Credit checks reduce procurement risk*

By Rob Cook

Local governments procure goods and services from a range of suppliers. Through their selection, these suppliers form an integral part of the value chain, allowing councils to deliver necessary services to their communities. When things function well, all is well. But when the chain is broken, the trouble starts.

The simple fact is that there is always some degree of risk that something can go wrong.

Risk comes in many forms, and local government procurement is increasingly focused on mitigating the threats. Not only do councils need to ensure that they purchase the right goods and services at reasonable prices from suppliers, but these also need to be dependable suppliers who don’t pose any continuity or reputational risk.

Many of these requirements are routinely addressed through well-considered procurement policies, robust processes and specialised procurement toolsets. But there’s only so much certainty to be had when purchasers have to make decisions that rely on information provided by potential suppliers. Sure, your procurement methodology can ensure that you choose the right products and get competitive pricing, but it will struggle to guarantee the financial stability of your chosen vendor.

Rising financial risk
While Australian insolvencies have slowed since the Global Financial Crisis, we are still seeing almost 2,000 businesses entering external administration each quarter. And some analysts say this is only the tip of the iceberg, with many businesses continuing to trade even though they are not technically solvent. And others are hanging on by a thread as they struggle to pay their staff and their own suppliers.

The risk for local authorities is that unless you dig very deeply, it’s almost impossible to determine the solvency of bidders from the information typically contained in tender documents.

To make matters worse, businesses under pressure are more likely to offer significantly lower prices because of their heightened cash flow needs. These 'win-the-business-at-any-cost' bids may look more attractive to prospective customers, but they are often not sustainable.

The rising risk of supplier failure is placing additional demands on local government procurement, and enlightened organisations are now seeking external validation of their bidders.

TenderLink, through its association with business information provider Dun & Bradstreet, is seeing more of its customers implementing credit and business activity reports in their procurement processes. Where the contracts are significant in terms of size, scale or strategic importance, it makes sense to seek an independent, third-party analysis of the potential providers’ ability to deliver on the requirements – and to continue to do so.

Augmenting tenders with credit reports
Unfortunately, purchasers can’t always rely on bidders to guarantee their own creditworthiness. What’s required is independent, arm’s-length evaluation such as that provided by Dun & Bradstreet, which offers a range of reports, from credit checking to analysis of profitability in the industry sector.

Of course, there are costs involved in sourcing these reports and local authorities can either pass the costs onto bidders, or wear them themselves.

Bidders can be required to provide an independent financial risk report as a mandatory bidding criterion. This adds an additional cost to the bidding process which, in itself, may be a deterrent for some borderline bidders. However, those bidders with nothing to hide may gladly bear the cost of demonstrating their financial stability in order to ensure that their bid complies with your requirements.

For smaller contracts, where there may be a large pool of potential bidders, it may not be necessary to demand credit reports from everyone. Instead, councils could seek financial reports only from shortlisted parties. Interested parties are informed upfront that they will be required to provide evidence of their solvency and creditworthiness should they make the shortlist.

For crucial purchases, another option would be for the purchaser to conduct their own risk check on the preferred bidder as part of the final due diligence process. Sure, this means additional costs for the buyer, but if security of supply is essential, we would argue that this investment is more than justified.

As local authorities face more scrutiny of their purchases, it is increasingly important that procurement activities are shown to be robust and transparent. And the ever-present risk of financial failure on the part of suppliers places an added impetus for incorporating risk checks into the procurement evaluation process.

• Rob Cook is Marketing Manager of TenderLink (www.tenderlink.com), one of Australasia's largest web-based procurement networks.

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