PWGSC / TPSGC

SOSB Products and ServicesAbout Supply OperationsWhat's New

Benefits Driven Procurement
 
 
 
 
A Paper Presented to the
Ninth International Public Procurement Association
 
Copenhagen
 
Wednesday, June 10, 1998
 

Table of Contents

A new procurement philosophy
How the Government of Canada buys goods and services
Today's Procurement Challenges
Why Major Projects Fail
Benefits Driven Procurement -- Answering the Challenges  How the BDP process works
Benefits of BDP
Some examples of the BDP approach Implementing BDP

A new procurement philosophy The Canadian government has adopted an innovative new approach to buying goods and services to help ensure the success of complex acquisition projects, traditionally characterized by significant risk.

The approach is called Benefits Driven Procurement (BDP), stressing a focus on results, on the benefits that the government -- but also its suppliers -- must gain from each acquisition project. BDP is a philosophy more than a method, although its aims are achieved through very methodical means.

Developed by the Canadian government in collaboration with Canadian industry, the BDP approach is designed to avoid the pitfalls that beset many complex projects -- the delays, cost overruns and end results that often fall far short of expectations. It is a new concept for today's new era of rapid-fire technological change, competitive marketplaces and pressures on governments to be more efficient and effective than ever before.

We first developed BDP to solve problems with information technology acquisitions, but the concept has a broad application and is relevant to a wide range of complex, high-risk procurement endeavours. This is not to say that BDP should be applied to all projects. For some, a traditional purchasing approach may be perfectly adequate.

BDP has generated considerable interest internationally and, although tailored to meet the challenges of the Canadian experience, we believe its principles may be applied elsewhere and will be relevant to other governments.

To understand this new procurement concept and why it was developed, some background on the Canadian government procurement system is in order.

How the Government of Canada buys goods and services
Most purchasing on behalf of the Canadian federal government is conducted by Public Works and Government Services Canada (PWGSC), which also delivers many other services to enable the rest of the government to carry out its work. The procurement arm of PWGSC is the Supply Operations Service Branch (SOSB). Purchasing more than 17,000 types of goods and services from private industry on behalf of about 100 departments and agencies, PWGSC is Canada's largest procurement organization. The department deals with approximately 75,000 contracts totalling $8 billion annually.

PWGSC project managers and procurement officers work closely with departments and agencies --
PWGSC clients -- to ensure that their needs are met.

Departments and agencies may:

For higher value purchases, departments and agencies turn to PWGSC, which solicits competitive bids from the private sector through its electronic tendering system or through a system of source lists.

PWGSC's mandate is to ensure that federal procurement activities are open, fair and transparent and that the Canadian government obtains the best value for the Canadian people. Government purchasing also is designed to advance national socio-economic policies, where consistent with international trade obligations.

Today's Procurement Challenges
Today's procurement environment poses a number of major challenges.

Technology is changing at breathtaking speed. The government relies increasingly on state-of-the-art technology to deliver its programs and services, yet it is difficult to invest wisely in a field which is evolving so fast and in which systems become obsolete overnight. Costly mistakes, however, are less affordable than ever.

In recent years, the Canadian government, like organizations the world over, has had to reduce costs and streamline its operations. When the current government took office in 1993, Canada faced a large budget deficit and debt load. This deficit has been eliminated through major restructuring and belt-tightening measures. By 1998/99, some 55,000 federal government positions will have been eliminated and expenditures lowered by $8.1 billion. But this means that there are fewer staff available to undertake complex procurement projects and fewer financial resources to spend on projects.

Our client departments and agencies now rely more on PWGSC to deliver the procurement results that enable them to run their programs effectively. Delays, cost overruns and systems that do not work properly or do all that they are supposed to do, cannot be tolerated.

Today's tighter budgets also make it difficult for government to find and keep the highly skilled personnel required to maintain complex information technology systems.

A further complication is the so-called millennium bug. As the Year 2000 approaches, organizations worldwide must ensure that automated systems do not malfunction because of the ambiguous two-digit date code "00". Systems must be tested and, where necessary, modified to become Y2K compliant, at a cost of millions of dollars. This pressing need is a further drain on limited resources and leaves fewer available for other procurement projects.

All these realities call for a new, more effective procurement methods. We cannot afford to have projects fail.

Why Major Projects Fail

Major information technology (IT) projects -- among the most important and complex procurement projects nowadays -- have a history of failure, as shown by research both in Canada and the United States.

One U.S. study done in 1990 by the President's Council on Management Improvement identified 14 reasons for project failure. In brief, these reasons are:

(Managing the Risk and Uncertainty of Technological Change - A Review of Federal Practices for Acquiring Major Information Systems, 1990)

In 1997, KPMG Consulting conducted a survey of IT projects in Canada echoed these results to some extent, finding that the common reasons for project failures are poor planning, a weak business case and lack of top management involvement.

