promoting competitive markets: the role of public procurement

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Journal of Purchasing & Supply Management 11 (2005) 242–251

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Promoting competitive markets: The role of public procurement

Nigel Caldwella,�, Helen Walkera, Christine Harlanda, Louise Knighta,Jurong Zhenga, Tim Wakeleyb

aCentre for Research in Strategic Purchasing and Supply, School of Management, University of Bath, Claverton Down, Bath BA2 7AY, UKbSchool of Management, University of Bath, Claverton Down, Bath BA2 7AY, UK

Received 26 May 2005; received in revised form 6 December 2005; accepted 13 December 2005

Abstract

The study presented here examines how public procurement agencies address establishing and maintaining competitive markets; a

topic still in its academic infancy. Cases are used to address impediments and improve understanding of strategic priorities in managing

for competitive markets. Public policy academics have observed many competing policies in the wider public sector. Specifically, this

paper identifies a need for research on supplier incentives at a market level, on the post contract management of suppliers and as an

important sub-set, key supplier relationship management, along with professional development.

r 2006 Elsevier Ltd. All rights reserved.

Keywords: Competitive markets; Public procurement; Strategic supplier management

1. Introduction

This paper discusses the role of public sector procure-ment agencies in influencing the development of competi-tive markets. Managing for competitive markets is an areathat has been neglected in the procurement literature.However, at a recently organised international publicprocurement conference (Knight et al., 2003), the need tomanage markets was deemed a major emerging issue. Asthere is so little guidance the aim of this paper is to bringtogether a number of themes that public procurementneeds to address to become effective at managing marketsfor competition.

The paper seeks to address the following researchquestion: from a public procurement perspective, whatissues need to be considered in managing markets forcompetitiveness? The paper starts with a literature reviewthat identifies key issues in promoting competitive markets.The next section introduces the case methodology, anddescribes three cases, each with a summary of key findings.The discussion provides both case and cross case analysis.

e front matter r 2006 Elsevier Ltd. All rights reserved.

rsup.2005.12.002

ing author. Tel.: +440 1225 383881;

383233.

ess: [email protected] (N. Caldwell).

Finally, conclusions are presented, along with the limita-tions of the research and areas for future research.

2. Literature review

2.1. ‘Muddling through’: policy as successive-limited

comparisons

In a seminal paper on policy-making in the public sector,Lindblom (1959) proposes that unlike the policy process setout in text books, most policy makers ‘muddle through’,setting policy by making ‘successive-limited comparisons’with imperfect information, and complex and competingvalues. Kickert et al. (1997) discuss three perspectives onpolicy-making and governance: the rational central ruleperspective, the multi-actor perspective and the networkperspective. The network perspective sees policy-makingand governance taking place in complex networks consist-ing of various actors none of which possess the power todetermine the strategies of the other actors.Eden and Cropper (1992) note a new drive in the public

sector towards clearly stated objectives, measurable in-dicators of performance and a well-articulated system ofaccountability. Their concern is not with the new systemsof measurement, but the wider issue of what public sector

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systems are tasked with achieving. Academics such as Thai(2001) have noted a trend toward strategic procurementand professional development in public procurement.

2.2. Defining competition

Thus public sector solutions to dealing with turbulentenvironments have been to shift policy towards greatercompetition in the public sector and to apply private-sectorstyle management practice to the public domain (Hood,2000, p. 164).

In seeking here to provide some definition of whatcompetition means in the public sector, the abovequotation is interesting in that it implies competition is‘low’ or at least below its potential level. The economistGalbraith (1980/1952, p. 58) suggests: ‘‘A market isworkably competitive if, among other things, there is aprogressive technology, [and] the passing on to consumersof the results of this progressiveness in the form of lowerprices, larger output, improved prices.’’

Galbraith’s initial qualifier ‘workably competitive’ sug-gests pragmatism towards the perfectibility of markets. Hisemphasis upon low prices is unlikely to appeal to suppliers.Smaller suppliers define competitive markets in terms oflack of impediments to their ways of doing business, suchas ‘unbundled’, appropriately sized packages of work(Badenhorst and Hugo, 2001) and simple, fast and efficienttendering processes (van Vuuren and Badenhorst-Weiss,2003). In an essay on the meaning of competition, Hayek(1948) explicitly contrasts the conception of competitionused by economists with those employed by businesspeople. Hayek sees competitive markets as envisaged bybusiness people presented as ‘aberrations’ or ‘imperfec-tions’ to the competitive equilibrium model economistspresent. ‘‘That in conditions of real life the position even ofany two producers is hardly ever the same due to factswhich the theory of perfect competition eliminates by itsconcentration on a long-term equilibrium, which in an everchanging world can never be achieved’’ (Hayek, 1948,p. 101).

