Blog: Speech by Rupert Soames Chief Executive of Serco to the IACCM

Blog: Speech by Rupert Soames Chief Executive of Serco to the IACCM

 

Madrid, 13th May 2019

 

It is a huge privilege to be asked to give the keynote speech here at the IACCM, particularly in this your 20th year, because here truly one can talk to peers, and, I hope, with a common interest of developing and improving private sector and government contracting.

I have had quite a lot of experience - well about 40 years - of doing both, and it was suggested to me that it might be useful today to "compare and contrast" the two experiences.  I am going to gallop through my presentation so that hopefully we can get on to have a productive and vibrant Q&A session.

And it is in this spirit that I make a confession.  It is true that over the past few years I have been what I think is candid and straightforward and helpful feedback to Government about their procurement practices.  They might use different descriptors, and it is true that I have said in public that contracting with Governments can be for the dumb and the desperate.  That some of the terms and conditions they seek to apply amount to bully-boy tactics.  That you might as well place your money on the 3:30 at Cheltenham races as accept 10-year change of law risk. It can probably be safely said that I am one of the less popular CEO's amongst Government commercial officers.

You may therefore be surprised when you hear how sympathetic I am towards the travails of those who are charged with public procurement.  

There is a tendency to believe that the reasons why Government procurement sometimes seems to be ineffective and slow is because the people who inhabit Government are ineffective and slow, with the implication that people in the commercial world are paragons of efficiency and effectiveness.  I do not think that is the case.  I have met some staggeringly incompetent managers in the private sector, and some brilliant public servants.  And vice versa.

The truth is that the world of Government procurement is constrained by rules and realities that we in the private sector see only through a glass, darkly.  And today I want to see if we can polish that glass a bit and see more clearly the differences between the two worlds.

I am going to use some headings we can use to compare and contrast Government and private sector contracting.  It may sound like an odd list, but trust me, they do run together.  The headings are:-
Formality and speed; procurement challenge; flexibility post-contract award; politics; and finally, monopoly.

Let's start with formality and speed.  It is uncontentious to say that Governments are much slower and more rigid in their procurements than the commercial world.  A major new procurement in the UK may take between three and five years, from initiation to contract.  Many in the private sector ascribe this to general Government incompetence, but they are wrong.  Government procurement is inflexible and slow because because we, as taxpayers and voters, have insisted it be so.  I know of no private sector organisation which has to manage purchasing rules as complex as European or US procurement procedures.  And if a politician or civil servant does not follow them, they can go to prison, because Government procurement procedures are not the invention of a corporate purchasing manager or Internal Audit, they are the law.

In comparing Government and private sector's approach to procurement, it is essential to recognise that they have different priorities.  Ostensibly, both aspire to deliver best value for money.  But within that, what the private sector values most are operational outcomes such as speed, agility, getting to the best value answer fast, and then moving on.  The overriding objectives of Government procurement are probity, transparency, fairness, and immunity to challenge.  And why is there this difference?  It is because we as voters and taxpayers expect our Governments to exercise transparency, fairness and probity in disposing of the vast budgets that we the taxpayers provide them.

History shows us what happens if you give politicians unfettered control of taxpayers' money.  For many people in this room in the private sector, the kind of opaque horse-trading - if you take 10 of these, I'll give you 3 of these - that is the daily habit of skilled private-sector buyers and sellers, would be unacceptable in public procurement.  Such stiffness may make the system ungainly and slow, but we all know that is far preferable to a system which is corrupt and in which if mistakes are made it is generally down to cock-up rather than conspiracy.

Which brings me onto another difference between Government and Commercial procurement, which is the right of unsuccessful bidders to challenge procurements.  

And I must declare an interest as Serco is currently involved is some serious procurement challenges in both the US and UK.  The idea that an unsuccessful bidder for a private sector contracts could or would challenge the decision of a purchasing department is almost incredible in the commercial world.  In the last 18 years as a CEO, I have seen it maybe four times, and two of those challenges came from people who were clearly mad.

