The operation of Melbourne’s trains and trams has been privatised since 1999. This was a Kennett era transformation that was intended to leverage on the success of similar arrangements in the UK. There have been 4 iterations of the franchise arrangements – colloquially known as MR1 to MR4 (Melbourne Rail Franchising iterations 1 to 4).
The Andrew’s government is now about to embark on the 5th round of franchising, or MR5. The tram franchise has been announced as going to market this year with a new franchise contract to commence in November 2024, and the train operator has been extended for 18 months before it is also tendered.
The Incumbent’s Curse
It is often considered advantageous to be the incumbent for a major service tender. After all, you have done the hard work to get to know the client, understand the issues and (hopefully) provide good quality services for the contract period.
It is true that there is a certain “stickiness” of the incumbent for long term contracts for a number of reasons, including:
Client and supplier develop relationships and ways of working that are not documented but are critical for day-to-day operations
IP gets locked into the supplier that might be lost if they don’t continue
Fear of the unknown and risk of it failing, especially for critical services.
The incumbent will sometimes also have the benefit of the existing organisation and its subject matter experts to assist with bid development Whereas new entrants will be beholden to the quality and quantity of information in a data room, using people that don’t necessarily have the same level of familiarity with the business.
The incumbents curse, however, is real and manifests itself usually in three ways:
In any long term relationship (contractual or otherwise) there have usually been issues that have had to be managed – and you can’t please all the people all the time. The commercial nature of contracts and business means that the supplier will sometimes take a harder approach on some issues, and this can sometimes lead to relationship stand-offs with the client. This, in turn, can lead the client to wonder – could things be better with a different supplier?
The incumbent is expected to have already brought all their ideas and IP to the business and operations. And to some extent this may be true. The incumbent may have also tried things that didn’t work and the operations may be close to as good as they will ever be. However, the new entrant will turn up with a bag full of new tricks, ideas and ways of working – and this can be quite compelling.
The incumbent knows the business well, sometimes too well. All the issues, risks and costs of the business are clearly understood and the logical thing to do is ensure that these are adequately covered off in the tender price. Whereas a new entrant will, to an extent, be willing to take greater risks to win the job with less than perfect information. So what we often see is the incumbent being more conservative, and the new entrant being more aggressive when it comes to risk and cost.
What should the New Entrant do?
A new entrant has nothing to lose except its bid and opportunity costs. A tender process is a promise of something to come, and all parties are doing their best to ensure that the promise is deliverable and realistic.
A new entrant needs to create a reason for change with the promise of something new and better. This should start with defining how they are different from the incumbent and clearly articulating why this will be better – from a relationship point of view, from a service delivery point of view and from a cost point of view. Long term contracts for things such as public transport have constant media commentary pulling apart the successes and failures of the arrangements. This is fertile ground and a good starting point for background research on where some of the opportunities might be. This can be further enhanced with industry intelligence.
Having defined the opportunities, it’s now about lining up the bag of tricks to show how you will make a difference. In our opinion, it is no longer good enough to “throw the kitchen sink at it” and hope for a shock and awe moment with the client. The better responses take a more strategic and deliberate approach to change and improvement, with fewer but deeper changes that adjust the way the organisation works with the client to achieve shared goals over the term of the contract.
Can it be done cheaper? Probably – and if this is what the client wants then it makes for an attractive proposition. Creating opportunities to reinvest any savings into new initiatives is tricky, but a challenge in all tender responses. However, more and more, sustainability is as important as cost and this will most likely be scenario tested as part of evaluation.
How can the Incumbent defend?
All tenderers would revel in a clear annunciation of the problem so they can bid back a strong response to solve it. However, what if the problem is you – and you don’t realise it?
Incumbents in long term service contracts need to find a way to get honest feedback on their performance, the status of the client relationship and a good dose of “if only you……..” to help baseline their problem to solve. It is very rare that the incumbent won’t need to reinvent themselves to a certain degree. The purpose of the tender process is to make it better than it was – which is a challenge if you are the incumbent, but one which needs to be acknowledged and embraced. How can we make it better is a key starting point for any bid strategy.
The second area of defence is playing into the benefits of knowledge and the risks of change. As the incumbent you have the benefit of history and experience that you must bring out in the tender. Across each element of the bid, or problem that the client is asking the market to solve – ask what, as the incumbent, do we know and what have we learned, and how can we apply this knowledge to solve the problem. This can be quickly followed up with the risks of change – it might look better – but you know with us that we can, and will, get the job done.
Finally – bid it like it’s yours to win and not just to lose. Be brave and take risks in delivery and outcome. Bringing in fresh teams and people to challenge your thoughts, ideas and approaches will be critical throughout the bid development. Focus on what could go right and what this means for cost and risk. Has enough been done? Can we be better?
About the Authors
The Commercial Advisory Partnership (TCAP) is led by four partners who have worked in detail across all iterations of Melbourne’s train and tram franchise contracts. They have led franchise procurement activity, contract design and evaluation for government as senior project members as well as advisors. They have also held senior commercial roles within the transport operators and advised on the development of successful franchise bids. They are experts in Melbourne’s transport arrangements and its stakeholder environment.