Government procurement and the commercial market: expectations and reality.
Today at the TZ round table with you:
Alexey GUREEV, General Director of ZAO «Company Security»
Vyacheslav TESAKOV, General Director of the company «Ravelin»
Alexander POPOV, the company «Takhion»
Question for discussion
What is your company's experience in the public sector and in the commercial market? What prevails and for what reasons?
Alexey GUREEV:
Our customers are mainly public sector companies, among which I would like to note the enterprises of nuclear and hydroelectric power, law enforcement agencies of our country. The share of the public sector in the total volume of orders of the company is about 80%. This ratio is typical for ZAO «Company Security», since the company was initially focused on working with facilities with increased security requirements, sometimes requiring an individual approach to the development of physical protection systems. For us, government orders are a key element of the company's strategy.
Vyacheslav TESAKOV:
We have experience in implementing government orders, but not much. At the stage of the company's formation, we participated in tenders for government orders. Having analyzed this experience, we came to the conclusion that the efforts and resources spent on receiving and implementing government orders are inadequate to the results that the company receives. And we gradually moved to the commercial market, and today our efforts are concentrated in this segment.
But we are very closely monitoring what is happening in our industry with government orders. What is the situation there? In my opinion, the current system of distributing government orders is not very good, it does not contribute to the development of the market or the implementation of the best technical solutions.
The system includes two ways of obtaining a government order: a tender or an auction. Moreover, and this is no secret to anyone, a tender is usually held for a specific company. From the very beginning, it is 80-90 percent known who will win this very tender. Exceptions happen only in one case: if one of the players suddenly resorts to dumping.
The same is with auctions. Initially, the seemingly good idea of open and mass auctions is in fact implemented, as a rule, in such a way that it is almost impossible to include a reasonable profit in the estimate.
These are, in fact, the main reasons why our company does not directly participate in government tenders. But we help our partners by offering technical solutions that allow them to win tenders.
Alexander POPOV:
The company has experience working with government orders. Let me make a reservation, I mean that the direct customer of our company is a government agency; the «Payer» column in the invoice contains the details of the government organization. That is, those sales that go to government agencies through commercial intermediaries or installers are not taken into account. And, speaking of direct government customers, yes, there is experience, and considerable. First of all, in terms of the duration and scrupulousness of communication. If we talk about the ratio of government orders (again, direct) and commercial partners, then the share of government orders will not exceed 1%. I simply looked through my data for the last two years and compared the shares of all sorts of CJSCs, AOZTs with the shares of GPs, FSUEs, etc. But this is for today. There was a time when it exceeded half of the turnover. But as far as indirect orders are concerned, as far as can be judged from the nomenclature and information “from the outside”, the share is still large.
That is, the picture today is as follows: the share of our products in government procurement projects is quite significant (significantly more than a year, two, three — five years ago), and government agencies themselves act as our direct customers very rarely.
Question for discussion
What, in your opinion, is the share of government procurement in the TSB industry?
Alexey GUREEV:
According to my estimates, the share of government procurement in the industry is approximately 50%.
Vyacheslav TESAKOV:
The share is quite significant. If we add to the purely state structures that place their orders in our industry companies in which the main shareholder is the state, say Gazprom, then I think it will be about 50% of the entire Russian TSB market.
Alexander POPOV:
Let's say that state procurement objects consume the lion's share of the consumer electronics market today, if we take this market in monetary terms. If we take it in commodity terms, this share will be significantly lower, but it will still remain the largest segment of the consumer market. This is the specificity of such a consumer and the specificity of consumer electronics as a segment of the consumer market as a whole, taking into account, so to speak, the internal political and legal factors of marketing.
A question for discussion
Is it true, in your opinion, that a state procurement is always the highest quality equipment and the best solutions?
Alexey GUREEV:
It is always very difficult to operate with such vague concepts as «quality equipment». State enterprises make the main choice in favor of reliability, which is especially important when equipping facilities with increased safety requirements. Basically, equipment from Russian manufacturers prevails. However, this approach has its drawbacks. By putting such a criterion as reliability at the forefront, the manufacturer has practically no opportunity to use advanced innovative solutions when developing complexes.
Vyacheslav TESAKOV:
Here, a lot depends on the company that wins the tender. In St. Petersburg, for example, there is a company that chose the best technical solution at that time and won the tender with this solution. The case is almost ideal, I have already told about it many times to both partners and journalists. But, alas, this is the only similar example that I know.
Basically, the choice of equipment depends on how much money a particular government agency can spend on equipping a facility with TSBS systems. Most decisions are tailored specifically to the amount allocated for the facility. You understand that it is not always enough to be able to choose the best. The exception is especially important facilities, when potential threats are seriously analyzed and the best equipment is really selected. However, in fairness it must be said that the development of the market in general and its service component, in particular, increasingly forces installers to give preference to high-quality equipment that does not require large expenses for warranty service. Another point influencing the choice of equipment can be conditionally called the political component of government procurement. If it is assumed that high-ranking officials and city leaders will often visit this facility, then both customers and installers try to choose more reliable equipment.
