Government procurement in IP contracts: a dreadful waste of money?

fit for purposeWhat is the purpose of a Government procurement office?  Silly question – to save money, of course.  According to the home page of the UK Government Procurement Service, its mission is simple:

Savings for the Nation

Our role is to provide procurement savings for Government and the UK public sector, including Health, Local Government, Devolved Administration, Education and Not for Profit organisations.

Note the repetition of the word “savings” in both the title and the text above.  The focus of procurement offices, in IP Draughts’ experience, is monetary.  Yet as all good commercial managers and commercial lawyers know, the price is only one part of a negotiation.  Value for money can mean getting a high-quality product or service at a higher price than for a comparable, medium-quality or low-quality product.  Other factors such as brand reputation, user-friendliness, product reliability, service levels, and compatibility with other products, may also affect the market price.

Ah, but procurement is about much more than price, the procurement manager may cry.  It is also about defining responsibilities and allocating risk, through suitable contract terms.  And it is certainly true that the contracts prepared by Government and other procurement procurement serviceorganisations tend to be weighty affairs with detailed provisions about performance, warranties, indemnities, financial penalties (however dressed up to make them legally enforceable), insurance obligations, termination rights, and so on.  IP Draughts recalls negotiating a 350-page contract produced by the UK Ministry of Defence, which was full of these kinds of terms. This approach is not confined to the public sector.  Some large commercial companies have procurement departments that produce lengthy and one-sided contractual documents.

circumlocutionYet for all their training and professionalism (and some are very skilled at negotiating contracts), procurement managers have a limited perspective on the supply of goods and services.  They cannot guarantee that, through their efforts, a supplier will provide the desired product or service.  All they can do, ultimately, is point to a contract that requires the supplier to do so.

For some types of supply, this approach may be sufficient.  If a supplier of bulk products – office chairs, say – doesn’t perform its obligations, the contract can be cancelled, penalties enforced, and a new contract placed with another, eager supplier at a price that reflects the size of the order.  The consequences of failure are usually limited.  In the worst case, some personal injury claims may be made for back injury due to faulty chair design, but this risk may be low and the liability contained.

With other types of supply, including some IP-related supplies, this kind of procurement approach is deeply flawed.  In all procurements, before a supplier can be selected and contract terms negotiated, someone needs to decide upon a specification for the products or services, and on selection criteria for potential suppliers.  In practice, the way these criteria are framed tends to favour large suppliers over small suppliers, but that is another story.

use your noodleWith complex procurements, these preliminary stages take on a much greater significance than they do for routine supplies.  Defining clearly in advance what is required, finding a supplier whose capability and commitment you trust, setting a price mechanism that enables them to make a reasonable profit, and working closely with them to ensure that the project is managed and completed successfully: these factors may be critical, and the detailed contract terms irrelevant.

If any of these critical factors is absent, the contract is likely to collapse.  This may result in adverse consequences that cannot be compensated by the application of financial penalties or other onerous contract terms, even assuming that the fault can be laid at the door of the supplier.  Familiar examples from newspaper reports include:

  • NHS Direct withdrawing from supplying the “111” non-emergency health telephone service because the price was too low for the work involved;
  • The provision of language interpreters in the English courts, where Government switched to a single procurement contract with a large supplier and promptly lost more money than they saved, because interpreters didn’t turn up for trials and court hearings had to be rescheduled; a House of Commons committee concluded that the Government had not been an intelligent purchaser of services and the result was “chaos” in the court system
  • numerous examples of expensive IT procurement contracts that failed, sometimes due to changing (or ill-thought-out) specifications or requirements

partnershipIn IP Draughts’ experience, many IP-related contracts fall into this category, i.e. what is required is intelligent purchasing, and collaboration between purchaser and supplier, not onerous contract terms.  Government departments sometimes pay lip service to this idea.  IP Draughts recalls, during the negotiation of the 350-page contract referred to above, a civil servant telling him that the MOD took a “partnership approach” in its dealings with suppliers.  IP Draughts bit his tongue to avoid saying what he really thought, which was that this was complete bollocks, as evidenced by the ridiculously one-sided, antagonistic, and patronising contract terms that they were discussing.

