© The College of Estate Management 2002

Paper 0362V1-0

Principles of strategic procurement

Contents

Aims and Learning outcomes

1. Introduction

2. A strategic approach to construction procurement

3. Components of the procurement process

3.1 Functional needs analysis
3.2 Overall procurement philosophy
3.3 Detailed design of the procurement approach to be used
3.4 Selecting the most appropriate partners (contractors and consultants)
3.5 Implementation

4. Conclusion

Self assessment questions

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Aim
The aim of this paper is to:

z introduce you to the basic concepts of strategic procurement;

z review the need for a strategic approach to procurement issues across the
whole construction industry supply chain.

The paper develops this concept to provide the basis of a cohesive framework for
construction procurement. This in turn provides an anchor for more extensive studies
covered elsewhere.

Learning outcomes
After studying this paper you should be able to:

z Explain the meaning of the term ‘strategic procurement’ in relation to the

achievement of construction project objectives.

z List the components of a strategic procurement process, explain their

importance in the process as a whole, and explain how they interrelate in order
to achieve the project objectives.
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1 Introduction
The continuing search for maximum value for money in construction work has
increasingly focused attention on the procurement process.

The impetus for change in Britain has been driven by a number of factors, not least a
growing dissatisfaction among construction clients with the quality and predictability
of construction work. At the same time, an increasingly knowledgeable and
empowered body of influential corporate and public sector clients is developing.

Similar pressures are becoming evident elsewhere in the world, particularly in South
Africa, Australia, Hong Kong, Malaysia and Singapore.

The need for a more strategic and cohesive approach to construction procurement has
long been recognised by construction commentators and academics as a significant
prerequisite for improved project success, and the publication of The Procurement
Guide by the RICS in 1996 (ISBN 085406783 3) provided much valuable advice to
practitioners.

Considerable effort has also been devoted to examining how the procurement process
and project supply chains are managed in other industries, with a view to transferring
the technology into construction. Initially, such efforts met with limited success and
quickly led to the view that, whilst these techniques have considerable potential, they
need to be significantly modified to meet the special needs of the construction
industry. However, there has recently been a significant shift in the way commercial
companies view their interaction with the construction and development industries. A
greater understanding of generic supply chain relationships and the factors that drive
them has led companies increasingly to recognise that the supply chain management
techniques they have developed within their own core business can be adapted to the
construction supply chain, given a better understanding of how that supply chain
works.

2 A strategic approach to construction

procurement
In the light of the above, it is clear that a strategic and inclusive approach to
construction procurement must provide a cohesive framework within which all the
various project objectives required by the client may be addressed in the most
effective way. This implies that the client’s needs and wants are sufficiently well
articulated, analysed and understood for an appropriate procurement process to be
developed.

It must also be clearly recognised that a strategic approach to project procurement

must be dynamic rather than static. The more complex projects become, the less
likely it is that a ‘one size fits all’ approach will be successful.

Every project is unique to some extent, a product of both the client’s needs and
desires, and the external influences operating at a particular point in time. The
procurement process must evolve and develop to meet particular sets of
circumstances at specific points in time.

It has been argued that there is no such thing as universal ‘best practice’ in
construction procurement, in the sense of simply choosing one overall procurement
methodology (traditional, design and build, management contracting, etc) from a
limited and predetermined menu of all-inclusive options. What is required for more
complex projects is a bespoke approach designed to address each particular set of
circumstances.
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If this argument is accepted, then instead of viewing procurement approaches as

simply a limited set of ready-made solutions, we must instead consider the overall
procurement strategy as the sum of a set of processes, some of which will be ‘off the
shelf’ and some bespoke, all of which are interrelated within an overall strategic
framework.

This leads us to view each of the individual techniques that might be used to address
specific aspects of the procurement problem simply as a elements of a comprehensive
toolkit. An acceptable overall procurement methodology then consists of selecting the
right combination of tools from the box to meet specific client and project needs.

3 Components of the procurement process

The basic components of any procurement process will include:

1. Functional needs analysis.

2. Overall procurement philosophy (ie the procurement strategy).
3. Detailed design of the procurement approach to be used (ie selecting and
developing the appropriate tools).
4. Selecting the most appropriate partners (ie contractors and consultants).
5. Implementation.

3.1 Functional needs analysis

For construction projects, the starting point for the functional needs analysis will
usually be the client’s brief.

Experience shows that, historically, both clients and designers have exhibited poor
briefing skills. For complex projects, and especially where clients are also large and
multi-headed, considerable effort may be required to achieve an acceptable brief.

Modern construction clients in both the public and private sectors are beginning to
think more strategically about their interaction with the construction industry and
their expectations from it, particularly in terms of the value added by construction
services to their core business. Standard project briefing procedures will therefore
often need to be supplemented by an externally facilitated project strategy workshop,
with input from all the major client stakeholders.

