Four key procurement mistakes following a recent natural disaster that highlight risks for all organizations

by Morgan Doty, Manager at Insight Sourcing Group

Most executives whom Insight Sourcing Group works with would agree that savings is at or near the top of the list when it comes to reasons to invest in running rigorous and disciplined sourcing processes (both internally and supported by third parties).  While other factors such as service issues, updated requirements, and company growth are also frequent reasons that companies conduct sourcing events, many executives do not consider the alternative question, “What is the risk if we DO NOT run a formal sourcing process?

A recent controversy around the award of a $300MM contract to a two-person Montana company to rebuild much of Puerto Rico’s power grid following Hurricane Maria is a great example of what can go wrong in the absence of a formal and competitive process.  That contract has now been canceled after public outcry, but many issues with the deal are common when companies go outside the standard process.

Here are four sourcing mistakes that were made in the Puerto Rico power grid bid mentioned above that we see companies routinely make:

  1. Not fully vetting suppliers.  The Puerto Rico Electrical Power Authority (Prepa) said that based on the website of the awarded supplier, they were comfortable that the supplier had the experience necessary to do the work.  Missing from that website was the fact that the supplier had only two employees.  Whenever relying on a vendor’s sales materials, pitch, or website, companies allow the vendor to control the conversation and present the information that puts them in the best light.  A formal sourcing process should dictate a common set of information needed from all participants and be tailored to the needs of the company.
  2. Lack of socialization.  Once news broke of the $300MM contract award, many relevant parties like FEMA and Congress appeared to be caught off guard, and attacked the deal.  Ultimately the pressure from these and other important groups caused the deal to be called off.  During a sourcing process, it is also important to socialize the process with relevant stakeholders across the organization and ensure that the right people are informed about—and have a chance to participate in—the decision-making process.  This will help give credibility to the resulting decision and create buy-in from the decision-makers to do everything possible to make the chosen vendor(s) successful.
  3. Not understanding pricing competitiveness.  Some reports suggest that FEMA was unable to confirm whether or not the prices listed in the agreement were reasonable.  Relying on a supplier to define what is appropriate when it comes to pricing will almost always lead to higher-than-necessary prices.  Competitive pricing from other suppliers based on the same scope and requirements is critical to understanding whether a fair proposal is being offered.  Even if you do manage to achieve appropriate pricing without competitive pressure, how will you be able to defend that pricing when challenged if you do not have competitive market information?
  4. Overreliance on relationships.  Many questions about the Puerto Rico deal revolve around the relationship that one of the owners of the selected vendor has with the Interior Secretary, whose son also worked a summer job at one of that vendor’s construction sites.  Although to date no influence has been proven, the lack of a formal process makes it more difficult to dispute those allegations.  Making vendor selections based on relationships at any level can open both organizations and individuals up to questions and potential negative repercussions if someone feels that a fair process was not conducted and/or alternatives were not explored.  Understandably, relationships between vendors and customers are developed that are not negative. However, vendors should be required to demonstrate that they are operating in their customers’ best interests and that they are the right choice for the products or services that they are providing.  Failure to conduct this level of due diligence opens the door to individuals prioritizing relationships over their employers’ best interests (and potential outside criticism) even if the partnership is, otherwise, above board.

Even though no wrongdoing has been proven, the lack of transparency and lack of evidence of a formalized sourcing process ultimately led to criticism that caused the Puerto Rican agreement to be canceled.  While it is unknown whether the initial contract was best for the Puerto Rico Electrical Power Authority, those managing the process were unable to defend it against critics, which ultimately doomed the resulting vendor relationship.

We see similar issues with countless client organizations.  When rigor and discipline are absent, companies tend to put in place bad agreements that hurt them.  Even in situations where resulting agreements may not be an issue, stakeholders are unable to defend their work against any critics as there is little evidence that they can point to in order to justify their resulting outcomes.  In extreme cases, the problems mentioned here and exhibited in the Puerto Rican example help create an environment that can lead to corruption and monumental negative financial and legal implications for organizations.

Is your organization minimizing its risk by making vendor decisions in line with best practices?

If you are unsure, reach out to us.  We’d be happy to chat.