False economies

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This story in today’s Western Mail neatly highlights one way in which attempts to cut costs in the short term can backfire and lead to cost increases in the long term.  And whilst this may be an extreme example, I’ve seen other similar cases before.  The public sector is particularly prone to this problem, in its striving to achieve – and demonstrate – open competition and value for money.

I’m not sure that I entirely accept the figures quoted in this example, to be honest.  I find it hard to believe that each of 30 different companies would really decide, individually and separately, to spend £3,000 on bidding for a contract worth only £20,000, knowing that price was a key element in winning.  Spending 15% of the maximum total revenue value of a contract on the sales process looks excessive to me.  The only sensible decision for a company faced with that level of cost and competition for such a small contract is to qualify themselves out and decide not to bid.

And that’s the first way in which an excessively costly pre-sales process can actually push prices up – some of the more competitive and cost-conscious companies will simply decide not to bid.

If we take the figures as correct however, then presumably the procurer – in this case an unnamed local authority – might argue that the £90,000 in costs incurred by bidders isn’t their problem.  They’ve secured the best possible deal for their own authority, and that’s the beginning and end of their responsibility.  It’s a short-sighted viewpoint. 

Every company which spent £3,000 on an unsuccessful bid will be looking to recoup that sum on the business it does win; those pre-sales costs are thus effectively factored in to its prices.  And if they are going to lose 29 out of every 30 bids they submit, that’s an awful lot of factoring in.

It’s also the second way in which open tendering for small contracts can push overall prices up rather than down.

Most companies tendering for business should be expecting to win 1 in 3, or at very worst, 1 in 5, of the contracts for which they tender.  Any lower than that, and their pre-sales costs will start to make them uncompetitive.  A wise public sector procurement process which was serious about wanting real, long-term, value for money would recognise that.  If the rules to which public bodies are working are forcing, or even encouraging, the sort of approach highlighted by this article then they need to be changed.