In drawing the conclusion that there is a bigger dividebetween competition and no competition than betweenperfect and imperfect competition, he believes more is to begained by studying Government suppression (either byassistance or by tolerance) of competition, than by study-ing the imperfections of competition. Kirzner (1997) buildsupon Hayek’s views on competitive markets, exploringhow Austrian economists in particular perceive a failure inneo-classical economics in understanding the role ofentrepreneurial discovery (Kirzner, 1997) in markets.However, Kirzner goes onto differentiate between theAustrian position of opposing government regulation ofmarket activity as it is likely to ‘yobstruct and frustratethe spontaneous, corrective forces of entrepreneurialadjustments’ (Kirzner, 1997, p. 81) and that of the ‘laissez

faire’ or pure competition of the Chicago school. Again thedistinguishing factor is how each school treats [the

likelihood] of there being an equilibrium point wheremarkets are fully competitive. Richardson (1990) cogentlyargued against the equilibrium view of competition, and itsfailure to appreciate the entrepreneur and the role ofinformation. ‘Perfect competitiony represents a system inwhich entrepreneurs would be unable to obtain theminimum necessary information; for this reason, it cannotserve as a model of the working of actual competitiveeconomies (Richardson, 1990, p. 2)’.With such opposition to a neoclassical view of compe-

titive markets as an ideal to be strived for, the most recentUK Government has looked to other sources. Written inthe 1950s, Galbraith’s emphasis on innovation (andlearning from the private sector) still resonates with arecent UK government’s ‘White Paper’, which stated:

Government needs to learn and innovate as much as theprivate sector and it must create new mechanisms forsharing ideas and best practice. Just as the UK needsmore entrepreneurs in business, it needs a new genera-tion of innovation in the public sector (Department ofTrade and Industry, 1998).

The current UK Government and Galbraith concur onthe importance of innovation, but Galbraith (and Hood,1991, as quoted in the opening paragraph of this section)suggests pragmatic limits to competition.

2.3. The limits of competition

Public markets are often uncompetitive in that they failthe tests of economic models that require features such asperfect information and particularly low barriers tosupplier entry (and exit). For Telecommunications andIT/IS the nature of the sector will involve concentration ofspend with relatively few players. A UK white paper hasspecifically addressed this issue in the market for commu-nications networks where ‘‘y high barriers to entry fornew businesses, economies of scope and scale, networkseffects, and technical gateways or bottlenecks y may givetheir owners market power’’ (Department of Trade andIndustry, 2000).In certain sectors relations with key suppliers will

determine how competitive the market is. However, thetradition and legacy of public sector contracting is to adoptan arms length approach and avoid forms such aspartnering. Erridge and Nondi (1994) note that publicaccountability and competitive frameworks may limit thedegree to which partnering can be pursued.Having acknowledged the limits of competition in terms

of classical views of markets, the pragmatism of those whosuggest that public markets are not fully competitive isdiscussed here in terms of competing agendas.

If multiple and sometimes conflicting stakeholder goalscan be identified in the cases, then the added dynamic ofvariations between stakeholder goals over time mustalso be included. That is it appears public procurement

ARTICLE IN PRESSN. Caldwell et al. / Journal of Purchasing & Supply Management 11 (2005) 242–251244

has to manage multiple stakeholder objectives, that maybe contradictory, and which vary over time—e.g.demand for ‘cheap’ or ‘local’ services will vary (forexample with economic or political cycles) (Knightet al., 2003, p. 41).

Taking into account the interests of the variousstakeholders diminishes pure competition as a goal.Erridge and Nondi (1994) found that ‘the extreme formof competitive bidding is, on the whole, incompatible withsuccessful achievement of Value For Money (VFM)’. VFMand other policy objectives may mitigate the power of(public sector) market forces.

Any study of public procurement over time highlightshow common place ‘reorganisations’ of structure are,indeed in some cases they appear endemic (Dooley andTonkin, 2003). Some authors propose that the presence ofcontinual reorganisations suggests that the central/de-volved debate may be contingent, with no best solution.

The cycles of pushes for centralization vs. decentraliza-tion may well be tracked to the level of scrutiny orinterest being shown by the public being served by theagency. y In times when public scrutiny is high, eitherbecause of poor economic conditions or a specific flash-issue or misappropriation, agencies will probably pushfor greater control and centralization (McCue et al.,2003, p. 197).

