By carrying out competitive tendering for contracts on a regular basis, contracting entities are free to choose their contractual partners and ensure that they can get the goods and services with the best price and quality. However, contracts between government agencies and companies may also lead to long-term partnerships. Such contractual relationships involve risks but they can also bring benefits.
In a recent audit, we examined why central government has long-term service procurement contracts with a number of service providers and what are the advantages and disadvantages of such arrangements. There are many reasons for long-term partnerships between central government contracting entities and private service providers.
Why do long-term partnerships arise and what are their benefits?
A purchase contract may be valid until further notice, which provides a basis for long-term cooperation. A contracting entity may also determine that a fixed-term purchase contract should be a long-term arrangement. In the third case, the same company wins the tender for the contract for several successive periods, leading to a long-term partnership despite the tendering.
The same service provider may be awarded several consecutive contracts because it has accumulated expertise in the implementation of the contract. As a result, the tenderer is able to operate cost-effectively and to execute the contract without problems.
It is also possible that there is no competition in the market, in which case the same supplier is repeatedly awarded the service contract even though competitive tendering is carried out.
In certain situations, the contracting entity may plan the purchase so that it is based on a long fixed-term contract. For example, many information system services require extensive investments, and long contract periods are therefore essential. Transferring such services to another service provider may also result in significant costs, disruptions and information security risks. Long-term contracts help to keep purchase-related risks under control.
The conceptualisation, development and testing required by the purchase may also necessitate a long contractual relationship. In a long-term partnership, the parties are familiar with each other’s operating methods. The cooperation between the client and the supplier is based on interaction and trust. This in turn facilitates the achievement of the objectives set for the purchase and provides an opportunity to develop new solutions during the contractual relationship. In fact, a long contractual relationship may serve as a platform for innovations.
What are the risks associated with long-term partnerships?
Long-term partnerships may also involve problems and the contracting entities should be aware of the risks arising from them.
When competitive tendering is carried out for a purchase based on a long-standing contractual relationship, the contracting entity may obtain a product or a service that is better than the existing solution in terms of price or quality.
The client may also become dependent on a specific supplier for technical or financial reasons. Such supplier dependency (called vendor lock-in) may lead to a situation where it is difficult to change the supplier without significant costs.
Although the partnership may provide an opportunity to enhance expertise and create new innovations, the parties may also become less interested in improving their operating practices or expertise. Moreover, the client may be unwilling to make any decisions that are against the interests of the ‘familiar’ supplier. However, even in a long-standing partnership, the contracting entity should be able to prioritise its own interests, complain about errors and use the sanctions provided in the contracts.
Especially in a small market such as Finland, a long-term partnership with a specific supplier may prevent competitors from entering the market, thus narrowing the choice for the contracting entities. However, government agencies may also boost market supply with their own actions.
The Finnish Transport Infrastructure Agency and the ELY Centre for Southwest Finland carry out competitive tendering for five-year road maintenance contracts in different procurement areas on a staggered basis. When the tendering process is staggered, only a limited number of major projects is under way at the same time, which will attract more bids. The aim is that small and medium-sized companies are also able to participate in the projects.