Crothers: more flexible pricing models are key

Government chief procurement officer tells David Bicknell more flexible pricing models are essential for mutually beneficial government and supplier relationships

The government’s chief procurement officer Bill Crothers has signalled the government’s desire to adopt more flexible approaches to pricing to save money.

As well as encouraging major suppliers to come up with better ideas that can help the government cut costs, Crothers believes there are alternatives to time and materials (T&M) and fixed pricing that could be adopted as and when necessary.

“What I want us to look at is how we do business. I do think one aspect is pricing, I don’t think it’s a case of T&M being bad or fixed price being good, but I think there are sometimes more sophisticated pricing methods that we should be considering,” he says.

“For example, guaranteed maximum price is a variation of fixed price; it just means you pay a maximum price, but if it comes in less, you pay less. There is also a pricing method called TCIF – target cost incentive fee. I think us being more thoughtful about pricing methods is something we should be doing. Pricing is as much a behavioural tool that sets incentives as it is about the price you pay.”

Crothers also indicates that frameworks now offer limited scope for government to save money, as times have changed.

“How do we go about getting the money? I don’t necessarily think it’s through frameworks. I view frameworks with a caution,” he says.

“They were essentially a UK invention, a device to deal with slow European procurement rules. It’s pre-buying, getting a preferred list. Actually, if the problem was simplicity and speed of procurement, wouldn’t it be better to have simpler procurement rules and speed? And the lean procurement programme has been doing just that.

“We’ve been encouraging the procurement professions and departments to go about procurement in a different way, which means they can buy faster and that should less mean for frameworks.”

He explains that departments could have set a framework three or three and a half years ago when conditions and prices were different, and still be buying from it.

“I’m particularly sensitive to that given that market conditions have changed so much in the last two years,” he says.

Crothers believes suppliers should be doing more to engage more effectively with government, especially larger suppliers: “If you’re a billion pound supplier, you can’t just sit as you’ve always sat. We need you to be giving us savings. The cheapest in terms of effort, is to have quite a blunt instrument, just say, ‘give us a discount – knock it off your price’. But that’s the most expensive way for you to give.

Crothers suggests that a better way would be for suppliers to be more sophisticated suppliers and think about how they take money out of the system.

“And then the money that you’re giving us isn’t costing you margin. It might be costing you revenue, but not margin,” he says.

That does not mean Crothers is against suppliers making profits, as he explains: “We’re not prejudiced. If a company, a supplier, starts making below-hurdle margin, that’s a bad thing. Profit is good. If we have a supplier who’s not making good margin on a contract, then I know what happens – dysfunctional behaviour sets in. And also, you don’t get the best people working on the contract. In my career, we knew what the dog contracts were. And they were the ones that you avoid getting staff onto because you knew you were never going to get promoted on dog contracts.

“We want people making reasonable margin. That’s really important. You want a reasonable good return because that’s healthy. And normally, there is a straight correlation between customer satisfaction, which probably equates to performance, and profit.”

But, says Crothers, the government still has a need for money: “We’re either going to take it from their profit, their price, or they’re going to need to be sophisticated and think about how to get it. Some of it is mundane: what is the ratio of people to printers and ratio of devices to people? Us imposing our method of systems development, say?

He says that if the Cabinet Office is analogous to ‘head office’, then the suppliers who are deep in a government department probably know more about how to make savings than the Cabinet Office itself because they, the suppliers, understand the situation better.

“They can see inefficiencies in the method. They can see that offshore might be appropriate or moving it into an onshore development centre. They can see it – but for too long they have just gone with the flow,” he says.

“It’s not about thinking outside the box; it’s about thinking about how you do business with your best private sector clients. For a number of suppliers, we have more prices, more rate cards than we have contracts for one supplier. There are some contracts that have more than one rate card. There is one supplier where we have 30 or 40 separate rate cards. In contrast, some of the best private sector companies have moved to a single rate card. But in government, we have tolerated multiple rate cards for years. That’s an easy win.

Asked about transparency, Crothers responds that the current government is “all about transparency” He adds that some suppliers will not disclose their profit, but “profit’s an artefact, a man-made construct. Profit in itself is meaningless. I need to know is it gross margin? Net margin? What’s an allowable cost?”

But Crothers says that he wants greater openness from suppliers. “I want more transparency from them and education and training for our people to understand how to use the transparency. I had a conversation with one supplier recently where they had depreciation as a cost to get to gross margin. I’ve never seen that. You just wouldn’t do that. So I think it’s education and training of our people hand in hand with transparency.

“Quite often we’ll get megabytes of spreadsheets to get asked to see the margin. I don’t need that; I just need one number. But often the civil service likes process and details and they love spreadsheets.”

Crothers says it is frustrating that few savings ideas have yet come to fruition. “I think it’s nuts from their position because they have an invitation from maybe their largest client to come up with exactly what their marketing speak would say, which is an opportunity to transform part of your business i.e. government, to take out substantial amounts of money – and along the way, do more business. They’re not taking up the invitation.”

Suppliers should now know what message to expect from the government, he maintains. “They think differently from a year ago. I think the message has got out and they know it’s not going away.

“We’ve had a few meetings with the minister. The procedure is the Crown Representative meets with the suppliers in advance and asks them to think about the preparation for the meeting. It’s simple – it’s ‘Give us money and give us ideas.’ It is, ‘Over to you. You know what our message is.’

“It is a cultural change if you like for them, because we have never asked them to treat us as their largest customer before. And they’ve never treated it as such, because they were dealing with each individual department. So they have to get that into their mind, and it’s still seeping through.

“We are not a single contracting entity – but we are a single customer. And it’s getting tiresome keeping trying to catch them out. They price differently over here; they price differently over there. They’ll tell one department that, ‘This is the best price you’ll get anywhere in government.’ And then they’ll do the same thing for a different department. And it’s a different price – it’s higher. It would be better for them – and us – if they knew we were going to catch that stuff. It’s a bit like cat and mouse.”

Crothers fears that both government and suppliers could be stuck “in a groove” in their approach and suggests that they might get a more innovative approach from those who are not embedded in government ways and thinking.

“By that I mean people who work in the civil service and the individuals within suppliers who have always supplied to the government. It’s a closed system.

“If someone comes in and says, ‘I’ve spent my whole career working for government, from the supply side, they see that as great. I see that as bad, because if you see someone who’s spent their career in insurance or banking or telecoms, they would be bringing you great ideas from different industries, and what I’d like to do is get some external stimulus.”

Crothers also signalled that the Government will take a closer look in the autumn at its use of Crown Representatives, taking the Crown Representatives model “to the next level” and in particular considering the ratio of the number of representatives to suppliers.

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