Create value through your purchasing
April 28, 2017
Please note that this blog presents research-based insight to further the discussion of innovation procurement. This posting is a snapshot of an academic working paper intended for publication, available by request to email@example.com.
Modern governments face pressures of digitalization and a growing number of ICT solutions. By tapping into innovative solutions from the market, public outsourcing of ICT is one strategy to reduce public costs and increase the quality of end-user services. Reaching this goal depends on how well a tender call can support the business case for a procurer’s outsourcing project – whether the realized benefits outweigh the costs.
In this blog post, we provide a current example of public procurement of ICT by the municipality of Groningen in the Netherlands. We highlight how the tender design may challenge its business case, given economic procurement trends.
The municipality of Groningen sought to reduce the relatively high number of suppliers in their ICT portfolio to a more manageable number. To this end, they pursued a business case to motivate a procurement for outsourcing ICT services. From a budget of €27 million, the business case predicted higher quality, flexibility, and innovation. Using this approach, they predicted ICT structural savings of $4.5 million seven years after implementation, with a break-even point in the third year. The business case details greater internal maneuverability of a (downsized) internal ICT cluster and limited transition risks from the chosen process. In an effort to realize these expected benefits, the municipality published a call for tenders using a competitive procedure with negotiation (concurrentiegerichte dialoog) for a contract worth €66 million. This contract is awarded to a single supplier over a six-year period, and can be extended twice for two years each time. The procurement is currently in the first stage of tendering, to be complete by early 2018.
The business case motivating this tender supported the municipality's decision to outsource based on high expected benefits compared to costs. However, we do not predict that the cost savings will be realized, due to the chosen procedure and concentration (size and division) of the tender.
Regarding the procedure, the competitive procedure with negotiation reduces the number of suppliers while increasing the specificity of the demand through a stage-wise process. Due to the close connection between the reduction of competition and the further definition of services and cost aspects, this procedure often results in legal action by losing suppliers. For example, from 2012 to 2016, there were thirteen lawsuits in the Netherlands for procurements that used a competitive procedure with negotiation; six of these regarded ICT delivery. This means that approximately half of the tenders for ICT using this procedure resulted in lawsuits, making the risk of the procedure much higher than for other procedure types.
Figure 1 - Number of ICT tenders in the Netherlands from 2013-2015, according to procedure type and in- or out-sourcing.
The contract for the tender is atypical in its concentration: it is larger than all but a single other ICT tender in the Netherlands in the last three years, and is awarded to a single winner.  As well, the prize of €66 million is more than twice that used in the business case analysis, which significantly increases the costs and reduces the return on investment. Small and Medium-Sized Enterprises (SMEs) will have difficulties in offering the range and intensity of services requested by such a large single-lot procurement. This can also increase the costs of services provided, due to fewer and less specialized firms who will lead the competition. Additionally, if there are knowledge asymmetries and the procurer has additional requests after the tendering and contracting is complete, then the procurer will incur even more additional costs. This means that the break-even point will be pushed back, the return on investment reduced, or both.
Figure 2 - Distribution of value of ICT tenders in the Netherlands from 2013-2015, for in- and out-sourcing. Orange lines depict a change of scale.
Completion of this tender is likely to lock the municipality into the solutions of a single supplier, which we predict will be a large firm. As it is not divided into lots, this tender protects the winner from competition for this assignment for potentially ten years. However, if the contract is not extended to at least eight years, then the €4.5 million of savings will not be realized. Typical contracts in the ICT industry are must shorter, at only three to five years, due to the high rate of innovation. If there are no performance incentives in the contract, it is less likely that the municipality will receive newer products and services over the duration of the contract, to the detriment of service quality to the public. Finally, given the size of the tender, there is a high likelihood of high transition costs at the end of contracting and when the municipality wishes to transition to another supplier.
Figure 3 - Distribution of number of offers received per ICT tender in the Netherlands from 2013-2015, for in- or out-sourcing.
In examining Groningen’s outsourcing procurement, we see a mismatch between the business case and the tender design. The tender forecloses the market in what is otherwise a competitive and innovative industry, which may result in cost and risk increases, and benefit reduction. Dividing the tender into multiple lots would allow more specialized firms (who are often SMEs) to compete within each of these lots, supporting higher price-quality ratios. Including standards within the tender then ensures compatibility between the different lots, and thus the different providers of complementary services. Contractual clauses can also help support the business case, as they are part of negotiation which influences the dynamics of competition. Importantly, performance requirements would support continued innovation, whereas a well-defined exit clause (including minimum duration and required data formats) would reduce transition costs.
This example shows that while outsourcing ICT may be attractive to governments seeking higher quality at a lower price, a tender’s effect on competition and innovation can have important consequences for the value pursued by a procurer’s business case.
 Eindrapport greenfieldanalyse Gemeente Groningen. Versie 1.0. Quint, Dare to Challenge, Gemeente Groningen.
 Outsourcing generieke ICT - Referentienummer: 6-2017. https://www.tenderned.nl/tenderned-web/aankondiging/detail/publicatie/akid/0ea498f0da4155de9e26e1e881f6d425
 In the selection phase, the eligibility criteria dictates which companies may participate by stating the grounds for exclusion and minimum requirements. In the next phase, the procurer uses the award criteria to select five parties with the highest points. In this tender, the award criteria requires that the entire scope of the purchase is covered in a maximum of five references. These five suppliers who are then invited to make an offer by providing evidence, upon which they are scored using the award criteria to choose. The two tenderers with the highest points will be invited to negotiate; the third choice will be ask to take a reserved place. Finally, one of these companies will be awarded, and if this party does not perform then the second party can be chosen (who will also have an agreement that they are bound to this under the condition that the first choice does not perform).
 To provide a snapshot of public procurement of ICT in the Netherlands, we used data for contract award notices (CAN) of Dutch procurers over the years 2013-2015 inclusive, published at the European level. Source: Tenders Electronic Daily (TED) - public procurement notices from the EU and beyond. Retrieved from https://data.europa.eu/euodp/en/data/dataset/ted-1