I recently saw an article on how procurement foiled a bid-rigging plot in Hong Kong. The Administration Procurement Department of Hong Kong’s Young Women’s Christian Association (YWCA) was reviewing tender documents last year when the staff noticed something amiss. The four bids that they received, which were under the names of four different companies, contained the same information except for the bid amounts.
The staff alerted the Director of Finance, who conferred with his CEO, and they decided to refer the matter to Hong Kong’s Competition Commission. Last March, this regulatory body commenced proceedings against five IT companies, four of which submitted the bids. It was the regulator’s first legal action since Hong Kong’s competition law came into effect this year.
YWCA did not provide details because legal proceedings are still ongoing, but they did mention that the tone at the top was important and their zero tolerance policy helped avert malpractices and achieve value in procurement. The news article further mentioned that bid rigging and other such practices have long been suspected to be a fact of business life in Hong Kong. This was an interesting comment. The article further identified the four IT companies that participated in the foiled bid. The four included BT Hong Kong, SIS International Limited, Innovex Distribution Limited and Tech 21 Systems Limited. The investigation included a fifth company, Nutanix Hong Kong Limited. These are all established names in the industry. The commission alleged that a representative of Nutanix and BT Hong Kong colluded with their friends in the three other IT companies to prepare and submit dummy bid documents. This was a startling allegation considering that these companies are multinationals.
I go back to my experience with our telecommunications division. We had very high standards for identifying and pre-qualifying vendors. Potential vendors had to go through a rigid accreditation process to prove their financial and operational capabilities. They had to share reference sites or customers so we could cross check their performance. We needed to know who they were, as well as the principals that they represented. Once identified, the bid process itself was conducted under strict guidelines. We had two bid methods. One was the traditional sealed method and another was through an open reverse bid or auction method. The sealed method was primarily for single transaction type products or services that were distinct in nature, while the reverse auction method was used for repetitive transactions with variable costs, such as construction. Once chosen, these vendors were subjected to regular audits and vendor evaluations so we could rank them in terms of performance. The best vendors were granted annual quality awards and more importantly, repeat orders. In this highly controlled environment, there were few instances when we noticed discrepancies. And yet we still did.
One interesting event that we noticed over a period of a year was the repetitive granting of awards to a single bidder despite very competitive bid guidelines. This automatically raised an audit alarm. During the initial investigation, we did not discover anything wrong. The IT vendor was an accredited and experienced integrated infrastructure network provider. It had sufficient means in terms of both financial and operational resources. It has been performing quite well, although recently, it was noticed that its manpower was starting to feel the pressure because of the multiple projects that they were working on. Although there were other alternate vendors that we could have tapped to balance the workload, we hesitated to change “our” own rules to distribute the workload and award to second or third ranked bidders.
We wanted to maintain our rigid and uncompromising bid award rules. And yet, something was bothering us, but we could not put a finger on it. We decided to approach the foreign principal to help us resolve our doubts. Since we were a respected and valuable customer, the principal did not hesitate to share with us their distribution methodology. They told us that as a principal, they wanted to make sure that their distributors were treated equitably and that they performed according to global standards. One of the ways to treat distributors equitably was to reward distributors who brought the business opportunities first to the table. In other words, the distributor that got wind of a project first and referred it to the principal got a better discount and was assured, or was given an edge in winning a project bid. It was, therefore, not surprising that the same vendor got the succeeding projects. They were on the ground with our own technicians when the future projects were being rolled out. It was natural that they would discover this projects first. This was a startling revelation to us as we always assumed until then, that the network products had standard prices and the local services were the variable in the bid.
The other distributors still participated in the bids knowing their inferior positions, first to maintain their relationship with us and secondly, with the mindset that they could still beat the leading competitor through a more efficient service delivery, which could reduce time and costs. In most instances, we all realized that this variable could not beat the better product discount given to the preferred distributor. It turned out that the bids were performed simply to fulfill our own bid requirements but the winner was practically pre-determined by the principal through the various discounts that the principal gave its own competing distributors.
With this discovery, we approached other foreign IT principals and found out that they had similar practices. We were in a dilemma. How do you continue the competitive pressure if you knew that the principal was driving the bidding process? We decided to adopt the concept of “should cost.” In essence, we needed to actually know the prices of the products and services beforehand so we could avoid bidding them out altogether. We could also maintain the competitive pressure by pitting competing brands with the same specifications. This was easier said than done though, because of certain interconnectivity or compatibility requirements in our network. Standalone requirements, like computers, were easier. We just needed to avoid bidding the same brand and had to identify competing brands
The internet provided most of the “should cost” pricing. This required a lot of research effort. We also asked the principals to assign their best distributor based on the complexity of our network requirements. We then set up frame supply agreements with the “winning” distributors so we could place repeat orders. This simplified our own process. This method required that we continually update our “should costs” but it saved us more in the long run.
This process of discovery is key in improving and innovating processes. We just need to be mindful of the opportunities when we see the problems.
Ronald Goseco is currently EVP of the Financial Executives Institute and President of IDI-Volkswagen