Procurement and cost reduction in UK central government

PAC report has relevance to public and private sector procurement.

The Public Accounts Committee (“PAC”) published its report last week, ” Cost reduction in central government: summary of progress“. The report may be of interest to procurement stakeholders in both public and private sectors :

  • Procurement is critical to achievement of deficit reduction and provision of (maintained) frontline services.
  • The report contains messages that apply to any organisation seeking to make savings through procurement initiatives.
  • The PAC  makes observations and recommendations regarding the approach to achievement and measurement of savings.

The PAC concluded that future spending cuts may not maximise efficiency in delivery and may have a greater than intended impact on frontline services. Followers of my blog will be aware that I have commented at some length on the risks to business performance posed by procurement cost reduction programmes. The PAC conclusions and recommendations (in my view) in large part make perfect sense, though some lack foundation.

First I want to make clear this is not a politically motivated piece. There has been too much misrepresentation, by politicians and the media, of what is actually going on with regard to austerity measures. So let’s get the politics out of the way. According to the PAC, the progress and plans are as follows:

  • Government departments  reduced spending by £7.9bn (2.3% in real terms) in 2010-11 compared to 2009-10.
  • The deficit reduction plans require public spending to fall by £77 billion by 2014-15 compared to the pre-2010 Budget assumptions.
  • Most departments need to reduce spending by a further 19% over the next four years.
  • The Cabinet Office predicts £16 billion of cost reductions from efficiency savings in central government and £20 billion from the wider public sector.
  • The need for cost reductions will continue into the next Spending Review period extending the time over which savings will need to be found to at least eight years.

What does this tell us?

(a) The fall in spending to date is small (hardly austerity!) and is comparable with (or less than) Labour’s proposed cuts  at the time of the 2010 election.

(b) To hit the extended target for deficit reduction, future savings need to be sustainable at 5% year on year over the present term (more than double the first year’s achievement).

Moving on from the deficit reduction, what can we learn from the PAC report that is relevant to procurement in general?

Procurement lessons from the PAC report

Three of the 7 conclusions and recommendations from the PAC were particularly interesting from the procurement perspective:

  • “Most departments cannot link costs to outputs to identify the consequences of changes in spending.”
  • “It is not enough to deliver the required spending reductions by cutting annual budgets in real terms without considering the impact on services.”
  • “There is tension between the drive for efficiency savings and the localism agenda that results in a lack of clarity about the best procurement route.”

There are three messages here. The first two are clear. (1) The lack of appropriate systems and management information is a serious barrier to sustainable cost reductions.  (2) Procurement and the wider business need to understand the impact of procurement cost reduction initiatives on the business operations, and the business outputs. The third message is about appropriate organisation. This is where the PAC, in my view, jumps to a recommendation which lacks firm foundation:

The centre can contribute to cost reduction by making economies of scale through coordinating activities, for example in procurement…. The Cabinet Office is centralising procurement of common items while localising commissioning of local services…. although our reports demonstrate that better value could be secured by a more centralised approach…. we stress the need for the Cabinet Office to lead procurement across the public sector to maximise public sector purchasing power. The centre should have the option of mandating actions to secure best value.”

In an earlier article I refer to research[i] that shows the effectiveness of a centralised approach is dependent on corporate coherence and the maturity of procurement and supply management, neither of which are strong across local authorities and disparate government departments .

The use of shared services – the default approach to reducing back office costs – rarely delivers expected savings and efficiency. The public sector has a poor record in this respect. Critics[ii] argue that economies of scale in the service sector is a myth.

The PAC itself acknowledged the ineffectiveness of public sector in the delivery of savings initiatives when it reviewed the 2007-11 Spending Review claimed savings:

“The National Audit Office found that only 38% of the savings that were claimed were actually real, and 18% were simply not there at all.”

In my experience, this inability to deliver real savings is not confined to the public sector. My recent consultations with procurement professionals highlight real problems, from Procurement’s lack of understanding of real costs, to contrived savings (driven by Goodhart’s Law and the use of ‘savings’ as a measure of procurement performance).

Finally, I firmly believe that mandates are ineffective in securing the stakeholder engagement that is essential for effective procurement and the delivery of best value.  I set out my case in the article, “Are your Procurement stakeholders champions or saboteurs?

So, whilst the PAC’s conclusion, that there is lack of clarity about the best procurement route, may well be correct, the reorganisation of responsibilities requires more rigorous assessment. Further guidance on procurement organisation can be found in the series of articles (aimed primarily at the private sector ) “How to Determine Procurement Organisation.”

Centralisation of procurement may be beneficial for some categories. Local procurement of many services may also be the best option. Centralisation of some, ostensibly commodity-type procurements, may transfer responsibility for managing frontline opportunity and risk to remote and out-of-touch officials. On the other hand, the wholesale devolvement of responsibility for non-commodities to local level is reckless; the expertise may exist in pockets but not in sufficient depth and breadth overall.

The PAC is right to conclude that the proposed approach is unlikely to deliver best value, but the solution is more likely to involve central leadership and support in process and key category expertise rather than centralisation per se.  Removal of constraints on the use of external expertise – professional interims and subject matter experts rather than big consultancies – is necessary to facilitate effective delivery at local level .

The procurement lessons in summary

In conclusion the procurement lessons from the PAC are as follows:

  1. The lack of appropriate systems and management information is a serious barrier to sustainable cost reductions.  Measuring reduction in procurement spend is not enough.
  2. Procurement and the wider business need to understand the impact of procurement cost reduction initiatives on the business operations, and the business outputs.  This includes, for example, changes in process, efficiency, waste, consequential activity by other stakeholders, and value of the outputs.
  3. The organisation of procurement activity needs to reflect the nature of the impact on wider business opportunity and risk – ensuring that the management responsibilities for those opportunities and risks are vested in the most appropriate stakeholders, and are not compromised.

 

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