L5-14 Student Slides

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Slide 1 L5-14 Contracting in the Public Sector Student Slides

Transcript of L5-14 Student Slides

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L5-14 Contracting in the Public Sector

Student Slides

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Welcome and Introductions

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Session One

L5-14 Contracting in the Public Sector

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Learning Outcomes

1.0 Develop the business case (25%)

1.1 Evaluate potential risks and establish appropriate procedures to manage risks:

Types of risk: • Political eg reputational, loss of democratic oversight by elected representatives• Limited competition in the market• Failure to meet performance standards• Change of law • Security of supply, contingency planning, stock holding and alternative sources of supply • Quality, project or technology failure• Supplier insolvency, monitoring and guarantees• Security, theft and damage• Fraud, accounting & payment exposures, conflicts of interest, purchasing ethics and codes of conduct• Contractual failure, consequential loss and provision for remedies

Procedures to manage risks:• Allocation of risks between client and contractor according to which party is better placed to manage the risk• Determine form of governance arrangements through which risks can best be managed eg contractual incentives and penalties, liquidated damages, relationships • Establish procedures for monitoring and managing the key risks identified

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Overview of the key themes and learning outcomes

UNIT CHARACTERISTICS

This unit recognises the differences in contracting and regulatory requirements within the public sector environment. Developing Contracts in Purchasing and Supply means taking on the challenges of managing a contract from inception through to conclusion.

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Overview of the key themes and learning outcomes

UNIT CHARACTERISTICS

This unit is designed to provide students with the knowledge and understanding to analyse concepts underlying the contracting process, including;

MarketsTransparencyCompetitionRelationships, and,Trust

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Overview of the key themes and learning outcomes

UNIT CHARACTERISTICS

Students will be expected as a result of studying this unit to be able to manage the contracting process efficiently and effectively through:

Developing the business case for the procurementAnalysing the nature and scope of the contractApplying appropriate selection proceduresDeveloping positive relationships with suppliers

…to realise intended benefits in the context of public accountability and responsible stewardship.

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Overview of the key themes and learning outcomes

LEARNING OUTCOMES

There are four sections to this Unit, each apportioned a percentage of the total time and focus for the whole unit.

1.0 - Develop the business case (25%)

2.0 - Analyse the scope and nature of the contract (30%)

3.0 - Manage the supplier selection process through the application of appropriate rules and procedures (15%)

4.0 - Develop and maintain positive relationships with suppliers to realise benefits from the contract (30%)

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Definitions of Risk and Risk Management

Risk is ‘the possibility that a hazard will cause loss or damage’

Risk management is ‘a discipline for dealing with uncertainty’ (Kloman)

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Common Risks

Quality Environmental Pollution Health & Safety Fire Computer failure Marketing risk Fraud Security International Trading Political risk

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Internal Risks

Quality Accidents Fire Security Fraud IT Marketing Buildings Telecoms Human

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External Risks

Political Economical Social Technological Environmental Legal

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Vulnerability in the Supply Chain

Reputation Unreliability Overstocking Price increases Conflicts of Interest Corruption Financial failure

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Types of Risk – Supply Market Risks

1. Potential suppliers have limited interest in the procurement

2. Lack of capacity or unwilling to invest in technology

3. Takeovers and mergers occur

4. Supplier insolvency

5. Supplier withdraws from market sector

6. Weakness in the supply chain

7. Unwilling to share intellectual property

8. Off-shoring strategies and decisions

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Types of Risk - Political

1. Change in government policy

2. Change in priorities, particularly with major projects

3. National emergencies

4. Surge in demand due to crisis scenario

5. Lack of democratic oversight by elected representations

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Types of Risk – Contractual Risks

1. Change of law

2. Failure to meet obligations e.g output specification

3. Limit of liability

4. Lack of adequate insurance

5. No Parent Company Guarantee or Performance Bonds

6. Unwilling to accept English or required Jurisdictions

7. Extent of sub-contracting

8. Changes in key personnel

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Types of Risk – Financial Risks

1. Lack of working capital

2. Milestones are unclear and valuations inaccurate

3. Budget constraints

4. Payment approval difficulties

5. Supplier’s cash flow problems

6. Incentive payments ill-defined

7. Damages for non-performance not deducted as provided for in the contract

8. Fraudulent activity

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Types of Risk – Buying Organisation Risks

1. Lack of procurement involvement2. Conflict of interest3. Code of conduct4. Ethical practices5. Lack of forecasting6. Inadequate specification definition7. Poor decision making8. lack of communication protocol9. Security failure, theft, damage to property10.Poor project/contract management11.Contingency planning12. inventory planning and mismanagement of stock holdings

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Types of Risk – Post Contract Award Risks

1. Failure to manage mobilisation

2. Sample approval flawed

3. Acceptance testing

4. Missed delivery dates

5. Contract change mismanaged

6. Stakeholders involvement

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Types of Risk – Other Risks

1. Failure to comply with EU Procurement Regulations

2. Failure to comply with Standing Orders

3. Inappropriate tender evaluation criteria used

4. Changes in personnel accompanied by poor handover

5. Tenders not accepted within validity period

6. procedures to manage risks

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Procedures to Manage Risks

Allocation of risks between client and contractor according to which party is better placed to manage the risk.

