Cooperative Purchasing

From the September 2014 print edition
With fiscal cliffs looming, public institutions are increasingly leveraging their group purchasing power through cooperative purchasing initiatives, including federal standing offers, provincial vendor-of-record arrangements, regional and sector-based purchasing co-ops, and external shared services bureaus. This article addresses the challenges of achieving cost savings while navigating a fragmented administrative environment and unclear regulatory landscape.
Unclear regulatory landscape
Canadian public procurement rules, which include trade treaties, federal and provincial statutes and regulations, and a multitude of government directives and guidelines, generally support group purchasing. But they tend to be silent on implementation details. Collaborative purchasing, even within institutions, typically requires the use of a pre-qualification process and the creation of master agreement frameworks permitting multiple assignments and often result in a roster of pre-qualified suppliers. Public institutions are usually obligated to avoid supplier discrimination based on geographic origin or biased or branded specifications. They must avoid using closed or perpetual source lists that exclude new suppliers. They must also ensure open and transparent competition for contract awards, including the applicable second-stage selection processes for assignments under master agreements. These rules have never been extrapolated to provide clarification on how they should be applied to the complexities of multiple-institution group purchasing initiatives.
Universal challenges of group purchasing
Public institutions face reputational risks if they don’t achieve what are often overly optimistic group purchasing targets. In February 2012, Ontario released the Drummond Report claiming the province could see $1 billion in healthcare savings by expanding group purchasing. The report’s failure to address past failures in group purchasing dampens the credibility of cost-saving projections. High-profile failures include the Ontario Ministry of Finance’s OntarioBuys initiative, criticized by the province’s Auditor General in 2009. The Auditor General’s report found that OntarioBuys failed to establish business cases that identified potential savings before creating broader public sector shared services organizations. It found that substantiated cost savings only amounted to 13.5 percent of what was spent on administering OntarioBuys initiatives, translating into $20 million in shown savings versus $128 million in program spending. Further, 40 percent of the consulting contracts breached competitive procurement requirements. In a subsequent 2010 report the Ontario Auditor General found widespread procurement infractions in the retention of consulting services across the health sector, including 75 percent non-compliance with sole sourcing rules within the Local Health Integration Networks, the entities recommended in the Drummond Report to expand group purchasing.
These audits show some of the challenges of implementing group purchasing. Recently, in its June 2014 report on the Establishment and Use of Multi-Use Lists (“MULs”), Australia’s Auditor General stated that “the arrangements applying to MULs are not so well understood and, in most cases, greater consideration needs to be given to whether a MUL is most suited to an agency’s particular procurement objectives.” The report noted common breaches of procurement rules including instances where agencies approached too few suppliers for competitions, didn’t provide sufficient time for suppliers to respond to bid request and failed to treat suppliers consistently. The report concluded the MULs didn’t meet the government’s fair competition duties and value for money objectives.
Similarly, in its May 2014 report, a review of collaborative procurement across the public sector, the UK’s Auditor General noted widespread failure to use proper group purchasing practices—attributed to a lack of procurement management information, a lack of understanding of end‑user requirements and a lack of knowledge of collaborative purchasing options. That report amplified a report from March 2013 where the same Auditor General found that the central government’s “light touch” with local administration undermined its attempts at procurement cost savings across 43 local police forces. Like Ontario’s reports, the Australia and UK reports found that government bodies weren’t maximizing their group purchasing potential and needed to coordinate efforts.
The devil in no details
While senior governments have proclaimed the cost savings of group purchasing, they’ve been slow to support these initiatives. Realizing group purchasing’s potential means senior governments leadership. As governments gear up for another round of domestic trade treaty negotiations the proper coordination and implementation of group purchasing should be placed at the top of their trade agendas.
Paul Emanuelli is the general counsel of the Procurement Law Office, which recently published a detailed research paper on group purchasing in Canada. Reach him at [email protected].