Cheats sometimes prosper: fiddling the open book contract

For reasons that will become obvious, a company we won't name announced very good results to the City a short time ago. That reminded me that a few years ago I came across that firm using some very 'interesting' practices to mislead their customers and the procurement people within them.  Now things may well have changed since then (on eof the reasons I won't name them), but anyway, there is an interesting lesson in it for procurement and contract managers.

The firm in question - lets call them %%% plc - provides outsourced services.  In many cases, those services are provided with at least an element of 'open book' contracting; their client pays actual costs as per the 'open book' record, plus no doubt a margin of some sort.

%%%  used (and still does I expect) a large number of temporary agency staff, both unskilled and some skilled.  I was asked (unpaid, a friend of a friend request) by a provider of such staff to help  to give them some advice on how to handle negotiations with %%% , which were getting very difficult.

Part of the difficulty was this.  %%% were demanding that the agency billed them at a standard rate for each different type of role for which they provided individuals.  Nothing wrong with that.  But then, at the end of the year, %%% wanted a volume rebate of up to 50% of the spend!  That caused some accounting issues and concerned the agency for ethical reasons as well.  Because the reason was clear. The headline rate was being presented as an actual cost as part of the open book arrangement with the ultimate client; the 50% rebate was not.

So the ultimate client saw that the book rate for a 'toad-wrangler' (for instance) was £20 an hour and paid %%% accordingly.  But the real rate paid was only £10 an hour after %%% received their substantial rebate; and you can be sure that was much closer to the genuine market rate than the £20.

Now, a really informed client would know that toad-wranglers don't earn £20 an hour and would challenge the provider.  But how many contract managers of outsourced services - a highly undervalued and underpaid breed in my experience  - have the time, skills or inclination to become experts in the second or third tier markets underpinning the first tier service provision?  Not many.

Clients therefore think they have a great deal at competitive margins, and the second tier supplier gets both squeezed and drawn into the deception.  So do a bit of due diligence on what you're presented as open-book costings; and if you really want open-book to give you the best deal, include contractual provisions that specifically require the prime to disclose ALL commercial transactions, rebates, discounts and so on with their supply chain.

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