The risk management process will include the;

• Creation, and, • Subsequent maintenance of a risk register/log

This should be incorporate the following areas as a minimum:

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Risk Register

1. Risk number2. Risk type3. Author-who raised the risk4. Date identified5. Date last updated6. Description7. Likelihood of occurrence8. Interdependence with other sources of risk9. Expected impact10.Bearer of risk11.Countermeasure (risk mitigation strategy)12.Risk status and risk action status e.g High, Medium or Low

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Using Risk Registers

Risk registers/logs kept as permanent record Record –

Type Who is responsible Date identified Description Cost Probability Impact Response actions

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Risk Register (HR Example)

Risk Controls and ActionsReviewed by

1.1 Lack of succession Personal development Annually by

planning plans for managersHR Director

1.2 Injury at work, Training and education Line managers eg; RSI and HR

Supervisory reviewmanagers

Annual report on completion of training

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Risk Register (Strategic Objective)

Risk Impact Probability Control Action Owner

Late High 35% Expedite ICT Ian Smith

Delivery

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Risk Register (DoH)

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Student Question

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Session Two

L5-14 Contracting in the Public Sector

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Procurement Structures and Service Provision

1.0 Develop the business case (25%)

1.2 Assess the relative merits of internal, external or mixed provision of the purpose of the contract:• arguments for and against internal, external or mixed provision by public, private and third sector providers eg voluntary bodies, charities• policy on contracting out, competitive tendering, use of private finance, private and voluntary sector expertise • models for determining the appropriate governance arrangements eg transaction cost economics, relational competence analysis

1.3 Identify the correct level of approval for the purchase and obtain authority to proceed:• official (eg by grade, by department (Purchasing, Finance etc)), legal and political (eg Council Committee, ministerial) approval levels in accordance with established procurement and ethical procedures• relevance of approval procedures under Gateway reviews or programme and project management techniques such as PRINCE2 and Managing Successful Programmes (MSP)• internal and external stakeholders with whom consultation is necessary

1.4 Plan that procurement staff with expertise appropriate for the requirement are involved at an early stage:• risks of not involving procurement at an early stage• procurement knowledge and competences appropriate for various requirements• communication skills appropriate for interacting with more senior staff and staff from different professional and technical backgrounds

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1. Compulsory competitive tendering

2. Best Value

3. Byatt Report

4. National procurement strategy

5. Centre’s of excellence

6. Regional Improvement and Efficiency Partnerships

Historical Key Drivers

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1. Comprehensive spending review (CSR 07)

2. White paper (LAA and MAA)

3. Third Sector

4. CO2 emissions

Current Key Drivers

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Releasing resources for the frontline: Independent Review of Public Sector Efficiency

Sir Peter Gershon's review of public sector efficiency, set out the scope for further efficiencies within the public sector's;

1. Back office2. Procurement3. Transaction service4. Policy-making

functions. The report also identified opportunities for increasing the productive time of professionals working in schools, hospitals and other frontline public services

The Gershon Review

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The 2004 Spending Review identified auditable and transparent efficiency gains of over £20 billion in 2007-08 across the public sector.

Over 60 per cent of these were directly cash releasing.

The Gershon Review

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Different Models of Service Provision

There are generally three different models;

1. Internal provision

2. External provision

3. Mixed provision

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Use of External Resources

Decision whether to use internal or external resources must be made by:

Having a thorough understanding of the needs and constraints of the organisation

Conducting a cost-benefit analysis of the internal and external alternatives

Identifying the objectives of the specific project

Identifying and quantifying the appropriate measures / or internal and external provision of services

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Reasons to use External Resources

Have access to technology, skills and knowledge

Improve business processes and enable organisational change

Provide short-term services without adding to ongoing operational costs

Focus in-house resources on core strategic plans and projects

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Reasons to use Internal Resources

Retain skilled personnel who are able to respond directly to the organisation’s needs

Obtain services at lower life cycle costs

Access employee’s unique insight into a project

Ownership and control over resource and personnel assets

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Cost Benefit Analysis

This is a term that refers both to:

A formal discipline used to help, appraise, or assess, the case for a project or proposal

Its an informal approach to making decisions of any kind Under both definitions the process involves, whether explicitly or implicitly, weighing the total expected costs against the total expected benefits of one or more actions in order to choose the best or most profitable option.

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Cost Benefit Analysis (Example)

Accurate Cost Benefit Analysis means that once you have collected ALL the positive and negative factors and have quantified them you can put them together into an accurate cost benefit analysis.

Some people like to total up all the positive factors (benefits), total up all the negative factors (costs), and find the difference between the two.

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Cost Benefit Analysis (Example)

Cost Benefit Analysis - Purchase of New Stamping Machine (monthly costs)

Purchase of Machine .................... £20,000Installation of Machine ...................£ 3,125

Increased Revenue ........................£27,520Quality Increase Revenue ..............£ 358Reduced material costs ..................£ 1,128Reduced Labor Costs .....................£18,585

New Operator ................................. £8,321Utilities ............................................ £ 250Insurance .........................................£ 180Square footage ...................................... 0no additional floor space is required

Net Savings per Month .................. £15,715

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Cost Benefit Analysis (Example)

The cost benefit analysis clearly shows the purchase of the stamping machine is justified.

