Examination of Witnesses (Questions 60-79)
MR JOHN
OUGHTON, MR
PETER FANNING,
MR HUGH
BARRETT, MR
MARTIN SYKES
AND MR
DAVID ROSSINGTON
17 MAY 2006
Q60 Mr Newmark: So things have improved
since the NAO Report came out?
Mr Rossington: Absolutely and
there is more grinding out of detail on headcount reductions and
matching of different kinds of figures, so that we are certain
the answers are correct.
Mr Newmark: Thank you very much.
Q61 John Thurso: I have one question
on procurement, and I am going back to the NAO Report again. Their
report on postal services procurement found that in some areas
OGCbuying.solutions has not been effective at negotiating with
postal suppliers on behalf of the public sector. Are you satisfied
that your target for annual efficiency savings from the use of
mail service framework agreements of £30 million a year is
realistic in the light of what they have to say?
Mr Barrett: The comment in the
NAO Report refers to a negotiation that we held with the Royal
Mail which was not as fruitful as I would have liked. The NAO
are picking up on that in the report. The major part of the £30
million efficiency savings referred to in the NAO Report will
come from a combination of two things. One is the departments
and other public sector bodies moving to more appropriate forms
of delivery of mail; for example, moving from first class to second
class mail. The second thing is taking advantage of more competitive
offerings that are now available in the market place; in other
words, business will probably move away from the Royal Mail as
a result.
Q62 John Thurso: Has anybody worked
out what the cost to the Exchequer would be of the impact of that
decision on Royal Mail?
Mr Barrett: I think the very simple
answer is no.
Q63 John Thurso: Does it not seem
like an obvious thing, for the left hand to work out what the
right hand is doing and where the costs are?
Mr Barrett: It is a commercial
decision for the Royal Mail to make as to how far they want to
lower their prices in response to competition. That is established
policy. We are taking advantage of the deregulated market to get
the very best deal for taxpayers in that market place.
Q64 John Thurso: That is the point
that interests me: the best deal for taxpayers, because at the
end of the day, under the Universal Service Obligation the Royal
Mail has to undertake that delivery network. It is the only player
in the market that has that burden. If the cream goes to private
suppliers, the obligation still exists. We will still want to
have our letters delivered to the Ardnamurchan Peninsula or whatever
it might be, and the net result of that is that it becomes more
of a loss-making business. Where does that money come from? The
Exchequer. You save £30 million or £40 million or £50
million on a contract, but the Royal Mail is quietly having to
have a bigger sub, and if you even it all up . . . .
Mr Barrett: Yes, but in the bigger
picture, at the end of the day the competitive pressures that
apply to the players in the market place provide efficiency and
effectiveness across the whole market. I worked for BT. They have
seen their market share go down from what was 100% pre-1984 to,
I guess, something like 60% now, but the level of service and
the price of services delivered to customers, both public and
private sector in the UK today, is unmistakeable to the one that
pertained in the early 1980s.
Q65 John Thurso: I am sorry, I digressed
there rather. When will you hit your target of 60% of public sector
postal spend going through the frameworks?
Mr Barrett: I would hope to do
it in three years time.
John Thurso: Thank you.
Q66 Ms Keeble: The magic of quite
a bit of what you say about procurement, in particular about the
aggregation of demand, would argue against small and medium sized
businesses being able to secure public sector contacts. Do you
expect to see an increase in the number of SMEs?
Mr Oughton: We would be aggregating
only in those areas where it makes sense to do so. Having looked
at the market place for certain commodities, it would make sense
to aggregate for buying utilities because the market place is
already a group of very large players. What is the best way into
that market place? It is by aggregating demand and driving the
best discounts we can from the suppliers. One of the important
challenges for us is to be analysing the market place and judging
where you are dealing just with big players and where you are
dealing with a more variegated market.
Q67 Ms Keeble: You have mentioned
utilities, but which other sectors?
Mr Oughton: Fleet, transport,
other commodities: print, mobile phones, software licences—that
type of commodity, where you are talking about high volumes and
where demand typically, both in the public and private sector,
is aggregated. There will be many other requirements that government
has—both in central government and in wider public sector
bodies, in health and education and elsewhere—where the
right answer could well be to buy from small firms or from local
firms or buying particular types of products, encouraging innovative
solutions. I would like Mr Sykes to say a word about how we are
trying to approach that issue.
Mr Sykes: As John has said, there
is aggregation of demand and we are very careful about the words
we use because it is about being an intelligent client. Instead
of 30,000 different public sector organisations all buying individually,
it is about a corporate behaviour and understanding the market.
We have been doing a lot of work over the last few years on trying
to address the issues that were raised in the Better Regulation
Task Force Report on the barriers of entry to small business.
We worked with partners in the wider public sector and in the
private sector on a pilot in the West Midlands. We tested out
five areas of innovative approach to try to understand how we
could improve entry to the markets. We had a sample base.
Q68 Ms Keeble: What were the areas?
