How to make a ‘high risk’ purchase

23 May 2013
Stephen Ashcroft - January 2013Risk is an ever-present consideration, regardless of the sector where procurement activity is taking place. Examples are safety-critical equipment on aircraft, traceability of pharmaceutical feedstock and business continuity plans for strategic suppliers. How do you plan to buy a high-risk, high-value product or service? You may find the following helpful, while recognising it is not intended as a full statement of requirements for such a plan. A specification should be written, including acceptance criteria. It imposes an early discipline. Generally speaking, the buying organisation is, in these circumstances, exposing itself to the liabilities arising when the specification is inadequate. There is a modicum of solace that an ‘expert’ supplier should apply their skills and point out alleged deficiencies but, of course they will not be aware of the end purpose. By definition, this must involve stakeholders. If, for example, a professional services provider is awarded a contract we may ask what are their deliverables? I have seen this defined as a ‘report’. Clearly this is totally inadequate, recognising the many disputes and alleged breaches of contract for not providing high-quality advice. The trading and contractual history of the proposed supplier should be set out. There is a consistent failure to undertake appropriate due diligence both prior to contract award and subsequently. What happens when a strategic supplier goes into administration? There is the need for a discussion about the cost of the procurement. If there is a budget, where did that originate? Is it a guess or is it informed? Have we engaged in a through-life cost study? What are the key cost drivers? Who will devise the cost model to include with the request for proposal or invitation to tender? If a contingency is to be provided, how was this determined? Is it a standard 10 per cent overspend allowance? Construction and IT offer serious examples of prices getting out of control, and increases of 150 per cent are not uncommon. The planned contractual safeguards should be set out. If we are using standard forms of contract or standard terms and conditions of purchase, are these adequate? The answer is probably not. There are many factors to consider, including acceptance testing, warranties, limits of liability, insurance, key personnel, dispute resolution, termination, step in rights, escrow, rights of audit and the payment of damages. Procurement should take this initiative, including contract management and monitoring procedures, basing their approach on a comprehensive risk assessment. Key elements of a plan to ensure procurement risk is visible should include a thorough risk assessment considering such matters as the supplier’s business continuity plan, dependencies between the parties, technical specification deliverables, programme management, inspection and testing and key personnel. How are you ensuring your procurement risk is visible? ☛ Stephen Ashcroft is a procurement coach at Brian Farrington. He welcomes comments and LinkedIn connections, and you can follow him on Twitter 
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