From Contract Management to societal Value Creation: A public Procurement Portfolio Model

In this episode of The Leading Edge, Nikki Mackay is joined by Andrea Patrucco, Robert Handfield, and Daniel J. Finkenstadt to discuss a new approach to public procurement. Together, they explore why traditional procurement models often fail in the public sector and how procurement leaders can better balance accountability, resilience, supplier diversity, and societal value.The conversation examines how public procurement can evolve from a compliance-driven function into a strategic tool for delivering broader economic and social outcomes.

Transcript

SPEAKER_02 0:03

Well, hello and welcome once again to the Leading Edge, a series which offers in-depth insights into the key challenges, innovations, and evolving dynamics of the contract and commerce landscape. I'm your host, Nikki Mackay, Chief Development Officer of the Commerce and Contract Management Institute. Now, in today's episode from Contract Management to Societal Value Creation, a public procurement portfolio model, we are shifting our lens towards a sector that handles trillions in economic activity, but is too often dismissed as mere administrative paperwork, public procurement. So to guide us through a groundbreaking new framework for this space, I am joined with by Andrea Petrucco and Robert Hanfield and Dan Finkenstadt. So for decades, organizations have tried to force private sector logic into public sector buyers. But standard models built around profit maximization and aggressive cost leverage are fundamentally mismatched with an environment driven by regulatory accountability, policy mandates, and the pursuit of equity. So today we are discussing a transformative public procurement portfolio model that replaces profit impact with institutional stakeholder complexity. We'll explore how public sector leaders can look beyond the four walls of a single contract to strategically manage multi-tier supply network risks while actively delivering societal value. So Andrea, Rob, Dan are here to guide us through this evolving landscape. Welcome to the leading edge.

SPEAKER_03 2:01

Pleasure to be here.

SPEAKER_02 2:04

Great. So let's dive in and I'm going to come to you first, Rob. For decades, public procurement has borrowed frameworks designed around profit leverage and cost optimization. What is fundamentally different about public procurement that makes those traditional models insufficient for creating societal value? What are your thoughts, Rob?

SPEAKER_03 2:28

Well, the number of differences is uh is multifold. There's it's really almost like night and day uh when you compare public procurement and private sector procurement. Um for many years, um the private sector was governed by a framework uh introduced in the early 80s by Peter Kraljak, which was the Kraljek model, which basically said that every category of purchase could fall into a uh a bottleneck, a leveraged uh strategic, or uh, you know, kind of an outlier section of uh difficulty that's classified by spend and uh strategic value. What's different about public procurement is is again multifold. Number one, uh with public procurement, you don't have a single stakeholder, you have multiple stakeholders. Uh you have uh internal government stakeholders, you have the community, you've got different subcommunities within the communities. And so there's uh you know, there's multiple goals, multiple objectives, and multiple stakeholders. That's number one. Um number two is public procurement is uh governed by uh very specific and unique uh government requirements. For instance, every state in the United States has a different set of public procurement uh regulations and requirements. The uh federal procurement is governed by something called the federal acquisitions uh regulations or the FAR, which is a uh has over the years has become a you know uh a massive book of intricate uh rules and regulations that are extremely difficult to interpret. Um and then uh last of all, I would say that uh you know the challenges are are not so much about cost, but but about value and defining and thinking about value in uh in public procurement, especially societal value, uh can be very difficult to get your arms around. There isn't a single measure of that. Andrea, what are your thoughts on that?

SPEAKER_00 4:50

Yeah, no, I mean 100% agree. Um, so I think that uh the main uh issue is really like the evolving question that affects public procurement compared to like private procurement. So if you look at a company, procurement often start with questions like how much does this category affect profit? And can we reduce cost and can we use our buying power? Instead, in the public sector, these questions are completely different. So we need to look at if this is fair, transparent, can we justify to citizen, auditors, unsuccessful suppliers. So, in this sense, uh, the models that have been used for decision making and strategy decision making in the private sector are not really suitable uh for the public procurement and for the public context because they are mostly about value capture for the buying organization. Instead, as you were saying, there are different objectives in the public sector that makes polyprocurement about value creation for the society, and that that changes everything because that shift the priorities from consolidated demand and negotiating aggressively, from innovating as a core strategy, the same behavior in the public sector can raise concern about competition, matching uh, um, competing objectives of these certain stakeholders, supplier access, fairness, and so on. So we need a shift uh in strategic decision framework and strategic decision model that are able to capture uh this type of different uh priorities, and that's why the idea of this of this model came from.

