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IACCM - International Association for Contract & Commercial Management Contracting Excellence Magazine
 

Contracting Excellence Magazine - Apr 2008

 
 

 

 

Public Sector contracting: innovation or bureaucracy?

 
Governments are the largest consumers in an economy — on average the public sector spends 45-65 percent of their budgets and 13-17 percent of their GDP on procurement. The effectiveness and efficiency of public sector procurement impacts the scope and quality of public services, as well as ensuring that taxpayers receive ‘value for money’. Overall perceptions of performance are not generally favorable, fuelled by media comments that range from ‘Corruption is rampant in 60 countries, and the public sector is plagued by bribery, says Transparency International’, through to the more general implications of incompetence each time there is a failed, high-profile project. TIM CUMMINS, CEO, IACCM
 
 

by TIM CUMMINS, CEO, IACCM

Governments are the largest consumers in an economy — on average the public sector spends 45–65 percent of their budgets and 13–17 percent of their GDP on procurement.[i]

The effectiveness and efficiency of public sector procurement impacts the scope and quality of public services, as well as ensuring that taxpayers receive ‘value for money’. Overall perceptions of performance are not generally favorable, fuelled by media comments that range from ‘Corruption is rampant in 60 countries, and the public sector is plagued by bribery, says Transparency International’, through to the more general implications of incompetence each time there is a failed, high-profile project.

It often seems popular to criticize those responsible for public procurement; but is it justified? It would be equally easy to select a range of terms or relationship types invented by government agencies and suggest that they are, in fact, a source of significant innovation.
Certainly, there are many failed projects, or those that have enormous cost overruns, but the same is true in the private sector — perhaps they are just less visible. There are also suggestions — including those that arose from an IACCM study in May 2007[ii] — that public procurement policies fail to optimize value. These assertions may have some truth, but that is not evidence of incompetence or lack of care. Staff involved in government and public sector contracting face an array of obstacles in achieving consistent goals, not least of which is political interference and inconsistency. This is then exacerbated by fears of ‘bribery’ or other actions that undermine free and fair competition. For many countries, the need to build policies that ensure transparency, fairness and a level playing field often act against the ‘deal-making’ culture of the private sector. There is no question that this carries a cost.
That cost is often a high level of rigidity (for example, non-negotiable terms and conditions) or bureaucracy (for example, inflexible rule books that ensure consistent governance and facilitate audit, but crush innovation).
On the other hand, government is uniquely placed to innovate — it has the budgets and the power to mandate new approaches, or to assume unusual risks.
However, on an international basis, there are remarkable differences in capability and maturity of contracting. In the US, for example, the acquisition and contract management communities are prolific. They are well trained and professionally certified. This community has often been the originator of new terms and conditions, many of which have then become global in their application (for example, termination for convenience, liquidated damages, or the current focus area, software assurance).
There are those who question whether this ‘innovation’ is helpful or destructive. Government has unique powers and also unique forms of accountability. Even if the terms they devise are beneficial, they may not translate well in the private or commercial sector. For example, liquidated damages has arguably driven a culture of cover-up and blame, rather than its intended effect of cleaner and quicker resolution of delays or failures.
Outside the US, the evidence of well trained resources at any consistent level is far more variable. In the UK, for example, the Office of Government Commerce (OGC) has developed a plethora of policies and guidelines which are broadly followed even if not universally loved. It has also developed creative approaches to contracting — for example, the public-private partnerships (PPPs) that have seen new relationships being formed to tackle major, high cost (and often high risk) projects. But unfortunately success has been mixed and in part the reason for this seems to be that the community at whom these initiatives are directed is extremely fragmented. There is no professional body of contract managers using consistent methods and practices, except in highly sensitive departments with long-term project-based contracting, such as the Ministry of Defence.
This pattern is repeated across many countries. For instance, the EU may have a sophisticated public procurement policy, but many countries lack sophisticated staff to manage it. Rigidity deters competition. Failure to manage post-award performance leads to sub-optimized results.

As projects become increasingly complex, as the range of relationships continues to increase, as the pace of innovation and change increase, government and public sector bodies are being forced to confront their need for increased investment in high quality, well-trained contracts and acquisition professionals. Projects are under way in several of the leading countries to address this issue and to safeguard outcomes. In the process, we may perhaps start to escape the image of bureaucracy and inefficiency, and instead develop a reputation for value and innovation.

Government has the power to drive change; it is probably first and foremost a question of whether it has the vision.
In this edition of Contracting Excellence, we seek to inspire with ideas and examples that show things can be — and should be — very different.
Tim Cummins,
CEO, IACCM.


[i]. International Institute for Sustainable Development — Sustainable Public Procurement Report May 2007
[ii]. IACCM study of EU public procurement suggested that current policies result in a significant (28 percent) price premium
 
 

 

 


 

 


 

 

 

Government procurement contracts: some principles of deterrence in public extortion situations

 
This article is intended to help private commercial sector representatives improve their chances of successfully getting what they need from extortionist government functionaries without submitting to the extortion demand. This article does not deal with the unsolicited bribery of public sector officials.  BRUCE HOROWITZ, Paz Horowitz, Abogados
 
 

 by BRUCE HOROWITZ Paz Horowitz, Abogados 

This article is intended to help private commercial sector representatives improve their chances of successfully getting what they need from extortionist government functionaries without submitting to the extortion demand. This article does not deal with the unsolicited bribery of public sector officials. 

Main points
       Anti-corruption compliance minimizes a company’s risk, but it does not make all extortionist government functionaries disappear.
       Also apply your due diligence investigations to your host-country lawyers and accountants.
        The statistics are in: you can improve the success rate of ethically negotiating with extortionist government functionaries without paying bribes.
       Successful and ethical strategies and tactics can be found through ’positive deviance’ methods, and by understanding and using the secondary effects of the present international anti-corruption system.
        Negotiating with extortionist government functionaries is part commercial, part barricade and part suicide negotiation.

Government procurement contract work can mean interactions with extortionate government functionaries[i] Once you have reached anti-corruption compliance with internal controls and due diligence, you will have lowered your exposure to criminal prosecutions, harm to reputation, costs and fines, and shareholder class-actions. 
However, none of these safeguards will shield your enterprise from all hit-and-stick extortionist government functionaries as you investigate leads, answer request for proposals (RFPs), negotiate terms, finalize and carry out public contracts.
Beyond compliance
Let’s assume that you and your worldwide staff, agents, joint venture partners and even your foreign distributors have internalized the rules, and that none of you will ever pay, promise or offer bribes to gain or maintain business for yourselves or others. You understand that a bribe can be anything of value that is offered for an improper advantage. You keep accurate and complete books and records that do not hide bribe payments. You know the ‘red flags’. You know that ‘lack of materiality’ of the bribe amount is no defense, and you do not stick your head in the sand when it comes to questionable practices and intermediaries. You have a ‘zero tolerance’ policy in place. Your internal and external due diligence is top notch. Your motivation to comply comes from both your own ethics and the knowledge that your country and other countries are fining companies many millions of dollars, dragging corporate names through the mud resulting in shareholder class-action lawsuits, putting the kibosh on mergers, landing colleagues in prison, leading to resignations, and even suicides. Everyone in the organization knows when to say ‘no’ and how to walk away from an extortion demand.
Having a reputation for saying ‘no’ to extortion in the government contract arena seems to decrease the number of times you get hit for a bribe.[ii] However, saying ‘no’ to a bribe, during a government procurement process, may not be enough to move that process forward — with you still in it. It tends not to bring you closer to signing a government procurement contract and getting paid, or much further away from extorted modifications to the contract once you have signed it.
Why not just go to the police, file a complaint, take it to court, or make a big stink? Of course you can, and maybe some day you may have to take one or all of those actions; but, as stated in a recent article, republished on the IACCM website: ‘You simply can't get effective law enforcement in these countries’.[iii] As Richard Nielson has written, ‘… this situation is common in many developing countries where the press, the police, the military, and the government are all part of the corruption’.[iv]
Actually, saying no and walking away, or making a big stink, are just two of about a dozen tactics that people use when confronting extortionate government functionaries and other road-blocking bureaucrats.[v] Do any of these tactics actually get you what you need from the government without having to submit to extortion?
Until about three years ago, we only had anecdotal evidence either way. Then, a study on public corruption in Peru showed that extortionist government functionaries are neither omnivorous nor omnipotent. That is, these extortionists do not eat all of their potential victims all of the time. In fact, of the 21 percent of the people who refused to submit to extortionist functionaries in the preceding year, one out of three of them claim to have received what they needed from the government. Let us add a poetically just cautionary note -of the 79 percent who paid bribes, one out of four of them did not get what they paid for.[vi] We now have evidence on a much smaller scale that lawyers and paralegals who deal on a regular basis with public officials may have an even higher probability of success for their clients when they reject extortion demands.[vii] Clearly, some people are saying ‘no’ in a way that creates a successful negotiated outcome.[viii]
Using local agents
Sending ‘home office’ staff overseas to handle government extortion situations can be very expensive, and potentially counter-productive due to a lack of understanding of the culture or of the local power hierarchies. However, it may be even more expensive in the end if you think that it is easy to keep local host-country agents in your pocket while they negotiate with extortionist government functionaries. We have found that many local agents and intermediaries (and this can include even lawyers, accountants and lobbyists) are good at serving foreign corporate clients, and just as good at signing Foreign Corrupt Practices Act (FCPA) certification clauses, while still hiding bribe payments. Good faith record-keeping and due diligence, by themselves, will not avoid a scandal, nor will those efforts eliminate criminal and civil fines, nor stand in the way of your forced retirement (as apparently occurred in part of the Siemens cases) <www.spiegel.de/international/spiegel/0,1518,455234,00.html>.
To deal with the risk of bribery and extortion you should hire local intermediaries with the highest reputations for honesty, with experience in dealing with government officials, and with an in-depth understanding of negotiations.
Negotiation theory and practice
I say ‘negotiations’, because once you get past ‘no’ with an extortionist government functionary, you are negotiating. As far as I know, while a lot has been written on negotiating with difficult people — with Hitler, the Devil and even three-year olds — very little has been written on negotiating with extortionist functionaries. (For some readings on this topic, see endnote 9).[ix]
In fact, at the middle and higher levels of government, extortionist functionaries are no more difficult as negotiators than anyone else. At these levels, extortionists may be very personable negotiators, because they often want to create an ongoing business relationship with you (that is, you bribe them, you get this contract and many more in the future, as well as kick-backs, and quality-cutting, profit-boosting, expense-inflating side agreements). In other words, it can be an easy negotiation as long as you are willing to accept a private side-agreement with extortionist government functionaries and their extortionist hierarchy. This is what the private-sector/government corruption business is all about. The most difficult part is how to reject these side deals, and still sign the procurement contract, complete your work, and get paid and taxed appropriately.
If you can picture it, negotiating government extortion is a combination of theories and practice in commercial negotiations, hostage negotiations, and suicide negotiations. For normal commercial negotiators, it can be difficult to ignore one of the main principles of commercial negotiation, which is that when the other party asks for something of monetary value you are supposed to counter-offer with something more than zero, otherwise, your interaction may not even rise to the level of a negotiation. However, in the case of a negotiated agreement anchored to a bribe request, your final counter-offer must always be nothing.
Using positive deviancy
If your best monetary offer is nothing, and you want to stay in the negotiation, you will need to ‘expand the pie’ for a ‘corrupt official’. Do you even want to be near such a person? Is there any way to ethically make a bigger pie? At this point, we still do not know if you will be a corruptee or an ethical person. This is where positive deviance theories and experience come in. Positive deviancy is about finding social anti-bodies in sick human communities.[x] Positive deviancy theory and practice originated in international public health and nutrition studies, and relies heavily on statistics; but its purpose is to find answers to apparently intractable human problems. Instead of studying what is overwhelmingly wrong, morbid, sick or (in our case) corrupt in a community in order to kill it or cut it out, the positive deviancy approach tells us to seek out the few healthy individuals in a sick community, and learn from them how they have stayed healthy by deviating from the negative norm — hence, ‘positive’ and ‘deviancy’.
Jerry and Monique Sternin, the founders of the Positive Deviance Initiative at Tufts University, have been working in this area since at least the early 1990s, and their methods have now extended from rural health and nutrition, to lowering death rates in hospitals, improving education, stopping human trafficking and female genital mutilation, improving productivity and morale in industry and, most recently, deterring government extortion of individuals in the private sector. We have been using certain positive deviance concepts and methods in Ecuador since 2005 with lawyers, paralegals, law students, anti-corruption professionals and business clients. In the spring of 2007, I had the honor to work with the Sternins and with Deb Grammicione of TRACE International[xi] for a short American Bar Association workshop on using positive deviance methods to successfully and ethically get past extortionist functionaries. As the Peruvian census bribery statistics have shown, there is a small minority of people who not only refuse to submit to extortion, but who also get what they need from the government without paying bribes.[xii] These workshops almost always uncover viable and proven strategies and tactics.
 Do you turn into a corrupt person if you take your extortionist to lunch to explain why you cannot pay a bribe? Do you become one of them if your company buys furniture for their government office which will allow the public to sit comfortably while waiting for government permits? What if you join with other companies to pay for gifts, raffle prizes and productivity bonuses for an entire government office, in order to increase staff morale and efficiency, and thereby improve services to the public? Do you violate anti-bribery laws, by paying for travel and tuition for government officials? What if you donate to an extortionist’s favorite charity or help build a potable water system in an area where a large and vocal minority is trying to cancel your service-and-supply contracts with the government? The list goes on.
NOTE: These are not rhetorical questions. Do not try any of these things unless you have a favorable opinion from experienced anti-corruption compliance lawyers in both your home country and in your host country.
There are some things you can do to make it less likely you will commit a corrupt act. First, all payments and purchases must be on the books and recorded with real references. For instance, if you buy soccer shirts for the staff team of the local Immigration Bureau, then record it as such. Do not record it as a marketing or work-uniforms expense. Make sure the check is made out to the soccer shirt retailer. Make sure, and put in writing, that the soccer shirt retailer, wholesaler and manufacturer are not related to the director of Visas, or to anyone else in that hierarchy. Read down your list of ‘red flags’, avoid them, and write down how you avoided them.[xiii]
There are many ways to get scorched in these situations, but the good news is that there are also some ways to create a trusting and honest relationship with a ‘palms-out-under-the-table’ government official, get the procurement contract, complete your work, and get paid, all without paying bribes.
Using the Deus ex Maquina[xiv]
When the local system of justice and the government hierarchy does not punish public corruption, you need leverage from outside that system to convince the functionary on the other side of the desk to drop the extortion demand. I am not talking about going to the INTERPOL. Instead, take a great internal leap, and see the extortionist as a person who needs your help to get down from a ledge. Let them know, even though foreign anti-bribery laws and international treaties may not threaten them directly, that the active implementation of those laws and treaties are causing a sea-change in how international companies are regarding foreign officials who are involved in corrupt practices. One general difference between low-range and high-end government officials is that the latter tend to move back and forth between government and industry. They may, for example, work as industry lobbyists, business brokers or own companies that need foreign capital. More and more major foreign companies are doing their homework, and are not hiring these kinds of lobbyists. Fewer companies are acquiring, investing in, or guaranteeing loans to, companies owned by corrupt foreign officials.
The World Bank’s Voluntary Disclosure Program may be creating a ‘Prisoner’s Dilemma’ for all bribe-payers and receivers. Well-funded long-term investigative reporting of corruption is on the rise. Websites with names, dates and amounts of corrupt payments are appearing on the internet. There are now mandatory information exchanges and more technical assistance between countries on corruption and laundered money. Again, the list goes on, and in this negotiation, you hold the levers of information asymmetry while the extortionist is lost in self-denial about the changes that are happening in the world. You have just been given the rare opportunity to help save someone from himself or herself.
Using repetition and redundancy
In addition to spreading the results of positive deviancy, and the lessons of court cases and Justice Department clues, we have seen that knowing what to do and say is different from actually doing or saying it when you come face-to-face with the extortionist government functionary. In our workshops, we have moved into repetitive practicing of physical and verbal approaches and responses to the Bridge Ogre —the government functionary who would eat you for breakfast. We expect the participants to have a greater ability to ethically and successfully handle extortion and potential-extortion situations..[xv]
When it comes to big money and bribery, it is always good to remember that it is hard to trust anyone. Negotiating with extortionist government functionaries can be dangerous, which is why the negotiation needs the right tone and openness of dialogue.[xvi]
Conclusion
The best anti-corruption compliance programs and efforts in the world will not prevent a bribe demand from a government functionary. This is a one-on-one situation. When the best obtainable negotiated agreement continues to include a bribe amount, you have to take your best alternative to a negotiated agreement, which means walking away from the negotiation. Extortionist government functionaries have been, and can be, persuaded or influenced to get out of the way between you and the government goods, services or recognition that is rightfully yours. There are ’positive deviance’ negotiation methods from within and beyond the local culture that can improve your chances of getting what you need without paying bribes.
Bruce Horowitz,
Paz Horowitz, Abogados,
Quito, Ecuador,
bhorowitz@pazhorowitz.com
www.pazhorowitz.com

