10 November 2011 | Steve Bagshaw

"Procurement ain’t 
the most sexy thing, but 
look at the numbers – the numbers are sexy”, Professor Marc Day told The Times last month on the launch of the report Why public procurement is central to the UK’s economic performance… and how to transform it.

Indeed, £37 billion is a ‘sexy’ sum to everybody. And that’s what the report estimates say could be eliminated from UK public procurement spend before the next election and “up to £70 billion over two parliamentary terms”. Although most Times readers don’t work in government procurement, they are taxpayers. And the report offers a great deal of interest for this, much larger, non-buyer constituency as it focuses on how these savings can “reduce the need for spending cuts, improve service delivery and boost economic growth, to provide a boost for UK PLC and knock £1,000 off income tax”.

And unlike previous reports on this topic, it looks not only at procurement’s current remit, but also at those areas for which it doesn’t (but could) take responsibility. “The vast majority of [public sector] spend awaits transformation and the value associated with it remains largely untapped,” estimates co-author Jon Hughes: that despite endless efforts, reviews and reform, much of the spend hasn’t been affected by procurement at all.

And he says the only way in which this can be changed will be “procurement becoming a much stronger core competence for the delivery of government policy”.

Public sector procurement in the UK is no stranger to criticism, with a raft of high-profile and negative reports over the past 20 years – and probably longer before that, although records prior to the 1990s are difficult to locate. In addition to reviews, assessments, reports and probes, things don’t ever seem to get better. And the review by Future Purchasing and Henley Business School suggests the philosophy underpinning previous reform efforts is wrong.

But maybe this could be a turning point, an opportunity to take a different view to the range and method of public sector procurement? Aside from The Times coverage, reports have appeared in the Financial Times and the Guardian. And according to Hughes the report has “received a positive response… and there is certainly a clear agreement that procurement reform presents a considerable opportunity, and one that has not been fully realised”.

The report has high-level backing. The government’s own chief buyer John Collington has agreed to meet the authors to discuss it further. “I welcome this report; it is well written and it recognises that procurement is at the heart of reducing the deficit. My challenge for the authors is the presumption that the [existing] baseline contracts are not very good, that they are not thorough. That will be something I will bringing up with the authors,” he told SM.

Suggested Improvements

The research project is an “unauthorised biography” of UK public sector procurement. Hughes says they had no direct help with the research, but it is a huge, wide-ranging and comprehensive paper that approaches the issue of transforming public procurement in six categories: value, spend, options, structures, processes and people. It also examines six large spend areas: NHS; local government; central government; Ministry of Defence (MoD); education and welfare; and Private Finance Initiatives (PFI).

Overall, it paints a bleak picture of public sector buying, with a lack of both skills and political backing. Many of these areas will be familiar to SM readers (boringly so for public sector buyers themselves).

It calls for “a step change in 
structures, authority to act, roles, resources, leadership, accountability governance, process excellence, defined ways of working, programme and project management, performance-based remuneration and incentives”. That 
doesn’t leave much.

But where this report takes on the argument is in two main areas – a positive nod towards the Efficiency and Reform Group (ERG) – and calls for previous reform models to be overhauled.

So what does it actually recommend? In broad terms:

•  Reform of the procurement 
reform model.
•  A cabinet minister whose role would be to scrutinise all public sector spend.
•  The Parliamentary Public Accounts Committee to monitor plans for 
future spending.
•  An alignment of procurement transformation with government 
policy goals.
•  That spend is broadened to include 
£243 billion procurement, as well as 
£267 billion of PFI and £52 billion of nuclear decommissioning costs.
•  Changing organisational structures to address collaboration and aggregation.
•  The implementation of modern category management techniques while streamlining bureaucracy and EU regulatory constraints.

But how will these objectives 
be achieved?

•  Reform of PFI projects by extracting substantial, multi-billion pound concessions from the industry, renegotiating contracts and imposing clawbacks, thereby securing a sustainable deal for the taxpayer and reducing unaffordable and unfair financial burdens on, for example, hospitals.
•  All key parts of the public sector to produce their own procurement reform and business plans on a rolling annual basis and introduce systematic annual reviews and scrutiny of them.
•  Setting up a network of procurement-orientated non-executives and 
external advisers capable of 
championing procurement with the
 most senior executives in the public sector, supporting them in the 
creation of procurement reform 
plans and monitoring their 
successful implementation.
•  Injecting, as a matter of urgency, stronger and best practice procurement in order to drive procurement productivity, professionalise the function and reduce the unacceptably high failure rate of major procurement exercises. Adopt a return-on-investment model to pay for this.
•  Setting up a Government Procurement Academy and similarly high-quality performance-based learning initiatives, in alliance with CIPS. With the initial focus to be on high, added-value staff in order 
to build category, supplier, contract and programme management skills that can 
be rapidly deployed on major projects closely aligned with the policy goals of 
the government. 
•  Committing to meaningful expenditure data analysis and publication of the UK-wide public sector spend map.
•  Accelerating the process and procedural simplification of EU procurement regulations and increase SME access to public procurement.

