This is an original Trees with Character column.
Is it legal to minimise risk in procurement?
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Ten Sentence Summary
- To achieve a particular aim, in support of the mission and or adding to the bottom line, organisations have to procure services or products.
- Increasingly often these services and products are so complex that it becomes impossible for an organisation to identify the characteristics by which to distinguish between competing offerings.
- Procuring such complex services or products poses a risk for the organisation: getting it wrong may have a negative impact on the mission and or the bottom line.
- In procuring complex services or products, traditional procurement – using requirements, contracts, price and or negotiation – merely minimises the impact of selecting a non-performing vendor.
- To minimise the risk for an organisation, the expert-vendor is to be selected: the vendor who can transparently demonstrate to have the expertise and the solution to achieve the organisations’ particular aim.
- The vendor will be able to transparently demonstrate to be the expert by using relevant and easy to understand information, and thus by avoiding details and technical terminology the organisation will not be able to understand.
- Instead of scoring complex functionality and features of a service or product, an organisation can rank (‘pre-award’) vendors based on their relevant expertise as expressed in an easy to read ‘quality document’ of only a few pages.
- The vendor who ranked first will be awarded only after making it transparent that, with the scope of his service or product, the organisation’s aim will indeed be achieved – minimising the organisation’s risk.
- But, in the context of the European public procurement law – so the vendor who took us to court asked – is it legal to rank vendors based solely on the scoring of a quality document, without any technical information to describe the solution?
- The answer is yes, as long as several conditions are fulfilled – and those the judge stated in the ruling.
For more information on the procurement method used (Decision Free Procurement), the case, the conditions to be fulfilled, and the lessons learned, you are invited to read the rest of the article.
As the project manager responsible for the procurement of innovative technical equipment and related services, with a price-ceiling of 80 MEUR, I wanted to get it right. A consortium of three hospital organisations were, literally, going to build a clinical facility around this equipment. Because of the resulting vendor lock-in, it was clear that the continued operational success of the facility depended on the expertise and vision of the vendor. More so than on the performances of today’s equipment.
To all involved in the process, it was clear early on we would be asking for trouble trying to assess the relative importance of all of the equipment’s various features. Instead of compiling a long list of requirements, we opted to define our aim, what we wanted to do, and how we were going to use the equipment. Rather than to ‘buy equipment’, we set out to identify the ‘expert-vendor’: the vendor who possessed the expertise and solution needed to achieve our aim, now and into the future.
The procurement approach we used was Best Value Procurement (or ‘Decision Free Procurement’), the tendering procedure we selected was the ‘competitive dialogue’ (with the ‘dialogue’ primarily an opportunity for the vendors to ask us questions). Within a couple of months we had written our tender guidelines, started our tender, and then scored, ranked, and so identified a vendor.
And then I found myself in court in The Hague. With our lawyer and our procurement officer. Waiting for one of the lawyers of the vendor ranked third to stand up and start his plea. I was about to hear, 15 pages long, how I and my team had understood nothing of the guiding principles of the European public procurement law. Identifying a vendor based on expertise? Scoring a quality document no more than a few pages long? Isn’t that inherently subjective?
The logic (and method) of identifying the expert-vendor
When you need help to achieve your aim, you want the expert-in-achieving-your-aim to help you. The expert will know what to do. The expert will be able to explain to you how what he does is necessary to achieve the aim. And as the expert knows what has to be done next, the expert doesn’t have to make decisions. Decisions are conclusions reached after consideration. When something needs to be considered, it is not transparent. When it is not transparent, it is not transparent to the non-expert. If the non-expert arrives at a conclusion, risk is increased.
In order to minimise risk in achieving an aim, the buyer has to identify the expert-vendor. To do so without making decisions two things need to happen. First, the buyer’s aim must be unambiguous and understood the same by buyer and vendors. Second, the vendors must make it fully transparent they understand the aim and have the expertise to achieve it.
