Posted by: bevmeldrum | October 6, 2008

Listening to … Tim Curtis

Procurement Versus Marketplace

Who are we listening to? This is a question asked in many marketing departments, entrepreneurship lectures and board rooms? Are we here to listen to our customers or to sell them something? The tension between having something sell, or a social justice issues we are passionate about and providing something our customers actually want is a fundamental tension in social business, and it runs to the core of whether we are procurement or market focussed. This is because we have to understand the nature of the two types of clients- the public sector and the wider (broadly private) marketplace. Who are they and what challenges do they present to our business model?

What does the public procurement market represent? The market watchers BIP say that total public spending in the period 2007-08 to 2010-11 will rise from £589 billion to £678 billion. So it represents a huge market, but it is not a single market. This is made up of, in the main, salaries and pension contributions. The rest is massive construction projects, private finance initiative expenditure and defence spending. The Mayor of London’s £3bn budget boils down to £450m of spending on small companies.

Public procurement is an intrinsically rules bound process. If anyone has read the EU Procurement rules, and they are to be reserved for significant sleepless nights, and the guidance on State Aid, they will rapidly realise that public procurement is primarily concerned with the governance of the procurement process- that the procurement should not distort or upset the smooth running of pure competition. Although attempts have been, and continue to be, made to include social clauses in contracting processes, effectively the public procurement market is designed to ensure that no one organisation gains a competitive edge from the procurement process itself. For a social enterprise, which is pursuing a social outcome as a primary objective of business, the procurer or commissioner can’t choose to select a social enterprise as a supplier.

The procurer can’t choose one supplier over another purely because of their status as a social enterprise. Large amounts of public procurement has shifted over the last few decades from ‘lowest cost’ decision making towards purchasing certain public policy outcomes. But, despite this progress away from the ‘cheap as possible’ approach, any organisation can deliver, or appear to deliver, a social outcome. This has been seen in the environmental field, when procurers starting thinking it would be a good idea to include a requirement for environmental management in their prequalification documents. I lost count of the number of ‘Environmental Policies’ I was required to write for companies that wanted to get on the pre-qual list, with no intention of doing any more to protect the environment than printing off a stock-phrase environmental policy. The same is potentially true in other social justice areas- day care services can be provided by any organisation, as long as they appear (in audits) to have achieved a narrow set of social outcomes, but they might well achieve these outcomes and yet exploit their staff with low wages and no pension, or skimp on another cost centre, or exploit food growers in the third world by not buying fairly traded products. In order to be efficient- i.e. provide the service whilst reducing the apparent cost to the public sec tor as well as providing a modest return on investment for shareholders still requires certain costs to be shed.

Shedding costs, however, is a false economy, because the costs (like the carbon emissions we fail to capture and use) don’t disappear- someone else has to pay for them- the costs are borne somewhere else.

Enough of the macro economics. What of the ‘marketplace’? How is this different? The marketplace is less rules bound and its measure of value is based on affordability. Anyone can buy anything, even somebody else’s life. And if I want something I work out how I can generate the cash to buy it- this is fundamentally different from public sector spending which is driven by fixed or reducing budgets. If a company or an individual wants to buy something that is very desirable, there is an opportunity to go and do something (sell more products, get a pay rise etc) in order to afford the product. The marketplace is intrinsically more relationship based- dare I say it- the private marketplace is a more ‘social’ place than the public space. We make more decisions about purchasing based on who we know and what we know about the vendor than we do about ensuring fair competition. The public procurement rules and processes narrow the scope for relationship building, because of the obsession with competition and not distorting the market.

The private market, on the other hand, accepts that the market already is distorted, and that competition is uneven, if not unfair. At the most basic level, differences in the information about a product because of language differences means that a local language product has a competitive edge over a ‘foreign’ product. In addition, purchasers are not unrelentingly rational. We make irrational decisions all the time, particularly over our taste in music or food.

So, to summarise- what is the difference between the public and private marketplaces?

PUBLIC                           PRIVATE

Rules-based                    Relationship Focused

Budget Controlled           Will earn money to afford a product

Efficiency oriented           Influenced by the desirability of a product

Predictable                      Unpredictable

So what does this means for social enterprises? Which market should we be listening to? Which market place is listening to us? Perhaps the question should be- what marketplace is best able to listen to us and why? Although one expects the public sector marketplace to be the one that is the most ethically informed and aligned with our own interests, in fact we must remember that the fact that there is a market at all is the result of the imposition of quasi-free market politics in the 1980’s. This means that the marketplace exists to implement government policy without distorting competition. It does not, therefore, exist to support social objectives that are not covered by (national or local) government policy objectives, nor is it able to listen more closely to one service provider over another.

The private market on the other hand can listen to whomever it wishes, it can contract (more or less) with whomever it wishes in what ever form it wishes. If a company wishes to be hugely inefficient and buy the most expensive product on the market, then it is free to do so. If that product happens to be intrinsically ethical and internalises lots of social costs, then that is a huge bonus. A private market can and does seek to distort the market. Traditionally this distortion is made in the interests of the company, but in some cases the distortion is made for a social justice purpose. The private sector is increasingly engaging with relationship contracting- where the costs of a product is less important than getting the product right and getting the relationship between vendor and purchaser correct.

Because the public sector market is rules-bound it is a predictable market. If you social enterprise relies on a predictable market, then the public sector is for you. If your social enterprise does not rely on predictability, then the private marketplace is for you, but you will need to prepare to weather the changing whims of the marketplace, and be prepared to keep innovating and out-competing the competition- including big corporates.

Advertisements

Responses

  1. […] came three workshops of varying usefulness: Procurement Versus Marketplace was an interesting idea and reminded me why I avoided public-sector projects for years: I’m […]


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Categories

%d bloggers like this: