22 July 2010 | Baudouin Heuninckx

The defence sector in Europe has long been familiar with collaborative purchasing. Baudouin Heuninckx picks out lessons for other organisations

Collaboration is being hailed as one way to achieve procurement savings in the private and public sectors in the UK.

In collaborative procurement, two or more entities with a similar need agree to purchase together – and sometimes to share the use of – the goods or services they require. This is expected to bring a number of benefits.

First, if the procurement involves fixed costs such as research and development, they can be shared between participants.

Second, the organisations can achieve economies of scale because of the higher number of goods or services bought.

Third, operational benefits can be gained from the use of the same products or contracted services: such resources can be pooled or shared, increasing flexibility.

Finally, collaborating in procurement can help build longer-lasting partnerships with suppliers.

In the field of defence, collaborative procurement, whereby a number of states agree to purchase a major weapon system together, has been used for a long time. Despite being plagued by delays and cost over-runs, it remains a key feature of defence procurement in Europe. A number of studies have been conducted on joint defence buying, and many of the lessons learnt are applicable to fields other than defence. Here are a number of recommendations to ensure mistakes are not repeated.

JOINT PLANNING

One of the main issues of joint defence buying is the extended time needed to launch the project (once a programme has started, additional delays tend to be comparable to those of similar national programmes). This is principally because all governments involved must be ready to decide the same thing at the same time. The political will must be there, the requirements agreed, and the budget available. Unfortunately, this is often not the case and the project proceeds at the pace of the slowest participant.

Therefore, those intending to buy goods or services collaboratively should first secure formal senior management approval early in the process so the contract can be awarded as soon as an agreement is reached with a supplier.

In addition, participants should provide each other with early visibility of their planning, requirements and risk assessment. Even though they may have similar requirements in qualitative terms, widely different timings could undermine the possibility of cooperation. Participants should be ready to review their planning in the light of others.

Lastly, participants should make their budgets visible to each other. This does not mean the potential contractor has to know what the budget is, but the other participants should. This would avoid finalising negotiations only to find that one of the participants is unable to pay.

BE PRAGMATIC

Another common delay is the time it takes to agree on common technical specifications. When entities first contact each other with the aim of collaborating, each should have a clear idea of what it wants. However, at some point a single technical specification will have to be drawn up. Even though differences between the versions destined for each participant are possible, they should be kept to a minimum because they are a source of increased costs.

When discussing common technical specifications and putting forward requirements, each participant should ask itself: “If my partners do not need this requirement, why do I?” The key here is pragmatism to keep costs down. Too often the resulting product has simply been the sum of all the requirements of participants with limited harmonisation.

For that purpose, it could also be useful for entities just beginning cooperation to concentrate on quick wins such as the procurement of off-the-shelf products. They could leave bigger projects, such as those involving research and development or services, for a second step once they’re more comfortable with the process and each other.

THROUGH-LIFE APPROACH

It is necessary to consider a through-life approach for any procurement, even more so when the goods are complex. This is something to remember for collaborative procurement. Too often participants agree the procurement of a common system, but leave operations and in-service support for each to decide individually. This reduces the potential benefits of commonality – such as the economies of scale that can also be achieved through common support, pooling spare parts and sharing maintenance contracts.

EFFICIENT DECISION-MAKING

A critical question for collaborative purchasing is who will actually manage the procurement process. This could be one of the participants buying on behalf of the others, a consortium specifically set up for that purpose, or an existing central purchasing body. Each participant could even conclude separate but coordinated contracts with the same supplier or service provider.

There are advantages and disadvantages to each of these ways of going about it, but a critical element of each is the need for a clear decision-making process. Before the start of the procurement, participants must agree on the criteria and procedure for selecting the contractor and how decisions about contract management will be made. All these processes must be clear from the start.

In addition, procedures must be as efficient as possible to avoid delays. Processes requiring the unanimous agreement of all will work only if the number of participants is limited and strategic goals aligned. On the other hand, leaving complete freedom of decision to the entity managing the process without any involvement of the other participants could in some cases be inappropriate. The right balance has to be struck.

BE MINDFUL OF INDUSTRIAL RETURN

Collaborative defence procurement programmes are often based on the so-called juste retour principle. This is where the industrial return of the programme in each participating state has to match each state’s financial contribution. This leads to inefficient work allocation and duplication of resources, such as the creation of industrial capacity where none existed or the creation of separate production lines in each country, thereby increasing development and production costs.

Even though this problem is less likely to happen in collaboration between private entities, it could be an issue for public authorities intending to use procurement to boost the local economy. A choice will have to be made between implementing such horizontal policies and achieving the expected cost benefits of collaborative procurement. Contract award other than on the basis of economical criteria will result in higher costs. Participating entities have to align their work allocation policy, if any, before the process begins.

LEGAL CLARIFICATION

The law applicable to collaborative defence procurement is especially unclear. It is also important in other sectors to ascertain which law must be complied with before the procurement process begins.

Public sector authorities have to consider how applicable the EU procurement directives are, not only to the actions of the entity awarding the contracts, but also to their relationship with the entity, which could be considered a services contract. This should be done on the basis of applicable case law of the European Court of Justice.

Private entities also have to pay special attention to competition law since EU legislation prohibits agreements and practices that could affect trade and have as their object or effect the prevention, restriction or distortion of competition. Legal advice should be sought to ensure the agreement to collaborate does not infringe competition law.

Despite some biased negative assessments of collaborative procurement, cooperation can bring benefits if managed efficiently. Because of this, the lessons from defence should be used as a guideline for the other sectors, and implemented to improve joint defence buying itself.

* Baudouin Heuninckx is a procurement consultant and a PhD researcher in the Public Procurement Research Group of the University of Nottingham. The views expressed here are his own. You can email him here.