“The most common way people give up their power is by thinking they don't have any.” - Alice Walker
Much is heard about the supposed inefficiency of government and the public sector. Bureaucratic processes, political interference and conflicts of interests are often used to criticize how taxpayer money is allocated and spent.
What is heard more seldom are the ways that the public sector is better at spending money than the private sector. And this stems from the unique strengths of public buyers, which can lead to a superior negotiating position in the market.
To benefit from this power, however, Buyers must understand and use it. Here are 4 ways that public Buyers can leverage their market power.
First off, public Buyers can leverage their power to set the rules within the tendering process. While many aspects of tendering are prescribed by law, such as procurement law, Buyers still have significant leeway over the process, incl. over:
Buyers can adapt procurement processes to the specifics of individual tenders, instead of applying the same process for every tender. In some cases, longer deadlines, flexible contract terms and full information disclosure early is the optimal strategy. In other cases, shorter deadlines, stricter contract terms and limited information exchange is best.
Suppliers are unlikely to pass over tenders of interest due to a few inconvenient aspects and will typically accept the rules set by the Buyers.
In negotiations, best alternative to negotiated agreement (BATNA) refers to the best option available, if negotiations fail. A good BATNA has been shown to be one of the key determinants for good negotiation outcomes.
In Buyer-Supplier relationships, a good Buyer BATNA can be defined in several cases, such as:
Buyers are able to benefit from a strong BATNA, if they plan for it. For the scenarios above, some recommendations would be to:
The sheer size of public organizations and the total public procurement (~14% of GDP of economy) incentivizes suppliers to do a good job at reasonable prices, because fulfilled contracts can lead to future business opportunities, while poor performance can be punished with negative consequences for supplier reputation. Due to this, suppliers tend to be more motivated to leave a good impression on public Buyers than private customers.
This can give an edge for public buyers both in the tendering stage, and in the contracting stage. During tendering, suppliers are more inclined to be truthful in their offers and negotiations. During contract execution, suppliers wish to leave customers happy and fulfill all contractual requirements on time.
Nobody wants to be blacklisted by the government - but even without formal penalties, suppliers understand that their performance will affect their reputation within the public tendering system, for better or worse.
Buyers need to be aware of this supplier concern - and let their suppliers know that good deeds will be praised, but underperformance can have a cost on their reputation. And in the case of serious contract breaches, Buyers can go a step further and threaten retaliation.
In case of serious contract breaches, organizations can take legal action or escalate issues in other ways. For business-to-business contracts, this step is rarely taken due to cost, time waste and general disruption to business operations, and companies usually choose to settle disputes through negotiations.
For suppliers dealing with public Buyers, this may not be the case. First, public Buyers have limited wiggle room for re-negotiation after a contract is signed, and suppliers know it. Second, due to anti-corruption policies and oversight, out-of-contract concessions to suppliers are rarely made. Third, Buyers often take a tough stance as representatives of the public.
Due to this, suppliers know that public Buyers are more likely to proceed with retaliatory measures to supplier misconduct than private companies, such as breach of contract, legal action, and even using media as a punitive measure. This provides Buyers with additional leverage in negotiations.
Public Buyers wield a lot of market and negotiating power in the procurement process. By understanding their strengths and the dynamics of particular markets, Buyers can leverage this power to reliably obtain better goods and services at lower cost, benefitting taxpayers and the tendering system as a whole.
To do this, Buyers need to (1) understand how suppliers think about the tendering process, what motivates and constrains them, (2) plan their approach to tenders well in advance of tendering and (3) adapt to different market circumstances.
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