Part 3: Strategic procurement planning

Developing a procurement strategy

3.1
In Part 3 of our overarching guide Public sector purchases, grants, and gifts: Managing funding arrangements with external parties, we discuss the need for a public entity to take a strategic approach to managing public funds. Although it may not always be separately identified as a specific discussion, this high level thinking will often involve considering the different types of funding arrangement a public entity could use. In these processes, a public entity will often make fundamental decisions on the types of funding arrangements it will use to achieve its goals, and on how important a particular type of funding arrangement is for its work.

3.2
If these issues have been well considered, it should be relatively simple to understand the importance of procurement to the public entity achieving its overall goals and business strategy. This Part provides guidance on developing a procurement strategy when procurement has been identified as integral to the business strategy.

Strategic procurement planning and analysis

Expectations

3.3
We expect that each public entity will have a thorough understanding of the:

• type of procurement that it does;
• value and risk associated with the procurement; and
• importance of procurement to achieving its overall goals and business strategy.

3.4
A public entity should develop a procurement strategy if procurement is integral to achieving the overall business strategy.

3.5
Where procurement is not integral, a public entity should still be able to demonstrate:

• a knowledge of the type, value, and risk associated with the goods or services it procures; and
• that policies and procedures are in place for those involved in procurement activity to ensure that good procurement principles and practices are adopted.

Guidance

3.6
A public entity's relevant policies and procedures should include a strategic component that assesses whether procurement is sufficiently integral to the business strategy that it warrants a separate procurement strategy. To do this, a public entity will need to understand what it is procuring and how integral this is to its overall business goals.

3.7
Regardless of the size of the function, a public entity should know:

• what goods and services it procures;
• how much it spends by category type and also on individual procurements;
• its main suppliers and the volume and value of the procurements; and
• the main markets it procures in.

3.8
The public entity should include guidance in its policies and procedures on how it will develop and implement its procurement strategy. The guidance should cover:

• who will have overall responsibility for procurement planning;
• who will be involved in the planning process and when they will be involved; and
• how the procurement strategy will be linked with the public entity's broader strategic planning processes.

3.9
If the procurement function is large, a public entity may need to have systems in place to gather and analyse information on its procurement activities. It will also need to decide:

• how it will gather this information; and
• how the information will be analysed and used for decision-making.

3.10
The strategies a public entity uses to approach markets can range from simple credit card purchases with local suppliers to complex multi-stage offers. When deciding which strategy to use, a public entity should take into account:

• the value and risk of the goods and services;
• the availability of the goods and services;
• the importance of the goods and services to the public entity;
• the characteristics of the market and any action the public entity may want to take to develop or otherwise influence the market;
• the transaction costs associated with the procurement; and
• government policy objectives – for example, sustainability.

3.11
There are a variety of tools and techniques public entities can use to help them with their strategic procurement analysis. One tool that is widely used in strategic analysis is matrix analysis (sometimes referred to as quadrant or portfolio analysis). Typically, some aspect of risk, difficulty of supply, importance to the organisation, or equivalent is plotted on a graph against expenditure on various goods or services. Combinations of these factors and the goods or services are then categorised into four quadrants on the graph.

3.12
Figure 2 shows how the risk and value of the procurement provides a useful categorisation of goods and services as a means for identifying and developing different strategic responses for each category. This approach can help a public entity to choose an appropriate procurement strategy to address the risk and value of the goods or services being procured. A public entity may also find it useful to establish what proportion of its total expenditure on procured items is in each quadrant. Typically, quadrant 4, high risk and high value items, can make up more than half the value of the public entity's total expenditure on procured goods and services.

Figure 2
Analysing type of procurement to identify procurement method

3.13
Figure 3 is derived from the Queensland Government Department of Public Works' Better Purchasing Guide Developing “Agency Purchasing Procedures” (which can be found on its website at www.qgm.qld.gov.au). Figure 3 shows how four-quadrant analysis can be developed into a basic procurement strategy. It also sets out the issues a public entity should consider when developing procurement procedures for each category.

