© 2005, monash university, australia cse5806 telecommunications management lecturer: dr carlo kopp,...

© 2005, Monash University, Australia

CSE5806 Telecommunications Management

Lecturer: Dr Carlo Kopp, PEng

Lectures 17-29

Procurement Procedures


Reference Sources

NOTE: These sources are indicative - there are many other good texts

available in libraries and on the Internet. They are referenced here as this presentation draws on them extensively.

Better Practice Guide – Selecting Suppliers Australian National Audit Office 1998

http://www.anao.gov.au then click on ‘Publications’

Better Practice Guide – Contract Management Australian National Audit Office 2001

http://www.anao.gov.au then click on ‘Publications’


Project Lifecycle - Eng’g Processes

SystemSpecifications

SystemSpecifications

System and Sub-System

Specifications

Detail Design

Ideas

Sub-system Testing

System Testing

Acceptance Testing

ProgressClockwise

Review Operations Strategy Studies

Operations

AnalysisArchitectural Design

User Requirements Specification

User Oriented Testing - Functional and Performance

System Oriented Testing- Technical Functionality, plusConnectivity and Interfacing

Acquire and ImplementSub-systems

Sub-system Oriented Testing- Detailed Functionality, plusConnectivity and Interfacing

Shaded area shows work normally considered for external “Procurement”


System Life Cycle Acquisition era

Strategy Formulation Broad Design (Architectural design) Specification (may involve another level of design) Tendering Process (RFI-RFP/RFT) Selection (Evaluation and identification of ‘Preferred supplier) Contract negotiations and signing Building, Installation,Testing and Training Commissioning and Implementation (“Setting to Work”)

Operations Operational Use Maintenance and Support Enhancement, extensions, modifications

Close Down and Replacement/Disposal


Acquisition Strategy Many approaches possible:

Acquire (buy) in-house Operate and support using in-house resources Acquire using in-house resources, but operate outsourced Variations and combinations of above –

eg acquire and operate in-house under local management control, using outsourced services for specialised services such as Telecommunications, maintenance, training

Up front costs are high – acquisition effort, equipment costs Risks can be high – ie responsibility primarily in-house Benefits good – eg in-house control, expertise development

Outsource all aspects of the function totally Outsourcing company responsible for acquisition and operation

Costs become annual ‘operations’ rather than ‘capital’ costs – eg low (or zero) up-front costs, no issues of owning obsolescent equipment

Some loss of control and flexibility Still requires extensive in-house effort to manage

planning, specification of functional needs, oversight and controls etc BUT effort is less than with full ownership and operational management

Generally a mixture of approaches is used.

This session focuses on in-house activity of managing the acquisition


Acquisition Role-Players Inside Staff

Are there enough staff with appropriate experience & skills? Internal staff are rarely involved in major acquisitions – eg every ‘n’ years

What about non-performance or poor performance? (job on the line)

Consultants and Specialists (or ‘Short Term’ specialist employees)

They do this sort of thing often - possibly several times each year They often have broad experience in most aspects of acquisition work –

RFP/T preparation, tender bidding, tender evaluation, system/acceptance testing Can usually call on scarce resources or experience from colleagues May continue into operational support – ease the transition period

Issues when using consultants Often lack user-domain knowledge No emotional ownership of the systems/task – (commitment?) Issues of legal liability if things don't work – who is responsible? Are the consultants truly independent of suppliers?


Acquisition Role-Players (2)

Outsourcing of Acquisition Task Pay someone else to buy equipment etc for you

All of the advantages and disadvantages of Consultants Provision of skills and people – eg Expertise and staff numbers Independence of suppliers –

but check their past tasks for possible conflicts of loyalties Less skills transfer than using resident consultants or short term

employees Commitment to long term goals may be questionable

Whose goals – yours or theirs?

Removes emotional ownership issues Clearer focus on performance (or no payment) Issues of liability – who is responsible if it does not work?