For private sector projects this would typically include end users, budget holders and
those responsible for maintenance of the completed facility. For public sector projects
the list may be supplemented by representatives from audit and legal departments, to
ensure that the project procurement mechanisms chosen are acceptable in terms of
public accountability.

3.2 Overall procurement philosophy

Relative importance of project success

The functional needs analysis should:

z provide a set of prioritised objectives which the project is required to fulfil;
z develop sets of key performance indicators and benchmarks defining how
project success is to be measured;
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z show how important the project is to the employer within its overall business
plan and development strategy.

It will thus help to define the amount of effort which should be put into the project
procurement process.

This relationship between client needs and procurement strategy can be modelled in
various ways. Figure 1 shows a very simplistic approach, showing the likely impact
on the employer if the contractual relationship with the contracting partner were to
fail. The vertical axis shows the impact on non-cost-related factors such as reputation;
the horizontal axis shows impact in terms of cost.

FIGURE 1 Procurement strategy as a function of the impact of failure

z Projects lying in the bottom left-hand quarter have minimum impact in both
financial and non-financial terms, and can be dealt with effectively using
conventional procurement approaches involving little management effort.
z Projects lying in the top right-hand quarter have maximum impact, and
maximum effort should be devoted to them.
z Projects lying in the top left and bottom right-hand quarters have limited
impact, and should be dealt with through a procurement strategy incorporating
appropriate incentives.

Figure 2 develops the concept of collaborative methodologies as affected by

increasing project complexity and increasing impact on the employer’s core business.

z As projects and/or commercial relationships become more complex and more

fundamental to the employer’s core business, the nature of the relationship
needs to change. Increasing effort must be devoted to ensuring that they work
properly and support the employer’s key business aims and project objectives.
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z As project significance increases and the possible consequence of failure

becomes more significant, we might expect to see a progression from the
simpler single-project partnering relationships, through more complex multi-
project strategic alliances, to true joint ventures where both parties have a
financial stake.
z The limit of the model, where projects and/or relationships become absolutely
fundamental to the employer’s core business, might ultimately involve
bringing the operation in-house, often through a merger or acquisition route.

FIGURE 2 Collaborative trading relationships related to

projectcomplexity/impact on the employer’s core business

Figure 3 recognises that other external influences may have a bearing on the
procurement decision. It models procurement strategy as a function of potential
market difficulty and type of spend.

Here the contention is that any trading relationships incorporating multiple projects
ought to be based on collaborative strategies, whilst those involving only a single
project might be better based on more traditional ‘arm’s length’ arrangements.
However, it might be argued that complex issues involving high degrees of market
difficulty should also be based on collaborative arrangements.

As with Figure 1, the most important relationships – and thus those to which the most
effort should be devoted – are those in the top left-hand quarter of the diagram.
Similarly, those in the bottom right-hand quarter are the least important, and therefore
justify rather less management effort.
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FIGURE 3 Procurement strategy as a function of market difficultyand type

of spend

Components of a collaborative relationship

Developing successful collaborative relationships will depend on alignment of the
objectives of the various organisations involved in the project. This in turn depends
on successful agreement of both commercial and cultural elements of the
arrangement. The commercial and cultural issues on which attention should be
focused are illustrated in Figures 4 and 5.

The central cultural issues to be addressed are those of trust and team-working
(Figure 4). These are conventionally addressed in a ‘workshop’ environment,
generally using an external facilitator. Many types of management development
techniques have been developed, ranging from outdoor-based activities – where
people learn to work together to solve problems in an environment perceived to
present some physical hazard or challenge – to purely academic desk-based problem-
solving tasks, often incorporating some element of role play.

The other cultural issues illustrated in Figure 4 (relationships, communications

systems, a ‘win–win’ attitude, and mutual respect) will all follow from the
development of a strong team culture.
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FIGURE 4 Cultural issues

Equally important is the development of the commercial aspects shown in Figure 5.

Central to this is the formation of a joint set of mutually agreed project objectives,
which each party to the agreement is prepared to support and work towards. The
objectives must be measurable, and therefore need to be supported by a robust set of
key performance indicators and benchmarks showing how far the objectives are being
achieved as the project proceeds.

FIGURE 5 Commercial issues

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Also crucial to project success is the development of:

z procedures for risk management and value management that support

achievement of the mutual objectives;
z a fair and timely dispute resolution methodology that will allow potential
problems to be resolved before they escalate into full-blown disputes.

(For examples of readily available risk management processes, see PRAM Project
Risk Analysis and Management Guide, Association of Project Management, ISBN
095311590 0; RAMP Risk Analysis and Management for Projects, Thomas Telford,
ISBN 072772697 8.)