Figure 3
Options for approaching markets

Characteristics	Basic procurement strategy	Issues to consider when developing procurement procedures
Low value and low risk (Quadrant 1)
Goods or services in this category are usually low value. These goods or services can be routinely procured or procured as required. They are generally goods or services for which demand cannot be aggregated to establish standing offers. The transaction costs associated with procuring them may be of greater cost than the items themselves. Generally, there are competitive local supply markets for goods or services in this category, even at the local level. The skills required for these types of transactions are generally administrative.	Keep procurement in this quadrant relatively simple to minimise procurement and transaction costs. Devolve procurement and associated budgets to the lowest practical geographic level where competitive local markets exist. Establish efficient local procurement arrangements to minimise processing costs. Document the administrative procedures for procuring goods or services in the entity's procurement policies and procedures.	What are the goods or services procured in this category? For the different goods, services, or groups of items in this category, what procurement methods will minimise processing costs and deliver value for money? How will the number of competitive offers needed to deliver value for money, probity, and accountability be determined? Who will be doing procurement activities in this category? What skill levels are required to do the various types of procurements? What expenditure and procurement authorities/approvals are needed for management control and to ensure probity and accountability? What other procedures, documentation and records are needed to manage the procurement function in this category?
High value and low risk (Quadrant 2)
Goods or services in this category are generally widely used by public entities, they have no special quality, safety, reliability, or environmental implications, they are simple to specify, and they have common standards. Procurement of these items is often in high volumes but with sometimes low value individual transactions. There are often whole-of- entity or syndicated arrangements for supply of these goods or services. Buying is usually an administrative task (for example, booking travel). However, high level procurement skills are required to establish and manage these arrangements (for example, setting up travel arrangements).	Aim to ensure that total costs, including the costs of processing large numbers of low value transactions, are reduced. Consider using standing offer arrangements with electronic ordering and transaction processes. Aggregate procurement to increase the attractiveness of buying the goods or services, thus increasing the competitiveness of the pricing. Document the administrative procedures for buying in the entity's procurement policies and procedures. Consider if there is a need to address environmental issues about disposal, waste management recycling, handling, or storage.	What are the goods or services purchased in this category? Where are the competitive markets for these goods or services? Does the aggregation of procurement at the local level for particular product types warrant a full service provider with regional delivery capability? Where is it practical to establish standing offer arrangements or other methods of supply? Are processes such as electronic ordering/paying or other processes available to reduce processing costs? How will the buying strategies to deliver value for money, probity and accountability be determined? What skills are needed to establish and buy from standing offer arrangements? What skills are needed for the other buying methods used in this category? What expenditure and procurement authorities/approvals are needed for management control and to ensure probity and accountability? What systems and supporting procedures, including expenditure and procurement authorities/ approvals, are needed for management control and to ensure probity and accountability?
Low value and high risk (Quadrant 3)
Goods or services in this category are usually highly specialised (for example, high-tech medical equipment). There are often very few potential suppliers. There are relatively few transactions in this category. High-level procurement and technical skills are required to establish and manage these arrangements. Price may not be the principal factor in the procurement.	Reduce exposure to limited sources of supply. This can be done through actively identifying alternative sources of supply and/ or changing the demand requirements of the public entity. Prepare individual strategies or procurement plans for each procurement project is this category.	An individual procurement strategy/plan will need to be developed for each item in this category. The public entity's procurement policies and procedures need to provide an efficient mechanism to do these procurement projects. What organisational systems and procedures need to be in place to do procurement and contract management in this category? How will the required procurement, technical and other expertise be identified for each project? How will project managers be identified and what responsibilities and authority will they have? How will projects be integrated into the public entity's other business activities? What systems and supporting procedures, including expenditure and procurement authorities/ approvals, are needed for management control and to ensure probity and accountability?
High value and high risk (Quadrant 4)
Goods or services in this category are often a complex “bundle” or “package” of services and associated goods that are critical to the service delivery of the public entity. Long-term relationships with suppliers are common. Supplier attitudes to the public entity as a customer are often critical to the value the entity will derive from the delivery of the goods and/or services. High-level purchasing and technical skills are required to establish and manage the procurement process.	Focus on ensuring that the successful supplier has the ability, availability, and resources needed to work with the public entity. Manage the relationship with the supplier to obtain value for money. Have a detailed understanding of what is required, how the arrangement should be managed, and the market characteristics. Develop individual procurement strategies or plans for each procurement project in this category.	Buying strategies will have been developed for each item in this category. The public entity's policies and procedures need to provide an efficient mechanism to do these procurement projects. What organisational systems and procedures need to be in place for doing purchasing and contract management in this category? How will the required purchasing, technical, and other expertise be identified for each project? How will project managers be identified and what responsibilities and authority will they have? How will the projects be integrated into the public entity's other business activities? What systems and supporting procedures, including expenditure and procurement authorities, are needed for management control and to ensure integrity and accountability?

Planning for the procurement

Preparing a business case

Expectations

3.14
We expect a public entity to:

• prepare a business case to support the procurement of higher value and higher risk items; and
• require the business case to be part of the project approval process.

3.15
In some instances, a public entity may use a preliminary business case or equivalent document in the early stages of a particularly large or complex procurement. It will then refine this case into a full business case.

3.16
A public entity should carry out an appropriate level of market research to ensure that it prepares a good business case and that it makes an informed decision on the procurement method.