ABOUT THE AUTHOR
BRUCE HOROWITZis a founder and the Managing Partner of the Quito, Ecuador law firm of PAZ HOROWITZ, Abogados. He has been studying negotiations and public corruption issues since 1985, and has advised international corporate and individual clients on how to comply with foreign corrupt practices legislation since 1989. In 2005 he began training lawyers, paralegals, law students, clients and others in Ecuador and the US on how to use Negotiation and ’Positive Deviance’ principles and techniques when facing extortionist government functionaries.
PAZ HOROWITZ, Abogados is the TRACE International representative in Ecuador (www.traceinternational.org).
Bruce is Senior Advisor to the ABA International Section’s Committee on US Lawyers Working Abroad, Vice-chair of the Latin America and Caribbean Committee, and an active member of the ABA International Section Anti-corruption Committee.
 
 
 

1. This article refers to ‘extortionist government functionaries’ rather than to ‘corrupt officials’. ‘Corrupt official’ is an emotionally loaded term, and is too broad for this article. There are many types of government ‘corruption’. This article discusses how to prepare for, and respond to, a bribe demand, that is, ‘extortion’. It refers to ‘functionaries’ rather than to ‘officials’, because in some countries, ‘officials’ only refers to the higher levels of a government structure, while ‘functionaries’ refers to anyone who can extort a bribe in exchange for government goods, services or recognition.
2. The first somewhat reliable example that I found in the literature comes from Richard P. Nielson’s The Politics of Ethics: Methods for Acting, Learning, and Sometimes Fighting, with Others in Addressing Ethics Problems in Organizational Life, Oxford University Press (1996), involving extortion by government tax inspectors. ‘The bank … has found that at least one American bank does not make the payments. That bank refused to pay the bribe the tax inspectors requested, and for a while was regularly inspected, which was time-consuming and expensive. In addition, the bank thought that it had to pay higher taxes than competing banks. However, the tax inspectors have stopped asking for bribes and stopped putting the bank through unusual inspections’ p 176. We have heard many similar stories in private interviews and at conferences. Recently, Alexandra Wrage, the Executive Director of TRACE International told IACCM ‘that companies simply saying ‘no’ is meeting with increased success.’ http://tcummins.wordpress.com/2008/02/27/ethics-regulation-global-realities.
See, also, Horowitz, B ‘Negotiating with extortionist government functionaries, Part 4’, The Negotiator Magazine(January 2008), http://www.negotiatormagazine.com/article409.html.
3. Evans, Simon ‘Despite high-profile scandals, many British multinationals remain blissfully unaware of the fraud dangers lurking overseas’, The Independent: England. 21 October 2007. Found in www.IACCM.com under Articles on Risk Management, ‘International Contracting: Corruption Risks’.
4. Nielsen, p 50.
5. According to survey results of Miller, William; Grodeland, Ase; and Koshechkina, Tatiana Y A Focus Group Study of Bribery and Other Ways of Coping with Officialdom. University of Glasgow working paper, www.nobribes.org/rc_survey.htm. 1999. the strategies that private participants use when dealing with these functionaries include: 
  • acceptance (that is, giving up, and walking away without getting the public thing to which they are entitled);
  • persistence (for example, sitting in the functionary’s office all day or coming back every day with the same request);
  • arguments based on the law and their rights;
  • threats;
  • appealing to another functionary higher in the hierarchy;
  • bribery (this is the alternative most often mentioned in the surveys);
  • using the influence of someone outside the formal hierarchy;the formation of protest groups;
  • pertinent laws and legal materials;
  • learning the ropes;
  • being nice; and
  • using sexual attraction.
 
6. Hunt, Jennifer and Laszlo, Sonia Bribery: Who Pays, Who Refuses, What are the Payoffs? McGill University, Toronto. 31 January 2005. pp. 13–14 and Table 2. For more information on this study, see Horowitz, B, ‘Bridge Ogres, Little Fishes And Positive Deviants: One-on-one deterrence of Public Functionary Extortion Demands’, February 6, 2006, which can be found at http://www.positivedeviance.org/projects/law/.
7. Horowitz, B, ‘Bridge Ogres, Little Fishes And Positive Deviants — above note..
8. Ury, William The Power of a Positive No: How to say no and still get to yes, Random House, Inc (2007) is a very good place to start on negotiating when you must reject the other party’s main position.
9. See, The Negotiator Magazine:Subject Matter Index, under ‘Negotiating with
Corrupt Officials’ http://www.negotiatormagazine.com/subject_index.shtml. . Also,
listen to the IACCM Ask The Expert Call: ‘International Negotiation and
Deterrence of Government Functionary Extortion - Recording
‘, Speaker:
Bruce Horowitz, Added: 24 May 2007. For those who read Spanish, and who
are interested in the theoretical basis for successfully and ethically negotiating
with extortionist government functionaries, you may contact the author of this
article for a copy of his post-graduate short thesis: Horowitz, Bruce
Ganar-Ganar con el Ogro del Puente: La aplicabilidad, para los abogados,
de la teoría y técnica de las negociaciones en situaciones de extorsión
pública
,2005, Universidad Católica, Quito, Ecuador.
10. Perhaps the best place to quickly learn about positive deviancy is to
browse the www.positivedeviance.org website. 
11. TRACE International ‘is a non-profit membership association of
multinational companies and their commercial intermediaries committed
to the highest standards of transparency. The goal of TRACE is to provide
anti-bribery support for companies and commercial intermediaries across
all industries and regions.’ (Taken from http://www.traceinternational.org).
TRACE works closely with IACCM.
12. Above note 6, Hunt and Lazlo.
13. Newcomb, Danforth et al, FCPA Case Digest ©Sherman & Sterling LLP,
p 117. In the case of SEC v Schering-Plough Corporation (D.D.C. 2004),
the company, without admitting or denying any wrongdoing, agreed to pay
a $500,000 civil penalty for having donated $76,000 to a charitable
foundation. According to the SEC Complaint, indicia of wrongdoing
included the fact that the foundation president was also a government
official who could influence government purchasing of pharmaceuticals;
that none of the donation was accurately reflected in the company’s books
and records, and that the company’s system of accounting controls failed to
prevent or detect improper payments. The Sherman & Sterling FCPA Case
Digest
is a quick and excellent source for Foreign Corrupt Practices Act
cases and Justice Department response letters. http://www.shearman.com/files/Publication/1da67f8a-ce0c-499a-bf6c-4669c8288eeb/Presentation/PublicationAttachment/
3add2d77-3713-4f5a-857d-250d913ee7f8/FCPA_Digest_100507.pdf
14. From Latin, literally, ‘god from the machine’. Here, it refers to the use
of outside influence to solve internally intractable problems.
15. Patterson, Kerry et al Influencer: The power to change anything.
The authors stress the importance of repetitive practice of what they call
‘vital behaviors’, broken down into learnable parts., McGraw-Hill,
 ©VitalSmarts, LLC (2007-2008)
16. As Nielson says in The Politics of Ethics, p 50, ‘single-loop forcing
methods’ can be dangerous when mafias are involved. One example of
a single-loop forcing method is simply standing on principle, shouting no,
and threatening punishment. More open types of negotiation/ dialogues
minimize the danger to you. This would require another article.
 