SPEAKER_02 6:32

I'd love to thank you, Andrea. Um, I'd love to have your perspective too. Um Dan, if if I may.

SPEAKER_01 6:40

Yeah, absolutely. So I think that the main difference with public procurement when they were talking about societal value versus consumer value and even investor value, is that there's there's a broad set of sentiment and and policy areas that shift that are quite different than just tracing like you know, what the consumer is excited about, right? And the total addressable market in a lot of these areas is dramatically different for the the sale side, so for the the contractors themselves, right? So in many cases, like defense, their requirement doesn't exist for anyone else, right? Like no one's buying missiles except for defense, right? So it's a much harder situation to so a lot of the things that um a uh a commercial procurement model could rely on, like profit motivation and investment by a company that they can trust on, doesn't really occur because the only demand signal that's coming is coming from one single source, which is the public, right? But to Rob and Andrea's point, it's this like amalgamation of priorities, right? So it can become it can become a very difficult market to navigate as a seller, and then as a buyer, that constrains your options for buying as well. And and just you know, the core thing is that the crawl jick model is basically profit-focused net currency loss, sort of like versus gain, right? That's sort of the simplistic view of that. Whereas, you know, in public procurement, things like uh social effects and public good doesn't exist in the crawl jet model. And that's one thing that's been brought forward with the model that we've introduced.

SPEAKER_02 8:13

Thanks, Vink. So um, I'd I'd really like to build a bit more on and look in detail at the framework. Andrea, I'm gonna come to you because one of the most significant shifts in your framework is actually replacing profit impact with institutional stakeholder complexity. So, what what does that concept mean? Talk us through it in practice and how does it actually change the way procurement leaders will make decisions?

SPEAKER_00 8:40

Yeah, I mean, institutional stakeholder complexity sounds like a very academic term and the framework. Uh, but like so, what we mean in practice is that uh it's much simpler. So it's basically how many public obligation, interests, and expectations sit around the procurement decision. Um, as also Rob mentioned, a private company usually focuses on how much we spend, how much leverage do we have over supplier. Instead, a public buyer is focused on a different set of questions. Who is affected by our decision? What are the public policies attached to it? Who needs to be consulted? What would citizens think and expect from us when we make this decision? So, if we build around this question, a critical strategic dimension is looking at the public environment around the purchase. Now, if you want to put it as an example, think about like a very easy purchase, like buying office cleaning service for a municipal building. Very easy purchase. The specifications are clear, the service is familiar, there are several suppliers usually available on the market. Usually stakeholders agree on what matters and how this needs to be purchased. Fair price, reliable service, uh, compliance with labor requirements. So, this is what we define as a purchase with low institutional stakeholder complexity, because this has a very low uh criticality in terms of the environment, the public environment that procurement need to look at when making the purchasing decision. Of course, the procurement team still needs to follow all the rules and complying with the policy and regulation, but overall the decision doesn't require major political negotiation or complex stakeholder agreement. Then let's look at something more complex. Like, for example, a new citywide public transformation transformation system or a digital platform or school meal service or a large social care contract. So, in these types of purchases, the procurement is not just buying a product or services, uh, you're really touching uh the life or citizens or students, service user, elective official, community group. So you are affecting a broader type of network in the environment. So in this case, you have to try to reconcile the objective that might be different across this group of stakeholders. Someone can care more about the cost, another may care more about the service quality, someone else might think about access to small businesses and so on. So, in this case, is what we uh what we define as a high institutional stakeholder complexity, which means that uh when we make the purchase decision, we need to go beyond uh what is like the typical procurement focus and look at how we can reconcile these competing objectives. So we need to go beyond thinking uh how important is this category to our budget? To we need to make our decision answering the question how much public alignment, uh, governance and accountability does this procurement require to be successful. When the complexity is low, usually the process is pretty straightforward. Instead, when the complexity is high, uh procurement teams need to slow down a little bit and be sure that everyone is aligned with all the steps of the procurement process uh in order to avoid the problems that can arrive, arise later in the procurement life cycle.