Alexander POPOV:
The fact that this statement is incorrect is the subject of a separate article of mine on the pages of the TZ. To give a detailed answer to this question is to repeat the entire article on 8 pages. If once again and briefly, then the presence of «state» is absolutely not connected in any way with the perfection of the applied technology and the optimality of the chosen solutions. A clear example is the continuous «construction of safe cities», but exclusively in continuous time. Not a single city has been built normally in the perfect (perfect) time.
Question for discussion
Financial risks in state and commercial orders: is there a difference and how significant is it?
Alexey GUREEV:
With government procurement, financial risks are practically reduced to zero. In the case of working on the commercial market, the risks are always significantly higher. Moreover, it has long been the norm for commercial structures to conclude contracts that do not provide for prepayment at all, which, in turn, leads to an increase in accounts payable to ensure the fulfillment of project obligations. An important factor is also the high reliability of the projected cash receipts during the year, which allows for high-quality budget management in the company. From my point of view, government procurement is more profitable for performers than orders from commercial structures.
Vyacheslav TESAKOV:
In my opinion, the risks are lower with government procurement. If you have a signed contract, if the tender is won without conflict, ultimately all the money comes. In the commercial sector, non-payments happen much more often, especially now. But this happened before the crisis too — the stronger the company's «roof», the greater the likelihood of not receiving or not receiving money on time for the delivered products and work done.
Alexander POPOV:
There is a difference, and a very significant one. A commercial partner is predictable. He is specific. These are specific names and surnames of the management, this is their fame and reputation in the market. In the end, an honest commercial partner is always open. And our market is quite open (at least among «our own», to which, I hope, I can include myself) — you can deceive someone once, and then, if someone steps on the same rake again, this is the result of his unwillingness to work as it should be, the result of laziness and self-confidence. I remember that I even organized a topic on the forum of one of the industry Internet portals «Blacklists of clients». That is, with a commercial partner, the risk itself is known, it can be big, but you know that it is big, and you build your work in accordance with this. Or be minimal, accordingly, the client ends up in a more advantageous position for him. And the commercial partner himself understands this perfectly well, supporting in the absolute majority of cases honest mutually beneficial rules, thereby creating more favorable conditions for himself. And the commercial partner constantly thinks about tomorrow. He pays his money.
The government customer is always impersonal. There is only a certain official or a group of people responsible for this and that, and any necessary step aside is a search for another responsible person. But the biggest risk is that the responsible person is responsible only to another person of a higher rank, and no one is really responsible (in money) to the supplier-installer. Therefore, the risks can be not only large, but also unpredictable. Moreover, no one will refuse any obligations. But when? — such a question can hang for a long time. It was precisely when direct government orders made up the bulk of our turnover that we were once told about non-payments to us under contracts: «Don't you know what the situation is in the army?!» This was the only case in our history when wages were delayed for a month. And we are not public sector employees. We have no other sources of income except our production and commercial activities. Therefore, the unpredictability of risks can mean complete ruin in absolute terms. I know of more instructive cases with other companies. I think everyone has had the opportunity to see for themselves how unpredictable the initiatives of officials are. There may also be an unpredictable change in decisions already in the process of work. And in the nature of this there is some kind of unhealthy distorted understanding of relationships: the state customer has the right to do everything, because he is «state».
Here, as in extreme sports, the main thing is to understand in time where the extreme ends and simple begins… (well, you get the idea). This is the main risk of state procurement — did not catch this line, and … a fatal outcome.
Question for discussion
How to get a state order? By what criteria should tenders be held?
Alexey GUREEV:
In order to work with government procurement companies, it is necessary to understand the specifics of approaches to building protection systems for government facilities. A necessary condition when working with government agencies is very often the presence of in-house production, in-house R&D in the field of hardware and software, since none of the existing solutions, including those of well-known foreign manufacturers, fully meets the customer's requirements. It is difficult for me to answer what criteria should be used to conduct government tenders, but I know for sure that price should not be the determining factor in decision-making, otherwise the customer, with this approach, may receive a system from manufacturers that do not have high requirements for quality of performance and reliability. For me, the main criteria for choosing a contractor are the following: first of all, this is the company's experience in building physical protection systems for large government facilities, the quality of work during the implementation of systems, and the conditions for providing a long-term warranty for the installed systems.
Vyacheslav TESAKOV:
You need to meet the right person, get the tender conditions, it is advisable to play along with the tender conditions to the technical means you have or to the opportunities you have. There is always a chance of losing, especially if you made a mistake with the price. However, there may also be someone willing to work simply for working capital for their company, especially now, during the crisis.