Purchasing Models

Fixed Price

Variable Price

Single supplier X XMultiple suppliers X X

Many variants are possibleMain ones used are:

Often a mixture of approaches is used eg different phases of a major project use different models


Purchasing Models – Fixed Price Fixed price purchasing (aka ‘Firm Fixed Price” (FFP))

Requires that both purchaser and supplier are clear about scope of work – good for well known and well defined tasks such as payrolls, poor for leading edge systems where both the task and technology are not well

understood leading to high risks (price will be loaded to accommodate the risk)

Single Supplier - Fixed Price (SSFP) Single supplier for whole task, usually including installation and training Supplier may subcontract some/most of the work, but retains responsibility and liability

as “Prime Contractor” or “Prime Systems Integrator” (PSI) Most appropriate where the task is well defined in testable terms. Good where the overall task is intimately associated with many minor aspects requiring

close coordination of many parties (e.g. supply and install a network, where power, air conditioning, cable installation, security, building works etc etc are involved)

Multiple Supplier - Fixed Price (MSFP) Requires purchaser to have more staff designing, coordinating, managing

(outcome very dependent on inside staff numbers and expertise) May be cheaper than SSFP

(Prime Contractor or PSI usually charges 15% to 30% add-on to sub-contract costs for supervising the sub-contractor and for integrating their work into the main task)


Purchasing Models – Variable Price Single Supplier - Variable Price (SSVP)

Project cannot be specified in sufficient detail to allow fixed price approaches Eg leading edge technologies

Actual task is defined as the work progresses and knowledge is gained

Often a multi-stage project, where each stage is managed as a Fixed Price task, with one sub-task in each stage to define and cost next stage

Project often subject to exchange rate changes or other factors beyond control of contractor

Often needs a "head" contract to define the rules. Often called "time & materials" contract.

Multiple Supplier - Variable Price (MSVP) Combines MSFP and SSVP aspects Really a project which is self-managed and self sub-contracted.


Procurement ProceduresSequence and Indicative Timescales

(Times shown are indicative for a ‘high tech’ $50M+ task)

Starting Point - After concept has been developed, and strategic decision to go ahead

RFI preparation, responses, and decisions (3-12 months)

RFP/RFT preparation (1-3 months)

Tendering period (2-4 months)

Tender evaluation (3 months)

Contract negotiation and award (2-6 months)

Contract execution (6-36 Months to build, install, test etc)


Request For Information (RFI) Used in major projects where the tasks to be done and the

technologies available are intertwined – especially where the purchaser is unsure of what can be done and the

estimated costs involved, or seeks info to guide strategic decisions

Eg general need known, but technical possibilities not known, and the

purchaser has flexibility to alter the ‘needs’ and timings to match the

technical and financial realities

Paints broad functional picture and requests innovative proposals eg “We want a network capable of (broad functional description, possibly never done before)”

Usually a semi-controlled ‘fishing expedition’ by the purchaser

Expects would-be suppliers to do leg-work (at their expense) in the hope

of a future sale

Mainly used for major projects in a big organization

Often followed by one or more RFP/RFTs tailored as a result of the RFI

Often used to develop short list of potential suppliers


RFI Issues Usually more or less unfair to respondents and would-be suppliers

Costly to respond, with low probability of future work Respondents may need to disclose information which is later used to

their disadvantage proprietary information ‘leaked’ to competitors Immature information eg probable future releases of equipment

Unfairly used by purchasers to ‘test the offerings in the market place’ rather than to make real strategic decisions

Used by purchasers to develop a superset of offerings being requested in an RFP/T (which nobody can satisfy)

Can be good for both purchaser and would-be suppliers Identifies innovative possibilities and potential suppliers Advises industry broad concepts of forthcoming RFP/Ts

Allows industry to prepare themselves (plan and build bidding team etc) Enables development of short list of bidders for RFP/T

Should always include Non-disclosure contracts on both parties


RFI to RFP/T Period Purchaser should use RFI information to:

Plan and consolidate strategic directions and decisions Budgets Technical directions Timescales and schedules

Develop technical specifications which are Well written – understandable, non-ambiguous, complete, consistent Fair to all parties (not biased to any particular vendor or style) Achievable and satisfactory to real needs

Neither a superset of all possibilities nor so specifically a subset that the real need is not satisfied

Within the timeframes needed Able to be tested (quantified, defined, bounded)

Reason for above?