It has been suggested that purchasing as a function israrely involved in choices over the level of devolvement(Lamming, 2002). Re-organisations can be based on widerpolitical, rather than operational needs (Knight et al.,2003). Such ‘wider’ needs may take precedence overoperational requirements for competitive markets.

2.4. Innovative procurement

This section examines innovation in public procurementapproaches to market competitiveness. One of the barriersto competitive public markets is accurate, timely data. Aninterim review commissioned by the UK Office of NationalStatistics (Atkinson, 2004) suggested that the amount theGovernment spends on the public sector is not properlyreflected in the country’s National Accounts. Public sectorspending was often wrongly classified in the economicaccounts.

Significant markets will be specific to governmentdepartments (e.g. highways, defence), but common marketscut across the public sector in areas such as construction,IT/IS, consultancy etc. Even the seeming ‘unitary’ natureof a ministry such as defence is misleading. Taking the UKMinistry of Defence as an example, external spend of some£11.5 billion with suppliers (Formby, 2004) is actually splitbetween two organisations (the Defence ProcurementAgency and the Defence Logistics Organisation).

The likelihood of constructive liaison across PublicProcurement Entities (PPEs) is further hampered by the

lack of common information systems across government.Indeed Quayle (1998), in an empirical examination of theimpact of procurement strategy on corporate performancein UK government, identified a lack of cross-departmentaldialogue on strategic procurement issues. In promotingcross-departmental dialogue one critical challenge is totake into account these varying cultures, stakeholderrequirements and requirements of internal customer ‘buygroups’ (Knight et al., 2003).The ability to share information constructively also

affects performance measurement of suppliers. However,there are exceptions, for example the US federal govern-ment collects information about a contractor’s perfor-mance on every contract over $100,000. Negative feedbackis shared with the supplier (Drabkin and Thai, 2003).One area where procurement practice can be innovative

is in using coordinated purchasing (consortia) and frame-work agreements. Framework agreements allow the centralnegotiation of a contract, whilst permitting devolved usersto manage their spending. Problems arise where ‘local’users do not abide by the framework agreement (in the UKNHS a figure of only approximately 50 percent adherenceto framework agreements has been estimated (Knight etal., 2003)). In line with emerging work on consortiapurchasing (Aylesworth, 2003; Rozemeijer, 2000), itappears that establishing framework agreements involveson-going commitment as well as creative and innovativeleadership to make them work.Coordinated purchasing raises the need for communica-

tion and feedback mechanisms in promoting competitivemarkets. Having the authority to lead and mandateinformation requirements, and ensuring active participa-tion by members are issues raised in previous studies. Thereappear real concerns about concentrating consortia de-mand with too few suppliers, with too little attention beingpaid to possible exclusion effects (Aylesworth, 2003;Kivisto and Virolainen, 2003). ‘‘Consortia can encourageelitism, oligopoly, and the artificial creation of barriers tonew entrants’’ (Knight et al., 2003). Broadly it appears thatconsortia need very specific management to ensure acompetitive supply market is maintained.Perhaps the most significant area of innovative practice

has been in new forms of partnership and risk sharingbetween public and private sector organisations such as theprivate finance initiative (PFI), one form of public/privatepartnerships (PPP). Walker et al. (2002, p. 71) discuss PFIin the context of outsourcing and suggest it represents astep change in the involvement of the private sector inhealth care provision and in outsourcing issues in the NHS,as PFI contracts are between 10–30 years, potentiallyleading to more established supplier dominance. In termsof value for money and risk, PFIs represent the largestoutsourcing decisions made by NHS Trusts. The first waveof PFI Trusts have not met up and shared their experiences(Grant and Dutton, 2001). There is a need to learn fromthe best and worst cases, and glean what is known tooptimise PFI performance.


With further new markets opening to private sector firms(Simpkin, 2004), new organisations emerge and resourcesare shifted into these new areas. Harland et al. (1999) andKnight and Harland (2001) analysed the impact ofoutsourcing on markets extensively. Walker et al. (2001)produced a comprehensive study of the impacts ‘local’decision making in the NHS, specifically regarding out-sourcing, can have in creating undesirable—and unin-tended—consequences for markets. Although work is nowemerging on procurement risk (Zsidisin, 2003; Hallikas etal., 2002), and a variety of supply risks have been identified(Harland et al., 2003), understanding the risks inherent inmanaging for competitive markets is an under-researchedarea.

