Take competitive out of tender
Energy Martin Worth, Plant Integrity Management Ltd director, calls for a review of the competitive tender process
Collaboration is seen as being key to the future of the oil and gas industry. Sir Ian Wood said that ‘new technology and “serious collaboration” among operators in the development of small fields can add 5-10billion barrels of oil equivalent to recovery’. The Oil and Gas Authority was created to ‘maximise collaboration in exploration, production and development’. In addition, the Wood Review suggested that collaboration could result in ‘the reduction of complexity and delays in legal and commercial processes’, there’s no doubt this is something that would reduce costs but is it achievable? Would it benefit the supply chain?
To put it bluntly, current procurement processes are not collaborative. Competitive tender processes are commonplace in the industry. On receipt of an invitation to tender (ITT), suppliers or contractors wishing to compete to win the work submit their best price for the job. The receiving company reviews the bids and awards the contract. It sounds straightforward enough and it is probably fair to say that, in the majority of cases, the work is given to the company offering to perform the work/deliver the goods for the lowest price.
The real question is; does this make the tender process a win-win situation or a race to the bottom? The company awarding the work gets their desired service/goods at the lowest price and the contracting company may have the certainty of having won a longer term contract. But for me this raises more questions.
One advantage of the competitive tender process is that it is said to promote competition. Does it do so at the expense of quality? Does the creation of a ‘level playing field’ which supposedly delivers better value for money, if the work is awarded on cost, come to the detriment of real value and innovation? Does this make for a successful relationship; one that benefits both parties?
I would argue that the competitive tender process not only doesn’t benefit both parties but that it is not sustainable and eventually results in everyone losing. Inevitably it drives down quality and limits innovation as bidders strive to submit lower and lower costs in order to be in with a chance of winning work. In addition, long term contracts often tie the contracting company to holding their rates for a sustained period. This approach minimises profit and restricts the company’s inward investment which can lead to a demoralised workforce with limited career progression opportunities as well as impacting innovation. To me this is a restrictive practice, especially when you consider that a happy workforce is likely to be a motivated one and that any resulting innovation is likely to benefit the end customer.
To go back to the original point, without doubt the industry needs to reconsider how work is awarded. We could learn lessons from other industries. For example, if you were planning to build a house you would be unlikely to ask the builder for a schedule of rates, rather you might give a ballpark figure that you are prepared to spend and proceed from there.
There is no doubt that collaboration does have its place in our industry but to my mind this isn’t in the procurement process. Perhaps, what we actually need to do is to turn the procurement process on its head. The client company could issue a scope, along with their indicative budget, giving all parties the same information. Discussion during the bid process would then force contractors to differentiate themselves based on value and quality. The most appropriate technical bid, the one that delivers best value rather than the cheapest, could be chosen by the client.
We need to determine how to deliver value to both sides of the relationship. As a minimum there should a sustainable middle ground whereby quality and value are delivered at a price which allows the contracting company to make a reasonable profit and also enables inward investment which can, in turn, help to deliver innovation to the benefit of everyone.