But in the world of Government procurement, challenge is becoming endemic and in the US in particular, standard practice.  In US Federal procurement, incumbents who lose to new bidders nearly always challenge the award on the basis that the worst that can happen is that they keep the business for an extra 6 months or so whilst the challenge is adjudicated.  The system of challenge in the US has got completely out of hand.

What to think of procurement challenge?  Is the private sector the better for the fact that procurement directors are pretty much immune from challenge?  That they can make serial errors, abuse and treat suppliers with virtual impunity because none dare complain for fear of never being invited to tender again.  When I was a jobbing salesman, a wise mentor told me a wise adage: "Rupert, engrave this on your heart: you never win an argument with a customer", and it is indeed true that Hell hath no fury like a purchasing manager embarrassed.

But the fact is that procurement departments, be they private sector or Governmental sometimes make shocking mistakes, and without some form of appeal, these go uncorrected.  And why have rules if there were no consequences for not following them. My own view is that some mechanism of appeal and arbitration which aggrieved suppliers can use to call out mistakes in procurement is desirable for both private sector and Government buyers, and I think on this the private sector has a lot to learn from Government.  

But once suppliers get in the habit of challenge and start abusing the process it can be terribly distracting and destructive.  And Government can become irrationally frightened of challenge.  I have seen examples of procurement authorities refusing to change contracts five years after award, on the grounds that one of the losing tenders might challenge.

The next point of difference between the world of public and private procurement I would suggest is flexibility post contract award.  Many is the time that a customer has taken a contract I have just signed, and with great ceremony locked it in the bottom draw of their desk saying: "that's where it belongs, hopefully it never will come out, now lets get down to business".  In the private sector, a contract for complex services between willing buyer and willing seller is often treated as a framework.  

Consenting adults know that as the inks dries on a contract, the world is changing, and both sides will want to change the terms of the deal, to their mutual advantage.  Up until contract signing, the balance of power between buyer and seller is generally win-lose in favour of the buyer; that relationship becomes win:win once a contract is signed.  For years suppliers used to do this with Government; land and expand it was called.  Sign a contract at almost zero margin, and make the profit on the variations.  But in the world of Government contracts this strategy no longer works.  

One of the reasons why the UK Government's supply chain is so distressed at the moment is because the purchasing authorities are simply not able to adapt in-flight contracts.  It matters not the customer desperately needs tasks to be done differently, and that everyone knows that the passage of time has made a nonsense of the contract.  But no contract manager dares to be put in the position where the National Audit Office, or a Parliamentary Committee, can criticise them for being soft on suppliers.  

I am reminded of the lovely words from the Rubaiyat of Omar Khayyam, actually written as a caution against over-affectionate love letters, but equally applicable today to Government contracts:

"The moving finger writes; and having writ,
Moves on: nor all they Piety and Wit
Shall Lure it back to cancel half a line
Nor all thy tears wash out a word of it"

If there was one magic wand I could wave in public procurement, it would be this: to make the political masters who hold Civil servants accountable, realise that adapting contracts to changing circumstances is the mark of good and effective public administration, not bad.

And so to politics. Commercial companies like to deny that politics ever regulates their behaviour, but we all know this is not true.  But the politics that gets played in corporate life tends to be pretty low-grade stuff.  Its about career advancement; sucking up to the boss; securing an office with a view; making sure people of influence such as the HR director know just how good you are and how bad that hopeless person from finance is.  And that come budget time, you get the resources you need.  And of course all this happens in Government too.

But - and herein lies an important difference between the private sector and Government - public servants also have to manage around grown-up politics and policy.  And these political changes can be profound and result in them having to deliver very rapid changes of priority.  In Western Australia, the election of a Labour Government changed policy from being pro-the involvement of the private sector, to being viscerally against it, overnight, and the public servants had to turn on a dime.  The same could happen in the UK if a Labour Government is elected.  And in the meantime Brexit has diverted and distracted the UK Civil service to the point where work on anything new in most departments has come to a halt.