 

 
Congratulations to Christian Cullinane, Commercial Director with QinetiQ Consulting, who has just competed in the world’s longest winter ultra-marathon north from Anchorage, over the Alaska Range, skirting Mt. McKinley and to McGrath. Imagine yourself there — 350 miles of bike riding and wading through deep drifting snow with wind chills of -60C. Of the 44 people who started, only 29 intrepid extreme sportsmen conquered Alaska’s unsparing elements to the finish line. Christian met some great people, saw some awesome views, got frost-nip in his fingers, but above all he finished. Christian raises money for charity each time he races. Read more on his website <www.cool-biker.com>, especially his diary — and for an insight into how he kept motivated on this trip, read his entries on 1st March.

Outside contracting— contribute to this new column
Do you have a special activity or achievement in your life outside of contracting? If so, send photos and a 100-word description to Suzanne Birch at <sbirch@iaccmresourcing.com> for consideration to publish in this column.

 

 


 

Assessing risk on third-party relationships

 
This article outlines the elements of the due diligence process in assessing third-party relationships. CAROLYN LINDSEY, TRACE International Inc
 
 

by CAROLYN LINDSEY, TRACE International Inc 

This article outlines the elements of the due diligence process in assessing third-party relationships.
The requirement under international anti-bribery regimes that companies conduct due diligence on their overseas third parties is clear. Recent enforcement actions brought by the U.S. Department of Justice (DOJ) highlight the importance of this requirement. Companies such as Baker Hughes and Titan received such large fines in the US in part because they conducted no due diligence on the overseas intermediaries that they relied on to help promote their business interests abroad. 
Government contractors must be especially vigilant when using third party sales agents to market their services to overseas governments since they can be held liable for any actions of the third party that run afoul of one of a number of anti-bribery laws. In order to mitigate this risk, companies generally put their overseas sales agents through a rigorous vetting process so that they can determine whether there is any likelihood that the third party will make improper payments to government officials to win a contract.
Even when entering into commercial relationships with third parties providing other types of services, companies should have some knowledge of the third party’s background and reputation. In the US, the DOJ has made it clear that it is willing to look beyond the types of third-party relationships that were previously considered ‘high risk’ to find liability with types of third-party relationships that were previously considered to be lower-risk or even risk free. Before the InVision case, most companies believed that entering into an arms-length relationship with a distributor reduced or even eliminated the risk of vicarious liability for that distributor’s violations of the U.S. Foreign Corrupt Practices Act (FCPA). The $800,000 civil penalty imposed on InVision as part of its FCPA settlement with the DOJ and a subsequent $65,000 fine imposed on one of its former senior executives for related charges proved otherwise.
The need to conduct due diligence on third-party relationships and government enforcement agencies’ expansive view of the types of relationships that require due diligence, can leave companies struggling to determine how much due diligence is necessary. When the potential universe of third-party relationships number into the thousands, and corporate resources are limited, companies are forced to make decisions that could potentially pose anti-bribery compliance risks. Is the same high-level due diligence required for all types of relationships? What relationships really do need to be vetted? Do vendors and suppliers pose a risk? Can the company assess the risk of each relationship to determine how much due diligence is necessary?
At least in the US, enforcement agencies have indicated verbally that risk assessment is appropriate when determining how much due diligence is necessary on various third-party relationships; however, additional guidance has not been forthcoming. TRACE recently conducted an in-depth, four month ‘best practices’ project with its member companies that resulted in guidelines that companies can use when assessing the risk posed by a third party. While there will be considerations that are industry specific, company specific and even deal specific, these guidelines provide a basis for a company’s tiered approach to due diligence on third-party relationships.
Identifying third-party relationships
As stated above, there is an expectation that companies should conduct due diligence on a broader range of third-party relationships than previously believed. While most companies understand that their sales representatives who market products to a foreign government on a commission basis require a high level of due diligence, companies often question the need to conduct due diligence on other types of relationships.
Companies should consider performing at least some due diligence on the following relationships: marketing consultants, offset consultants, subcontractors, freight forwarders, customs brokers, resellers, vendors, accounting firms, public relations firms, law firms, joint venture partners, teaming partners, real estate agents and suppliers.[i]
Assessing the risk
Determining the risk level of a third party is not always straightforward. Sales representatives that are paid on a commission basis require a high level of due diligence, but what about customs brokers and freight forwarders? Those relationships can pose significant risk, as many companies have recently discovered; however, few companies are conducting due diligence on these relationships.
The following are some of the factors that companies can use to determine the risk posed by various third-party relationships:
  • the purpose for which the third party is being retained;
  • the nature and frequency of contact with government officials;
  • the amount and type of compensation that the third party receives; and
  • sales volume and value.
Third-party relationships that pose a high compliance risk should be vetted using a first tier due diligence review; those that pose a lower risk can be vetted using a second tier, or more streamlined, due diligence review.
A tiered approach to due diligence
Once a company has determined the risk associated with the retention of various third parties, they then need to determine how to approach due diligence. Given that resources are often limited, it is unlikely that most companies will be able to conduct a high-level due diligence review on every third-party relationship. Instead, they can divide third-party relationships into various groups with different due diligence requirements. For example, based on the risk assessment described above, a supplier or vendor would most likely require less due diligence than the standard commission sales agent, while a potential joint venture partner would most likely require increased scrutiny.
Certain aspects of a robust due diligence program should be used no matter how much risk an intermediary appears to pose. Companies should have a reasonable justification for any third-party relationship that they enter into. They should determine the ownership of any entity with which they have a third-party relationship to make sure that they are aware of any government ownership. In addition, companies should ask all intermediaries basic compliance questions and should conduct a media search.
A ‘best practices’ first tier due diligence program requires intermediaries to provide audited financial statements or a financial reference, whereas self-certification of financial stability would probably suffice for lower-risk intermediaries. A personal interview is necessary for third parties that pose a higher FCPA compliance risk, but may not be necessary for a low-volume supplier.
Ensuring an adequate review
It is important for companies to remember that even third parties that are initially considered low risk can move into the high risk category based on information that is uncovered as they proceed through the due diligence process. Companies should move these third parties to a first tier due diligence review in order to ensure that all red flags are resolved.
A tiered approach to due diligence should not be used to push higher risk intermediaries through an inadequate due diligence review in order to decrease the time it takes to bring them under contract. Rather, it should be used to enhance a company’s compliance program by increasing the universe of third parties that undergo some form of due diligence. 
Carolyn Lindsey,
Attorney and Director of Member Services,
TRACE International, Inc., a non-profit membership association helping companies to raise their anti-bribery standards.
Lindsey@traceinternational.org.


[i]. This list is merely illustrative and is not mean to be an exhaustive list of every third-party relationship that could pose an anti-bribery compliance risk.
 
 


 

 


 

Who is to blame when government contracts go astray?

 
When issues arise with government contracts, the contractor is not always at fault. Better monitoring and oversight of government contracts can help avoid problems and improve performance. RICHARD CRUME
 
 

by RICHARD CRUME

When issues arise with government contracts, the contractor is not always at fault. Better monitoring and oversight of government contracts can help avoid problems and improve performance.

Main points
        Problems with a contractor’s performance can often be caught early and corrected with better government oversight.
         Providing routine review and feedback, anticipating problems before they occur, and acting quickly to resolve issues, are all examples of good oversight.
         Equally important is shifting the focus from a reactive, administrative style of oversight to a proactive, strategic, and collaborative style.
         Improved contract oversight, especially early in the life of the contract, can help to avoid serious problems later on.

In the past year, the news media has run numerous stories on problems with government contracts. Cost overruns, delayed schedules and poor performance are often cited as endemic problems, and have caused some in the US Congress to call for investigations and tighter controls on funding. More often than not, the contractor is blamed for poor management while being accused of reaping huge profits and big executive bonuses.
Having worked for both government contractors and a government agency, I have some insight into the behavior of both types of organizations. While it is true that contractors sometimes mismanage their programs, the government may also be at fault for a lack of attention to performance details during the implementation of a contract. In many cases, a more proactive and engaged style of contract oversight by government employees can help to avoid serious problems during the life of the contract.
In this article I review the role that government contractors play in today’s society, factors at play when contract problems occur, and 10 steps for contract management success.
Government contractors in today’s society
It goes without saying that contractors are critical to many government programs — from social services to highway construction to national defense. Contractors provide specialized expertise often missing from the government ranks, and contractor personnel frequently make up the majority of the workforce on government sponsored projects. By relying on contractors for technical expertise and staffing support, government employees can devote more time to setting priorities, formulating policy and managing their projects.
Most contracts are awarded in a highly competitive business environment, and winning bids ordinarily offer the greatest value to the government — that is, the best combination of high quality and low cost. Because contractors must optimize their operational efficiency to achieve the highly competitive costs needed to win a government contract, they often understand the critical importance of scheduling, budgeting and resource management even better than their government counterparts. Managers at contracting firms know all too well that even a minor delay or overrun can tarnish their company’s reputation and affect the bottom line.
Many contractor personnel have prior experience as government employees, work under contract to their former agency and maintain close personal relationships with their government colleagues. This allows contractors to better understand their clients’ needs and respond to the requirements of the contract. However, it also creates challenges for government employees needing to maintain a professional distance from their contractors — as a result, objective review and assessment of contractor performance can sometimes be difficult. The need to maintain appropriate professional relationships between US government employees and contractor personnel is addressed in the Federal Acquisition Regulation, Part 3 — Improper Business Practices and Personal Conflicts of Interest (www.arnet.gov/far/). Most state and local governments also have codes of conduct for contractor relationships.
A variety of contract types are in use in government today, varying according to the degree of responsibility assigned to the contractor and the amount and nature of profit incentive. Generally, government contracts can be grouped into two categories — fixed-price and cost-reimbursement — as described below.
Fixed-price
  • Establishes a price not subject to adjustment for actual cost in performing the contract.
  • Places maximum risk upon the contractor in assuming full responsibility for all costs and the resulting profit or loss.
  • Provides an incentive for contractor management to control costs and maximize performance efficiency.
Cost-reimbursement
  • Provides payment of allowable incurred costs, as prescribed in the contract.
  • Establishes an estimate of total costs and a cost ceiling that may not be exceeded without government approval.
  • Allows for situations where uncertainties in contract performance prevent costs from being estimated with accuracy.
Within these two categories, there are a number of variations that provide the government with added flexibility in managing contract terms and deliverables. For example, fixed-price contracts can allow price adjustments under certain circumstances (when the commercial price of some item increases or labor indices change) and may provide award fee or other incentives for bettering cost or scheduling targets. Similarly, cost-reimbursement contract variations include cost-plus-fixed-fee, time and materials, and indefinite delivery. Purchase orders, letter contracts, and purchase cards may be used for smaller purchases.
When problems occur
Unfortunately, no matter how good the contractor, something will probably go wrong during the life of the contract. The problem could be as simple as missing a delivery date or overrunning a task budget — or, it could be much more severe, such as constructing a critical engineering component that is later found to be out of specification. When problems occur, there could be a number of causes:
  • Was the contractor cutting corners to meet an overly aggressive cost proposal?
  • Were the work requirements poorly specified in the contract?
  • Did the contractor properly prepare for the work at hand?
  • Was there an improper post-signature change to the scope of work?
  • Were the contract terms realistically achievable, or was the contractor set up for failure?
Regardless of the cause, it is likely that the problem could have been caught early and corrected, if not entirely prevented, with a more proactive and engaged style of contract oversight.
For most large government contracts, the contracting officer authorized to commit the government agency by signing the contract delegates oversight to a representative. For example, oversight for a contract to build a highway bridge would probably be delegated to an engineer in the highway department who has lead responsibility for the required work. Various titles are in use for individuals providing contract oversight, including contracting officer representative (especially at the federal level); project officer; work assignment manager, and project manager. (I use the term project manager below.)
Project managers often have technical expertise but little experience with contract administration or oversight. Furthermore, in today’s government business environment, where tight budgets and overworked staff are the norm, many project managers are preoccupied with multiple projects, endless meetings, and an excessive volume of email. Who has time to monitor a contractor’s work? It is often easier for project managers to forgo regular oversight, instead trusting that their contractors will perform responsibly and report problems as they occur. This is a flawed strategy.
Most contractors care about the quality of their work and know that their bottom lines depend on customer satisfaction. For this reason, contractors value client feedback and depend on regular oversight to help them stay focused and on target for their services and deliverables. More than once, while working for a contractor, I have been frustrated when the project manager left my draft report lying on his desk for several weeks because he was too busy to review it.
While proactive oversight of contractor work is necessary, improper business relationships that could raise questions about objectivity and conflict of interest must be avoided. In particular, project managers should be careful to stay away from situations involving personal services — where contractor personnel are given direction as if they were government employees. Even the mere appearance of a personal service must be avoided. Otherwise, project managers risk being reprimanded and even losing their jobs.




