Why Public Procurement is Central to the UK’s Economic Performance…

Posted 16/01/2015

...and how to transform it

© Copyright 2011, Jon Hughes, Future Purchasing Consulting Ltd and Marc Day. All rights reserved. 

You can click here to download and read a full expanded copy of the report.

EXECUTIVE SUMMARY OF THE FUTURE PURCHASING & HENLEY BUSINESS SCHOOL REPORT

Public procurement, in all its different forms, represents 40% of the expenditure of the public sector and 20% of UK GDP. Annual conventional expenditure and Private Finance Initiative liabilities combined amount to over £0.5tr. How well that money is spent has a considerable impact on service delivery, the financial performance of the UK and its ongoing growth. It also represents £5,000 for every UK taxpayer. There are few areas of government or the public sector that can release so much money, so readily, and with so little political disagreement or social detriment. Public procurement transformation may well be one of the few areas on which politicians, policy advisers, senior executives, business managers and commercial directors can agree readily. However, to achieve that broad coalition of common interest and focus, there is a need to develop and support a
stronger and different model of procurement transformation, build depth of understanding on its scope and secure the necessary commitment to apply it. Most importantly, it needs to impact every single part of the public sector but on a primarily devolved basis. And it should deliver, as a minimum, £37bn of cost savings by 2015. 

Ten Point Action Plan for Public Sector-Wide Implementation

A number of “pillars of transformation” have been defined: Value, Spend, Options, Structures, Processes and People. Here is our blueprint for reform and ten-point action plan for public sector-wide implementation. 

  1. Make total public sector procurement transformation a Government policy goal, with publicly stated objectives and clear deliverables with £37bn cost savings by 2015.
  2. Put much stronger leadership behind procurement transformation, which should be owned by a Minister without Portfolio at Cabinet level but with accountability and performance delivery devolved to the appropriate executive level across each part of the public sector.
  3. Adopt a stronger and different procurement transformation and reform model. “Reform of reform” is required, not just more of the same.
  4. Create annual procurement reform business plans covering all the main parts of the public sector and wherever significant money is spent.
  5. Subject each procurement reform and business plan to annual scrutiny and review by a network of procurement oriented non-executives and external advisers. Conduct broader reviews by ministers, the Public Accounts Committee, the National Audit Office and the Office for Budget Responsibility.
  6. Renegotiate the Private Finance Initiative, inject greater transparency into these off balance sheet liabilities and renegotiate terms with the consortia of banks, investment houses and major suppliers.
  7. Inject best practice procurement in category, supplier and project management to drive procurement productivity and maximise real value across the public sector’s main areas of expenditure, while professionalising the function.
  8. Set up a Government Procurement Academy. Build competence and capability wherever money is spent, and encourage the formation of a highly professional, government-wide cadre of top quality, pivotal procurement leaders.
  9. Commit to meaningful expenditure data analysis and publication of a UK-wide public sector spend map.
  10. Accelerate EU procedural and process simplification. Increase SME access to public procurement.


WHY IS UK-WIDE PUBLIC PROCUREMENT TRANSFORMATION OF REAL IMPORTANCE, AND IN WHAT WAY DOES IT CONNECT TO THE GOVERNMENT’S THREE MAJOR POLICY GOALS?

UK gross domestic product (GDP) for 2010/11 was £1,473bn. Total public sector expenditure was over 40% of this at £632bn. Of this, conventional third party public procurement expenditure on an annual basis was £243bn. In addition there is a thirty-year Private Finance Initiative (PFI) liability of £267bn and also nuclear decommissioning costs of £52bn.

The Government has repeatedly argued for the need to reduce the structural deficit, rebalance the economy and stimulate economic growth, while opening up public services to greater choice and competition. This was strongly reiterated by the Chancellor of the Exchequer in the Autumn Statement, 29 November 2011. 

15% procurement-led savings across the whole public sector (at the low end of aspiration) should deliver £37bn while 30% would deliver £74bn. This substantial amount could be reinvested in service delivery and future growth-orientated
infrastructure of the UK. 15% should be the goal for this parliament, ending 2015, and 30% the goal for the next term. It is a
change programme for the decade.

WHAT PROGRESS HAS BEEN MADE SO FAR ACROSS THE FIVE MAIN AREAS OF UK-WIDE PUBLIC PROCUREMENT EXPENDITURE?

