Published on March 15, 2013
Generating Economic Benefit and Growth Through Smarter Public Sector Procurement Generating Economic Benefit and Growth Through Smarter Public Sector ProcurementThis ground-breaking report shows how political leaders could create 2.2 million jobs through better purchasing of taxpayer-paid goods and services while cutting the U.S. deficit. www.cut-the-deficit.com Written by Colin Cram, Internationally recognized public sector expert Sponsored by Rosslyn Analyticswww.cut-the-deficit.com 1
Generating Economic Benefit and Growth Through Smarter Public Sector Procurement Generating Economic Benefit and Growth Through Smarter Public Sector ProcurementTable of ContentsPage 3 Why you shouldn’t read this paperPage 5 Purpose of this paperPage 6 Main findings and conclusionsPage 7 Understanding how taxpayer money is spentPage 9 Securing the benefitsPage 11 Selecting the appropriate procurement modelPage 13 Creating first class ProcurementPage 15 The optimum modelPage 16 The authors’ conclusionAppendicesPage 17 Appendix A: Why public sector organizations can pay too muchPage 19 Appendix B: Re-structuring procurement. The potential benefitsPage 21 Appendix C: Procurement Objectives. Delivering value and economic growthPage 23 Appendix D: Selecting the Right Procurement Model: A Comparison between Collaborative, Consortium and Integrated ProcurementPage 25 Appendix E: Understanding How the Money is Spentwww.cut-the-deficit.com 2
Generating Economic Benefit and Growth Through Smarter Public Sector Procurement Do Not Read This Report! …if you want to go bankrupt, increase taxes, deliver poor services to citizens and change nothing for the betterMunicipal debt in the United States amounts to $3.7 trillion. Many cities are facing bankruptcyand citizens are facing reduced services. However, much of this pain could be avoided throughharnessing the purchasing power of public sector organizations in a new way.Public sector organizations purchase an estimated $2 trillion a year of goods, services andconstruction, equivalent to $6,500 per adult and child. 75% of this is spent by the states andthe cities, towns and counties within their boundaries. Astonishingly, given the unimaginablescale and importance of this expenditure, there is only limited knowledge of how much isspent, by whom and on what. This means it’s impossible for it to be managed effectively.Why First Class Procurement Matters.Experience in countries such as the United Kingdom indicates that first class, integratedprocurement can deliver cash savings for the public sector of 5-10% overall, but up to 90% onoccasion. A fragmented approach to procurement, such as that found in much of the UnitedStates of America, prevents such benefits being achieved.Better purchasing of goods and services on behalf of taxpayers could: 1) Save Cities from bankruptcy. Effective management of procurement spend could prevent some cities from going bankrupt, resulting in fewer layoffs in the future. 2) Deliver huge cash savings. The author’s experience is that creating a first class integrated procurement organization can lead to overall cash savings of 20%. Even taking a lower range of savings of 5-10% overall, the better management of procurement expenditure by states, counties, cities and towns will save some $75 billion to $100 billion a year across the country. 3) Reduce budget deficits. Many states, counties, cities, and towns are running unmanageable deficits. Better control of procurement spend could help solve this. 4) Reduce taxes. Those states, cities and counties that are in a healthy financial position may be able to reduce taxes. 5) Deliver better public services or be able to maintain services that might otherwise have to be cut. 6) Create sustainable investment and growth. Understanding how taxpayer money is spent will enable authorities to target it more effectively at those companies that will create economic growth and jobs. 7) Maintain global economic leadership. The US, with competition from fast growing emerging markets such as China and India, will be better positioned to keep its top ranking as the world’s largest economy with the most political and military influence.This ground-breaking paper provides a blueprint for harnessing these opportunities.www.cut-the-deficit.com 3
Generating Economic Benefit and Growth Through Smarter Public Sector ProcurementAcknowledgementsThe author would like to acknowledge the advice and information provided by Bob Sievert,Director of eVA State of Virginia, Jon Hansen of PI Window on Business and Lance Mercereau ofRosslyn Analytics.www.cut-the-deficit.com 4
Generating Economic Benefit and Growth Through Smarter Public Sector ProcurementMAIN REPORTPurpose of this PaperCities are going bankrupt. Services are being cut. Taxes are increasing.This paper explains how the United States can harness the power of its $2 trillion annual publicprocurement spend to turn round this situation, deliver big cash savings, create jobs anddeliver extra economic growth to lay the foundation for its future prosperity. This year is a pivotal time for the United States: The country faces the largest deficit in its history; Unemployment is at an all-time high; Municipal debt amounts to $3.7 trillion; States, cities and towns are facing bankruptcies.This paper offers readers a roadmap to navigate successfully the country’s woes by sheddinglight on unrealised opportunities for procurement savings and growth, and providing viablesolutions which are not currently being discussed by taxpayers, city majors, state governors,and other elected officials in Washington, D.C.www.cut-the-deficit.com 5