SPEAKER_02 12:22

Excellent, Andrea. Um Rob, I want to build a little bit about now on this very delicate competing priorities, because public procurement, of course, is increasingly expected to deliver outcomes beyond cost savings alone, um, you know, from supplier diversity and sustainability to economic resilience and service continuity. So, how how can leaders balance these competing objectives, but at the same time still maintaining transparency and accountability and value for money? What are your thoughts, Rob? Rob, you're on mute.

SPEAKER_03 13:02

Yeah, it's it's it's very complex for uh you know for contract officers and uh public procurement um buyers and managers to deal with this this uh menu of of different requirements. Um you know, very often they're given sort of checklists of uh things that they have to consider. Um supplier diversity certainly is one, you know, we want to uh the federal government in particular wants to support uh minority and diverse communities, uh, women-owned businesses, um uh, you know, veterans in the DOD, they want to support veterans, uh, veteran-owned businesses. So the question becomes, you know, are they the most capable supplier uh or are they getting the business just because they happen to be a minority? Well, you know, though those issues come up very often, and and sometimes they're uh they have to make sacrifices one way or the other. Um sustainability is a very big issue, uh, perhaps less so under the current administration. But um uh you know there's there's many laws now that are coming out that are requiring uh that that uh organizations be sustainable. Uh I did some work with the uh U.S. Department of Agriculture on biobased products. And so there's an increasing focus on uh using um uh biobased products that uh are not using um non-renewable materials. Um the the functionality has to be equivalent, and the cost hopefully can't be too much more than the alternative. Um you you also brought up transparency. So the the uh every step of the way has to be transparent and open to all of the suppliers. Uh what often will happen though is you'll get a protest. And a protest will say, well, they weren't it wasn't fair, it wasn't transparent. Uh they were biased in their decision making, and there's a whole procedure that goes on to uh to deal with those kinds of protests. That doesn't happen in the private sector. You know, the decision is final, you win, you lose, and and that's it. Um and then finally, value for money. You know, you have to ask the question, is it technically feasible? Uh, you know, does it does it have uh superior features? And what is the value of those superior features in the in the context of um, you know, the budget, the state budget, the uh the federal budget, and what have you. And then of course, you have some other interesting behaviors at the end of the fiscal year. Uh, if there's budgets remaining, uh agencies want to spend it as quickly as possible and uh buy things that they may not even need in some cases because they want to blow out their budgets. And you never want to have budgets, uh any, any, any uh uh currency left in your budget, because then that means they'll reduce it next year and you want to get more next year. So there's there's a game that's played uh in terms of budgets as well. And uh, Dan, I'm sure you've seen all of this stuff as a contract officer uh in the US Air Force over the years.

SPEAKER_02 16:27

Alice, Dan.