It is a very mixed picture. Here are the “big five” areas of procurement spend calling for significant reform, together with a snapshot of progress to date:

Private Finance Initiative

£267bn of off-balance sheet liabilities across 650+ operational projects. £8.5bn of annual spend servicing them. A well-intentioned approach that has become a national disgrace. This is public procurement’s Greece or Enron. The PFI industry should not be exempt from reform. A real need to extract concessions from the industry, renegotiate contracts and impose claw-backs on deals done during the economic boom time before the recession hit hard. The PFI industry has benefited from synergies and operational improvement that should have been predicted. The private sector’s gain is the taxpayer’s loss. That is unacceptable and needs to be addressed.

Defence

£31bn procurement spend p.a. Budget cut of 7.5% in real terms by 2014/15. Shedding 25,000 civilian staff and cutting Defence Equipment & Support by one-third. Described by the Public Accounts Committee as the most dysfunctional government department, and the procurement system was described by The Economist as “a monstrous mess”. We wouldn’t disagree. Systemic cycles of failure in defence procurement have to be stopped. Fundamental reform is essential. 

Health (excluding doctors and primary care)

£48bn procurement spend p.a. Massive political turbulence over market-oriented reform. £20bn of efficiency savings required by 2014. 45% cost cuts in management and 30% in administration. National Audit Office believes that neglect in procurement is endemic. There is chronic underperformance in this area. 20-30% cost savings are readily attainable, with the potential for every pound saved to be reinvested in healthcare. Leadership in Trusts has been half-hearted about procurement so far.

Local Government

£51bn procurement spend p.a. 28% cut in grant driving substantial reduction in services and eligibility criteria. Massive challenge and a real need for transformative savings and redefinition of service delivery. Procurement is traditionally weak. Huge scope for cross-council shared procurement services, aggregation, outsourcing and a shift from in-house provision of services to external commissioning from the private and voluntary sector.

Central Government

£31bn procurement spend p.a. 400,000 job losses under way. Budget cuts averaging 19%. ERG Central Government Procurement Model under way, aiming to save 25% over four years from a baseline of £13bn. A much-needed initiative, which now has to prove that it can deliver to scale and on time.

BUT UK-WIDE PUBLIC PROCUREMENT REFORM IS ALREADY UNDER WAY, ISN’T IT?

Only in part. There have been over 20 significant studies of public procurement in the past decade, most notably by Sir Peter Gershon in 2004 and Sir Philip Green in 2010. Also, with depressing regularity, the National Audit Office and Public Accounts Committee pronounce in robust and often highly critical terms about procurement disasters and cost overruns, particularly in the context of information technology, defence and infrastructure. Unfortunately, many of these reviews are the equivalent of “looking in the rear-view mirror”. While they acknowledge the evidence of underperformance, they do not join up the wide range of available best practice initiatives into a coherent forward plan of campaign, with clear goals and public sector-wide interventions to achieve them.

Future Purchasing and Henley Business School, University of Reading have studied all these reports, together with over 100 case studies of good and bad practice.

Our conclusion is that on a wide range of metrics, less than one-third of promised delivery has been secured. At least two-thirds of potential benefits have been squandered, ignored or falsely claimed. Admittedly there are now several excellent initiatives under way, such as the aggregation of £13bn worth of pan-government commodities being led by the ERG and the innovation in payment by results introduced within welfare-to-work reform.

On the most generous interpretation of current initiatives less than 20% of total procurement spend is under close scrutiny. In most other parts of the public sector, procurement is focused on highly tactical and crisis-led interventions as part of the front-loaded public sector cutbacks. Well intentioned but piecemeal approaches are most unlikely to unlock the scale of cost savings, service delivery improvements and support for economic growth available. Structural complexity, turf wars, conflicting priorities, political in-fighting, inadequate resources, weak leadership, insufficient insight into best practice, lack of sufficient process and project management discipline, bureaucratic obligations of compliance with EU procurement regulations and demotivation of staff at a time of considerable cutbacks all combine into substantial headwinds pushing back on the necessary
changes. The breadth and depth of reform required will simply not happen without a small number of very substantial changes. 

WHAT BEST PRACTICES NEED TO BE APPLIED TO PUBLIC SECTOR PROCUREMENT?

There are immense opportunities to inject best practice and innovation into procurement, since the vast majority of the spend is relatively untransformed. However, this is not to argue for a single, predominant focus on any one best practice lever. It is vital that a range of fit-for-purpose options and interventions are applied. Fortunately many of these are readily available to policy-makers and procurement/commercial practitioners.