Mr Sykes: May I explain this first?
We had a sample in the West Midland of 500 SMEs, which was representative
of the social distribution in that area of ethnic businesses,
women in businesses, and so on, so that it was representative.
We looked at making available the opportunities. We worked with
our partners in that area and with Birmingham Chamber of Commerce
to pilot a portal which made (I do not like the phrase low value)
some sub-£100,000 opportunities available to the community
of SMEs and we encouraged them to go and look at our website.
Just putting the opportunities out there in the first place is
important. We have done some world benchmarking. We identified,
from our colleagues in South Africa, that one of the biggest barriers
to small businesses is all the forms that they have to fill in.
We designed a pre-qualification questionnaire where we told them
the answers to the questions and invited them to indicate whether
they could comply with the requirements or not. This did two things:
it reduced the burden on the public sector buyer in analysing
the essays that came in from people; it also meant that those
organised, small enterprises that deselected because they could
not meet the requirements knew what they would have to do the
next time round. We worked with departments to try to understand
how much buyers knew about how to do business with small enterprises.
We developed a training package to go out to buyers in that particular
community to show them how to think small and to design their
procurements in a certain way. We worked with small businesses
to put them thorough a sort of training course on how to respond
to requests that came from the public sector, how to answer questions
and how to put their bids together. We also did some work at that
time with what I call primes, the big suppliers to the public
sectors—many contracts have to be with big suppliers because
the risk is so great—on how they could work with their supply
chain. At the end of that particular pilot, we were amazed by
the results. We started off with something like 14% of our SME
community having done business in the public sector and the figure
was about 23% at the end of that period that had won work in the
public sector. I am pleased to say they had won work on the basis
of merit. We checked afterwards and they had done perfectly good
work; it was very good value for money; they had brought in innovation
and good ideas. It was good to bring them in. We were able to
go out to the buyers and say, "This is a good thing. It is
a good value-for-money way forward". What we have done since
then is to work with the Small Business Service to roll out the
learning from the West Midlands' pilot. It went live about a month
ago, and there is now a supply route to Government 2, which is
a service run by BiP, a publisher; they won a competition to provide
a national service, which is free to small businesses within their
postal area. They pay a very modest fee if they want to apply
to go on the register for business outside their area. That is
cheaper than going into Yellow Pages, and it has a greater
chance of success. We went around the country and trained over
800 buying people from the public sector using the training courses
that we had developed. We worked with suppliers on a regional
basis to invite SMEs and show them how to do business with government.
We ran seminars and over 1,000 people attended. We have now handed
the training packages over to the Regional Development Agencies
and they have taken that up. We are continuing to work with the
key suppliers to Government to encourage them to include SMEs
in the way they do business in the future.
Q69 Ms Keeble: That sounds a very
interesting pilot and an interesting approach to the roll-out.
Is that looking at advising or supporting other areas of government
procurement as well? I noticed earlier you referred to schools,
which I would have thought was all dealt with at local government
level. Just to take one example from there, in my own constituency
of Northampton, 34,000 items of fruit go to the schools every
day. A number of struggling farmers would quite like to get the
contracts. For some reason or another, it seems there is either
not the opportunity or the skills to be able to manage that contractual
relationship so that the local suppliers can get in. Are you able
to unpick some of those? Do you actually look at the social consequences
of government procurement?
Mr Sykes: Do we look at the social
consequences? I think the answer to that is yes, but it is a very
complex landscape. There is now of course, in the particular sector
you talk about, a Centre for Procurement Performance. I have colleagues
working in that sector who are trying to help schools do their
procurement in a different way. OGC has specifically made a portal
for the small business, as I said, providing the opportunity to
advertise opportunities. Any school can advertise its opportunities
on there at zero cost and so there is now no barrier to people
who want to put out opportunities to business. If the small buyers
are in that postal area, they can register in that postal area
free, and there is a way of introducing the small supplier to
the small buyer. Within the resources we have, we cannot deal
with 20,000 plus schools on an individual basis. We have to do
that through our partners in DfES.
Q70 Ms Keeble: Does PFI limit any
of the opportunities for sharpening up procurement because people
are stuck in long-term contracts where sometimes the monitoring
of them can be quite problematic? I am thinking of the hotel facilities
in either schools or hospitals.
Mr Sykes: That is an interesting
question. At the first level, there are risks for small and medium
enterprises associated with financing a 25-year deal. PFIs are
not done below £20 million and so a lot of small businesses
are not bidding into that kind of space.
Q71 Ms Keeble: I was thinking about
the same service areas rather than the size of the contract. Obviously
PFIs are the larger contracts.
Mr Sykes: There is more work to
be done. We need to encourage those first tier PFI partners to
think about the value that can be added by small businesses. It
is an opportunity for small businesses to keep their costs level
or down as they go forward in time.
