Every year, organisations around the globe award more than $25 trillion in supply contracts, most via a tender process. For decades, the tendering process has been considered the global standard for mitigating corruption and collusion. It is designed to protect taxpayers and shareholders by ensuring the best value outcome and the most appropriate supplier is selected.
However, even the most advanced procurement practices could be leaving executives and shareholders exposed.
Research shows there is a “chink in the tender process armour” that it is hiding in plain sight. The problem lies in the techniques relied on by ill-equipped procurement staff to compare tendered prices. The problem is so systemic that it is likely there is some form of error in up to 99% of all tender comparisons.
This means organisations are likely to be missing out on cost saving opportunities. Beyond mere economics, the disruptiveness of the problem is huge: contracts are more likely to end up in dispute, tender outcomes are liable to be challenged and, worse, executives may not be adequately exercising their duty of care.
The silver lining is there are a number of solutions to this problem in the market today. The even better news is that solving this issue does not necessarily require an enterprise-wide tendering system that can be expensive, difficult to manage and lack flexibility. Some simple starting points — such as ensuring data validation is used when requesting suppliers’ prices — are both free and immediately implementable. For more complex and large contracts, tender analysis software is now available that automates data validation, analysis and scenario testing. This Standalone tender pricing analysis software is a cost-effective way to ensure accuracy either across the board or in high risk tenders.
The cost of flawed pricing evaluation
One could assume that mature organisations with professional procurement teams, well defined policies and robust systems are almost immune from flawed tender evaluations. Or even if they weren’t, the chances are so low that they either (a) won’t happen or (b) will be immaterial to the outcome.
However, our in-the-field experience over the last 13 years with industry leading publicly listed and Government organisations would suggest that such assumptions are not well founded.
“A recent show of hands at a Procurement Conference of more than 100 procurement managers (with a combined responsibility for billions of dollars of purchases every year), not one of them could be confident that their pricing evaluations didn’t contain errors.”
Our research found that there are four key costs to taxpayers, shareholders, participating suppliers, and organisations (specifically their directors) when tender pricing evaluation is flawed.
- Awarding to the wrong supplier/s
- Disputes and project delays
- Breach of duties
The best way to explain these costs are with examples gathered from over 13 years of consulting work. Organisation names have been excluded for privacy reasons.
Awarding to the wrong supplier
In a tender for industrial consumables (widgets etc) the prices for items from one supplier were incorrectly transposed from their tender response document into a tender evaluation/marking sheet. This error made that supplier appear cheapest when in fact they weren’t. The result was that the wrong supplier was awarded the contract.
Paying too much
A tender for a waste management contract asked suppliers to provide rates for picking up different types of bins in different locations. These rates were then transposed from each of the suppliers and multiplied by historical volumes to determine the total cost of the services being provided by each supplier. Whilst the volumes were indicative of the future requirements, there was an error in the calculation used to multiply the volumes by the rates and determine the total contract cost. The result was that the more expensive supplier was chosen which unknowingly cost the organisation millions.
Disputes and project delays
In a construction tender, bidders provided Lump Sum prices with a breakdown of the cost components. Only the Lump Sum prices were reviewed. Within months of starting the project, the winning contractor discovered an error in their costs and put forward a significant variation. This triggered a full review of the tendering process and decision which delayed the project for more than six months. The review found that the error should have been picked up in the pricing evaluation process and the organisation had to pay the contractor the difference.
Breach of duty
Both Corporations and Securities Laws that exist in many countries require that executives exercise due care and diligence and that organisations have adequate controls in place to minimise risk to shareholders and individuals. As part of the procurement process, directors need to sign off on such tender decisions and they are required to show that care and due diligence has been taken. Breaches of these obligations may carry civil and criminal penalties based on the severity, while aggrieved tenderers may also seek to recover their costs for participating in flawed tender processes should mistakes ever be uncovered.
Hang on…. aren’t procurement policies, people, systems and audits there to protect us?
