Effect of Supplier Management Procurement on Public Sectors

One: Introduction

Best Value (BV) was introduced into the public sector in 1998, announced through the government’s white paper “Modern Local Government in Touch with the People”. This paper introduced extensive reform to local government, including the new initiative of BV. Within this BV is the e-Government, Community Planning, Strategic Partnerships and new political management structures (White Paper 1998). BV replaced the system of Compulsory Competitive Tendering (CCT) (Local Government Act 1999). The aim of BV is to influence the efficient expenditure of public money; estimated to total £455.2 billion for 2004, forecasted to grow by 3-5% for the period 2005-9 (www.statistics.gov.uk/). The 2001 review of local government procurement in England (Delivering Better Services for Citizens) was published as a consultation paper. The report included the following recommendation; there should be clear political responsibility for procurement, with elected members taking a strategic role in securing outcomes. Best Value is about breaking down the boundaries between the public and private sectors in local service delivery (The Byatt Report 2001).

Supplier relationship management within the public sector has to an extent been dictated by the central government initiatives evolving the CCT era into the Best Value regime. Best Value has led to distinctively different approaches within the public sector to consultation, competition, performance reviews, and to partnership working. Since the abolition of CCT, evidence is emerging of a new maturity in localgovernment’s relationships with the private sector. In some authorities, this is evidenced by the fact that they are now recognisingthe inevitability of the mixed economy of provision,and are prepared to work within it (Bovaird, 2000).

Procurement, and best value procurement, is a complicated subject to examine, largely because getting the best value for a product or service does not necessarily mean choosing the lowest bidder. Indeed, modern procurement strategies need to consider several interrelated factors, of which costs is just one, when determining and implementing the best value procurement process. This implies a significant increase in the number of issues encountered by many public sector agencies, for who best value procurement and competitive tendering concerns have replaced the simpler days of low bid auctions for services. As a result of these changes, best value procurement has now developed into a significant strategic option, which can provide many advantages to the public sector procurement professionals. However, along with the potential benefits, best value procurement also brings significant related risk factors, especially in the public sector where policy and political considerations can lead to significantly different interpretations of best value both across public sector organisations and across individual projects within the same organisation. Indeed, when efficiently written and executed, best value contracts can both save money and increase service levels, however by its very nature best value involves a great deal of evaluation and comparison, which can complicate the process to the point where the potential gains are lost. Equally, distortions caused by interpretations and political factors may enter into play when gauging the many factors in addition to price, often leading to debates around different perceptions of what constitutes value for a given product or service.

Each best value procurement example is subjective and entirely unique, especially in the public sector, and because of this, communication between end users, procurement professionals, policy makers, and suppliers is of utmost importance. In procurement, as in other fields, people with the right knowledge about the product or service being supplied, and the project for which it is required, will be able to make better decisions than those without the necessary information. As such, when choices must be made, project sponsors, buyers, contract administrators, technical authorities, advisors, bidders, and contractors must be kept in the know. This leads to the hypothesis that supplier relationship management in the public sector will, by virtue of increasing the spread of knowledge along the procurement chain, better help the public sector to achieve best value in its procurement activities. This work intends to test this hypothesis through a detailed search of the existing literature on procurement in the public sector, and the various aspects of procurement which underlie the provision of best value for public sector organisations. This will be achieved using the positivist paradigm and phenomenological hermeneutics to identify, contextualise and analyse the various research on best value, and also to determine how supplier relationship management will impact on this for public sector organisations.

Two: Methodology

Due to the wide scope of the subject matter of this dissertation, and the specialised nature of procurement within the public sector, the work will be solely based on existing secondary research. As there is no primary research to interpret, the research process will be different from conventional dissertations. As such, the interpretation of the existing research will form the cornerstone of the analysis and also drive any conclusions. This means that the dissertation will not only need to analyse the content of these articles, but also the motive of the authors for writing them, the context and any inherent bias. A research method is needed that will identify any contextual factors or bias and exclude them from the overall results. The chosen method is phenomenological hermeneutics, because this methodology states that literature can only be fully interpreted through an analysis of its contextual basis. The method further argues that, instead of being based on historical or cultural contexts, each text reflects the mental frame of the writer or writers. As such, phenomenological hermeneutics will be used as the research methodology and philosophy because it allows one to take a text and “methodically isolate it from all extraneous things including the subject’s biases and allow it to communicate its meaning to the subject” (Demeterio, 2001).