Generating Economic Benefit and Growth Through Smarter Public Sector ProcurementMain Findings and ConclusionsThere are certain pre-requisites to achieving the above aims: 1) An understanding of how much is spent on what and with whom. Such data needs to be obtained nationally, by state, city, town and county. 2) An integrated procurement structure within each state, with the authority and terms of reference to secure maximum benefit and advantage from this vast procurement resource. This requires partnerships between institutions, cities, towns and counties. 3) Much stronger joint procurement between states; the above procurement model for public sector institutions between states would facilitate this. 4) Ensuring the right organizational structures have the capability through employing sufficient specialist contracting, product and service category expertise to be able to deliver the potential benefits.Overall, and despite some excellent initiatives and examples of excellence, these pre-requisitesare not in place.A second option for an integrated approach within each locality or city, but not the state-widestructure as proposed above, was considered; but this will not produce anything like thebenefits of the preferred model.Public sector procurement is improving through the increasing employment of procurementprofessionals, often externally recruited, and increasing collaboration between and, in someinstances, within states.However, procurement remains generally fragmented and therefore all too often unable todeliver the opportunities listed above to the degree required for sustained savings. This paperexplains that it is vital for there to be a comprehensive understanding of: How the non-Federal procurement spend of $1.5 trillion is spent; How that information could be used to deliver cash savings and help boost the economy; and, How procurement could be organized to be able to deliver the cash savings needed and other economic benefits.But, without adequate data, it is impossible to develop the right strategies that will deliver thecash savings that are required and to support national, local and state economies. Nor will it bepossible to measure their impact. But if it isn’t measured, it can’t be managed.This paper describes how adequate data could be obtained relatively quickly and cheaply,despite the myriad of different finance systems in use by the government in various capacities.The right analysis will enable public sector organizations to determine the right procurementstructures and collaborative models that will realize the maximum cash and economic benefits.www.cut-the-deficit.com 6
Generating Economic Benefit and Growth Through Smarter Public Sector ProcurementThis paper is a tool that can be used by the authorities to determine how to achieve thisoutcome. However, big benefits are rarely achieved without fundamental change, which publicsector organizations tend to be loath to do.Understanding How Taxpayer Money is SpentHarnessing the potential of public procurement is notabout central planning by the Federal government or the An understanding ofindividual states. It is about the smart investment of procurement expendituremoney provided by the taxpayer. combined with anHowever, it will require an intelligent dialogue between integrated procurementthe states and the cities, towns and counties and other organization can deliverpublic sector bodies within their boundaries about howto secure maximum benefit from these assets. This cash savings of 20%, andwould need to be based on evidence about how this huge up to 90% in someresource is used and spent. Equally important, there instanceswould need to be an intelligent dialogue with businessabout current and future spending plans and trends. Thisis what the most successful businesses have to do, and the public sector should emulate them.The United Kingdom has recognized the importance of addressing its public sectorprocurement expenditure in order to tackle its budget deficit. However, despite excellent workin some sectors, it has still not undertaken a nationwide public sector-wide data analysis of thekind proposed below.The author’s experience in the UK is that an understanding of procurement expenditure,combined with an integrated procurement organization, can deliver cash savings overall of20% – and up to 90% in some instances. In those parts of the UK public sector whereunsuitable legacy structures continue, not only are potential savings often unrealised, butcartels have been able to operate (such as in the construction industry), which may have over-charged local government authorities by $500 million in three years. Suppliers will frequentlyhave a more complete picture of public sector spend with them on particular productcategories than public sector organizations.In the United States, procurement data is patchy. This means that procurement spend cannotbe optimised either in terms of best value, supporting innovation or investing most effectivelyin the overall United States, state and local economies. This disadvantages even the bestprocurement teams. For example, there is no national database on how much is being spentoverall and with whom. The Federal government has much spend information and many statescan provide a pretty good indication of their procurement spend – some in much detail.However, within each state there is varied and often limited information overall onprocurement spend by city, town, county and other public bodies such as universities. Inparticular, information is generally lacking on the amount of expenditure that is with suppliersbased within their geographical boundaries.www.cut-the-deficit.com 7
Generating Economic Benefit and Growth Through Smarter Public Sector ProcurementThere are thousands – probably tens of thousands – of finance, procurement and otherenterprise systems in use, often with little compatibility.However, turning this into usable data for analysis in a common format, which can becombined to give local, regional and national pictures, can be achieved by downloading the rawpayments data from such systems, converting it to a common format and manipulating it. Theauthor has demonstrated that this can be done in a variety of environments. This enables thestarting point to be established. Ordinary transactional payments data is adequate. Throughthe manipulation of the raw data, a wealth of information could be obtained nationally, bystate, by city, by type of institution, by institution and locally. This would include: Expenditure by supplier. Identifying spend with common suppliers. Where, geographically, the money is spent. How much is spent with local suppliers and Expenditure with small