All posts by J.D.

5 Tips On What To Do When Things Go Wrong In Procurement

We share 5 tips on how to manage procurement difficulties when the policies and guidelines fall short and things start going wrong…

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Over the course of the last decade, a lot has changed in public procurement. Among other developments, international organisations have gotten more involved in public procurement policy, creating toolkits (think O.E.C.D in Paris), and standardising how procurement is integrated in national strategic plans and development projects (e.g., World Bank programs, and that of other regional and international financial institutions).

There’s also been a big push for procurement legislation to be implemented in evolving and emerging markets, ensuring greater transparency of government spending. In addition, the private sector has found itself more involved in public-private partnerships, and procurement rules have evolved to accommodate this growing trend.

Despite these efforts, one area still lacks sufficient guidance: what to do when things go wrong in procurement!

This article will share 5 tips on how to manage public procurement difficulties when the policies and guidelines fall short. The objective is to avoid or limit potential occurrences that may adversely affect the execution of procurement processes, while maintaining that the expected result must be in conformity with applicable laws, regulations and procedures.

1. Classify problems based impact

Begin by consulting the internal policies and procedures for procurement, and take note of language related to complaints, protests, challenges or errors. Once you identify whether a principle of procurement or an organizational policy has been violated, you must attempt to classify the impact of the problem.
Procurement problems can have either a high, medium, or low impact on the outcome of the process. High impact problems typically affect mandatory aspects of a procurement process and often lead to cancellation. Medium impact errors, may result in a high risk of failure of some aspect of the procurement and can lead to a flawed or failed procurement process. Low impact problems, may be signalled by a disgruntled bidder through a written complaint, or even a formal bid protest, but often lack evidence.

Low impact issues frequently result in “paused” procurement proceedings, reputational damage, or reluctance of potential bidders to respond to future opportunities. You should have a pulse on your organisation’s risk tolerance thresholds. If your organisation is comfortable managing risks, then there may already be a plan in place outlining the resources to assist you in managing procurement difficulties. However, if the organization is risk-adverse, then you will need to develop your own plan, pooling all available resources.

But, before you pull out all the stops, assessing the impact helps to categorise the problem by understanding the procurement risk, then applying practical measures to mitigate.

2. Separate ethical issues from operational ones

Literature on integrity in public procurement tends to focus on conflict of interest, fraud and corruption. Other than advice on disclosure, recusal, or reporting on these incidences, little additional guidance is provided to procurement professionals, unless they’ve received specialized training.

Certainly society has a vested interest in ensuring that public funds are used for their intended purpose, not only because we all benefit when the funds are used for the public good, but also because those funds come from us; the tax-paying public. It is therefore critical that ethical concerns in public procurement be managed apart from operational challenges.

When the principles of fairness, equal treatment, and due process are violated, they can taint the credibility of the entire process, and that of involved public procurement officials to a degree resulting in termination of employment. Worse yet, integrity matters can lead to criminal liability.

Fortunately, there are tools and mechanisms specifically designed to address ethical dilemmas including: ethics codes; declaration and waiver forms; internal and accounting controls; segregation of duties; and access to ethics officers, among other options.

All of the above should be implemented vigorously from the top to bottom of the public procurement hierarchy to avoid even the appearance of impropriety.

3. Keep and follow a procurement audit trail

An audit trail is documentary evidence of the sequence of activities that have affected, at any given time, a specific procurement procedure. It ensures there is an internal control environment that supports a transparent procurement process.

In procurement, the audit trail consists of two main categories:

A. Information about the actual data generated; it’s the who, what, where, what kind, and how many documentation of the procurement process; and

B. Information about how data was analysed (e.g., notes kept by evaluators, information flows in committee, identifying who will be responsible for what, etc.).

Procurement professionals should be informed of the scope of the audit, which would provide a window on the risk areas requiring special attention in any procurement organization. Procurement errors tend to revolve around completeness, timeliness, and accuracy of processes. Resulting recommendations often point to areas for improvement in procurement planning, tools, training, monitoring and reporting, and staffing resources. Pay particular attention to those.

