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Procurement Perspectives: Considerations that motivate private sector procurement

Stephen Bauld
Procurement Perspectives: Considerations that motivate private sector procurement

Negotiation, of course, is only one tool that government could borrow profitably from the private sector.

There are a range of other non-ticket price ends that can be served through the use of techniques other than traditional government competitive contracting. Most of the considerations that motivate private sector practices are geared towards the superior ability of the private sector to employ full life cycle costing, in which the ticket price is of far less importance.

Government procurement would have to be extremely modified to take into consideration any of these suggestions, however, such concerns would include the following:

Developing relationships

The supply of goods and services is an interactive process and purchasing involves more than buying to meet immediate need. Many private sector customers prefer using suppliers with whom they have a strong established relationship. The supplier’s superior knowledge of the customer’s needs allows it to better serve those needs. Established suppliers usually are more reliable. In addition, by developing a relationship with the supplier, the customer is better able to co-ordinate in arranging a supply that fits with its purchasing strategy.

Quality control

Since private sector purchasing departments are generally better resourced, private sector customers are far more oriented to monitoring performance and the quality of supply than their public-sector counterparts. As a result, they are more inclined to place an emphasis on demonstrated quality control in supply. As a rule, governments contribute to their own higher costs by being more tolerant of delay and poor performance than the private sector.

The private sector benefits from the narrow focus of its activity

In the private sector, buyers acquire a solid knowledge of the industries from which they are buying, because purchasing tends to be commodity based, allowing buyers to acquire knowledge regarding the materials and services they are purchasing. Such knowledge is harder to acquire in the public sector, since governments engage in a more diverse range of operations at the municipal level.

The private sector stresses the development of a buyer’s  ability to negotiate

For instance, a longer-term commitment can be used as an incentive for cheaper supply, since it reduces the cost of contracting to the vendor. That option is denied to the public sector buyer, since the competitive process affords no assurance of a long-term relationship.

Long-term contracting can generate economies of scale

A negotiated long-term contract with a single supplier can lead to improved delivery of products and services, enhanced responsiveness and deeper knowledge of the government program requirements. The possibility of a long-term relationship encourages suppliers to invest in better understanding customer needs and in providing superior service.

In contrast, in the public sector, good suppliers with proven track records of above-average delivery are given no preference at all. On the contrary, they frequently lose contracts to low-ball bids from suppliers who provide poor service.

Drawing on the cost efficiencies of negotiation

Large private sector companies tend to set up blanket orders with suppliers that are quoted every three years. They build up relationships with these suppliers that last sometimes for decades. This different concept of doing business cuts down on the overall procurement process. The short-term arrangements favoured in the public sector generally represent a more expensive method of procurement.

Getting the cost of government procurement down is in everyone’s interest.

According to a widely quoted U.S. study, for every dollar of additional tax, the nation sacrifices 40 cents in economic growth. That loss occurs irrespective of whether the taxes concerned are applied at the federal, provincial or municipal level.

No one would suggest that government should cheat the private sector. However, fairness has to work both ways. The ultimate goal of the public procurement process is to get a good deal for the taxpayer, not to provide lucrative work for merchants.

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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