1. Adopting a system lens for public procurement

The premise of the report

With the support from the European Commission Structural Reform Support Programme (SRSP), the OECD has been advising the Slovenian government on the application of a systems thinking approach to public procurement. This exploratory process represents a test case for the use of systems thinking to solve concrete challenges in Slovenia. Previous support from the government for the OECD’s work in this field culminated in the report Systems Approaches to Public Sector Challenges: Working with Change (OECD, 2017[1]), launched in Ljubljana in 2017. This report drew the attention of governments to the opportunities offered by the adoption of systems thinking – a key methodology to align existing structures and practises with government objectives and to address the complex challenges facing the public sector. The purpose of the present report, Introducing Systems Change to the Public Procurement System of Slovenia, is to provide advice and guidance to the Slovenian government that will help them to apply systems approaches within the context of public procurement.

Public procurement in Slovenia provides an excellent test case for the use of system approaches in government, as the system is well developed but could be used more strategically to achieve broader policy goals. While the Government of Slovenia’s Public Administration Development Strategy 2015-2020 aims to prepare the public sector for the 21st century, a key challenge is the ability to successfully address complex issues. There are problems surrounding the translation of new government policies into clear legal frameworks and appropriate implementation tools. However, efforts are being made to improve the situation. In the public procurement sector, the Open Government agenda has helped to facilitate structural change and introduce new business models, as well as new electronic procurement tools integrated with national e-government and e-commerce frameworks.

The European Commission (EC) has called for further improvements to public procurement in Slovenia to remedy issues with complexity and lack of clarity in current procedures, insufficient professionalisation of procurement staff, underdeveloped digital infrastructure, lack of high-level strategic focus and an over-reliance on price as the key factor in awarding contracts (European Commission, 2020[2]). The EC has also called on Slovenia to improve public procurement in major focus areas. For instance, the EU Council Country Specific Recommendations to Slovenia in 2017 cited the need to improve the public procurement framework in the field of health care, and capitalise on the centralised co-ordination system (European Commission, 2017[3]). The recommendations also emphasised the need to increase competition in the system and improve the bidding process.

The Slovenian government has taken a number of actions to address these issues, a consequence of which is the harmonisation of national legislation with European law. The Ministry of Public Administration – the authority in charge of implementation of national public procurement law – offers various forms of consultations for procurement authorities, prepares general non-binding written interpretations, provides recommendations, guidelines, manuals and a help-desk, and also ensures that all processes are transparent. Nevertheless, rigidity and slow adaption to new and innovative forms of public procurement procedure remain a main barrier to public sector innovation across the country. Pressure for change often results in legislative responses but fails to spark innovation in public procurement process management. The system is characterised by an absence of reflection regarding what is possible and appropriate for a new EU regulatory context with new expectations and demands of local policy priorities. Furthermore, disrupting horizontal government processes and core systems such as public procurement, while continuing to provide essential public services, presents a challenge.

There are over 3 000 public entities in Slovenia at the central and local level, which are obliged to comply with Public Procurement legislation. These contracting authorities differ significantly in size and capacity, and the number of tenders they undertake annually can vary substantially. While some policies and provisions are mandatory for all contracting authorities, regardless of statutory type, source of financing and so on (e.g. green public procurement), others are compulsory only for the central government and recommended for local entities (e.g. the use of e-auctions when procuring off-the-shelf products and services). The system is therefore quite complex in character and encompasses different stakeholders with divergent roles and responsibilities. Such an environment would benefit from a systems approach as a means to tackle public sector challenges in a more holistic manner.

Taking a systems approach involves not only mapping different systems components and how they delivers outcomes independently or in connection with each other; it also entails building a common understanding of how the system functions and how it can be geared towards new goals and purposes. This entails a bottom-up approach to change that addresses perceptions, behaviours and realities on the ground. The first stage in the work therefore was to analyse the lived experience of the procurement system in Slovenia, collectively validate systemic challenges and co-design strategies to tackle them.