4. Integrate other resources across your organisation

Procurement challenges whether in the form of bid protests, professional error in the process, failure to adhere to the terms of the solicitation, or the like, should not be managed in a silo by the procurement department. Going it alone is not an option!

Team effort is particularly necessary when managing public procurement spend. A good team scenario would involve four to five staff, including:

i)  the manager of the affected department;

ii)  the procurement professional in charge of the process in question;

iii)  a legal procurement expert who can explain the legal implications for the organization and enforce the organisation’s legalstrategy, including who can bring a challenge, under what rules, in what forum, and potential legal consequences;

iv)  a subject matter expert (on call) who can provide specific information on the product or service being procured, including market conditions; and

v)  a financial or accounting member who understands the budget lines of the organisation and keeps tabs on potential expenditure linked to the procurement error or challenge.

5. Seek external expert guidance

Best efforts should be made to resolve the matter internally, however, sometimes, the internal resources are insufficient. If your organisation permits seeking external assistance, and there are no available in-house “experts” with the experience to assist, then external resources may be the best option.

In addition to international agency guidelines, other tools to explore include:

i) national laws, with associated guidelines on how to manage procurement issues;

ii) specialty firms for procurement professionals, offering on-line consultations; and

iii) local, national, and international trade associations which offer case studies, “thought” pieces, and news-setting precedent from procurement experiences gathered from global sources. Many professional associations also offer webinars and chats with other procurement professionals, which allow anonymity, while offering a chance to share experiences and seek guidance to facilitate answers to the most difficult of procurement problems.

In the end, whether in procurement or any other field, experience is your most important ally. The more experience we gain, the more we develop the competencies necessary to manage procurement challenges, along with the confidence to do so with ease. Each challenge brings important lessons, and each lesson will help you overcome new obstacles the next time things go wrong in procurement.

International Supply Chain Risks: How U.S. Sanctions Can Kill Your Deal

U.S. sanctions are being applied more vigorously than ever to perceived foreign foes.  What risks do these sanctions pose to our supply chains and  what Mitigation Strategies Can be Used?

The United States (U.S.) had $2.21 trillion Dollars in exports in 2016 according to the U.S. Department of Commerce (D.O.C)i, and an estimated 10.7 million U.S. jobs supported by exports ii. Yet U.S. unilateral sanctions are being applied more vigorously than ever to perceived foreign foes, negatively affecting trade balances.

One of the most important and sensitive supply chain risks for private and public organisations is how to manage U.S. unilateral sanctions. The U.S. Treasury Department Office of Foreign Assets Control (OFAC) is responsible for administering U.S. sanctions. OFAC also distinguishes between primary and secondary sanctions, with the former prohibiting U.S. persons from engaging with sanctioned entities, and the latter targeting non-U.S. persons, outside U.S. jurisdiction, engaged in activities with the sanctioned entity either directly or in an ancillary fashion. Potentially affected businesses and individuals, therefore, must regularly consult the Department of Treasury’s online resources, or engage lawyers with OFAC compliance experience, to ensure they are not exposing themselves to significant penalties (or jail time) from U.S. authorities. For international or multi-lateral organisations, unilateral sanctions risks are particularly tricky because both the U.S. and the sanctioned country, or countries, may be among their members. This article will focus on U.S. unilateral sanctions risks affecting International Organisation deals.

Why Is This A Problem?