businesses. There is no national A more complete list is to be found in Appendix E. database on how much Analysis commissioned by the author in the United is being spent overall Kingdom suggests a much greater commonality than and with whom expected between different types of public bodies, e.g. universities, municipal authorities. A similar picture seems likely to emerge in the United States (paragraph 7, page 9 refers).In short, such data analysis provides the platform to devise the best procurement strategies todeliver agreed objectives of public sector organizations and the most suitable procurementstructure to do so.Such data analysis is ideal for individual organizations, that do not have sophisticatedprocurement information systems, to understand their procurement spend better and identifyopportunities to make savings, deliver better value for money, understand their impact on thelocal economy and how to enhance it.Ideally, however, each state should work with the cities, towns, counties and other publicbodies to understand how public sector procurement is being used and to obtain an overallpicture state-wide, by type of public body, regionally within the state and down to locality. Notall organizations would agree to take part, but as long as enough did, it’s possible to obtain apicture that was good enough to be able to develop a strategy to deliver the agreed objectives.Agreeing such an analysis could be protracted, and quick wins could be obtained in themeantime by individual cities, towns and counties in commissioning their own analysis for thepublic bodies within their boundaries.www.cut-the-deficit.com 8
Generating Economic Benefit and Growth Through Smarter Public Sector ProcurementSecuring the BenefitsEstablishing a suitable procurement structure, whether within a state, county, city or town orfor collaboration between them, is critical to maximising agreed financial, economic and socialbenefits. A comprehensive spend analysis of the kind indicated above is vital to helpingdetermine the most appropriate procurement structures, where and how value can beobtained and how the benefits of investment through procurement can be maximized.The right structures, reasonably resourced, will be able to employ the best specialists – onbehalf of all. Top class category managers, with suitable commercial freedoms, can deliverexceptional results compared to a good non-specialist. They can work up and down the supplychain, taking out cost.A positive development is the recruitment of first class procurement professionals by manypublic sector bodies - so the expertise to be able to make use of detailed data on procurementspend exists in many places across the country. There is also increasing collaboration betweenthe states on procurement, supported by the National Association of State ProcurementOfficials (NASPO).Any potential collaboration should start with: 1) A clear set of objectives (Appendix C refers). The procurement objectives would be integrated into those of the organization(s) as a whole. They would According to the State of be measurable and would cover value for money Virginia, there’s significant (The National Association of State Procurement commonality of purchase Officials has produced guidance on this), what is spend between the state, spent within the state geographical boundaries, how cities, towns and counties. It’s much is retained and how much is devoted to safe to assume this supporting innovation and small, developing commonality exists in every businesses. other state. 2) Comprehensive and integrated data on procurement expenditure and the achievement of objectives.From this, organizations can determine the collaborative procurement structure that is fit forpurpose, contains the expertise that is needed, is accountable for results and has the authorityto deliver them.A purchase spend analysis by the State of Virginia, using data from its first class ‘Total e-Procurement Solution’, indicates significant commonality of purchase spend between the stateand the cities, towns, counties and other public sector bodies within it. It is reasonable tosuppose that similar commonality exists within every other state. Therefore there are manycategories of goods and services where all the bodies within each state could maximise theirpurchasing power in order to secure better value for the taxpayer and to achieve otherobjectives such as investing in innovative and potentially growing businesses.www.cut-the-deficit.com 9
Generating Economic Benefit and Growth Through Smarter Public Sector ProcurementHowever, as companies such as Wal-Mart demonstrate,securing best value requires specialist category productexpertise. Such in-depth product expertise possessed by the The budget for atop class category specialists tends to be rare. Were it joint/integrated procurementavailable so that each state, county, city and town could organization can be 15-25%employ all the specialist expertise they required, the size of less than the combinedthe procurement teams would be unaffordable. Also, for costs of the procurementeach of these organizations the limited volume of work in organizations it replacesmost categories would mean that most category specialistswould be under-employed. That means that most publicsector bodies have to ‘get by’.Specialist expertise goes beyond individual categories and includes activities like the letting ofmajor contracts. One only has to be aware of the problems and added cost that badly let andmanaged contracts can cause in order to be aware of the value of such expertise. Again, feworganizations within a state geographical boundary will be able to employ the expertise that is required. An ideal model is to ensure that the expertise of the best would be available to all and collaboration can help achieve this. A major government organization, in the mid- Evidence that joint and collaborative procurement can 1990s, saved 20% – $96 bring benefits comes from the collaboration between state million per annum overall – procurement officers and the number of collaborative by bringing together the arrangements that exist. It comes also from states such as purchasing