In order to effectively achieve this goal, the research method shall focus on eliminating any sources of inherent bias in order to draw out its key messages and fit them into a coherent discussion and analysis; however, as Lye (1996) states, “In order to ‘understand’ one must ‘fore understand’, have a stance, an anticipation and a contextualization. This is what is known as the “hermeneutic circle”: one can only know what one is prepared to know, in the terms that one is prepared to know.” As such, this work will need to examine the various articles of literature in the context of each other; to enable the construction of a hermeneutic circle and to truly understand the points each author is trying to make. As such, the interaction of the text with the contextual frame of reference given by the literature as a whole will lead to an interpretive paradigm being formed (Lye, 1996), through which it will be possible to draw out the common themes and the salient points from the literature.

To appropriately construct this paradigm, it is necessary to understand that each article will be an embodiment of the ideas, beliefs, knowledge and experiences of the author, and that the interpretation of the text will also be an embodiment of the ideas, beliefs, knowledge and experience of the reader; as such, it will be necessary for the author of this work to be aware of the impact that this will have on the interpretation of the articles. This work will embody the ‘style’ of the author (Lye, 1996), and will likely reveal some significant aspects of the author’s views on politics and asset allocation, both conscious and unconscious. This will potentially add a further contextual bias to the interpretation, and one which may be significantly harder to identify, isolate and remove.

This potential contextual bias will also make it difficult to effectively apply the logical positivist paradigm, which is strongly based on taking an objective view of reality, rather than a subjective view. The view of positivism that knowledge can only be obtained by the use of data that can be verified by an independent observer (Schrag, 1992) implies that someone attempting to use the positivist paradigm for research purposes must be as objective and unbiased as possible. Indeed, as all phenomena are subject to natural laws that coexist with each other in a logical manner, humans can only discover these laws through the use of inductive and deductive hypotheses and empirical testing of social and scientific theories. As such, the positivist paradigm will have to be carefully applied to all research and interpretation in this work, taking into account the phenomenological hermeneutic interpretation to provide a well rounded argument and conclusion.

Regarding the research and data collection methods used, an inductive approach has been taken, which is appropriate as it involves interpretation of the research and data during the gathering, as well as the analysis phase. This has been extended through the use of a standard horizontal and vertical analysis of the existing literature and the initial sources found. The horizontal aspect of the research has involved using the terminology, key words and arguments underlying historical public sector procurement processes and strategies to uncover other related works which discuss the same concepts but with different arguments and in different contexts. The vertical aspect has involved examining the sources cited in the initial sources used to move back up the chain of argument and see how different arguments and theories have been formed and influenced over time. Online searches have also been used to facilitate looking for sources which cite the identified articles and examining how these sources have further developed the article.

The research and data gathered for this dissertation is composed entirely of secondary research. Initially, the author considered gathering and analysis primary data, however this was deemed to be unfeasible for two reasons. The first reason is that the majority of people working within public sector procurement are busy professionals, working full time to ensure that their procurement goals are met. As such, they would be unlikely to have the time available to assist in the research process, and their responses would be limited by the commercial and confidentiality considerations that underlie most procurement projects. Secondly, as was discussed above, this topic is highly specialised, with practitioners, advisors and academics having significant levels of knowledge and experience. As a result, it is more appropriate, and probably more accurate, to use the results of experienced academics and practitioners, who have carried out significant amounts of in depth, and often independent, research on this subject, as a contextual basis of the positivist paradigm being used; however, research gaps should be discussed when identified.

Another important consideration when collecting the data was the time horizon because, as stated above, the UK public sector procurement industry is now in a fundamentally different state than at any time in its prior history following the longest consecutive period under Labour rule. As such, examining research data and literature from too far in the past will likely be of limited use when discussing public sector procurement in the modern economic and political environment. Therefore it has been decided that data will only be used from the period 1997 to 2007, which is the period for which the Labour government has been in power, and within which most of the major reforms underlying the current processes, strategies, and improvements have been drawn up and implemented.

This research methodology has produced analyses of about fifty major articles on which the work will be based; together with some other articles defining the research methodology itself, and some sources providing general public sector procurement context and supplementary information. The major articles have been analysed and reviewed in the Structured Literature Review, under each of the main themes identified. This is the most logical method of analysis for this work, as the majority of the articles and surveys carried out around best value in the UK public sectors have been focused on specific areas such as the Public Private Partnership initiatives and the work of the Audit Commission. As such, a longitudinal method of analysis is also useful for the phenomenological hermeneutic approach taken by this work, as it will enable progressive clarity of understanding of the contextual factors underling the literature reviewed.

