Where do colleagues in the public sector go wrong?

Imagine a situation where you are the director of strategic procurement and you are purchasing mobile services (a practically perfect commodity) for 300 franchise branches, meaning each branch is a separate organization, with slightly different requirements, a different number of employees, and will pay on its own.

You are choosing between three options:

(1) let each organization tender mobile services separately,

(2) create standard templates, methodology, and price analyses, and let each organization run the tender in line with the provided materials,

(3) centralize the tender, standardize the packages, and design a strategy where the contract is split between two bidders, e.g., 80% for the best supplier and 20% for the second one. Automate invoicing and payments as much as possible, give the supplier a target to monitor actual needs and adjust packages accordingly…

Personally, for mobile services, I would choose option (3) and proceed with three consecutive tendering rounds. In the first step, I would just centralize but not change user requirements (to avoid endless minor disputes) — I would save thanks to economies of scale and reduced tendering costs. In the second step, in cooperation with suppliers, I would conduct a detailed background analysis and then optimize and standardize — I would save thanks to standardization. In the third step, I would focus on process savings and innovations, because by then I would have grown an in-house expert who knew more about procuring mobile services than the suppliers themselves…

Assume that one tender costs CZK 20,000 in administrative expenses (20 hours of work for the buyer and others). With 295 tenders, this translates into savings of CZK 6 million per year. If we saved just 1% on tariffs through centralization, that would mean CZK 10 million saved per each billion spent. And if we optimized the packages by an average of 3%, we could be talking about CZK 30 million in savings per billion. Large contracting authorities will save less than small ones…

Of course, suppliers are happy with the current state, but imagine the fight if my 80–20 strategy meant they risked losing volumes, since only two suppliers would remain and one would get just 20%. And in the next tender, everything would be open again…

I believe there are many similar low-hanging fruits in the public sector. And it’s not administratively complicated — for example, in Promitea software, which specializes in the private sector, there is a “central procurement” module that allows users to easily run such centralized tenders, even across multiple countries simultaneously. (Individual branches enter their current requirements into the system, the software aggregates them into packages, and suppliers submit bids based on these packages — personally, I would opt for an e-auction here. The buyer then decides whether one supplier wins it all, whether the contract is split by packages, or even whether one package is split between several suppliers.)