spend of nearly Virginia, where collaboration between the state and other 1,000 cost centers entities within the state boundaries is growing. It comes from other countries such as the UK, where collaboration Appendix A has delivered some major benefits. Examples from the author’s own experience include savingsof from 10 to 50% (exceptionally 90%). Some of the savings resulted from the elimination ofduplication, which reduced cost within both supplier and public sector organizations.Appendices A and B provide further information on these savings.Evidence of the benefits of joint/integrated procurement comes also from the private sector. Itis inconceivable that Wal-Mart would be the force it is today without a first class, integratedprocurement organization accountable for delivering some varied and stretching objectivesthough the use of its purchasing power, detailed knowledge of its procurement spend andsome sophisticated procurement techniques.www.cut-the-deficit.com 10
Generating Economic Benefit and Growth Through Smarter Public Sector ProcurementSelecting the Appropriate Procurement ModelWhen considering collaboration within cities or between cities, counties and states, one has toconsider what the right model is likely to look like, but also whether collaboration is likely todeliver additional value and benefit the local, state or national economies.This can be done by considering the relative merits of 3 basic collaborative models and usingthe matrix at Figure 1. The 3 models are ‘Collaborative Procurement’, ‘ConsortiumProcurement’ and ‘Integrated Procurement’. The model at Figure 1 also considers‘independence’, i.e. no collaboration as an option.Appendix D explains the relative merits of each option in some detail. Briefly, however,collaborative procurement is normally a group of organizations working together to letspecific agreements for joint use. Public sector organizations tend to be fairly undisciplined inusing the agreements, so achieve less purchasing leverage than is ideal; hence less cash issaved. Only a small proportion of the procurement spend of collaborating bodies tends to becovered. Also, collaboration can carry large and hidden overheads.Consortium procurement is more disciplined than collaborative procurement and there maybe a central team coordinating on behalf of members and sometimes letting procurementagreements. However, again, only a small proportion of procurement spend tends to becovered and although the cost of any central team may be clear, members’ time and traveltends not to be costed.Integrated procurement is capable of delivering significantly greater benefits. This is wheretwo or more organizations create a single procurement team to provide a full procurementservice to them. Benefits are: Aggregation of procurement expenditure to provide maximum leverage and negotiating power; Elimination of duplication; Making life easier for suppliers through consistent: o Approach to quality o Contract terms and conditions o Specifications Ability to employ the best category and commercial managers; Sufficient critical mass to ensure good development opportunities for staff; Sufficient critical mass to ensure avoidance of single point failures.Normally such arrangements would have service level agreements (SLAs) with a diverse rangeof customer organizations. These would define its objectives, including local policies that itwould be expected to deliver. The SLAs may also define performance measures and how theyare to be monitored.Full accountability would also be achieved as the full costs and benefits of procurement wouldbecome evident, often for the first time.www.cut-the-deficit.com 11
Generating Economic Benefit and Growth Through Smarter Public Sector ProcurementThe overall budget for a joint/integrated procurement organization can be 15-25% less thanthe combined costs of the procurement organizations it replaces, but because matters are sosimplified, it should be able to afford the best category expertise. Its joint structure means thatit should be able to operate more efficiently.It is possible also to introduce more effective fraud prevention measures in an integratedprocurement organization and to be able to identify when fraud is taking place.www.cut-the-deficit.com 12
Generating Economic Benefit and Growth Through Smarter Public Sector ProcurementCreating First Class ProcurementThe comparative benefits and weaknesses of the various models become evident through theuse of the following matrix. Each organization that is considering collaboration in any formshould make its own assessment using this model. Only those who reach a similar conclusionshould try to collaborate. The UK experience has been that failure to put the right structures inplace nationally means that delivery has often fallen well short of local and national objectivesand aspirations.As a first step, organizations proposing to work together should agree objectives. They can beexpressed in procurement terms or the outcomes needed, for example lowest prices,maximising local economic development or better public services. Each procurement modelshould be scored according to how far it is likely to be able to deliver a particular objective.Using a range of from 0-5 works well. One can refine the approach further by weighting eachobjective according to its relative importance, though this rarely produces a different outcome.In nearly every instance, the assessment will show that there is no ideal collaborative model.The best solution is what fits best. All have some disadvantages, but the ‘independent’approach will tend to deliver least benefit.Understanding the procurement spends of the organizations that are proposing to worktogether is necessary if an integrated procurement organization is to be one of the optionsconsidered. The purchase spend analysis, described on pages 7-8, is an ideal way to do this.www.cut-the-deficit.com 13
