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Procurement – A Route To Reducing

November 20, 2008

Procurement - A Route To Reducing

Public sector purchasing policy is not exactly a subject designed to make the pulse race. But perhaps it should. At a time when scrutiny of the public finances has never been greater, a prudent procurement policy offers a heaven-sent opportunity to rein in public expenditure.

The lack of visibility of so much of this spend means that the cost to the public purse risks spiralling out of control. There are straightforward disciplines which the public sector could adopt which can be taken from the private sector. Reduce the number of suppliers, manage those suppliers better, don’t let them change the terms mid contract, negotiate well, bring transparency and disclosure to whom money is spent with.

In essence purchasing impacts the public sector more profoundly than you might imagine. Everything which is neither salary nor distributed as a grant or as welfare is regarded as public sector purchase. For this an estimated annual budget of £150 billion is up for grabs. Even a relatively modest ten per cent saving in this category would bring with it potential dividends.

Goods and services that the public sector purchases vary from IT systems (not noticeably good value in recent years), buildings, highly sophisticated defence equipment and stationery. Meanwhile services include the acquisition of childcare, consultants and call centres.

The science of sales is well known. It is certainly the somewhat sexier counterpart to purchasing. Top sales professionals are stars in the corporate world – their dark arts are the subject of an extensive body of learning and training. By contrast, the procurement industry is very much in its infancy – regarded as less easily understood or easy to define and its practitioners undervalued compared to sales staff. Moreover purchasing managers are rarely motivated to beat their suppliers down on price – this culture is especially common in the public sector.

Indeed it is estimated that there are some fifty times more professional sales people than trained procurement people and that procurement performance is rarely tracked in the way that sales are. The scale of public sector expenditure across a range of sectors is mind boggling. Grouped by department, Local Government (£39.8 billion), Health (£30.1 billion), Defence (£16.9 billion) and the devolved administrations (£15.4 billion) are the largest public sector purchasers. The goods and services purchased across departments include construction (£22.3 billion), pharmaceuticals (£8.9 billion) and the slightly more mundane transport (cars and business travel – £5.4 billion), telecommunications (radio and TV – £3.6 billion), IT services (£4.2 billion), down to food (£3.2 billion) and furniture (£1.2 billion).

The desire to ‘cut waste’ is one shared by opposition politicians across the world. The important thing surely is to drill down to determine the precise nature of the procurement and purchasing budget as well as examining why people are so bad at the science of buying.

In essence there are three variables – price, quantity and specification. When you buy a single good such as utilities, like electricity or water, there is a fixed price which hinges upon the quantity consumed. A poor purchasing deal is often done because of ignorance, lethargy, personal preference for a particular supplier or a misperception of the risk or product concerned. Whilst sales people are highly focused, all too often the purchaser of a single good fails to recognise the market is moving all the time and cannot keep up with these crucial changes.

By contrast, purchasing decisions over a multitude of items (such as stationery) involves pricing a basket of goods based on the volume of each item sold. In this model high value volume items should be less expensive. The total paid depends on the purchaser predicting the volume of each item and negotiating the price accordingly – get the prediction wrong and the high volume items will end up being rather more expensive.

Buying professional services can be trickier still. For example – something very close to my own heart – buying the services of a lawyer usually depends upon fixed day rates, quantity of consumption that can vary massively and a specification which is not visible at the time of purchase. The odds are typically firmly stacked against the purchaser when compared to the party making the sales. Mistakes include poor upfront thinking which can lead to an inadequate analysis of the specification and inefficient use of a supplier: using an overqualified and therefore more expensive professional for more mundane work or else agreeing to pay for the A Team but getting the less qualified and less efficient B Team for most of the assignment.

Buying services also involves a leap of faith – as a sales person it is easy to promise but hard to deliver. Defining and measuring of outputs and their quality can be so difficult that the entire process can be overly focused on inputs (such as time sheets for hours inefficiently spent undertaking the task at hand). Naturally the fee model can impact on behaviour by any supplier – day rates understandably encourage both prolonged and more complex work.

Even buying services over the longer term when many of the pitfalls should be foreseen can lead to problems. For example, the supplier may start cheaply and then charge overrun fees in the knowledge that the costs of changing supplier are prohibitive or would cause more delay to the process. Once locked in, the effective rate shoots up. Almost inevitably if a decision is made to pay the service on inputs then the project time (and expense) will extend. Similarly a supplier of long term service who may identify a problem may not also be that person delivering the answer. All of these factors make for a bad deal for a purchaser of services.

Then of course there is the problem that striking a deal is attractive but managing the subsequent process is far less so. All too many organisations – especially in the public sector – are notoriously bad at managing suppliers both commercially and operationally. Sales people, the suppliers in this context, are trained to be better at exploiting this.

It is also the case that the biggest savings often mean internal change. The easy part is to renegotiate the price of an existing supplier but changing to a new supplier (which may in the short term be more costly as well as inconvenient) is potentially the efficient way forward. If the buyer whose job it is to determine the volume of services of goods being bought as well as the specification is poor at managing the process of buying then costs will begin to spiral.

Unfortunately the public sector seems unusually susceptible to changing specifications as it goes along. As anyone who has employed a builder knows, this is not a good idea. The maxim here is straightforward – the better you plan, the better you buy. Much of this may sound like commonsense but it requires a meticulous approach. At the outset it is crucial that the individual charged with purchasing goods and services fully understands the objectives and payment around pre-determined delivery in the public sector.

This is an area of opportunity for the Conservatives to say something new by addressing ways of capturing value across a third of the public sector expenditure budget. At a time when the economic clouds are gathering and there are increasing pressures on the public purse, adopting a more systematic approach towards procurement should not detrimentally affect the services to the public.