November 14, 2011

Negotiation of contracts a key in procurement

Procurement Perspectives | Stephen Bauld

When we talk about one of the main differences between public and private sector procurement process we need to mention the negotiation of contracts.

In the private sector procurement department buyers play a very different role in trying to control the cost of production. Whereas in the public sector, procurement continues along the customary path of more or less open, competitive procurement, in the private sector, purchasing managers and senior buyers are expected to play a key role in driving down prices. There, purchasing managers draw on strongly established supplier-customer relationships to secure price concessions. In contrast, the short term, competitive approach of the public sector is not able to support any such approach. Private sector managers are also able to draw on superior negotiation skills to obtain cost savings contracts with vendors. In the private sector, skills of this nature are developed through years of on-the-job experience and training. In the private sector, purchasing directors with negotiation skills are sought after and are paid a premium. In contrast, the skill set of the public sector purchasing manager is geared more toward supervising the procurement process and preparing reports than negotiation the best deal. Not to take anything away from the public sector buyers, it is simply not part of the daily job requirements, as it would be in the private sector setting.

Some private sector companies even have a program to reward buyers for cost savings concepts. This would never happen in the public sector government approach. So, who is in fact doing what is best for the organization they work for? The answer is both public sector and private sector buyers are doing exactly what they are getting paid for. Private sector purchasing staff grinding down prices and public sector buyers following the purchasing policies and procedures as set out by the governing municipality and the bylaws of the elected officials. When we examine the private sector, purchasing can be divided into three basic steps: information, negotiation, and settlement. At the information stage, prospective customers identify their needs and evaluate potential sources to fulfill them, gathering information about market conditions, products, and sellers. At the negotiation stage, individual business partners start to interact with each other and determine prices and availability of goods and services as well as delivery terms. Successful negotiations are usually finalized with a contract. The other side of the coin in the public procurement process is completely distinct from this model. In public purchasing, an information stage similar to that of the private sector initiates the process. However, the conclusion of this stage is the preparation of the specifications for the request for tender and request for proposal. There is no negotiating stage. The terms are essentially set out in the tender or RFP documentation, with the contract generally following the established form of public authority contracts.

As I have noted many times, the open- transparent-competitive paradigm of public procurement places primary emphasis on the price (or, at best, full-life cost) of supply sacrifices other aspects of procurement: quality beyond the extent to which quality can be dictated by tight specifications. This is an ongoing argument for years to come with respect to the best way to procure goods, services, and construction. It is simply two completely different types of procurement process being applied to the way things have been done from both sectors for decades. Many would like to see a more private sector approach taken in public sector procurement, but the chances of that happing are slim to none. The risk is far too high, and the reward is much too low to revamp a set of completely different rules that has been passed down for generations.

Stephen Bauld, Canada's leading expert on government procurement, is president and CEO of Purchasing Consultants International Inc. He is also the co-author of the Municipal Procurement Handbook, published by LexisNexis Canada. He can be reached at stephenbauld@bell.blackberry.net.

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