Understanding shared service procurement

Arthur Cox Partner Aaron Boyle outlines the main processes for procuring shared services and considers the extent to which Ireland can learn from Britain.

Public procurement is a regulated industry. Any time that any public sector body wants to buy anything it needs to be thinking about the rules which govern public procurement. Procurement in a shared services context is about structuring procurements in a way which promotes efficiencies in public purchasing. Shared services have a variety of forms, some more obvious than others.

Agency

There is now an active market in public bodies procuring not only on their own behalf but also on behalf of other identified public bodies. This type of agency arrangement is a form of shared service function. Centralising common purchases in certain sectors makes sense. There have been examples of this type of ‘agency’ arrangement running into difficulties, however, because the description of the entities intended to benefit from the procurement being run by the ‘lead’ public body, is vague. Describing the beneficiaries as being for other public bodies in the transport, health or education sector, for example, is unlikely to suffice. Each individual public body which is intended to be captured by the procurement should be named.

The Office of Government Procurement has identified a broad range of services to be procured by ‘category councils’ i.e. one body buys on behalf of the public sector as a whole. The intended benefits of this structure are obvious – a single procurement concentrates buying power, means that the public sector gets one price for the product or service and avoids duplication of effort. In many instances, it is further intended to undertake these centralised purchases using frameworks.

Frameworks

Frameworks are regularly used for purchasing by public bodies. Frameworks allow a public body to procure a range of services, supplies or works and to ‘call off’ or seek specific requirements over the course of the framework. If you are not successful in being appointed to a framework, it can result in you being excluded from that market for years. That can have disastrous consequences for excluded parties. As a result, there is a lot of attention paid to how frameworks are used in practice: whether the scope of the framework is being extended (contracts are being awarded for items not reasonably within contemplation of the framework when it was established) or the manner in which contracts are called off (making sure that it is consistent with what the framework tender said would happen at the outset). In this latter respect, it is important to set out, upfront, how individual contract under a framework will be awarded.

SMEs

The combination of centralised purchasing and the use of frameworks has led to concerns from SMEs that they are not getting access to contracts because these centralised purchases require scale which SMEs cannot meet. It would appear that the intention is not to move away from centralised, collective procurement but rather to encourage SME participation through other means. It is now a regular feature in significant contracts to see SME ‘meet the buyer’ events where SMEs that are too small to tender for the contract or framework on their own can meet with the larger entity who succeeded in the procurement and seek to find a role.

Such events, while welcome, are unlikely to improve matters significantly for SMEs. Aware of this, some public bodies are now making SME participation a feature of their tender processes by either making it a minimum requirement or awarding marks for tenders which demonstrate SME access. There are also social inclusion clauses in public contracts which reward or penalise good or bad SME engagement.

A feature of procuring on a larger scale is that smaller enterprises are unlikely to be able to tender for the bigger contracts on their own. Consortiums are quite common in complex contracts but are likely to be much more of a feature for centralised procurements generally. There is a learning curve process for some SMEs to understand how they team up with entities they would either previously not have dealt with or even actively competed against. Issues such as division of responsibility, whether there are guarantees required or joint and several liability (the latter being very unattractive for SMEs) should be considered and agreed prior to participating in any consortium type arrangement.

Lots

Similar to frameworks and consistent with a shared services outlook, lots are increasingly being used to allow public bodies have a single tender process for a range of services. Indeed the new Procurement Directive will require public bodies to explain why they are not using lots. Lots are typically broken into different services or by size or both. While single procurement processes are administratively attractive at the outset, they can be operationally difficult to manage in practice. There are examples where it would, due to the complexity of a contract, make more sense to use the entities appointed under a higher value lot, for example, but because the tender process was structured by value only, this is not achievable. Shared services structures will need to factor in flexibility to deal with centralised services being dealt with using a lot structure.

Vertical and horizontal co-operation

Vertical co-operation is shared services in its simplest form. Basically, a public body decides to re-align certain of its functions in order to perform certain services itself.

Where two public bodies each have an independent function (often supported by statute) with a common aim, which is for the public good and where there is no private sector involvement, then contracts between the public bodies to deliver that common aim can be entered into without the need to run a tender process. This is known as horizontal co-operation and has found its way in the new Procurement Directive (Article 12).

Some public bodies have developed templates which contain, in specific and detailed terms, each element of the test (summarised above) to be satisfied. Both public bodies participating in the co-operation satisfy themselves that they fall squarely within the exception and complete the template. This then also constitutes the agreement between them for the services to be delivered. Many shared services structures are based on a form of horizontal co-operation.

UK lesson?

The UK has been delivering shared services for some time. There are lessons which can be learned from those experiences.

Centralised procurement in the UK is on a much bigger scale than it will ever be here. As a result, Ireland does not need to use some of the more complex structures used in the UK in order to undertake effective shared services. For example, establishing joint ventures with private sector operators in order to develop shared services, while having the benefits of securing closer collaboration in delivery of complex services for the benefit of the public, is not likely to be seen as a primary structure to be used here.

Ireland is currently grappling with some of the key structural issues such as VAT treatment, data protection and employees’ issues on shared services. Once these structural issues are addressed and provided the structures work, then avoiding the temptation to tinker with them later is important.

Shared services structures are popping up in a variety of forms in Ireland. We expect 2015 to see some significant developments in the sector in Ireland.

Aaron Boyle is Partner with Arthur Cox
Earlsfort Centre
Earlsfort Terrace, Dublin 2
Tel: +353 (0)1 618 0568
Email: aaron.boyle@arthurcox.com
Web: www.arthurcox.com