6 Market Creation

Purpose

This guidance provides advice to public sector bodies planning or engaged in a procurement exercise. It deals with the situation where the public sector organisation believes that there may be an inadequate competitive response to its requirements. The guidance shows how the public sector body can stimulate the marketplace and ensure that it will obtain a healthy competitive response to its requirements, thereby contributing to the achievement of value for money in any resulting procurements.

The guidance describes:

• scenarios where market creation activity is required
• steps to ensure a healthy competitive response to formal procurement
• who is involved in market creation from the customer side
• how to approach the market
• supply-side considerations and how to address them
• special considerations where there is an incumbent supplier.

It does not describe standard procurement procedures, EU regulations, supplier evaluation, contract development, etc. - these are covered in detail in other areas of OGC guidance.

This guidance is based partly on information gathered by OGC from public sector organisations which are or have been involved in activities to create a competitive market. 

Key messages

• Understand the marketplace and the commercial drivers of the suppliers
• Be prepared to market to the supply side, to stimulate and maintain their interest
• Undertake market soundings and be prepared to adapt your requirements to the capacity and capabilities of the marketplace
• Be open to novel approaches and to consideration of technical and commercial options for meeting the requirements
• Ensure the support and commitment of departmental senior management in dealings with suppliers
• Where there is an incumbent supplier, consider whether competition is realistic; demonstrate that the bid is winnable, maintain a level playing field for all bidders and allow competitors to demonstrate their competence

Background

Public sector organisations frequently need to work with private sector companies in order to achieve their aims. Typically, the public sector needs to procure goods and services from the marketplace: the public sector identifies a need, and then uses established procurement procedures to meet its requirement. The procurement may be conducted through a pre-competed catalogue or framework agreement, or may involve a fresh approach to the marketplace by the public sector organisation - for example, for major requirements the procurement is likely to involve the use of EU procurement procedures.

The public sector generally expects all procurements, including procurement of catalogue or framework arrangements, to be subject to competition. A competitive procurement is one of the ways in which the public sector aims to achieve value for money in its purchasing. It is therefore important that, wherever possible, a public sector organisation approaching the marketplace with a requirement should be confident that what the Kelly Report calls a "healthily competitive supply market" exists to respond to the demand - and that competition can be maintained throughout any resulting procurement process.

A public sector organisation may be aware from the start that market interest in their requirement will be low, although some organisations have discovered only part-way through a formal procurement exercise that there is minimal market interest. The realisation that there will be little or no market response may occur when the formal procurement procedures have already been initiated, for example via an OJEU advertisement. At that stage the organisation may be forced to abandon the procurement and rethink the whole exercise, with implications for project/programme timescales and costs. Any organisation planning a procurement or an approach to the market should, as far as possible, assure itself in the early stages of the programme that a competitive market exists, or will exist, to meet the proposed requirement, and that any advertised procurement will receive an adequate competitive response. The necessary activities should be undertaken during the period of initial investigation leading to the development of the Strategic Outline Business Case - before Gateway 1. Guidance on approaches to the market in these early stages is given in the SD Toolkit  modules on "Market Assessment", "Early Market Engagement" and "Market Sounding".

The need for market creation

A public sector organisation may face the need for market creation in relation to:

• a single specific requirement leading to a procurement exercise for the supply of goods or services;
• a generic requirement for the creation of a market which will be called upon to satisfy a range of requirements over a period of time, resulting in a number of procurements as specific needs arise.

This guidance applies to both these situations.

There are several situations in which a public sector organisation may find that there is not, or is not likely to be, a competitive supply market willing to address its requirements.

Novel requirement
This is where the department has a novel or non-standard requirement, and there appear to be no current offerings in the marketplace which meet the requirement, and little or no interest among suppliers to respond to the requirement. The department will then need to stimulate interest among potential suppliers in order to generate a competitive market response.

One instance of the "novel requirement" scenario will be where the public sector organisation is seeking suppliers to undertake the delivery of functions which have previously been the sole responsibility of the public sector. In this case, there will not be a developed external market for the supply of these services, and the public sector organisation will need to stimulate the creation of a competitive market for their provision.

Incumbent supplier
This is where an existing service or product supply is being re-competed by a department and there is an incumbent supplier who is regarded by the market as strongly entrenched. The department will need to generate and maintain interest in a competitive procurement, and persuade the marketplace that the bid is "winnable" and that there is a level playing field for all prospective bidders.