The machine will save your company over £15,000 per month, almost £190,000 a year.

Cost benefit analysis determine the advisability of a course of action and then to support it once you propose the action.

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Investment Appraisal Techniques

HM Treasury provides guidance to other public sector bodies on investment appraisal and evaluation.

The ‘Green Book’ encourages a more thorough, long-term and analytically robust approach to appraisal and evaluation. Exacting detail can be found at http://greenbook.treasury.gov.uk/

There are a number of investment appraisal techniques to inform a financial decision on whether or not to invest in a project, or indeed choose from a number of projects, if there are restrictions on the available capital to invest.

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Investment Appraisal Techniques

Financial appraisal should form only a part of the decision as to whether or not to invest in a capital project and that there will be other factors that need to be considered in making the final decision. These include;

1. The ranking of risk and reward2. The intangible benefits of undertaking a particular project3. How each project fits in with the strategic aims of the organisation4. The liquidity of the project and the return on the investment.

The financial appraisal provides a quantitative analysis, which gives an organisation a basis from which a considered decision can be made.

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Investment Appraisal Techniques

In the public sector there may be other benefits accruing from a project that demand a wider investment appraisal technique.

Examples of the Public sector’s different drivers across local and central Government, defence, emergency and health services are:

• Environmental costs e.g. lead in petrol;

• Political/electoral costs e.g. congestion charging;

• Retention costs for materials ‘undisposable under current technologies’ • e.g. nuclear waste.

• Retention costs for resources which might be needed sometime e.g. ‘Green Goddess’ fire tenders

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Investment Appraisal Techniques

• Improvements to society e.g increased longevity;

• Better pupil : teacher ratios;

• Better healthcare;

• Reducing poverty.

• Improvements to the environment e.g: cleaner air; cleaner beaches; better public facilities.

Capital investments tie up significant amounts of resources for long periods of time and consequently the decisions to invest become a critical part of the business plan.

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Investment Appraisal Techniques

The types of investment decisions, public and private sector, against which investment appraisal can be applied include:

• Expansion of buildings, plant, equipment and stock

• New product lines, business diversification and new enterprises

• Cost savings, such as technology versus labour

• Whether or when to replace a piece of capital equipment

• Choosing between alternative investments

• Determining optimum financing options, such as lease versus purchase.

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Investment Appraisal Techniques

The types of investment decisions, public and private sector, against which investment appraisal can be applied:

When evaluating projects, whether or not they are competing for that scarce resource, capital, there is need to consider the cost of capital, the asset’s residual value, the cash flows and timings emanating from the project, taxation including capital allowances, grants, risk and cost benefit.

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Investment Appraisal (Three Principal Methods)

There are three principal methods to Investment appraisal;

Payback period

Accounting rate of return (“ARR”)

Discounted cashflow, which takes two different approaches: • Net Present Value NPV • Internal Rate of Return (“IRR”)

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Payback Period

This is calculated by determining the length of time required to recover the initial investment.

For example, if the capital cost is £20,000 and the annual net cashflows from this investment are £4,000, the payback period is 5 years.

If the annual payments were uneven i.e. more or less over the payback period the investment appraisal would conclude a longer or shorter period to return the payment.

This is described as a pay back period with uneven cash flows.

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Payback Period

The advantages of the payback period are its simplicity.

Its disadvantages are that it ignores what happens beyond the payback period, the time value of money and is concerned with cost recovery not profitability.

The payback period is considered more of an indication of risk rather than an investment criterion.

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Accounting rate of return (“ARR”)

The ARR is the accounting profit as a percentage of the capital employed.

Taking the same example, with a capital cost of £20,000 and an annual profit of £2,000 (net cashflows less straight line depreciation over 10 years), the ARR is 10 per cent.

The advantages of the ARR are again its simplicity and its concern with profitability, however it still has the disadvantage of ignoring the time value of money and also is dependent on the depreciation policy adopted by the business.

This method is less appropriate for the public sector than the private sector.

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Discounted Cash flow (DCF)

DCF focuses on the time value of money, £1 is worth more today than £1 in the future.

The reason being that it could be invested and make a return (even in times of low interest, so long as interest rates are positive).

The discount formula is: i / (1+r) n , where i = investment, r = discount rate of interest and n= number of years.

So, for example the present value of £1, at a discount rate of 10% in 3 years. £1/(1.10) 3 = £0.75

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Discounted Cashflow (DCF and NPV)

There are two main approaches to Discounted Cash Flow (DCF) appraisal;

NPV and IRR.

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Net Present Value (NPV)

The annual cash flows are discounted and totalled and then the initial capital cost of the project is deducted.

The excess or deficit is the NPV of the project.

Hence for the project to be worthwhile, financially, the NPV must be positive.

The higher the NPV the more attractive is the investment in the project.

