Competitive tendering is a highly effective instrument for driving down price: no one disagrees with this proposition. Concern over the use of this instrument has always focused on the way in which an intensive focus on price encourages a 'race to the bottom', compromising quality of service, workers' terms and conditions, corporate profits and, potentially, the political and commercial sustainability of the market.
Over the years, providers have repeatedly pleaded with government not to employ aggressive price-based tenders for complex public services. Experienced players know that it is difficult for them to abstain from bidding if their competitors persist. They also understand the impact that low-price competition will have over time on relations with their government customers, the public at large, staff and unions, and investors and analysts.
In spite of repeated warnings over several decades about the dangers of low-price bidding for complex services, the problem is worse now than ever.
Several providers interviewed for this report described tenders where price and quality were meant to be balanced but where, because of the structure of the assessment process, the procurement wound up being assessed solely on price. It was not unusual, they said, for potential customers to speak about quality and innovation in the early stages of the procurement, but then to focus almost exclusively on price.
The National Audit Office has provided examples where suppliers have signed contracts that reduced prices by 25-30% for services that had already been market-tested several times. This is madness - in the absence of some major technological breakthrough, no provider can hope to deliver real productivity savings of this scale over the short-term, particularly with a service that has already delivered significant cost savings.
Self-interest may not act as a constraint on self-harm in an aggressive price-based procurement, and there are a number of reasons for this. Company executives are human beings, subject to the limitations of the human condition, and they are often obliged to make decisions with little time, drawing upon limited information. But there are also cultural and systemic reasons for such behaviour - sunk costs, a perception of first mover or last survivor advantage, unexpected changes to customer behaviour in a sudden shift from relational to transactional contracting, the bias to deal-closure embedded in bid teams, the inclination even amongst operational managers, to become caught up in 'bid fever', investor expectations of growth.
While the imperative to reduce costs in a time of austerity has undoubtedly contributed to the use of intensive low-price bidding among departments and agencies, the bias in favour of price has long been a feature of public sector procurements. In part, it seems to be an issue of risk aversion. As one survey participant expressed it: 'No one ever gets fired for going with the lowest price'. Another former civil servant said that while budgetary issues are today's concerns, 'value is seen as jam tomorrow'.
There does seem to be a view in central government that procurement teams are not responsible for rejected tenders that they believe to be unsustainable. One senior civil servant involved in the commercial service told the author that, in his view, if two bidders persisted in offering exceptionally low prices, he felt obliged to accept the lowest, even if he believed that it might be unsustainable. It has not always been so.