Governments and large companies have long since invested in and implemented detailed procurement policies as well as audit checklists for tenders to ensure processes are competitive and to reduce risk. However, we found that for all the policies, people, systems, advisors, and audits, tender processes typically have a blind spot – the pricing evaluation itself – meaning executives may be over reliant on the tender process to deliver the best outcome.
The number one risk to the procurement process is collusion and “bid rigging” during the tendering process, or the use of creative ways to avoid going to tender.
Therefore, the underlying objective is usually to ensure that the tendering process is competitive, fair and transparent. But procurement policies are often silent on the risks involved in evaluating supplier prices and therefore don’t really ensure the best outcome is achieved.
Procurement as a profession has come a long way in the past 20 years, to the extent that large organisations entrust procurement departments with some of the most significant decisions impacting their bottom line. However, a review of the procurement professionals in Australia found that 49% haven’t completed any education beyond high school and less than 10% have an accounting, actuarial, engineering or data science related education.
With such limited training, one could argue that many procurement professionals are unconsciously incompetent with respect to understanding the risks involved when analysing suppliers’ prices.
Even where there are competent procurement personnel, a lack of clear accountability or understanding of the operations can also lead to flawed price evaluation.
The tender process and involvement of procurement staff can range from only instructing how tendering should be undertaken to being 100% responsible depending upon the structure of the support function (i.e. centre-led, decentralised, and centralised). Our experience has been that these expectations and accountabilities are typically not well defined. One procurement person once told me, “It is so much work to double check the pricing and no one is going to look, so it doesn’t get done.”
In addition, incentives are often not set up to promote accuracy and accountability. Workload and time pressures can mean that the main criteria for procurement teams is completion, therefore accuracy is not a critical factor.
Most pricing evaluations are done outside of systems in spreadsheets like MS Excel. The spreadsheet’s greatest attributes, its versatility and flexibility, are also its biggest weakness when it comes to reducing risk.
Probity Advisors and Audits
Governments strongly advise the use of probity advisors for large or politically sensitive tender processes. The role of a probity advisor is to reduce corruption and ensure due process is followed. However, because procurement policy is silent on pricing risk, pricing evaluations aren’t thoroughly checked because this is generally outside of the probity advisor’s mandate.
Audits have a similar blind spot. The framework for auditing tenders developed by The Institute of Internal Auditors (a global organisation with more than 200,000 members) is silent on finding and de-risking the pricing evaluation process within tenders. This leads to business leaders having a false sense of security when in fact significant errors can still exist.
One reason for the gaping hole in the process is the assumption that the risk of occurrence is so low. In our research, we questioned if the examples we were seeing were just one-off occurrences or if these errors were systemic across all tendering activities. To better answer that question, we first defined the type of problems and how they were occurring.
Why the process for evaluating supplier pricing is flawed
Pricing analysis errors are driven by a number of different factors including the supplier, the system used and the requirement for significant manual intervention. With most tender processes requiring most of these touch points, the risk of errors is amplified.
Tenders require the aggregation of pricing data from multiple suppliers in order to effectively compare outcomes. With the increasing complexity of pricing structures, this aggregation process can involve volumes of data and be highly complex.
Software is an obvious solution for this problem.
However, while Tendering Software (also known a Source-To-Contract software) has been around for many years, research has found that the existing applications are built in such a way that they don’t easily accommodate complex pricing tables or undertake complex pricing analysis and therefore most organisations use spreadsheets for analysis. This high degree of manual intervention drives errors in a number of different areas outlined below.
Supplier Pricing Errors
When a supplier is completing the pricing section of a tender response document, they can unintentionally make a mess of it. Typical supplier errors are when the supplier hits the wrong keys and puts in a ‘6’ instead of a ‘7’, inputs a number that is an order of magnitude out (i.e. 100 instead of 10), or they incorrectly put in three numbers (i.e. the price for part A, part B, and the total) and these three numbers don’t add up.
These errors can sneak into the pricing response documents as the supplier shares the pricing response document around their organisation for input and approval. The opportunity for errors increases when the pricing gets changed a number of times as they try to be as competitive as possible.