A systems approach to change

Today, complexity and uncertainty are the norm – they are contexts, not just risks. The world seems to operate by a new set of rules that are difficult to observe directly. The defence and intelligence communities refer to this state as “VUCA”, a reference to the volatility, uncertainty, complexity and ambiguity characterising geopolitics after the end of the Cold War period. Technology, decentralisation, the rise of non-state actors and other factors have accelerated the rise of VUCA in every domain. In this context, isolated efforts to address to policy issues and objectives are unlikely to be successful. Policy making is becoming highly interdependent with the consequent trade-offs and unintended side effects creating challenges for governments. There is a need for a new policy-making approach that will promote robust systems and adaptive structures.

In this environment, the effectiveness of decisions will depend on how completely the problem and its context are understood and how well the dynamic relationship between interventions and context is tolerated. This requires a new mindset – one that acknowledges uncertainty and complexity as part of everyday decision making and encourages working in iterative and innovative ways. At the same time, public policy makers have traditionally dealt with social problems through discrete interventions layered on top of one another. This is also true for the machinery of government, where challenges such as people management, budgeting, policy making and procurement require new approaches that take into account these new realities. However, such interventions may shift the consequences from one part of the system to another or continually address symptoms while ignoring causes. Recognition of the complexity gap (the disconnect between institutional capacity and the problems they face) has therefore led to growing interest in systems thinking as well as other systems approaches such as design thinking.

Design, systems engineering, systems innovation, systems thinking and design thinking have interlinked philosophical foundations and share – to some extent – methodologies. This analysis uses the umbrella phrase systems approach to describe a set of processes, methods and practices that aim to affect systemic change. The use of systems approaches to analyse public service delivery and common ministerial responsibilities can prove challenging due to siloed structures and narrow remits, but can also effect change. Public interventions need to move beyond a narrow input-output line of relationships. Of course, the ease or difficulty with which government systems can be changed depends on the maturity of the system; however, new developments are underway. This topic was explored in the OECD publication Systems Innovation: Synthesis Report (OECD, 2015[4]), which discussed public sector challenges through a systems innovation lens. Followed by other supporting material (Burns and Köster, 2016[5]) (Burns and Köster, 2016[6]), the OECD (2017[1]) launched a report specific to the context of the public sector covering the history of systems thinking and its interlinkages with other approaches. The report also defines systems from a purpose and action-oriented perspective (Box 1.1).

The initial research conducted by the OECD found only a few well-documented cases of systems approaches in the public sector (OECD, 2017[1]). The small number may indicate that governments in-source systems capabilities and, thus, tend to rely heavily on outside consultants and designers to lead and instigate systems-level changes. Only in recent years has there been renewed interest in applying system approaches, such as design, more rigorously in the public sector. Furthermore, while the OECD’s previous work on system changes has focused on societal issues, less attention has been paid to the transformation needed in core traditional government roles such as procurement systems. In most examples of public sector system thinking work, these issues are often addressed at the organisational level, but rarely at the system level where opportunity and value can truly be unlocked. This report seeks to apply OPSI’s system thinking methodology to internal systems that operate the machinery of government. To this end, OPSI has developed specific tactics (Figure 1.1) that draw on systems thinking methodologies, problem-framing tools, design thinking and other supporting material.

Figure 1.1. Tactics for system change

Source: Based on OECD, 2017.

The systems analysis offered in this report starts by defining the purpose of the system or framing the problem that needs a response, rather than examining an established legal recommendation or best practise within a policy field. The idea is to understand the aims and goals of the system and how to make them actionable. This means concentrating on contextual issues first – why a system is not performing – and then on the techno-legal frameworks that form part of the functioning of the system, but may not be its main influencers. Defining policy problems is usually understood as a two-stage process: the first stage defines the nature of the problem and the second stage identifies its scope (Peters, 2005[7]). “Problem frames” are in essence “sense-making devices” (Brugnach and Ingram, 2012[8]), however they also make problems dependent on context and cognitive comprehension. This means that stakeholders employing a systems approach must first define the purpose of change – what is the effect that the systems strives towards – and then determine how well the system is delivering towards that purpose (scope of the problem).

