Tight budgets and hard times are far from unknown in the private sector, but their procurement departments play a very different role in trying to control the costs of production.
Whereas in the public sector, procurement continues along the customary path of more or less open, competitive procurement. In the private sector, purchasing managers and senior buyers are expected to play a key role in driving down prices.
Purchasing managers draw on strongly established supplier-customer relationships to secure price concessions. In contrast, the short-term competitive approach of the public sector is not able to support any such approach.
Private sector managers are also able to draw upon superior negotiation skills to obtain cost-saving contracts with vendors. In the private sector, skills of this nature are developed through years of on-the-job experience and training.
In the private sector, purchasing directors with negotiation skills are sought after and paid a premium. In contrast, the skill set of the public sector purchasing manager is geared more towards supervising the procurement process and preparing reports than negotiating the best deal.
In the private sector, purchasing can be divided into three basic steps: information, negotiation, and settlement.
At the information stage, prospective customers identify their needs and evaluate potential sources to fulfil them, gathering information about market conditions, products and sellers.
At the negotiation stage, individual business partners start to interact with each other and determine prices and availability of goals and services as well as delivery terms.
Successful negotiations are usually finalized with a contract. At the settlement stage, the terms of the contracts are carried out and goals and services are transferred in exchange for money or other forms of compensation.
The public procurement process is completely distinct from this model.
In public purchasing, an information stage is similar to that of how the private sector initiates the process. However, the conclusion of this stage is the preparation of specifications for inclusion is a request for tender and request for proposal. There is no negotiation stage.
The terms of the contract are essentially set out in the tender or RFP documentation, with the contract generally following the established standard form for contracts of that public authority.
A limited form of “negotiation” may take place prior to the submission of bids, during which individual suppliers, or perhaps a trade association acting on their collective behalf, seek modification of either the specifications or the terms and conditions governing the tender or RFP.
Generally, however, this limited negotiation does not even occur. Instead, bids are submitted containing essentially fixed prices bids for the contract concerned. The government opens all bids simultaneously and the winning bid is either the lowest bid, or the bid offering the best overall value for money to the municipality, determined according to some predefined formula.
As I have noted in previous articles, the open-transparent-competitive paradigm of public procurement places primary emphasis on the price or, at best, full-life cost of supply at the sacrifice of almost all other aspects of procurement.
In contrast, in the private sector, studies suggest that price ranks second after quality, and that many of the other matters rank in nearly equal importance.
Since few people would likely argue that public sector procurement operates as efficiently or effectively as its private sector counterpart, it seems reasonable to suggest that at least some consideration should be given towards a greater utilization in public contracts than has formerly been the case.
I have always believed that there is no strong theoretical argument to support the widespread assumption that tenders or RFPs lead to the best possible price.
Stephen Bauld is a government procurement expert and can be reached at swbauld@purchasingci.com. Some of his columns may contain excerpts from The Municipal Procurement Handbook published by Butterworths.
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