Complex contracting in the public sector: Managing relations and negotiating contracts in the absence of market discipline

Posted by on Feb 4, 2011 | Comments Off on Complex contracting in the public sector: Managing relations and negotiating contracts in the absence of market discipline

Governments buy lots of goods and services. The U.S. federal government spent over $419 billion in fiscal year 2006 for procurement, almost double 2001 procurement expenditures (Hutton, 2008). The rationale for buying is to lower costs through scale or market efficiencies, spark service delivery improvements or innovation through competition, and access expertise or capacity unavailable in-house (Kelman, 2002). The risks are that contracting’s cost savings are sometimes illusory, quality suffers, and delivery delayed (Sclar, 2000).  Some fear that such large scale procurement undermines accountability: when government purchases rather than produces, the chain of accountability is extended yet further and perhaps even weakened. People working for government are more easily held accountable than people working for organizations that sell to the government. When contracting fails, contracting muddles responsibility: does fault lie with the seller, the buyer, or unforeseen circumstances that nature delivered?

from Accountability Challenges in Public Sector Contracting for Complex Products, prepared for the Kettering Symposium on Public Accountability, May 22 – 24, 2008

The above referenced excerpt is from a 2008 paper that was written by Trevor Brown (John Glenn School of Public Affairs, The Ohio State University), Matthew Potoski (Department of Political Science, Iowa State University), and David Van Slyke (Maxwell School of Citizenship and Public Affairs, Syracuse University).

Consisting of four sections, the authors attempt to relate to the reader, the dynamics of complex contracting in the public sector.  Outside of the context of today’s post, I would definitely take the time to review the paper and their findings in its entirety through the SlideShare viewer below.

However, one statement or observation that stood out was the writers’ assertion that “Contracting in complex circumstances does not guarantee failure, but it does make it more likely, ” citing as a reason the fact that “buyers and sellers can no longer rely on market discipline, but instead must manage their relations to ensure the exchange bears its win-win fruits.”

Traditionally associated with the financial markets, the term market discipline is for lack of a better description the indigenous checks and balances associated with operating according to a transparently sound set of immutable guidelines that ensure best value decision-making.  In essence, the buyers and the sellers in a market are said to be constrained by market discipline in terms of setting prices so as to generate revenue and avoid bankruptcy.

If the buyer consistently pays too much, they could find themselves over budget and thus put their organization in financial difficulty.  Conversely, a seller must obtain a price that ensures their organization’s profitability objectives are achieved otherwise they put themselves at risk of a similar fate.

However, and as the paper’s authors suggest, market discipline is largely absent from a complex contract negotiation as a result of the limited number of players involved in the acquisition process.  The assumption is that the market indicators that represent a touchstone and are available as a result of broader participation associated with simple or commodity-type purchases, no longer exist under a complex model and therefore require greater expertise in critical areas such as relationship management.

The question then becomes one of ascertaining the most effective ways to ensure that said expertise in complex contracting is itself acquired and maintained by both the buying and selling stakeholders?  Of even greater importance is to what extent technological advancement either helps or hinders the process?

The technological question is an interesting one on many levels, especially since it has generally been believed that financial engineering and technological improvements enabled financial intermediaries to be involved in overly complex and advanced financial operations.  This would seem to suggest that the advent of technology has to a certain degree created a false sense of capability when in reality none exists.

According to some reports, realization of this nature have led to an increase of interest among policymakers and academics for enhancing the environment for market discipline, as they believe that it can help to enforce regulatory compliance.

However, compliance alone will not address an absence of skill sets in the area of complex contracting, especially when it contributes to the belt with suspenders risk averse mindset within the public sector.

Let’s face it, market discipline has been increasingly absent from public sector purchasing, not so much because of a willful intent to snub established standards by any one particular stakeholder or stakeholders but, and as the paper’s author’s suggested with their comparison between simple and complex procurement, the lack of suppliers coming to the table.  After all, how can you establish a reliable reference point to incorporate a discipline standard when so few vendors are bidding on even the more basic government contracts let alone those that are of the complex variety.

Putting aside for the moment the challenges posed by eroding supply bases, there are distinct differences in terms of approach to both simple and complex acquisitions from a technological standpoint.

With more basic, commodity-type purchases, and through the utilization of systems that leverage advanced algorithms within the framework of centrally established parameters of importance such as price, delivery capability, quality etc., nominal experience at the buyer level represents a viable model.  This is one of the reasons why, within 18 months of a SaaS-based solution being implemented in a production environment, the purchasing staff for a large Department of National Defence contract was reduced from 23 down to 3, while simultaneously achieving an increase in SLA performance from 51% next day delivery to 97%.  This positive trending was also reflected in the fact that in the subsequent 7-year period, the cost for MRO Indirect Materials decreased 23% year-over-year.

Conversely, and in line with my February 3rd article in the Procurement Insights Blog titled “Spend Intelligence: A Matter of Thought Versus Knowledge,” automation alone will not produce similar results in the complex acquisition arena.  However, and this is a big consideration, if the software vendor’s indigenous expertise is in contracting versus application development, your chances of being able to at least lay a solid foundation for building the prerequisite capability within your team is considerably greater . . . and accomplished in a much shorter period of time.

Or to put it another way, automating a process without really understanding the core principles regarding the underlying function from a practical sense (which is the starting point from which most ERP vendors develop their applications), means that you invariably overlook the subtle nuances of experience and expertise.  You have for all intents and purposes reduced the process to an autocratic chain of executional actions without understanding, a practice that does not align with the paper’s authors conclusion that complex acquisitions requires buyers and sellers to manage their relations to ensure the exchange bears its win-win fruits.  Autocratic automation provides perhaps another reason why the paper makes the observation that Contracting in complex circumstances does not guarantee failure, but it does make it more likely.

The answer of course is a blended approach whereby the skill sets of the stakeholders in conjunction with what I will call intuitively proactive technologies built from a standpoint of process versus technological expertise, are leveraged to create a de facto market discipline.


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