SPEAKER_01 16:28

Yeah, I mean, budgets are a huge thing, right? Like if you're in a company and you decide that you, you know, there's an ROI that you need to address and you have the budget to do it, you can action that quite easily. Now, obviously, as companies get bigger and more bureaucratic, that's harder, but for the most part, very agile. Because of the accountability piece, the way we appropriate funds and stuff like that, it's very hard to reprogram and move money off of its intended area. Um, and it's not so easy as just calling the CEO, COO, CFO, and going like, you guys agree with the move. It's a relook and vote by, you know, representatives from every state, right? Uh to figure out like, are there, you know, the the folks involved in that, like, are they okay with moving that, right? And there's there's some nuances there uh for doing that, but for the most part, it's that difficult. Um, and budgets do not follow demand. Companies do things really smartly, like start investing early to get ahead, uh, to reduce costs later on. Our budgets typically lag our requirements, and so capacity tends to fall. So we end up having lower investment where we need, which means we have less capacity, which actually impacts demand because then people think we can't actually even get it. So it reduces the actual demand. So there's this really interesting dynamic that happens. And then the other thing that happens in public procurement, which is quite different, is um this idea of public good is not just social good, it's also security and recovery. So we have an entire category in our matrix around um around contingency contracting, um, which is sort of what what are those methodologies and approaches we have to take when some of those other objectives of social good are circumvented or overridden by security and recovery, you know, so massive hurricane, uh war, you know, stuff like that, where we we sort of we don't break the rules, we adjust them to the conditions, right? So to Rob's point, optimal conditions are value for money needed with speed and uh public transparency and integrity in the process, right? That level of accountability. Um, sometimes we're willing to move extra fast to secure whatever conditions are happening at the at the uh uh expense of perfect traceability, right? Um, and then we've we figured out after the fact. That's why you get to read all those wonderful uh inspector general reports at all the different levels about what we did wrong when things were really stressful, right? So, but they're nice for future learning, but the reality is we need a methodology to move fast. And we've built emergency procedures at the federal level, and I know a lot of states have as well to deal with that.

SPEAKER_02 18:54

Yeah, fascinating dynamics at play. Um, I want I want to touch now, Andrea, I'm gonna come to you on the knotty subject of unintended consequences, um, because public procurement is often used to shape markets and support broader policy. However, interventions can sometimes create unintended consequences, um, like reducing competition or reinforcing incumbent suppliers. So talk to us, Andrea. How can procurement leaders support local economies and deliver supplier diversity and resilience, but without supporting uh distorting markets or creating this kind of long-term dependency?

SPEAKER_00 19:38

Yeah, so um, this is actually one of the most difficult parts of the pilot procurement mission because if you look at what governments in procurement are trying to do, they usually try to match uh two competing uh things at the same time. So, on one side, as you said, and as we discuss, achieving broader public goals, local economy, development, supplier diversity, uh sustainability, resilience. But then on the other side, we also have to remember that we must still protect competition, fairness, transparency, value for money. So the traditional principle of poly procurement. So the real question is how do we shape the markets without uh kind of like over controlling them through through procurement? And just wanted to kind of give you also kind of a couple of examples, referring also to the model that we are uh proposing in our article. So, in our view, the idea is that public buyers should use procurement to help a supplier become more capable of competing, not just protect a small group of preferred suppliers from competition. Just a couple of examples. So think about a city uh or uh a like local government that wants uh more local business to participate in a facility maintenance service. So a risky approach could be awarding the same contract to the same few local suppliers simply because they want to buy local. Of course, if you do that repeatedly over time, you can reduce the competition, then of course, there is a problem of dependency on the same supplier and also make it harder for new suppliers then to enter this type of market. Instead, a better approach is to ask why are smaller suppliers not bidding in the first place, so that I have to try to take them in and favor them to achieve this objective. Like maybe the contracts are too large to begin with, too demanding insurance requirements, payment terms that are not sustainable. So the key is to understand the barrier and then try to understand what type of intervention can be done to favor and to shape the market in the appropriate way. So the same applies to supplier diversity. So we have heard a lot about that. So think about a public agency. That wants to increase supplier percentage in terms of minority own or women-owned business to win contracts. So the answer is not just simply give contract to this group of suppliers to eat a target. You need to design a process where those suppliers can realistically participate and win a contract. So, for example, think about splitting them in smaller contracts, using transparent set as sites when they are legally allowed, or implementing mentor or capacity building products, uh programs, uh designing evaluation criteria that are clear from the beginning. So, where competition is still maintained, but then the playing field between suppliers is kind of like leveled. Like all of these examples, for example, fit our strategy in the model that we call patronized competition, where the word competition in this case is key. The public buyer is not abandoning the competition, is keeping the competition in place while using some policy instrument to help these traditionally underrepresented suppliers or smaller suppliers to access the polyprocurement market. Similar, when we talk about resilient, if you look during COVID or other crises, many governments they realized that they had become too dependent on a small number of suppliers. And that was a problem for critical good. Again, if you look at TIC COVID, it becomes like the PPE problem. So after the crisis, the lesson is not we need to buy everything locally or we need to reduce the reliance to international supplier because that can be expensive or unrealistic. But the lesson is to design more resilient supply network, multiple supplier, balance between regional and international capacity, pre-qualified emergency supplier, clear visibility into the supply chain, contract that allow rapid scaling when there are crises, which is another type of strategy that we propose in this model. So the main takeaway is that there is a space when procurement is seen as strategic and can actually implement a strategy tailored to the category that is both, to kind of like matching these competing interests and actually uh doing this market shaping role that in traditional circumstances, so when procurement is perceived more operational, can be challenging to achieve.