Alexander POPOV:
Regarding “to receive”. All companies on the market strive to participate in a government order by supplying equipment, and not to the end customer, but to at least the installer, and even the intermediary, and perhaps not just one. But, oddly enough, installers are increasingly little-known, or even unknown companies on the market. Regarding the desire to directly receive a government order in the form in which it exists today, in my opinion, the situation is best reflected in a wonderful statement by I don’t remember exactly which of the famous American businessmen of the early 20th century: “The strategy of investing capital is determined by what is more important to you — to eat well or to sleep well.” Although there are no guarantees about eating well either. But you definitely won’t be able to sleep well.
And how tenders should be conducted is practically a question of how to bring our government order to a normal form.
First of all, what tenders should not be. Exactly as they are presented today. Namely, price and closed.
Firstly, our market is not a market of price competition in principle. It is some kind of Chinese approach: the cheaper, the better. In the language of marketing, this is called a production concept. Yes, in the times of Henry Ford, such a concept worked. When there were no other cars, and the only one available on the market had to be made mass-produced, accessible to the widest range of consumers. But already in the 30s of the 20th century, Henry's son almost buried his father's entire business with this concept. Honor and praise to Sauer, who made a decent quality gun mass-produced, accessible to a wide range. But show me today at least one more or less sane person who chooses a weapon based on the criterion the cheaper, the better? And our market is very similar to the arms market in terms of selection criteria. If you look more broadly, it is, if not a weapons market, then at least a market for technical weapons. Moreover, in the final execution it turns out that the total budget would have been enough for the most decent equipment. So why was the cheapest one initially preferred? The answer to that question is in the next paragraph.
So, the production concept with its price competition is a road that leads nowhere. And the only possible marketing concept works everywhere today. That is, satisfying the consumer's needs. And here is a very common fundamental problem with government procurement — and there is no need as such. Calling safety a need is not a need for the technical equipment market. It is the same as calling satiety a need for the food market. A specific need is not formulated. Instead, we have two extremes. The first is when a request begins for everything that was once seen at exhibitions, in the movies, heard from stories. They receive it, even launch it, but there is no desired result. It is as if you and I came to the doctor and told him what medicine he should prescribe for us, what procedures to prescribe so that you recover from an illness. I think he would send you to the pharmacy. Why would he? And, it turns out, for a government contract — so that there would be someone to answer for the end result. Would a normal doctor agree even for a lot of money? I don't think so. That is why among the installers there are often new companies or companies that do not specialize in the TSB market. They will definitely not sleep well. But the veterans see the end result and do not want to be the ones left behind.
True, it happens that initially the need, as such, is not needed by anyone. Security is a very fertile ground for implementing purely selfish goals under plausible pretexts. That is, everything is turned upside down — security does not act as goals, but exclusively as a means. And the goals in this case are very precisely defined. But this is already an outright crime, in which there is no mass desire to participate in the market. The second extreme: it is proposed to the supplier companies and installers themselves to formulate their own model of such an end need. And this has passed through our hands. Like, how do you see our solution yourself. And it is also proposed to develop several options, so that the customer has something to choose from. Gentlemen, I will see it the way I need it, and not you! Does anyone really doubt this? The system will work. And it will solve my purely commercial problems.
How it should be. Any system should be preceded by a security concept. A vision of the situation as a whole and in particular by the customer himself. This is his product — security, and not the TSB market. Hitting a target is a sniper's product, and not the manufacturer of an optical sight. A specific (and not a general — the safety of everyone and everywhere) task should be set. But a specific technical solution should not be offered. Categorically. The same problem can be solved by completely different methods. Different not only in equipment, but in methods and approaches to the solution. In Lobachevsky geometry, parallel lines intersect. And it turns out that there is nothing to be afraid of.
The tender must consist of a comprehensive analysis and comparison of the proposed solutions. Moreover, the problem must be solved, and the most effective solution must win the tender. And it will never be the cheapest. This is the law. Well, our officials did not choose the Oka as their official car, did they? But it is the cheapest solution. Why is everything different here? The answer is again in the next point. And having chosen a solution, do not adjust it by individual components, any change will entail a change in the solution itself, which will no longer be the one chosen. And, it seems to me, that tenders should not only be open, but should be defended in the presence of all applicants. But this will probably happen in the next life.
Question for discussion
Unfortunately, we cannot ignore such an issue as the corruption component. There is an opinion that without a «kickback» you will not receive a government order, to what extent is this true, in your opinion?
Alexey GUREEV:
It seems to me that this is a far-fetched problem, inflated by the media. We do not use such a practice and do not know how other companies are doing. In order to gain access to a government order, any company in the security industry will have to go through a difficult path associated with investments in the development and production of software and hardware systems, their certification in the departments with which the contractor intends to work. My estimate of the duration of entry into the state market is at least one and a half to two years. These are really serious investments, if this is called a «kickback», then there is really no way to do without it.