The need for purchasing to have the profile to attract thebest people has been a perennial concern of the literature.In terms of innovating the profession itself to workeffectively in the 21st century environment, academicshave placed a new emphasis on team working andinterpersonal or ‘softer’ skills. This focus on team working,team building and dissemination is at the expense oftechnical skills (van Weele and Rozemeijer, 1998; Giuni-pero, 2000).

The final area for innovative practice reviewed here isthat of the ‘new information society’ and e-procurement.E-procurement is the use of web-enabled software systemsto enable the purchasing of goods and services online (heretaken to cover the whole purchase-to-pay process). Itcovers sourcing of suppliers, online tendering, e-collabora-tion, reverse auctions and electronic ordering. E-enabledbusiness (McGuffog, 2002) will, eventually, provide across-the-board data on buying organisations’ existing portfolioof bought-in products and services. However, as isdiscussed below, there are other requirements that willnot automatically be delivered. (e.g., market intelligence onpotential new suppliers, or sourcing options in newmarkets).

2.5. Other impediments to competitive markets

It is a sweeping statement to talk of one ‘public sector’;government and the wider public sector comprises alarge array of departments, agencies, quasi-autonomousnon-governmental organizations, and executive organi-zations with very variable characteristics and spendportfolios’’ (Knight et al., 2003).

Here attention is on competence-raising measures topromote market attractiveness; without such measuresPPEs poor at procurement will pay for savings made byPPEs with more expertise.

Fragmentation and lack of coordination of PPEsdemand not only add to transaction costs for customerand supplier (discussed below), but prevents learning fromexperience and the accumulation of procurement expertise.In the past public sector procurement has been perceived insome areas as cyclically influenced by the timing ofdepartmental budget allocations—i.e. there is a period of

relative feast when the budget is first allocated then arelative drought as spending is checked to prevent over-spending, often followed by a final ‘splurge’ as budgets arespent before year end (see Baeyens and Martel, 2003).Smoothing of demand across government departments andacross the financial year makes public markets moreattractive to suppliers.For a PPE an individual purchase can often be a one off,

therefore internal expertise cannot be built up (Erridge andGreer, 2002, p. 514). Suppliers have to be extremelycautious of contravening competition legislation, andbuyers of EU procurement legislation, both of which arefocused on individual transactions, and seem to do little tocater for long-term, aggregate level needs (Nielsen, 2000).Erridge and Nondi (1994) propose that extreme forms of

competitive bidding are detrimental. These forms involve:‘rigid application of tendering procedures for low-valueitems regardless of on-costs; too many suppliers; short-term contracts and the absence of cooperation fromsuppliers’.

3. Research method

Three case studies were investigated in this research,which assisted in identifying key themes in the role ofpublic procurement in promoting competitive markets. Thecase study method is appropriate: ‘‘when ‘how’ or ‘why’questions are being posed, when the investigator has littlecontrol over events, and when the focus is on acontemporary phenomenon within its real-life context’’(Yin, 1984, p. 13).In this research, case studies allowed us to learn from

different situations: the Jarvis case highlights the impor-tance of supplier relationship management, including theneed for information. The Procure21 case contributes toour understanding of relationship management, and theprosthetics case portrays the effects of public procurementon competition over time. The cases draw on a review ofprimary and secondary data. Newspaper sources have beenused in one of the cases, which examine contemporaryevents.The speed of developments in this area mean that senior

practitioners are addressing problems that are ahead ofwhat the academic literature has covered. Here we presenta brief case where the issues are still being played out.

4. Jarvic plc case study

4.1. Case description

Jarvis plc is only the second case of a major UKcompany specialising in PPP experiencing financial pro-blems. The company rose to prominence on the back ofPFI contracts. According to their website, their mission is‘‘innovative partnerships in education, transport, health,local government and industry’’. Therefore their keymarkets (and contracts) cut across most of the major


public sector spending departments. Further contractualcomplexity is added by the contractual requirements forconsortia (and the sheer scale) of PFI deals. Jarvis hascreated another ‘web’ of private sector partnerships, againacross all the market places it is involved in.

Jarvis’s recent financial problems have thrown thesurvival of the company into doubt. The Dow JonesNewswires (2004) commented

y Jarvis’s problems y [are] y because many projectsappear to have been won through excessively lowbidding, resulting in deals that generate returns waybelow expectations with little hope of recovering costslater on.

4.2. Key issues from the case

The example of Jarvis is used here not in any way todiscuss the problems of that particular organisation, but todraw out key themes in promoting competitive markets.First, PPP, with their emphasis upon consortia, can createmyriad and cross-government relationships between thepublic sector and one organisation. Additionally, contrac-tual complexity compounds the problem of establishingwhat public money is being spent with which organisation.