Lack of market interest
This is where there are potential suppliers able to meet the requirement in principle, but not enough bidders are willing to respond. The lack of interest may arise from the scale of the requirement (too large or too small), the geographical or organisational scope, perceived problems in the commercial viability of the resulting contract, concerns about risk, unhappiness with the procurement procedures, lack of resources for bidding or for implementation, concerns about the capability of the client organisation, etc. The department has to address the concerns of the marketplace, and stimulate interest in meeting the requirement as a viable commercial proposition; this may require revisiting the nature or scope of the requirement or the procurement route, or changing culture patterns or behaviours within the department.

The public sector organisation should be able to detect the need for market creation from:

• market intelligence from its own or other sources - e.g. OGC's Supply Intelligence Service (SIS)
• responses from early market soundings
• known factors in the current situation, e.g. the requirement is novel and there are no obvious suppliers
• indications from the marketplace, e.g. there is a public perception that an entrenched incumbent supplier will not be displaced
• information from similar large contracts being let at the same time elsewhere in the public sector.

Procurement teams in this situation need to understand the reasons why the market may fail to produce a healthy competitive response, so that they can take the requisite action to address the market failure and generate competition.

Who is involved

Responsibility for a successful procurement exercise, including demonstration of a successful competition, lies with the procurement team for the project or programme. Actions to ensure a competitive response should be included in the plans for the procurement, together with contingency plans for the situation where the desired competitive response is not forthcoming - this eventuality would be recorded as one of the risks in the procurement.

The business users in the organisation will wish to assure themselves that the solution emerging from the procurement represents the best value for money. They should be kept informed of any developments to create a competitive market, and may be required to reconsider the scope or packaging of the business requirement in the interests of generating a competitive response. The Senior Responsible Owner will represent the business requirement throughout the procurement exercise.

If the market needs to be convinced about the commitment of the public sector organisation to the procurement and to the stimulation of competition, it will be essential for the senior management to demonstrate their support for the contacts with the marketplace, and to make themselves available for top-level meetings with potential bidders.

Procurement and legal professionals will contribute to the procurement exercise, through the provision of advice to the procurement team. Access to marketing expertise could also be helpful in designing the organisation's approaches to the marketplace.

Approaching the market

There are many situations in which a public sector organisation can be fully confident that when it announces its intention to procure goods or services, numerous suppliers in the marketplace will immediately be ready and eager to demonstrate their suitability for the supply; the prospective customer may then often be the object of intense sales and marketing activity.

Where the public sector organisation discovers or suspects a lack of market interest in the requirement, the situation is reversed. The organisation cannot assume that a competitive response will emerge, and cannot sit back and wait for the market to come forward to meet the requirement. Now the public sector organisation must demonstrate strong marketing skills, in order to persuade a possibly reluctant supply side to take an interest in its requirements and to enter and maintain a competition for the supply: the public sector has to "sell" the opportunity to the marketplace. The public sector organisation must be prepared to exercise communication skills, and to be proactive in its approach to the marketplace. This is an unusual position for most public sector bodies, and may require a culture shift in the organisation. It will require the continued strong support of senior customer management, and may involve the participation of specialist consultancy support for the exercise.

The starting point for an approach to the marketplace is a good understanding of the relevant market. The public sector organisation should ensure that is has an understanding of factors such as:

• the structure of the relevant market: number and size of suppliers
• key players in the marketplace
• the current market offerings of products and services
• the drivers for the market: what business opportunities are regarded as most desirable
• the scope for innovation and for expanding the market
• current capacity and capability in the marketplace, and the demands currently being placed on the relevant supply markets
• the barriers to entry in the market.

It may be necessary to undertake or commission market analysis studies to provide this information. Where there is no obvious current market, the investigation will need to focus on related markets which could be persuaded to become interested in the new requirement, and organisations delivering similar services in other sectors.

OGC guidance recommends that Market Soundings are undertaken if a competitive response is doubtful. Market Sounding provides information on:

• feasibility: whether what is sought is actually feasible, or has ever been done;
• capability: the ability of the market (whether through a single supplier or a consortium) to achieve what is required;
• maturity: whether there is an established market for the requirement, and whether there are enough suppliers in existence for a competitive procurement;
• capacity: whether the market can achieve what is required quickly enough, or on a large enough scale.

Market Sounding is not just a procedure for providing the public sector with information; it is an opportunity to market to the supply side and sensitise them to the requirements. Potential suppliers can use this opportunity to help shape the requirements and make them more acceptable to the marketplace. During the Market Sounding exercise the public sector organisation can respond to the concerns of the supply side and develop strategies for market creation which take into account the inhibiting factors raised by the marketplace.

