Legal Insights

The incumbent provider advantage

By Simonetta Astolfi

• 07 August 2014 • 9 min read
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In procurement processes, an incumbent provider can have, or be seen to have, a significant advantage over other potential suppliers of goods or services by virtue of their experience, knowledge about the day to day workings of the entity buying the goods or services, and existing relationships. This can lead some potential suppliers to approach procurement processes with an attitude of 'why bother?'

For those that do bother, when a process results in the award of a contract to the incumbent provider, there can be a feeling that it was a result of the incumbent provider's actual or perceived advantages, and there is the potential for complaints that not enough was done to ensure a level playing field between all potential suppliers, or that the procurement process was not fair or impartial.

So, how do entities undertaking procurement processes avoid the 'why bother' attitude and the risk of complaints that the incumbent provider had an advantage in the procurement process?

First, it is true that incumbent providers have benefits as a result of their incumbency. Generally, they have had the chance to develop a strong understanding of the entity's business requirements and operations and to develop strong relationships with individuals employed by the entity. However, whether the incumbent provider can articulate their understanding of the entity's business and operations when it comes to tendering, and whether those relationships actually give the provider any advantage in the tender process, is another matter.

What potential tenderers may fail to appreciate is that incumbent providers can become complacent, lazy or expensive. An incumbent provider may well be 'on the nose'. This may work against them.

Addressing the incumbent provider advantage

The relationship and information advantages an incumbent provider may have can usually be effectively addressed, and the risk of any complaints on this basis can be minimised, by some or all of the following mechanisms:

  • ensuring the incumbent provider is not involved in developing requirements for the approach to market
  • ensuring the incumbent provider is not asked to comment on, and does not have access to, draft approach to market documentation (as this could lead to allegations that the requirements favour the incumbent provider, or that they received an advantage by having advance access to this information)
  • ensuring that sufficient information is disseminated to all tenderers in order to even up the playing field (this information could be included in the request documentation itself; provided via the entity's website, provided via a data room and/or by conducting industry briefings or other sessions to familiarise tenderers with the entity's requirements)
  • providing tenderers with scenarios that detail how the services operate or are performed or utilised on a day to day basis (subject of course to any confidentiality requirements that may apply)
  • ensuring tenderers have adequate time to review the information, ask questions and prepare their tenders
  • ensuring that there are appropriate separations of roles well before the procurement process is undertaken (i.e. that the contract management and tender evaluation functions are separated)
  • appointing an external probity adviser to independently monitor the fairness of the process
  • providing meaningful debriefs to unsuccessful tenderers (as this assists in minimising the risk of tenderer complaints).

What about the costs associated with changing providers?

What can be harder to overcome, however, is how expensive it can be to change providers (both for the procurer and the potential supplier), which is most often borne out in transition or implementation costs.

Incumbent providers can trip up here. They could assume that as the appointment of other providers will come with transition costs, they can increase their price and remain cheaper. This thinking generally won't play well for the incumbent provider during evaluation or for the longer term relationship. A proposal of this nature can often do the incumbent provider more harm than good.

What can entities undertaking a procurement process do when there are significant transition costs that would be avoided if the incumbent provider was re-appointed?

One option is to adjust the requirements, so that even the incumbent provider will have transition costs. This is useful if there are things that you want to have delivered that aren't currently being provided. It will also go some way to address potential suppliers' concerns about the incumbent provider's advantages.

However, if the arrangements you have are working, changing your requirements may be difficult to justify, or might cause you further issues (for example, changing requirements without researching whether the market can deliver those requirements means you run the risk of approaching the market for something no-one can provide).

Assuming the requirements aren't changing (i.e. you continue to need what the incumbent provider currently provides), procurers need to consider how to deal with transition costs during evaluation.

