The government’s £220bn procurement spend offers plenty of potential for big savings. But as Emma Clarke finds, if government agencies are to make those savings, they’ll have to start working together much more closely.
The question of whether to impose efficiency savings this year or wait until 2011 became a central debate in the election campaign – and the Tories have won this one: the Conservative-Liberal Democrat coalition government plans to take £6bn from ‘non-frontline services’ in this financial year. Even the NHS, which has been promised increased funding in real terms, is not exempt from the pressure to find efficiency savings, said health secretary Andrew Lansley in an interview with BBC Radio 4’sToday Programme.
Efficiency savings will be delivered, in part, by tighter control of procurement, which accounts for around £220bn of public expenditure every year. Yet plans around how these cuts will work in practice, released in the Budget in March and in election manifestos, have been met with a degree of scepticism.
Even deputy prime minister Nick Clegg told rivals on one of the televised leadership debates that it was impossible to fill the structural deficit by scrapping “paper clips and pot plants” in Whitehall. Most procurement specialists contacted by Civil Service World agree that there are big savings to be had in improving efficiency – but they are sceptical over whether politicians understand the kind of structural changes required to release those savings. Current plans, they argue, lack the scope and confidence that is necessary to bring about meaningful efficiencies that will help save the country’s finances.
Not enough
In the March Budget, departments set out their contributions to the Labour government’s commitment to make £11bn of efficiency savings every year by 2012-13. A large proportion of these savings were to come from reductions in procurement costs and spend on marketing, communication, consultancy, energy and IT budgets. The Department of Health, for example, said it would reduce the amount it spends on procurement by £1.5bn. However, these proposals will only make small inroads into the deficit. As Peter Smith, director of consultancy Procurement Excellence says, if the structural deficit for the UK is around £75bn per year, and it is assumed public procurement can save one third of that – it does, after all, represent about a third of government spending – then “government should be looking for at least £25bn in procurement savings”. Simply cutting services could save big sums of money – but for politicians and civil servants alike, reshaping government operations to improve the efficacy of spending is a far more attractive option.
This time round, Smith warns, efficiency strategies will have to be more effective than past efforts. The National Audit Office has criticised the measurement of government efficiency savings to date, questioning whether savings from the Gershon Efficiency Review that began in 2004 were ‘real’ in the sense that they ensured the same output but for less input. In recent years this vagueness hasn’t mattered so much, since budgets were rising and the ‘savings’ could be re-invested, says Smith. “But in the new world where budgets are being cut, or going up with inflation as in the NHS, if savings aren’t real it will become obvious and mean activities, services and staff will have to go.” As he says, this will put huge pressure on public procurement to deliver.
Low-hanging fruit
Small-scale improvements to procurement practice can certainly save some money – but many of the easy wins have already been achieved. “We have taken all the low-hanging fruit,” says David Pointon, head of procurement at Portsmouth City Council. “Now we have got to get stuck into more radical and difficult areas.”
Pointon’s concern is that past efforts have focused on improving the procurement of back office goods, rather than core areas of spend related to service delivery. Of Portsmouth City Council’s £250m budget on external expenditure, for example, only £15m is spent on back office goods such as IT, desks and office equipment, whereas the rest goes on services such as refuse collection, social care, street-sweeping, leisure services, and highways. “If we are going to make fundamental savings we need to raise our game by getting stuck into services instead of just looking at the narrow commodity end of things,” he says.
Furthermore, adds Smith, procurement cuts may not be as easily achieved as politicians make out, given that a large proportion of public procurement spend is locked in through PFI contracts, long-term outsourcing deals and committed contracts in areas as varied as legal aid or military equipment.
End-to-end
Some money can be saved by pushing suppliers to cut their prices. But many suppliers are already struggling to emerge from a deep recession – and the biggest rewards are to be found in rethinking the structure and scope of public sector procurement. “To make greater savings, procurement must find ways of spending less through demand management; by taking a hard look at specifications; and through skilful contract management,” says Smith. Or as Pointon puts it, “the problem is not the prices we pay, but what we are buying”.
In Portsmouth council’s case, he suggests, savings might not necessarily come from – for example – negotiating a better deal with taxi firms that take children with special educational needs to school, but by questioning whether this is the most appropriate way of providing that service. The council could make greater savings by paying parents to take children to school, or by providing schools with a minibus so they can pick up children, suggests Pointon.
Major upheaval
Some within the profession and industry insist that the government must take even more radical steps to change procurement. In a letter to the Telegraph in March, business leaders called for the public sector to ditch its “arcane procurement rules” in order to deliver greater efficiencies. But experts, including Smith, challenge these claims. Many of these rules are designed to ensure that public buyers conform to EU laws on procurement, he says, pointing out that the new government is unlikely to “put a head-on argument with the EU on this topic at the top of their priority list”.
The Chartered Institute of Purchasing and Supply (CIPS) and the Institute of Directors (IoD) have separately set out plans for a major restructuring of public procurement. CIPS chief executive David Noble has called for the appointment of a ‘minister of procurement’, who would set an overarching strategy across all government departments (see interview, p20). “We need to take a step back and look at efficiencies from a broader perspective, and create central strategy rather than drive targets for individual departments,” says Emma Scott, representation manager at CIPS.
