Procuring for benefits and value
APM Contracts and Procurement SIG is moving the goal posts, helping buyers to transfer the risk and sellers to profit from their ability to innovate. The APM Benefits and Value SIG is no slouch either, and it seemed a natural progression for the two SIGs to work together to produce a workshop on ‘Procuring for benefits and value’, held in London on Thursday 30 May. The last one was two years ago and there’s been a lot of developments since then.
We were hosted by Andrew Thorp at PricewaterhouseCooper’s More London offices, with a fantastic approach overlooking the Tower of London. Thanks are also due to David Warley.
1. Three perspectives
The overriding theme of the evening was moving contracting activity up the pyramid, from goods and services (competing on price) towards Benefits to stakeholders. There’s more room to transfer risk (from the buyers’ point of view), and more room for profit (for the supplier(s)).
1.1 Benefits and Value
Dr Hugo Minney, APM Benefits and Value SIG co-Chair, introduced the topics of benefits and value in this context. He highlighted that someone, somewhere, has a problem that needs fixing (or an opportunity they want to take advantage of), and that’s the most important benefit, the why? (or “Y”) benefit. Any solution must deliver on this why? benefit, so anyone delivering the solution needs to know what it is.
Then there are core benefits that contribute to the strategic objectives of the organisation(s) that wants the project delivered, which should be satisfied in order to justify the investment, core to the business case. There are “nice to have benefits” that strengthen the business case.
Hugo explained how to identify, clarify, define, measure, report, and perhaps most importantly, contract for, benefits and value.
When contracting, both sides can get a better result all round if we harness the innovation and experience of suppliers, and at the same time allow room for innovation, and, well, experience.
1.2 Types of contract
Dr Jon Broome, APM Contracts and Procurement SIG Chair, and a APM board member, then explained the opportunities within current contract law and contract practice.
Most organisations which have a business case for investment, have defined the success criteria. It makes sense to share these between buyer and supplier. Don’t enter into a contract until the provider(s) is/are committed and incentivised with sufficient contractual tightness that everyone is happy.
Jon advised that the big change for buyers is to avoid over-constraining the specification. He explained that bidders will be incurring investment in early engagement; and if the buyer wishes to retain potential suppliers in the discussion, they may need to look at a contribution. There’s a cost of being a part of the discussion. But there’s also a risk associated with sharing ideas and intellectual property. Intellectual property is relatively easy to protect since it is defined, but will a supplier share good ideas and other contributions which aren’t protected under law?
Jon concluded that different risk allocation and different incentives may be needed depending on which level of the pyramid a supplier is contributing, although in a changing world, flexible “annualised” incentive arrangements may be needed.
1.3 An example – the “Fix 7 Project”
Ian Heptinstall (APM Contracts and Procurement SIG committee member) sparked a lively discussion with an example, and how it could be applied.
Ian’s first point is that this isn’t new, it just isn’t widespread. Rohm & Haas (chemical company, Teesside) engaged a Project Alliance in 1970s, to build a modernised plant. There were numerous advantages, but it required innovative contracting and a lot of checking to ensure everyone was bought into the contract.
The RFP was 3 pages and selection of supplier took 4 weeks. In part, this was led by a simple CFV payment structure – Costs + Fixed Fee + Variable Fee.
Costs were agreed on a trust basis, but didn’t get out of hand because of the component in the Variable Fee relating to overall budget for costs. The Fixed Fee paid for management and overheads enabling the alliance partners to take part. The Variable Fee consisted of a series of success criteria, and the amount payable to the suppliers depended on to what extent they met the success criteria. Success criteria included safety, shutdown time, meeting schedule, budget costs, and “behaviour”.
It’s telling that the variable fee paid out £168,135 for performance against budget costs against an initial estimate of £60,000, suggesting that actual costs were considerably lower than the client had budgeted, and that “behaviour” also paid double the initial variable fee estimate.
2. Outputs and outcomes
After each brief presentation, the people in the room got to work with post-it notes and markers to add their thoughts.
We captured a lot of the information on post-its, however if you can, please go to update your feedback and your thoughts within the slides.
This will be summarised in the next few weeks, and over the next months will turn into a white paper on ‘Procuring for Benefits and Value’ published jointly by the APM Contracts and Procurement SIG and the APM Benefits and Value SIG.