Ten steps for contract management success
Although good contract oversight requires attention, it does not have to be complicated or overly time consuming.. The following 10 steps can help project managers take a more proactive approach to contractor oversight:
  1. Ensure that the contract scope of work has sufficient detail, including periodic milestones against which progress can be measured (for example, deliverable dates, interim results, and draft reports).
  2. Take time to understand the terms of the contract, especially cost and labor mix parameters that can be compared with actuals in monthly progress reports.
  3. Perform close monitoring and oversight of all tasks by conducting regular progress review meetings and phone calls, reviewing interim reports, and routinely following up on all scheduled activities.
  4. Communicate often, doing so in a direct and professional manner, with candid feedback on performance issues and praise for work well done.
  5. Avoid micromanaging the project details, focusing instead on critical milestones, performance measures and quality objectives.
  6. Stay focused on the goals of the project, and do not become distracted by side issues or personal research interests that are not in the scope of work.
  7. Let the work plan guide the project effort, ensuring that any changes in direction are clearly documented, communicated through appropriate channels, and coordinated between the project manager and the contracting officer.
  8. Refrain from unnecessary changes and unreasonable demands that can dampen the contractor’s enthusiasm and create extra paperwork in the contracts department.
  9. Act expeditiously on the contractor’s requests for review and guidance; never assume that the contractor can work out problems on its own.
  10. Anticipate problems before they occur, and either manage a way of avoiding them or implement corrective actions quickly to keep the project on track.
One final recommendation: Insisting that the project manager be involved in pre-signature negotiations can help ensure that the final scope of work reflects the desired business objectives, and that these objectives are clear and unambiguous for everyone involved. Frequently, project managers have valuable insights to offer during final negotiations, based on their experience with other procurements.
Good contract oversight not only involves providing routine review and feedback, anticipating problems before they occur, and acting quickly to resolve issues, equally important is shifting the focus from a reactive, administrative style of oversight to a proactive, strategic, and collaborative style. Attention to contractor performance from the very beginning will pay off for both the government and the contractor during the life of the contract.

Richard Crume,
rvcrume@ncat.edu
Richard has worked as an environmental engineer and program manager in both the public and private sectors for over 25 years. Additionally, he teaches a graduate level course on air pollution assessment and control at North Carolina A&T State University. His is registered as a Qualified Environmental Professional with the Institute of Professional Environmental Practice and as a Hazard Control Manager with the Board of Certified Hazard Control Management.

 
 


 

 

 

 


 

Step up to the mark — why procurement leaders need to embrace contract management

 
In both the public and private sector, there is little accepted best practice in terms of how procurement as a function and an activity relates to, and gets involved with, contract management. Procurement leaders need to take responsibility for contract management performance in their organisation by owning the overall process.  PETER SMITH Procurement Excellence, UK
 
 

by PETER SMITH Procurement Excellence, UK 

 
Main points
      In both the public and private sector, there is little accepted best practice in terms of how procurement as a function and an activity relates to, and gets involved with, contract management. Procurement leaders need to take responsibility for contract management performance in their organisation by owning the overall process.
        Procurement leaders need to take responsibility for contract management performance in their organisation by owning the overall process.
        That starts with ensuring continuity from procurement to contract management, ideally by ensuring that contract managers are involved throughout the procurement process.
        Procurement leaders should also ensure that contract management skills are appropriate and that enough resources of the right quality are available to meet the needs of the organisation.
       Governance issues are critical to ensure major contracts are successfully managed. There must be clear contract ownership at senior levels (not necessarily procurement) to act as a point of accountability, escalation and risk management.
        Providing proper guidance for contract managers is key, and procurement can provide leadership by including contract managers in professional networking activities, promoting knowledge transfer, best practice, and learning from success and failure.

Over the last 20 years, procurement has moved in many organisations from being perceived as a back-office or administrative function into a core business activity. In the private sector, procurement is attracting high-fliers from other functions, and is mentioned at annual results time as a driver of bottom line profit. The change has been even more dramatic in the public sector, where commercial directors now sit at or just below board level in most major departments, and procurement issues are regularly discussed at the highest level.
But there is one nettle that procurement in some organisations still seems reluctant to grasp, in both the public and private sector, and where practice varies considerably between organisations — that tricky issue is contract management. There is little accepted best practice in terms of how procurement, as a function and an activity, relates to, and gets involved with contract management.
Any experienced procurement person asked to draw a picture of the end-to-end procurement cycle will include a box headed ‘contract management’. So why do many organisations still see procurement as being totally divorced from post-contract management? And why do procurement leaders seem to perceive that contract management is ‘someone else’s responsibility’?
This approach too often leads to poor contract management and overall business performance. The contract may be ‘thrown over the wall’. Procurement personnel complete the supplier selection and contracting phases and then lose interest, handing contract management responsibility on to any person who happens to volunteer — or is just standing in the wrong place at the wrong time. This is no exaggeration; I have seen examples of exactly this random process.
Even where the contract manager is more formally identified and appointed, too often, there is little consideration of the skills they need, or effort made to ensure they appreciate the drivers behind the contract or that they understand the contracting process that has been followed during the procurement phase. This lack of real understanding, such as inflexible adherence to detailed contract terms, can lead to dysfunctional contract manager behaviour. As one supplier to a major government department said to me: ‘We know this key performance indicator (KPI) is meaningless, and so do the end-users of the contract, but the contract manager insists that we continue to measure it because “that’s what it says in the contract”.’
There are, of course, exceptions where procurement does take some serious ownership. In some UK government departments (the Department of Work and pensions comes to mind) the commercial function plays the lead role in the contract management of many of the most important contracts. This appears to work well — there is a strong focus on performance and value improvement from these contracts, not merely day-to-day delivery.
It is also true that when no-one else wants to manage the contract, or there is no clear single point of ownership, procurement is forced to take responsibility for contract management — stationery contracts being the classic example.
And, to be fair to procurement, there can be other potential ‘owners’ for contract management activities. It is likely that the chief information officer will be very interested in making sure the contract for supporting the physical IT estate is well managed; and his or her staff is probably best placed to track KPIs and provide performance management of the supplier. No-one would suggest that procurement should try to exclude the CIO from playing a key contract management role.
But even here, there is a clear overarching role for procurement. Why? It is to encourage a consistent organisational approach to contract management, to look more widely than the CIO’s interest in the contract, and to apply learning and leverage more widely across the organisation. All of these activities go well beyond the CIO’s sphere of interest, and it is hard to think of anyone other than the procurement (or commercial) director who is likely to have the capability or interest to drive these wider contract management issues.
It is interesting that the procurement profession has staked a claim to one post contract activity — supplier relationship management (SRM). Why has this attracted the profession’s interest? SRM does tend to be applied (rightly) to the most strategic suppliers, where the organisation may have multiple contracts. So there is a need for an overarching approach; and, again, there may be no other obvious owner for such activities. To be cynical, perhaps there is also an element of SRM being fashionable and therefore more attractive to procurement leaders than the hard grind of day-to-day contract management.
Opportunities to improve contract management performance
So what could (and perhaps should) the procurement director be doing to improve overall the contract management performance? There are five clear areas of opportunity.
1. Continuity
One of the most frequent causes of contract management problems is the lack of continuity between the procurement phase and the operational contract management phase. Often, contract managers are not appointed until after the contract is awarded, or in some cases well into delivery. The contract manager is then not aware of the underlying intent of the contract, how relationships have developed during the procurement process and, in the worst case, may not even understand the contractual terms and conditions. It should be procurement’s responsibility — both in terms of owning the process, and practically for each contract — to see that contract managers are involved through the procurement process. Where this is just not possible, procurement must make sure there is a full and structured transition from procurement to contract management, including briefing and knowledge transfer.
2. Skills and resources
The dispersed nature of contract management in large organisations means that training and development is still too often an afterthought. Indeed, many contract managers are appointed with no real analysis of their suitability or aptitude for the role. Someone, and again, the functional head of procurement seems best placed, needs to take responsibility for ensuring that contract management skills are appropriate and that enough resources of the right quality are available to meet the needs of the organisation.
3. Governance
Governance covers a number of issues that together are absolutely critical in ensuring major contracts are successfully managed. Is there clear senior responsibility for the contract; someone to take ownership and act as a point of accountability and escalation? Are issues reported to the appropriate level? Is risk managed properly and professionally, with risk plans and registers, mitigation strategies, and escalation of key risks? The procurement functional head is not the appropriate ‘owner’ for all contracts, but is the person who can ‘enforce’ proper governance.
4. Guidance
Most organisations have a procurement manual covering a combination of policy, process and best practice guidance. It is more unusual to find the same for contract management activities. While guidance in itself does not guarantee success, it can help. And the ad hoc way in which many contract managers are appointed and trained means that such guidance may be of great value to an inexperienced manager dropped into a difficult contract situation.
5. Community
Finally, contract managers often feel disregarded in their organisations. They usually work closely with colleagues and suppliers, but may have little contact with other contract managers. There are opportunities to improve their skills, motivation and performance by developing a sense of community through the contract management pool inside the organisation and more widely; professional networking, knowledge transfer, sharing best practice, learning from success and failure. But again, someone has to take responsibility for making this happen.
Procurement’s pivotal role in contracting management
This is not a plea for procurement leaders to take full line responsibility for all aspects of key contract management. But if they are willing to take strategic ownership of these activities, through the five levers described above, the benefits could be significant for organisations, and indeed for the leaders themselves.
Procurement is often perceived as either a back office function, or a more valued ‘professional’ but still non-line activity, divorced from core organisational delivery. Taking responsibility for overall contract management performance would put procurement leaders close to the front-line of their organisations, would expose them to a range of senior colleagues, and would give them the chance to demonstrate both strategic and operational value. So this seems to be a huge opportunity for improved organisational performance and improved reputation for procurement people and functions. If you are reading this as a procurement leader, and you haven’t embraced contract management already; what are you waiting for?
Peter Smith,
Director,
Procurement Excellence,
psmith@procurementexcellence.com.
 
