How to Fail as an IT Purchaser

Update 2014-11-15: This problem is still unsolved. Now contracts are being won with even -11 SEK/h bids for some categories of consultants.

Yesterday Computer Sweden revealed how a consultant company had managed to win a bidding competition for providing IT consultants the Swedish social security agency (Försäkringskassan). Their idea was simple, lower the price for many types of consultants to SEK 1 (sic!) / hour while maintaining normal prices for other types so that the average price was far lower than their competitors.

Unfortuneately for the client this does not mean that they will be able to benefit from the low prices promised by the company. According to critics there is a number of ways that the supplier can fail to deliver at the promised price without breaking any contract. For instance, they can say that consultants of type X in category Y are not available (at SEK 1/hour) but that they can provide a type X consultant in category Y+1 (at SEK 800/hour). In all fairness it should be pointed out that hhe supplier in question promises that they will play fair. Only the future will tell.

Researchers at the Simula Research Laboratory in Norway have recently published a study which is highly relevant to Försäkringskassan’s situation. In “How to Avoid Selecting Providers with Bids Based on Over-Optimistic Cost Estimates” Magne Jorgensen gives seven “anti-guidelines” for purchasers of IT systems.

1. Invite many bidders
2. Focus on price
3. Do not have enough resources to evaluate provider competence
4. Do not perform a reality check between the received bids and that from an independent expert
5. Do not provide support to bidders to understand the full complexity of the project
6. Give information about price expectations, describe the project as small and talk about future oportunities
7. Asking the supplier for a new bid based on a reduced scope

Let us see how many of these guidelines were “followed” by Försäkringskassan:

1. Yes, by law the customer in this case is required to advertise a request for proposals.
2. Yes, according to the article the primary focus was on price. “Försäkringskassan utformade upphandlingen sÃ¥ att de bolag som lämnat de lägsta snittpriserna inom varje tjänstekategori fick ramavtal.”
3. Maybe, according to the article Försäkringskassan used a consultant to support them in the process. That they used a consultant suggests that they did not have enough internal competence. Probably the consultant could provide the required competence.
4. Obviously no reality check can have been performed when prices which were off by two to three orders of magnitude were accepted.
5. Hard to say anything about this guideline as this was not a request for a specific project.
6. At least the last third of the guideline seems to have been met, according to the winning supplier they are investing in an important customer. “Vi har dÃ¥ valt att investera oss in i en kund som vi ser som mycket viktig.”
7. I would say that this guideline is not applicable here.

Out of Jorgensen’s seven guidelines for failing, two were not applicable, four were followed and one might have been followed. This gives a total score for following the guidelines of 90-100%.