Market Soundings can cover a wide spectrum of supply-side opinion. It may be useful to make contact with suppliers outside the mainstream or in areas only peripherally connected with the requirement - they may suggest approaches which would not otherwise be considered. The outcome of the exercise should enable the public sector organisation to assess accurately the likelihood of generating a competitive response to the requirement.

Other ways of communicating with the marketplace include:

• The issue of a PIN (Prior Information Notice) in the Official Journal of the EU; this may request responses, or simply provide information;
• Through contacts with industry forums, supplier organisations, trade bodies;
• Running workshops and conferences with the participation of supply side organisations;
• Via the Internet, through pages dedicated to publicising this requirement.

The supplier's perspective

Suppliers have to deal with many calls on their resources, and are necessarily selective in responding to business opportunities. Every business opportunity presents potential costs and risks as well as benefits. When presented with a prospective sales opportunity, a supplier generally "qualifies" the prospect, assessing it against a number of factors and comparing it with other potential calls on resources. The senior management in a supplier's organisation may need to be convinced that this opportunity is worth the investment of time and effort which will be required.

The qualification of prospects is not a one-off exercise: the supplier will generally review a prospect at each stage in the procurement process, and will be prepared to withdraw from the competition at any stage if the outcome of a review is negative. The public sector body therefore needs to appreciate the supplier's decision-making process in a procurement exercise. As the procurement process proceeds - for example, issue of a PIN, issue of an OJEU advert, issue of a prospectus, Pre-Qualification Questionnaire, issue of a Statement of Requirements, etc. - the level of involvement of the supplier and the costs of responding and staying in the race increase. Each succeeding stage in the process represents a decision point for the supplier, based on his assessment of whether it is worth investing in the next stage and his prospects of ultimately winning the business. Thus it is not uncommon for a public sector body to receive many dozens of responses to an OJEU advert, but to find that only a handful of suppliers are willing to respond to the Statement of Requirements. It can also happen that one or more suppliers selected to respond to an Invitation to Tender drop out of the competition at that stage, perhaps leaving the customer with only one bidder. Ensuring a healthy competitive response to a requirement means maintaining the competition into the later stages of the procurement, and the public sector body will need to consider how it will maintain the commitment of bidders to the competitive process.

Public sector bodies need to be aware of the way in which suppliers assess business prospects, so that they can put themselves in the suppliers' shoes and anticipate the supply-side response to their requirement. By identifying in advance the likely response of the market, the public sector body can address and mitigate the factors which may inhibit a competitive response from the marketplace. A typical list of the qualifying factors used by suppliers in their assessments, and suggestions for the approach of the public sector organisation to addressing each factor, are presented below.

Business factors
The business matches the supplier's commercial/technical/market strategy
The public sector organisation should consider whether the requirement is couched in terms with the widest possible appeal to the marketplace. It may be desirable to indicate options for dividing the requirement into packages, and for considering a variety of commercial and contractual approaches. There should be scope for a variety of technical solutions. Market sounding may suggest how the requirement could be met through the involvement of new entrants to the market, who could be encouraged to respond. Approaches to suppliers in related areas of business could prove fruitful.

Guidance on various contractual and commercial approaches, and "deal shapes" which could be employed, is given in the Risk Allocation Model.

The requirement is achievable and risks on both sides are manageable
Market sounding should indicate to the public sector organisation whether the market regards the proposed requirement as feasible, and whether the market is willing to undertake the risks involved. It may be possible to restructure the requirement to make it more acceptable to the marketplace, and to reconsider the distribution of risk in the proposed implementation. Where there is still uncertainty in the requirement, it may be desirable to undertake preliminary studies, which could include detailed consultation with the supply side.

The supplier is willing to work with/for the customer
Just as the public sector organisation will assess whether it wishes to do business with a particular supplier, suppliers assess their willingness to bid to and work with the prospective customer. Some suppliers may be reluctant to bid to the public sector because of the perceived overheads and long timescales involved in complying with the procurement procedures. On the basis of previous contacts, a supplier may regard the public sector organisation as a "difficult customer", and choose to seek market opportunities elsewhere. The market sounding process gives the public sector organisation the opportunity to discuss these concerns with individual suppliers, to explain the procurement process, correct misunderstandings and point out where past problems have been successfully addressed.

