From lowest price to best outcome: A welcome and necessary turning of the procurement tide
Three years ago, New Zealand made headlines around the world with the announcement of the first Wellbeing Budget. Minister of Finance Grant Robertson announced ‘the first steps in a plan for transformation – a transformation of our economy, a transformation of our public services, and a transformation of the way we work together to improve the lives of all New Zealanders’.
This, he said, would be backed by a Government that is ‘committed to being responsible – not just fiscally, but socially and environmentally’ to lay ‘the foundations for New Zealanders to have better lives in the decades to come’.
Since then, the Government has been focused and consistent in using its considerable procurement muscle ‘to support wider social, economic, cultural and environmental outcomes that go beyond the immediate purchase of goods and services’. This has spawned a dozen terms that have needed translation – Broader Outcomes and Public Value to name just two – as the Government has worked to shift the dial across ministries and industries that have relied for decades on the traditional procurement values of time, cost and quality.
So how far have we come since then, and what still needs to happen for buyers and bidders across the infrastructure sector to embrace it fully? MinterEllisonRuddWatts asked this question of Adrienne Miller of the Infrastructure Sustainability Council, New Zealand Infrastructure Commission Te Waihanga’s Ross Copland, Transpower’s Alison Andrew and Rosie Mercer of Ports of Auckland.
Price, value and rhetoric
"People recognise that buying solely on price is a mug’s game, and has always been.” - Alison Andrew, Transpower
Certainly, in my industry, people recognise that buying solely on price is a mug’s game, and has always been,” says Alison Andrew.
“They see value in an approach that seeks more collaborative relationships between buyers and suppliers, with the public sector as a key driver.”
As the national provider of an essential service, Transpower requires equipment that lasts for 50–60 years, with no excuses for buying something cheaply that needs replacing 5–10 years down the road. Andrew says that although this is reasonably straightforward for asset life, it is more challenging to put a dollar price on social factors.
“We have an enormous responsibility to buy for value. We must ensure our assets are robust, with long life, and we have to buy responsibly, causing no harm or damage. However, our shareholders and communities won’t thank us for taking risks on things that were trendy at the time. So, the question is how do you define a social outcome.”
This is just the first of the challenges that have emerged over recent years. Another, according to Adrienne Miller, is the willingness of the infrastructure sector to believe the rhetoric.
“There’s good reason for that. The industry has been burnt previously with non-price attributes being emphasised in procurer rhetoric, but responses on those attributes not receiving sufficient weighting at the tender box. Some procurers have reverted to lowest cost price behaviour under pressure, which has led to a healthy degree of scepticism in the market, as well as two major market misconceptions.
“The first misconception is that it takes longer to design and deliver sustainable outcomes. The second is that it costs more to procure sustainably. I challenge both of these. You have to look at the big picture and the whole life cycle of the asset. One of the reasons I work for the Infrastructure Sustainability Council is that we have a comprehensive framework that addresses this.“
Rosie Mercer believes organisations need to take an integrated long-term view rather than seeking short-term gains.
"The wellbeing viewpoint requires organisations to develop a model so when decisions are made with a short-term view, they understand the impact these decisions will have or the potential lost opportunities further down the track.” - Rosie Mercer, Ports of Auckland
“The wellbeing viewpoint requires organisations to develop a model so when decisions are made with a short-term view, they understand the impact these decisions will have or the potential lost opportunities further down the track. An integrated strategy model that includes factors like human capital, intellectual capital, social and relationship capital, plus natural capital, is probably one of the biggest keys to unlocking a systems approach. If you use this approach internally and then across the whole infrastructure sector you can see the impact that you might have on the long-term outcome.”
This prompts Adrienne Miller to say to organisations wrestling with all of this:
“Be reassured that ministries and agencies now really do care about non-price attributes. So, everyone should elevate the conversation, make it an agenda item every time. It is not just a risk issue; it is increasingly an existence issue, a business viability issue.”
On the topic of viability, Alison Andrew adds that the urgent need is to facilitate entry into New Zealand for critical workers. However, she says, a more important matter affecting New Zealand’s prosperity longer-term is a skills deficit.
"There are not enough STEM-qualified people coming out of university and into our business, nor enough Māori or women coming in.” - Adrienne Miller, Infrastructure Sustainability Council
“There are not enough STEM-qualified people coming out of university and into our business, nor enough Māori or women coming in. I would love to have a better plan for capability. The whole world is trying to decarbonise and produce renewable energy as fast as they can. Anyone with skills in these areas is hot property.”
Measure and verify: common standards are the key to the future
One of the big challenges in taking a value-based approach has always been creating measures of progress that buyers and bidders universally accept. Ross Copland comments one of the major challenges is that although we know intuitively that some of these actions are the right thing to do, it’s difficult to measure.
“Engineers in the room would be saying, if we don’t know what it is that we’re trying to optimise, we can’t solve this problem. If it isn’t well defined and articulated simply, it becomes abstract in nature and subjective around what these standards mean for a project or how you might approach it differently.”
Adrienne Miller agrees that it comes down to consistent measurement and tools the market will readily embrace.
“You have to be able to demonstrably prove to all stakeholders that you are making progress. Shareholders and investors need to see it, staff need to see you’re acting with authenticity and purpose, and customers will walk if they can’t see it.”
However, she says, the Government is having difficulty translating this desire into a single coherent set of practical measures.
“We need common data standards, and we need them quickly. It needs to happen, and I believe it is being worked on. The need for a baseline in data, a common metric to measure and benchmark against is not going away.”