Considering the chosen methodology for this work, this dissertation will have a Structured Literature Review instead of a conventional literature review. This is because the research used is solely secondary; therefore there is no need to conduct a standard literature review, which is usually done to contextualise and direct any primary research and to help explain its results. As this work is not based on primary research, there is no need for a standard literature review, and hence the structured literature review is more appropriate, because it can serve as the findings, results and analysis for the work, which shall be interpreted within the ‘findings’. Because the research philosophy and methodology is phenomenological hermeneutics, an interpretive, positivist method of analysis is required, which is facilitated by a structured approach to the analysis. Finally, as the literature review is being conducted along various themes, it is vital that it is correctly structured to ensure that it is analytical rather than just descriptive, and that it maintains some criticality. As such, the structured literature review will involve a thematic/structured review of all the salient articles in the work, analysing the arguments and themes within each article and linking the various articles and themes to each other.

The last part of the literature review will be an interpretation of all the articles discussed in the review, identifying common themes, disagreements and any potential implications or conflicts. This analysis will need to consider the various biases, backgrounds and any knowledge of the authors. Many of the major disagreements may not be based on the subject of best value itself, but rather the authors views on the ultimate aims of ‘procurement’ and the importance of the process and methodology underling it. This scrutiny will enable analysis of the validity and reliability of the articles by means of triangulation with the other articles reviewed and analysed. This will further assist in the phenomenological hermeneutic approach taken by this work, and it will facilitate the identification of any bias or conflicts that were not obvious in the initial review of the literature.

The methodology will also attempt to identify existing gaps within the literature, and highlight areas where further research could be beneficial to the work. Because most of the literature is written from academic perspectives, there are likely to be gaps around the various objectives and contextual factors of the various public sector organisations; and the various procurement frameworks the have in place; and potentially a lack of in depth research around issues such as political pressure and policy directives. As such, this work will attempt to identify where the existing literature has failed to focus on areas such as these, and how these omissions can be addressed by future studies and research.

Three: Literature

Best Value Procurement in the UK Public Sector

There is a large volume of research focusing on procurement strategies and measures of value for private sector organisations, and recently literature (Male et al, 2007; Lian and Laing, 2004) has begun to focus on the different procurement practices needed by the public sector. Indeed, Lian and Laing (2004) focused on the transactional and relationship based nature of procurement strategies to determine to what extent procurement is different between the public and the private sector. They focused on health services, as public health services are often seen as one of the most complex services provided by the public sector (Male et al, 2007), and their research demonstrated how the differing environmental factors, such as politics and resource allocation in the public sector, impacted on procurement, whilst many service specific factors, such as the need for medicines and temporary staff, were constant across the public and private spheres Indeed, their research demonstrated that politics and policy drivers have a major impact on the procurement strategies used by public sector organisations, and that these strategies, and the methods used to engage suppliers, were significantly different from that of private sector organisations.

This research ties in with that of Dixon et al (2005) which showed that, whilst the private sector tended to build relationships with suppliers, and leverage these to obtain better value, public sector organisations often based their procurement strategies on the costs of individual transactions. As such, the literature concludes that the private sector’s relationship based procurement strategies offer better value than those of the public sector. However, Lian and Laing (2004) also commented that public policy decisions often restrict public sector organisations from building relationships with their suppliers, and thus the very nature of public sector organisations often hinders or prevents them from achieving best value from their procurement activities. Palaneeswaran et al (2003) criticise this political dimension, claiming that “procuring best value should be one of the key objectives (for the) public sector”. Their argument is that best value depends upon the use of sound selection strategies, intended to ensure that all the procurement objectives are met, which includes the client and end user demands. As such, best value initiatives should all be geared towards the final state of business, rather than to serve public policy decisions. They conclude that, whilst the overall goal of any public sector organisation should be determined by public policy, best value procurement efforts should all be directed towards that goal and be free from political interference. Unfortunately, as Lian and Ling commented, whilst this may be desirable it is not always possible.

Current successes and failures of procurement strategies within central and local government

Walker (2006) notes that UK public sector organisations often make their main procurement decisions, for assets and services, at the local level, reflected in the fact that the NHS trusts and local government authorities all have their own procurement departments. Whilst this policy allows individual bodies to select the procurement strategy that best suits their needs, the lack of coordination of the procurement process can lead to inefficient supply markets, with either too few or too many suppliers, which reduces the efficiency of individual suppliers and thus increased the cost to the purchasers. These local procurement decisions are also often superseded or influence by central government guidelines and policies, for example Builders Merchants Journal (2006) detailed a new central government policy on public sector timber procurement. This policy specified that, whilst organisations are still responsible for their own procurement decisions, they must ensure that any timber they procure comes from a legal source, which increases the administrative burden for the local organisations. Furthermore, the government has also specified that organisations should supply sustainable timber wherever possible, however this is not compulsory. Such vague policy guidelines also make it difficult for organisations trying to balance budgets against policy.