Because the RFP/T period implies limited communications between purchaser and bidders


Request for Tender or Proposal Referred to as RFT or RFP Is issued to all prospective suppliers Involves a detailed specification of the facilities/system and/or the

functionality expected, and requests sufficient information to enable: Reasoned evaluation of alternatives Contract to be placed with one or more of the bidders for the ultimate supply

and operation

Usually requires the respondent (aka ‘Tenderer’ or ‘Bidder’) to undertake significant design work

Especially if a ‘functional specification’ style of RFP/T Usually requires bidders to submit detailed costing, draft design documents,

management plans, etc for ‘evaluation’ purposes

Needs to include a statement that purchaser reserves the rights determine which, if any, tender is accepted

A legal issue to avoid being forced to take lowest bid, or any other bid if the costs are too high


Why do it? RFP/T approach seen as:

Encouraging competition between prospective suppliers Method of getting best value for money

The RFP/RFT provides: Framework for the systematic definition of needs

Facilitates control of the acquisition process

Fair description of needs for all would-be suppliers to bid against Consistent task for bidding by all would-be suppliers

Standard framework for vendor proposals

Standard framework for evaluation of proposals Very important that evaluation stage be considered in the RFP or RFT

Vehicle for communicating business, technical, legal and insurance issues that

purchaser desires in the final contract (Bidders may propose variations or alternatives to these for negotiation)


The RFP/RFT Request: Usually issued in sections which can be split apart for the bidding

work - eg: Introduction Administrative Requirements (see later notes for statements of compliance) Technical Requirements (see later notes for statements of compliance) Business Requirements (see later notes for statements of compliance)

Legal/Insurance details Each section should be suitable for separation during bidding period – ie

largely suitable for ‘stand-alone’ work Different people or groups will respond to each part

Engineers/Tech staff respond to Technical requirements Accountants or costing specialists develop the costing sections Lawyers review and guide the contractual/legal aspects

Should be reviewed internally before issue, and endorsed at appropriate senior levels – both financial/legal and technical.


RFP/T Request (2)

Often contains draft contract for consideration and comment

Often contains the structure for a formal proposal from the vendor/supplier (see later slides for example)

Typically lists points on which prospective vendors/suppliers must reply appropriately

Usually contains a requirement that bidders give a ‘statement of compliance’ against each and every requirement in the RFP/T


RFP/T tips Have a good architecture or technical direction in mind when writing

the Technical specification Have experienced spec writers develop Tech Specs

Use of a committee to write them results in a ‘camel’ Lumpy, bumpy and nasty – with little coherence or completeness

Yet a Tech spec written by an individual will be restricted by the person’s bias and limitations

Seek a middle approach Develop spec using limited numbers of people Oversight spec using committee of stakeholders

Do not take too long to develop specification Technological overrun occurs, where the early sections reflect a different era

to other sections

Crucial to be well written Clear and unambiguous Such that resulting bids can be easily evaluated


Who Tenders or Bids? Vendors and Would-be Suppliers respond because of:

Open public tender (advertised in press, trade papers, web sites) By invitation (e.g. short-list from RFI)

Large companies have specialised bidding teams Small companies cannot afford costs of excessive bidding

May ride under the umbrella of a larger ‘Prime bidder’

Public bodies usually required to have a multiple tenderers as a guard against corruption and collusion between bidders Typically three required for government tenders Many companies require three or more

Purchaser may pay (token) fee to selected short-list bidders especially for extensive design or creative work.


Costs of Bidding/Tendering Acquirer’s or Purchasers viewpoint

Inevitably under-costed and under-resourced – resulting in less than optimum value-for-money

Allow for 0.5% to 1% of cost of job for specification and evaluation

More if extensive travel is required to research needs and solutions Bidder’s viewpoint

From 2% to 4% of cost of job for large ‘functional’ RFP/Ts (eg high level design, detail designs, extensive research is required,

many draft plans, samples of outputs, compliance with complex proposed contractual conditions etc)

More if extensive research, travel or effort required to satisfy the demands for innovation, examples, supporting documents, presentations, tight timeframes to bid (eg hiring aircraft to deliver the bid documents) etc

Is it worth the cost and financial risks? Could we do better bidding other work?


Costs in Bids Apart from the obvious costs of doing the job:

Bidders price reflects cost of bidding or tendering Bidders should expect to win approximately one in three bids, therefore

cost add-in to cover expenses of failed bids is 6% to 12% of cost of this bid Purchasers with bad reputations (eg using too many bidders, frequently

aborting bid work or not proceeding with purchases after bid work) will have higher prices proposed to cover the risks that bidders perceive.

