Conflict of Interest? What Conflict?

By Caroline Boot, MBA(Hons) BSc. MNZIM
Managing Partner – Clever Buying 

Last month, New Zealand was placed jointly first for public sector trustworthiness in the world on the Corruption Perception Index. While it’s great news that we’re back in that top spot after a few years further down the ladder, it’s good to reflect on how we can stay there.

In this article, we’ll outline why we need to stay vigilant, and what mechanisms are available to manage potential conflicts of interest. The most useful advice we’ll give you is to describe three procurement practices that can be easily incorporated in your tendering, that will make your organisation virtually bullet-proof against legal challenges.

We can’t afford to be complacent, particularly in relation to government procurement. In an interview last year with Peter Davies of the Auditor-General’s office, I was given sobering facts about OAG audits of procurement processes. Most than 80% of the concerns raised in those audits relate to conflicts of interest, Peter told me.

When it comes to procurement in New Zealand, we have challenges that most of our trading partners don’t. We’re a small country, with most industries having a tight pool of public sector ‘experts’ who have the knowledge needed to assess proposals for technical solutions. It’s inevitable that the expertise they bring to this task is based on experience in their specialist industry – most likely with one or more of the suppliers whose proposals they are now assessing.

They’re past employees or managers, directors, or simply have long-standing connections with others who they’ve shared their specialist career path with at some point. So naturally, they will bring that experience with them when they assess the proposals of their associates alongside others in the industry.

When conflicts of this nature are identified, government procurement agencies find themselves at Catch-22. To exclude these industry gurus from the assessment process because of those connections would be to risk the evaluations being made on an uninformed basis. But to include these people in your tender evaluation team risks allegations of bias, such as those that came to bear on the Lab Tests vs Auckland DHB and the Problem Gambling vs Ministry of Health cases.

Although the Problem Gambling Judicial Review Appeal was recently upheld, the importance of diligent identification and effective management of conflicts of interest is highlighted. The original judicial review coined the phrase “the Personal Knowledge Exclusion Rule” which effectively requires tender evaluators to exclude, both from their conscious judgments and their unconscious consideration, their personal knowledge of one or more of the tenderers.

The reason for this is simple and logical: while broad industry knowledge is useful, any evaluator’s personal knowledge of the bidders will never be even across the spectrum of tenderers. They may know one organisation (or part of it) well from personal experience; another may bring historical links which may, or may not be currently true; and other tenderers may be completely unknown to the evaluator.

It’s never going to be a level playing field! So personal knowledge and conflicts of interest need to be extremely carefully managed to avoid introducing bias (or even the perception of bias) into the tendering process.

The good news however is that ‘management’ of conflicts of interest may only rarely require you to remove the conflicted person from your evaluation team.

The Auditor-General’s Office has some great resources that help with this. Alternatives to removing the conflicted person from your TET include:

  1. Taking no action, transparency is enough;
  2. Asking whether all affected parties will agree to the person's involvement;
  3. Seeking a formal exemption to allow participation (if such a legal power applies);
  4. Imposing additional oversight or review over the person;
  5. Withdrawing from discussing or voting on a particular item of business at a meeting;
  6. Exclusion from a committee or working group dealing with the issue;
  7. Re-assigning certain tasks or duties to another person;
  8. Agreement or direction not to do something;
  9. Withholding certain confidential information, or placing restrictions on access to information;
  10. Transferring the person (temporarily or permanently) to another position or project;
  11. Relinquishing the private interest; or
  12. Resignation or dismissal from one or other position or entity.

In summary it should be rare that a conflict of interest is so significant that you can’t use one of these mechanisms to get around it.

But we think there are also some other common-sense practices that not only make it very unlikely that a conflict could result in a biased result, but which also make your procurement processes faster, more efficient and far, far easier to justify.

The first of these is to make sure that the information required from tenderers, the weights and the scoring system, are all tightly aligned to the factors that have been agreed by the organisation to be critical to achieving best value for money on the project. In practical terms, this means:

  1. Not recycling old RFTs with generic questions
  2. Not having set standards for the weightings
  3. Investing in the procurement planning phase to determine what characteristics of your suppliers will be the differentiators (i.e. will give your organisation the best value for the money you spend).