Accurate Data

As is often the case, the report sees spend data as one of the main areas lacking. “Despite some improvements, the sector operates as a collection of loosely linked data silos, so obtaining a complete, accurate spend breakdown across common categories, suppliers and projects is almost impossible,” it finds.

It also goes further, estimating the total public sector supplier commitment including PFI deals to be “in excess of 
£0.5 trillion… more than double the 
£243 billion of what might be termed ‘traditional’ public sector spend”.

The report describes centralised control over total procurement spend as “impossible”, but highlights 15 
“mega categories” which account for “90 per cent of government spending”.

This is the meatiest part of the whole report: that “need to be impacted with the right cost improvement and value maximisation, as well as managed at the right level through a range of fit-for-purpose structures, full application of modern procurement practices such as category management and with real evidence of high-quality professional leadership”. These, it concludes, “are the mission-critical element that enable the ‘elephant of procurement’ to be consumed – all in very large but manageable chunks”.

It also advocates “broad but explicit goals and milestones, which are monitored and reviewed annually”. 
And it continues, “this should be owned by a senior politician at cabinet level… with full reporting to parliament and 
the public”.

So where will some of the
‘big wins’ come from?

•  A rejuvenation of e-auctions and price analysis and to remove “absurd disparities much ridiculed by the national press”.
•  Supplier and contract renegotiation.
•  A shift from “price taker” to “price maker”, restructuring price, fundamentally changing supplier remuneration models, shifting the focus on to value-based pricing, payment by results and outcomes delivery.
•  Specification rationalisation and complexity reduction by simplifying specifications, removing gold-plating, de-scoping, standardising business requirements, reducing over-design, buying off the shelf when possible and policies to stop multiple variants.
•  Improved post contract management – 
the “Yeti of modern procurement – 
much talked about, but rarely seen”.
•  Changing organisational, leadership, structural and business models.
•  Mandation and more formal control of decision-making.
•  More outsourcing (not withstanding the perception that these deals often end badly).
•  New service delivery models with a 
focus on payment by results and voluntary sector support and even in some cases outsourcing to a free-standing independent procurement agency.

The report also moves on to tackle six large individual spend areas, assessing the issues faced and suggesting solutions.

NHS

Challenge: “There is substantial internal evidence that effective competition and choice makes all providers raise 
their game. Monopolies rarely drive 
either operational efficiency or 
customer responsiveness.”

Recommendation: “Chief executives and senior medical leaders should be held to account as a matter of urgency for rapid implementation of procurement reform plans within hospitals and across the sector. Finally, PFI hospital liability of 
£65 billion needs to be renegotiated and significantly reduced.”

Local government

Challenge: transformative savings of 20-30 per cent are needed in three areas: 
a change in expectations of service provision, business and service delivery models that maximise value for money and the consolidation and merger of

procurement points [people who spend] to maximise the £50 billion total spend across 600 councils.

Recommendation: this is not just about cost cutting and implementing the thousands of savings plans that have already been identified, but embraces a fundamental rethink of service provision.

Central government

Challenge: encouragingly, the ERG’s Government Procurement Model has now been launched and there is considerable scope for aggregation across common categories, and the ERG has set a benchmark of 25 per cent savings over four years from the baseline spend of £13 billion.

Recommendation: this is a relatively straightforward area for procurement transformation provided senior professional leaders in the function genuinely buy in to a pan-governmental collaborative regime.

Ministry of Defence

Challenge: the Public Accounts 
Committee remains convinced this is 
the most dysfunctional government department, whose procurement system is neither fit for purpose nor affordable for the taxpayer. The acquisition system is fundamentally flawed and the budget is being cut by 7.5 per cent by 2014/15.

Recommendations: deep changes in strategic leadership, accountability, structure, competence and capability are required if the “cycles of failure” are to be stopped. Build a new culture of procurement; inject best practice; rationalise “gold-plated” specifications; explore collaboration with NATO partners; renegotiate hundreds of contracts; adopt stronger category and supplier management, all the while focusing on the 20 biggest programmes and ensuring they are 
delivered to time and on budget.

Education and welfare

Challenge: in both departments there is a similar vision of extending choice and competition while addressing the policy failures of the past.

Recommendation: reform requires an increasingly autonomous structure through academies, free schools and new providers encouraged to enter the system. Independent providers have an interesting challenge to the mechanisms to use for leveraging common procurement spend across organisations operating on a decentralised basis.

PFI

Challenge: the liabilities across 650+ operational projects should not be exempt from government savings goals. The challenge is how to harness total procurement power to renegotiate with the PFI industry, contractors and investors to secure a better deal for the taxpayer.

Recommendations: there are three avenues to explore. First, seek voluntary rebates from the sector and sign them up to a number of clawback mechanisms reflecting unforeseen efficiency gains for providers in the operational phases of agreed contracts. Second, name and shame recalcitrant providers and investors, bearing in mind many are major banks and leading UK plcs. And if these fail to work, introduce a blanket levy through legislation.