Generating Economic Benefit and Growth Through Smarter Public Sector ProcurementFigure 1: Example Procurement Model MatrixOBJECTIVE / Independence Collaboration Consortium IntegrationCOLLABORATIVE MODELScore each box on a scale of 1-51. Strategic Management ofProcurement2. Leverage3. ‘A’ Class Expertise Available to All4. Best Practice Techniques – MarketShaping/management5. Consistent Specifications (to reducecost and improve overall quality)6. Consistent Quality of Products,Services, Works7. Efficiency: Reduce Costs forSuppliers and ContractingOrganizations8. Consistent Process/Procedures andLegal Interpretations9. Boost Economy (through increasedand targeted investment in localeconomy and jobs, taking a broad viewof value for money)10. Boost Economy (through being acatalyst for innovation)11. Minimising Procurement FraudTOTALwww.cut-the-deficit.com 14
Generating Economic Benefit and Growth Through Smarter Public Sector ProcurementThe Optimum ModelThe commonality of procurements between dissimilar public sector bodies has indicated in theUK that integrated ‘place based’ procurement would seem the best way forward, whilstallowing for specialist procurements for each category of organization, e.g. schools. Theanalysis in Virginia appears to confirm that this may be true in the United States. Without pre-judging the outcome, it may be that the optimum solution would be each state and all thepublic bodies within them, being serviced by an integrated procurement structure consisting ofa central organization to handle the big, strategic and common products and services, withlocal hubs (e.g. city or county) to handle smaller and unique procurements. This is not a ‘Wal-Mart’ model, but is almost as powerful. The diagram in Figure 2 illustrates what this might looklike.Figure 2: Completed Example Procurement Model MatrixLean Integrated Operating Model Collaboration Procurement Hubs Local Procurement Between for States and Major Units Neighbouring City Regions StatesMajor Regional/Sub-regional Contracts * *Relationship Management with Main * *SuppliersMarket Management * *Common Categories * *Major Project Support *Industry Specific *Small Local Contracts * *Discipline/Implementation/Compliance * *Where agreement within particular states for a state-wide procurement model proved difficultto reach, at the very least, cities should be seeking to integrate all public procurement withintheir geographic boundaries. A simplified version of the above diagram would be a suitablemodel. However, this option would not deliver the same benefits as the fully integrated statemodel.www.cut-the-deficit.com 15
Generating Economic Benefit and Growth Through Smarter Public Sector ProcurementConclusionThis is a pivotal moment for the United States: Does it have the vision and grit to take the toughdecisions that would enable it to remain the world’s economic super-power, or would it preferto avoid them and accept relative decline, allowing other, more vigorous nations, to overtakeit?At $2 trillion a year, public sector procurement is the biggestlever that the government – federal, state, local - has to At $2 trillion a year, publicdeliver cash savings, support economic growth and reaffirm sector procurement is thethe global economic leadership of the United States. The biggest lever that thealternative is already apparent in some states, cities, townsand counties – bankruptcy, economic decline and government has to createunemployment. 2.2 million jobs.What are the actions that need to be taken? None of themare rocket science: Firstly, there must be a complete and detailed understanding of how this $2 trillion is spent – by whom, on what, who with and where. This can be achieved through a purchase spend analysis using raw payments data from finance systems. This needs to be done nationally, by state, city, county town and institution. The capability exists to do this. Secondly, an integrated procurement structure within each state is required, with the authority, terms of reference, skills and capability to secure maximum benefit and advantage from this vast procurement resource. This requires joint working between institutions, cities, towns, counties and the state itself. There must be genuine and full commitment and no backsliding. Thirdly, there needs to be much stronger joint procurement between states.These actions require strong leadership from elected representatives, officials and decision-makers. This means abandoning out-of date-customs and practices. Protectionism must beovercome. The choice is stark, but the right choice will secure the prosperity of futuregenerations.www.cut-the-deficit.com 16
Generating Economic Benefit and Growth Through Smarter Public Sector ProcurementAPPENDIX A: Why Public Sector Organizations Can Pay Too MuchCreating Excessive Costs. Excessive costs for the public sector come from several sources: Procurement is often not coherently structured to be able to make best use of the data that is available or may have inadequate authority to bring together all the public procurement spend within a state or a city and maximise leverage and opportunity. Silos within many state funded organizations will often make this worse. Integrated procurement organizations created from previous independent ones emphasise the point. o In its first year, the Research Councils’ Procurement organization, which took over the procurement functions of five independent bodies, reduced the costs of procurement staff by 15% despite an increased workload. For the first time, expert contracting expertise became available to all. Procurement savings of $300 million were anticipated over 10 years and much has been delivered. o A major UK government organization, in the mid-1990s, saved 20% – $80million per annum overall – by bringing together the purchasing spend of nearly 1,000 cost centers and applying specialist category and contracting expertise to the collective purchasing spend. o The UK central government is adopting a joint approach to procuring common categories. Use of the consequent agreements will be mandatory. The savings target by 2015/16 is 25% ($5 billion) on an annual spend of $20 billion. This will be achieved both through better procurement and demand management. Public sector organizations fail to take advantage of opportunities by: o Failing to make use of existing purchasing agreements; o Being unaware of initiatives and opportunities created in other organizations; o Leveraging their spend to negotiate and secure the best deals. Disaggregation of spend and the limited expert category expertise available - there is not enough to go round, even if organizations could afford it – prevent the use of best procurement techniques such as supply chain management, market management (the US should be large enough to manage many of its public sector supply markets) and value analysis. Public sector procurement creates cost for themselves, for private sector businesses and obstacles to small and medium sized businesses through: o Reinventing the wheel – different organizations with different specifications for what should be identical products/services. o A huge variety of contract terms and conditions. o Different procedures. o Multiplicity of tendering, contracts and contract managers.www.cut-the-deficit.com 17