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Internal Rate of Return (“IRR”)

The IRR or yield of a project is the rate of return at which the present value of the net cash inflows equals the initial cost, which is the same as the discount rate which produces a NPV of zero.

For an investment to be worthwhile the IRR must be greater than the cost of capital.

The advantages of the discounting methods are that they are concerned with profitability and the time value of money.

They also provide a common denominator, being today’s value, for variable length’s of investment.

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Internal Rate of Return (“IRR”)

Their disadvantages relate to the complicated (relative) nature of the calculations, the choice of the rate of discount to apply, giving rise to the possibility of multiple solutions existing and the assumption that cash surpluses can be reinvested at the same rate.

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Stages in a Public Sector Investment Appraisal

With an OGC Gateway review, the review process examines a programme or project at critical stages in its lifecycle, including Investment appraisal to provide assurance that it can progress successfully to the next stage.

The process is based on well proven techniques that lead to more effective delivery of benefits, together with more predictable costs and outcomes.

It is designed to be applied to delivery programmes and procurement projects, including those that procure services, property and construction, IT-enabled business change and procurements using framework contracts.

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Student Question

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Session Three

L5-14 Contracting in the Public Sector

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Learning Outcomes

1.0 Develop the business case (25%)

1.5 Differentiate the appropriate funding mechanisms, whether conventional, PPP/ PFI or mixed:• advantages and disadvantages of various funding mechanisms eg conventional (from departmental budgets), privately financed eg bond issue, PFI contract• whole life costing• investment appraisal techniques

2.0 Analyse the scope and nature of the contract (30%)

2.1 Evaluate the supply market for changes to suppliers, technology, the nature and extent of competition:• number, size, location, socio-economic aspects (SMEs, minority owned etc) of suppliers • technological changes eg new processes, equipment, intellectual capital• Porter’s 5 forces model: barriers to entry, threat of substitutes, power of suppliers, power of buyers, intensity of rivalry and strategies to increase power of buyers

2.2 Evaluate opportunities for aggregation of requirements and cooperative procurement paying due attention to the optimum geographical and sectoral scope of the contract:• other buying organisations with similar requirements by sector, region, size etc • EU and UK rules on aggregation and joining previously let frameworks or contracts• nature of the client’s requirement: standard; some added/amended features; tailored for client• optimum geographical scope of sourcing and delivery: local, regional, national, European Economic Area; global

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Types of Risk – Supply Market Risks

1. Potential suppliers have limited interest in the procurement

2. Lack of capacity or unwilling to invest in technology

3. Takeovers and mergers occur

4. Supplier insolvency

5. Supplier withdraws from market sector

6. Weakness in the supply chain

7. Unwilling to share intellectual property

8. Off-shoring strategies and decisions

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distant relationships closer relationships

The relationship spectrum - diagram 1

distant relationships closer relationships

The relationship spectrum - diagram 1

RELATIONSHIP SPECTRUM

Relationship Spectrum of Buyers and Sellers(Diagram from workbook by Mike Fogg)

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Supply Positioning Model(Diagram from workbook by Mike Fogg)

StrategicSecurity

StrategicCritical

TacticalAcquisition

Tactical profit

LOW

HIGH

HIGHRelative costR

isk,

vu

lnera

bili

ty,

exp

osu

re

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Quality

Research and Development

Production

Maintenance

The Purchasing team

Inventory Management

WarehousingAnd

Distribution

Sales andMarketing

Finance

HumanResources

Information Technology

Customers

Suppliers

The Purchasing Process and its stakeholders(Manufacturing environment)

NB: The hierarchical sequence of the business functions in this chart is not meant to give prominence to one function over another, it is simply a convenient way of grouping stakeholders together in this environement

(Diagram from workbook by Mike Fogg)

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Cabinet and led member procurement champion. (Scrutiny of expenditure)

Central Government

e.g., (Office of deputy Prime

Minister)

Elected Councillors

Council tax payers and

voters

Regional centre of

excellence

Special interest groups

Users of services to the community, e.g.,

o Children and parents

o Householderso Senior

citizenso Library userso Motoristso Sports and

leisure users

Office of Government Commerce

Local businesses

The Chamber of Commerce

The Purchasing Process and its stakeholders(A County Council in the UK)

NB: The hierarchical sequence of the business functions in this chart is not meant to give prominence to one function over another, it is simply a convenient way of grouping stakeholders together in this environment. The author would like to thank

Fiona Holbourn of Leicestershire County Council and Ken May of ESPO for their assistance in refining this diagram

Externalsuppliers

Regional Development

agenciesExternal Audit

Other Local Authorities

Purchasing Consortia

Local government officers, e.g., IT, finance,

internal audit

Purchasing team

Trade Unions

Internal Suppliers

Local Strategic Partnership, e.g.,o Healtho Policeo Business

Interestso Voluntary

sector

Other Local Partnerships, e.g.,o Wasteo Children

and young persons

European Union (Diagram from workbook by Mike Fogg)

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Risk Assessment(Table adapted from workbook by Mike Fogg)