Q72 Ms Keeble: I have a couple more
questions. One is about areas where there is a limited pool of
suppliers. Given that government spending power is incredibly
important, obviously, there are some areas with quite a limited
pool of suppliers. Have you had problems in that area and what
is happening about broadening the supplier base? I am thinking
about computers?
Mr Sykes: Basically, if you have
two or more suppliers, you have competition, so this is not just
a question of suppliers; it is more a question of market capacity.
The number of suppliers at the point in time when the volume of
activity—
Q73 Ms Keeble: May I pick you up
on that? It is true that if you have two, there is competition
but it is pretty marginal competition. There is the possibility,
if you have only four major accounting firms, of having cartels.
There are some really serious issues. I would not accept that
two is competition. Sometimes they have cross-holdings anyway,
do they not?
Mr Sykes: Yes, it is not the ideal
competition. In fact, if we go back a few years to when OGC first
started looking at particular markets and take the IT market,
it is true that a large proportion of government IT expenditure
was limited to about three or four suppliers, with one or two
of those suppliers having a disproportionate share of the marketplace.
It was fortunate that we had new work coming forward and that
we had previous contracts which were coming to a renewal stage.
We worked with colleagues across the public sector to define ways
to open up the market and create a level playing field for the
incumbents and to encourage new players to come into the market.
We had extensive dialogue with large suppliers who were not playing
into the public sector space as to why they were not. We worked
with colleagues to try to create the right environment. In the
IT sector we now have about 15 suppliers and those very big suppliers
do not have the same proportion, though when you have an organisation
like DWP or HM Revenue and Customs, there are big contracts in
their own right.
Q74 Ms Keeble: Do you have any concerns
about corruption or sharp practices or anything approaching that,
given that these are very lucrative contracts?
Mr Sykes: I do not have any immediate
concerns. May I say further that there are other markets as well?
We have just been working with DEFRA on the waste market to see
whether there is adequate capacity, given the landfill directives
that are due. A report will be coming out in the next few days
on that.
Q75 Ms Keeble: Finally, may I ask
about Zanzibar, the wonderfully named online purchasing portal
that was due to be up and running by now at the beginning 2006?
What progress has been made?
Mr Barrett: Martin Sykes can claim
credit for naming the system but my organisation runs it. We have
just accredited the Zanzibar system to the appropriate security
level. We expect to go live with the Department of Work and Pensions
before the end of this month.
Q76 Ms Keeble: That is very good.
What is going to happen then about integrating, say, with DEFRA,
which I understand has its own separate system, is that right,
or are you just going to remain separate?
Mr Barrett: DEFRA certainly does
not have a separate system in terms of—
Q77 Ms Keeble: It says that they
have already developed their own e-procurement systems that appear
to duplicate the work, but that is not accurate, is it? That is
in my brief.
Mr Barrett: Lots of departments
have e-procurement systems, typically based around an Oracle or
SAP solutions. Zanzibar allows those sorts of systems to work
commonly together and then to face out to the supply industry.
I cannot say for sure that there is some functionality in the
DEFRA system that does not duplicate that in Zanzibar, but our
hope—and it is only a hope as far as DEFRA will be concerned—is
that ultimately there would be value for money case made, and,
where that is the case, that they will move to using Zanzibar,
but it is their choice. We cannot force them to do that.
Mr Oughton: We did look quite
carefully, in setting up Zanzibar, as to whether it would duplicate
other systems. We looked at Defence, for example, that had developed
their own electronic commerce system. We looked at other departments,
too. We looked at local government where again a system was already
in use. The point about Zanzibar, as Mr Barrett says, is that
it brings a number of functions together in the same place. It
is web-enabled. It is a full marketplace. It will be successful
if it demonstrates that it can produce value for money but again,
rather as we were saying earlier, to be in a position where you
rely only on one route to the market is not always the most comfortable
place to be. A little bit of choice here, at least at this early
stage when we are trying to understand what the technology can
do for us and what the benefits can be, is no bad thing.
Q78 Chairman: We have to move on
because there is a lot of material to cover. I know there is a
lot more we could discuss. I want to hear a bit more about the
performance of OGCbuying.solutions, if I may. As I understand
it, demand for the managed service has been rather flat at £36
million last year compared with £35 million the previous
year. Why is that?
Mr Barrett: That is because we
have reduced our prices essentially. Demand has increased. Let
me give you an example. We run a managed telephony service for
about 120,000 civil servants. We managed to reduce the price that
these civil servants would pay for that service. The reduction
in price, even though the volume has increased, has meant that
net there has been a relatively small increase in the charge that
we levy on departments for those services.
Q79 Chairman: I see, and so the service
is cheaper but the demand has in fact gone up?
Mr Barrett: Indeed, it has. A
good example is a parallel service to Zanzibar where we run an
e-sourcing service, which we launched in the middle of last year.
We have just got 1,000 users on to that system. In the last week,
the Olympic Delivery Authority has decided to use that for one
of their major infrastructure projects. That is a service that
has grown from a zero base in May last year.
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