Generating Economic Benefit and Growth Through Smarter Public Sector Procurement o Multiplicity of attempts to manage suppliers, markets and supply chains. o Varied expertise of procurement personnel. Tendering can be prohibitively expensive for small and lean suppliers – just the ones with which public sector organizations might wish to engage. Even the simplest tender will cost a bidding organization over $1,000 if its time is fully costed; so, assuming a 10% profit margin and a one in four chance of winning, a potential supplier needs to gain an extra $40,000 of business just to cover its tendering costs. Complexity and inconsistency of procedures add to the cost of tendering and hence the cost of the procured goods and services. The most complex tenders cost several million dollars.Integrated procurement reduces the number of tenders and, hence, the overall cost to bothparties. If done well, it need not reduce choice and can take into account state, regional andlocal issues.www.cut-the-deficit.com 18
Generating Economic Benefit and Growth Through Smarter Public Sector ProcurementAPPENDIX B: Re-Structuring Procurement: The Potential BenefitsThe potential for savings, through much better structuring of procurement, the availability oftop class category specialists and an understanding of one’s procurement spend through datamanipulation, is well established in the UK and increasingly so in some US states and cities.The following examples from the author’s career and personal knowledge show what can beachieved. Office furniture. Through working with suppliers on their manufacturing processes and with customers on their reliability, costs were reduced by 35% ($10 million per annum) and quality improved compared to the use of non-commitment framework agreements. Outsourcing facilities management. An integrated approach led to cash savings of up to 35 percent ($25 million per annum) against previously tendered agreements and improved service. Laboratory consumables. An integrated approach led by a category expert led to cash savings of up to 90%. Welfare milk. A category specialist saved 10% ($16 million per annum) with existing suppliers. Postage. $12 million per annum saving on a $110 million spend. The UK National Health Service improved its procurement of drugs for hospitals, saving 10 % of its $3.2 billion annual spend. Construction. Joint approach to construction procurement, led by an specialist team, is delivering cash savings of 10% in schools construction and improved quality and timeliness. As more organizations join in with this initiative, cash savings may rise to 25% or 30%.In most of the above instances, the use of procurement agreements was mandatory. Thatmeant that suppliers were assured of the business, and therefore had an incentive to offer bestprices, invest and innovate.But why can a fragmented approach to procurement between public sector organizations andindiscipline within them lead to high costs? Inability to take advantage of best supply management techniques Increased risk of those suppliers, with a greater understanding of how the public sector spends its money, taking advantage.The evidence for the benefits of integrated procurement is bolstered by examples of missedopportunities: Greater Manchester authorities, a city region in the north west of England, have over 100 specifications for ‘tarmac’, when only seven are needed. A potential saving of 10% is achievable. Potential to save 10% on procurement of garbage trucks by Greater Manchester councils. Unable to agree specifications and makes.www.cut-the-deficit.com 19
Generating Economic Benefit and Growth Through Smarter Public Sector Procurement Finance systems in local councils have different operating systems and requirements have been differently specified even though their functions are often identical, which means that separate finance systems are purchased. Potential savings from integrated systems of over 30% where groups of authorities work together appear to be possible. One financially pressed council rejected a re-design of street lighting because the council was situated on “the wrong type of rock” – a wiser council saved 30%. The real obstacle was ‘not invented here’. IT licences for HR and other back office functions are procured separately – potential saving from an integrated approach across the public sector should reach several tens of millions of dollars per annum. Laboratory / medical equipment – potential saving of 20% on an annual spend of $225 million. Indiscipline within organizations and lack of commitment creates much duplication of contracting, contracts management arrangements and cost for suppliers. Research has indicated potential savings, exceptionally of up to 35%, on total procurement and ownership costs.www.cut-the-deficit.com 20
