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Stepping up to the challenge

Monday January 18th, 2010

By Morven MacNeil, GO Features Editor

In the last issue of GO we analysed the approaches being taken by the major political parties to public spending in the coming years. In this final instalment, GO looks at the possible impact these proposals may have on procurement and the key issues that are likely to arise in the sector.

New year, new Government? New policies? Public spending changes? With a General Election imminent, the major political parties have been unveiling their plans for the next term of office, and at the heart of these plans is public spending. This is hardly surprising; since the start of the recession, public spending has been perhaps the hottest topic in government, with the key theme being ‘how to do more with less’.

Political party announcements – a recap

Chancellor Alistair Darling’s 2009 Pre-Budget Report (PBR) confirmed that the Government will keep to its previous departmental spending plans for 2010-11 to help support the economy through the downturn. From 2011-12 onwards, however, spending growth will reduce to help halve the budget deficit over the next four years.

The PBR also announced an additional 0.5 per cent increase in employee, employer and self-employed rates of national insurance contributions. As a result, public sector current expenditure will grow by an average of 0.8 per cent a year from 2011-12 until 2014-15. Public sector net investment will move to 1.25 per cent of GDP by 2013-14 and will remain at that level in 2014-15.

Commenting on this announcement, Councillor Margaret Eaton, Chair of the Local Government Association, said: “The Chancellor has rightly recognised that central government needs to cut its cloth. Reducing administration and red tape could save £4.5 billion a year before local services are affected. There needs to be a bonfire of red tape so that taxpayers’ money can be freed up to protect frontline services.”

The PBR has announced new efficiencies and reforms across the public sector, including £11 billion of savings by 2012-13 through smarter government, for example through rationalising arm’s-length bodies, greater use of online systems for providing advice and information to the public, cutting consultancy spend by 50 per cent, and better management of government assets.

The Conservative Party said they will save an estimated £7 billion-plus a year in government spending by the end of the next Parliament, or more than £23 billion over the full term of the Parliament. These savings would come on top of the longer-term savings achieved by raising the state pension age.

Conservative Shadow Chancellor George Osborne said the Government should set out plans to reduce the administrative costs of Whitehall bureaucracy and quangos by at least one third. This would reduce government spending by £3 billion a year by the end of the next Parliament, or by more than £7 billion over the life of the Parliament.

Liberal Democrat Shadow Chancellor Vince Cable said that if public spending is cut in the usual way there will be ‘great damage to local and national services’.

He said civil service bonuses and the culture of massively inflated salaries would be cut by the Liberal Democrats and that a freeze in the total pay bill would be better than cuts in services. With public spending at the forefront of the major parties’ plans for reform should they gain power, it is inevitable that procurement will be at the heart of achieving the next Government’s goals.

Whitehall sources have suggested to GO that the role of procurement would almost certainly increase irrespective of which party wins the election, with the likelihood of the current agenda of greater sharing and collaboration across boundaries continuing. published alongside PBR 2009, stated that the Government is looking to expand the most successful shared services centres with a view to potentially creating the first public sector shared-service company. A specialist company of this kind could then offer services across the public sector, providing a platform for public organisations to transform their backoffice functions more easily to reach private sector benchmarking levels.

The Operational Efficiency Programme (OEP), which was set up by the Government to look closely at achieving greater efficiency in a number of crosscutting areas, said in its final report that progress in central government shared services should be accelerated by consolidating existing shared back-office centres to provide a robust shared services offer to central government (including agencies and nondepartmental public bodies). The target is to deliver upper quartile performance for all those using the shared service and drive out cost savings of at least 25 per cent within three years. The OEP report also stated that a similar drive towards greater use of shared services should be encouraged across the wider public sector.

Terry Street, Principal Consultant and Procurement and Outsourcing Manager, Socitm Consulting, said: “Many organisations – particularly in local government – have had this on their wish list for some time, but it seems to prove easier to share Chief Executives and other senior personnel than frontline and support services. Many organisations are locked into long-term contracts with private sector suppliers and others find it difficult to maintain the crucial integration between front line and back office when frontline services are shared. The same goes for support services where neighbouring councils, for example, may use very different key systems that facilitate very different work patterns. One key area where collaboration can produce major savings is shared procurement – not just in terms of reduced administrative costs but also in achieving economies of scale.

