2016 Nobel Prize Winners Research Influences Procurement
Article by: Bob Youkim, CEO
Intelligence. Perseverance. Innovation.
The Nobel Prize is one of the most prestigious awards in the world — there’s no doubt about that. The honorees have ranged from Albert Einstein and Johannes Stark to Bob Dylan and Ernest Hemingway. This year’s winners, announced by the Royal Academy of Sciences in Stockholm, Sweden: two economic professors from MIT and Harvard, Bengt Holmström and Oliver Hart. Their contribution was based on contracts theory, which are agreements that shape the way we determine public policy, business, finance, etc.
Holmström’s research focused on employment contracts, specifically between CEOs and shareholders, while Hart’s was on whether public services should be privately or publicly owned. “Contracts are essential to the functioning of modern societies,” said the Academy in its announcement. “Hart’s and Holmström’s research sheds light on how contracts help us deal with conflicting interests.”
A significant takeaway from their research was the fact that privately owned and operated businesses resulted in a reduction in quality of products as opposed to reducing cost. Interesting, right? The lowest priced product isn’t necessarily the best choice. For many, the government procurement process is a broken one that has continued to remain stagnant. The outdated process, which is defined by ‘yes’ or ‘no’ checkboxes, can be easily checked by all participants and does not provide municipalities with the answers they need to help pick the best choice.
As technology continues to innovate and transform the way we move, it’s evident that the RFP process needs to provide a better reflection of the vendors and their products, without the open-ended checkboxes.
Inability to Evaluate Quality of a Product
One major factor Hart and Holmström focused their project on was the fact that privately owned businesses are not pushing out the best quality product.
Are they pushing out a cheaper product? Most likely.
Is it a quality product? Probably not.
For municipalities, this is less than ideal. For one, they’re not given the proper tools to evaluate these vendors. The checkboxes that ask vendors if their product provides certain features are checked-off easily, therefore, not giving governments a way to accurately measure product value. Secondly, having to evaluate a vendor based on a few parts is not the best way to successfully determine if the whole product is a positive asset to the city. For provisions of public goods, it’s difficult to judge the quality of the service when it’s provided privately.
Therefore, vendors are incentivized to reduce the product cost since governments struggle to accurately measure the quality of service. In the end, governments end up choosing the cheaper product. The incentive for the government is that they receive a lower cost, however, are they really getting a valuable product? Not necessarily.
Government Contracts Aren’t Structured to Incentivize Quality
Once governments enter into contracts, vendors typically focus on a way to reduce product price rather than increase quality. Nobody in the system is well incentivized, especially when it comes to contracts.
The RFP process is broken. Change needs to happen.
To better solve this issue of low-cost, low-quality, there needs to be a framework for vendors to be compensated. If the pricing is static and there’s no benefit of making the product better, then why should they create a quality product?
If they want to incentivize to increase quality, the metrics used to evaluate in the buying process have to improve. The evaluation process for procurement does not determine if a product is of high or low quality, which seemingly makes procuring for technology extremely challenging. Choosing a technology platform is more than just choosing, which one has the best features, but one that will provide your city with the solution that will grow alongside their needs. Having a variety of roles involved in the procurement process would help gain a new perspective on the product and its overall quality. More constituents, such as IT professionals, consultants, technology professors, and chief technology officers, to name a few, could greatly influence the process and boost change.
As Nobel Prize winner’s, Hart and Holmström aim to solve contracts theory, we hope to see a change in how the government procurement tackles its own process.