Equally, such fragmented policies make it hard for public sector organisations to plan long term procurement strategies to respond to market uncertainty. For example, Loveday (2005) reported that the UK public sector was forced to cut back service provision as a result of significant energy price rises which they had not planned for. Whilst this failing is shared with the private sector, which Loveday (2005) stated as having lost over £1 billion due to a lack of energy procurement strategies and poor energy risk management, the fragmented nature of local procurement means that the public sector is often as much as risk from utility price rises as small businesses, some of which have been almost bankrupted due to rising energy bills in recent years (Loveday, 2005).

Perhaps in response to these drawbacks, the literature highlights one of the main strategies used in recent years by the public sector to improve its procurement strategies: the rise of Public Private Partnerships (PPP) and the Private Finance Initiative (PFI), which form long term partnerships with private sector organisations to share the provision of public services. Smyth and Edkins (2007) examined the management of these projects, the relationships between the primary public and private sector partners and the use of the Special Purpose Vehicles (SPUs) to facilitate the partnerships. They found that the management of these relationships had two main dynamics: the contract, transactional, approach of the public sector, and the relationship management approach of the private sector. The combination of these two approaches, and how they influenced the project management discipline within the partnership, showed that they led to greater strategic and tactical consideration being given to functions such as procurement, leading to greater value generation. This consideration led to greater collaboration, both between and within the organisations, as they adjusted to new procurement conditions, demonstrating improved proactive and strategic relationship management versus individual public sector organisations (Smyth and Edkins, 2007).

Dixon et al (2005) also examined the several case studies of the success of the Private Finance Initiative schemes, focusing on projects related to the construction of infrastructure and other facilities. These studies highlighted several examples of best practice and best value procurement, together with the key critical factors for success in PFI projects, whilst also pointing out some drawbacks and lessons for future projects. Indeed, the literature demonstrated that the key value benefits of the PFI are that the public sector obtains increased value for money, whilst also transferring risk to the private sector partner. However, this transfer is offset by higher procurement and transaction costs, relative to the private sector’s standard costs; partly due to the cultural differences between the public and private sector, and partly due to large-scale nature of PFI projects, which frequently acts as a barrier to entry for some financing partners and suppliers. This highlights the need to develop competitive public sector supplier markets, and also to develop the appropriate procurement and project management skills within the public sector to ensure that they can work with private sector partners to ensure best value (Dixon et al, 2005).

These show two contrasting views of the PFI/PPP, with Smyth and Edkins (2007) seeing the initiatives as an excellent way to bring private sector efficiency to public sector procurement, but with Dixon et al (2005) claiming that the wide differences in skill sets mean that a lot of the benefits from the private sector methodologies are lost. In response to contrasting views such as these, Li et al (2005) conducted research into the various perceptions of what makes the PFI attractive or unattractive to potential partners as a procurement system for projects. The research was based on a questionnaire / survey of stakeholders in the various projects, with the various potential issues and factors for the survey identified from the existing literature. This research showed that PPP and PFI procurement efficiency can have wide ranging benefits and drawbacks across different areas of a project. In particular, Li et al (2005) found the public / private sector partnerships were perceived as giving better access to the technology required for projects, and thus leading to better project economy. This in turn drove greater public benefit, helped the public sector avoid transactional costs, and also helped manage or avoid some regulatory and financial constraints, such as the public sector timber procurement policy (Builders Merchants Journal, 2006). However, they also found that participants inexperienced is public / private sector co-operation, the high costs of setting up and participating in the initiatives, the length of time they took, and the tendency to over-commercialise some projects could lead to PPP / PFI procurement being less attractive for both parties.

These various factors will impact differently on different projects, thus showing why there are such wide disparities between articles in the literature on the relative merits of PPP and PFI. For example, Weston and Cassidy (2006) claim that the procurement of public facilities and services under the PPP and PFI arrangements provides a wide variety of significant benefits to the public sector, and to the private sector partners. In contrast, Chapman (2006) highlights claims that private sector participation harms services and efficiency, whilst purely focusing on guaranteeing the private sector partners their profits. As a result, the literature concludes that the difference between the success and failure of PFI and PPP schemes depends on a “clear and common understanding of the positive and negative factors surrounding PPP / PFI procurement” (Li et al, 2005).