And even when the tectonic plates of policy are not grinding, Ministers can change with little notice and far more frequently than tends to be the case in the corporate world.  In my previous job, I served as CEO of Aggreko for 13 years, and I have been at Serco for five years.  In the same length of time I have served as CEO of Serco, Australia has had 6 Prime Ministers, and the UK Ministry of Defence 4 Secretaries of State.

Finally, in this list of compare-and-contrast between the public and the private sector, I want to draw this distinction: although Government does buy a lot of standard product - paperclips, property leases, vehicles for example - it also buys a lot of services and equipment for which it is the only buyer.  It is a monopoly buyer, or more technically, a monopsonist.  Only Governments or their proxies buy prisons, or nuclear warheads, or air-traffic control services or care for asylum seekers.  Even in highly consolidated parts of the private sector, such as food retailing and car manufacture, there are multiple buyers of the same good or service, so sellers have a choice as well as buyers.  If a buyer behaves consistently badly, sellers can go elsewhere.  That is not the case for those companies, like Serco, whose business is dealing with Government.  We are faced by monopoly buyers, and my entire life experience is that monopolies over-reach themselves and behave badly unless very tightly regulated.

In the UK in particular, but also in other jurisdictions, the Global Financial Crisis of 2008 put huge pressure on Governments to reduce expenditure; there was also a move to improve and professionalise procurement.  By professionalise, Governments actually meant was that they wanted to behave more like they thought private companies behaved - the untrammelled exercise of relative power between buyer and seller.  The thing is in the private sector, buyers don't have untrammelled power, whereas in the public sector, they pretty much can set their own rules.

Governments asked their lawyers: "Pray tell me, oh thou clever lawyer, what would a perfect contract, from the point of view of the buyer look like?"  And the lawyers told them all the lovely things a customer could, in theory, ask of a supplier, and drafted contracts the like of which you would not see in the private sector.  Contracts which said that the supplier took the risk that the data the customer had given them was massively wrong.  That volumes could double; or halve.  That liability was unlimited.  That the rules set by the customer - in other words, in the case of Government, laws - could be changed and the supplier would have to take the risk.

Now actually, these sorts of penal contracts can work, but on the condition that it is understood that the customer would be reasonable and show discretion and common sense in their exercise.  European Commission contracts are pretty penal, as are Hong Kong Government contracts, but the customers are known for not applying the powers they have.

But, notably in the UK, two forces came together which have conspired to turn the supply side into something of a car crash.  The first was an absolute determination on behalf of Government to transfer risk and reduce supplier margins and cut costs wherever they could.  The second was a far greater level of supervision by the Public Accounts Committee and the National Audit of Government contracting.  This meant that any failure to extract maximum value out of contracts and to enforce every term was regarded as being naïve and soft on contractors.  The only safe course was to never allow any change to a contract and to apply every word to the letter, whatever the consequences for the supplier.  I know of Government departments where penalties for missing KPIs are regarded as a source of income, rather than a cause for operational concern.

It is for these reasons that I described the UK market for Government services as one that only the dumb and the desperate would want to supply.  I am glad to say though, that the UK Government is really showing signs of trying to swing the pendulum back a bit.  It has been shocked and surprised by the catastrophic destruction of value in its supply chain, proportionately larger even than the value destruction caused to banks by the Global Financial Crisis.  It is having to accept that the woes of its supply base, including the bankruptcy of two large public companies, is not entirely disconnected from its own behaviour.   The new Government playbook is a hopeful sign that there is a recognition that a successful Government needs a successful supply chain.

Thank you for listening to me so patiently, and I much look forward to taking your questions.  Before that, let me return to earth by reminding everybody of the words of the Civil Servant's prayer:

“Oh Lord God, in thy mercy, let me achieve modest change, in due course.”

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