The latter the vendors do by producing a short quality document (less than 10 pages), and by selecting up to three key people to be interviewed by the buyer. In the quality document the vendors make performance claims, and identify the main risks and opportunities in realising the aim. These claims are to be substantiated using easy to understand language. This transparency the vendors achieve by using metrics, and avoiding details and technical or specialist language the buyer does not understand. The vendor’s people who are key to achieving the aim corroborate this in an interview, providing further proof of the vendor’s expertise.
But now, in the courtroom, the question I was asking myself was as sobering as it was disturbing. Could it actually be illegal to minimise risk in procurement?
The legal challenge
The part where the ‘expert vendor’ is identified (the pre-award part) was challenged in court. The vendor’s lawyers deemed the awarding criteria not transparent and objective, and thus breaching the directives of the European public procurement law as established in court. Indeed, scoring quality documents and interviews were perceived to be inherently subjective. Consequently, the resulting ranking was arbitrary and could not be transparently motivated. The tender was unlawful, and had to be done again from scratch.
That the tender was unlawful was allegedly demonstrated by the outcome of the ranking. It was argued that the vendor who ranked first lacked ‘the necessary experience in delivering the equipment’. Furthermore, the quality of the plaintiff vendor’s equipment was insufficiently taken into account. That the buyer needs ‘some level of expertise’ to procure complex equipment ‘goes without saying’. Indeed, technical information is ‘quite simply necessary’ to describe performances and characteristics of complex equipment.
Unaccustomed to quietly listening for almost 40 minutes how months of diligent work and careful preparation were eloquently reduced to careless – no, criminal sloppiness, I wasn’t feeling all that great leaving the court room. The lawyers’ plea demonstrated they continued to miss the point with respect to transparently communicating expertise. But what about the ‘conflict’ with the directives of procurement law? Was scoring quality documents contrary to the principle of objectivity?
Our lawyer had heard some other things, including a procedural issue, and was in good spirits. It did nothing for mine. The stakes were too high, and tickling my stomach for three long weeks awaiting the verdict. The project’s timeline could ill afford redoing the tender. Let alone redoing it using a procurement method we all knew carried large risks.
Could it be that our tender guidelines had, perhaps, still not been clear enough? Did they have a point we had not been transparent enough ourselves in explaining why the vendor ranked first ranked first?
Could there be even wider ramifications? We had been so careful to implement Best Value Procurement/Decision Free Solutions in its purest form, that, although the approach itself was not on trial (only whether, in our tender, we had stuck to the tendering principles), it practically came down to the same thing. Was there a possibility that we, indirectly, could become responsible for ‘thwarting’ an approach to procurement which not only minimised the buyer’s risk, but which had been run successfully 2000 times in a variety of countries already?
The aim of procurement
In a world where products and services becoming increasingly more complex (and costly), the role of procurement becomes increasingly more important as well. When the organisation lacks the expertise to clearly distinguish between vendors’ solutions, procurement plays a pivotal part in minimising the risk. Especially when solutions need to be procured which are to contribute to the organisation’s mission, and or bottom line, for many years to come.
Procurement is to understand the business requirements, to determine the method to award contracts, and to support the organisation’s goal and subjectives. In purchasing products and services, procurement traditionally minimises risk by aiding the organisation in listing requirements, in how to score them, by guaranteeing performance through legal contracts, and by negotiating a good price.
The organisation’s risk is that it procures a solution that does not maximally contribute to its mission. But, generally, it is not that risk which procurement minimises. What gets minimised is the impact of selecting a non-expert vendor. Instead of ensuring that the organisation does not get hit, traditional procurement puts in great efforts to soften the blows.
Listing requirements for a complex solution you-are-not-an-expert-in does not minimise risk. At best it caps the performance you may expect, while simultaneously setting a goal for low-performance vendors to meet. Legal contracts will not make a low-performing vendor perform well and in the interest of the buyer. It only invites him to shift his full focus on meeting contract conditions. Making price a prominent awarding criterion opens the door all the way for strategic tendering, and may reward today’s low-cost solution over long term productivity and innovation.
