Is procurement contributing to capitalism’s weakness?

Capitalism doesn't seem to be working too well at the moment, does it? If it wasn't for the lack of any other feasible economic system, I'm not sure how many of us would be very enamored of it right now. Hold that thought, we'll come back to it.

We featured an article recently by Ed Haigh from Source for Consulting where he asked whether procurement was partly to blame for the increased dominance of the big firms in the financial services consultancy market. His argument was that in our professional desire to put ubiquitous and generic framework contracts in place, and ensure suppliers are capable, strong, reliable firms, we automatically tend towards the bigger firms as our preferred suppliers.

That got me thinking whether the same applies in many other sectors. And you can quickly come to the conclusion the answer is “yes”. There is a pretty inexorable increase in the concentration of power in the hands of a few firms in many many industries – the big and powerful get bigger and more powerful.

Is this a bad thing – well, not necessarily. But it can tip over into a lack of real competition, and perhaps a lack of genuine innovation, as we discussed in some of our posts recently (here for instance).  And for capitalism to be successful, open and vibrant competition is essential. Where we don’t get that, then things can quickly go wrong. Yet, the natural desire for a profit maximising organisation is to create a monopoly situation for itself – or as close to it as possible.

We might argue for instance that the huge salaries in banking are, in part, indicative of a lack of genuine competition in some of those markets or sub-markets.  So why don’t new market entrants come in and undercut existing players? Because it is virtually impossible, given the ever increasing regulation of the sector.

Another example - why don’t large suppliers to Government scream about tougher and tougher security constraints and restrictions? Because they know how to play the system. It may cost them a little more, but they know that for a small start-up, trying to break into the market, the extra cost, hassle or knowledge needed to work within the public sector requirements may just be the final straw. So we get small groups of very dominant suppliers in government markets. And BAE Systems, Capita or BT wins the new, more onerous contract.

And procurement can be guilty of helping the wannabee monopolists. Every time we add another condition to the PQQ, or require a higher insurance cover for suppliers, or insist that they can cover the whole country with their service, we rule out another batch of potential suppliers and favour the big firms.

The desire to rationalise the supply base has been another factor that has concentrated power in larger firms. One typical route to achieve that is the use of prime contractors. There has been a very interesting and quite heated debate going on LinkedIn around the use of prime contractors in the temporary (contingent) labour space. Do they add value, or do they just squeeze smaller players on margin to the point where they disappear and the market will inevitably become more and more concentrated?

Finally, and perhaps the most contentious of our remarks, has the whole globalisation / offshoring movement of the last 20 years really been “a good thing”? I’ve always been a big supporter of free trade and the theory of Comparative Advantage. But I begin to wonder.

There’s no doubt it has benefited millions, perhaps billions in many countries. But the downsides in the Western world seem to be getting starker, as we’re seeing real reductions in wealth and earnings amongst many in the US and Europe. Intellectual Property has often not been treated as it should, and one key result of globalisation has been the greater and greater concentration of wealth in the hands of a very small number of super-rich people*. Is that ultimately good for the world or the future of democracy and peace?

We’re not looking here for mass repentance from the procurement profession. But maybe we should start a wider debate about the economic and social effects of some of our strategies and approaches. Are they leading to undesirable and unexpected results?

* The richest 1 percent of Americans now take home almost 24 percent of income, up from 9 percent in 1976. (New York Times, Nov. 2010)  

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