Do you believe in the reliability, truth and ability of your suppliers? Do you trust them?

Tuesday, February 25th, 2014

A recent audit report[1] raises a series of issues for procurement professionals, no matter the country in which they are located. A key issue is the trust placed in suppliers (providers as they are referred to in the report). The report pronounces,

‘DPW’s past practice of trusting the providers to ensure compliance with applicable laws, regulations and standards cannot continue. Instead of taking corrective action against the providers, DPW allowed the noncompliance to continue for years.’

How can this behaviour be explained in the broadest sense?

In English Law there is the danger of a buying organisation acquiescing in a supplier’s non-performance by not taking decisive action. We have encountered a real dread in some clients that taking decisive action will, ‘upset the supplier.’ This is flawed logic when the supplier’s non-performance is damaging the client’s business performance.

The audit of DPW was to focus on the duties and responsibilities of DPW with regard to the supply of Financial Management Services (FMS). In 2013 DPW entered into an agreement with PCG Public Partnerships LLC (PPL). PPL were to provide FMS to approximately 20,000 persons who receive long-term care services and support in their homes and communities. Beginning in December 2008 DPW had 36 different provider agreements.

This situation warranted reflection in the decision making, prior to contract award. Monitoring the contract performance of 36 providers is neither a straightforward matter, nor is it a situation where the awarding authority can lie back and trust providers to perform their contractual obligations. It would be interesting to ask if a contract management plan was in place prior to contract award?

The report later concludes,

‘DPW officials said they held Group meetings with providers – however the officials could not provide us with any meeting minutes or dates of such meetings so that we could determine the frequency of the meetings, who was in attendance, and what was actually discussed.’

We would argue that the DPW situation is far from being an exception to the rule. Typically, no-one manages the contract manager(s). Review meetings may be held without an agenda being pre-prepared. Neither is it unusual for service providers to attend a review meeting and table performance data that the client is unable to verify and confirm. The supplier has the upper hand in many cases.

‘DPW officials stated to us that they were “stunned” and “surprised” at the scope of the incomplete and inaccurate data in the provider’s files.’

This is worthy of reflection in many procurement situations. The provider’s files, we suggest, are rarely reviewed by procurement or contract managers. It would require access through a ‘Right of Audit’ clause to electronic and hard copy files.

We have conducted such reviews, significantly on construction projects. The outcomes are confidential. However, when there is a hint of noncompliance we urge that the supplier’s files should be accessed by those with the experience and knowledge to understand what is being discovered. A warning should be issued at this juncture, that the emergent situation could be the foundation of a legal case against the supplier, hence expert legal advice should be sought.

‘DPW investigated and found documentation needed from some of the suppliers to process payroll payments was inaccurate, incomplete or non-existent. They began to realise the magnitude of information PPL would require to obtain transition by Jan 1st 2013. DPW ignored many red flags that PPL was not ready to pay all direct care workers by Jan 1st 2013. The most notable red flag that DPW ignored was PPL itself sounding the alarm about its inability to ensure timely payments to direct care workers on the start date. Thousands of direct care workers were not paid timely, in some cases for months.’

This report comment raises general points about managing contracts. We are great believers in having a ‘Right of Audit’ clause in contracts. We always ask the client, ‘Who will conduct the audit?’ Dependent on the nature of the ‘issue’ it will require specialist knowledge of the subject matter, and the skills of auditing. The talk of red flags drives at the heart of risk management in procurement[2].

It also drives at the heart of courage to recognise that a contract implementation date will not be achieved or it is under threat. The active use of a project risk register is very relevant. PPL deserves credit for flagging up the problem and sharing the issue with their new client. We suggest that their action would not be welcome in some clients who do not welcome any ‘bad news’, no matter who is the source.

‘DPW issued a request for applications in January 2012 and selected PPL in August 2012. However in the middle of the procurement process some of the providers unexpectedly terminated their agreements with DPW. Hundreds of care workers did not get paid in July 2012.’

It appears that the contract between DPW and the providers included a right for the providers to terminate the agreement ‘for convenience.’ In other words the providers could terminate even if they were not in breach of their contractual obligations. This ‘concession’ to providers is very high on the risk scale. It can be argued that some of the providers saw the request for applications as an opportunity to rid themselves of a contract that they no longer wanted.

DPW, if they had a risk modelling tool would have looked at the consequences of granting termination for convenience in the agreement. The consequences needed to be identified and specific plans put in place to deal with termination actions. At the very least, timescales should be set out, so should the requirements for the provider to provide management information to another provider, and finally, the consequences of DPW finding past unacceptable practice after the agreement had been terminated.

‘Finding 2- DPW’s procurement process was unfair to other vendors who might have bid lower and ultimately performed better.’

The process was deemed to be unfavourable to former FMS providers. Significantly in terms of procurement practice, DPW added an $18 million cash advance that was not included as a feature of the invitation to submit a tender.

This, in many circumstances, would be a material breach of procurement policy and not in accord with world-class practice. Other tenderers would have had to plan and cost cash flow in their tendered prices. The ITT seemingly stated that no advances would be made! So much for negotiation skills. The report includes comment on the weakening of DPW negotiation position in regard to achieving a contract start date that was at the least, optimistic, and at the worst, unachievable.

‘PPL had never provided FMS to a program as large as Pennsylvania’s, nor did it have an office in Pennsylvania. In response to the request for information PPL said they currently served 39071 consumers. If selected it would increase its customers by 57%.’

Here was another massive risk red flag. We should reflect on good quality procurement practice. It would demand that appropriate due diligence would take place.

Clarification is required to ascertain:

(1) What are PPL plans to increase their capability?

(2) Will the PPL, IT and administrative systems cope?

(3) Is PPL planning to open an office in Pennsylvania – where- when – the cost?

(4) What will be the senior management commitment to the Pennsylvania contract?

(5) What recruitment actions will PPL have to undertake by January 1st to ensure the contract effectively runs from day1 of the contract?.

It should be noted that DPW gave a robust response to the audit report. The response from DPW is forensically responded to. In summary, this whole audit report should be mandatory reading for the procurement profession and those claiming to be effective contract managers.


Read our “Procurement Fraud: A Shocking Wake-Up Call” article on the Procurement leaders website or a recommended read of “Construction Contracts – A Recipe for Disaster“.

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[1] ‘Department of Public Welfare’s (DPW) –Oversight of Financial Management Services Providers (FMS)’

Commonwealth of Pennsylvania – Department of Auditor General. Published November 2013

[2] Use of Procurisk® a procurement risk modelling tool. Contact Brian Farrington Limited [Steve to insert details]

2 Responses

  1. Tuesday, February 25th, 2014 at 8:18 pm

    I should be very interested in receiving “Think procurement”
    Thank you

  2. Tuesday, February 25th, 2014 at 12:59 pm

    […] We now recommend reading “Do you believe in the reliability, truth and ability of your suppliers? Do you trust them?” […]