The case also highlights the risks involved in assessingpricing in new markets, in managing the capacity of onesupplier to deliver, in how these risks are spread to privatesector consortia partners, and in public sector competenceat managing intricate alliances with organisations at thelevel of the market. Finally, ensuring that suppliers arefinancially sound has always been an important aspect ofprocurement. Different procurement skills are requiredbetween letting initial contracts, and managing the on-going relationship. Detailed knowledge of such a keysupplier (not just its finances, but its business plan andcapacity) is needed.

5. Procure21 case study


Procure21 was developed by NHS Estates as a responseto the Egan Report (Egan, 1998) ‘Rethinking Construc-tion’, which recommended public sector clients improveperformance through the adoption of best procurementpractice from other industries. The UK NHS spends over£3 billion annually on construction; however, commonproblems were recorded: being known for buying on pricealone (and yet work came through over budget and late);contractors’ use of cheap materials to keep tender priceslow was blamed for high repair and running costs; and thetendering process discouraged innovation and change.Finally, there was concern that a major building pro-gramme in the health sector would be competing forcapacity with other major and concurrent governmentbuilding programmes (such as schools).

NHS Estate’s Procure21 is a uniform approach to NHSconstruction based on long-term relationships with 12centrally evaluated, regionally based partners and theirchains. It provides a framework for local health sectorconstruction buyers. Critically, the scheme complies withEuropean procurement regulations. Thus Procure21 pro-vides National Audit Office recognition, and thereforeindividual tenders do not have to be advertised in OJEC,saving between 6–12 months. Projects happen quicker andsuppliers can be involved before build.Lead partner organisations had to pass a detailed audit.

Post selection suppliers were given agreed margins for thenext 5 years on NHS work, in return for transparency andopen book accounting. The transparency and open bookaccounting extends through the chain down to supplier’ssuppliers. The NHS runs a shared database of projects andcostings, allowing benchmarking across projects andsophisticated performance management (all partners andtheir supply chains have to agree to contribute data and toaccept random audits of their work).


There are other benefits and details to Procure21,but essentially it is a series of voluntary National Frame-work agreements introducing on both sides consistencyand transparency within a manageable number of coresuppliers.The first key issue is that the inability to offer consistent

work to suppliers has been acknowledged as a barrier toattracting the best suppliers. With regular work, knowledgeand expertise can be built up as partners (and the NHS)specialise and build long-term relationships. Suppliers canrun their businesses confident of continuity and stabledemand. Knowing that subject to satisfactory performancethey will have further NHS work, there is the incentive toinvest in asset/health specific expertise. Agreed marginsincrease stability, commitment and the ability to forwardplan.Second, re-using the same suppliers means the NHS will

have access to new forms of standardisation, varietyreduction and modularisation that will reduce costs. Forexample innovations and other opportunities are arisingthrough the provision of standard hospital facilities asprefabricated modules. Opportunities for off-site pre-fabrication are especially valuable in the health care sector;less construction (and construction vehicle access) reducesrisk and disruption in health care environments.Third, a national database of performance coupled with

transparency means Procure21 can be a mechanism forsharing good ideas, driving out poor performance andraising standards in (part) of an industry and in a publicsector market. Accurate data means NHS Estates is able toensure the supplier is not ‘loss leading’ or subsidising otherwork, or overcharging.The case shows a move from a transaction to a

relationship-based approach, which here involves more


knowledge being shared. The inflexibility of public sectorprocesses is a common supplier complaint. Here a majorincentive to adopt Procure21 is the time saving (and abilityto involve suppliers early) allowed, circumventing therequirement to publish a tender in OJEC.

6. Prosthetics case study


Initially established to meet the needs of limbless ex-servicemen, the English prosthetics service has for manyyears been largely public funded. Until very recently, allprosthetists in England have been employees of commercialfirms, which have contracts with each of the 34 (NHS)Disablement Service Centres (DSCs). In the early 1980s,the service was run centrally by the Department of Healthand Social Services (DHSS). Nominally, there were foursuppliers in the market providing limbs, remunerated on alimb-by-limb, cost-plus basis. Relations between suppliersand the DHSS were poor. One firm (Company A) was theparent company of two of the others, and collectively thesethree firms controlled 70 percent of the lower limb market.

In 1989, a Government commissioned review found thatCompany A had a monopoly and was conducting itsbusiness in a way that operated against the public interest.Technically, the fourth supplier (Company B) also had amonopoly, but did not operate against the public interest.