When the organisation is in need of a complex (often capital intensive) solution to meet its aims and challenges, it really is in need of the vision and the expertise of the vendor who understands these aims and challenges best. To ensure the solution is affordable the organisation is to determine a price-ceiling first: only solutions below the price-ceiling will be considered. As is demonstrated time and again, when asked to limit the scope to what is needed to achieve the aims, the expert-vendor knows best what is required, is the most efficient, and has the smallest risk – and thus automatically competes on price [Kashiwagi, 2016].
That is how risk gets truly minimised: by identifying the expert-vendor whose solution is below the price-ceiling, and then creating the conditions to maximally utilise the vendor’s expertise in delivering the procured products and services. This is known as Best Value Procurement (BVP), or Decision Free Procurement.
The principles of Decision Free Procurement
Next to BVP the term ‘Decision Free Procurement’ (DF Procurement) has been coined. This in recognition of what needs to be avoided to minimise risk: decisions (Verweij, 2017). Decisions increase risk, as decisions are made by those to whom something is not transparent. In procurement decisions are to be avoided in identifying the ‘expert vendor’, and, once the contract has been awarded, in executing the contract. As has been described in [Verweij, 2016, 2016a], the first principles to be observed to avoid or to identify decisions – collectively labelled TONNNO – are: Transparency, Objectivity, No details, No requirements, and No relationships.
With these principles in hand, the question whether minimising risk in procurement is legal when held against the directives of European public procurement law can be addressed.
The European public procurement directives, as interpreted in the case-law, expresses three guiding principles: transparency, equal treatment, and proportionality (Weller, 2011). Of these ‘transparency’ DF Procurement identifies as a first principle to avoid decision making. The guiding principle of ‘equal treatment’ follows from i) not excluding vendors from the tender process based on the buyer’s decision making in defining the aim (e.g. by including ‘details’ or ‘requirements’ which steer the solutions that may be proposed away from certain vendors), and ii) from avoiding decision making during the ‘pre-award’ phase during which the ‘expert vendor’ is identified. For example, if the aim is not measurable (objectifiable), then the buyer tends to make a decisions to determine when the aim will actually be achieved (and which vendor comes ‘closest’). If some vendors have greater access to the buyer’s time or information than others, than this defines a ‘relationship’, etc.
Whether the principle of ‘proportionality’ has been complied with in a given instance requires a two-step enquiry: first, determining “whether the measure at issue is appropriate for attaining the objective pursued” and second, determining “whether the measure at issue goes beyond what is necessary to achieve the objective” (Weller, 2011). For example, if the buyer introduces the need for ‘sustainability’ within its aim to achieve the broader objective (e.g.objectives of environmental protection and improvement of social cohesion), then the proportionality principle demands that ‘sustainability’ is appropriate for achieving the broader objective, and that this criterion does not go beyond what is necessary to achieve it.
In defining the objective the buyer is to stay clear of details and requirements: it is up to the tenderer to identify the appropriate measures to achieve the objective, not the buyer. On top of that, avoiding decision making entails that all elements of the buyer’s objective are transparent and can be made objective (measurable) during assessment. The tenderer is to link appropriate measures to measurable objectives. This is how the proportionality principle will be adhered to.
By consistently applying the TONNNO-principles in procurement, thereby avoiding decision making, the guiding principles of the European public procurement law are all observed.
All of which did nothing to settle my nerves awaiting the verdict on a Wednesday morning, September 16, 2015. Perhaps, despite our efforts, the tender guidelines were still not clear enough, or the judge too unfamiliar with the approach, or – much worse still – of the opinion that scoring quality documents and interviews is, inherently, too subjective.
The ruling and its impact
Our lawyer received the ruling over fax at eleven in the morning, and he called me straight away. The vendor’s claims had all been denied. He would have his secretary scan the pages and mail them to me.