 


 

 


 

Private sector can learn from government — really!

 
Automation in contract management is not just a task tackled by the private sector. More government agencies are embracing technology to help automate and streamline their contract management processes — to the point where these public sector entities are serving as best practice case studies for others, including the private sector. ASHIF MAWJI Upside Software
 
 

by ASHIF MAWJI Upside Software

Automation in contract management is not just a task tackled by the private sector. More government agencies are embracing technology to help automate and streamline their contract management processes — to the point where these public sector entities are serving as best practice case studies for others, including the private sector.

Main Points:

  • Governments and publicly funded agencies typically have more scrutiny, processes and governance for contract management, including complex rules for approvals, than the private sector.  As such, the public sector is a prime candidate for automation, especially given the increased workload of personnel and reduced staffing levels.
  • Keep the initial scope small: in many government departments, there are a number of stakeholders with competing interests, so it's important to identify the initial pilot scope.  Decision by committee: 'the old saying' - too many cooks in the kitchen...' holds true for projects as well - it's a must to have one decision maker who will strike the hammer when needed.
  • Always re-invent: automating your existing processes may be the wrong thing to do.  It's important to take the opportunity to streamline existing processes and rekindle the stupid rules committee'.
  • Brag and be proud: celebrating and showcasing wins is important - it will help to inspire other groups and gain momentum and support.

Customization is a bad word in software and, unfortunately, public and private sector organizations typically tend to want to customize the packaged software they buy. Most software vendors also offer professional services, so they are not quick to discourage customization, since it adds to their revenues. In the two case studies discussed in this article, the respective government agencies were smarter and decided to take the packaged software as provided and leverage the built-in configuration capabilities of the software to meet 80 percent or more of their needs. They were willing to sacrifice some requirements as long as 80 percent or more were successfully met by the packaged software. This strategy allowed them to not only implement quicker, but do it under budget and, more importantly, lower the total cost of ownership. They had been burned with past customizations of their other back-end systems and continued to pay the price, upgrade after upgrade — so with this undertaking, there was an oath taken to forbid any customizations.

Case study: Canadian government agency
In this example, the impetus for a Canadian Provincial Government department to look at automating their contract management was because they were inheriting the contracts governed by another agency, but no additional staff. As such, being efficient and having as much automation as possible was not a luxury, but a necessity.
The agency, under NAFTA (North American Free Trade Agreement) rules had to issue a RFP (request for proposal) to fairly select the best solution for their needs. They scoured the global market and short-listed three vendors after a rigorous process; and after further due diligence, including financial viability, reference checking and other important elements, they selected the vendor. They had been very careful in ensuring that their requirements were well-defined and each vendor had to follow detailed scripts to prove that it could indeed meet the needed functionality.
Although the agency processed a large volume of contracts, the project team left their egos at the door and asked the vendor to help by providing known best practices and advice on what the agency should do in terms of streamlining processes. There were boundaries that had to be respected, since public funds were being used and certain elements pertaining to approvals, governance and accountability could not be compromised.
One big area of inefficiency was issuing RFPs, then conducting the evaluations and finally going through the contracting process, not to mention the post contract signing management activities (for example, performance and compliance management). Fortunately, the vendor this agency had selected offered an integrated sourcing and procurement solution that tied seamlessly into the contract lifecycle management, as well as a billing module that processed the contract-based invoices. The full suite integrated fully with the agency’s ERP (enterprise resource planning) system, which happened to be SAP. So with the new system, the agency could electronically issue an RFI, which could automatically lead to an RFP using sanctioned templates and processes. The system also enabled online evaluations and scoring, and this helped to capture the right level of detail as to why an award was made, who scored what, and so on. With a click of a button, all the relevant data transferred in real time into the contract management module, which then took over and worked through the negotiation and finalization process. Throughout this process, there were numerous touch points and dynamic rules since, depending on the monetary values and other elements, different people were needed in the approval workflow.
Having an accurate and complete audit trail was a key requirement, and the system the agency deployed provided extensive tracking and reporting. The agency had to deal with numerous public information requests that would involve them in gathering and searching for information across different locations and sometimes unsuccessful attempts to find the right information. With the new system, a formatted report with the right level of detail which was 100 percent accurate with supporting audit data, was available within seconds. This in itself gave huge time savings.
The agency had a pilot group using the software in about four months, with full integration to their ERP system and other line of business systems, as well as legacy data conversion. They were able to successfully process their contract workload in addition to the group’s contracts they inherited with their same level of staffing. More importantly, they were able to shave 40 percent off the cycle time using the automation and streamlined workflow. Automation helped the agency not only to keep up with the workload without increasing staffing costs, but enabled them to provide better service levels and accountability to the public.
Case study: US municipal agency
Like its Canadian counterpart, this US municipal agency created and managed tens of thousands of contracts using manual tools and processes. The increasing burdens of compliance and governance were taking a toll on the morale of the staff, as they did not have the tools to do the job to their satisfaction. As a result, the agency issued an RFP to procure off-the-shelf contract management software.
All the typical processes and approaches this agency had taken in the past were fair game for revamping. They had a ‘eradicate stupid rules’ committee that, like a two-year old, constantly asked ‘Why?’. Every rule and process was challenged. An answer of ‘… because we have always done it this way’ guaranteed that the process would be eradicated in lieu of a new and improved one.
Like several other organizations, this agency had extensive experience in building software solutions as opposed to buying packaged solutions — and so coming in under budget, let alone within the allotted time, was unheard off. A recent audit had shown that the agency’s contract management processes were poor at best, and the stress levels were increasing due to demands from senior management for improved compliance and accountability. This time the agency listened to reputable analyst firms who advised a contract management software package that would best serve their specific needs.
The agency also operated by committee, and decisions on requirements or prioritization took longer than they should have. For this project, they selected a chair of the steering committee and respected the chairs’ decision on the various aspects of the project.
The deployment was completed successfully within three months. Going from a manual process to an automated one was welcomed by many, but it had its share of friction. Doing things manually meant that there was a lot of flexibility (less controls), for certain items, one could bypass the rules to get things done quicker. The new automated system would not let such things happen, and so if there were rules that did not make sense, the system did not know better and would follow them (as directed). The ‘—eradicate stupid rules’ team had a full-time job and worked overtime to ensure processes that were implemented did in fact make sense and were needed. The project team also provided time saving reports to offer ‘carrots’ to those who were not 100 percent converted, since those same people had to spend countless hours in manually creating reports. Overall, the project was a great success, and it helped the agency cope with the contract workload while providing higher levels of governance and accountability. Morale also improved, as the staff now had time to strategize and further improve processes.
Lessons learned
While the government agencies discussed in this article are based in two different countries and provide different services to their stakeholders, the challenges of automating their existing contract management processes were quite similar. One of the key factors in their respective successes was their attitude and desire to be the best, and to do what it takes to streamline processes. Automation is an element to overall contract management excellence and does require the people and the desire to ensure an organization can attain better control while providing best-in-class service levels.
Ashif Mawji,
President and CEO, Upside Software Inc,
Provider of contract lifecycle management software,
Email: ask@upsidesoft.com.
 
Upside Software is the ‘2007 Supply and Demand Chain Executive Top 100 Company and 2006 Deloitte Fast 50 Company’. Ashif was named the Entrepreneur Year by the Business Development Bank of Canada in 2007 and also the 2002 Ernst and Young Entrepreneur of the Year® recipient (Prairies Region — Young Entrepreneur), ranked as Canada’s Top 40 under 40TM (2004),he is a member of the Financial Executives International and was recently awarded the Queen’s Golden Jubilee Medal. 
 
 

A holistic approach to deal with complex public procurement issues: a call to action

 
This article describes a new methodological approach to designing solutions for complex public procurement problems JAVIER CARRASCO, NATO C3 Agency
 
 

by JAVIER CARRASCO, NATO C3 Agency 

This article describes a new methodological approach to designing solutions for complex public procurement problems


Main points
       Our conscious ‘logical’ thinking likes simplification as it makes it easier for us to rationalize the complex reality with which we are confronted — this in turn can lead to poor decisions.
        Too often, we fail because we focus on parts of the problem and fail to see the whole picture. We must understand the interrelated components and study it in its entirety — this requires a holistic approach.
       The first step is to build a conceptual framework to study public procurement systems.
        Such a conceptual framework will assist with the development of system models through the combined use of qualitative research and systems thinking techniques.
        Models will be built for each process for which remedial action is planned so that all the complexities associated with the sub-system or process are properly considered and addressed.
        Resulting models will contribute to a deeper understanding of public procurement issues and facilitate the design of sustainable solutions to improve public procurement processes.

Social psychologists show us that the limitations of human thinking explain the simplistic view that we usually have about the world — our conscious ‘logical’ thinking likes simplification because it makes it a lot easier for us to rationalize the complex reality with which we are confronted. Psychologists, like Greenwald,1 have provided quite sensible explanations of these kinds of mental self-deception mechanisms which make us avoid realizations that create unpleasant feelings, such as not being able to easily understand a complex issue.
However, experience also tells us that this is a defense mechanism which often leads us to make poor decisions. Consider, for example, the many organizational change initiatives that fail because those responsible for bringing about change actually ignore the complex human, technical and organizational interdependencies that will be affected by the intended transformation.
These failed initiatives originally may have been convincing business cases, well aligned with the strategic goals and values officially enacted by the organization. But they failed to address all the relevant psycho-social aspects. This is so because these ‘soft‘ aspects are complex and difficult to measure, therefore, unconsciously, we try to avoid them by understating their relative impact. In this way, we can put them aside and focus on other aspects with which we feel more comfortable. This instrumental bias makes us overlook crucial organizational and human constraints that will frustrate any attempt to change an organization unless we take care of them properly.
For many years, the theoretical approaches traditionally applied to the management of public procurement processes have not been exempted from this bias.
Do we really understand the complexity of public procurement?
Those of us who are involved in government contracting often share the perception that public procurement processes suffer from a series of longstanding deficiencies which appear extremely difficult — if not impossible — to fix. We witness governments striving to address some of these problems with new policies or costly organizational changes, and we have also seen some progress, but we are still troubled by the feeling that these changes do not come quickly or completely enough.
Some of us may even have particular ideas to address the various issues, but, too often, we focus on parts of the problem and fail to see the whole picture — we are perplexed by the way things are but we don’t make a comprehensive effort to understand why they are like that.
With limited knowledge about the complexity of public procurement processes, can we really be sure that policy or organizational changes will produce the intended outcomes?
Adopting a holistic approach through systems thinking
A system is a purposeful collection of interrelated components that work together to achieve a particular objective. Public procurement policy, public officials, industry and public contracts are just elements of the public procurement system.
If we want to understand this system so as to be able make decisions about what changes should be implemented to take it into a new, improved state, we must understand the interrelated components and study it in its entirety. This requires a holistic approach. There are several techniques available to do this. They can be implemented in isolation, but the most powerful approach is to combine several compatible techniques into a single line of research. This is something that can be achieved through the creation of a multi-disciplinary research group of both researchers and practitioners. Such a group should preferably be multinational in composition and take a global perspective so as to be able to address cross-national comparative issues and other factors, such as procurement systems of international organizations (for example,, the UN).
For obvious reasons, IACCM would be perfectly positioned to host such an international and multi-disciplinary research group.
In the initial phase, this group would focus on the following two areas:
  • the development of a public procurement conceptual framework; that is, defining the boundaries of the systems, identifying their generic constituent elements, and understanding how they function; and
  • The development of system models through a combination of systems thinking and qualitative research methods, such as case study, grounded theory and ethnography.
As system models are developed, solutions could start being tested. These solutions would take into consideration the various connected elements, how they make up the system and the estimated rate at which changes would generate the desired effects. These models would focus on practical outcomes. In subsequent phases they might be used to develop research projects with a stronger emphasis on the generalization of theories and the generation of wider scientific knowledge.2
Developing a public procurement conceptual framework
The first step to build a conceptual framework that can be used to study public procurement systems is to define the meaning of the term ‘public procurement’ — analyzing the type of entities that are part of the system and the type of activities within the system.
Developing a public procurement conceptual framework would also entail:
  • drawing conclusions about the main common features of the entities and activities which are considered to be part of the ‘public procurement’ concept;
  • analyzing the procedural aspects associated with term ‘public procurement’ (for example,, identification and analysis of similarities and dissimilarities with respect to private or commercial procurement processes);
  • identifying and analyzing the principles and goals underpinning public procurement (for example,, transparency and competition); and
  • analyzing the casual and intervening relationships between the various conceptual elements uncovered through the above activities.
The outcome of these activities eventually would be synthesized into a conceptual model which would define the boundaries of public procurement, its constituent elements and their interrelationships.
Development of system models
Such a conceptual framework would assist with the development of models for more effective public procurement systems. Models should be built for each process for which remedial action is planned (for example, the source selection process of a specific contracting agency), so that all the complexities associated with the sub-system or process are properly considered and addressed.
Qualitative research methods would be used to identify the various elements and relationships that make up the system. These methods have the following distinctive features.
  • Research is performed in the field, requiring researchers to spend considerable time in the locations under study.
  • Multiple qualitative techniques are used for data collection and analysis (for example, interviews, group interviews, direct observation, and analysis of correspondence and documentation).
  • Key elements of the strategy, like the selection of cases and the data collection methods, evolve with the research through an iterative thinking process.
  • Complex reasoning is used — both inductive and deductive processes are applied.
  • Although formalized methods are used for developing theory and drawing conclusions, research is essentially interpretive. Results depend on the integrative powers of the research team.
  • The phenomenon under study is analyzed from a holistic viewpoint.
Conclusion
Qualitative strategies of enquiry permit us to properly answer research questions like the ones required to understand how a system works (the ‘How?’ and ‘What?’). These methodologies allow the researcher to explore the various meanings associated with human actions by the individuals and groups involved in a given activity, and, in this manner, the researcher is able to understand the way the various system elements interact to produce the observed system outcome while accounting for the many dimensions of human behavior.
The main output of this type of research should be a rich picture of system processes, which would provide the material required to build a complete system model like the one shown in Figure 1 below, which depicts the properties and interactions taking place in a hypothetical source selection process.
Figure 1. Sample of system model for a source selection process


