Is supplier incumbency a major problem with government contracting?

Posted on July 20, 2011

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NOTE: The following blog was originally posted in the new Supplier Relationship Management Portal.  Remember to visit the Portal for more great articles and events.

When you consider the fact that a good many government procurement experts – including those involved with the procurement process itself, have routinely suggested that 90% of all contract winners are decided before an RFP is actually issued (check out the Al Gordon interview under the Videos Tab of this Portal), one cannot help but wonder if it is worthwhile to pursue opportunities for which there is an already established relationship with an incumbent supplier.

This is certainly a topic that comes up on a regular basis as demonstrated by today’s announcement in the IT Business Edge that the U.S. Air Force has awarded Intelligent Software Solutions (ISS) a $49.9 million contract to build a cloud-based system that will share intelligence information across multiple military and federal sources.

According to the Government Procurement Exposed website, this one-year contract extension is just a fraction of the $500 million award which the company obtained from the same government arm in 2009.

While I do not at this point have any specific details as to the tendering process for the extension including the other possible bidders, it would be reasonable to assume that ISS had at least to a certain extent, the inside track on this one.

Certainly IACCM’s Tim Cummins’ post in his Commitment Matters blog this morning raises, if not confirms the possibility of a winning bidder predisposition when he writes:

Recent discussions have included the ethics of ‘false’ bid events (e.g. where the driver is not to replace the incumbent, but to force price negotiation). Another related to the economics of replacement, especially where there are large capital investments.

Even though these kinds of assertions are controversial and certain to inspire much debate, the real question to me has always been centered on whether or not the influence of an incumbency relationship should be considered wrong in the first place?! Especially given the very real premise upon which people do business . . . specifically, we buy from those we know, like and trust!

This is a point that was driven home by expert author Judy Bradt who has helped more than 6,000 suppliers win in excess of $300 million in U.S. Government contracts, when she made the statement that “the process for winning government contracts is truly based on the ability of a supplier to legitimately and transparently win preference with government buyers.”

One of the best ways to gain said preference is transitioning from a prospective supplier to an incumbent supplier.

After all, when a supplier wins a contract – especially a long-term contract, they ultimately end up working in close proximity with government personnel on a day-in and day-out basis.

Let’s think about it logically for a moment . . . the larger the expenditure, the greater the perceived risk and desire to succeed (or avoid failure). In a situation such as with the ISS contract, with whom are you more likely to do business? A known and proven entity by way of the relationship you have established over the term of the contract or, the new supplier with whom by comparison, there has been little if any meaningful contact beyond the RFP exercise itself? Or to put it in more everyday terms, if your taxes are being audited by the government are you more inclined to deal with an accountant you know well, or are you going to scan through the equivalent of being on a standing offer yellow pages?

Before you get the impression that these are merely personal musings, let’s look at some statistical reference points such as a report prepared under the Ontario Buys program that found that the majority of purchasing people tend to limit their procurement to 4 or 5 known vendors as they did not want to take the risk of engaging a supplier with whom they are unfamiliar.

Now let’s examine the other side of the proverbial transaction table.

As discussed earlier in this post, after investing a significant amount of money and resources in order to respond to a bid, the winning supplier is usually engaged for a period of several years during which time they are going to form strong working relationships with government employees at all levels of the public sector hierarchy. The greater the expenditure of funds combined with the complexity of the service requirements associated with a major contract, the deeper and more significant these relationships must become to ensure the that the required level of service is achieved.

Think of it this way, you go to see your doctor because you are not feeling well. He or she asks you about the symptoms, and you say I am not going to tell you. It’s confidential. Will the doctor be able to effectively treat you?

Communication builds a rapport that leads to trust and yes the natural formation of a relationship. You cannot ultimately succeed in any endeavor if communication, trust and a relationship are not established.

To now expect that the forging of such essential bonds is not going to provide the incumbent supplier with a distinct advantage is both unfair and unrealistic.

This of course represents the proverbial fork in the road or contradictory nature of the tendering process in that to many this natural evolution of collaborative kinship is somehow wrong or affords the incumbent supplier with an unwarranted advantage in future bids. Well yes it does, and so it should!

After all the incumbent supplier is the one who has made the significant expenditure of resources and time to service the contract in the first place. Attempting to artificially create a level playing field by penalizing them for doing their job is counter-productive.

Now I am certain that there are some who upon reading the above would point out that the absence of the necessary checks and balances associated with the tendering process will lead to a complacency on the part of the incumbent supplier resulting in an erosion in service and a corresponding increase in costs.

If you believe in the old adage that absolute power corrupts absolutely, then such concerns would seem warranted. Truth be told, and based on actual experience, this is a factor that is indeed worth considering . . . within the framework of a balanced view mindset.

What is a balanced view mindset?

Quite simply it means that buyers are not forced to comply with a false set of “transparency” standards that contradict the way that people naturally do business.

From the supplier side, it means that they do not fall for the illusion of a level playing field based on a right to compete, but instead pursue government business based on targeting opportunities that play to their product and/or service offering strengths.

Competing in an arena of individual strengths is the ultimate level playing field, and creates the ideal circumstances for achieving a “best value” outcome.

What are your thoughts?