Nearly all international organisations have clauses prohibiting contracts, transfers of goods, or even technical cooperation engagements with vendors or countries subject to sanctions imposed by the United Nations Security Council. However, these organisations are not required by international law to adhere to unilateral sanctions of any one member country against another, due to the privileges and immunities conveyed upon them by international conventions.iii In theory this means that if the U.S. imposes sanctions on Iran for example (both member countries of the U.N. since 1945), but the United Nations itself does not impose sanctions on Iran, then U.N. agencies and similarly, non-U.N. multi-lateral organisations, could continue doing business with Iran and not have to abide by the U.S.’s unilateral action. In practice however, multi-lateral agencies may find it difficult to ignore the U.S.’s persuasive sanctions arguments, despite the detriment unilateral sanctions may cause another member. Why? The United States is a major actor on the world stage, and it has considerable influence. It can wield its tremendous political and economic clout as a powerful member of nearly every international organisation in the world, to ensure its objectives are met, and that any transgressions by suppliers or international agencies, are swiftly discouraged.

What Are The Supply Chain Risks?

Supply interruption – U.S. unilateral sanctions can be applied overnight because the surprise element is very powerful in coercing the sanctioned party to comply with U.S. demands iv. Because sanctions may be implemented quickly and unexpectedly, their enactment can trigger immediate supply interruption of goods and services. All members of the supply chain can become subject to rigorous product or service inquiry to determine continued eligibility, and re-negotiation of terms is a real possibility. Suppliers may find themselves scrambling to ensure their contract doesn’t involve activities or persons that expose them to secondary sanctions.

Payment restrictions – Cash flow can also become a problem, especially if suppliers negotiate special payment terms in certain currencies. If an international agency engages a supplier to provide goods or services, and that supplier is somehow involved with a sanctioned entity, directly or indirectly, payments or advance cash transfers may get tied up by banks who suspect the transfer may reach an entity subject to U.S. unilateral sanctions. This can lead suppliers to struggle to meet contract targets or cease delivery altogether. It can also make repatriation of payments back to a payer more difficult.

Reputational Impact – Although the U.N., other multi-laterals, and their staff enjoy immunity from legal processv, suppliers do not enjoy the same protections. Sanctions can bring additional costs they hadn’t expected and they may attempt to secure compensation when things go awry. Even when the relevant law and jurisdiction for disputes is determined by the international agency, suppliers may still aggressively pursue disputes and the reputational risk for the agency if it does not comply or compensate for a presumed breach, is high. Diplomatic and political resources often prevail in settling such disputes away from the prying eyes of the press and public, however, coming to a satisfactory resolution involves time, money, and uncertainty.

What Mitigation Strategies Can be Used?

The answer is…. “It depends.” First, it’s important to understand that navigating unilateral sanctions can be a political minefield for an international organisation! Unlike private entities, there is no clear system in place to manage unilateral foreign policy objectives of one sovereign member state against another. Second, although international agencies monitor political developments of member countries, and no doubt try to avoid dealings that would disturb the delicate balance within these structures, it is not within their purview to implement unilateral sanctions against a member, unless there is consensus among all members to do so. Third, supply chain risks are inherently unpredictable. Supplier audits and screenings only show a snapshot of current relationships, not entanglements with sub-contractors or third party beneficiaries. Although parties can attempt strong due diligence and even stronger government compliance, knowing the rules to follow when caught in the web of unilateral sanctions actions is challenging.

To read the full article by Magda Theodate, please click here. 

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i U.S. International Trade Administration, Department of Commerce 2016 Exports Fact Sheet, https://ibc- static.broad.msu.edu/sites/DEC/images/resources/1159b5b1-8a59-47a1-b988-4bb1836c9904us-exports- factsheet.pdf

ii U.S. Office of Trade and Economic Analysis, Department of Commerce Jobs Supported by Exports 2016 https://www.trade.gov/mas/ian/build/groups/public/@tg_ian/documents/webcontent/tg_ian_005543.pdf

iii Convention on the Privileges and Immunities of the United Nations (the “Convention”), adopted by the General Assembly of the United Nations February 13, 1946, and which set out specific privileges and immunities for the UN and its staff subject to waiver only by the Secretary General in certain situations.

iv U.S. implemented changes to Cuba sanctions rules announced officially November 8, 2017 and taking effect on November 9, 2017, see U.S. Treasury Press Release https://www.treasury.gov/press-center/press- releases/Pages/sm0209.aspx

v See Supra note 3