“Within the organisation, the days of multiple HR services within a single organisation, to take one extreme example, are clearly past; waste and duplication should by now be no longer visible in organisation charts or in business processes. Procurement services, to take another example, should be working across the organisation and ensuring that managers can safely delegate procurement to the professionals.”

Peter Howarth, CEO, Society of Procurement Officers in Local Government (SOPO), believes that we will see an increase in the number of shared services and shared resources in terms of procurement provision. He said: “Smaller councils will increasingly move towards a shared service for procurement activities to gain economies of scale in terms of the cost of procurement and also to put themselves in a stronger and more powerful position in the marketplace. Much will depend on the structure of local government – determined by whoever gets elected – but greater regionalisation of some sort will prevail.

“In terms of shared resources, procurement has led the way since the 1970s (a fact conveniently overlooked by those who think it is a new idea) in terms of consortia arrangements and so forth. I can only see this increasing on a number of supply fronts, as procurement professionals look at different ways of approaching the market. The creation of Pro5 is a good example of this already occurring. The danger is that the baby will get thrown out with the bath water and little recognition will be given to existing best practice, as well-meaning amateurs in newly created think-tanks think up new semantics for existing practices and try to define yet another approach to procurement.”

Input from the third sector

The third sector could take a stronger lead within procurement during the next Parliament. In Putting the front line first – smarter government the Government states that “more empowered citizens taking greater personal responsibility helps create stronger and more vibrant civic society. Together government and civic society can be partners in helping change public services and holding those services to account.”

This is to be achieved by providing a bigger role for residents, parents, patients and third sector providers in shaping services in their local communities. The report also demands a concerted government effort to transform ways of supporting the third sector and civic society’s work with the public sector – encouraging more people to volunteer, unlocking new assets for community use and opening up new sources of investment capital.

The Community Assets Programme (a £30 million programme to transfer public buildings to local organisations), aims to empower communities by encouraging the transfer of underused local authority assets to local organisations. It will enable the refurbishment of 37 underused local authority assets which will subsequently be transferred to third sector ownership, investing up to £30 million.

Mr Street said: “Developments such as the use of individual budgets will tend to encourage what is already a growing move towards the third sector, but the issue of governance cannot be ignored. Ensuring that inhouse social care professionals, for example, always follow best practice is hard enough; imagine the outcry when a third sector volunteer or whatever fails to protect a child or abuses their position. Data protection and privacy issues are likely to come to the fore. There is a public sector ethos of serving the public and respecting individuals’ privacy; third sector people may not be quite as professional in their approach, and low pay levels may exacerbate the situation.”

Mr Howarth believes that the third sector is still ‘a great untapped resource’. He said: “Procurement professionals need to take a close look at what is available, sometimes right under their noses. However, where potential exists for a competitive and commercial approach (which is not always appropriate) to third sector involvement, then this should be carried out without bias to the other sectors. What needs be looked at is the approach to specification, evaluation and outcomes which might influence the ability for third sector organisations to compete on a level playing field.

I hope that any incoming Government will look at any arrangements for the greater involvement of the third sector, to provide real value for money as well as social benefits. It is possible to achieve both a hard-nosed commercial price-driven approach and a soft patronising approach to involving the third sector.”

With regards to possible business/third sector supplier partnerships, Mr Street believes that governance is the issue. He said:“There are quite enough exploitative gang masters in the private sector. Business and third sector partnerships may be very attractive at first glance but service quality and accountability are less easy to outsource than many pretend. I am not aware of many public sector frontline employees who are visibly overpaid; what sort of wages and working conditions would enable real savings to be made?”

Transformational change Financial Secretary to the Treasury John Healey MP announced the publication of the Transforming Government Procurement report in January 2007. This unveiled a range of public procurement reforms to equip the UK with the capability to deliver world-class public services in the face of the growing challenges of global competition, changing demographics and increasing pressures on natural resources.