If an intelligent and collaborative approach to purchasing is followed, it is unlikely to be accompanied by aggressive contract terms that assume a kind of master-and-servant relationship.  Examples of contracts in which intelligent purchasing is required, in IP Draughts’ experience, include:
  • Contracts to run academic training courses, eg for medical students
  • Contracts for the provision of specialist technical services, eg research and consultancy, or the development of “state of the art” products
  • Contracts for the provision of legal services

IP Draughts is not sure why Government procurement departments seem, increasingly, to be proposing very one-sided contract terms for these types of project.  But they do seem to be doing so.  Some recent contracts with the UK Department of Health have been particularly one-sided.  He suspects it is a mixture of factors, including:

  • increasing use of procurement departments, and political pressure to reduce costs
  • a lack of discrimination between projects that suit onerous terms and those that don’t, combined with a general trend towards longer and more one-sided contracts
  • it is easier for Government departments to manage the contract negotiation process than it is to manage the earlier stages of defining requirements, choosing good suppliers, etc.  The former is a process that can be reduced to a measurable system; the latter is sometimes a very complex task that requires skills that are not always present in Government departments

Is this your experience or is IP Draughts being unfair on procurement departments?

2 Comments

Filed under Commercial negotiation, General Commercial

2 responses to “Government procurement in IP contracts: a dreadful waste of money?

  1. Vance, thank you for those great insights. I have a more fundamental issue, though, which is that (in my view) some services, including many professional services, shouldn’t be in a procurement process at all. By professional services I mean things like scientific and technical, financial, business consultancy and legal services.

    Buying software is perhaps at the boundary – some software is a commodity and can be procured, while other software development is more of a professional service.

    An interesting discussion of some of the perils of a procurement approach in a non-commercial setting appears in this evidence before a House of Commons committee on the subject of forensic science services for police forces: http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=4&ved=0CDwQFjAD&url=http%3A%2F%2Fwww.publications.parliament.uk%2Fpa%2Fcm201213%2Fcmselect%2Fcmsctech%2Fuc930-i%2Fuc93001.pdf&ei=530HUobbAcrUPL7DgZgO&usg=AFQjCNGMaiE2pOYSui9nwtxnKOmbnnmXng&sig2=sm360bgHP8Dujsn0PbDxng&bvm=bv.50500085,d.ZWU&cad=rja

  2. A substantial part of my practice and career has been spent representing clients (chiefly larger companies) in their procurement endeavors. From that perspective, I can offer the following starting-point for analysis (not that it excuses anybody’s wretched excess): For every dollar/pound/euro of revenue a seller achieves, roughly ten percent of it reaches the bottom line as net profit (more or less, of course, depending on industry and efficiency, see below). This is because it must filter through all the expenses of producing the revenue. For every monetary unit of cost averted through procurement savings, one hundred percent reaches the bottom line. Understand that and you understand procurement.

    In terms of rigidity vs flexibility, I completely concur that intelligent procurement should be as flexible as intelligent sales (we all know that a seller will make many compromises before walking away from a sale), meaning that it is usually a good idea not to squeeze the last drop of blood from the stone, because a reliable and loyal procurement relationship is often worth much more in the long run than getting the absolutely best price now. That means, in turn, that procurement officers should know what they’re buying and what the needs of the sellers are in that industry. It is futile, for example, to insist that a software vendor commit to features in the next version, since doing so will prevent the vendor from recognizing revenue on the current sale under accountants’ revenue recognition rules. Just don’t go there, it’s not worth it.

    The trouble is, as with much nowadays, that companies, governments and other economic actors are squeezed for budgets and personnel, and must adopt what they euphemistically call heuristics (read: corner-cutting), for dealing with a dizzying range of counterparties in a procurement environment. As a result, you get ridiculously detailed, rigid, and generally inapplicable one-size-fits-all terms and criteria regardless of what it is you’re buying. A seller should just be persistent and chip away at all the stuff that’s irrelevant, like a sculptor (as Michelangelo is reported to have said, “I just took a block of marble and removed everything that didn’t look like David”). In doing this, lawyers for the buyer are often more helpful than procurement officers (who feel that they have to put notches on their gun belts), if you can find one who can dedicate his/her time to the effort (bizarrely, despite the first point I made above, most companies devote 90 percent or more of their legal resources to sales and 10 percent or less to procurement).

    So, my advice to the seller dealing with an excessively rigid procurement department is: stiff upper and carry on. Oh, and one other thing: it is often helpful to point out to the procurement officer that the bells and whistles and liabilities the officer wants the seller to provide were not included in computing the price, so that if they really and truly want them, they should be willing to pay the necessary bump-up. That should concentrate their minds nicely.

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