The peer reviewed reports with regards joint procurement by Councils of services such as waste show that the economies of scale increase as the contract size goes from small to medium but plateaus or even decrease as the contract size goes from medium to large.
Therefore, when a Council or large organisation seeks to join with other organisations or multiple sites to tender for services, it should be seeking to increase the value above what it could achieve as a smaller entity to gain service benefits or lower prices as a larger entity. This needs to be offset with the negatives that accompany joint procurement. Let us look at those negatives first.
Joint procurement by definition involves grouping two or more entities. As a result there are automatic losses in:
Preparing the tender – more stakeholders, decision makers and administrators are involved with a wider variety of interests so it is a longer and more difficult process to agree on the proposed contract specifications. This often leads to either (a) a lower standard or more general service description and, or (b) a more complicated set of combinations or alternatives for tenderers to price. This leads to more difficult tender submission comparison and eventual agreement by all stakeholders on the final contract that is favourable to all parties
Attracting tenderers – larger, more complicated and higher risk tender specifications are more suited to larger tendering organisations so expect to receive less tenders with more qualifications that need to be negotiated out. Smaller, niche and often local service providers may have difficulty tendering competitively
Successful tender approval – prices and service solutions are often detailed for each Council or site. In many cases, one tender submission may be the best value for one Council of the joint group but another tender may be more favourable for another Council. Decisions need to be made as to which Council’s best option is favoured to select only one successful tenderer. This has seen parties in joint procurement leave the tender process, which disturbs the joint procurement project.
Negotiating the final contract terms – joint tender submissions contain higher risks, more qualifications and less certainty about the proposed service level for each Council’s individual needs and objectives. These should be determined before a tenderer is deemed “preferred” or successful to avoid loss of negotiating power or disappointment when the contract begins
Managing the contract – because each Council or site needs to ensure its own needs and objectives are maintained, an appropriate structure for ongoing contract management needs to be set. This can cause regular difficulties if the needs of each party differ or the Council representatives disagree with each other on how things should be done. A set of agreed processes can help but each stakeholder should be ready to compromise for the benefit of the harmonious operation of the joint contract. Flexibility for each Council or site entity is substantially reduced and that must be recognised.
Joint procurement projects that work best are those where a specific goal is unable to be achieved by a Council or site on its own but can be achieved by joining with a neighbouring Council or site. For example, a regional Council may have two recycling collection vehicles operating full time to collect a low number of recycling tonnes which needs to be transported a long distance to an appropriate recycling facility. However with a neighbouring Council there is sufficient to justify a new and local recycling facility to efficiently process the collected recyclables. An appropriate joint contract may involve advertising for tenders for a recyclable processing facility and keeping the collection as individual contracts for each Council or site. I.e., if a desired innovation in a specific element of Council’s services cannot be achieved economically on its own, but can be with neighbouring Councils, a joint procurement project may be appropriate.
Joint tenders also work best when the operational skills and resources are restricted. In the example above, it works best to limit the tender to processing only as processors often do not have the skills or resources to collect bins, especially in regional areas.
Recent years have seen a growth in joint tenders being managed by a third party procurement organisation. Sometimes this has become a necessity as Councils subcontract out procurement duties and are left with no in house procurement staff. Councils should be wary of this as the perceived additional value (which often is not realised) comes at the cost of:
Flexibility to adapt to changing markets
Increased scrutiny by the ACCC to ensure the project is in the best interests of Council ratepayers
Less visibility of contract operations and finances
Less ability to tailor Council services to updated strategic plans
Less responsiveness to the needs of their own ratepayer issues and demands
Large joint procurement contracts make great headlines for new contracts and new investments by industry however behind those attractive promotional releases are a raft of complications and compromises. Councils and large organisations should tread methodically and in a targeted manner if considering joining with others to achieve their own objectives.
More on this interesting topic to come in other blog posts.
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