The dark side of procurement

PROCUREMENT may seem like a boring topic to most of people. However, as the Auditor General's Office annually highlights many procurement lapses, the process of sourcing for and selecting the best vendors for the delivery of goods and services at the lowest cost can be a hot topic.

In a country like Singapore, which boasts high standards in business ethics and compliance, it is worrying to see a growing trend of procurement breaches.

This includes contract mismanagement, unfair tendering practices, overpayments, lack of reasonableness checks and the occasional black sheep case.

The 2017/2018 Auditor General's Office report shows there was S$468.28 million mismanaged due to procurement lapses, nearly three times higher than the previous year.

This escalation in procurement lapses is echoed by the PwC Global Economic Crime & Fraud Survey 2018, which revealed Singapore had a 35 per cent increase in economic crimes over the previous year.

Furthermore, the survey found 27 per cent of Singapore organisations reported procurement fraud, which is higher than the 22 per cent global figure.

This is just the tip of the iceberg - being only the cases that have been detected and reported. Hence, it is crucial to raise attention on this worrying issue, with the first step being proactive awareness and detection of such lapses.

And before you point out that this is the job of your procurement team and that your business would never be guilty of wilfully committing an economic crime, remember that a significant proportion of procurement lapses are not due to people purposefully trying to beat the system.

Instead, they may face tight deadlines or need to produce results under challenging circumstances, and believe the best way forward is to appoint a particular vendor to get the job done efficiently.

Here are some tips for everyone to ensure best practices in procurement:

Do a simple eyeball test

Sometimes a quick cursory scan can tell if something is not right. A good example of this would be the case in 2016 where an organisation paid S$410,000 consultancy fees for the study on building a waste disposal centre, which was nearly 90 per cent the cost of actually building the centre.

It would have been particularly useful if someone outside the project team could have done this eyeball test, as they would have likely examined the consultancy fee as a proportion of the total project cost and seen that it was not reasonable.

Have procedures and policies in place

Following certain procedures and having a sequence of approval keeps the checks and balances in place, helping to minimise risk of problems such as bribery, fraud or preferential treatment.

Companies should ensure these policies are easy to understand and simple to follow, to increase likelihood of compliance.

Compliance also improves when everyone knows why certain steps are in place, since people dislike excessive bureaucracy when they cannot see the benefit.

For example, explaining why getting three quotes is useful in getting more options, makes it easier to follow this policy.

Management also need to ensure that, where possible, the personnel in the procurement chain of approval have relevant experience, instead of merely being there to provide a signature.

It is also important that the purchasing organisation keeps transactions with related parties at an arm's length. If this policy had been in place, the case where an organisation bought 26 bicycles for S$57,200 may not have happened, since the winning vendor was a friend of the purchasing officer in charge.

Switch to a centralised procurement system

Having a centralised procurement system helps organisations minimise duplication, lower costs and improve relations with vendors.

Leveraging an e-procurement system has added benefits of increased efficiencies, reduced paperwork, automated best practices and the ability to access procurement analytics. The latter can identify and red-flag procurement lapses - both in real-time and even before they occur.

This would have prevented a case that happened in 2017, where a prior contract for site supervision services already existed, but additional expenditure for hiring more site supervisory staff was approved for a sum of over S$4 million.

A centralised system would immediately signal the duplication of such identical contracts.

Other cases that a centralised system would red-flag include multiple purchases made to the same vendor, where instead of a tender, only one quote is obtained with a waiver of competition.

As Singapore progresses towards a Smart Nation and pours funds into upgrading the city, we must carefully consider these issues and ask ourselves: Does it make sense that the mechanism, by which we allocate and dispense these funds to stay at the forefront of technology, remains stuck in the past?

The writer is the founder of ThunderQuote, a solutions provider that helps to source and select the right B2B vendors for business projects.