The rate of project failure is very high as shown in a study conducted by the Standish Group of the U.S., which found that:

For larger companies, the Standish statistics show an even bleaker picture. Only 9 per cent of IT projects come in on time and within budget, and, when these projects are completed, many are no more than a mere shadow of their original specification requirements. (Charting the Seas of Information Technology, 1994.)

Concerned about such statistics, the Treasury Board of Canada developed its Enhanced Framework for the Management of Information Technology Projects. Issued in 1996, the framework builds on existing management policies and comprises best practices, principles, methodologies, tools and standards aimed at ensuring a better success rate for projects. A number of the directives in the Enhanced Framework focus on the procurement process, which the document described as "too inflexible" and "not conducive to co-operation."

BDP evolved as a response to these directives -- a way of putting the new policies into practice.

Problems with procurement is one reason -- but only one of many -- for projects going awry, as the President's Council study quoted above shows. Improving the procurement process through BDP removes an impediment to project success, but also has a positive impact on other aspects of project management.

Benefits Driven Procurement -- Answering the Challenges

The traditional approach to procurement in a complex project has been for an organization to spend months, even years, developing a detailed requirement -- thousands of pages of specifications to present to industry. Firms are invited to present bids based on this massive document and the lowest bid usually wins. This approach has many pitfalls.

The specifications may be outdated before they are complete. They are probably out of step with the latest developments in technology. The organization goals may even change during the drawn-out process of drafting specs. Worst of all, companies may know that a project is not feasible and that it will fail, yet present a bid anyway simply in order to obtain the contract and have work for the short term. They have no incentive to do otherwise.

Thus, the traditional procurement approach tends to be lengthy, rigid, prescriptive, and costly in terms of time and human resources dedicated to the process. This approach focuses on the "how to" of a project rather than the "what" -- the results. It does not capitalize on the latest developments in technology, discourages innovation and creative solutions from industry and even compromises industry's integrity by encouraging companies to make promises they know they cannot keep.

BDP addresses these problems and a number of others by focusing on the big picture -- the overall desired outcomes rather than on detailed requirements. Basically, the BDP approach is to ask industry to deliver certain agreed upon results rather than follow a blueprint. Industry is also invited to submit ideas on what sort of project should be undertaken before a formal request for proposals is issued.

The other key distinguishing feature of BDP is thorough and rigorous front-end planning to remove or mitigate potential problems in the procurement process. Both the front-end planning and the management of the entire acquisition life cycle are based on four elements: 1) a solid business case; 2) risk analysis; 3) clear delineation of accountabilities; and 4) a compensation structure closely tied to the contractor's performance.

1) Business Case

Under traditional methods, a project is often launched prematurely without determining first whether it is really needed, whether it fits in with the organization's long-term goals and whether it has the full support of senior management.

The BDP approach is exactly the reverse. Under BDP, a client department prepares a rigorous business case justifying the project at the highest level and identifying the desired outcomes/benefits. The business case demonstrates that these benefits fit in with the organization's business plans and will help fulfil its mission and goals.

It also looks at issues such as:

Finally, the proposal will be approved by senior management before it proceeds to the next stage in the procurement process.

2) Risk analysis

Together with the business case, the client department prepares a risk analysis pinpointing what might go wrong in the project and how to avoid or deal with the consequences of such events. The goal is to minimize risk and, when problems nevertheless arise, to manage and contain them. This exercise assesses the probability of mishaps occurring and their potential impacts, including financial, political and any other ramifications. Risks are categorized as high, medium or low, according to certain criteria. The assessment also prioritizes risks, identifies who and what is at risk and assesses the project's overall exposure to risk.

Further phases of the analysis explore options for avoiding, reducing and managing risks. The exercise includes selecting containment measures and responses to activate in case certain events occur.

Under BDP, risk analysis is an integral part of the entire life cycle of the project. Clients conduct assessments, not only throughout the planning process, but also throughout the procurement and implementation phases. This helps ensure that endeavours with little chance of success are cancelled or modified early on and that PWGSC can draft tender documents and contracts with solid provisions against risk.

3) Delineation of Accountabilities

An essential aspect of risk management in BDP projects is the delineation of accountabilities. During front-end planning, the roles and responsibilities of the procurement organization -- the PWGSC client and the supplier -- are identified, as are the risks each party assumes. The tender documents and eventual contract will spell out these terms very clearly.

If, for example, the contract states that the supplier is responsible for delivering a certain outcome by a certain date and fails to deliver, the supplier must bear the costs of the delay. Thus, the client is protected from service delivery problems by an "accountability wall."