3.17
In all cases, the scale and complexity of the business case should be proportionate to the risk and value of the procurement.

Guidance

3.18
A public entity should include guidance on preparing a business case in its relevant policies and procedures. This guidance should outline:

• when a business case needs to be prepared; and
• what the business case should contain.

3.19
As a minimum, the guidance should require every business case to:

• identify the outputs and outcomes to which the procurement process contributes;
• identify the specific objectives of the proposed procurement;
• assess the costs, benefits, and risks involved;
• examine whether the initiative is feasible;
• identify the preferred strategy and method for the procurement;
• identify and assess options;
• provide for consultation with affected persons;
• show that the preferred option will meet the procurement objective; and
• justify any departure from a procurement method that the public entity is required to follow.

3.20
The guidance should also cover the type of situation where market research should be considered and examples of the types of market research that may be done.

3.21
The extent of the research required will depend on the value and risk of the procurement. Doing market research is particularly important when the public entity does not have comprehensive knowledge of the market.

3.22
In some cases, the public entity will be looking for a more detailed understanding of the supplier market and the range of technologies that might be available. In these cases, a formal request for information (RFI) may be appropriate.

3.23
Local authorities will need to take account of the decision-making requirements in the Local Government Act 2002, including requirements to assess the costs and benefits of options and to consider community views at various stages of the decision-making process. In some cases, a business case may need to provide for consultation or engagement with affected persons.

3.24
Local authorities may also wish to refer to relevant guidelines produced by the New Zealand Society of Local Government Managers. Reference to the guidelines is included on its website (www.solgm.co.nz).

Specifying the goods or services

Expectations

3.25
We expect a public entity to clearly specify goods or services before procuring them. If a public entity is using a competitive proposal process and the public entity is open to innovation, the specification may focus on the outputs and outcomes rather than the process to be followed to deliver the outputs or outcomes.

3.26
The specification should contain a clear, concise, logical, and accurate description of the goods or services being procured. This will help potential suppliers and those who will be involved in making the procurement decision.

3.27
Government departments' specification of goods or services must adhere to the applicable government policies and the Mandatory Rules for Procurement by Departments.

Guidance

3.28
A public entity should include guidance on specifying goods or services in its relevant policies and procedures. This could include the different types of specification of goods or services (such as the examples in paragraph 3.29), and when each should be used.

3.29
Examples of different types of specifications are:

• a functional specification, which focuses on what is to be achieved from the procurement – that is, the desired outcome, rather than how it will be reached;
• a performance-oriented specification, which defines the performance parameters required of the goods or services but not the methods to be used to achieve them;
• a technical specification, which usually sets out the physical characteristics of goods (for example, their size or capacity, the type of materials they contain, or their tolerance) in a highly prescriptive way; or
• a combination of the above.

3.30
Other potential contents of a specification include:

• mandatory requirements and non-mandatory preferences for the goods or services;
• requirements relating to timetable, delivery date, and so on; and
• performance standards, including key performance indicators and targets that cover inputs (the total resources), outputs (what will be produced), and outcomes (the effects of the service).

Procurement plan

3.31
Individual procurement plans should usually be considered for higher value and higher risk procurement – that is, those goods or services identified by public entities as being in quadrants 2, 3, and 4 of Figure 2 – and occasionally for those in quadrant 1.

3.32
Procurement planning is necessary to identify:

• the best way to approach the procurement of goods or services (through information gathering and analysis);
• risks associated with the procurement of goods or services early so that they can be managed; and
• ways of achieving the objectives defined for the procurement, in line with the public entity's procurement strategy.

Expectations

3.33
We expect a public entity to prepare a procurement plan that brings together the previous analysis and requirements in the planning process.

3.34
The content and size of the procurement plan will vary depending on the value and risk of the procurement, and the size and resources of the public entity.

Guidance

3.35
A public entity should include guidance on developing a procurement plan in its relevant policies and procedures. This guidance should cover when a procurement plan needs to be prepared and the expected contents of a plan.

3.36
The amount of detail in the plan will depend on the value and associated risk of the procurement. The content may include:

• the project scope;
• the procurement method;
• selecting an evaluation model (including the evaluation criteria) and process (see paragraphs 7.21-7.30);
• the type of contract and contractual conditions (see paragraphs 3.37-3.46);
• the responsibilities of the public entity's staff and any other stakeholders;
• the risks;
• the need for independent oversight or assurance over the process (see paragraphs 3.47-3.52);
• the timelines and key milestones;
• the resources needed (for example, project manager, evaluation team members, tender or proposal manager, and approving authority); and
• the budget, including the budget for conducting the procurement (for example, for external quality assurance, independent assurance, legal advice, and project management).