Transposition errors occur when pricing is copied from the supplier’s bid document into another document for comparison and further calculation.
The type of errors commonly seen here are when part of a number is copied over (i.e. 787 instead of 7,876) or when pricing is copied over from one supplier and incorrectly applied against another supplier.
While copy and paste functions in computers significantly reduce these errors, the number of times data needs to copied determines how error prone the resulting pricing evaluation is likely to be.
To put this into perspective, of the more than 2 million research pieces on Google Scholar that investigate the error rate for copying data from one place to another, the error rate averages to be 1 in 100.
One unfortunate problem with transposition issues is that they are very difficult to pick up when data has been transposed manually. This is because the software used (Excel, if any) doesn’t log the copy and paste actions.
Data Validation Error
This type of error occurs when the supplier is left to determine the type of information to be provided.
For example, when a cost is requested for a specific activity in a services contract, one supplier may provide the pricing in a different currency, with or without taxes, or worse, in monthly or daily costs while others provide it as a yearly cost.
Fortunately this type of error is easy to identify. A crippling and very hard to discover type of data validation error is when a supplier provides the pricing in text format instead of a number. When this number is used for calculations, the resulting calculation can create an error or worse still, that the number is treated as text and simply ignored.
Data structure and Logic Errors
A data structure or logic error in a pricing evaluation process is when the pricing is requested in a way that makes it very difficult (to impossible) to compare the prices provided by the various suppliers.
This can be the exclusion of critical components such as specifying if a product purchased includes or excludes shipping. Another example is when the type of product/service requested is ‘to be described’ by the supplier. Due to the infinite possibilities of describing, the products/services can never be compared on a like-for-like basis.
Spreadsheet software such as MS Excel or Google Sheets are still the go-to method for comparing and analyzing pricing information gathered through tenders. However, a number of types of pricing evaluation errors are commonly seen:
- Hard coding numbers (i.e. breaking calculation models)
- Look up errors (i.e. looking up the wrong information)
- Errors in the formula (i.e. lookup function is written backwards)
- Calculation logic errors (i.e. dividing something instead of multiplying it)
- Incorrectly referenced cells (i.e. a calculation uses the number from a cell that is blank and next to the intended cell)
Financial Modelling Errors
Determining which supplier provides the best value to an organisation isn’t always straight forward. It often requires financial modelling to account for variances in expected demand for different products or services or modelling best outcomes when suppliers can’t provide all the products or services requested.
The financial modelling errors that we typically see are when:
- Analysis is based on historic volumes of specific products/services.
To determine the total cost of a rate-based contract, the rates must be multiplied by expected demand (volume). An error is introduced when a pricing sensitivity exercise is not conducted and a supplier is awarded that is statistically likely to be more expensive.
- Prices are not normalised.
Supplier bids are missing pricing for specific products or services and the totals of their bids are compared even though their bids are incomplete. This can create significant pricing disparity which is not real.
The proof: A review of 100 high value tenders
During July 2019, Acquire Procurement Services took a random sample of their database of over 40,000 publicly available tenders and reviewed go to market documents for 100 tenders. More than 50% of the tenders had resulting contract values available and they ranged between $10M and $500M each. 30% of the contracts were for goods, 70% were for services and the number of tender responses (where available) ranged from 1 to 250.
The tender documents were publicly available and downloaded via various government Tender Portals from Australia, New Zealand, UK, USA.
At a high level, we found that:
- 90% of response documents had structural / logic flaws that would make it nearly impossible to accurately and fairly compare responses.
- 40% didn’t use structured documents (eg Microsoft Excel), instead relying on ‘freeform’ Microsoft Word or PDF documents and manually transposing that data.
- 60% used spreadsheets (Microsoft Excel files) to collect the pricing information, but only 30% of the spreadsheets contained calculations, and half of those contained errors.
- 93% of the pricing documents (Word or Excel) did not use data validation of any kind.