As a direct result of such reviews, from the late 1980s onCompany A and its subsidiaries ceased supplying the NHS,and more than 10 new firms were established. In 1991,NHS Supplies (a national procurement agency for theNHS) was established; some of its buyers began to lead orsupport DSCs’ annual tendering exercises. Concertedefforts to increase quality and reduce costs led to ‘pricewars’ and many suppliers merged or went out of business.

By the mid-1990s, there were once again four mainsuppliers, including Company B, of prosthetic services inthe English market. All had much lower margins than firmshad previously enjoyed, to the point of affecting theirability to invest in product innovation and their long-termprospects. The level of spend by the NHS fell from £53.3million in 1991/92 to £36.4 million in 1999/2000.

Buyers at NHS Supplies, some DSC Managers andsuppliers became interested in generating improvements inefficiency and effectiveness through focusing on value formoney, not just price, and through partnership workingbetween DSCs and suppliers. Annual tendering exerciseswere replaced with three-year contracts with an option toextend for 2 years and more in a few cases. Early on thesemuch longer contracts were seen as highly desirable for thefirms and the centres. It was not long, however, beforesuppliers and NHS buyers started to recognise that thepattern of tendering across the 34 centres made suppliersmore vulnerable. Most centres would tender together in 1year. If a firm did not do well, it could be a long time beforeit had another significant opportunity to win business, and

it might not be able to survive long enough due to almosttotal dependence on the NHS for business. This increasedfirms’ incentives to cut their bid price to win business, justto maintain turnover. It also increased incentives to cross-subsidise between different service contracts or betweenservice and component sales, a practice NHS Supplies hadworked hard to discourage.DSCs might reduce the duration of their contracts, but

no one would seek a return to annual tendering. An NHSfinance director dealing with severe budgetary constraintsfaced the choice of a lower cost contract or a higher-costaward, which would have kept the market from technicallybecoming a monopoly, and not surprisingly he chose theformer.


The case illustrates the tensions between local and/orshort-term contracting decisions and what makes sense inthe longer-term or at the sector level. It also shows that‘good practice’ may not have ‘good outcomes’. Whateverthe benefits of partnership working and long-term arrange-ments at a local level, the net effect at a national level of‘good practice’ was to jeopardise the long-term viability ofsuppliers and the competitiveness of the supply market.Though key actors in the network came to recognise thisproblem, and there was wide appreciation (also shared bysuppliers) of the consequences of monopolies, there was nosimple way to resolve it.The case shows a public procurement intervention (for

competitiveness) played out over time with unintended andunwelcome consequences. The case suggests a need forprocurement to have an understanding of the dynamics ofmarkets and market interventions, and illustrates how thestructure of public tendering processes can have theunintended consequence of locking suppliers out of amarket. The case also provides an example of public sectorcontracting encouraging suppliers to cross-subsidise.Finally, the finance director in the case is shown to take a

decision that saves money in the short-term at the expenseof creating a technical monopoly. Here market competi-tiveness collides with other [important] objectives such asachieving budgets.

7. Discussion

Having acknowledged that competitiveness is only oneobjective of public procurement, this paper has examinedliterature and specific cases for key themes. In this sectionthese themes are brought together under three mainheadings.

7.1. Managing markets via individual contracts and

transactions

Procurement regulations provide a framework withinwhich individual transactions and contracts can be


managed. In the cases there are many examples ofcontractual or tendering conditions impeding competitivemarkets. These range from irregular tendering patternslocking suppliers out of markets (Prosthetics case) todisjointed contractual practices encouraging suppliers toover-extend themselves (Jarvis).

Strategic procurement needs to be alert to the negativeeffect of such practices upon other potential suppliers. Atbest, underbidding forces competing suppliers to narrowtheir margins, at worst they are encouraged to exit themarket place altogether. The ‘successful’ supplier will thennaturally seek to restore margins, for example by cuttingcorners, with the substitution of less experienced personnelfor more expensive, experienced personnel a common ruse.Personnel substitution is a sophisticated example of acontract-based approach encouraging cross-subsidisation.The Procure21 case is one attempt to address the cross-subsidisation issue, which is also raised in the Prostheticscase.

The Procure21 case suggests that managing markets forcompetitiveness involves making that market as attractiveto suppliers as possible, here through stability andcontinuity. The incentive for the customer is knowledgeand process sharing for continuous improvement andinnovation. It is a significant irony that one of the majorattractions of Procure21 (for all parties) is that it permitsparticipants in individual contracts to avoid the delays andresources needed for compliance with European legislationdesigned to ensure competitive markets through advancepublication of tenders.