Vyacheslav TESAKOV:
Corruption is being openly discussed at the highest level today. Not long ago, a State Duma deputy said on television that, according to his information, up to 30% of tenders are held using a “kickback” scheme. In my opinion, the legislator has underestimated this figure by at least half. In general, this question is best asked to the officials who take these very “kickbacks”. At least their information will be the most accurate.
Alexander POPOV:
If there is an opinion, then there is no smoke without fire. It is possible that there is no direct «kickback» in absolutely every case. But there are multi-stage schemes. Here is someone who can explain to me: why, if it is known and even written in the project that the manufacturer of product N is company A, then why should this product N be shipped not only to the end consumer, but often to the installer, not directly by company A (although it ships this product throughout the country to any commercial partner directly), but exclusively through some component (supply) company, or even more than one, intermediary company? Try to offer such a scheme to a commercial customer — oh, and you will hear a lot addressed to you. This one, on the contrary, will find out the original source of each item, the price from this original source and will demand that this price appear in the calculation (except that he will add for delivery and troubles out of generosity). And it seems that due to the volume of supply, company A gives the maximum discount on product N, but this intermediary company will not work on a voluntary basis. And it turns out that the government customer (consumer) did not win anything, company A did not receive any additional benefit for itself, and a huge amount of money was spent. You learn from the newspapers and are amazed at how much video cameras can cost on our market! And those that we see at government facilities.
Question for discussion
What do you think are the main problems in the formation and distribution of government orders in the TSB industry (lack of objective information, excessive bureaucracy, corruption, etc.).
Alexey GUREEV:
I do not see any major problems with the formation and distribution of government orders, at least in the part of customers with whom our company works. Usually, at the end of the year, we learn about the program for equipping facilities with physical protection systems for the next year and the approximate dates of tenders. Therefore, we have enough time for a pre-project survey of facilities, preparation of high-quality commercial proposals, and collection of documents for participation in tenders. If we talk about some new sectors of the government market for us, in which we are not represented, I can really note the extremely problematic receipt of information about upcoming tenders and departmental programs for equipping facilities with security systems, and sometimes simply the unwillingness of the customer to enter into negotiations on these issues.
Vyacheslav TESAKOV:
It seems to me that it would be more correct to talk about the attitude to the state order as such. Our industry does not have any specific features that are unique to it. What, in my opinion, needs to be done first? The main thing is for state customers to have real responsibility for the decisions they make. What equipment is installed, how well it meets the safety requirements of the facility, how much state money is paid for all this. After all, it is not at all difficult to compare the prices in the estimate of the company — the winner of the tender with the real market value of the equipment and installation work.
Unfortunately, I have to admit that all these problems will not be solved soon. We need to go through many iterations before we learn how to correctly form the structure of the state order. Of course, it would be ideal if independent experts created the technical specifications, which would clearly state what the parameters of the cameras, fire alarms, notification periods, etc. should be. If the task is complex, the project cannot be completed with cheap means, and dumping will no longer work. Moreover, experts at this stage could form an approximate price for this state order. After all, the price lists of all suppliers are known, as are the rates of installers. I do not see any big problems here. But no one is doing this, although there are organizations that have the strength and resources for such work. But they make lists and inventories of equipment, although who needs them, these lists? Any equipment with a Russian certificate can be installed. The main thing is that it meets the requirements of a specific facility.
There is virtually no system for creating standard technical specifications. What prevents us from creating such standard technical specifications for schools, kindergartens, hospitals and other practically standard facilities? And also to calculate how much it will cost. It is not difficult at all. And if there are specific requirements, all installers must comply with them. This is a government order, so let the government worry about setting clear requirements for what it wants. By the way, the corruption component will also decrease, because the estimated price will be known, and if it is too high, it will be immediately visible to everyone. It seems simple. The main thing is that those who make decisions need it.
Alexander POPOV:
The main and most important drawback is the lack of competent concepts for the safety of facilities. That is, the task is not formulated in the volume necessary for the solution. And if the task is not set, it is useless to wait for its successful solution. And also the lack of direct dialogue between the customer and the contractor. First of all, due to the same multi-stage nature — a kind of national specificity. Often snobbery, dictated, in my opinion, by the lack of a certain commercial culture, the brief essence of which is: no one owes anything to anyone in advance; both the customer and the client are absolutely equal parties to the business process, obliged first of all to respect each other. Therefore, the issue of bringing government procurement into the right direction is far from a technical issue that can be resolved within a separate market. This is, if you like, a question of national culture. This is a question of understanding by everyone that money can be earned in any quantity, but cannot be received in any quantity. Earn and receive. This is the whole point. But I think this is an issue for more than one generation.