Another development in procurement is that direct competition between providers, via invitations to tender, is now widely used as the means of choosing suppliers or outsourcers for many public services in the UK. Smyth (1997) describes how competitive tendering can ensure local accessibility and accountability for users, innovation, from providers and help purchasers to reduce procurement and transaction costs. However, in common with many other writers, Smyth (1997) discusses co-operation and collaboration and the interference of policy decisions and the political process, which has led to the emergence of monopolies and inefficient integrated delivery systems, often to the detriment of value in the procurement process (Smyth, 1997).

Another effort made by the public sector, specifically the UK NHS, to improve purchasing efficiency is in the use of the NHS Purchasing and Supply Agency, PaSA, to negotiate National Framework Agreements through which individual NHS trusts can procure goods and services at bulk negotiated rates. However, as each NHS trust is a separate legal and managerial entity, responsible only to the Department of Health, a significant number of NHS trusts have resisted the move towards this centralised procurement approach in favour of their own relationships with suppliers. As a result, Cox et al (2005) discussed how PaSA, and the NHS senior management as a whole, have created regional procurement hubs and confederations in order to overcome this inability to enforce the Agreements within individual NHS Trusts. Whilst this was a sensible approach to resolving the lack of effective consolidation of demand at the individual Trust level, the individual procurement practices of regionally based NHS Trusts is still strongly driven by their own supply and demand considerations, and this has created a number of internal demand problems that the regionalised procurement approach has failed to overcome. These include “the failure by the Trusts individually, and by the NHS centrally, to control and manage the NHS design and specification process effectively and, in many cases, an inability to measure or collect information on the clinical and cost effectiveness of medical interventions” (Cox et al, 2005). As such, whilst these new reforms can be seen as a significant improvement on past collaborative procurement efforts, it is likely that they are still destined to fail, due to the fundamental nature of procurement in the NHS, and the lack of understanding around effectively aligning supply and demand at all levels of the NHS.

One final area, in which the public sector is often accused of being inefficient by the Audit Commission, and failing to secure best value procurement, is in the employing of management consultants for project management and other support roles. Corcoran and McLean (1998) investigated the purchase of management consultants in the public sector context, specifically the appointment of consultants to work with government departments, focusing specifically on the particular selection decisions. They found that, in accordance with government policy, many public sector decision makers focus mainly on securing best value for money when procuring consultants, however the criteria and information sources used to make the procurement decisions were often inconsistent. Similar to Cox et al (2005), Corcoran and McLean (1998) found that whilst the government’s public sector procurement principle was well known and relatively well understood, public sector decision makers seemed to be unable to connect this principle to the procurement process, often claiming that they did not have access to sufficient information to make an informed choice. Paradoxically, the majority of government departments tend to hire management consultants in an attempt to understand the procurement process that has hired the management consultants in the first place. One significant outcome of this is that the decision makers in many government organisations stated that they didn’t believe the selection process and decision around hiring management consultants was difficult, and would be straightforward if sufficient information was made available (Corcoran and McLean, 1998).

Future developments in procurement and threats to movement

The public sector is increasing beginning to rely on private sector organisations to form supplier consortia for major projects, especially those where the scale is such that individual suppliers are unable to cope with the demand. As the number of projects, especially the major PPP / PFI projects, increases; the demand for these consortia is likely to rise, and Jost (2005) believes that this may become the dominant model for public sector procurement in future. However, in order for this to occur, greater attention must be paid to building successful relationships, both between the consortium and the public sector organisation, and between the members of the consortium itself. Jost (2005) conducted a qualitative study of the existing consortia, and claimed that building trust, engaging staff and reconciling the differing objectives of the partners will be the main factors critical to this development, and a lack of trust among the private sector partners will be the biggest threat to progress.

Indeed, Swan and Khalfan (2007) claim that partnering will continue to grow significantly throughout the UK public sector. They focus on the UK public sector construction industry, and identified that, in future, factors such relationship management with external stakeholders, the general public in the case of public sector projects, will be important to the growth in partnership based projects. Indeed, whilst issues such as cost, quality, timeliness and safety will remain crucial to successful delivery, objectives such as sustainable and environmental development will grow in importance, and failure to acknowledge and address these issues will again pose threats to movement. Swan and Khalfan’s research showed that the industry is already moving forward, with a su