The long-term perspective of Procure21 (initial five-yearcontracts) is intended to introduce innovation, which canthen be embedded and shared by central performancemeasurement. The Procure21 approach contrasts with theappearance of a more fragmented approach to perfor-mance monitoring across contracts and across departmentsraised by the decline of Jarvis plc.

The UK prosthetics industry case has the benefit of alongitudinal perspective on public procurement interven-tions. This case illustrates very well the tensions betweenlocal and/or short-term contracting decisions and whatmakes sense in the longer-term or at the collective level. Italso shows that ‘good practice’ may not have ‘goodoutcomes’.

The key finding of this section is that in order to managefor competitive markets, there is a need to incentivisesuppliers to suit broader public sector requirements.Explicitly this suggests a challenge to public procurementcontractual forms; that of being able to reward suppliersfor excellence rather than for volume.

7.2. Managing key suppliers in strategic markets

The Prosthetics and Jarvis cases deal with industries atthe opposite ends of the scale. Prosthetics has often beentermed a Cinderella service; it is a relatively low cost andlow profile service. Health sector construction is a billion

pound sector where public sectors spend is often highprofile.The Prosthetics case is, however, much more significant

than it might appear. It provides insights to the dynamicsof a market where concerted (sometimes conflicting andsometimes complementary) efforts are made to influencecompetitiveness, where good practice has unexpected,detrimental results and, most importantly given currentGovernment initiatives, where commercial companiesprovide clinical services.Both the Procure21 and Jarvis cases involve construc-

tion, a reflection of that industry having been at theforefront and therefore a testing ground of, PPP. PFI dealshave offered an opportunity for fast growth in the facilitiesmanagement (FM) sector, which offers higher margins(and more repeat business) than the traditional construc-tion sector. The result has been a switching of resourcefrom construction to FM. This has occurred at the sametime as a series of UK government programmes are leadingto a surge in public sector demand in the constructionindustry.At a market-level Procure21 is a response to capacity

constraints in ‘traditional’ construction work. Resourcesput into new markets such as those Jarvis has pursued maycreate shortfalls or capacity constraints in other marketsectors. PFI initiatives are by nature long term, and whilsta supplier is effectively locked in for that term, significantproblems may arise if the public sector finds the arrange-ment no longer satisfactory, in part because resources willhave been reallocated and capacity taken out of certainmarkets.The Jarvis case illustrates just how multi-layered and

networked key supplier relationships can become, and thenew challenge to procurement of unravelling such relation-ships when they become unsatisfactory. The Jarvis casealso illustrates how inadvertently public procurement cancreate ‘key suppliers’ (see also the EDS case in Walkeret al., 2001).In the Jarvis case, a shift in the delivery mechanism from

the public to the private sector, and the letting of a numberof contracts at roughly the same time created a keysupplier. In some markets large suppliers may be inevitable(and preferable), e.g. where heavy asset specificity iscompounded by long time scales (e.g. telecommunicationsand specifically the market for broadband in the UKdiscussed above). While large suppliers may be preferablein some cases, buyers need to recognise that asset specificityand long time scales can create lock-in, with power(potentially) shifting to suppliers post-contract award. IT/IS and consultancy services would be other examples ofmarkets where large, key suppliers may be a commercialreality.Supplier dominance in the PFI sector has not yet been

investigated; an initial study (Walker et al., 2002) foundseveral interviewees thought that the same big suppliers arepart of PFI consortia across the UK (and in differentpublic sectors). This tentative finding is not surprising, and


is supported by the construction and FM consortiasuppliers named in the 12 regional supply chains selectedin the Procure21 case. The issue becomes a criticalprocurement concern in markets such as PFI, wheresuppliers are likely to remain in a dominant position fora long time, due to service contracts of 10–30 years.Participants in the Walker et al. (2002) study commentedthat few suppliers can compete in the PFI market anyway,so supplier dominance may be unavoidable. They sug-gested that the best approach might be to manage relationswith these big suppliers, rather than ‘fight the inevitable’and attempt any interventions.

Managing public markets for competitiveness suggests aprocurement responsibility specifically for managing thesekey supplier relationships (and for managing their emer-gence). The cases suggest dominant supplier relationshipscannot be managed serially, contract-by-contract. Thispaper has not addressed multi-contract, multi-nationalsuppliers as a separate topic, but they would be an extreme(but common) example of such pressures. Once again along-term decision horizon is recommended for procure-ment thinking. Such an approach suggests a subtlety topublic procurement beyond the approach of seeking ‘thebest supplier’. In one dimension the Jarvis case illustratesthe problems that arise when the best supplier on anindividual (or series of individual) tenders is adopted.

