It is unfortunate, but the procurement process is rife with the potential for loss, waste, abuse, and fraud. It requires many different steps to be performed by different departments, including ethics and compliance, audit, procurement, and fraud investigation. Procurement has also been somewhat slower to develop and adopt the kind of software solutions that are now helping companies to perform ongoing ‘know your customer’ and ‘know your supplier’ checks. There are very few solutions addressing the stages from procure to pay and even fewer for the stages before contracts are awarded.
Understanding the bid rigging problem
Bid rigging and cartels are a damaging type of anti-competitive behaviour. When potential suppliers collude when tendering for contracts, it drives up the price of the winning bid. This has huge financial implications and can also result in reputational damage. It creates a situation where companies are discouraged from participating in future bids and the procurer—whether company or government—does not get value for their money.
The UK National Fraud Authority defines procurement fraud as “a deliberate deception intended to influence any stage of the procure-to-pay lifecycle to make a financial gain or cause a loss. It can be perpetrated by contractors or sub-contractors external to the organization, as well as staff within the organization.” Bid rigging happens upstream of the procure-to-pay process. It consists of collusion at the tender stage, where bidders conspire to eliminate other competitors. This cartel-type behavior leads to inflated contract prices—evidence suggests that bid rigging results in overcharging ranging from 20% up to 45%*.
Preventing procurement fraud requires sophisticated analytics. Full oversight of the risk from end to end needs a data mining capability within all the systems to support this.
Preventing procurement fraud
Preventing procurement fraud requires sophisticated analytics. Full oversight of the risk from end to end needs a data mining capability within all the systems to support this.
Artificial intelligence is a game-changer in preventing procurement fraud. It applies machine learning techniques to massive amounts of structured, unstructured, historical, and recent data to detect pre-contract award fraud and provide insights to prevent malpractice. It means that a systematic end-to-end approach is now possible to collect and cleanse data, run feature selection, model, generate, and surface real-time alerts for investigation, report on risk and automate the feedback loop to reduce false positives. Analytics can be used to examine the bid patterns, compare prices, review bid structures, verify document text for similarities and even include whistleblower insights into the score cards.
These techniques can surface giveaways like bid price distributions, bid roundness or consecutiveness of zeros in a price, cointegration (where the prices of two bidders move together), and networks or geographical clustering. They have proven their value in real-life cases, identifying millions of euros in losses due to cartels.
Taking the important first step in fighting bid rigging
Now that the data can be accessed, cleansed, and stored on the fly at economically viable prices, it is time to take that first step towards preventing procurement fraud. Audit, finance, and procurement teams need to ensure that procurement remains transparent, competitive, and in the best interest of their firm—and stop pre-contract award fraud in its tracks.
Want to know more?
I had the pleasure of presenting SAS in a Global Government Forum webinar called "Responsive and resilient: how to create more robust procurement in government". In the panel, we had interesting guests sharing their insights: Arturo Herrera, Global Director for Governance in the Prosperity vertical, World Bank, Matthieu Cahen, Senior Policy Analyst, Public Governance Directorate, OECD, Dag Strømsnes, Chief Procurement Officer, Agency for Public and Financial Management, Norway and the webinar chair Siobhan Benita, former UK senior civil servant.
Watch the on-demand webinar - no registration requiredRead the full article on LinkedIn