This approach helps to set crosscutting priorities to work across existing silos. Systems approaches also empower civil servants to go beyond their traditional remits and apply different methods pragmatically in situ. This can be described as a bottom-up or co-creative approach to systems change. The starting point is not rooted in existing frameworks, but rather in the behaviours and outcomes the systems produce. Once the problems are framed, they can be scoped (i.e. what causes the issues to manifest and how they can be changed with specific purposes in mind). Two aspects of particular interest here are the sensibility of the system (the interconnectedness that give the living system its characteristics), and feedback loops – enforcing mechanisms that enforce or push back on developments and at times produce unintended consequences (Ison and Shelley, 2016[9]).

In the case of problem scoping, different systems thinking methods – both qualitative and quantitative – can be applied. The choice depends on the aims and characteristics of the system: Is it possible to understand the system through qualitative analysis or is quantitative modelling is needed to make sense of the data? With the latter there is always a trade-off between the contextual characteristics and depth of data versus simplification and the ability to capture outcomes at scale. The choice of systems analysis methods should be made based on the problem at hand. As such, special attention should be paid to the specificities of the procurement system.

The complexity challenge of procurement

Modern public administrations are becoming increasingly complex, complicated and technical. This includes the field of public procurement. Various factors influence the procurement process all of which are interlinked and interdependent. These include organisational elements, policy, operational factors and the quality of contractual processes, as well as individual behaviour and practices (see (Sönnichsen and Clement, 2019[10]) for an overview of systemic factors influencing strategic procurement in the field of green and sustainable development).

Accordingly, size, strategy, culture, risk management and top-level management characteristics can considerably influence how procurement is used and to what ends. Operational tools include procurement process and value prioritisation tools, calculation and criteria-setting tools, standards, standardisation and legal aspects, and supplier selection – all of which can influence the outcomes and effectiveness of procurement systems. The quality of contracts alone can be highly dependent on available capacity, the negotiation process and existing cross-sectoral collaborations, not to mention individual motivation, beliefs and awareness. Other factors include processual limitations, such as delays in the system, communication patterns in and across units, and the possibility of standardisation (see (Barrad, Valverde and Gagnon, 2018[11]) for an example of applying systems dynamics to procurement operations). Additionally, a variety of players are involved with public procurement systems often with competing and sometimes contradictory interest and roles (Edler et al., 2005[12]). These include the leadership of the organisation, the finance department, the staff responsible for technology or services, internal users of technologies or services, the legal department, oversight bodies and procurement officials to name but a few. In each case, their motivations, awareness and capacities to engage with the procurement system may differ depending on the context and institutional setting.

Sitting between individual-organisational and institutional processes are numerous “adaptive processes” where combinations of factors start to influence procurement behaviour. These include:

• small-group adaptation processes (between members of purchasing groups or between supplier groups)

• adaptation processes within organisations that can manifest themselves, for example, as intra-organisational resistance to new types of procurement or problems in co-ordinating activities

• external adaptation processes between organisations such as isomorphic pressure (e.g. following EU best practises) and priorities emanating from the local context (Guenther et al., 2013[13]).

All of these factors can influence procurement outcomes. For example, risk aversion is characteristic to procurement systems (Rolfstam, 2012[14]) at the individual and the organisational level, as the risk and failures are usually attributed to procurement officials, while other actors are credited with project successes (Yeow and J., 2012[15]). Risks – perceived or real – may arise, for example, from technology or the difficulty of articulating demand, especially when multiple buyers are involved (Hommen and Rolfstam, 2009[16]). Further categories of risks include organisational, societal, market and financial threats. Some international organisations have envisioned systemic ways to assess the administrative capacities of their stakeholders (see Table 1.1), but these usually focus on the macro (structural) level, or inputs or outputs of the procurement systems, but not their interdependencies.

