It is not procurement’s role to ensure a supplier can make a sustainable profit margin from a contract, a former government CPO has said.
John Collington, former CPO for the Cabinet Office (CO), said as a procurement professional he would never tell a supplier their profit margins on a contract were unsustainable.
Giving evidence to the Public Accounts Committee (PAC), as part of their review into how government manages its strategic suppliers following the unexpected collapse of Carillion, Collington said: “If they [the supplier] don’t believe there’s enough profit margin for them to operate a commercially viable solution then I frankly wouldn’t expect them to bid for that work.”
Unsustainable profit margins on government contracts were thought to be one of the major contributing factors to the sudden demise of Carillion early this year, an event that left the provision of government services across a number of departments in question.
Last month, John Manzoni, current permanent secretary at the CO, told the Public Administration and Constitutional Affairs Committee that poor procurement processes had encouraged major contractors to bid low, and said government had “allowed an era where companies have spread themselves very thin”.
However Collington, who joined the Home Office in 2007 before moving to the CO from 2010-12 said: “I think it’s up to the supplier to identify whether the supplier can make their targeted profit margins from the contract that they choose to bid for.”
He added: “I think the evaluation criteria has also changed. [It] used to be predominantly based on price. Price is still a material factor in evaluating a bid, but as well as that it’s also the quality of service.”
When government started enacting austerity policies in 2010 Collington said they looked at the annual reports of key suppliers to “understand what level of profit margin they were making across those government contracts” before having conversations about their role in cutting costs.
He said: “We were putting it to [suppliers], ‘We know how you operate, we know what your financial position is, but you’ve got to join us in tackling austerity and you’ve got to help us identify where you can save money for the taxpayer'.
“We were very much relying on the end user or the contract manager within in the department who was receiving the service to ensure that the quality would not be compromised while we were tackling the price.”
Asked if there were the skills within departments at the time to do this, he said it was “inconsistent in 2010”.
Collington said now, as a government outsider, he was surprised at the slow response of the risk rating system after Carillion’s first profit warning. “Proactive supply management has got to continuously look at the financial and trading performance as well as the performance of the supplier in delivering the service to the end user,” he said.
Collington, who is chief operating officer at Alexander Mann Solutions, which has just won a major government contract, was in favour of making the prompt payment code mandatory, particularly with respect to key suppliers paying their subcontractors.
“Two critical measures [as a supplier] are your debtor days and your creditor days, and those are two performance indicators that should be applied to all strategic suppliers and throughout the supply chain as well,” he said.
“As part of the formal quality quarterly business reviews, payment and payment performance should be a key part of the analysis. Suppliers should be compelled to shared that information with the managing contracting authority.”
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