Risk description Likelihood Impact Calc

Risk 1 – example, late delivery 3 3 9

Risk 2 2 5 10

Risk3 2 5 10

Risk4 1 3 3

Risk5 2 4 8

Total 4o

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Selecting Strategic Suppliers

Knowledge of people, processes and performance

Capability to meet requirements

Compatibility

Comparison with competitors

Relationships tend to evolve over time

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Assessing Suppliers(Diagram from workbook by Mike Fogg)

Assessing suppliers

Pre contract award

a pre-commitment assessment of a

potential supplier’s capability of

controlling quality, delivery, cost and all

other factors forming part of a

buyer’s requirement

Supplier Appraisal

Post contract award

is an objective assessment, often

expressed as an index, of a supplier’s

performance in meeting standards agreed with the buyer in the supply

of goods, works materials or services

during the lifetime of a contract

Vendor Rating

Pre contract award

The provision of finance, technology or other

forms of assistance by the buyer to a supplier

to enable the supplier to offer a product or

service which meets the buyer’s needs, or to

interface with the buying organisation in a

mutually appropriate way (Compton and

Jessop – CIPS dictionary of terms and

conditions)

Supplier Development

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Supplier Management

Actively managing suppliers can derive many benefits, managing the supply base and suppliers can mean benefits such as;

1. Communication improvement

2. Better trust

3. Less bureaucracy

4. Single sourcing

5. Opportunities for procurement staff to build in agreed incentives such as volume discounts etc

6. Better feedback and the understanding of tender requirements

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Aggregation of Requirements

National Audit Office (NAO) recommendations around;

1. The sharing of information2. Communication3. Use of pan Government initiatives such as OGCbs, Catalist, consortia’s and

others.

The Gershon Review has also made a significant impact and shared services such as, printing, back office, HR, shared services etc.

Also EU and UK rules on aggregation and the opportunities involved in “buying big”.

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Student Question

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Session Four

L5-14 Contracting in the Public Sector

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Learning Outcomes

2.0 Analyse the scope and nature of the contract (30%)

2.3 Propose the opportunities for sustainable procurement, and the need to enhance supply to the public sector by SMEs and minority owned businesses: • policy on and sources of sustainability: ‘green’ procurement including energy efficiency, recycling, biodegradability; ethical procurement• mechanisms and EU/UK rules on enhancing access by SMEs and minority owned businesses: splitting large contracts eg geographically, by category; preference schemes; outreach eg meet the buyer, Internet, multilingual documentation2.4 Plan the appropriate duration of the contract and the optimum number of suppliers in relation to the nature of the requirement, the supply market and the opportunities for aggregation:• factors impacting on contract duration eg duration of the requirement; market characteristics eg technological change, stability/volatility of price, capacity, storage; EU/UK rules and policy; supplier relationships• factors affecting the number of suppliers eg capacity of the market; impact on competition; range of products/services included; ease of managing the supply chain; number and location of customers and delivery points; scope for enhancing access by SMEs and minority owned businesses; risk of too few suppliers 2.5 Manage the specification by involving clients, potential suppliers, financial and technical experts at an early stage:• advantages and disadvantages of performance, functional and technical specifications for various products, services, projects• policy and EU/UK rules on involving potential suppliers in specification• types of financial and technical expertise for various requirements and their sources eg in-house, other government body, private consultancy• cross functional team working

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Sustainability Policy

Key Public Sector Themes –

Transparency and fairness Freedom of information  Public money Reputation is crucial  Responding to public perceptions  Responding to the environmental good

 

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Corporate Social Responsibility Themes

Local suppliers (OJEU issues)

Tendering processes (declaration of interest)

  Green options

Anti fraud / corruption

Stakeholder engagement  

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Sustainability Policy

The principles of Ethical Trade –

Employment is freely chosen Freedom of association and the right to collective bargaining are respected  Working conditions are safe and hygienic Child labour shall not be used  Living wages are paid  Working hours are not excessive  No discrimination is practised  Regular employment is provided No harsh or inhumane treatment is allowed

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Fraud and Ethical Conduct

Assets – Valuable? Commercial secrets

Staff - Left unsupervised with finance or assets? Addictions or heavy financial commitments? Close links with suppliers or customers? Accounts employees never taking holidays

Systems – Record keeping Written procedures Fraud audits undertaken?

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Specification Development

Performance and conformance specifications

Stakeholder engagement

Standardized materials

Mainstream environmental requirements

Balance technical requirements to VFM

Use of Kraljic

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Student Question

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Session Five

L5-14 Contracting in the Public Sector

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Learning Outcomes

2.6 Discuss the intended costs and benefits from the contract and incorporate targets, incentives, monitoring and reporting mechanisms for their realisation:

• sources of information on costs and benefits of the requirement eg supplier associations, trade literature, standard labour costs, supplier’s accounts, other procurement agencies

• factors affecting sharing of benefits and costs from the contract eg nature of the requirement eg strategic, bottleneck, non-critical, leverage; nature of the relationship; cost of provision; nature and allocation of risks

• opportunities for incentivisation through targets appropriate for the requirement and the relationship

• factors affecting allocation of responsibility for monitoring and reporting between client and contractor