Overall, it calls for “a step change in structures, authority to act, roles, resources, leadership, accountability governance, process excellence, defined ways of working, programme and project management, performance based remuneration and incentives”. And underpinning this is the buy-in from the very top, what Cabinet Office minister Francis Maude referred to as the “political will”. The absence of this will was, in his view, why previous attempts to reform failed. He believes the deficit reduction strategy provided the impetus for that will.

This transformation is considered a major organisational change and will involve large-scale investment in capabilities and competencies across the devolved structure. Without this, sufficient momentum will not be generated to affect the majority of spend.  

The report welcomes the work of the ERG and of the politicians behind it, particularly Maude with his “advocacy for mandation and a complete change of approach”. But
the report is concerned at the “small percentage of total expenditure”. It calls for the formation of a “Star Chamber” of politicians and policy advisers to “broaden the focus and embrace defined goals and common initiatives capable of reducing the structural deficit by a third through total procurement reform”.

Engaging senior figures, including permanent secretaries who actually control the expenditure, with third-party suppliers as well as a group of procurement-orientated non-executives and external advisers would give objective guidance.

It also calls for government CPOs, commercial directors and public service commissioners to “evolve into an aggressive, proactive and demanding UK-wide group that frames, drives and funds policy initiatives with a focus on competence, capability, professionalisation and performance”.

Further, it requires high-calibre individuals to drive through major procurement exercises and who are capable of transforming the perceptions of senior stakeholders.

But all this takes time, as examples from the private sector demonstrate, and one that will be “mapped out over a number of years while simultaneously building immediate credibility on shorter term performance. But creating this kind of capability and competence requires investment in structures, process and people.”

Reactions

Peter Howarth, CEO of the Society of Procurement Officers in Local Government and managing director of SBV.

This report is a timely intervention in the public procurement debate.

But the emphasis on price management has resulted in real sustainable improvements in contract management, demand management, supplier management, and so on, being overshadowed. The report rightly identifies this as one of the solutions.

The scaling up of leadership is of paramount importance, but leadership has to be evident not just at central government/ministerial level, but also at the local level in local authorities, government departments, defence units and hospitals.

Without doubt, a fundamental review of the current PFI situation is paramount. Despite recent reviews, there is still misunderstanding in the public sector with regard to the process.

You cannot disagree with the fact suggested by the report about the importance of meaningful spend data. Much of that data is already available within public sector organisations and with a modicum of help can be relatively easily accessed. However, access isn’t the problem, it’s knowing how to make use of it and communicating it to those who need to be aware of it.

A similar problem exists with regard to cost and price structures. There is still a lack of understanding as to how prices may be determined, which is just as likely to be what the market will bear as a sophisticated costing mechanism. An improvement in writing specifications, category management and supply chain re-engineering as suggested in the report are obvious solutions.

The biggest problem here is the lack of skills and knowledge across the sector (and the private sector, too) coupled with an ability to implement such improvements at the operational level.

This will require considerable investment across the public sector in training. The availability of professional procurement and commercially orientated people in the public sector is thin on the ground. Current training budgets need to be directed towards a skills need for a wider proportion of public sector employees than even the report alludes to.

Andy Davies, London Universities Purchasing Consortium, director

It’s the recommendation about PFI contracts that grabs my attention. There’s no doubt that there will be savings available from renegotiating PFI contracts. But this is so much easier said than done and raises a number of key questions, such as:

• Who will do the negotiating? PFI contracts are notoriously complex and require specialist expertise in procurement, finance and contract law. These contracts have been let over an extended period from the early 1990s, so to re-negotiate or attempt to re-finance them all in a short period of time to realise savings in this or the next parliament would entail mobilising a massive effort. Doubtless this will mean engaging consultants, lawyers and advisers from perhaps the very firms that assisted the public sector in doing the deals in the first place – and at great expense!
• Renegotiation will mean incentivising the private sector to reopen discussions. PFI contractors will also need to engage advisers – at some considerable cost. They will also look to get a good result to deliver to their shareholders – they’re not about to relinquish the value built into PFI contracts out of the goodness of their hearts. They will expect something in return. What can government offer them?
• Likewise the banks, who have billions of pounds invested in these assets through debt finance delivering a healthy return for them, aren’t exactly overwhelmed with alternative, sure-fire investments that will deliver profits to their shareholders. What’ll be in it for them if they renegotiate?

What I do think will help is making sure that client-side contract management teams are properly trained and resourced to manage PFI contracts effectively. Naturally, contractors will exploit opportunities to maximise their revenues from these contracts and they require proper management to minimise this effect over the term of the agreement. The past 20 years has been littered with examples where, having gone to great expense putting a PFI

deal in place, contract management is then under-resourced on the client side, leaving the door open for contractors to take advantage. That’s what’s led to costs running away.