 
Models like these can then be used to design end-state models and to determine what should be implemented for an effective system.
As more models are developed, certain common aspects and recurring system behaviors would emerge. These emerging patterns would allow the formulation of generalizations about the way public procurement systems work and, in this manner, serve as foundation for new scientific theories about the behavior of these and other socio-technical systems.
Javier Carrasco,
Senior Contracting Officer,
NATO C3 Agency,
Tel: +32-2-707-8214,
javier.carrasco@nc3a.nato.int,
jcarrasco@skynet.be.
Javier has an extensive experience in public procurement gained in a variety of organisations such as the Spanish Ministry of Defence and the North Atlantic Treaty Organisation. He is currently working as Senior Contracting Officer for the NATO C3 Agency. Javier alternates his professional duties with an active involvement in research activities. He is about to complete a PhD research project on public source selection processes under the supervision of the University of A CoruÒa (Spain). Last year, Javier received the National Award ìJose MarÌa Fern·ndez F·bregaî from the Spanish Association of Purchasing and Supply Chain Management Professionals (AERCE).
Endnotes
1. Greenwald, A G ‘Self-knowledge and self-deception’ in Lockard, J S and Paulhaus, D L (Eds.), Self-deception: An Adaptive Mechanism? (pp 113-131) (1988) Prentice Hall, Englewood Cliffs, NJ.
2. Scientific knowledge is knowledge (for example, theories, explanations, and models) that has been generated through the use of generally accepted scientific research methods and meets certain criteria (empirical testability and logical coherence). One of the strengths of the approach proposed in this article is that it reconciles the interests of the professional and academic communities because its implementation to the solution of practical problems can serve as a foundation for true scientific research.
 
 

 

 

 


 

U.S. Communities — overview of a government purchasing alliance

 
Purchasing cooperatives have existed for centuries. They provide savings to their participants by aggregating spending volumes and providing access to better pricing, terms and conditions, and access to commodities or services. Cooperatives can be local, regional, state-wide or national. In fact, a number of cooperatives are international. STEVE SWENDIMAN National Association of Counties Financial Services Corporation and U.S. Communities Government Purchasing Program
 
 
by STEVE SWENDIMAN National Association of Counties Financial Services Corporation and U.S. Communities Government Purchasing Program
Purchasing cooperatives have existed for centuries. They provide savings to their participants by aggregating spending volumes and providing access to better pricing, terms and conditions, and access to commodities or services. Cooperatives can be local, regional, state-wide or national. In fact, a number of cooperatives are international.
The U.S. Communities Government Purchasing Alliance came into existence in 1999 through a partnership between two state associations of local governments (the California State Association of Counties and the League of California Cities) and five national associations (the National Association of Counties, the National League of Cities, the Association of School Business Officials, the National Institute of Governmental Purchasing and the United States Conference of Mayors). Borne out of a need to have large-scale commodities contracts to offer local and state agencies on a national basis, in its early days the program focused on creating a platform for voluntary participation by the 87,250 local and state governments in the US.
The program operates as a non-profit instrumentality of government. A board of directors composed of its founding members and an advisory committee composed of professional public purchasing officials from local, state, school and university agencies oversee the program and its policies. Advisory board members also act as lead public agencies on solicitations. As of January 2008 the program offered 16 contracts serviced by 23 suppliers. Over 30,000 local, school, state and non-profit agencies are registered and use the program. In 2007 the total aggregated purchases exceeded $1.3 billion. The estimated savings to public agencies in 2007 through the use of these contracts was $200 million.
U.S. Communities was faced with a number of challenges during its first years of operation. Public agencies expressed concern about the loss of spending to local suppliers. Public agencies have myriad policy directives regarding local spending set-aside programs, requirements for the use of minority, women-owned, veteran-owned, and small business programs, the concern for loss of management control and the concern for political fallout from using a national contract vehicle. U.S. Communities has prided itself on being a fast, flat and flexible organization that responds to the needs of its participants. The program offers the following advantages to the public agency.
  • All contracts are publicly solicited by a lead public agency on behalf of all governments within the US and Canada.
  • Any public agency and non-profit that serves public agencies may use the program.
  • Each public agency may use the program as much or as little as it desires. There are no minimum spending requirements on any of the contracts.
  • The public agency pays no fees to use the program.
  • The program offers access to best purchasing and supply practices through its contracts and through its access to the large network of public agencies using the program.
In 2007, U.S. Communities initiated a new program — Canadian Communities. Through its national sponsors, U.S. Communities and representatives from NIGP (National Institute of Governmental Purchasing) and ASBO (Association of School Business Officials) International in Canada worked together to create an opportunity for Canadian public agencies to piggyback on contracts solicited and awarded by the U.S. Communities lead public agencies. This initial foray into international relations enables both US and Canadian public agencies to benefit from cooperative contracts.
U.S. Communities program managers employ around 15 full-time people to support the program and to work with suppliers and public agencies to promote and improve the program. Suppliers pay a small administrative fee to U.S. Communities. These fees pay the costs of administration, auditing, marketing, training, product development and sponsorship of the program. Additionally, over 70 state associations of schools, cities and counties sponsor the program.
Steve Swendiman
CEO, 
The National Association of Counties Financial Services Corporation, and 
Co-manager,
The U.S. Communities Government Purchasing Program,
<SSwendim@naco.org>.
 
 

 

Contracting resources - Profile by Joseph J. McGrenra, CFCM

 
IACCM government contracting expert panel offer their valued resources.    
 
 

Government Contract Law Basics by Thomas G Reid

For those interested or involved in federal contracting within the US, it may seem that there is an overwhelming amount of information on various aspects of the process. Regardless of whether you are in the private or government sector, government contract law can be the most confusing area to understand.
Management Concepts has recently published the Federal Acquisition ActionPacks, a series of inexpensive, user-friendly desk guides on government contracting topics.
Government Contract Law Basics, the volume by Thomas C Reid, serves as a great introduction to those who new to the field, as well as a valuable tool to more seasoned professionals. 
Mr. Reid is the problem solver for Certified Contracting Solutions and has close to 30 years of contracting experience with the federal government, large and small business. He is also an attorney (specializing in procurement), which is hard to believe, because the volume is written in such in easy-to-understand English
This is not a theoretical volume, but a practical desk guide that can be referred to on a daily basis.
It is divided into three sections. Part I covers the basics of government contract law and is presented in a easy to read ‘question and answer’ format; Part II reviews key terminology, tools and techniques; and Part III captures best practices with a brief summary of each best practice followed by a ‘How to do it’ section that gives practical implementation advice.
If you have ever wondered about the primary sources of government contract law, go to page 14, where you will discover the six primary sources. And what about how conflicts of interest during the award and/or administration of government contracts be measured?-Go to page 40 for a brief but complete overview.
For my money, the best section of the book is Part III that documents best practices and provides tips on implementation.

 

Other Federal Acquisition ActionPacks:
         Earned Value Management
         Performance-Based Contracting
        Contract Estimating and Pricing
         Contract Administration and Closeout
         Contract Formation
         Best-Value Source Selection
        Government Contracting Basics
         Performance Work Statements
         Contract Terminations
 
Best Value Source Selection and Performance Work Statements by Phil Salmeri
The Best Value Source Selection and Performance Work Statements are both timely in government contracting. The author provides good resources for the reader to learn more about the two topics.
Annually, the federal government spends approximately $350 billion for goods and services. For those not involved with government contracting, images of detailed specifications and a cumbersome contract process (say, from the 19th century, spring to mind). However, since the early 1990s, the world of federal contracting has been undergoing a huge transformation in the underlying business philosophy. Processes and procedures have been streamlined and more effective and efficient ways to contract have been developed and implemented. Two such concepts are ‘best value source selection’ and ‘performance work statements’.
Best value source selection’ is an acquisition process that permits the evaluation of proposals and selecting the one that best fulfills the documented evaluation criteria (even if this proposal is not the least expensive).
Performance work statements’ are high level descriptions of a contract’s performance requirements. In other words, rather than a detailed description with performance requirements, performance work statements allow the customer to define their need and to provide performance objectives. Interested contractors are given the opportunity to propose individual approaches to satisfying the need.
Mr. Salmeri has been one of the leading proponents in spreading the benefits of both best value source selection and performance work statements. Mr. Salmeri has over 35-years of government contracting experience as a negotiator, contracting officer, branch head, trainer and consultant. Not only does he know the material, but he has extensive experience putting best value source selection and performance work statements into practice and stills maintains enthusiasm that is contagious.
So it should come as no surprise that Management Concepts asked Mr. Salmeri to write the volumes on both topics for their Federal Acquisition ActionPack series. Mr. Salmeri is a hands-on guy, and as he clearly states in his introductions to both books ‘I would rather conduct workshops and seminars than sit down at a computer and write…’, but luckily the publishers pursued him on these books and he agreed to write them.
The Office of Federal Procurement Policy provides overall direction for government-wide procurement policies, regulations and procedures and promotes economy, efficiency, and effectiveness in acquisition processes. The Administrator is appointed by the President and confirmed by the Senate, and from 1993-1997 this position was held by Dr. Steven Kelman. Dr. Kelman, who is currently a professor of public management at Harvard University’s Kennedy School, writes a regular column for FCW.COM. In his 28 August 2006 column, he dubbed Salmeri as an ‘… unsung hero of contracting …’
Having been involved with both best value source selection and performance work statements, I was expecting to scan both titles to refresh myself on a couple of aspects, but I was surprised — I learned a lot. I have also referred to each title several times since my original reading of them. Both are practical desk guides that can be referred to on a daily basis, and I highly recommend both of them.
If you are a government contracting official who has not yet used best value source selection and performance work statements, you will learn how to; if you are an experienced veteran, you will refresh and increase your knowledge; and if you are a contractor interested in bidding on requirements that will utilize either best value source selection or performance work statements, you will get some invaluable advice on preparing your proposals.
Joseph J McGrenra,
CFCM

Joseph has 25 years experience in government contracting and currently serves as theDeputy for Small Business for the Naval Facilities Engineering Command (NAVFAC) Mid-Atlantic located in Norfolk, VA.
For further information about the ActionPacks series visit <http://www.managementconcepts.com/publications/catalog.pdf>
 
 

Contracting Resources - Profile by Tony Mackey, HP

 
IACCM government contracting expert panel offer their valued resources.    
 