All of these different factors influence procurement systems. To change the system, all of the above need to be engaged at different levels (in small groups within organisations as well as between organisations). For example, the more complex projects become, the more they start to depend on negotiated or agile procedures. Conversely, the more corrupt the procurement environment, the greater the likelihood that complex projects will be systematically crowded out both intra-organisationally and within organisations (Baldi et al., 2016[18]).

These complex interdependencies within procurement systems cannot be addressed easily; however, the OECD has done much to tackle these issues. In 2015, the OECD adopted the Recommendation of the Council on Public Procurement. The Recommendation covered core issues of all public sector procurement systems and included clear recommendations to improve the system (Box 1.2). It was the result of collaboration across policy communities within and outside the OECD, demonstrating the multi-disciplinary nature of procurement. The Recommendation supports a comprehensive and integrated approach to the procurement cycle and reflects the growing interest in transforming public procurement into a strategic policy lever for government. Substantial progress has been made in implementing the Recommendation (OECD, 2019[19]), and a series of thorough country reviews have followed (OECD, 2019[20]; OECD, 2017[21]; OECD, 2017[22]) accompanied by an evaluation (OECD, 2019[23]). For the latter, the OECD carried out a survey in 2018 on implementation in 34 countries, spanning a range of topics relevant to the 12 integrated principles of the Recommendation. The work showed that countries were transforming their systems at a fast pace, especially in terms of reforming their frameworks to advance complementary policy objectives, and becoming more supportive of strategic procurement. However, systemic evaluation of procurement outcomes remains a challenge in most OECD countries. To achieve real transformation in the procurement system, different interventions needed to align systematically.

In order to facilitate learning between countries and support the transformation of procurement systems, the OECD has invested in the development of a public procurement toolbox (OECD, 2019[24]). The toolbox aims to provide practical guidance and concrete examples to governments on how to adhere to the recommendations above in complex environments. The guidance and examples are based on country cases and organised around the 12 principles (Box 1.2). As mentioned above, the OECD supports the implementation of the principles through assessment (OECD, 2019[25]; OECD, 2017[26]; OECD, 2019[27]). This work could also draw on the Methodology for Assessing Procurement Systems (MAPS) tool which assesses public procurement systems in their entirety. MAPS was elaborated by the World Bank and the Development Assistance Committee (DAC), but has been recently thoroughly upgraded under the co-ordination of the OECD (OECD, 2019[19]). It is mainly used by development banks, bilateral development agencies and partner countries to assess their procurement systems (Figure 1.2). MAPS uses comprehensive sets of indicators to analyse procurement systems, and is, thus, very useful for outlining gaps in the strategic requirements and capacities of procurement systems. However, the methodology does not outline the interdependencies between behavioural and organisational factors or the change management processes needed to transform procurement systems.

Figure 1.2. The MAPS Analytical Framework

Source: www.mapsinitiative.org.

Here, it is important to note that small changes in complex systems can cause cascading effects due to the high level of interdependencies. Public procurement systems rely on both internal and external stakeholders, creating numerous interlinkages in addition to all the other complex factors outlined above (Loosemore and Cheung, 2015[28]). For this reason, any approach that relies on single interventions or recommendations will not be effective. Accordingly, this report adopts a scenario approach to discuss different systemic options to upgrading the system (Chapter 6).

Differentiating between innovative procurement and procuring innovation

Procurement can be used for spurring innovation in substantive policy areas (e.g. as a form of demand-based innovation policy (Edler and Georghiou, 2007[29])), but also as a subject for innovative practices themselves. The former is referred to as public procurement of innovation (PPI); the latter is termed “innovative procurement”. The OECD published a comprehensive report on PPI in 2017 (OECD, 2017[30]). In general terms, PPI relates to purchasing activities carried out by public agencies that lead to innovation (Rolfstam, 2012[14]). It involves setting the right level of ambition and building capacity inside the public sector, as well as opening doors for innovators (e.g. by reducing administrative burdens, adjusting selection criteria, using lots, etc.) and attracting innovation. The European Commission has issued various guidance documents to delineate this area (Box 1.3). Innovative procurement concentrates on the procurement system itself, incorporating innovative approaches into the procurement process. These include innovative tools and methods (e.g. for use in data analysis, needs assessment, market consultation, cost projections, etc.) and organisational solutions to the public procurement system both online and offline.

