Public AdministrationGovernment Procurement: Time to Invest in Capacity, Capability & Competence

Summary of our Submission

Transformation of procurement is under way, with an increasing number of significant success stories.

The majority of procurement, both centrally and across the whole public sector, remains unreformed.

Less than 15% of external expenditure has received the attention it requires.

The scale of ambition for efficiency savings could be increased by a factor of at least three.

Top-down leadership from ministers, permanent secretaries and senior executives is crucial.

Procurement must be elevated from a minor, transactional function to a much more strategic one.

Procurement has suffered from neglect and under-investment. This has not really changed yet.

Procurement should not be outsourced to prime contractors, but strengthened internally.

The focus on procurement should not just be at the functional level, but include all major budget-holders, commissioners, programme and project managers, and those who lead them.

Procurement skills have been hollowed out over the past decade. There is inadequate capacity.

Significant investment is now required to rebuild a strong public sector procurement capability with modern competencies to deploy best-in-class processes that will make a major contribution to the policy goals of deficit reduction, economic growth, front line service delivery, social value and environmental impact.

That will not occur without procurement improvement becoming a sufficiently serious policy goal of government to merit a cabinet minister overseeing it, permanent secretaries being required to incorporate procurement reform plans into their forward strategies, departmental chief procurement officers reporting directly to those permanent secretaries, and modern talent management being deployed to recruit, retain and renew a highly motivated cadre of top quality procurement leaders.

Reinforcing the Government’s Policy Goals and Elevating Procurement as Central to their Delivery

1. The public sector spends approximately £700 billion per year. Public procurement, in all its different forms, represents 40% of this expenditure and 20% of UK GDP. This equates to £250 billion+. Whitehall, central government procurement is £60 billion. Cabinet Office influence, through the Government Procurement Service, impacts less than £13 billion, which is around 5% of the total. The prism for the analysis of procurement productivity, effectiveness and capability should be far more than this minimal amount of overall influence.

2. Significant initiatives in public procurement have been launched, particularly under the leadership of Francis Maude at the Cabinet Office. They are beginning to reshape the way procurement is done and services delivered. That is to be welcomed and encouraged. However there is considerable scope for far more innovation and greater UK-wide impact across four government policy goals:

(i)Deficit reduction: we believe that procurement-led efficiency savings across the total public sector, at the lower end of aspiration (which is in line with best-in-class practice in the private sector) should be a minimum of 15%. This would deliver at least £37 billion. A more aggressive, but realistic, higher-end target (in line with recommendations such as those of Sir Roy McNulty in the rail sector) would be 30%, or £75 billion. Therefore we estimate that achievable Whitehall/central government procurement reform should generate between £5 billion and £10 billion of savings (as a minimum) by the end of this Parliament. This would be a sizeable contribution that can be directly reinvested in service delivery and future growth-orientated infrastructure of the UK.

(ii)Economic growth: efficiency cost savings should be a minimum expectation for professional procurement. Economic reform should be triggered by developing new models of sustainable growth for the UK, in conjunction with third party suppliers. The size of spend is a powerful lever that can be applied directly across the UK’s industrial and services sector. That leverage remains considerably under-acknowledged and under-utilised. Opening up public services to greater choice and competition, pressing for more innovative and localised services, spend aggregation on targeted areas across central government and much more tightly managed supplier relationships with prime contractors in large private sector companies should be central to public sector procurement’s ambitions.

(iii)Front line service delivery: this is definitely not just about more of the same, at lower cost. Across the public sector, 20%+ cuts in departmental spending are driving reassessment of service delivery frameworks and fundamental re-evaluation of the balance between in-house and external supply. Despite the pain, all the initial evidence is that there is a correlation between substantial budgetary cutbacks and a readiness to encourage procurement innovation.

(iv)Societal and environmental impact: public procurement is a powerful tool for innovation, infrastructure development, support for the SME community, encouragement of local enterprise partnerships and mutual organisations.