 

Best practices in contracting — FAR and DFARS 

In my opinion, the US Federal Government has been the originator of many best practices and standards in contracting, (procurement, sales, and ethics), since at least the 1980's. The best part about this is that all of these practices and standards have been codified in manuals for many years, that is, in the Federal Acquisition Regulations (FAR) and the Defense Federal Acquisition Regulations Supplement (DFARS).
It seems that those practicing commercial contracting have long resisted embracing the standards, guidelines, regulations, and practices embodied in the FAR and DFARS, in an ‘anything goes’ culture and are only recently adopting similar or parallel standards due to the ethics-related pressures imposed upon them by Congress via other government regulating bodies. We see this exemplified in the Corrupt Practices Act, Sarbanes-Oxley, Anti-Kickback Act, or the recent requirement for big business to have ethics programs. These principles have long been embodied in FAR & DFARS.
Here are some topics extracted from the FAR Table of Contents from March 1, 1991, to name a few.
FAR Part 3 — Improper Business Practices and Personal Conflicts of Interest
FAR Part 6 — Competition Requirements
FAR Part 23 — Drug Free Workplace
FAR Part 30 — Cost Accounting Standards
FAR Part 31 — Contract Cost Principles and Procedures 
Most of these topical references pre-date 1991
Tony Mackey,
Contracts Relationships Manager,
Public Sector (Federal) Contracts,
HP.
 
 

Contracting Resources

 
The International Contract Manual The original International Contract Manual was initiated as an in-house publication for one of the world's major multinational corporations. Co-sponsored by the Federal Bar Association and the Corporate Bar Association, and produced at the Pace Institute of International Commercial Law, it shares the expertise of many firms and nation-states. The new edition of 2008 is sponsored by IACCM.
 
 
<p><span style="color: rgb(102, 102, 102); font-family: Arial; font-size: 16px;">Under the auspices of the Pace Institute of International Commercial Law, </span><i style="color: rgb(102, 102, 102); font-size: 16px; box-sizing: content-box; outline: 0px; font-family: Knowledge; -webkit-tap-highlight-color: transparent;">International Contract Manual</i><span style="color: rgb(102, 102, 102); font-family: Arial; font-size: 16px;"> covers key issues involved in forming contracts with international business partners, ranging from antitrust and anti-bribery issues to export control and more. The text assists contract managers and lawyers in making correct contract drafting decisions.</span></p> <p style="box-sizing: content-box; outline: 0px; font-family: arial, helvetica, sans-serif; -webkit-tap-highlight-color: transparent; margin: 0px 0px 10px; padding: 0px; border: 0px; font-variant-numeric: inherit; font-variant-east-asian: inherit; font-stretch: inherit; font-size: 16px; line-height: 1.4em; vertical-align: baseline; color: rgb(80, 80, 80); background-color: rgb(255, 255, 255);">These volumes contain contract law and business law information on all major countries and additional jurisdictions. Coverage of the United Nations Convention on Contracts for International Sale of Goods (CISG), a type of international Uniform Commercial Code, is available in volumes 4–5 of this product, available for sale either as part of a five-volume package or separately.</p> <p style="box-sizing: content-box; outline: 0px; font-family: arial, helvetica, sans-serif; -webkit-tap-highlight-color: transparent; margin: 0px 0px 10px; padding: 0px; border: 0px; font-variant-numeric: inherit; font-variant-east-asian: inherit; font-stretch: inherit; font-size: 16px; line-height: 1.4em; vertical-align: baseline; color: rgb(80, 80, 80); background-color: rgb(255, 255, 255);">The International Contract Manual can be purchased at <a href="https://store.legal.thomsonreuters.com/law-products/Treatises/International-Contract-Manual-Vols-1-3/p/100005805">https://store.legal.thomsonreuters.com/law-products/Treatises/International-Contract-Manual-Vols-1-3/p/100005805</a></p> <p> </p> <p><span style="font-size: 12pt"><a href="http://west.thomson.com/store/ad.aspx?promcode=570638"><img alt="" border="0" height="76" src="http://www.iaccm.com/userfiles/image/Newsletter 2008/THOMSON_BANNER_590_Newsletter_Ad.jpg" width="590" /></a></span></p>
 
 

 

From the front line

 
Your questions and answers
 
 

Question 1: Terms and conditions of government contracts
 
14 March 2008: Our CFO would appreciate any information that helps him streamline a basic response to the issue that Ts & Cs of Government contracts are non negotiable. He has particular interest in respect of the Limitation of Liabilities clause
 