In some instances, it is possible to define the price you're willing to pay, which takes price off the table. There are examples of this in Commonwealth procurements, for example, in the procurement of hearing device providers, and of outsourced employment services providers. However, setting a fair price isn't always possible, and if the price you set isn't well researched, then you expose yourself to an increased risk of criticism (on the basis, amongst other things, that value for money has not been achieved), difficult negotiations, and arrangements where the shortfall is recovered in other ways.

Assuming the requirements aren't changing, and it is not possible to quantify reasonable transition costs and set a price, what other options does the entity have?

One option is to ignore the potential suppliers' transition costs (either by not asking for them, or by asking for them, but not including them in your assessment). This sort of wilful blindness means there are unknown costs lurking behind the corner, which you might not find out about until it's too late. An evaluation process that disregards these costs means the assessment of whether or not a solution represents value for money is a flawed one, because the real cost to the entity of each solution has been ignored. This could expose the entity undertaking the procurement process to criticisms, including on the basis that it has been financially irresponsible.

Another option that is sometimes mooted is to average out the transition costs set out in the tenders, and to apply the average of those costs to all tenderers, or to add the average to the incumbent provider's price. This is unfair to the incumbent provider, because their solution simply doesn't come with these costs. If the average is applied to all tenders, it is unfair to those tenderers whose transition costs were less than the average, as it inflates their tendered price. This approach could, therefore, justifiably give rise to complaint or criticism. Ironically, this approach potentially creates more inequity than it addresses.

Sometimes you can ask that transition and implementation costs be amortised by tenderers over the life of the contract, or that they are otherwise factored into pricing (not separated out from other prices). Where transition costs are significant, asking for pricing on this basis means the incumbent provider's advantage remains, but is less visible when you come to evaluate price. This approach may also make it difficult to appropriately assess value for money and compare apples with apples, particularly as between the non-incumbent providers. Also, it may not always be possible to apply this approach, particularly where you do not necessarily require an overall fixed price and may want to separate out various elements of the services to be priced separately.

What the above suggests is that almost anything you can do during evaluation to address the incumbent provider's advantage in relation to transition costs is likely to be unfair to, and could give rise to complaints from, the incumbent provider. Perhaps the fact that the incumbent provider does not have transition or implementation costs is an unavoidable advantage that the incumbent provider has because they are the incumbent provider.

The European Court of Justice has considered issues of this nature on a number of occasions, and has considered that the incumbent provider, or tenderers that propose to subcontract the incumbent provider, have an inherent de facto advantage that cannot be neutralised absolutely, except by excluding the incumbent provider from tendering. In the face of this, the Court has determined that a requirement for a fixed price for transition based on information provided to all tenderers, or a requirement for an unpaid transition period does not infringe the requirement for equal treatment of tenderers.

Addressing the incumbent provider's transition costs advantage

If an unavoidable advantage exists, perhaps the best that can be done is to face up to it. Approach the market with your eyes open and be sensitive as to how it may impact the evaluation.

Given what we've considered above, here's what we suggest:

  • change your requirements if this will be of some benefit to you, but don't if it won't
  • if there's no need to change your requirements:
    • make sure you request information that allows you to see the impact of transition costs on evaluation (i.e. to the extent it is possible to do so, do ask tenderers to provide itemised implementation and transition costs in their tenders – at least you then know what you're dealing with)
    • make sure your evaluation methodology allows you to take note of the impact of these costs and is flexible enough to test whether or not these are the decisive factors – they seldom are, and if you've tested this during evaluation, this can assist in addressing questions or complaints from unsuccessful tenderers4
    • avoid an evaluation methodology that is overly rigid in how price is compared to technical criteria – a non-incumbent provider's high transition costs may be outweighed by the non-financial benefits of its solution. Similarly, an incumbent provider's cheaper overall price might be outweighed by risks the entity has identified in relation to its past performance in delivering the services.

If the incumbent provider is successful due to the unavoidable advantages they have, and you have addressed these to the extent you can, so be it – if a tenderer is the cheapest, technically the best, and the lowest risk option, they're the best option.

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