This sounds simple, but it’s easy to take the lazy way out, and not put the time needed into designing a procurement process and selection criteria that are clearly aimed to favour a supplier that will deliver what is best for the project. Personal bias will struggle to make a difference if this process has been done diligently.

The second, and probably the most important mechanism to counter conflicts of interest,  is to discuss, agree, and ‘anchor’ your scoring system before you review the responses. Ideally this should be done before you put the Request for Tender out.

What do we mean by ‘anchoring’ the scoring system? This is a practice that’s been used for decades in the education sector for assessing capability of students fairly. And the good news is that the practice is easily adapted to assessing the capability of tenderers. Here’s how it works.

First, you need to identify the key differentiators within each attribute category. Usually these are based on the main risks or the opportunities for added value that a top-notch supplier might offer.

Then, decide what will ‘satisfy the requirement’ – in factual terms. Here’s the crux of it – rather than referring to a ‘good’ response, you need to get down to the nitty-gritty. For example:

  • A Traffic Manager with CoPTTM Level 2 qualifications
  • Successful experience (as confirmed by referees) in delivering a bridge construction project valued at over $1 million
  • Ability to fix faults within a three-hour period.

Be sure to state these descriptions in purely factual terms, so there can be no differences of opinion or subjectivity among the evaluators when they score the responses later.

Then, decide what a ‘fail’ would be and state this in indisputable fact-based terms. For example:

  • Supplier provides false information in their response
  • One or more referees would not engage them again
  • Supplier does not mention environmental controls in their risk mitigation methodology.

This gives you an extremely robust and defensible foundation for building your scoring framework. I encourage procurement managers to make those two areas transparent to their tenderers, so that they know what the essentials are – and unsuitable tenderers who do not comply will self-select out of the process.

The third part of the process is to identify some examples of major benefits and minor benefits that suppliers might bring; and major or minor reservations that a response might include. The more creative you are in this area, the more useful this will be as a frame of reference. For example:

Minor reservation:

  • Change of Project Manager anticipated after project set up; but replacement has similar skills, experience and qualifications

Major benefit:

  • Project programme enables completion at least two weeks ahead of schedule
  • Specific experience on this site on a previous project (hence understands difficult ground conditions and has existing positive relationships with community stakeholders.

Armed with this fact-based scoring scale, agreed by the evaluators and documented before they review the responses, the opportunity for any evaluator to introduce bias to the evaluation process through their conflict of interest is negligible.

Moreover, it’s an astonishingly powerful tool to speed up the evaluation process, to make moderation of scores easy (as they tend to be within a very tight range), and to make it extremely easy to justify the decisions made by the tender evaluation team.

The third mechanism to eliminate conflicts of interest is to provide a comprehensive briefing session for tender evaluators, before they are involved in evaluating the tender responses. At this meeting, it’s important to cover typical areas for conflicts of interest, such as:

  • Former employment
  • Financial shareholdings
  • Professional advisor relations
  • Personal friendships or family relationships
  • Receipt of any financial payments, sizeable gifts or paid expenses.

These could apply not only to the companies that are tendering, but also to any of the personnel who have significant links (financial or otherwise) to those companies. This also extends to any family members or close friends of the tender evaluator.

It’s common practice to require tender evaluators to sign conflict of interest forms at the start of the process, but it’s even more prudent to re-visit those declarations when the evaluators have read the responses. It is always possible that a conflict emerges that an evaluator was previously unaware of; and it is essential that those conflicts are declared, even if no action needs to be taken.

So what should you take to heart from this article? Here are a few key learnings:

  1. Conflicts of Interest are the most common cause for legal concerns on tendering processes.
  2. They can be avoided by three simple but effective practices:
  • Robust procurement planning
  • Anchored (fact-based) scales for scoring
  • Thorough evaluator briefings, including conflict of Interest declarations both at the start, and after the responses have been reviewed.

Caroline Boot is the Managing Partner of Clever Buying, an organisation dedicated to providing practical procurement training including Government Rules of Sourcing, NZQA assessment and expert procurement support for tender evaluators.