Responses
Charles Rumbaugh A very broad question — for example, all government contract clauses have a policy associated with the use/non-use/modification of same by a contracting officer — the FAR, DFARS etc all have that. Several clauses have a requirement that specifics may be added in the special terms and conditions. Then there are provisions that an offeror can propose for negotiation — especially in a sole source situation. Then there are the situations when the Government modifies a FAR ‘required’ clause and a properly issued deviation under FAR Part 1 is required. And, perhaps terms within a clause need to be further defined based upon the specifics of an individual procurement.:
As to Limitation of Liability — again, there are required insurance clauses and most times the government self-insures, sometimes those clauses require CO consent for flow-down, NASA has limits on liability for space, there are government indemnification ‘opportunities’ also.
But all of ‘this’ could/should be part of the policy and procedures of contractors in defining an acceptable tolerance for risk and allocation of same by the contract. www.Rumbaugh.net
David Barrett: Some thoughts:
1. In very large projects in government sourcing in Europe there is some negotiation, particularly when the ‘negotiated procedure’ is used. Negotiation is perhaps a different concept than used in the private sector; a better concept would be discussion and interaction between suppliers and government.
2. I suspect there is much more ‘negotiation’ in the UK and Ireland because these are countries where government outsources a lot — there is not a lot of public sector outsourcing in Continental Europe as yet.
3. A big constraint on public sector organisations is that of equal treatment — in other words they need to be seen to treating all suppliers equally. Of course, that is a wonderful fig to hide behind if one does not want to negotiate!
4. LofL is a particularly sensitive issue because the potential exposure in public sector can be so great. I am bound to say though that real exposure in government is often very low — for example, they effectively cannot incur consequential and economic loss and they don't tend to incur additional costs if things don't work out. Also whilst the LofL might not be what one would like, in general terms most public sector bodies now accept the need to cap liability. I would therefore strongly counsel our member not to look at this in principle but look realistically whether liability is to be incurred. (Also the propensity of public sector to claim is I think much lower than private sector.
5. One tactic I have often used is to appeal to the public sector mandate to get best value for money and/or buy cheap! Often if they are told that an unrealistic LofL is costing a lot (with evidence) they are willing to think about lowering it. Of course a practical problem is that very few suppliers can ever substantiate that the increased ‘risk’ has any financial implication or, at least, that it costs more. I am bound to say that I really do wonder in those circumstances why people get so agitated — particularly if they are within their insurance limits!
David Barrett, Chief Executive, PROCURITAS Limited, London, david@procuritas.co.uk
Associate General Counsel at a US-Based corporation: Our experience is that depending on the government entity, federal, state or local, and the bid or RFP instructions, that you can negotiate certain terms. We often provide a letter of clarification or exception to T’s and C's we cannot manage to and are often successful in negotiating with the government entity. It all depends on the situation, the person in charge and, I would also presume, what is being procured. There may be products or services that create more of a risk so the government is less inclined to negotiate. In our space, MRO supplies, we find that we can often negotiate T's and C's.
Mark Hope: My advice in respect of the UK is ‘know your market and know your customer’. Start by identifying the rules in the relevant government organisation for procuring different types of goods and services using different contracting models. Essentially, you will be able to achieve normal negotiation conditions in some scenarios, for example, big IT procurement, but you won't in others, for example, building works for local government. Ideally, you need to be able to produce a patchwork quilt where you know whether negotiation is possible or not for certain types of products/services to particular organisations using various contracting models. Also, a simple point to consider will be whether the government organisation has some standard terms for the transaction in question, as if they haven't then they are more likely to consider using supplier terms as a base in the absence of a standard set. A good tip is to go and see the procurement team and commercial contracts teams/lawyers to establish the rules.
As an example of the range of scenarios in the UK government market — with local government there will be invitations to tender for products and services where the cheapest fully compliant bid will almost certainly win and non fully compliant bids are discarded and negotiation is not going to be possible — this practically is how ‘Best Value’ is often implemented. Responding requesting negotiation will not work in these circumstances and you are wasting your time. It is better in these circumstances either not to pursue the sale, or accept that if you do want to win this business an alternative approach is required that will contravene your normal business model, for example, unlimited liability. Essentially, you have to decide whether you want to play in that market. Other contributor comments about whether this is real additional risk are valid in my view.
Conversely, an IT deal with local government may well be negotiable, and indeed you may be able to use your own terms as a base. This seems to arise because few IT companies will agree non-negotiable approaches and also because the terms don't exist as a standard set. Outsourcing operates similarly.
Looking from the other side of the fence, it needs to be borne in mind that local government departments with a relatively small budget, compared to say blue chip companies, have a huge number of transactions and hard deadlines for such things as building work, children and adult services, patient care etc, so it would be very difficult for them to negotiate numerous deals.
I do think that it is incumbent upon members of associations such as ours to work from within for the benefit of both government procurers and the sellers. I do not believe that government is not open to persuasion that Best Value could be interpreted in a different way, such that full compliance and cheapest price doesn't always equal Best Value. Nor do I believe that government departments are not prepared to listen to input about the appropriateness of terms and approaches. It may therefore be possible to develop and update terms and tendering procedures. I don't actually think government believes that unlimited liability is necessary. Of course unlimited liability can't really be insured against and can't be of any use unless the supplier has a bottomless pit of cash, and I question whether, for instance, local building companies in breach could pay and also whether such a term is really fair in those circumstances. I think a lot of government organisations would welcome an update of their standard terms and tendering and procurement processes and I suspect many are very old indeed and our input would be invaluable and welcomed. I am sure some of our members are doing exactly that now.
My last point is that things change very slowly in government, so I can't emphasise enough that you need to know your markets. Strategic decisions need to be taken as to what you bid for and the need for a special unit with a different approach to the approach you adopt in the private sector.
Subhash Dhanuka
It has been experienced that the Ts & Cs of Government Contracts are non negotiable, especially in the AsiaPac Region when RFQ process is through public bidding. In this case government customer floats same Ts & Cs to all the bidders. In the case deviations are accepted by the customer, it is applicable to all the bidders (equal treatment). However, in the case RFQ process is not through public bidding, government customer may be open to negotiate a LOL (limitation of liability) clause. The government clauses can be modified by its legal department and, generally speaking, they are not involved in the purchasing processes. The purchasing /contracting officer escalates a customer’s clause/deviations only if the majority of bidders raise an issue. In the case [where the] competition accepts customers’ LOL clause or do not ask for a LOL clause and have no issue, it becomes difficult for that particular bidder who would like to pursue his LOL clause to the government. The better way is that if one can act proactively with the government and the LOL clause is added to ‘Special Ts & Cs’, the ‘Special Ts & Cs’ supersedes ‘General Ts & Cs’.
The basic question here seems to be the non-negotiable behavior of the government buyer. It is true that LOL is a very important issue in this dynamic word and the organizations across the world like to cap their liabilities. Although one can control or mitigate most of the risks, it will be at a cost. And all the costs are added to the price of the opportunity. If this cost is huge, then the price may be greater then the market price. and eventually the proposal becomes uncompetitive. But we must appreciate that the real exposure to additional liabilities in government organizations is on the lower side. Government customers cannot expense public money as per their wish and they have various systems in place. If they would like to incur any additional expenses, there is a very robust process, which is always subject to strict vigilance and audit. It has been seen that Government employees in AsiaPac region generally do not like to take these personnel risks and do not go for incurring additional costs when things go wrong. They tend to send notice after notice and the bottom-line is that they go for drawings against bonds and bank guarantees, if the differences are not resolved. The bonds and bank guarantees value differs from 5 percent to 20 percent from case to case. So, it is better try to negotiate on bonds and bank guarantees — perhaps this could be another idea to reduce the risk in practical terms.
A realistic approach is that one needs to see whether the liability is to be incurred or not. What is the tendency or habits of the government customer to claim unlimited liabilities or damages in that specific country? It is true that, contractually, any compromise in the LOL clause makes the bidder weaker in case of any eventuality but, at the same time, one can really analyze the quantum of the opportunity lost. And perhaps the amount of this loss may be greater then the loss on account of LOL.
If the Ts & Cs are not negotiable and the best lowest price (L-1) is going to win, then the alternative is either to take a business decision and form a different business model for such government customer or to decide whether you can loose business for the LOL clause ( policy decision to be taken).
John McGowan, Director of Risk Management at a Financial Services company, based in US: I can offer perspective on eight years as US Government Contracts Manager for HP, and 10+ years as WW Contracts Manager for HP Test Business and Agilent Tech. We found that 99 percent of those non-negotiable liability clauses were in fact non-negotiable. We took legal advice in many places and concluded that the only strategic risk to enterprise was in US, where court and jury damages could be staggering. In most other countries, liabilities are limited by reason, short of truly high risk ventures, like nuclear power or mining or weapons manufacturing and sales.
Where a clause was truly unacceptable (benefits and profits not in balance with potential losses) we’d propose to use reseller, and often small or small disadvantaged reseller. They would accept the clause, and we would not accept the clause as a flow-down. If the customer sought to enforce a substantial liability, they’d be going after someone with shallow pockets, and often decline to pursue. Governments might complain, but they were no worse than if they’d awarded to a small under-capitalized competitor who enthusiastically agreed to a ridiculous clause in lieu of going out of business anyway if hey didn’t win contract. Occasionally, the status of the reseller provided competitive advantage. Similar approaches outside of US, although care must be taken to limit roles and risks of using local suppliers or bidding agents for government deals. If not careful, you might avoid liability for fault, and be exposed to liability under FCPA or local laws around irregular bidding.
Finally, we’d sometimes just walk away, and let the government know why, and sometimes they’d come back with modified RFP or IFB, and be able to purchase after all. 
Peter Allen: Posting the thoughts from a certified practitioner, Mike Moore of TPI. Mike was the CIO for San Diego County and led the contracting strategy and implementation for outsourced IT services. He's reachable at mike.moore@tpi.net.
Mike writes ... I have not seen a single set of terms and conditions being touted as non-negotiable in the state and local space. I have seen terms listed as ‘key deal terms and conditions’.
I have seen individual deals (like San Diego County) where there were terms and conditions that were ‘fundamental’ to the deal — and may have been viewed as non-negotiable. For example, Terms that require the service provider to continue to deliver services even if the parties are in dispute. This term is fundamental relating to continuance of the government provided services.
I have heard some entities suggest they would not move on the ‘Limitations of Liability Clause’.
I think dialog on this subject would be healthy and a better understanding of the position on both sides would help resolve this. This discussion usually gets handed off the legal team rather than making it a business discussion.
Ultimately, these terms and conditions relate to risk. Government is and has always been fairly risk adverse. Risk always has at least two dimensions — How large is the exposure and what is the probability of occurrence?
Senior Government employee in the UK: The question does not make it clear what form of procurement is taking place — the commercial staff's position will vary depending. However, government will always reserve the right to select on the basis of suppliers; willingness to comply with stated terms and conditions. If, however, a supplier feels that a certain term or condition will create a poor contract, there is no reason why they shouldn't express their views and set out the impact it will have on their bid. My advice in such circumstances is always to offer a fully compliant bid, but if the impact, say on price, is significant then offer a parallel non-compliant bid which sets out the advantages. It is then for the commercial team responsible for the competition to decide how it would wish to play the proposition
Javier Carrasco: I think that, for historical reasons, government procurement systems of developed nations have traditionally adopted certain terms and conditions that reduce a government’s obligations or expand a government’s powers by deviating from the principles and rules of private contract law (for example, special government’s prerogatives to handle disputes or to invoke contract termination under unusual circumstances, inexistence of a breach materiality threshold, and possibility of termination for government’s convenience). However, in the question of indemnification and limitation of liability, I believe there is still some room for negotiation. I agree with other colleagues about the variability of governments' responses with respect to this issue. It really depends on what legal system the government agency operates under (example, common law versus civil law), the procurement method (open competition versus sole source), the nature of the relationship and the contract envisioned (arms-length versus partnership; cost versus fixed price), the nature of the goods and services to be delivered, and the peculiarities of the government agency concerned. From a practical standpoint, the ability of the contractor to substantiate the cap in a reasonable manner and to prove the existence of relevant precedent is usually very effective for the acceptance of liability caps by government officials.
Tim Cummins Further input from the UK's Office of Government Commerce: Naturally, if the opportunity existed, it would be helpful for the procuring team to invest time with potential suppliers before the competition is launched to discuss the requirement and programme — including risk allocation — to reduce the time required for the competition itself and de-risk the delivery phase.
There will be some issues around liabilities that are set by government policy. The particular one I have in mind is the creation of contingent liabilities which have particular rules associated with them — requiring Treasury and potentially Parliamentary involvement. Otherwise the answer will depend, as indicated in previous input, on the form of procurement. OGC Service Desk number/e-mail - 0845 000 4999, ServiceDesk@ogc.gsi.gov.uk
Rene Franz Henschel, Aarhus School of Business: If the non-negotiable nature rests on parliament decisions and statutes, I guess there is nothing to do. However, my experience is that most countries somehow try to divide the contracts into negotiable and non-negotiable contracts; an example can be found in Australia, see: http://www.treasury.sa.gov.au/public/download.jsp?id=2614.
Here, a division is made between contracts above or below AUD5 million, however, even in contracts above AUD5 million, LOL can be acceptable, to be approved by a risk assessment commission.
This sometimes leads to a very practical-flexible approach; the parties agree to divide a contract of $8 million into two separate contracts of $4 million each — however, this might not be in accordance with the spirit of the law.
In general, there is nothing else to do than to calculate and present the risk/loss scenario for the government partner, explain that the risk incurred therefore is unreasonable or that insurance is impossible, and then to explain that you are not able to form any contract with the government partner for this reason if the T´s and C´s are not changed. But whether this ‘take or leave it’ approach will work everywhere, I cannot predict.
Joseph McGrenra I would suggest reviewing FAR 52: 52.000 Scope of part:
(a) gives instructions for using provisions and clauses in solicitations and/or contracts;
(b) sets forth the solicitation provisions and contract clauses prescribed by this regulation; and
(c) presents a matrix listing the FAR provisions and clauses applicable to each principal contract type and/or purpose (for example, fixed-price supply, cost-reimbursement research and development).
Question 2: Extortion for bribes at Customs Offices
9 February 2008: Bruce Horowitz: Extortion for bribes at Customs Offices around the world is one of the most repeated and most difficult anti-bribery compliance situations faced by companies doing business across borders. I am looking for both face-to-face techniques and longer-term strategies that you have used to get major pieces of equipment (not your luggage) out of customs without submitting to extortion, that is, without paying a bribe.
Responses
Charlie Webster: Buy in country whenever possible. Limit cross-shipping as much as possible. Turn this into the vendor's issue on how they service you in international space.
Tim Cummins: I contacted one of the world’s top experts, Alexandra Wrage, the Executive Director of TRACE International.
Alexandra was certainly sympathetic to the problem, but could not offer any silver bullet. She did observe, however, that companies that simply say ‘no’ are meeting with increased success. She explained that smart business people are citing the major fines, penalties and even jail terms now being imposed on those found guilty of corruption — and that, while foreign officials may not like this removal of their source of funds, they do understand that there really is no choice.
So the stock answer seems to be to make sure that you and your staff have the facts in front of you and treat this like any other negotiation — explain why you will not and cannot accede to their demands. And if you want to find evidence to support this, the TRACE website is a great place to start.
Our conversation moved on to cover some of the contractual methods open to companies with regard to anti-bribery measures. This is where things remain tricky. Many companies are today focusing on contract terms that require their suppliers to adhere to regulatory and other ethical standards — bribery, environmental, child labor all being examples. Increasingly, they insist that such provisions are passed through to sub-contractors and service providers. The problem is, how is this validated?
Self-certification is one choice; but some companies go further and insist on a right of audit (which is what the US Department of Justice recommends). This is potentially a double-edged sword, because if you have the right of audit and an exposure then arises, you may be judged negligent if you were not active in pursuing your audit rights.
Realistically, most companies simply cannot afford the overhead of conducting regular audits of their global supply base. So perhaps self-certification, with extensive consequences for any non-compliance, may be the best answer right now. And maybe it also means that companies need to consider avoiding smaller, local suppliers who may find it harder to push back against corruption. By working with larger multi-nationals, the transaction price may be higher, but the business cost will be lower. And perhaps the loss of trade will be an added incentive to foreign governments to act against corrupt practices.
 
 

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Editor
Kerrie Tarrant

Consulting editor

Tim Cummins, CEO, IACCM

Vice President of Research and
Advisory Services, and Advertising
Sales enquiries

Katherine Kawamoto

Editorial Panel
Mark David, CommitMentor, UK.
Rose Gazarek, BAE Systems, US
Craig Guarente, Oracle, US
Helena Haapio, Lexpert Ltd, Finland
Christof Hoefner, IBM, Germany
Bruce Horowitz, Attorney/Arbitrator, Ecuador
Doug Hudgeon, Macquarie Bank Ltd, Australia
William Knittle, BP, UK

Automation and technology panel
Mark Darby, Alliantist, UK
Ashif Mawji, Upside Software Inc, Canada
Tim Minahan, Procuri, US
Terry Nicholson, Selectica, US

Address: International Association for Contract & Commercial Management (IACCM), 90 Grove Street, Ridgefield, CT 06877 USA. Ph: (1) 203 431 8741, www.iaccm.com
Editor: ktarrant@iaccm.com
Sales enquiries: kkawamato@iaccm.com

This issue may be cited as (2008) 1(4) Contracting Excellence.
ISSN: 1937-9765; ISSN: 1937-9757

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