Transparency in Public Sector Procurement: Are You Ready for Open-book Accounting?
Open–book accounting means the sharing of an organisation’s accounts with everybody who has an interest in the organisation: not just employees, direct and indirect shareholders and others. In effect, this means opening the books to the public. With growing interest in business transparency, it is a growing trend. There is no insurmountable technological barrier, since virtually all organisations now keep their accounts in digital form. Nevertheless, most publicly listed companies still keep their accounts behind firewalls and only release information to pre-set timetables according to regulatory requirements.
When it comes to the public sector, the case for open-book accounting is of course stronger and the interest goes deeper: as taxpayers and as consumers of public services, we are all stakeholders in national and local government. Where is the money being spent? Who are the suppliers? What is the nature of the contract between government and suppliers? When a public body is spending significant sums of public money to procure and secure the delivery of critical public services, it is reasonable to expect transparency of payments, performance and profit. And all the more so when an increasing number of public services are outsourced to contractors in the private sector.
“Greater transparency can help improve supplier relationship management through the benchmarking of costs and performance.”
At our JAGGAER Pan-Government Forum in May representatives from ten different government agencies, together with the consultancy 4C Associates, discussed the future of public procurement. They identified open–book accounting and, more broadly, the increasing need for collaboration and transparency as key topics of focus.
It is now five years since the publication of the National Audit Office (NAO) report, Open-book accounting and supply chain assurance. In addition to the strong case for transparency and accountability, the NAO pointed out some other arguments that support open-book accounting in public sector procurements. It helps negotiations, especially when considering possible extensions to contracts. It gives the public sector body leverage when challenging a supplier’s costs. Greater transparency can also help improve supplier relationship management through the benchmarking of costs and performance. And where joint public-private initiatives generate revenues and profits, open-book accounting can help calculate how these can be shared equitably.
— JAGGAER USA (@JaggaerUSA) June 4, 2020
A checklist for implementing open-book accounting
Nevertheless, it is easier said than done. Expertise, time and effort are required to apply open-book accounting in full.
- First, you need to check and review the terms of existing contracts. Many will not be set up to allow open-book accounting.
- Second, you may meet resistance, especially with regard to a supplier’s pricing decisions, which they may regard as confidential, for a number of reasons. A buyer will want to probe the cost drivers, including labour, materials, overheads and contingency provisions. A supplier may feel that this scrutiny will impact his profit margins. Detailed category management – including an understanding of the true resource requirements – will be necessary to identify what is reasonable, for example when it comes to overhead recovery – does the latter cover costs that are already accounted for elsewhere under contract labour and materials? If so, double charging is taking place.
- Third, a supplier might reasonably ask, “What do you propose to do with this information?” Because, apart from ticking the transparency box (and how many members of the public will actually take a detailed interest?) open-book accounting is not much use until you act on it. How much control does it give you? A public sector authority might say to a supplier, “Your margins are too high”. Then to protect his profit, the supplier might either a) do a bit of creative accounting to shift costs from margin to overheads or b) advise the buyer to choose another supplier offering a poorer product, at a higher price, but with a lower margin. The point is that without clear standards and guidelines on open-book accounting, which take account of different categories and non-price issues, suppliers are likely to present accounts that reflect what the buyer (or the political leadership of the buyer’s authority) is looking for. That does not necessarily reflect non-price issues and best value.
- Fourth, it is one thing to open up the books on first-tier suppliers, but what about n-tier suppliers? This especially applies in areas such as socially responsible procurement. Great, so you have appointed a first-tier supplier who provides open accounts and ticks all the boxes on social value. But how can you be sure that the extended supply chain is 100% ethical?
- Fifth, there is a widely acknowledged skills gap in many public sector organisations in supply chain management and category management. Based on our engagement with public sector we can see that this is changing in the United Kingdom and, combined with the right technology, this will help to address many of the above challenges, if not definitively fixing them.
Covid-19 has provided a good place to start
Procurement Policy Note 0220 on Covid-19 supplier relief requires open-book accounting and the provision by suppliers of supporting information (including a full break-down of costs) to allow the authority to check that commercial principles are complied with. Therefore, it is a good place to start; suppliers have a very strong incentive to comply. When it has been implemented once, it will be a matter of maintaining an existing best practice rather than asking suppliers to do something entirely new.