Since its publication, ‘transforming government’ has been a key theme in procurement and looks set to be a major element in sustaining any public spending cuts.

Mr Street believes that transformational change should be the key focus for the public sector in the coming year. He said: “All political parties would agree with this, given the financial situation. To be significantly cheaper and yet provide as good or even better public services can only be achieved by radical change in how the public sector does business. This could be promoting the use of cheaper customer access and service channels and ensuring that information flows are electronic end to end. Home, mobile and flexible working, enabling much reduced spend on office space and related infrastructure costs, is another point. Redesigning processes to eliminate duplication and waste and to squeeze out costs, more effective use of outsourcing and much stronger control of outsourced suppliers are other areas where transformational change can be used.”

Mr Howarth said: “With regard to transformational change, only a fool would suggest change is not necessary in the public sector as a whole or in public sector procurement. However, the endearing belief that all will be well if it is left to the private sector to come in and manage this transformation will only herald another false dawn. Is this not the same sector that in some cases managed to miss the move from large computers to the personal computer, that failed to recognise the portents in the subprime market, that finds difficulty in communicating with its customer base through inefficient (although no doubt profitable) call centres? I could go on, the point being that we need to find a route that identifies and builds on the best practice from all sectors (including the third), and brings a balanced and effective approach to the delivery of public services of all types. Lurching from one sector to another and yet another in the hope of finding Utopia will not work.”

Cost savings

Most organisations today have gone through multiple rounds of cost cutting. Senior executives now face very difficult decisions about how to further reduce costs, without negatively impacting operations. The challenge the public sector may face now is how to cut costs further while still maintaining quality services.

On this topic, Mr Street said: “Contrary to politicians’ electioneering pledges, there is very little fat that can be easily cut out of public services. Major cost savings can be made but require transformational change. You can only save millions on office space, for example, if you’ve effectively banished paper, reduced office-based staff to the minimum, integrated your communications and rationalised processes across the board. It can be done, but requires a multi-year programme. Random cuts achieved by aiming for ‘low-hanging’ fruit could actually harm the prospects for real savings. That said, better procurement can usually achieve year-on year-savings and there is considerable potential in reviewing current contracts and renegotiating them selectively.”

Mr Howarth believes there are alternative avenues that procurement professionals should follow. He said: “If cost savings are seen as the only role of good procurement then the incoming Government will be missing a trick. Although obviously the move to reduce costs is important and necessary, greater savings can also be achieved through better demand management of clients and providers. We also need to look at better ways of leveraging additional benefits from the procurements we make that make better use of the resources available. This can result in wider benefits being realised than may be first envisaged, adding greater value to the outcomes achieved, and therefore creating better value for money for the public sector as a whole. The obvious link here is to wider policy objectives such as the sustainability agenda.”

Contracting for services

Mr Street says that massive changes are not going to happen overnight with regard to the public sector contracting out services. He commented: “Unless very carefully controlled, outsourcing can sometimes prove more expensive, so many of the services provided directly by public sector employees will continue to be for the foreseeable future. Ultimately, though, the council or other government body of the future will focus more and more on buying in services (on short contracts wherever possible) than on providing them itself.”

In terms of the public sector continuing to contract out services, Mr Street thinks this is ‘inevitable’. However, he added: “I hope the powers that be realise and make arrangements for the fact that outsourcing a service is only the first step in the process. Adequate provision has to be made to ensure these contracts are managed properly by trained professionals and that contractors are not left to their own devices, otherwise we will be left with spiralling costs, increased (supplier driven) demand and service delivery, which take little account of the overall goals of councils and other public sector organisations but which are driven by the objectives of the contractor –  eg maximised profit. Several years ago the National Procurement Strategy suggested we let and then forgot contracts; we still do, because we still fail to resource the ongoing contract management activity properly.”

What next?

The next few months will be a waiting game, and until the General Election is over, no one can give a certain answer as to the fate of public spending. However, going by each party’s communications so far, procurement is going to play a pivotal role in reforming public spending while maintaining quality public services.

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