilt, did I just say there could be more than one set of requirements? How can that be fair?

Consider this, does your clarification process have a mechanism to allow proponents to ask commercial in confidence questions that the answer is not broadcast to all proponents? If it does, and if you respond to those questions, you have in affect produced a separate set of requirements for that proponent.

If you are evaluating based on outcomes, then the details of the requirements are less critical to the fairness of the process.

Managing multiple sets of requirements can become a nightmare, so it is recommended that the core requirements remain the same and a set of deviations from the core requirements be maintained for each proponent. The same approach generally used used to manage deviations from a standard framework contract.

How do we do it…

Here is where you get to flex your creativity muscle, there is no one answer to this question, the process has to be adapted to meet the requirements, the organisation and the market. But there are some broad concepts:

  • The first step is to invite the market to engage. Where there is significant competition in the market, this first step may include a method of down-selecting the most desirable respondents.
  • Proponents should not be selected only on their solution, but also on their willingness to engage to develop the solution
  • The aim is to adjust the requirements, so the interaction occurs before the proponents are required to issue their formal position
  • Invite a response from the market that allows them to address what they see as the shortfalls in the requirements and sets their starting point for the interactive sessions
  • On larger processes, with multiple workshops, you may want to include group engagements with all proponents present, but to be really effective, key workshops must be one on one between the buyer and the seller teams
  • You are clarifying their solutions and developing you’re requirements, so the sessions don’t all have to be identical and the detail of discussions will probably differ, but make sure all proponents are provided the opportunity to discuss any aspect of the requirements
  • The interactive session could be as simple as a single workshop to allow proponents to explore the requirements while there solutions are equally explored
  • Make sure the proponent brings their key delivery personnel along and the users of the solution from the customer should also join the sessions
  • As the requirements get more complex, pricing and the impact of changes on pricing increases, so make sure pricing is a component of the workshops and response and changes are tested throughout the process. We don’t want any nasty surprises at the end

Worked examples…

Project MAnager

There is a requirement for a project manager to come in and run a major change to the organisations core business system. No-one in the business has much experience in specifying or selecting project managers.

Issue an invitation to multiple recruiting companies and/or project management specialists. Hold a one day briefing for all involved and outline the outcomes the organisation is hoping to achieve. Request all attendees to review the specification developed and invite them to re-write the specification so that we will achieve the outcomes we are looking for. Review the submissions, learn from the diversity and similarity of the suggestions, select the best parts of each of them and issue the requirements for response.

Pipe Repair

You need to replace your existing pipeline repair contract and you’ve heard of new technologies available in the market.

Issue an invitation to participate in an interactive process. The invitation has a broad outline of the region the work will be carried out in, the historic types and frequency of failures and maintenance carried out and the standards, policies and legislation that apply to your industry. Invite participants to submit a response that provides an understanding of the approach they would employ to deliver the requirements and include a submission of items they believe would form a good specification for the requirements.

Assemble the next round of requirements based on internal documents and the suggestions from participants. Select the most desirable proposals and issue the new set or requirements to them, then conduct a number of workshops to discuss the details of their solution and the requirements. Continue this cycle until the details are all worked out, then issue the final requirements and request the final bids.

Conclusion

Procurement processes are not a competition to see who wins, they are a process of a buyer engaging with the market to communicate their requirements and invite the market to develop a solution. Competitive tension is critical to successful procurement’s, but the competition is between suppliers, not the buyer and the supplier.

Develop procurement processes and cultures within your organisation that aim to get the best possible outcome for the organisation and sets the supplier up to succeed in delivering their solution.

 

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