Achievement of mutual objectives will be further aided if all parties are committed to
a critical re-examination of the processes conventionally used for the management of
projects, with a view to seeking improvement through innovation and process re-
engineering.

This in turn will be aided by the development and introduction of suitable incentive
mechanisms that allow those bringing forward innovative ideas to share in the
potential rewards.

3.3 Detailed design of the procurement approach to be used

Once there is an overall procurement methodology, the detailed design will generally
be progressed by selecting and/or developing the tools best suited to achieve the
project objectives.

Note that not all projects will need the whole toolkit. There are significant advantages
in keeping the detailed design as simple as possible, consistent with ensuring
adequate project performance. Collaborative procurement methods may not be
appropriate for all projects; nor may sophisticated risk and value analysis tools. The
important thing is to ensure an appropriate selection of tools to meet the needs of a
particular client at a particular point in time.

3.4 Selecting the most appropriate partners (contractors and

consultants)
Selecting the most appropriate trading partner is of paramount importance in
achieving successful project delivery.

The basic procedures for contractor selection may be perfectly adequate for simple
projects using an ‘arm’s length’ procurement strategy. For more complex projects,
however, particularly those requiring a collaborative approach, more complex
selection processes are likely to be required to ensure the necessary ‘cultural fit’
between the trading.

These processes usually involve bringing the potential partners together in an

interactive way. At the lower end of the scale, interaction has simply consisted of an
interview lasting perhaps an hour or an hour and a half, during which potential
trading partners (contractors or consultants) are given the opportunity to explain their
approach to the project, and in return the employer has the opportunity to ask
questions. Though the concept of interviews of this kind is good, experience shows
that many contractors approach the interview primarily as a marketing opportunity.
They put forward their ‘best’ team rather than the team that will actually be
responsible for carrying out the work, and this has sometimes led to considerable
client disappointment when the project team subsequently fails to perform.
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More recently in the case of larger projects – particularly where multi-project

strategic alliances are involved – assessment centre techniques, largely borrowed
from human resources management, have been used. Here the contractor’s proposed
project team is required to work with the employer – perhaps for a whole day – in a
structured and highly interactive way. Activities might include business games and
simulations, small group discussion sessions and mini-workshops, some of which
might be designed and run by the contractor, in addition to the more formal
contractor’s presentation.

3.5 Implementation
The successful design and implementation of a workable procurement strategy is
plainly a highly skilled process. The increasing attention being paid to it has led to the
development of specialist procurement advisers. At first these tended to come from
within the construction disciplines, but now this area is becoming the focus of
attention by procurement specialists from other industries.

The following skills and knowledge may be required of a construction procurement

adviser:

z Clear understanding of the generic management issues posed by the

organisation, and operation of complex supply chains.
z Knowledge of the factors governing the management of relationships.
z Clear understanding of the nature of organisational structures, their boundaries,
and the factors affecting communication between them.
z Comprehensive knowledge of the nature and function of the various standard
contract forms commonly used in the construction supply chain;
z Clear insight into the way the construction industry is structured, and the
industry-specific factors affecting the working of the construction supply
chain.

4 Conclusion
Current advances by commercial companies in understanding how supply chains
work will lead to significantly enhanced expectations of those responsible for
commissioning and managing construction work.

This will lead directly to the need to develop more sophisticated approaches, both to
the ‘front line’ procurement of construction works and services, and to the
management of construction supply chains by the industry itself.

It is also clear that well informed corporate employers will not shrink from direct
involvement in construction supply chain management if the construction industry
fails to actively engage with the challenges posed.

There are serious implications here for those involved in project management.
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Project success is increasingly being seen to be less to do with detailed management

of the technical issues such as time, cost and quality and more to do with managing
the relationships between the organisations involved in the extended supply chain.
This extended supply chain is more and more seen as spanning the complete range of
project participants, from end users at one extreme, through client budget holders,
main contractors, subcontractors and suppliers, to those responsible for facilities
management at the other. Indeed, some are beginning to see project success as being
directly related to successful relationship management, and the successful project as
being the aggregate of a series of successful relationships.

This is not to say that the traditional project management skills will become
redundant – rather that employers will take such skills for granted and will, in
addition, require project managers to understand and implement all the additional
‘softer’ management skills inherent in a modern strategic procurement environment.

SELF ASSESSMENT QUESTIONS

1. Explain the meaning of the term ‘strategic procurement’ in the context of

construction work for a major manufacturing company.
2. Identify the component parts of a strategic procurement approach, and explain how
each adds value to the procurement of construction work.
3. Explain how strategic procurement approaches differ from conventional
construction procurement.
4. Explain how the skills required of a project manager working in a collaborative
strategic environment differ from those required to work on a project adopting a
more traditional approach.