Bidder’s price reflects perceived risk in the task High risk = higher prices

High risk may be technical, contractual or schedule risks (eg innovative or leading edge technology, severe penalties in contract, difficult schedules etc)

May be perception (reputation) that the purchaser is difficult to satisfy Bidder’s price may reflect an unwillingness to do this job

They do not really want to do the job at this time and only bid to keep their name in the game because of fear of being ignored in future

Excessively low prices generally indicate either: Misunderstanding of the job, or Desperation for work


Bid Period Protocols During the bidding period certain protocols used to ensure fairness

and openness in the process eg Purchaser does not publicly identify prospective bidders

unless this is done via a list freely available to all bidders RFP/T docs made available to all bidders at same time

public advertisements may have some ‘late’ requests for documents All bidders are issued with identical documents

Communications between bidders and purchaser must be: Restricted to specified senior levels –

usually only one person at each organisation Written (email/fax generally OK if followed up with hard copy) Clarification requests & responses distributed to all bidders

Bidders need to be careful that their queries do not disclose sensitive info


Sample Proposal Outline Following OHPs indicate a sample proposal outline that could be

suitable for many ‘high-tech’ bids It not necessary to follow this, but doing so provides a reasonable coverage

of the issues Use only the parts appropriate to the particular task There is some duplication of information in this sample, which indicates

alternative locations for the information

NOTES: Bid must be read and understood by evaluators who may have no real ability to

contact the bidder for clarification In order to facilitate fairness to all bidders To provide ‘transparency’ of the evaluation process

The claims made in the bid are often able to be legally considered a part of the “contract to supply” – inflated claims are financially dangerous


Sample Proposal Outline (adapted from Rosenthal)

Executive Summary System Objectives Proposed Solution

System Overview Architecture Functional Characteristics Performance Characteristics

Technological Methodology Equipment Configurations Software Description Maintenance Proposals Site Preparation needs

(Continued)


Sample Proposal Outline (2) Implementation Plans (What will be done, how it will be managed) Financial Data

Presented by type and date Capital, maintenance, operational, consumable etc and Anticipated date for expenditure or demand for payment

For Hardware Software Manpower etc

Legal and Insurance Warranties Representations and Certificates (Copies)

Certificates of Professional Indemnity , Worker’s Compensation, Public Liability insurance

ISO 9000 certification etc

(Continued)


Sample Proposal Outline (3)

Schedules for: Implementation Training Documentation Delivery Payments – progressive payments and trigger points

Confidentiality of Arrangements and Information Which information is ‘proprietary or commercial-in-confidence

Product Literature (summary only, details in an annex) Sample or proposed Contract Glossary of Terms

(Continued)


Sample Proposal Outline (4) Technical Aspects

Operational Considerations Functional Requirements

How these have been addressed Backup & Recovery System Benchmarks (performance benchmarks) Interface Requirements

Implementation arrangements and procedures Maintenance proposals and arrangements

During development and installation period Within warranty period Following warranty period

Training Installation support

(Continued)


Sample Proposal Outline (5) Resumes of key personnel Customer-furnished equipment (CFE)

How this will be used – including accounting for it, maintenance etc Customer Furnished Information (CFI) and Data (CFD) Multi-vendor interface – management and support, including problem

resolution User environment

Product performance Product reliability aspects Product compatibility (upward, downward, with other manufacturers etc) Product enhancement (upgrades to new versions)

Project direction – Management etc Site Specifications and access requirements – what is needed or

assumed Documentation – what will be supplied, how many copies, when Standards (compliance), testing against etc Current hardware/software environment including developmental

environment Acceptance Test criteria and procedures


Sample Proposal Outline (6) Business Requirements Finance and legal Issues

Costs and Pricing Excess use charges (rentals) Unit pricing (over time) Discounts Expansion costs Maintenance costs

Estimating techniques How this job was estimated How any subcontracts will be estimated

Financing method (customer, supplier) Emergency substitute equipment –

how decision is made, what will be supplied Supporting documentation for financial issues Option to buy (after rental/lease contract) Accruals towards purchase Investment tax credit Local involvement statements – eg ANZ content

(Continued)


Sample Proposal Outline (7) Warranties Training Implementation & delivery schedule Upgrades Trade-ins Equipment condition Price protection Exchange rates variations Use of sub contractors Bidder’s Acquisition policies and procedures Standard contract form from the Bidder

Product life cycle Technological obsolescence issues eg

Proposals to handle situation where equipment proposed is superseded before purchase

(Continued)


Sample Proposal Outline (8) Bidding Company Information

Corporate identity, legal structure eg Pty Ltd, Key personnel History Financial stability (including financial history) Relevant past experience