4) Compensation Tied to Performance

Where feasible, the BDP contract will include incentives for superior performance and disincentives for the supplier's failure to meet expectations. For example, the contract might specify a base level of payment for finishing a certain phase of the project by a certain date, and a bonus for finishing early. Conversely, a penalty, such as a deduction from the base payment amount, might be imposed if the contractor fails to deliver on time. A non-monetary incentive could be the intellectual property rights to a technology developed under government contract. The exact compensation formula will depend on the project at hand, and will vary with each case.

How the BDP process works

The contract: Benefits of BDP

PWGSC considers BDP an effective procurement method for complex, high risk projects for the following reasons:

Some examples of the BDP approach

BDP is a brand new and evolving concept within the Canadian government procurement system. Nevertheless, elements of BDP have already been incorporated into many projects. These can serve as examples of BDP at work.
Confederation Bridge

In June 1997, the Government of Canada officially opened Confederation Bridge linking Prince Edward Island with mainland Canada. This 12.9 km span of concrete and steel over Northumberland Strait is considered a great engineering feat. It is the longest continuous span structure over waters that are ice choked much of the year and is built to last a century -- twice the norm for such structures -- before major repairs are needed. The bridge replaces a ferry service and gives people of the region a fast, reliable, year-round transportation link between the Island and the mainland.

This project, of which Canada is justly proud, is the result of a procurement process and a contract that had many of the elements of the BDP approach.

1) front-end planning

The challenge that Government of Canada faced was to provide a reliable means of transportation to and from P.E.I. Rather than determining from the outset what form this link might take (whether bridge, tunnel, and so on), the government asked industry to propose solutions. The invitation specified only some minimal, though stringent, performance criteria such as safety objectives and a service life of 100 years for the new link. A general price target was also established. (It was roughly tied to the cost of operating the existing ferry service.)

The bridge project was selected as the best solution to the challenge at hand.

2) risk management

An agreement was worked out with a private developer which proved highly advantageous to all parties and resulted in the resounding success of the project.

Under this agreement, the private sector was to finance, design and construct the bridge and operate and maintain it for 35 years, after which it becomes the property of the Crown. The Government, for its part, would pay the developer a sum equivalent to operating the ferry service for 35 years. All cost and risk was to be borne by the private sector.
A number of guarantees were built into the agreement to ensure that these terms would be met. These guarantees included:

3) accountability

Accountabilities within the project were clearly defined, with the developer responsible for delivering the work according to the specified terms, while PWGSC was responsible for monitoring the overall delivery.

A third party -- an independent engineering firm -- was hired to check all aspects of the construction and ensure that the work was done properly. Only after monitoring and certifying work completed, did the independent engineer authorize payments from the trust fund established for the project. The engineer also reviewed the construction plans and certified that there was enough money in the trust fund to complete the remaining work on the project.

4) payment tied to performance

As noted above, the contractor could only be paid if the work was certified by an independent third party. If the contractor had been unable to finish the job, the Government of Canada would have been able to access funds from a trust fund set up to finance the project, and thus complete the work itself.

Incentives were also created to ensure that the bridge was opened on time. If the bridge had not been complete by the deadline, the contractor would have had to pay to keep the ferry service running. The contractor did deliver the bridge on schedule at the end of May 1997 and was rewarded with access to funds set aside to operate the ferry service.

Alternative Forms of Delivery

In the interests of efficiency and effectiveness, PWGSC has been looking at new ways to deliver some of its services, an exercise known as Alternative Forms of Delivery. Certain functions -- such as policy making and setting standards -- are considered core to the department's mandate and must continue to be done in house. Activities seen as non-core, that is, of a more operational nature, could be carried out by the private sector.

One of these non-core activities is the management of federal buildings, which until now has been handled in-house by employees of PWGSC's Real Property Services Branch. The department decided to seek an outside provider for this service and recently signed an agreement with a private firm to take over the operations and maintenance of about 300 government-owned buildings.

1) front-end planning

PWGSC defined its requirement as property management services for 13 portfolios of federal government buildings. Among the specified goals was the need to save taxpayers' money, but also to minimize the risk of job losses for government employees.

Companies were asked to meet these requirements and to detail their qualifications for the contract, rather than to respond to a detailed list of federal rules and regulations.

2) risk management

Contractors were invited to submit proposals based on the principle that at least half of the government employees engaged in property management would be hired by the successful bidder and that they would receive at least 85 per cent of their public service salaries. The winning bidder, Brookfield Lepage Johnson Controls (BLJC), did even better. It gave jobs to almost every employee and agreed to pay them 100 per cent of their salaries for the first two years of the contract.
Financial guarantees were written into the procurement process and financial letters of credit were required to cover both the bid process and the contract.