• types of management and operational information eg cost, quality, delivery performance against target; timeliness of reporting; problem solving and dispute resolution; performance against critical targets or ‘gates’

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The Key Principles of Contract Formation

The four essential elements that must be present for a contract to be legally valid and binding are:-

Agreement (offer and acceptance)

Consideration

Intention to create legal relationships

Capacity and legality

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The Tendering Process

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Slide 84

Project Management

TimeCost

Quality

Scope

The Project Management Triangle

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Teams

There are several types of team, for example;

Temporary teamsCross-functional teamsTop management teamsSelf-directed teams

Meredith Belbin – Team Role Theory

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Slide 86

Specification Development

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Slide 87

Student Question

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Slide 88

Session Six

L5-14 Contracting in the Public Sector

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Slide 89

Learning Outcomes

3.0 Manage the supplier selection process through the application of appropriate rules and procedures (15%)

3.1 Plan at an early stage the selection procedures appropriate to the requirement with reference to EU and national rules, in particular the use of competitive dialogue, frameworks and the opportunities for e-tendering:

• EU and UK rules and policy on supplier selection procedures• advantages and disadvantages of competitive and negotiated selection procedures• appropriateness of various selection procedures eg competitive tender, framework agreements, competitive dialogue, for a range of requirements eg goods, services, projects• types of and opportunities for electronic procurement eg e-tendering, e-auctions 3.2 Manage the tendering process transparently through explicit identification of selection criteria and weights, appropriate advertising, and the provision of documentation which informs suppliers clearly of the requirement without overburdening them:

• obstacles to accessing public procurement eg identification of business opportunities; excessive tender documentation; compliance with standards and technical specifications; unclear delivery requirements; inadequate volume information; vague selection criteria; insufficient time to respond; no contract award information• mechanisms for reducing barriers to supply eg develop commercial expertise; clarity of roles of procurement staff, technical experts and end user; consistency in the tender process; single point of access; explicit weighting of criteria

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Slide 90

EBI can add value as follows; better supplier relationships effective development of specifications greater innovation opportunity

EBI can overcome such risks as;

early accounting officer reassurance reduce financial risks target ethical or legal challenges

Early Buyer Involvement

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Slide 91

E-tendering

E-ordering

E-payments

E-marketplace

E-sourcing

EDI

Bar Coding

E-procurement

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Slide 92

Private Finance Initiative (PFI)

Public sector wishes to invest in a new capital resource (leisure centre, street lighting, school or hospital etc)

There are insufficient public funds to make this happen (without high risk or impact on taxes etc)

Design, build, fund and run programmes, commissioning the private sector will allow for this to happen at reasonable payment intervals

Negotiated procedure tends to be applied to PFI arrangements

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Slide 93

Private Finance Initiative (PFI)

Advantages Provides a resource by an affordable scheme Uses effectively private sector expertise Governance procedures apply Funding is based upon whole life costing issues

Disadvantages Can create very high whole life costs Can create a long convoluted procurement process

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Slide 94

Public Sector Funding Mechanisms

Central Government assessment

Local tax

Selling services

Loans

Asset sales

Interest and reserves

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Slide 95

Supplier Selection Process

Standing list / approved suppliers (future requirements) Supplier assessment (current requirements)

OJEU procedure (Legal)

Approval process (stakeholder)

Local suppliers / SME’s

CSR

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Slide 96

Competitive Dialogue Procedure

This procedure should only be used in complex procurements

Guidance about the procedure has been published by both the OGC and

the European Commission and individual guidance in Departments, Local Authorities etc has been widespread

However there is still some uncertainty amongst contracting authorities and

bidders about its operation in practice

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Slide 97

Competitive Dialogue Procedure

Under what circumstances competitive dialogue can be used?

It is for complex procurements Dialogue is allowed for specifically MEAT is the only award criteria There are explicit rules on post tender negotiation.

The Negotiated Procedure is now to be used very rarely if at all

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Slide 98

Competitive Dialogue (Advantages)

•Easy to justify its use thus reducing legal challenge

•Up front discussions with bidders quickly provide possible solutions

•If no solution is evident the procedure is concluded quickly

•Phased de-selection is permitted if applying pre-determined criteria

•Legally avoids protracted /costly/ ineffective discussions with bidders

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Slide 99

Competitive Dialogue (Advantages)

•Freedom to structure the dialogue to meet the circumstances of the purchase

•Permits the graduated development of essential documents eg, the contract and cost model

•Permits innovative solutions to develop with the active input of the contracting authority

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Slide 100

Competitive Dialogue (Disadvantages)

•It is a new, unfamiliar and unproven procedure, thereby carrying the risk of being ineffective

•The solution will be developed with bidders during the dialogue and providing sufficient time is permitted exhaustive iterations can take place

•Bidders may be reluctant to disclose information during the dialogue

•No negotiation is possible post closure of the dialogue, the bids can only be clarified, specified or fine tuned

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Competitive Dialogue (Disadvantages)

•No legal procedure exist

•High initial cost of supplier engagement in the process

•There are, potentially, complex phases and a need to set a definitive programme

•A danger that the contracting authority discloses confidential information

•A changing risk profile throughout the process

•A lack of confidence in the procedure by suppliers making them cautious about engaging in it.

