Why It’s Dangerous to Judge on Price at the Expense of Quality
The news that the cervical smear test contract was awarded in 2012 based on the lowest price available isn’t surprising. Though the initial award in 2008 and its renewal in 2010 appear to have been based on the “most economically advantageous tender” method it appears that there was a change in policy with regard to how these contracts would be awarded. It would be interesting to find out if this change in approach was typical throughout HSE procurement practices.
When taking part in a competitive procurement process it’s common to hear quips about competitors “buying the business.” This is usually down to their capacity to consistently price their services lower than anyone else.
How do they do this? A well run and financially prudent company who invests in processes, people and new technology will often reach a level of consistency that is reflected in their pricing. Cutting edge technology may give them a significant competitive advantage through reduced cycle times and dramatically enhanced capability. Multi-skilled staff may be used across a range of contracts, keeping headcount in check and payroll at an acceptable level. Innovation can confer an advantage for years, particularly if the company holds a number of industry-changing patents. All this assumes that the company is run ethically and doesn’t implement work practices that impact the environment negatively and run its workers into the ground.
If a buyer receives a tender that is priced significantly lower than the competition, he or she is required to look for clarification from the supplier in question before binning it. If the clarification indicates that the company has vastly superior processes, technology, or patents then the buyer is on safe ground in allowing the supplier to remain within the competitive process. If it’s obvious that the supplier’s work practices are unethical and unsustainable it behoves the buyer to reject the bid. Well, that’s the theory anyway.
A few years ago one of my clients and his competitors were frustrated by the entry into their market of a very low cost service provider. The company was headquartered outside of Ireland and was owned by private equity. The key buyers within this particular industry indulged the new entrant and within a year it had snapped up a large number of important contracts within the sector. The type of work involved is specialist, but also very labour intensive.
After a while the low cost provider’s staff began to defect to other companies within the sector, complaining about poor pay and working conditions. Before too long the company was seriously under resourced and unable to hit its SLAs, resulting in the loss of a significant number of the contracts. These were then redistributed among the industry’s top performers, my client included.
I was able to examine a number of the RFPs subsequently. Of the ones I saw, each used the “Most Economically Advantageous Tender” framework, which enables the contracting authority to take account of criteria that reflect qualitative, technical and sustainable aspects of the tender submission as well as price when reaching an award decision. The weightings heavily favoured price at the expense of the other criteria resulting in the provision of a cheap and low quality service.
Given that price was the only game in town during the recession, it’s plausible that the public sector bought more than its share of third rate services. It’s worth remembering though, that in some instances a third rate service may result in you sitting on the phone for half an hour or more, but in others it could potentially cost people their lives. So, buyer beware!
Hopefully, you’ve enjoyed this piece and that you now have a better understanding on the dangers of awarding a contract based on price over quality.
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