Capability factors
There is bidding effort available
Achieving a healthy competitive response to a requirement assumes that enough suppliers are willing and able to bid. Bidding for large, complex or novel requirements is expensive and requires skilled effort which is generally under great pressure and in short supply - suppliers to the public sector often complain about "bid fatigue" and their inability to respond to all the opportunities which arise, particularly in the context of a pan-government programme which may generate a large number of individual procurements. The timing of a procurement exercise can be critical in ensuring that the supply side organisations will have the necessary bidding effort available. In some areas of the public sector there is close cooperation with suppliers to ensure that procurement exercises are phased in order to spread the bidding load on suppliers. In other areas the public sector organisation should attempt to establish whether there will be any conflict between its procurement exercise and other similar activities in the public sector; it may then be desirable to reconsider the timing of the procurement exercise. The views of the supply side can be sought in market soundings.

The supplier will have access to resources to do the job, in the right place at the right time
The suppliers bidding for the contract will need to establish to their own satisfaction that they will be able to meet the requirements under the contract. For large or complex requirements they will almost certainly need to bring in partners or sub-contractors in order to construct an appropriate supply chain, deploy the right mix of skills and staff numbers, and/or provide the required geographical coverage. The requirement should be set out in a way which allows for a variety of organisational responses from suppliers. In some circumstances, breaking up the requirement into packages may encourage more suppliers to take an interest in particular specialist areas of supply. Alternatively, aggregating the requirement with other requirements may be more appropriate to stimulate the interest of suppliers, but could restrict responses to the larger supply organisations (see the OGC guidance: "Aggregation - Is bigger always better?"). Dividing the requirement into geographical lots where appropriate may encourage a wider response, and give multiple suppliers the opportunity to become involved.

Financial factors
The bid costs will be affordable
Bidding for large and complex requirements can be expensive; it is not unusual for a bidder to spend several million pounds on a major procurement exercise. Prospective bidders will therefore look very carefully at the costs of bidding. The public sector organisation must appreciate how the proposed procurement procedures will place resource demands on bidders. It is not usual for public sector organisations to reimburse bidders for the costs of bidding. However, it is acceptable for the public sector organisation to commission paid design studies, or similar deliverables, from short-listed bidders during the bidding process, on the basis that the end products will be of value to the customer and therefore worth paying for.

The prospect is commercially viable
A critical area of assessment by the bidder will be the commercial viability of the opportunity: the bidder will seek to establish that he will recoup the costs of bidding, and make an adequate return over the lifetime of the contract. This assessment will include the supplier's estimates of the cash flows arising from the contract, and the supplier's costs of financing the provision - for example, in PFI/PPP contracts. The public sector organisation should be aware of these considerations, and should have built them into the Business Case for the requirement. It should be open to a variety of commercial approaches to meeting the requirement; modelling different commercial approaches should form part of the customer's initial investigations.

Prospective suppliers will need to invest money and resources in gearing up to meet the requirements of a new market, and they will consider carefully whether the returns are likely to justify the investment.

Bidding situation
There is a real opportunity
Bidders will be unwilling to invest major resources in pursuing a requirement which they perceive to be uncertain. The public sector organisation must make clear to the marketplace the status of the requirement, e.g. whether financial approval has been given for the procurement, or whether the requirement is only in the early stages of formation. Market soundings will generally take place in the early stages before the Business Case has been developed and approval sought. At the time the public sector organisation approaches the marketplace with requests for significant involvement, the supply side will wish to be certain that "it will definitely happen": the requirement is firm and any investment in bidding will not be wasted through major changes in direction, a premature termination of the procurement exercise, or suspension awaiting a management decision.

Where the public sector organisation wishes to establish a market for the delivery of goods or services without any specific advance commitments to purchase, such as for "framework contracts" or call-off arrangements, suppliers may well be wary of investing resources where there is no assurance on the scale of future business. In this situation, efforts should be made to establish the likely size of the market and the timing of purchases, so that potential suppliers have a basis for assessing the risks and returns of competing for the business. Letting the first contracts will be a very positive indication to the marketplace that the public sector organisation is serious about establishing the new market.

There is a real competition
Any supplier considering a response to a procurement will need to be convinced that they are in a genuinely competitive situation and have a reasonable chance of success - that the bid is "winnable". In the case of a recompetition, for example, it must be clear that the public sector organisation is willing to consider seriously the replacement of the incumbent supplier; in the case of bidding against in-house provision, the public sector organisation must demonstrate convincingly that there is no bias towards the in-house bidder. Each supplier will make his own assessment of the competitive situation, including his perceptions of the stance of his competitors and the preferences of the customer. The public sector organisation must be aware of the factors which the supply side will take into account; it must take steps to ensure that there will be a level playing field for the procurement, and must communicate these in good faith to the marketplace.