Hearing the verdict I breathed an audible sigh of relief. A relief that turned into excitement reading the ruling not much later.
In the ruling (The Hague, 2015) the judge not only stated that the tender guidelines had been clear ‘for the reasonably attentive tenderer’, he also explicitly addressed the issue of ‘subjectivity’. And he went on to provide the recipe that all tender procedures (and thus including the method of BVP/DF Procurement) had to follow to be within the legal framework.
The ruling (in Dutch – Note: all translations are by the author!), provided that ‘some degree of subjectivity is inherent to the assessment of qualitative criteria’, as is the case with BVP/DF Procurement. ‘While this is (somewhat) at odds with the objective assessment system of procurement law and the applicable principles of transparency and equal treatment, this does not – in itself – entail that it actually breaches procurement law, casu quo its principles’.
The ruling then goes on to list what has to be provided to the (prospective) tenderer:
- It must be absolutely clear to the (prospective) tenderer what is expected of him
- The tender documents must be assessed using a scoring system that is ‘as objective as possible’
- The contracting authority is to motivate its assessment in a manner which allows the rejected tenderer:
- to assess the way the assessment took place
- to verify the assessment validates the (pre-)award decision
A judge is to legally intervene ‘only in case of procedural or substantive inaccuracies casu quo unclarities, which might result in an improper award decision.’ Over and beyond that a judge only has ‘limited freedom to evaluate the assessment of qualitative (sub)awarding criteria’. To that extent, the appointed people of the buyer’s assessment team ‘shall be allowed the necessary freedom.’
I was excited to be able to tell the team that our efforts to draft clear tender guidelines had now been officially ruled to be clear (note: a copy of these guidelines can be requested). I was also excited to share the ruling with the BVP/DF Procurement community. And on top of that, now that the case was won, I could also be excited about all that the plaintiff’s lawyers had taught me!
There was, in fact, a procedural issue. In the lawyers’ plea they addressed issues which were not raised in the subpoena. The judge did not take them on board, as it was not in compliance with the rule of law. But the team of lawyers had left no stone unturned. Their effort stressed the importance of providing clarity from beginning to end, including the transparent demonstration of why the vendor ranked first had won.
Based on all the lessons learned I, together with the founder of BVP, wrote an article titled ‘Introducing the Best Value Quality Checklist in Procurement’ (Verweij, 2016a). To aid both the contracting authority as well as the tenderer in ensuring (or determining) the guideline principles of procurement law are adhered to.
Not only is it legal to minimise risk in procurement, the risk of legal challenges can now also be maximally reduced.
Kashiwagi, D. , 2016 Best Value Approach, Kashiwagi Solution Model (KSM), Mesa, Arizona, pages: xv, 15-13, 15-20, 15-23, 15-35, 15-39.
The Hague, (2015), Ruling by court of The Hague (the Netherlands), September 16, 2015, ECLI:NL:RBDHA:2015:15888.
Verweij, J. (2016), Introducing Decision Free Solutions – a generic systemic approach to minimize risk by avoiding decision making. Journal for the Advancement of Performance Information and Value, Vol 8. No 2, https://decisionfreesolutions.com/publication/introducing-decision-free-solutions/
Verweij, J., Kashiwagi, D. (2016a). Introducing the Best Value Quality Checklist in Procurement, Journal for the Advancement of Performance Information and Value, Vol 8. No 2, https://decisionfreesolutions.com/publication/introducing-best-value-quality-checklist-procurement/
Verweij, J. (2017). Why decisions must be avoided (and how) in 10 sentences, column published January 15, 2017, https://decisionfreesolutions.com/publication/why-decisions-must-be-avoided/
Weller, C., Pritchard, J.M., Maitre, E. (2011). The guiding principles of public procurement transparency, equal treatment and proportionality; Identifying Opportunities for Sustainable Public Procurement Briefing Series; Briefing No. 3; http://www.clientearth.org/