Generating Economic Benefit and Growth Through Smarter Public Sector ProcurementAPPENDIX C: Procurement Objectives: Delivering Value and EconomicGrowthThere is an argument that the focus of procurement should be to deliver best value for moneyand that giving it other objectives is likely to dilute this focus. This is a questionable assertionon two grounds. 1) What is value for money? It could be defined as lowest price. Alternatively, it could be defined as what is best for taxpayers. The two can be very different as the list below (page 21-22) explains. 2) First class private sector organizations will often have a range of objectives and targets relating to the aims of the business of which they are part. Public sector procurement should be no different.The definition of value for money depends on to whom one asks and how the question is put.Ask a typical tax-payer and they may say lowest price (cheapest). Press them a little harder andone is likely to be told that quality is a factor. There is no point in paying for a service thatdoesn’t meet requirements. Pose the question of whether where the supplier pays its taxmatters and it is a reasonable supposition that most taxpayers would feel that should be takeninto account. Locally based suppliers would score over suppliers based in other states orabroad. One can take this further by asking if taking on apprentices and reducing the numberof jobless in the area should be taken into account. This turns them from living off thecommunity and state to contributing towards it. As employing previously unemployed peoplemay reduce crime and disorder and other financial demands on taxpayers, as well asimproving the quality of life in the neighbourhood, then it seems likely that few taxpayerswould exclude this from the value for money equation.One could go even further and suggest that the amount of innovation required by the publicsector in the contracts they let also matters. A soon to be published piece of research by theManchester Business School (part of the University of Manchester, one of the UK’s leadinguniversities) has shown that 25% of companies in the UK that win public sector contractswhich require innovation, go on to grow their export business. This means more jobs and moreincome, equating to more wealth generation. There is no obvious reason why the results ofthis research should not be broadly applicable in the United States.Is reducing procurement fraud a part of the value for money equation? Information fromRosslyn Analytics suggests that around 2% of U.S. public sector procurement spend is lostthrough fraud. If correct – and there seems to be plenty of circumstantial evidence to back thisup, the cost to the US taxpayer is some $40 billion a year, equivalent to $450 per taxpayer.To summarize, there is an argument that the objectives of public sector procurement shouldbe: To procure the right goods and services; To the right quality; At the lowest overall cost, taking into account:www.cut-the-deficit.com 21
Generating Economic Benefit and Growth Through Smarter Public Sector Procurement o Price Lifetime cost Tax revenues from suppliers Saving taxpayers’ money through job creation and skills training to turn people from dependency on taxpayers to net contributors To develop the local economy through growing small to medium sized businesses (and local job creation, apprenticeships, skills training); A catalyst for innovation, thus creating more jobs and boosting the economy still further; A good custodian of taxpayer’s money through reducing the $40 billion estimated annual procurement fraud bill.There is an increasing awareness in the UK of the above factors and a change in attitude fromfocusing largely on price.It seems likely that those parts of the UK prepared to harness their public sector procurementspend to greatest effect will have an economic advantage over those that do not. The same islikely to be true in the United States.Public sector procurement is a huge cost, but it also presents a great opportunity.www.cut-the-deficit.com 22
Generating Economic Benefit and Growth Through Smarter Public Sector ProcurementAPPENDIX D: Selecting the Right Procurement Model: A Comparisonbetween Collaborative, Consortium and Integrated ProcurementCollaborative ProcurementCollaborative procurement, without mandate, can deliver significant benefits, but the cost andeffort of collaboration can sometimes exceed them. Also, its focus tends to be on price ratherthan delivering more complex and higher level objectives, such as supporting economicgrowth.Collaborative procurement tends to require agreement, for each procurement organization, atevery stage in the process, which can be expensive as well as time consuming. There isfrequently passive resistance, where collaboration is seen as work that is additional to the dayjob, deadlines get missed and management information can be slow to be provided. In anychoice of priorities between that of the collaborative group and that of one’s own organization,the latter always has priority. Lack of discipline within individual member organizations canundermine progress. There can be endless debates about specifications, terms and conditionsof contract etc. Progress is frequently made at the pace of the slowest.Unsurprisingly, collaborative procurement can require expensive structures to facilitate it. Theannual cost of the overlay of collaborative structures in the UK public sector will have run totens of $millions a year. At the same time, savings from collaborative procurement are oftenquoted as “potential”, since they depend on the extent to which organizations are prepared toadopt agreements. Without prior commitment to ensure procurement spend does not leakaway and that suppliers can be confident about the amount of business they will receive, bestvalue is unlikely to be achieved. Baselines against which savings can be measured are oftendifficult to determine.A further weakness is that collaborative models depend on the expertise that exists withinmembers. Often the resources are not available to appoint top class product categoryspecialists. However, at its best, collaborative procurement can enable specialist expertise tobe shared between organizations and can deliver benefits well beyond the means of theindividual members of the collaborative group.Consortium ProcurementA consortium requires a more disciplined approach than ‘collaborative’ procurement, whichwill tend to have membership rules and require greater commitment. Frequently, there will bea central team appointed to manage the consortium, work with members to develop theprogramme of work and oversee or support implementation. Its income will come fromfunding by its member bodies or rebates from suppliers or a combination of both.Some consortia may have the cash resources to appoint some first class professionals to handlecommonly used items. A weakness is that commitment to use the agreements tends to belimited, which reduces the leverage of the consortium on behalf of its members. The moredisciplined the consortium, the greater the benefits. Consortia can often provide good valuecompared to the resources employed. However, even the best suffer from some of thewww.cut-the-deficit.com 23