SPEAKER_02 24:28

Yeah.

SPEAKER_03 24:29

I would I would add to that, you know, the the general public um you know has a very negative perception of public procurement. You know, they they often will say, oh, the government is wasting money on these stupid projects. And uh so so it's it even puts people in a much more difficult situation. And uh there are circumstances when uh you know spending money in a way that is not necessarily the lowest cost or the most efficient uh is completely justified. Uh we're working on a project right now on the uh generic drug markets and uh uh companies that uh have and and Medicare uh, for instance, have uh purchased all the majority of their generic drugs uh in uh from factories in India and China, where they have the uh key starting materials and APIs there. And what they're discovering, and and this is what we're seeing in our projects, is that the quality of these generic drugs is suffering uh because of the uh low price being imposed on uh these factories. And uh we've seen uh several kinds of drugs like mentformen, high levels of contaminants like NDMA and so forth in them. Uh and so uh what we're proposing, and I actually testified to uh to Congress, uh Congressional Committee, that we need to bring some of these generic drugs back into uh Western countries for manufacture, uh which means we'll have to pay a higher price. But uh if it comes uh to the safety of drugs that we're ingesting, uh the public is ingesting, I think it's worth paying a bit more for those drugs uh if we know they're they're safe.

SPEAKER_02 26:19

Absolutely. Um I'm gonna go on to my final question now, and I I'd love to hear everyone's perspective. We're gonna sort of look look towards the future. If governments, you know, really fully embraced procurement as a strategic tool for societal value creation, what would public procurement look like in five to ten years' time? And and what do you think, what changes in leadership capability or policy really will be needed for us to get there? So I'll go to to Dan first.

SPEAKER_01 26:56

Yeah, thanks, Nikki. Well, I think you know, when you think about what Rob and Andrea and I have been talking about with the model and the fact that it's not profit-driven, right? It's value-driven. The two biggest things I can think of are really working hard on this outcomes-based contracting concept that we've come forward with, which is the idea of like how do you actually define outcomes and what is value? And then working towards a model that allows for value-based pricing, to Rob's point earlier, which is like it's not just about the lowest cost, right? Sometimes you're, you know, and it's not just about the cost input, because that is another thing that government does right now that I don't think is optimal, is they usually do, you know, even if it's a fixed price, they're still managing it as what does it cost to make it and what's the reasonable margin above it. There's not a lot of value-based pricing, which is like, well, what would I pay for the counterfacturer? And what does it cost for the counterfacturer? So maybe it's worth a little more to me, right? Because if you think about commercial pricing, that's typically how it works. Um, I think the government has to relied just on competitive bids as a way to live on, like, oh, that's commercial pricing, um, without realizing sometimes there's even a premium in that. The reality should be more along the lines of like, what is my willingness to pay? So I think I think those are some of the things that are critical for a model like this to actually take hold. Because what we want them to get to is portfolio management at the category level that's strategic to what Andrea has said. Um but you can't do that until you understand how to manage outcomes-based requirements and outcomes-based contracting and move towards a value-based pricing model.

SPEAKER_02 28:24

Thank you. Um, Andrea.