Annexes, Appendices and Attachments Contain details of many points covered throughout the bid

Brochures and technical specifications of equipment Detailed drawings of floor layouts, buildings etc Detailed mathematical / simulation models of performance, reliability Work management details

Work breakdown structure (WBS) lists/charts PERT/CPM and Schedules (eg Micro Project outputs)

Formal ‘statements of compliance’ will be an annex if not submitted elsewhere above

(end of Sample Proposal Outline)


Tender (Bid) Evaluation Period

Proposals and Tenders (aka “Bids”) are evaluated by the purchaser following bid submission date

Late bids may be ignored (RFP/T docs need to state this)

Sometimes worth looking at, but a bid that is late without a valid reason implies a would-be supplier less organised than others

Bids may be evaluated by in-house or consultant staff Non-disclosure and commercial confidentiality agreements needed!

Other points: additional requests should go to all bidders common to short-list some bids for deeper investigation common to invite bidders to meetings & information sessions.


Tender Evaluation (2)

Must be seen as balanced, unbiased & independent Especially when evaluating government tenders

Will cause loss of confidence by bidders if perceived as inconsistent, prejudged, biased, unfair, unreasonable or incompetently performed

Must apply the same criteria to all submissions Must handle non-monetary aspects in the same

consistent manner Difficult to handle inconsistent approaches between

bidders One bidder proposes 12 months warranty,

while another proposes 24 months How do you handle this?

I try to convert both warranty periods to a monetary value


Technical Evaluation Fairness and consistency paramount Significant judgment and decision making skills needed Proposals in excess of requirements are difficult to handle

Eg Requirement is “able to support 24 users” One bidder claims ‘complies’ Second bidder claims ‘able to support 36 users’ Third bidder claims ‘able to support 128 users’

Which is best, or all considered equal? How you handle this type of situation is very important

Beware of ‘expectation creep’ among evaluators and in-house staff Expectations often evolve (creep upwards) as the evaluation progresses

Will inevitably you will need some system of ‘weighting’ requirements (weighting should be described in RFP/T documents) EXAMPLE regarding a coffee drinking vessel or ‘Coffee Cup’

Option 1-Thin Plastic Option 2 - Ceramic mugs Option 3 Metal beakersRequirement Weighting % meets Score % meets Score % meets Scoreholds hot coffee 5 100 500 100 500 100 500Insulated 2 10 20 50 100 0 0Has handle 2 0 0 100 200 0 0

Totals: 520 800 500


Contracts Purchase/supply contract is a crucial component of the process. The contract should contain:

Definition of terminology used Clear statement of what the supplier is to provide

Quantified values rather than qualitiative statements Refers back to material in tender submission, plans, etc. Clarifies status of pre-contract assurances, agreements, etc. Definition of buyers obligations Definition of acceptance tests Definition of remedial action if tests are failed Definition of intellectual property rights, etc. Define liabilities for copyright, patent, etc. Establish basis for ongoing support Define responsibilities of both parties if the contract is breached.


Legal Aspects Many acquisition projects end up in legal proceedings

System alleged not to perform as expected or agreed Main areas of contention:

Definitions of functionality Definitions of performance Validity of performance tests Representations made before/during tendering or tender evaluation

Essential to: Have all representations in writing Tie representations to contract Avoid vague terms ("reasonable") Avoid unrealistic expectations

Outcomes: Damages Varied contract (other deliverables)


Ethical Considerations

Supplier: Accurate representation of capability Meet staffing commitments Avoid external pressure (board, political, etc.) Avoid tricks and traps (word gets around)

Customer: Equal handling of tenders Ignore extraneous issues (e.g. hospitality) Objective scoring techniques Confidentiality of supplier information Professional handling of unsuccessful tenders


Consider: Q: Should there be differences between private and public bodies in

their manner of procurements? Why? – or are we simply continuing an outdated approach?

Is there a better way than the processes described here? Eg What if the available budget was advertised to bidders rather than

being hidden from them? This would have the advantage of automatically scoping the task value.

Thus, bidders way out of the expected cost value could opt to ‘no bid’Many aspects of uncertainty and risk would be clarified by publishing the expected value.

Bidders would then differentiated by value for money rather than price

Is the alternative seen as fair to all?

© 2005, monash university, australia cse5806 telecommunications management lecturer: dr carlo kopp,...

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