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Applied Game Theory – the future of IT procurement? Looking at it through a government lens

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DLA Piper’s Technology and Strategic Sourcing team recently completed a c. £275 m transformative networks and telephony deal for one of the UK’s largest financial institutions, which used an innovative negotiation method known as ‘applied game theory’ in order to carry out the final negotiation stage of the procurement process. The resultant outcome was a commercial success – in this post we assess the viability of this innovative methodology in the context of public procurement and offer tips for best practice.

What is Game Theory?

Game theory is a Nobel Prize-winning branch of behavioural economics that was pioneered by Hungarian-born American mathematician John von Neumann in 1944. It is centred on the scientific modelling of interactions between multiple self-interested and rational parties, who engage with each other based on how they think the other parties may act. More familiar examples of game theory in action are chess or the “prisoners’ dilemma”.  In the commercial world applied game theory has more recently emerged as a tool to predict behaviour, manage commercial negotiations and drive greater cost savings.

Is Game Theory compliant with public procurement?

In a recent case (AbbVie Ltd v NHS Commissioning Board (operating under the name of NHS England) [2019] EWHC 61 (TCC)), NHS England (“NHSE”) had appointed consultants experienced in game theory and auction theory to develop the bid evaluation methodology for a strategic procurement of Hepatitis B treatments. This usage of ‘game theory’ and alternative evaluation methodologies was challenged by AbbVie (a pharmaceutical company) on the basis that it included formulae which operated by reference to deemed amounts/dummy price mechanisms which are “meaningless and/or difficult to comprehend” and that this methodology appeared to favour particular bidders whilst prejudicing other bidders.

The equal treatment test

Under public procurement law, a contracting authority has discretion over its choice of evaluation methodology, provided such methodology meets what is known as the equal treatment test. The equal treatment test requires that “comparable situations must not be treated differently and that different situations must not be treated in the same way, unless such treatment is objectively justified” (Case C-21/03, C-34/03 Fabricom v Belgium [2005]).

In AbbVie v NHS the judge clarified (by reference to Amplexor, an incumbent bidder case) that “the mere existence of differential treatment” does not automatically give rise to a breach of the equal treatment test. Instead, provided that such differential treatment is not arbitrary or excessive and is objectively a proportionate means of achieving a legitimate aim, then the equal treatment test will still be met.

In this procurement NHSE had been aware that two of the three bidders would be unable to supply bids capable of serving the entire Hepatitis B market and therefore in order to be able to use a “whole market approach” to allow for a like-for-like comparison of all three bidders, NHSE had needed to implement “dummy pricing”. The judge found that NHSE’s aim of implementing a “whole market approach” was legitimate, and that in this case the applied game theory method used was proportionate, reasonable and not speculative.

It should be noted that this decision is particular to the facts of the case and, for example, the judge clarified that by contrast, such “dummy pricing” would “have no place in a separate market approach.” In addition, in this case the judge not only examined the structure of the methodology, but also the detailed technical assumptions (including market data and internal data from previous procurements)  that had underpinned NHSE’s decision to use applied game theory in this procurement, suggesting such fact-based evidence was crucial in supporting NHSE’s case.

Tips for use

Contracting authorities seeking to make usage of the “Game Theory” approach therefore need to:

  • Be clear on its procurement aims and set them out clearly in the ITT
  • Consider carefully whether your transaction is appropriate for the use of applied game theory and whether the nature of such a process aligns to your interests as a customer
  • Ensure there are sufficient evidence-based assumptions underpinning the decision to use applied game theory that support its use and can be relied upon in the event of a legal challenge
  • Issue the evaluation methodology to bidders early on and ensure that members of the evaluation team understand the assumptions on which the model is based
  • Refer back to the aims and assumptions in regulation 84 of Public Contracts Regulations 2015 and relevant reporting and documentation requirements to “justify decisions taken at all stages of the procurement procedure
  • Be clear as to exactly what constitutes a “whole market approach” and what constitutes a “separate market approach” – an issue which has not yet been addressed definitively by the English Courts

It is also useful to remember that you will be entering into a long-term arrangement with one of your bidders so ensure that you build good foundations for this relationship during the procurement process. All stakeholders involved in utilising applied game theory must understand how the process will work, the purpose behind using it and how it will be used.

Written by Holly Pearsall and Faye Morton with thanks to Kit Burden, Jessica Sanders, Imogen Palmer and Louise Huson for their contribution.

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