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Competitive bidding: is there another way?

Are FM and procurement a bit stuck?

Competitive bidding is a means to an end. We often forget this: it is after all a habit that claims to deliver positive outcomes reliably, and it follows a process which is understood by all involved. It delivers transparency, at least in theory, and an auditable trail of decision making which protects both the buying organisation and all the individuals engaged in the process.

But like all habitual processes, protagonists can lose sight of the objective, and see  process compliance as sufficient justification. While tendering is only one way of achieving the ends required, it has become the dominant, paradoxically monopolistic, process used to procure facilities management and facilities services contracts. Because it is widely used and sometimes successful this can obscure its shortcomings, of which the most spectacular are the costs for all parties, which when balanced against the possible savings for the Buyer and profit for the Vendor may not be justifiable.

To unpick some of this, let’s re-consider what the objectives of outsourcing might be. Cost saving is obvious, you might think: but actually cost saving is derived from the application of improved management techniques, deeper expertise leading to process improvement and improved resource utilisation, improved buying power, consolidation of back office functions … These are the things that  create savings. They are also required to deliver the other benefits of outsourcing:  risk reduction and compliance improvement, improvements in service quality and organisational agility, and so on.

There is no obvious reason why tendering, with its emphasis on lowest cost, should be the best means to identify Vendors who can contribute these elements, let alone implement all the associated change management required for successful transition to a new management regime. There is a growing consensus that tendering is often counter productive. Why is that view emerging? And, perhaps more interestingly, how else might we assess vendor suitability?

For Buyers, tendering is starting to be a zero-sum game: 2nd or 3rd generation procurement of services is showing that usually all the practical savings have been made and quality improved. A medium scale FM outsource might cost the Buyer organisation over £200,000 in internal resource time, consultant support, and legal advice. Add to that the mobilisation costs if a new provider is appointed, and tendering has suddenly become a major periodic  cost which might not be off-set by savings. Even where bids show potential savings, these  are speculative and may not in any case off-set the costs incurred. Worse, the change in supplier involves serious risk of damage to service quality and to the existing client/contractor relationship during the bidding process.

To embark on such an process without certainty that a positive outcome is achievable would in most situations be regarded as career threatening madness: but Buyer organisations seem  procedurally wedded to tendering as the sole solution.

Bidders face the mirror image problem. Especially as contract scope and geography is expanding, the costs of bidding are becoming onerous – well over £100k on medium size contracts, and of course much more if you think of PFI/PPP bids where costs run into  seven figures. Simple maths suggests that if buyers insist on 6 company shortlists, then 5 bidders must lose. So each time they win a contract, they need to recoup the costs of 5 losses, meaning that the awarding Buyer is paying for that. It may not be obvious where that cost is in the fees, but it has to be there in the organisational cost base and thus in the cost recovery model. The result of this is that Vendors are becoming much more selective about which contracts they will bid for, which consequently reduces the level of competition, and thus rather undermines the fundamental premise of competitive tendering.

Before considering alternative options, its worth acknowledging the situations in which Tendering clearly delivers benefits. We can posit a few generic situations where it fulfils its function: buying of commodity goods and products; first time outsourcing of services (and probably second round as well, as lessons learnt are applied); smaller single service contracts (where the process is relatively short and simple); major service reconfigurations (for example, bundling multiple services into a single integrated contract, or into a multi-national scope);  and new premises occupation. However, it is worth noting that in these last two situations Buyers face a serious dilemma, in that they very often lack the robust asset data required by bidders to establish their resource plans and costs. Without this, bids received are notoriously unreliable and are often hedged with caveats that make pricing wholly  notional.

Having said all that, the list excludes a large number of situations in which contracts are presently routinely tendered. What might Buyers do differently?

If cost is the key driver, as it often is, there is no evident reason why a re-examination of underlying resources and organisational structures wouldn’t achieve this in most stable situations – in other words, just doing what management should do regardless of who provides the service. Who better to assist that with than the incumbent supplier? Won’t they know “where the bodies are buried”? Can’t they be incentivised to deliver change in a way which is cheaper (no procurement or mobilisation costs, for example), more reliable (they know the cost base) and less time consuming than re-tendering?

What if cost isn’t the main issue – if, say, the buyer is dissatisfied with vendor performance, or simply believes they have become complacent? If Buyers can accept that tendering is a lottery, why not undertake research into the market to identify a very small number of potential suppliers (maybe as few as two) and carry out a competitive dialogue with them? In that way, it is possible to explore issues like cultural fit (the lack of which is more often the cause of Buyer/Vendor relationship breakdown than quality or cost), robustness of processes, resourcing and alignment with the corporate strategy – all issues which are critical but often subsumed by cost in traditional tendering.

It might be argued that this lacks the objectivity and demonstrable transparency of larger shortlists and competitive bids. To an extent that’s true, but this can be mitigated: use of reputable external advisers might be one component, plus the vigilance of procurement specialists to ensure probity, and a sign-off process with a business case presented to senior management would be a serious legitimating stage. In any case, let’s not pretend that tendering isn’t sometimes subject to Buyer manipulation – it’s not always as objective a process as its proponents suggest.

Buyers could then establish budgetary constraints (for example, costs must not exceed the current level) and discuss with potential vendors how to drive improvement, sustain quality and keep pressure on costs. It would also allow a more development approach for large scale contracts, to address the asset and service data constraints on large scale contracts referred to previously.

Doesn’t this put too much power in the hands of the Vendors? And doesn’t it mean that over time costs will inevitably slide upwards? Certainly Buyers need the means to compare costs against peers and relevant norms, but to date the lack of any effective industry benchmarking system has prevented this. In organisations where FM costs are not a significant element of competitive advantage (most, you might think) this would seem an obvious development. Some industries already have a means of sharing non-core operating cost data between real estate and FM professionals. It might be valuable for the major FM service providers and the major corporate occupiers to collaborate on this, since it could provide a very cost effective and objective solution to issues around occupancy costs, as well as providing a comparator which would be respected by FD’s, and thus perhaps relieve some of the demands which inevitably occur in an information vacuum.

Tendering need not, therefore, be the only tool used to procure support services. While it is often beneficial, its blanket usage is harming those it is intended to assist and it is demonstrably not always succeeding even on its own terms, let alone in meeting corporate objectives. A re-think is, perhaps, rather overdue.

First published in The Leesman Review , August 2013

© Dave Wilson / Effective Facilities , 2013