2 September 2010 | Nick Martindale

UK public sector buyers could look to Canada for pointers on how to make drastic cuts in the budget. Nick Martindale outlines the lessons that can be learnt

As the UK’s coalition government gets to grips with its £155 billion deficit, observers both inside and outside Whitehall will be looking to Canada for inspiration.

In the 1990s the then newly elected Liberal government in Ottawa, under prime minister Jean Chrétien slashed spending from 16.8 per cent of GDP in 1993-94 to 12.1 per cent in 1999-2000, reducing its deficit from $42 billion to zero in three years.

While there are differences with the UK’s current situation – Canada was about to enter an economic boom when it started cutting back, interest rates were falling and the federal government had a much more limited remit to start with than the UK – there are lessons to be learnt for UK public sector buyers and heads of procurement.

Much of Canada’s reduction in spending came as a result of headcount losses, with some 55,000 government employees – around a quarter of the workforce – losing their jobs. Attractive early retirement schemes and an innovative job-swap programme allowing those who didn’t want to retire to change positions with those who did helped deliver savings across all departments and avoided in the main the kind of union action we may yet see in the UK.

The other main focus was to undertake a thorough re-evaluation of what should come under the remit of the federal government. George Butts was working at the time as director at the Alternate Forms of Contracting Directorate (AFCD), acquisitions branch. Among others, he was responsible for overseeing a project to contract out the maintenance for all government-owned businesses, which had previously been done by state employees. The restructuring affected around 1,500 people in all; around 550 of whom transferred to the private sector.

“The whole era was less focused on cutting back on what the government would purchase [range of products and services] but more on cutting back its programme spending,” he recalls. “We shrank the footprint of the federal government; departments were made smaller in terms of personnel but we also shrank the programmes and services of the individual departments. There was a logical hierarchy of analytic questions departments were forced to go through. If you wanted to keep a programme alive you had to have a compelling set of answers to those questions. By and large, we terminated all the programmes.”

Seeking long term savings

The AFCD avoided the urge to impose blanket cuts, although other outsourcing projects run by National Defence imposed targets of 15 per cent. “We took the decision that anyone could save us 15 per cent on the buildings but it would be short term,” says Butts, who retired in 2007 as director general, services and specialised acquisitions management systems, acquisitions branch, in the government’s procurement department Public Works and Government Services Canada (PWGSC).

“In five years’ time the buildings would have degraded and that was a major concern to us,” he adds. “We focused on removing those 550 people from the public sector payroll and the associated costs that went along with those and when reviewed by the Parliamentary committees here we were touted as quite a success.”

At the time, Tom Wright was working as director general of both HR and regional services at Industry Canada, and found his departments on the receiving end of proposed projects being shelved. “Where the government had a contractual obligation it was honourable and fulfilled the obligation,” he says. “But where they hadn’t signed a contract they withdrew from discussions and stated clearly that they would not be carrying on with the programme.

“A lot of people were not happy. They could have been mid-stream in preparing their applications so to suddenly be told that the programme exists no more meant there was a lot of dissatisfaction.”

Overstepping the Mark

Inevitably, there were examples where – in hindsight – the cuts went too far and programmes had to be reintroduced in some form or other.

The government was forced to restart a programme in the aerospace and defence sector under a new name of Technology Partnerships Canada in the late 1990s, while Keith Parsonage, then director general of the information and communication technology branch of Industry Canada, found himself fighting against new practices imposed by PWGSC, a centralised buying facility for all federal government departments.

“In our sector, it was all about going for total low-cost procurement,” he says.

“It wasn’t about solution buys. The industry was advocating very strongly that you had to get better buys for your dollars. Well, you
may get the cheapest PC on the desktop but you’ll just pass somewhere else the cost of servicing it and your overall costs will go through the roof.”

A different tack

Within PWGSC the drive for cost savings meant a change of approach. “One thing you need to be careful about is not to treat your suppliers as partners,” says Alan Williams, who was assistant deputy minister, supply operations service, at PWGSC in the 1990s and effectively headed up the government’s contracting process.

“This went against the trend at the time with private/public partnering. My view was that the word ‘partnership’ conjured up the wrong kind of image. That was very important in not trying to obfuscate accountability, which to me is the key thing whenever
you want to successfully negotiate and manage contracts.”

Williams did, however, work closely with both industry associations and suppliers to establish how things could be done more effectively. “The worst mistake you can make when you’re in the government is thinking that you know it all,” he says. “The fact is you don’t. Industry associations are much more aware of the leading practices in the private sector and also commodity line from commodity line. You need to make sure you tap into that.”

With suppliers, this approach included sending out drafts of requests for proposals and asking for feedback on whether there were certain terms and conditions that could restrict competition from bidders. “If I thought it needed it then we would modify it to facilitate competition,” he says. “There’s no doubt in my mind that competition is the best way to drive down costs. There are some times when you can’t do that and we did have experts in the organisation so if we did have to sole-source it at least we’d look at their books, materials, overheads and try to determine a reasonable profit. But the objective is to know the industry and try to create a competitive marketplace.”

Noel Bhumgara was director general of the science, informatics and professional services directorate in PWGSC until his retirement in 1997. He confirms that the emphasis was very much on competitive tenders rather than renegotiating deals with existing suppliers; something the UK government has hinted at doing.

“Hammering suppliers to reduce their costs was tried later on when the department went through a similar exercise about five or six years ago and frankly it was a disaster,” he says. “You either have a competitive process and accept that will yield you the best market price or you have a negotiated process. The two are quite different.”

Bhumgara was also responsible for switching from a system where the individual directorates would have “source lists” of preferred suppliers to one where anyone could bid. “This was pre-internet days but we did have dial-in facilities so people could dial in to the computer and look at what was available,” he recalls. “It’s now become standard procedure that we publish everything on the internet and that process itself is actually done by a private sector company.”

His advice to the UK’s procurement heads is to undertake a thorough review. “Look at your processes and see whether there is any possible efficiency you can squeeze out of them, and have the mindset that if someone else can do it more efficiently than you then to go ahead and do that.”

Focus on local

Working closely with suppliers was also pivotal at a regional level, according to Christine Reardon, who held various positions as director of purchasing in the 1990s, including for the region of York. She gives the example of setting up a meeting with road salt suppliers, where it emerged that putting out the tenders at the wrong time of year was pushing the price up because it failed to give suppliers enough notice for them to plan to have the grit stored locally. 

“No one had ever talked to them about that,” she says. “It’s thinking outside of the box; meeting with suppliers and finding out what it will take to reduce the price. Maybe it’s a longer-term contract. It might be any manner of strange things but it needs to be a partnership with the government and the vendors.”

Ultimately, though, purchasing can only be part of the solution. “Procurement alone cannot do it,” says Bhumgara. “If you create a true competitive environment then it will give you what it can but it won’t give you 25 per cent or anything close to that. The real savings are going to come from getting out of the business and getting somebody else to do it faster and cheaper.”

Nick Martindale is a freelance business journalist