Since Lady Thatcher exited the British political scene in the eighties, unions in the United Kingdom have not been the fiercest to organize demonstrations. So why have thousands oil and power plant workers across the United Kingdom staged strikes over the last 5 days?

Crowds have been demonstrating all over Europe in the recent weeks. The Greeks demonstrated against the failings of their education system, the Icelanders protested the bankruptcy of their economy and the French following their tradition, pointed out the rise in unemployment. However these British strikes are not a mass social movement, they are the direct result of a procurement decision made by the global oil and gas group Total.

Total has awarded a $280 million construction project for the UK site of Lindsey to the Italian company IREM. The Italian contractor will use its permanent workforce to execute the contract, sending 400 Italian and Portuguese workers on site. It is not surprising to see such a decision inflaming British workers in the context of rising unemployment (1.92m, up 0.31m from the previous three months).

From a procurement perspective, the event triggers a couple of questions…

What sourcing process did Total follow?

Total invited five UK firms and two European contractors to bid. No other details have been made public, Total is a private company and the OJEC rules do not apply to them.

How legal is it to select a foreign company to work on British soil?

In 1996 the European Union introduced the “posted workers” directive. It allows a European company to employ its own staff on a temporary project in another EU member state. The only condition is for the contract to be limited in time. The employer has to meet local working conditions such as the local minimum wage or working time.

What advantages would Total have to use an Italian company rather than a local British company?

1. Hypothesis 1: Shortage of skills. Not so long ago the United Kingdom was suffering from a shortage of skills in the construction sector. This may have encouraged Total to choose an Italian supplier who could guarantee better qualified and more available staff. Having said this, British firms have the opportunity to employ migrant European workers directly as the UK is welcoming workers of all European Union states without restrictions.
2. Hypothesis 2: Costs. Although right wing extremists are keen to appeal to the argument of low paid foreign workers taking British jobs, the posted workers directive explained above proves that staff cost were probably not a decisive advantage for the Italian firm IREM. IREM will also have to pay travel and accommodation costs to its staff. From this perspective the only difference would be lower overhead costs or margin calculated by IREM to win this contract.
3. Hypothesis 3: Leveraging the spend. Total may have seen IREM as a partner with global presence capable to deliver construction services across the globe. This would allow Total to leverage its construction spend, benefiting from more favorable commercial conditions from IREM and also streamlining the processes, increasing the learning curve between the two companies and accelerating the project delivery time.
4. Hypothesis 4: Currency effects. Since the introduction of the Euro in 1999, the Sterling has been historically strong. Assuming Total conducted its sourcing process in January 2008, the Pound was valued at EUR1.35, making the total cost comparison eventually in favor of suppliers in the Euro zone. However the Pound has since then lost 25% of its value and now stands at EUR 1.05.

The Lindsey refinery case should give us procurement professionals in the construction industry reason to think, since it challenges us on two aspects.

First, the validity of our supplier capabilities and total cost assessment. The economic cycles (labor, currency) have changed faster than we expected. When running a sourcing exercise we need to foresee better how a supplier can adapt to new conditions. When awarding a business we need to establish more scenarios, extend them to a more extreme “worst” and introduce new factors (e.g. potential changes in employment law).

Second, our commitment to social responsibility. In a recent post, Mike Petro wrote that “One interesting provision that steel companies are REALLY pushing for is a ‘buy American’ clause”. There is no doubt that British construction companies will follow suit. In September 2007, UK’s Prime Minister Gordon Brown was already promising “British jobs for British workers”. The European Union legislative framework has not allowed this but we should expect to see national legislation going in this direction soon, in Great Britain and also in France. No doubt that the Lindsey episode will add bad publicity to Total, whose 2008 profits of over €11 billion have been perceived as obscene by some. Helping local suppliers is not only a commitment to social responsibility but also a way to protect one of the company’s biggest assets, its brand.

Jean-Pierre Lauer is a Category Manager for Services in Ariba’s Global Services Organization. Based in London, Jean-Pierre works with corporations through EMEA.