SPEAKER_00 28:29

So I have uh two focus area to be very specific, where I think there's great opportunity and there is still like a little bit of a gap uh between private and public procurement. So the first one is market intelligence. So there is a huge opportunity in public procurement to understand supplier market that is unexploited. So we still have this conception today that uh procurement people in the public sector just like they run process and they follow procedures and they don't need to understand if the market is thin, if there are dependency risks, which supplier have actually performed well before, if there are new potential source of supply. Instead, this is this is very important because it's part of the procurement lifecycle. So if we really want to take procurement to the next level to try to achieve the strategic objective, the first activity that you have to do is gain knowledge of the supplier market. So market intelligence is the first area that, in my view, in the next year, is gonna be invested in and is gonna be improved in terms of competences and also kind of like part of the procurement profession more thoroughly. And the second is uh contract and performance management. So, as we're talking about uh societal value, so we do not create the value when the contract is awarded, we formalize how the value is measured, but then the value is actually created during the delivery. So if you have a supplier that promises you lower emission, local jobs, uh, service continuity at the contract level, then you have to be sure that during the delivery, these commitments are measured and managed to ensure that they are met. And this is another area where procurement is not fully mature yet. We always forgot about Torah performance management and dashboard to understand how suppliers are performing, and that even when a performance dasport is in place, as Dan was saying, different categories require different indicators and different depth. Now, that leads me to another area that we haven't touched upon, but it's clearly very critical. Of course, AI will accelerate this shift. AI tools in DL development, assuming that they are allowed and they are deployable in government processes, they can help procurement teams to scan the supply market, identify potential risk, flag categories that are more exposed to disruptions or they are more easy to purchase, compare contract performance. So past versus future versus current, projected, detect where tender requirements exclude or include more small of dire supplier and so on. So clearly the digitalization and the trend that we're seeing naturally bring us uh to a toward a more focus on this area that right now, in my view, are underexploited uh in procurement to achieve this kind of like strategic objective that we've been discussing.

SPEAKER_02 31:35

Wonderful. Thank you, Andrea. Um and finally, Rob, let's hear from you. What's your view of the future?

SPEAKER_03 31:41

Yeah, I I agree um with both Dan and Andrea's uh key points. Um, you know, I I think the other area that the federal uh that federal governments and state governments can work on is uh really uh not just understanding uh the supply base, um, you know, conducting market intelligence, and many of them restrict their uh sourcing to uh current suppliers, suppliers they already know have contracts or have done business with the government. Um but there's a whole group of other suppliers out there that have superior capabilities and with so uh the ability to develop or labor your current uh supply base is important, and uh AI can certainly help uh you know identify those potential suppliers and there's opportunities to develop and grow that supply base, even if they're not making exactly what you need today, they have the process capabilities to be able to do that. So I think that's gonna be a big uh area, especially as we look at uh uh you know the uh industrial defense base and and bringing more uh external uh you know suppliers all over the world uh to uh to a domestic uh supply base as well. Um the other the other thing I'd say is that you know you brought up leadership. I think leadership is really important. Um we need to uh organize ourselves to really allow our procurement contract officers to become experts uh in a certain in a certain category, you know, using what they call category management to uh allow them to become real experts and to focus on these uh unique supplier markets and uh be able to delve deep into them and understand what's happening. And so I think that will be also uh you know a critical element that I think is is uh good uh would would be really beneficial in the future.

SPEAKER_02 33:47

Thank you so much. Huge opportunities for transformation. Excited to see what is to come. And of course, um all of the information about the framework, the the article that was written will be available um in the Institute website. Um So, unfortunately, that's all we've got time for for this episode of The Leading Edge. Um and I think if there's one vital takeaway from today's conversation, it's that public procurement must evolve from a compliance-driven, transactional contract administration task into a strategic mechanism for societal value creation. Um, and by treating regulatory obligations and supply network vulnerabilities not merely as constraints, but as core dimensions of procurement strategy, state and local governments can build resilient local economies, foster supplier diversity, and really maintain agility even in times of acute crisis. So thank you so much to my experts here today, Andrea, Rob, and Dan, thank you so much for joining me today. Um, and thank you for listening. If you like what you heard, stay tuned for our next episode where we'll continue to explore the ideas, innovations, and leadership shifts shaping the future of commerce and contracting. Until then, keep challenging, keep adapting, and keep reading.