Here are the key ones:

Price management

Many high impact “quick wins” exist, e.g. renegotiation of contracts, price benchmarking and levelling (removing the price disparities much ridiculed in the press), and much greater use of e-auctions (less than 5% of total spend is conducted electronically). But equally there are more sophisticated areas for price and contract innovation, with a greater focus on changing supplier remuneration models, value based pricing and payment by results. This is all about restructuring supplier pricing and payment mechanisms.

Cost management

Three inter-related big opportunities. 40-80% of cost is locked in by specification and design. There is immense scope to reduce complexity by rationalising “gold-plated” specifications, buying off the shelf wherever possible and standardising across common subcategories and platforms. The public sector is several decades behind the private sector in this area. But there is also a need for transformative cost savings that can come from unbundling mega contracts and re-engineering supply chains, particularly in complex projects and long-term maintenance deals in defence, PFI, infrastructure, rail, highways, capital equipment, IT and property. There is little cost transparency at the moment, with far too many examples of “black box” sourcing (no-one really knowing what is going on inside the contract) and far too few examples of “should cost” modelling and
performance contracting. Post-contract supplier management is notable only by its absence. Again, this is decades behind the private sector, notwithstanding the challenges of EU regulatory compliance.

Aggregation and shared services

Procurement primarily operates on a devolved basis. That will not and should not change. Centralised control is impossible. At maximum no more than a fifth of government expenditure is, or should be, managed from the centre. But England, Wales, Scotland and Northern Ireland from a procurement perspective operate separately, as does every department. There are between 25,000 and 40,000 relatively independent public sector procurement points across the UK employing 250,000 practitioners and up to 500,000 in total when the budget-holding, project-managing, programme-leading and commissioning community are taken into account. These half a million individuals spend £0.25tr of taxpayers’ money each year, but with minimal pan-government perspective. Many of these procurement points are far too small and fragmented, with inadequate
resource to develop and apply best practice. There is strong evidence to suggest that intelligently designed, well- orchestrated and much stronger aggregation, collaboration and co-ordination needs to be applied through voluntary merger of small buying units, leveraging of procurement hubs and shared services groups, and rapid deployment of task forces and project teams when needed.

Outsourcing

Despite public perception that every outsourcing contract, particularly in IT, is a disaster, the reality is that there have been many successes. Research shows that there are substantial gains to be delivered in this area with extensive private sector provision being a considerable catalyst for change and performance improvement.

Blue sky thinking in service delivery methods

There is immense scope for complete remodelling of service delivery. The welfare-to-work programme, structured around deferred payment by results and with extensive voluntary sector support, is an excellent example and potentially a new social model for service delivery. We enthusiastically support such innovation. Local authorities can redefine their roles as enabling councils, commissioning rather than providing services. In defence, independent entities could be created that draw on world-class programme management to break the cycles of failure in equipment procurement. Free-standing, independent procurement agencies could be established for commoditised procurement spend.

EATING THE ELEPHANT.
HOW CAN THE TOTAL SPEND AND THE REQUIRED REFORM INITIATIVES BE BROKEN DOWN INTO MANAGEABLE PIECES?

£562bn of annual and committed supplier procurement liabilities (£243bn in traditional spend, £52bn in nuclear decommissioning and £267bn in PFI) channelled through 40,000 purchase points by about 500,000 people, sounds unbelievably daunting. Yet 90% of this spend is actually driven by only 15 pan-government mega-categories (such as professional services, construction, facilities, social care, temporary staff etc.), some of them operating horizontally (they are found in virtually all parts of the public sector) and others vertically (primarily within a particular department,
agency or function). A parallel theme involves the relatively small number of mega-suppliers and consortia in defence, PFI, infrastructure, utilities and the rail network.

There should be a vigorous, high profile focus on both, firstly defining where they are/who they are; then mapping the linkages between these mega-categories and mega-suppliers and all major departments and policy areas; and then subjecting them to in-depth review and analysis by high quality procurement leaders, category directors, supplier directors and the public sector equivalent of key account managers. This in turn drives best practice sourcing, post-contract supplier management and ongoing performance improvement. 

To download the full strategy report or to follow our progress on public sector procurement transformation visit: www.deficit-reduction.com


Tagged by topic: NHS , Procurement Transformation , Public Sector Procurement

  by Jon Hughes

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