Arguably, PPI is very difficult, if not impossible, without innovative procurement. For example, PPI often necessitates procedures involving negotiation (e.g. EU procurement rules allow for competitive procedures with negotiation and competitive dialogue). These cannot be implanted meaningfully, however, without the right functional or performance criteria, and appropriate award criteria, in terms of quality, outcomes or other characteristics. This may also involve prototyping, design contests and challenges in prior phases to make the process successful, requiring procurement authorities to change and innovative their systems internally to work in new ways.

The public sector needs to cultivate divergent capabilities in order to use procurement to create demand for innovation, but also to innovate the procurement system itself. For example, OPSI has proposed a model for public sector innovation based on the level of uncertainty and directionality of (desired) change (Figure 1.3). The model defines four different facets: enhancement-oriented innovation, mission-oriented innovation, adaptive innovation and anticipatory innovation. These different facets all require divergent strategies and working methods to be successful. Systems thinking works best in the context of purpose-driven change, when the goals and problems are known or can be collectively defined (OECD, 2017[1]). Hence, PPI can drive the mission, but this requires the capacity to delineate missions and develop external partnerships. Anticipatory innovation requires knowledge and experience of procuring research and development (e.g. pre-commercial procurement, innovation partnerships, etc.), while adaptive innovation focuses on developing user perspectives, which can be captured by design, challenges and hackathons leading over time to concrete procurements. Enhancement-oriented innovation can be used to actively tweak and develop the procurement system itself.

Figure 1.3. Public sector innovation facets model

Note: The model was elaborated as part of the work of OPSI.

Source: OECD.

However, innovating the procurement system or undertaking PPI is far from easy (Amann and Essig, 2015[32]). It is generally a costly and time-consuming process which requires intensive co-ordination among stakeholders and continuous evaluation and learning (Lember, Kalvet and Kattel, 2011[33]). Challenges in setting up systems for PPI include reducing risk aversion, creating new forms of co-ordination, improving skills and capacity, encouraging public purchasers to dialogue with suppliers, and enhancing data collection and the monitoring of results (OECD, 2017[30]). All these challenges interact with the complexities of the procurement systems outlined above.

Need for systems change in the Slovenian public procurement system

Since 2015, Slovenia has worked to reform its procurement system and its ambitious efforts have produced results. According to the 2019 Governance at a Glance report, Slovenia has become one of the main OECD countries to make information about the procurement process widely available to the public. Since 2018, tender notices, evaluation criteria, award notices, contract text and bidding documents have all been publicly available (OECD, 2019[19]). Slovenia has also achieved solid participation among SMEs, which in 2018 accounted for 78% of contractors for public awards (European Commission, 2019[34]). However, the Slovenian procurement system tends to operate in a rigid manner, as well as facing other challenges. For instance, the share of negotiated procedures without prior publication amounted to 24% (European Commission, 2018[35]) – one of the highest scores in the European Union – signalling that there is still room for improvement in opening of procurement markets. In addition, the proportion of co-operative procurement (proportion of procurement procedures with more than one public buyer) is low, and there are still a high number of single bidder tenders (European Commission, 2019[34]). The latter is due, in part, to the small size of the country, the size of bids and economic development cycles. Low uptake of the most economically advantageous tender (MEAT) criteria1 and the high proportion of procedures without prior publication may also contribute to these challenges.

Figure 1.4. Co-operative procurement

The proportion of procurement procedures with more than one public buyer

Note: Although not all types of purchase are suitable for joint procurement, excessively low rates suggest lost opportunities.