This strategy would demand the use by public agencies of collaborative procurement deals for certain products and services. “We don’t want to get away from local sourcing, but for some things like software or computer peripherals, centralised contracts could work more efficiently,” says Scott.
The advantage of insisting on collaborative procurement is that it ensures departments act as a single buyer and create big single orders in order to get the best deals from suppliers. “The Office of Government Commerce [OGC] are stuck between a rock and a hard place at the moment,” says Scott. “They are trying to make deals with suppliers [through framework agreements], but these are based on promises rather than firm commitment on who will use them.”
An overarching strategy would also cut the costs of procurement processes, she adds. “People think they can get a better deal than the OGC framework, so they go off and do their own thing. But this means there are two bodies working to get a better price, and that adds cost.”
Meanwhile, a recent paper by the Institute of Directors came to many of the same conclusions, alleging that £25bn a year is wasted on badly organised public sector buying and outsourcing. The 10 Greater Manchester authorities, for example, were found to have more than 100 different specifications for tarmac between them, when seven would be adequate and could deliver a potential saving of 10 per cent. Local authorities, said the paper, often have separate finance systems even though their functions are very similar. If authorities were to work together on such issues, they could often save over 30 per cent of their costs.
The paper proposes a complete restructuring of procurement through the introduction of an ‘integrated’ model. This would mean that central bodies such as the Department for Work and Pensions, HM Revenue and Customs, or OGC agency Buying Solutions would manage the procurement and contracting of major deals, making all procurement decisions for local and national bodies including gathering orders, arranging distribution of goods and services, sorting out specification issues, and questioning the need for purchases. Other purchasing bodies would act at a regional level, and sub-regional bodies would provide local support and let smaller contracts and framework agreements. This model would, therefore, mandate collaborative procurement and require local authorities and others to give up control of some of their own purchasing functions.
Not only would this structure ensure the public sector could go to the market with greater volumes and commitment, but it would also put expert purchasing professionals in charge of specific areas of spend, says Colin Cram, the report’s author, who has 30 years’ public procurement experience. “A purchasing professional who is top class in a limited category can deliver much greater savings compared to the average non-specialist,” he adds. “By having a proper structure you allow this expertise to be available to all.”
Many of the efficiency savings set out in the March Budget assume collaboration will drive savings. But such collaboration requires real commitment from public bodies, says Cram, which will need to make compromises and focus on organisational change. “If you want 1-2 per cent improvement, you can achieve that by doing what you do now, but better,” he says. “If you are looking for 4-5 per cent improvement, then you need a more structured and disciplined approach to collaboration. But if you want 7-10 per cent savings or more, then you have to do it this way. Only big changes lead to big improvements.”
Too far?
There are concerns about whether such a major overhaul could work in practice. Consultant Peter Smith, for example, thinks this plan is unlikely given the governance and constitutional implications. Cram replies that these can be overcome by giving local authorities (which are constitutionally independent and cannot be obliged to participate) the option to either commit, or stay out for three years. Few chief executives, he says, would risk opting out for fear of being criticised for missing potential savings.
Ian Conner, head of Southwest One, a shared services joint venture, is also wary of forcing people down the path of collaboration. “There is clearly opportunity for greater collaboration and co-operation, but you need to look at the motivation for people to climb on board,” he says. “Bringing them to the party because they can see the benefits of it is a much better way to go.”
Organisations may have reasonable objections to greater collaborative procurement, Conner argues; after all, there are genuine obstacles to overcome. “The more you expand the club, the more disparate the demands, and the harder it is to find a consensus. You then spend more time on stakeholder management than on actual procurement activity,” he says.
Nonetheless, Conner’s work on sharing procurement costs is already yielding results. Southwest One is a public-private joint venture between IT firm IBM, Taunton Deane Borough Council, Somerset County Council, and Avon and Somerset Constabulary, managing back office services through a shared-service arrangement. By bringing the procurement for these organisations together under one roof, Southwest One combines scale and resource. £150m savings have been identified from the organisations’ combined spend of £500m each year, with £21m of savings generated to date.
“I am trying to shift procurement from being a back-end, process-driven team, to bring it to the front of the business so it gets involved at the commissioning stage of projects and influences strategic decision-making,” says Conner. The agency has, for example, reduced travel spend through the use of video conferences. It has also set up tools and processes that ensure better utilisation of beds in social care environments. Currently the body is securing a single contract for cleaning and catering across all three organisations to save £1-2m a year.
Whatever the route taken, it is clear that government departments must take a bolder approach to reducing costs. But the most obvious and direct ways of saving money around procurement may neither produce savings on the right scale, nor make use of the opportunity to improve services. “Politicians expect efficiency savings such as those from procurement to be quick and straightforward politically, but these are not necessarily the right savings,” says Sonia Sodha, head of the public finance programme at think-tank Demos.
To mend the hole in the deficit, says Sodha, politicians must also consider how to make public services more sustainable through long-term reform in areas such as commissioning, or investment in prevention services. Then, she argues, the government will be able to both reduce costs substantially, and improve outcomes. “This will be a massive challenge, because it must be achieved against a background of cuts,” she concludes. “I don’t think any of the political parties in the run-up to the election have fully grappled with the scale of the challenge.”