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Slide 102

Negotiated Procedure (Advantages)

It is a tried and tested procedure giving both sides the confidence in its application

Negotiation is possible up to the point of a Best and Final offer

A phased de-selection is possible

Both sides costs are controlled and contained within well defined parameters

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Slide 103

Negotiated Procedure (Advantages)

There is a well documented set of case law to clarify the finer points of the procedure

Can be used where the need is not particularly complex but where negotiation is required

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Slide 104

Negotiated Procedure (Disadvantages)

OGC guidance and EU Directive say it should only be used in exceptional circumstances

EC has indicated that it will closely examine procurements that still follow the negotiated procedure

Encourages supplier non-compliance with aspects of the Invitation to Negotiate documentation eg, terms and conditions

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Slide 105

Negotiated Procedure (Disadvantages)

Back end negotiation resources likely to be high thereby challenging contract award date

Risk issues not resolved until late in the process

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Slide 106

Student Question

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Slide 107

Session Seven

L5-14 Contracting in the Public Sector

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Slide 108

Learning Outcomes

3.3 Ensure that tenders are evaluated in accordance with procedures using the advertised selection criteria and weights, and that successful and unsuccessful suppliers are provided with the opportunity for debriefing:

• EU and UK rules and policy on selection criteria and weighting

• relevance of selection criteria for various requirements eg products, services, projects and policies eg access of SMEs and minority businesses, through life capability; use of procurement for socio-economic purposes; sustainable Procurement

• organisational policy, procedures and ethical aspects of the constitution and operation of evaluation panels

• mechanisms for the provision of effective feedback eg email, telephone, face to face; on-demand or provided automatically; presentation of outcomes of evaluation

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Slide 109

Supply Market Evaluation

A robust procurement process should be linked to a firm knowledge of the

marketplace

The number of suppliers and size of suppliers is key

Supplier locations and socio-economic considerations will also be key

The use of BME’s and the Third Sector

Application of Porters five forces model

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Porter’s Value Chain

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IndustryCompetitors

Intensity ofRivalry

BuyersSuppliers

NewEntrants

Substitutes

Threat ofNew Entrants

Threat ofSubstitutes

BargainingPower ofSuppliers

BargainingPower ofBuyers

Porter’s 5 Forces

M.E.Porter: Competitive Strategy: 1980

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Slide 112

Stakeholders

Individuals or groups who have an ongoing interest or influence on the process of purchasing

Includes customers and suppliers

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Slide 113

Evaluation and Weighting Criteria

All tendered contracts must hold an appropriate evaluation criteria to ensure

effective assessment of suppliers takes place. This will allow for;

Clear communication to suppliers of the requirements tendered A clear audit trail on supplier award Price to quality split allows for effective tendering Key aspects are clearly detailed

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Slide 114

EU Rules and SME’s

The sustainable procurement agenda

EU rules and category management

Lots and joint ventures

Problems and complexities

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Slide 115

The Benefits of Aggregation

Standardisation of costs and prices

Reduced duplication of tendering

Greater purchasing power and expertise

Greater benefits for small purchasers

The use of alternative buying organisations

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Slide 116

Student Question

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Slide 117

Session Eight

L5-14 Contracting in the Public Sector

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Slide 118

Learning Outcomes

4.0 Develop and maintain positive relationships with suppliers to realise benefits from the contract: (30%)

4.1 Evaluate the relationship continuum from arms length to close and collaborative and deploy strategies appropriate to the relationship and the requirement:

• characteristics of types of relationships • factors affecting the relationship strategy: strategic or operational requirement; degree of clarity and certainty about the requirement; competitiveness of the supply market; one-off, short term or long term duration; power of buyer and supplier

4.2 Evaluate the costs and benefits of developing partnership and relationships based on mutual trust with suppliers:

• potential costs of developing partnership: ‘hard’ eg systems alignment, senior management and staff time, relocation; ‘soft’ eg cultural change, building trust, joint activities

• potential benefits of developing partnership: improved communications; integrated systems; shared understanding of the requirement; improved problem solving and dispute resolution; continuous cost, quality and process improvement (Cox and Hines 1997; Erridge 1995; Erridge et al 2001)

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Slide 119

Appropriate Contract Duration

Factors affecting the appropriate contract duration are as follows;

1. Prior knowledge of the marketplace

2. The timing of the procurement

3. SME implications

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The Specification Process

1. What type of specification?

2. Functional, technical and performance specifications

3. Financial and technical supplier expertise

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Slide 121

Kraljic

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Slide 122

Supplier Perception Matrix

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Slide 123

Relationship Spectrum of Buyers and Sellers(Diagram from workbook by Mike Fogg)

Distant Closer

RELATIONSHIP SPECTRUM

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distant relationships closer relationships

The relationship spectrum - diagram 1

distant relationships closer relationships

The relationship spectrum - diagram 1

RELATIONSHIP SPECTRUM

Relationship Spectrum of Buyers and Sellers(Diagram from workbook by Mike Fogg)