Selecting the type of contract

3.37
The form of the contract will depend on the value and complexity of the purchase as well as the nature of the goods or services being procured, the uncertainties that may be involved in contract performance, and the extent to which the public entity or the supplier is to assume the risk of the cost of performance of the contract. Contracts differ in the degree of responsibility assumed by the supplier.

3.38
For low value, low risk purchases, the contract will be as simple as completing a purchase order or requesting goods and services with a procurement card (see paragraphs 4.8-4.9). For medium value, low risk purchases, a short form contract may be required. For higher value and higher risk purchases, a more detailed contract will be required that reflects the risk and nature of the goods and services being procured. The following expectations and guidance relates to higher value and higher risk purchases.

Expectations

3.39
We expect the contract terms used to be appropriate to:

• the nature of the goods or services;
• any anticipated uncertainties in the supplier's ability to perform its contractual obligations; and
• the extent of any risk that the supplier will be required to assume.

3.40
A public entity's procurement contract should:

• be comprehensive enough to meet the objectives of the procurement;
• reflect the full specification of the goods or services;
• be consistent with the conditions specified for the procurement process;
• define and protect the rights and obligations of all parties;
• be consistent with the entity's statutory functions, duties, and powers;
• be fair to both parties and pass the “sense test”, particularly where clauses cover limitations or exclusions of liability, indemnities, warranties, and intellectual property;
• be included in the procurement documents, and respondents should be required to confirm whether they would accept the proposed contract terms (or propose alternative terms); and
• comply with relevant public sector constraints – for example, the contract may not be able to contain indemnities, and cannot contract out of the Official Information Act 1982.

Guidance

3.41
A public entity should include guidance in its relevant policies and procedures on the factors that should be taken into account when selecting the type of contract – for example:

• the nature of the goods or services;
• the type and complexity of the procurement;
• the likely administrative costs for both parties;
• any likely difficulty in clearly defining the contract requirements;
• how much technical or operational co-ordination the public entity will need to provide;
• the intended duration of the contract;
• the likely volatility of cost inputs; and
• the extent of risk that either party will have to assume.

3.42
The guidance should also set out the circumstances when the public entity should seek legal advice or assistance in preparing the contract. Legal advice will often be required in a procurement process, particularly for high risk, complex, or strategic procurements. The public entity should consider this advice early in the planning stage, since it may need to develop specific documentation, including a draft contract, to accompany the procurement documents.

3.43
An incomplete understanding of limitations or exclusions of liability, indemnities, warranties, and intellectual property and the resulting risks can lead to unnecessarily conservative contractual positions, which reduce the opportunities that may evolve from a contract.

3.44
The guidance should specify that the contract needs to reflect the relationship that the public entity wishes to establish with the supplier. For example, as well as the more traditional “arm's length” contracts, partnering or alliances are increasingly being used (see paragraphs 6.9-6.13 for further details on these two methods).

3.45
The guidance should set out the types of issues that the contract should cover – for example, who owns intellectual property created under the contract, and defining and ensuring the public entity's right to use background intellectual property.

3.46
The guidance should also set out the types of standard conditions that the contract might include – for example:

• conditions relating to termination, default, and insurance liabilities; and
• special conditions specific to the procurement – for example, delivery and payment conditions, financial and performance guarantees, liquidated damages, copyright, confidentiality, and dispute resolution.

Independent oversight or assurance over the process

3.47
The public entity team managing the procurement and other personnel either directly or indirectly involved must be fully accountable for the procurement process and ensure that it is in line with accepted standards. To help them fulfil this role, a public entity may appoint an independent adviser for high value, high risk procurement to oversee the process.

Expectations

3.48
We expect that appointing an independent adviser should not be seen as a way of avoiding having sound processes. It does not reduce the accountability of the public entity for running a good process. The public entity must retain primary responsibility for ensuring that appropriate professional standards are met. The public entity is accountable for the decisions that it makes.

3.49
The appointment of an independent adviser cannot be used to transfer risk from the public entity to someone else.

3.50
An independent adviser should be engaged early in the procurement process. The public entity should prepare terms of engagement that clearly set out the role and scope of the engagement.

Guidance

3.51
A public entity should include guidance in its relevant policies and procedures on the situations where a public entity should consider engaging an independent adviser. An independent adviser may be engaged for particularly large, complex, or sensitive transactions. However, complexity alone is not enough to justify using an independent adviser, because a public entity should be able to monitor compliance with its own procurement standards and not have to rely on “contracting in” such expertise.

3.52
The terms of engagement should include:

• who the independent adviser will report to (this should normally be to the person or body responsible for the procurement);
• the scope of the engagement;
• the timing of the independent adviser's reports (usually at important stages of the procurement process and at the end of the process);
• attendance at meetings; and
• remuneration, or the method for determining it.

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