Organisations with this new supplier management roleare emerging, with the creation of the Office of Govern-ment Commerce (OGC) in the UK, and the reformationand refocusing of the Acquisitions Service of the PublicWorks and Government Services Canada (PWGSC). Theapproach adopted in the UK has been to create a centralunit (the OGC) with responsibility for a wide range ofgovernment and public sector procurement.

The key finding of this section is to look beyondchoosing the ‘best supplier’, and instead to examine howto manage suppliers within a portfolio of market relation-ships.

7.3. Changing capability requirements for purchasing

personnel

The three cases share a common theme of the need forpost contract management. In the Procure21 case there areexplicit mechanisms (transparency, fixed and agreedmargins), which reduce the subsequent need for contrac-tual negotiation and a database for performance measure-ment. In the prosthetics case post-contract managementappears as a delayed response to the limitations apparent incontracting. Both the literature reviewed earlier and theProcure21 approaches suggest ongoing contract manage-ment is important.

The traditional arms length management of suppliersseems to be moving towards closer supplier relationships,and suggests new skills for purchasers. The cases haveillustrated different types of relationships at different stagesin markets with different dynamics. Procurement profes-

sionals will need the competencies and institutional supportto be able to assess and take highly contingent approaches.Team working and dissemination skills – and ‘softer’ ratherthan technical skills are highlighted here. The ‘one size fitsall’ solutions that may be easier for corporate style trainingto deliver will not be appropriate. This is a challenge forthose charged with developing public procurement profes-sionals.Developing the theme of contingency, various procure-

ment risks are raised in the cases and the literature (e.g.,locking a market into a few existing suppliers; over-relianceon one supplier, itself heavily networked with othersuppliers). Beyond the need to avoid sub-optimisation ofoutcomes through unconnected ‘local’ procurement deci-sions, it is suggested that managing for long-termcompetitive markets involves having a sector level perspec-tive, competence in understanding individual supplier’spublic sector business models and how they fit withachieving competitive markets. The central function atthe heart of the Procure21 initiative is one method ofachieving this. The continuing rebalancing of public/private provision (Jarvis case) is another area of procure-ment risk where new techniques and tools may be requiredin public procurement. Not enough is known about themanagement of long-term PFI relationships.Those charged with professional development could

have an immediate impact in the areas the cases raisewhere procurement needs new explicit knowledge. Thecommon theme of these areas is that they take a market ornetwork approach. For example the Jarvis case suggests aneed to build upon existing financial appraisal skills byadding competencies at unravelling the inter-connectionsbetween consortia. The Procure21 case extends traditionalsupplier performance measurement competence into mar-ket-level performance measurement, and how to presentand disseminate such findings. The prosthetics casesuggests the need for techniques of market appraisal thatinvolve assessment of supply over time. Other specific,tangible skills suggested by the cases involve the need forIT/IS skills in relation to e-procurement, enterprise wideresource planning tools etc. However, the specific andcontingent nature of the problems presented in the casesmeans this paper shies away from seeing ‘e-’ as a solution initself, rather it will be a critical new tool for managing theissues. For example in the prosthetics and Jarvis cases fulle-capability would be an important resource, but could notsubstitute for understanding market dynamics or suppliers’business models for the public sector.The key finding of this section is that the skills required

of public procurement professionals need to evolve toaddress more strategic issues, particularly post-contractaward management.

8. Conclusions

The exploratory nature of this paper reflects the role ofpublic procurement in promoting competitive markets


being in its academic infancy. The themes drawn out in thispaper make a contribution as there are few studies in thisarea, and yet the role is an important, emerging one forpractitioners. This paper seeks to highlight key issues thatmay support public procurement decision-making inmanaging complex markets.

We acknowledge the limitations of this study; it is aworking paper setting out key issues that emerge from theliterature and three cases, rather than attempting to furtherexplore or empirically validate those themes. The nature ofthis field and its topicality mean that there is very littleempirical work to draw upon.

The cases have been used to present managing forcompetitive markets as addressing impediments andimproving understanding of strategic priorities. Publicpolicy academics have observed many competing policiesin the wider public sector. Pursuing competitive markets isitself only one of many public procurement polices such asValue For Money, sustainability, etc. (Walker et al., 2004).

This paper has aimed to set out the parameters andcontext of an under researched area. Therefore futureresearch suggested by this paper includes exploring howpublic procurement can function at a market level.Specifically this paper identified a need for research onsupplier incentives at a market level, on the post-contractmanagement of suppliers and as an important sub-set, keysupplier relationship management, along with professionaldevelopment.

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