While it is extremely doubtful the entire public sector approach to open and competitive procurement will be abandoned, I could see considerable value in encouraging public sector procurement staff to develop their negotiation skills to enhance their procurement efficiency and to introduce some measure of flexibility rather than formality into the public sector procurement process.
Negotiation is the process by which (a) the parties to a dispute attempt to resolve their differences by way of voluntary agreement; and (b) two or more parties attempt to devise a transaction involving the transfer of resources or performance of services between them, so far as to exchange their mutual welfare.
Negotiations of both types involve similar considerations and require the utilization of similar skills. The relevance of negotiation to procurement is obvious. It is rare for a customer and potential supplier to have identical interests. Where interests diverge, they must be reconciled and settled.
There are at least five situations in which a greater use of negotiation might improve the results achieved in public procurement.
1. Negotiation is an attractive method of concluding a contract where an existing contract comes up for renewal. A decision to eschew negotiation as a means of concluding a renewed contract limits the opportunity to build on an existing contractual relationship (e.g., using the lure of an expanded contract to gain improvements to an existing contract as well as a better price for the new one than might otherwise be obtained), as for instance to achieve economies of scale or to capitalize on synergies.
2. Negotiation is also an attractive option where it is known that there will only be one or two suppliers who are prepared to bid for the supply of goods or services to a municipality. In such cases, it is not realistic to treat a tender or RFP as a competitive process. There are too few bidders (or no bidders) to cause the price to be driven down purely by the nature of the bidding process. It is also far too easy in such a situation for the bidders to work out an arrangement between themselves.
3. Negotiation should not always be viewed as an alternative to the use of a competitive process. In many cases, it can be an effective supplement to that process. The right to proceed with negotiation should always be reserved in cases where only one compliant bid is received.
Similarly, the right to negotiate should be reserved where the lowest bid received is above the upset limit price for the contract. The current market expectation in Canada where a tender has been used, is that any negotiation will take place with the lowest bidder on the basis that by submitting the lowest bid that bidder has somehow earned the right to a first crack at the scaled back contract.
Given this entrenched viewpoint, it would be difficult to advocate another approach. However, any such right should be understood to be time limited, and it should also be understood that once that limit is passed, the municipality will proceed with negotiations with the same latitude of discretion as would apply as if the tender had never taken place.
4. Negotiation should also be reserved as an option where in an RFP there is only one bid which meets the qualitative requirements of the municipality.
5. Negotiation should also be considered as a supplement to the award of a contract purely by tender or RFP where three or more of the indicia of bid-rigging appear to be present or where the market is highly concentrated.
Since negotiation has not been widely employed in the public sector, municipalities should incorporate institutional guidance with respect to the process into their purchasing bylaws.
Stephen Bauld is a government procurement expert and can be reached at email@example.com. Some of his columns may contain excerpts from The Municipal Procurement Handbook published by Butterworths.