In my February 17th post “Supply Chain Finance (Part 1): How do governments finance suppliers when their own credit worthiness is in question?,” I broached the concept of governments financing supplier involvement in the acquisition process as a means of addressing the steadily declining responses to public bids.
It is not that outlandish an idea on many levels including the fact that there is a general belief that “Supply chain finance is clearly an option that all large corporates should consider providing” within the private sector. Why not then in the public sector?
It is also a reasonable consideration given that declining supplier participation in the government tendering process usually leads to increased costs and declining service levels, not to mention the negative impact on innovation.
My intention with this post, which was to be Part 2 in the series on Supply Chain Finance, was going to look at the means by which governments could offset the onerous costs and elongated time line for suppliers (especially SME’s) to win their first contract. According to a recent AMEX study it takes 19 1/2 months at a cost of $98K per year to pursue and win a government contract for the average supplier. In a down economy, this for many small to medium enterprises is too costly of a process on which to embark with no guarantee of success.
However, and this is a noteworthy consideration that cannot be ignored, the question is not one of how governments can help to fund or offset the expense but whether or not they should in the first place.
It has started to become abundantly clear based on poll/survey responses to date that a vocal majority believe that any efforts on the part of a government to subsidize suppliers in terms of lessening the burden associated with the tendering process, is a definitive no!
Despite my references to the fact that 80% (if not higher) of all government contracts are being won by what Mark Amtower calls the usual 20% suspects, and that the data shows that the cost of goods and services are higher due to the steadily declining number of suppliers (especially SMEs), who are responding to bids, most were adamant that supply chain financing was not a good idea.
Examples of the responses I have received are as follows:
The cost of new business acquisition has always been the burden of the suitor or the selling party, the notion that a client/the government would reimburse a supplier for business development costs would defy logic and standard practice.
Scott Miller – National Account Manager at MLT/Instructing Technologies
The short answer is no, the gov should not finance a small business entrance into gov. contracting. It would not in the long run promote entry of small business into gov. contracting, but would open yet another door to fraud and corruption.
George Fozzard – quality analysis at i oasis
Not a chance. This is a cost of doing business. If you want to sell to enterprises or retail it also costs a lot of money to get up and running.
Now if the govt. wants you to build something specific for them that you can’t sell elsewhere then they should guarantee orders or pay NRE.
Brendan Curley – Business Development / Technical Sales
No. Let me Clarify. NO!
Greg Poulos – Production Manager providing AV services for Special Events
Those whose responses were not in the negative, contended that there are many programs already in place to assist vendors, in particular SME suppliers, to affordably pursue and win government business. Here is just a sampling of these comments:
The federal government is already “financing” business development efforts for a host of “disadvantaged” businesses through programs such as veterans preferences, minority set-asides, HUBzone preferences, small business set-asides, native American owned business preferences, etc. Who else would you like to add to the list?
Robert Bragaw – Sr. Director of Contracts
The government does finance the process. It allows progress payments on fixed price contracts for small business as often as twice a month. It also allows a small enterprise to bill for commitments to suppliers without having paid the invoices for same.
Among the pool of small, small veteran-owned, small minority-owned, HUB Zone and small women owned businesses we have assisted over the last 15 years there have been many who have developed a sound approach to entering the field and managed the expenses quite well.
Kenneth Larson – Retired Aerospace Contracts Manager, SCORE Volunteer Counselor and Founder, “Small to Feds”
In the end, I am still inclined to go along with Heidi Titchenal, an editor at Wordsmith Pros who said, “Definitely a thought provoking question. You need a certain liquidity to deal with the government. They have endless legal resources and from time to time you’ll need an attorney (or legal team) to resolve even relatively minor issues.”
Heidi then concluded by saying, Government contracting is not for the faint of heart.
All this of course brings us back full circle to where we started in that we are not any closer to addressing the growing problem of declining supplier participation coupled with rising costs and poorer service levels.
This leads to another interesting question . . . is the availability of supply chain financing programs for SMEs in and of itself going to re-energize the government supply base? Not likely, as other problems such as risk assignment and the workload associated with bureaucracy administration also present major hurdles that have to be addressed.
But, and in line with the comment by expert author Judy Bradt that it is essential for a vendor to have a good relationship in place with their bank before deciding to pursue government contracts, any undertaking that lessens the suppliers reliance on their financial institution is a big step that can bring these important players back into the competitive bid process.
In this regard, I will once again refer back to my opening paragraph from the February 17th post in which I shared an excerpt from an article regarding supply chain finance. For those who may not have had the opportunity to read the 17th article, here is the opening paragraph to which I am referring; One of the first things the government seems to have accepted is that, at least in part, the answer to the problem of SME access to better channels of credit is going to have to come from somewhere other than just tapping the big banks as in the past.
While I doubt that there will ever be a consensus on supply chain financing in the public sector, it is safe to say that there are a myriad of things that need to happen before we actually have a transparent procurement process that delivers maximum value to the government and to taxpayers. Lessening supplier reliance on private financing through banks is one of many important first steps.
After all, if it was good enough for the auto industry . . .
Look for Part 2 in the series shortly. It will to say the least be very interesting.