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Slide 125

(6) Supply Positioning Analysis (Diagram from workbook by Mike Fogg)

Supply Positioning

A tool to identify strategies and tactics for goods and services purchased, including consideration of

Risk identification and management

Relationship opportunities

Stakeholder management

People allocation and skills

Make, buy, outsource

Inventory Management

Purchasing processes and measurement

“e” Purchasing

Time AllocationControlling price

and costContracting strategies

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Using the Supply Positioning Model (Diagram from workbook by Mike Fogg)

Ris

k,

vu

lnera

bili

ty,

exp

osu

re

Relative cost to the organisation

xx

x

x x

x

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Supply Positioning Model (Diagram from workbook by Mike Fogg)

StrategicSecurity

StrategicCritical

TacticalAcquisition

Tactical profit

LOW

HIGH

HIGHRelative costR

isk,

vu

lnera

bili

ty,

exp

osu

re

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Slide 128

Supplier Preferencing Model (Paul Steele and Brian Court, published in Profitable Purchasing Strategies, McGraw Hill)

Development Core

Nuisance Exploitable

LOW

HIGH

HIGHRelative value of the account

Att

ract

iven

ess

of

cust

om

er

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Slide 129

Marketing Management Matrix (Paul Steele and Brian Court, published in Profitable Purchasing Strategies, McGraw Hill)

Nuisance Exploitable

Development Core

Nuisance Exploitable

Development Core

Nuisance Exploitable

Development Core

Nuisance Exploitable

Development Core

TacticalAcquisition

TacticalProfit

StrategicSecurity

StrategicCritical

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Tactical Relationships (Diagram from workbook by Mike Fogg)

TacticalAcquisition

TacticalProfit

StrategicSecurity

StrategicCritical

Nuisance Exploitable

Development Core

Nuisance Exploitable

Development Core

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Slide 131

Strategic Relationships

Outsourcing Strategic Alliance Partnership Co-destiny

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Slide 132

Cost and Benefit Analysis

1. Allocation of risks

2. Dependencies

3. Nature of relationships

4. Political and KPI’s

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Slide 133

Student Question

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Slide 134

Session Nine

L5-14 Contracting in the Public Sector

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Slide 135

Learning Outcomes

4.3 Develop a shared understanding of deliverables expected from the contract based upon cost down initiatives and benefit sharing:

•policy on and evidence of supplier innovation and benefit sharing • models of developing partnerships eg Ellram • types of deliverables with targets and deadlines• agreement on factors triggering variations to or termination of the contract eg change controls, exit strategies

4.4 Plan and manage the supply relationship through the collation, analysis and dissemination of data to enhance current and future supply market intelligence:

• joint governance arrangements appropriate to the relationship eg Siemens/Office of National Savings, balancing top level policy making with middle and lower level reporting on implementation and performance against targets• negotiation and problem solving strategies appropriate to achieving goals within a partnership relationship • types of data to enhance current and future supply market intelligence eg performance of current supplier against targets; level of competition from potential alternative suppliers; development of new technology, processes or intellectual capital impacting on the market

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Slide 136

Contract Targets and Incentives

Are we paying the right price and demonstrating VFM? This can be demonstrated by;

1. Price benchmarking with other public bodies

2. OGC and Laxtons Building Price Book

3. Tendering exercises

4. Regional procurement Hubs

5. Professional institutions (CIPS, RIBA) etc

6. Trade associations

7. Other procurement agencies

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Slide 137

Supplier Selection Procedures

1. EU Notices

2. PQQ

3. Open and Restricted tenders

4. Competitive dialogue and Negotiated procedure

5. Single tender requirements

6. E-procurement and e-auctions

7. Tendering evaluation and transparency

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Slide 138

Supplier Innovation and Benefits Sharing

1. Use of competitive dialogue for supplier innovation

2. Development of sustainability programme

3. Partnership and incentivised contracting

4. Five stage development model;

> Stage one – Assessment > Stage two – Preparing > Stage three – Framing issues > Stage four – Making collaborative decisions > Stage five – Maintaining relationships

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Contract Variations and Change Controls

Variations and change controls will generally fall into two categories;

> Pre-contract> Post contract

These need to be;

> Managed> Transparent> Fair> Hold a clear audit trail

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Slide 140

Reasons for Variations and Changes

Pre-contractA mistake has been found on tenders or PQQ that requires open and communicated variation to bidders

An innovative or output based specification requiring updates as the requirement becomes clearer

Part of the competitive dialogue or negotiated procedure (supplier symposium)

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Reasons for Variations and Changes

Post-contractA mistake has been found in the contract, items not accounted for requiring inclusion in the contract

Quantities or delivery locations have increased or reduced due to changes in customer requirements

Ownership of the contract has changed (i.e. LSVT or outsourcing)

KPI, milestone or performance issues (above or below expectations)

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Joint Governance

Issues

Part of a shared service or strategic partnership

ALMO arrangement

Outsourcing or joint venture

Special terms of governance of board

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Slide 143

Managing Markets

Issues

Collaboration

Greater control of spend

VFM

Improved service levels

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Student Question

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Slide 145

END