The Law of Unintended Consequences Meets Public Sector Procurement
Part 1 of a 6-Part Series
The primary objective of any procurement process is simple: to draw the best value out of spending taxpayer dollars through the acquisition of products and services. Typically, entities follow defined procurement processes designed to secure the best possible pricing and contract terms to accommodate their individual needs. For public sector entities, that process must fall within the explicit guidelines of applicable state (and sometimes federal) statutes. For private sector businesses and non-profit organizations, procurement rules and regulations are generally governed by an internal process.
Sourcing Alliance has learned that no matter what the procurement process may be, the law of unintended consequences tends to rear its ugly head. Leveraging our 14 years of experience in the procurement industry, we developed this six-part series to provide insights on what those unintended consequences are, and how our procurement team solved for them on behalf of our members. Let’s get started.
Awarding to the Cheapest and Worst
As professionals impacted by public sector procurement processes, we are all subject to a procurement standard, such as “lowest and best” or “lowest responsive and responsible”, when awarding contracts to suppliers. These standards usually work well when purchasing undifferentiated commodities; if one bag of rice is the same as another bag of rice, then the only difference to consider is the price. However, when this standard is applied to the acquisition of products or services with differing characteristics, choosing the cheapest provider often compromises the quality of the products or services received. And that’s how “lowest and best” can easily become “cheapest and worst”.
Take the janitorial services industry as an example. We all want great quality cleaning at the lowest possible price. And if you really think about it, those two things are mutually exclusive when it comes to cleaning. Consistent, high-quality cleans require:
- A sufficient number of people and hours allocated to do the job well.
- High-quality cleaners who both show up and perform consistently.
- Intensive management oversight (from hiring and training to day-to-day management and ongoing quality control).
Janitorial services vendors seeking to provide the lowest quote to win your business only have three levers to pull to cut costs and present the most attractive price to you. They can:
- Reduce the number of hours allocated to cleaning your buildings, which means quality suffers and your buildings aren’t actually clean.
- Reduce the wages of the employees cleaning your buildings, which means lower caliber, less experienced cleaners, higher turnover, and your buildings aren’t actually clean.
- Reduce management involvement and oversight, which means quality control and issue-resolution suffer, and your buildings aren’t actually clean.
In addition to your buildings not actually being clean, pulling any of these levers leaves you, the paying customer, with a myriad of issues, including complaints from employees, bad impressions for your visitors, employee/visitor sickness and employee absenteeism due to unsanitary conditions.
We used janitorial services as our example to demonstrate the point that “lowest and best” often leads to “cheapest and worst”. Think about the range of services and differing products your organization procures… does the janitorial services analogy apply to other spending line items?
So, what do you do? How do you avoid dealing with the potential, and even likelihood, of making awards to the cheapest and worst when you are constrained by explicit public sector purchasing guidelines and standards requiring you to award contracts to the “lowest and best”?
Here’s what Sourcing Alliance does to balance “lowest” and “best” when designing our RFP specifications, evaluating competitive proposals, and making contract awards.
First, we readily acknowledge that there is often an inherent conflict between low cost and high quality. Second, we recognize that there is no such thing as a “one size fits all” solution – services are NOT undifferentiated commodities, so price is NOT everything. Keeping those two realities top of mind, we develop our RFP specifications to design programs that balance cost and quality with a focus on achieving the lowest Total Cost of Ownership for our members, not just the lowest price. We require our suppliers to provide:
- A Proven Track Record – a demonstrated history with public sector customers of high-quality product/service delivery, performance, and customer satisfaction.
- A Broad Portfolio of Services – a wide range of products and services to meet not just a member’s immediate needs, but also their future needs.
- A Consultative Approach & Customized Solutions – a team of specialists that works diligently to understand each member’s existing challenges and strategic objectives, educates members about options and potential solutions going forward, and develops a customized solution for each member based on exactly what the member decides they want.
- Transparent Pricing – once the supplier and the member have developed the customized solution for that member, our suppliers provide detailed pricing with no hidden costs. This transparency provides members with the ability to balance competing budget limitations and desired quality.
- Effective Account Management – a strict and detailed process to manage members’ accounts, from planning and initial implementation to regular reviews and ongoing communication.
The next segment in this series will focus on what Total Cost of Ownership (TCO) means and how applying TCO thinking to public sector procurement enables public sector entities to achieve better outcomes and reduce overall organizational costs.
In the meantime, our website offers a wealth of knowledge and resources about how you may leverage your Sourcing Alliance membership to secure the products and services your organization needs to operate.