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Does Balancing Risk Improve the Procurement Process?

Posted By Robert Shumate, Tuesday, May 19, 2015

In recent years, much attention has been directed toward providing a more level playing field in risk management associated with the procurement process. Buyers have become more open to changing what in the past has been one sided risk positions where Suppliers were expected to assume most of the risk of project failure. This has come about as Buyers began to realize that unbalanced risk assumption was driving away some of their best potential suppliers. Efforts to change contract terms and conditions have gained favor, two examples of which are Oregon and California who in collaboration with the Supplier community have produced terms and conditions templates where the risk of failure is more evenly distributed between the Buyer and the Supplier. This is all to the good since suppliers have complained for years that unlimited liability, protection of intellectual property rights and performance bonds among others have made it difficult to assume the risk of bidding on technology contracts. While these steps may indeed increase the pool of perspective suppliers willing to submit bids on technology projects these risk mitigation initiatives do not by themselves improve the chances of  a successful completion of a technology contract. The penalty provisions in a contracts terms and conditions usually are enforced only after, the procurement and the ensuing project fail to achieve a successful conclusion. In 1995, the Standish group conducted a study of IT contract performance results. They found that 31% of such contracts were abandoned before completion, while 53% were challenged, defined as either over budget, late or did not deliver the required features (challenged). There is little evidence that contract results have improved that much during the ensuing period. In 2009, a similar study by Standish showed that the relative figures were 24% of the contracts were canceled and 44% were challenged. More recently (2013) the Code for America Foundation, the Omidyar Network, and the Sunlight Foundation conducted a procurement survey of local government entities to try to determine what problems local government entities faced.[1] Ninety-six percent of the survey respondents indicated that they face “significant” challenges in procuring technology projects. The relationship between the procurement process and the success or failure of the resulting project is even today not fully understood. It would be unreasonable to assign all of the blame for contract performance failures on the procurement process alone since management of the contract activities after the procurement is complete can be a contributor to failure. However many people who have examined contract failures believe that the procurement process itself is a significant contributor to the high failure rates. Based upon a number of studies the probability of any specific technology procurement producing a fully satisfactory result is less than 50%. Not all unsatisfactory results lead to penalties or litigation but the possibility of some level of failure is sufficiently high that both Buyers and Suppliers are highly incentivized to seek to reduce their risk level that are specified in the legal terms and conditions. Reducing the Suppliers level of risk make the likelihood of failure more acceptable but add only marginally to improving the chances that the procurement will result in a successful implementation. The real risks of a project failure lie in other elements of the current procurement paradigm. The following summarizes a few of the more compelling issues in procurement that jeopardize their success. The Buyer often does not organize the procurement effort to insure that stakeholders, technical staff, procurement and legal professionals as well as the Buyers project manager are involved under a competent leader with the authority to manage and move the process to completion in a timely fashion. However, an integrated project team alone doesn't mean that the procurement is integrated with the project plan.  Effective technology procurement should have a procurement strategy that is a component of the business case and is integrated into the technology project plan.  A misaligned procurement strategy can lead to project failure even if the procurement itself is awarded. Sometimes in technology related procurement, the using agency and therefore the buyer have not done an adequate job of identifying the problem that must be solved.  If the agency attempting that needs the technology does not understand the business objectives, the solution that the buyer is trying to purchase is unlikely to be successful. Buyers should prior to issuing a formal RFP, take the time to invite two or three Suppliers to make presentations of what solutions they have that would be applicable to the problem you are seeking to solve. This as a minimum requires the Buyer to expend the effort to think through and document the as is processes for which they are seeking a solution. Buyers can often use the RFI process to achieve this end but they should ensure that the process involves face-to-face presentations from qualified suppliers. Many RFP’s present prescriptive technical details that often do not reflect the best technology approaches to dealing with the problem. Add to that the inclusion of requisites that limit the responders’ flexibility to offer a more effective solution and you create a perfect situation for a Buyer ending up with a solution that will fail to meet their expectations. Buyers understand the business they are in and should concentrate on describing the problem they want to solve and rely on the Suppliers to propose the best technical solution. Communicate, communicate, and communicate. Once a formal RFP has been issued, Buyers should provide a forum for near real time response regarding questions that Providers may have regarding the requirements contained in the RFP. In today’s electronic world the ability to provide rapid response to questions while maintain transparency with other participating suppliers exists and Buyers should expend the effort to insure that communication lines are open throughout the RFP process. An open communication process will help reduce misunderstandings between the Buyer and the Seller regarding the requirements contained in the RFP. These are but a few of the elements that can help improve the procurement process. For a more complete examination of the elements in procurement that deserves consideration, see the IJIS Task Force Procurement Innovation Report.    

[1] Local Government Procurement Survey

Tags:  procurement  risk  Risk Management 

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