Source: (European Commission, 2019[34])

In addition, public perception of corruption within the public procurement system is relatively high, which also corresponds with the low and falling levels of trust in government discussed in Chapter 2. In Slovenia, 89% of respondents said that corruption was widespread in their country in 2017, compared to an average of 68% for all EU member states (European Commission, 2017[36]). Perceptions of corruption are also prevalent among the business community, where half of Slovenian businesses surveyed believe that corruption has prevented them from winning a public tender or a public procurement contract (Director General for Communications, 2019[37]). This rate is the second highest in the European Union, behind only Slovakia (see Figure 1.5), and has increased from 44% in 2017 and 37% in 2015 (European Commission, 2017[36]). In Slovenia, a majority of companies believe that “widespread” problems with the public procurement system include the creation of tailor-made specifications for particular companies (80%), collusive bidding (79%), the involvement of bidders in the design of specifications (73%), conflicts of interest in the evaluation of bids (66%) and abuse of negotiated procedures (62%), among others (Director General for Communications, 2019[37]). Hence, regardless of Slovenia’s efforts to improve transparency, citizens and businesses still have low levels of trust in the public procurement system. It is important to note, however, that these perceptions may not align with the reality. In other words, the potential exists for perceived levels of corruption to be significantly higher than actual corruption in Slovenia.

Figure 1.5. Corruption in public procurement

In the last three years, do you think that corruption has prevented you or your company from winning a public tender or a public procurement contact?

Note: The amounts listed are percentages.

Source: (Director General for Communications, 2019[37]).

Slovenia’s system also lacks concrete award criteria related to innovative goods and services (OECD, 2019[23]). It is generally agreed that use of innovative procurement methods is low and innovation in the system is not occurring at the levels necessary, despite recommendations from the European Commission, the OECD and best practises across the world. These recommendations and guidance documents are helping to create a foundation for improving the procurement system, but the challenge now is finding ways to accelerate that change.

Chapter 3 of this report describes major developments and influential events in the public procurement system in detail. The analysis shows that Slovenia has undertaken major efforts to improve the procurement system in accordance with international standards. Invariably, these efforts have concentrated on the legal framework of public procurement in Slovenia and efforts to digitalise connected processes. However, the persistent issues outlined above remain a challenge. To address these, the government must look past traditional interventions to identify the factors holding back the use of innovative methods and solutions in the system beyond regulation and techno-administrative solutions.

Consequently, this work seeks to explore how system thinking can be used to create a consensus and increased appetite for reforming the public sector procurement system in Slovenia. It explores the complexity, history, ambition and opportunities for transformation in the current system. In addition, the final chapter explores some potential scenarios that match the level of ambition within the system to the level of transformation, and identifies potential issues and results (Chapter 6). The Ministry of Public Administration of Slovenia, the steward of the procurement system, seeks to champion this transformational change and help create the necessary space for new approaches and ideas within a rigid, legal-based system.

For this report, the OECD team examined the structure of the system, but focused more on internal interactions, behaviours and drivers. Slovenia has already undertaken significant work to ensure that the necessary system elements to produce innovative results are in place, but has focused less on the institutional drivers responsible for producing a system that lacks innovative procurement. By understanding the interlinkages and drivers, this approach seeks to identify the appropriate levers to unlock and transform the system, rather than ensuring the elements are functioning independently. Thus, the systems approach of this report involved the following steps:

• Delineating the initial problem frame with key stakeholders within the procurement system

• Performing a desktop analysis of reform trajectories and path-dependencies within the procurement system

• Interviewing key stakeholders about the interlinkages and lived experience of the system

• Conducting an initial systems analysis of interconnected aspects of the procurement system and validating the findings with stakeholders (creating a common problem frame for the Slovenian public procurement system)

• Creating a common understanding of the procurement process and its aims, and co-designing solutions with stakeholders (identifying the scale and scope of problems)

• Developing and co-designing change scenarios for the procurement system and stress testing them with stakeholders in Slovenia (the scenarios help to ascertain how the system may react in practise to the recommendations and to identify which cascading issues new solutions may unearth within the system)

• Establishing feedback loops to enable active monitoring and evaluation of the system, when solutions are implemented and changed on the ground.