Assessment is based on value, not price
Public sector organisations are required to establish that contracts arising from procurements deliver Value for Money, taking into account a realistic assessment of the real costs to the customer over the whole life of the contract. Suppliers generally welcome this approach, since it enables them to compete on their capabilities rather than on meeting the lowest price for a defined solution. However, there is still a perception in some parts of the marketplace that the public sector is interested only in the lowest price; the public sector organisation may need to dispel this belief as part of its marketing activity to the supply side.

The customer is open to innovative approaches
In setting out the requirements for a procurement, the public sector organisation should be focused on the desired outcomes, and not on details of the means whereby they are to be achieved. Stating requirements in this way, such as through an Output Based Specification, gives suppliers the opportunity to come forward with innovative solutions - although not all will wish to do so. Where a supplier wishes to suggest novel solutions to the requirement, this should be encouraged. An innovative supplier may be able to suggest approaches which the customer had not previously considered, and these proposals may form an important part of the bidder's competitive strategy.

The procurement process is well defined and managed
A supplier considering whether to enter the procurement process will wish to know that the overall process is being well-managed, and the timescales and procurement activities are defined in advance and will be kept under control. Delays, uncertainties and changes of direction in the procurement process will involve bidders in additional expense. The public sector organisation will normally establish the procurement as a separate project, with its own project team and plans, and defined procedures. The marketplace must feel assured that the whole procurement process will adhere to the published plans and timetables, and that the procurement project team has the necessary skills and effort available to do the job. Visibility of the procurement project, its plans and resources, should be part of the marketing exercise to the supply side.

Creating a market: guidelines

This section summarises the activities and behaviours which a public sector organisation needs to adopt in order to stimulate the marketplace to respond to its requirements.

Approaching the marketplace

• understand the marketplace in which you are operating, and the commercial drivers of the suppliers
• undertake the procurement as a marketing exercise, aimed at stimulating interest in your requirement; employ a range of mechanisms for communicating with the marketplace
• undertake Market Soundings and maximise the benefit to yourselves and to the supply side from these contacts
• understand the suppliers' position, and be prepared to deal with the factors which may inhibit responses from the market

Engaging with the supply side

• engage early and widely with the supply side; give them an opportunity to shape the requirement
• work with the supply side on an equal basis: ensure openness of access to staff and information; establish good communications channels and keep bidders informed
• maintain genuine competition throughout the process - do not leave bidders in the competition if you do not believe they are capable of winning
• be transparent about the procedures and top-level criteria for evaluation of bids
• maintain the commercial confidentiality of information received from suppliers
• be willing to consider commissioning pilots, paid studies, Proof of Concept exercises, Design and Build exercises, etc.

Framing the requirement

• be open to novel approaches
• focus on the desired outcomes
• be willing to reconsider the requirement and scope, and the packaging of the requirement for procurement
• be willing to consider a range of commercial/contractual options, e.g. multiple suppliers, geographical split
• consider what the position will be in the event of retendering - frame the requirement in a way which will help to avoid lock-in of the supplier.

Commitment and organisation

• ensure you have the commitment and support of senior management in dealing with the marketplace
• have a good understanding of the risks involved for both sides
• apply rigorous project management procedures to any procurement exercise, and make these visible to the supply side
• ensure that all the necessary skills are available to the procurement project team.

In the case of a recompetition involving an incumbent supplier, some additional factors need to be considered. Where the incumbent supplier is regarded as having done a good job, and the requirement has not substantially changed, competitors will generally be sceptical about the winnability of a recompetition. The public sector organisation should:

• consider whether competition is realistic in this situation (Is there sufficient likelihood that the incumbent could be displaced? Are there grounds for the Department seriously to consider a replacement supplier? Has the requirement changed in a way which invites consideration of fresh approaches?)
• ensure and demonstrate a level playing field for all bidders, so that all potential suppliers believe the contract is winnable and are incentivised to bids
• ensure that the incumbent supplier is not involved with production of the specification or management of the procurement
• make arrangements for provision of information by the incumbent supplier; ensure that the incumbent supplier is prompt and accurate in the supply of information to the other bidders
• handle issues of migration to a new supplier; disregard business continuity in the competition evaluation criteria
• consider the novation of sub-contracts with the incumbent supplier in the event of a change of supplier
• address the issue of transition costs, and the impact of these on a change of supplier; be prepared to fund transition costs
• ensure the availability of all relevant information, and access to the business, for all bidders
• request demonstrations of competence by challengers, to give them the opportunity of "showcasing" their capabilities.