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Social inequality and the role of predatory purchasing

July 1, 2017

The story of Westminster and Chelsea Council’s relentless drive for cost savings will no doubt be explored in more detail in the forthcoming public inquiry into the Grenfell Tower disaster.

The fragments of information emerging, such as the “nudge email” urging the cladding contractor to be aware of the need to present “good costs” to the responsible councillor, remind me of painful experiences at the hands of corporate purchasers during my own career.

Over forty years, first as an employee, and subsequently as a business owner, I have seen all manner of methods companies and public bodies use to reduce costs, both through bidding processes and by unilateral demands for price reductions.

In the Middle East, I’ve seen whole teams of people adhere to Western-designed tender processes full of rigour and forensic examination of the goods and services on offer, only for the final decision on the winning bidder to disappear into a black hole of informal and undocumented discussions between the stakeholders. A week, a month or a year later, the name of the winner emerged. And you knew that the result was more or less predetermined. What you didn’t know was the distribution of the slice of the bid value to be divided up between the powerful figures who made the ultimate decision.

I also heard rumours of a major building contract let to a prime contractor, and the work performed by a subcontractor at the bottom of a multi-layered supply chain for ten percent of the main contract price. Whether the rumour was true of not is only a matter of scale. The system was well-established.

It was not for me to describe such practices as corrupt, but they were widespread. And I do recall being given a formulaic set of words to be used when discussing the delicate matter of the buyer’s “commission”. Fortunately I was never in a position to use them.

When I and a partner started our own business, the level of business we did with our clients was initially too small to come under the purchasing radar. The middle managers who used our services would determine whether we did business with their organisations, and the purchasing departments, if such existed, simply followed orders, and did what was necessary to put us into their systems as suppliers.

As our business with our larger clients grew from tens of thousands to millions, our growth happened to coincide with that of increasingly aggressive purchasing departments. Whereas in the early days we would have a relatively relaxed relationship with purchasers, and could expect to be dealing with the same people for several years, over time, those relationships changed.

New people came on board, assertive and aggressive. They treated us as suppliers rather than partners. They kept us at arm’s length. In many cases they blocked our access to the end user, thus depriving us of the opportunity to gain insight into what was required beyond formulaic statements of work.

That was not to say that the process was always transparent. If we were in an ongoing relationship with the client, we would sometimes be asked to write the specification for a new project. It would go to the purchasing department and be used as the basis of a competitive tender.

In that case, we would have a potential advantage because we would be familiar with the client’s needs, and the competitors would not. If we were bidding as an outsider, the art was to know whether or not we were making up the numbers or had a genuine chance of getting the business.

As the nineties turned into the noughties, the purchasers became ever more aggressive in pursuit of cost savings. Some large companies outsourced their purchasing to consultants, who would devise all manner of torturous wringers through which their suppliers would have to go, especially when long-term framework agreements were up for grabs.

In some cases, the purchasers took the back seat, as high profile executives came up with their own tactics, which often amounted to bullying. In one case, a major tech company phoned my partner and “advised” him that he required us to deliver a ten percent reduction in our prices. Immediately. Otherwise, the executive said, we would lose all of our multi-million revenue from his company.

I also remember a friend telling me that his company, a management consultancy, was subjected shortly after the 2008 financial crisis to similar tactics by the Cabinet Office Minister at the time, who allegedly banged on his desk and said “I want money!”. His suppliers were ordered to come back with cost savings within 24 hours. Slightly less subtle than an email nudge.

Which takes us into an era when companies and government use their power over their suppliers with increasing ruthlessness. Small businesses that depend on large ones for their revenue, are ground down, their profits eroded, often without a care on the part of the purchasers for the well-being of those who run and work for those businesses.

Large companies also use their purchasing power to squeeze margins by unilaterally extending payment terms. Ask any business about the effect of having to wait an additional three months for the money they’re owed, and they’ll tell you it can be catastrophic.

One of the major culprits of corporate bullying are the supermarket chains. Stories of small suppliers been squeezed to the edge of existence by Sainsbury’s, Tesco and their ilk are legion.

The bullies will always defend themselves by saying that they are driven by market forces. The supermarkets work on low margins, and know that the loyalty of their customers is only as good as their competitive prices. They might make noises about their suppliers being partners, but in the end all they care about, provided quality standards are met, is price. And all their shareholders are concerned about is return on investment.

Much of the political talk following the recent general election, and especially in the wake of Grenfell, is of the gap between rich and poor. But the behaviour of large organisations in their relationships with smaller ones should equally be of concern. Small companies, denied the ability to make a profit that enables them to maintain reasonably-paid, stable workforces, resort to hiring people – often from EU countries – on zero-hours contracts that pay the minimum wage.

Their growth is stunted by being unable to invest in expanding their businesses without having to resort to bank finance.

So we have a system wherein successive governments make great play of their support for small businesses, yet tolerate a business environment in which the powerful bully the weak in the name of competition. It’s a sacred nostrum in the West that small businesses are the engine of economies. But if those businesses are never allowed to move beyond the level of corner shops, all the work and tax-payer-funded resources invested in establishing a robust small business sector are wasted.

Inequality will not be solved merely by asking the wealthy to pay more tax, or by increasing corporate taxes on large businesses, as some politicians claim. And introducing a national living wage will not lift millions out of poverty. It will help some, but it will not help the unemployed, who remain so because potential employers who rely on business with larger organisations are deterred from expanding because they know that sooner or later they risk being exploited and possibly crushed by predatory customers, who say to them “if you don’t like the terms we’re offering, screw you – there are plenty of others who will take what we give them”.

I can claim a little experience on this subject. Apart from running a business for a number of years, I also once served as a non-executive director of one of the larger Business Links, an organisation funded by government to promote the growth of small businesses. Watching the constant gyrations in government policy in that field is another story altogether.

I don’t know how blame will finally be apportioned for the failings that led to the Grenfell Tower disaster. But I do know that our culture of squeezing and bullying suppliers won’t escape attention. And I also know that unless we introduce some controls over macho purchasing practices, there will always be suppliers who will be tempted to go against their better instincts in order to win business.

I for one would be happy to pay more for my milk, vegetables and meat if I knew that by doing so I was helping those farmers who ultimately supply them to move beyond the edge of viability, to employ more people and give those people a decent living. In fact I would be happy to pay more for more or less any goods and services if I knew that the money I paid was distributed fairly down supply chains rather than gobbled up by those at the top of the tree.

As we lurch into Brexit, we more than ever need a vibrant small and medium business sector. Without it, we will be reliant on government jobs paid for by an ever-diminishing tax revenue, or on large businesses who use their dominant market positions to exploit the lower-paid in the name of competition.

And if we don’t address the issue of predatory purchasing, slowly but surely our economy will hollow out. The gap between rich and poor will continue to widen. And we can look forward to a level of social instability last seen in the 1930s.

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