Using innovative approaches to deliver value for money through outcomes-based procurement

Thinking about outcomes when supplying can lead to innovation, explains Innes Willox, CEO of Ai Group.

Outcomes-based procurement has attracted significant attention over recent years both internationally and across Australia.

It has, for instance, been incorporated into Queensland’s Procurement Policy which now requires Queensland government agencies to pursue opportunities to develop innovative supply solutions, either through innovation in the procurement activity itself or by fostering innovative solutions by suppliers. Other similar initiatives have been adopted in other jurisdictions.

In brief, the reasoning is that by adopting less prescriptive, outcomes- based approaches where appropriate, suppliers can propose innovative solutions that may otherwise be excluded from conventional procurement processes.

To this end, outcomes-based procurement seeks innovation from the market by focussing on the agency outcome required rather than defining how the outcome should be achieved.

Outcomes-based procurement may not be suitable for all public- sector procurement and, where it is appropriate, how outcomes- based procurement can best be operationalised can vary considerably across different types of procurement.

A factor essential to the success of outcomes-based procurement is deep engagement between industry and government agencies – engagement close to the coal face where solutions can be built around the features of actual exchange and the specifics of different sorts of risks and outcomes.

For our part, Ai Group is currently involved in two exercises to develop approaches to more complex procurement arrangements.

The first of these is a very promising alliance that has been forged between Victorian and New South Wales agencies and the Australian Constructors Association, with which Ai Group is very closely affiliated.

The second reflects the procurement work Ai Group’s Defence Council has been engaged in with the Department of Defence among others.

Construction
There is a significant pipeline of government infrastructure projects in NSW, Victoria, and other states. This is driving the need for new approaches in procurement and project execution to ensure the industry remains sustainable and able to effectively and efficiently respond to the community’s infrastructure needs.

The emergence of “mega projects” has resulted in increased complexity and high-risk project portfolios. There is a very low success rate (measured by achieving budget, schedule and economic business case) for complex megaprojects.

This is not confined to Australia. The global success rate is less than 15 per cent while Australia’s is noticeably better than that – between 40 and 50 per cent, although we should clearly be aiming much higher than that.

To successfully deliver on the current pipeline, a new approach to project structure and risk is required.

The unprecedented pipeline of public investment across transport and social infrastructure will place significant pressure on government and industry to respond without driving up costs and stretching out delivery timeframes.

Existing procurement methods are costly both in time and resources and may not deliver the best for project outcomes. Such a large program of work increases pressures on capability and capacity in both the private and public sectors. Accommodating a pipeline of this magnitude at a time when skill shortages are already acute in some areas requires new thinking, processes, and partnerships to deliver successfully.

Innovative solutions are being sought through a partnership approach that has brought government and industry together to define the major challenges in procurement and project delivery as early as possible.

The Construction Industry Leadership Forum which kicked off almost two years ago is a joint forum of leaders from industry and the Victorian and NSW public sectors to drive improved collaboration and action around procurement and delivery of major government infrastructure projects.

It has broad support from chief executives within the key agencies in the NSW and Victorian governments responsible for the delivery of the pipelines for each state. It also has representation at CEO level from the largest infrastructure contractors operating in Australia. It aims to:
• Reduce the time and cost of tendering;
• Optimise risk allocation;
• Identify innovative procurement models and forms of contracting to achieve best value and greatest long-run benefit;
• Harmonise contractual and commercial terms; and
• Maintain a sustainable construction industry.

Not unsurprisingly, the Forum is putting in a lot of work identifying key risk areas and collaboratively identifying principles and options for addressing these risks. Through its work program, it is building much greater shared understanding of the outcomes being sought, the risks involved and how these can be mitigated.

Defence
The second area of work that Ai Group is involved in comes from our Defence Council, which is a collective of private-sector businesses involved in the defence industry.

Ai Group’s Defence Council includes the vast majority of the primes, many of the second and third tier defence suppliers and we are currently bringing together smaller businesses through an alliance between ourselves and other associations (AIDN and DTC).

We have been working closely with Defence to lift procurement performance both for Defence and for the industry. Defence has put in place significant risk management processes, including a stronger internal contestability function and staged approval processes.

Other key factors in risk management, particularly from an industry perspective, include:
• Early consultation with industry on the requirements to determine “the art of the possible” and industry capacity;
• Ensuring cost and schedule estimates are realistic and achievable;
• Identifying and putting in place risk management particularly for capabilities requiring high levels of developmental activity and integration; and
• Working in close partnership with industry to develop capability – underpinned by new “Engagement and Negotiation Principles” that Ai Group and the Department of Defence signed together on 31 July.

Ultimately, ongoing collaboration and engagement between governments and industry is necessary to reform the procurement process, drive value for money outcomes and secure the ongoing sustainability and viability of industry and its supply chain.

There has never been a better opportunity to change the game.