Parent companies of the BLJC limited partnership submitted "parental guarantees" to assume all financial risk if BLJC happened to fail for any reason.

BLJC is required to maintain liability insurance, which allows the Crown to share any liability risk.

3) accountability

Under the contract, the federal government still owns all 300 buildings and will continue to be responsible for strategic decision making, while BLJC carries out the day to day operations and maintenance.

The contract with BLJC is arranged on a "cost reimbursable" basis. Every month, the government pays the company a set amount for building management fees and the company reports on its actual costs. This allows the government to see whether the firm will run over or under estimated costs. Every 12 months, BLJC is required to submit an audited statement that reconciles all the costs during the year.

4) payment tied to performance

The government pays 85 per cent of the fees to BLJC on a monthly basis. The remaining 15 per cent is paid at the end of the year according to the company's performance. This 15 per cent is divided as follows: 5 per cent for making sure the buildings are kept in good working conditions; 5 per cent for achieving tenant satisfaction (based on tenant surveys) and 5 per cent for financial performance.

If the contractor meets or exceeds all these goals, it receives a bonus of an additional 5 per cent.

MERX

MERX is an Internet-based, national electronic tendering service designed to increase competition and provide a level playing field for businesses competing for procurement opportunities within the public sector. The system was developed by a private-sector firm for PWGSC and replaces a previous and more limited tendering system called the Open Bidding Service.

The MERX experience is a good example of an approach to procurement that stresses protecting government interests through a clear delineation of accountabilities.

The agreement over MERX specified that the company was responsible for delivering electronic tendering services by a certain date. The government was responsible for testing the system to make sure it performed to expectation. Initial tests found the that system was not satisfactory and needed refinements before it could be launched. To fill in the service gap, the contractor took over operation of the old system -- the Open Bidding Service -- at its own expense and provided electronic tendering for government contracts to the business community until MERX was ready. Had this accountability not been written into the contract agreement, the government might have been left without this essential tendering service for several months.

Human Resource System

Middle managers of a certain department decided to contract for the development of a system to facilitate a human resource application. The idea seemed to make sense in terms of improving human resources administration. However, when the project initiators prepared the business case and the risk analysis, they discovered that senior managers had quite a different vision of what their department needed and did not support the project. As a result it was cancelled.

In a previous era, when senior management support at an early stage was not considered as integral to the procurement process as it is now, this project might have gone to the tendering and even the contract stage. The new BDP mind set will ensure that no project goes beyond first base, as it were, unless the major risks, such as the lack of management support, are identified and contained.

Implementing BDP

The Government of Canada has begun the process of implementing BDP through a number of important measures.

In February 1998, PWGSC and the Treasury Board Secretariat convened a Procurement Reform Workshop consisting of representatives from the private sector, government departments and academia. The meeting was held to recommend implementation objectives and to initiate detailed planning for procurement reform and BDP. Participants made a series of recommendations including the establishment of a Technology Procurement Forum, a government-industry committee to help launch BDP and guide its development and a BDP Centre of Excellence within PWGSC.

This Centre of Excellence, comprising a small group of specialists in BDP, has recently been established. Its role is to provide advice and expertise on BDP in order to facilitate the concept's acceptance and implementation across government.
Services that this Centre will provide include:

In addition to using its own staff, the Centre will draw on resources from other parts of PWGSC -- experts on procurement policy, trade agreements and the costing of complex projects. The Centre will also hire consultants from outside government when in-house expertise is not available.

Because it is radical new concept in procurement requiring significant change in attitudes and behaviours, BDP will not be adopted overnight. It must become part of the mindset and incorporated into the daily business of everyone involved in procurement -- PWGSC staff, PWGSC clients and suppliers.

To bring about such change, we will have to explain the philosophy, teach the techniques and convince people to apply them to relevant projects. We will also have to continue to develop the approach, adopting practices that work, rejecting those that don't. All this will take time. But in the long run, these efforts will save the government a great deal of money by helping ensure that each acquisition project is a full success.

BDP can create win-win scenarios for everyone involved in or affected by government purchasing. Client departments benefit from a procurement process that is shorter, less resource depleting and more effective, delivering projects more likely to live up to, or even exceed, expectations. Suppliers benefit by being able to contribute their innovative thinking to projects, by being rewarded for superior performance and by knowing from the outset exactly what is expected of them. The BDP process cultivates all that is best in Canadian industry, helping it become more competitive internationally. Finally, Canadian taxpayers gain from more successful public sector projects and the avoidance of costly mistakes.

For all these reasons, we believe that the BDP approach will help support Canadian industry, boost confidence in the public sector and confirm PWGSC as a world leader in government procurement.


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