Generating Economic Benefit and Growth Through Smarter Public Sector Procurementweaknesses of the collaborative model and overall cannot be expected to deliver the samebenefits as an integrated model.Integrated ProcurementIntegrated procurement (or joint procurement), in contrast to the two previous models, is thecreation of a coherent procurement structure to do all the procurement and contracting onbehalf of several public sector organizations. It has the authority to take decisions, to deliver, tosort out specification issues, to question the need for procurements, to question solutionsproposed by budget holders and to commit. The sponsoring organizations retain theirindependence, but have chosen to join forces with others for procurement. It does not meandoing everything in one place. The structures can be central, regional, city or local, but eachstructure is fully integrated under a common line management.Integrated arrangements require service level agreements, with commitments both by theprocurement organization and customer organizations. An integrated procurementorganization takes over all the procurement responsibilities of the members, so there is noduplication. Integrated procurement organizations are properly funded but, in return, areexpected to provide management information and deliver pre-agreed objectives and targets,including pre-agreed service levels at an agreed cost. Full accountability would also beachieved as the full costs and benefits of procurement would become evident, often for the firsttime.The overall budget for a joint/integrated procurement organization can be 15-25% less thanthe combined costs of the procurement organizations it replaces, but because matters are sosimplified, it should be able to afford the best category expertise. Its joint structure means thatit should be able to operate more efficiently.It is possible also to introduce more effective fraud prevention measures in an integratedprocurement organization and to be able to identify when fraud is taking place.www.cut-the-deficit.com 24
Generating Economic Benefit and Growth Through Smarter Public Sector ProcurementAPPENDIX E: Understanding How Taxpayer Money is SpentAsk yourselves how much money is spent in your state by cities, towns and districts: With each supplier? With suppliers that are common to more than one body within the state geographical boundary? Where, geographically, is the money is spent? With local suppliers? With small businesses? With foreign suppliers (which may pay little in terms of state and federal taxes)? On the various products and services that are purchased? (A good idea can be obtained by downloading the raw data on payments to suppliers and running it against databases of the products and services supplied by each business). By various types of organisation, for example schools? o What do they spend their money on? o How much do they spend on each product or service category? o Do they have peaks and troughs in their procurements that could be smoothed to reduce costs?Also: Can the above information be provided for the United States as a whole? o What are the differences between different states and different regions of the United States? o Are there different expenditure patterns between cities, towns and districts in different parts of the United States? Do different organisations pay different prices for the same products? How big are the differences? What annual peaks and troughs are there in spending patterns? Could one save money through discussions with business as to how these could be smoothed and costs reduced (due for example enabling manufacturers to smooth their production schedules)? Can the purchase data be used to highlight where fraud and corruption may be occurring? Can the purchase data be used to highlight where cartels may be operating?www.cut-the-deficit.com 25
Generating Economic Benefit and Growth Through Smarter Public Sector ProcurementAbout the AuthorColin Cram is an internationally recognized expert on government transformation with aparticular focus on public sector procurement. Colin, for the past 30 years, has worked formajor public and private sector organizations around the world..During Margaret Thatchers premiership, he was responsible for developing the governmentsstrategy to improve public sector procurement. During this time, Colin pioneered the UKspublic sector outsourcing policy, which now has led to the government being at the forefront ofservice outsourcing.Colin is regularly called upon by governments for his expertise and advice. Colin is an activemember of European Union (EU) working groups on innovation, procurement andsustainability. Recently, he testified before the House of Lords Science and Technology SelectCommittee on the role of “Public Procurement as a Tool to Stimulate Innovation.”About Rosslyn AnalyticsRosslyn Analytics, recognized as one of the fastest growing privately held software companiesin the world, helps public and private sector organizations accelerate business performanceand innovation by giving their employees the data they require to make smarter, timelydecisions. Its revolutionary cloud-based RAPid enterprise data enrichment platform is serving1,000s of decision-makers, developers and organizations deploy self-service analytics in the cloud includingspend and supplier analysis.. Rosslyn Analytics is ISO 9001:2008 and ISO 27001:2005 certified. Tolearn more, visit www.rosslynanalytics.com and rapidlabs.rosslynanalytics.com.www.cut-the-deficit.com 26
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