- The value, geographical location, or whether it was a product or service didn’t influence how susceptible they were to errors.
When we carefully reviewed these 100 tender documents, we found that 99% of the subsequent pricing evaluations were likely to contain pricing errors based on the types of failure modes previously mentioned.
This goes some way towards explaining why none of the procurement managers surveyed were confident in their evaluations of accuracy.
What can be done?
The silver lining is there are options available to de-risk the pricing evaluation process. The options can be categorised into two areas: platforms and people.
There are a couple of very quick and implementable platform solutions than can significantly reduce the risk:
- Stop using Word documents for pricing responses
- Stop requesting the responses back in PDF
- For simple/low value tenders, if Excel must be used, then ensure that the cells are locked / protected and use data validation. This step ensures that you get the right data back in a consistent format. In addition, put in place a rigorous error checking process.
- For complex and/or high value tenders use Standalone tender pricing analysis software to reduce the risk of errors when aggregating and analysing and allow for more detailed comparison and scenario analysis
New technology exists that enables users to aggregate all the supplier’s responses and do detailed commercial analysis on them without opening up a spreadsheet. This software is known as “Standalone tender pricing analysis software” and it is available in the cloud as a secure “Software as a Service” or can be run on a standalone computer for tenders requiring defence-level security.
This software does the following:
- Automates pricing aggregation
- Handles bespoke pricing files and advanced pricing excel models
- Looks for supplier errors by benchmarking each pricing point against all suppliers
- Undertakes financial modelling and advanced pricing evaluation such as pricing sensitivity and pricing normalisation
- Handles multiple pricing file versions (i.e. during negotiation stages)
- Automates scenario modelling
The benefits are:
- Removes risks introduced through aggregation and analysis
- No spreadsheet analysis required
- Lesser commercial spreadsheet skills are required
- Works fast. What would take a good analyst weeks or months, the software does the work in minutes. Even for advanced pricing models supplied by hundreds of suppliers, the pricing analysis can be completed on the day of submission.
- Analysis is securely stored in the one place reducing version control issues or requirements to update the evaluation model
- Opportunities uncovered through advanced pricing analysis more than pays for the price of the software
Because tendering happens behind a closed door, many people involved have limited exposure to how other people and companies are doing it and therefore how they could be doing it better to reduce errors.
Training people to show what good and bad pricing evaluation looks like when tendering would be a great place to start.
As an organisation that helps companies to get better results from their tender processes, we have found that training people on the following topics has de-risked many of our clients’ projects:
- Financial modelling for tender analysis
- Advanced excel functions and formula
- Error checking techniques
- Bid Design techniques for pricing
With better trained people and better designed pricing response documents, the software platforms mentioned above can be used with greater effect and save weeks and months of work.
When used together, these platforms, process, and people solutions can prevent and catch these errors now; well before an external auditor is appointed.
How to approach change
Aside from reducing the risk of spending too much, awarding to the wrong supplier or not discharging your duty of care, the upside to making adjustments to your platforms, people, and processes is that your pricing evaluation and decision-making will be faster and help deliver better value for your organisation. With more transparency and certainty, better relationships can also be developed with suppliers.
If you are looking for support to make these improvements in your business, Acquire can assist across multiple areas:
- Help you select the most appropriate platform for your tenders
- Structure your tenders upfront to avoid common errors
- Provide standalone tender pricing analysis software on a one-off or subscription basis
- Most importantly work with your team to train them across these improved processes to set a new standard within your organisation for ongoing success
About the author
Simon Thompson is CEO of Acquire Procurement Services, an Australian outsourcing contract advisory firm. He is personally experienced in establishing global contracts across all ends of the contract market, from the low millions to billions. Simon has worked with most top-tier global mining organisations as well as numerous Australian blue chip organisations and is seen as a contrarian thinker and problem solver interested in challenging the status quo. He has made technology a large part of the Acquire service, calling on field experience and client feedback to build innovative tools which focus on ensuring financial transparency and the best commercial outcomes are achieved.