3. Procurement should be securing considerable cost savings; economic reform through new models of sustainable growth for the UK; encouraging greater use of competition; pushing for more innovative and localised services and driving productivity and spend aggregation on common categories of expenditure. Our evaluation is that a good start has been made, but there is a long way to go.

Assessing Progress to Date

4. We believe that there has been greater progress made in the early years of this Government than in any previous administration. Significant steps includes: centralising Whitehall procurement initiatives through the work of the Government Procurement Service; a strong focus on efficiency savings via robust demand management and aggregation; significant steps forward on spend analysis covering £60 billion and half a million suppliers across 17 central departments, with visibility on 80% of procurement spend in central government; positive action on SMEs with a clear aspiration of 25% of business routed to them; excellent leadership through Francis Maude; simplification of bid documents, standardised processes and the active encouragement of cheaper, faster, lean procurement (with more procurements being completed in 120 days); opening up of more markets to competition; some flagship reforms, such as DWP and welfare-to-work; a more open-door policy with regard to supplier engagement; and claimed savings of £3.75 billion 2010–11 and £5 billion 2011–12.

5. Not surprisingly, there have been setbacks and disappointments as well: highly public disasters such as West Coast rail franchising, A4e, G4S and the Olympics contract; a continuing absence of an all-encompassing vision, strategy and change model for total public sector-wide procurement; unresolved tensions between central government control vs. localism and the use of large prime contractors vs. SME deployment; lack of clarity and integration between commissioning, major projects and procurement processes; an almost complete absence of post-contract supplier management; weak transparency in the definition and auditing of savings particularly between those attributable to demand management (cutting of services) and application of best procurement practice (step down in the cost base and recurring savings).

6. The NHS Standards of Procurement, Department of Health, May 2012 made an important distinction between three levels of improvement (a. Building, ie awareness and putting the building blocks in place, b. Achieving, ie making good progress, and c. Excelling, ie outstanding procurement performance). We find this a helpful framework, and have extended it as follows as an assessment framework for public procurement.

(i)Transformational maturity: our experience with private sector organisations is that they go through at least three phases of change, with capability development at the heart of their sustainability. The public sector is no different. (a) Launching phase: expense control, demand management, quick wins, rapid cutbacks, yet invariably under-resourced, with minimal top leadership support and few changes to the way in which a service is delivered. 2010–12 in the public sector. (b) Accelerating phase: strong appetite for more savings and performance improvement, volume aggregation and spend management, greater price transparency, supplier rationalisation and introduction of more modern processes such as category and supplier management. Under way, 2013–14. (c) Transformational phase: evidence of considerable changes in service delivery models, major infrastructure/project management innovation, adoption of new performance pricing and risk models, and executive-level endorsement with much greater accountability. Barely started within the public sector.

(ii)Professional procurement leadership: a common mistake is to assess procurement capability and competence only as being relevant to the procurement function. What really matters is a clear focus on boosting these at three levels. (a) Procurement as a transactional discipline: investing in the core procurement teams as a back-office function. Private sector equivalent: cost efficiency and effectiveness. (b) Procurement as an operational and commissioning discipline: investing in a disciplined approach to category, supplier, contract, risk and programme management. This requires properly embedded and well defined processes. Private sector equivalent: achieving operational excellence and lean ways of working. (c) Procurement as a driver of service transformation and public sector innovation: driving new service delivery models and embracing change levers such as shared services, outsourcing, risk-sharing reward structures, payment by results mechanisms and markedly different organisational configuration. Private sector equivalent: securing and sustaining competitive advantage.

(iii)Organisational sponsorship, ownership and accountability: this is a precondition and enabler of the other two. (a) Focused on procurement leaders and the professional procurement community: there is a huge requirement for capability and competence building across the whole of the function. Substantial investment is required throughout this decade. (b) Focused on major budget-holders and programme managers: they influence all of the most significant decisions with regard to procurement activity. (c) Focused on permanent secretaries, ministers, senior stakeholders and non-executives: their role is pivotal in providing the necessary elevation of procurement from a narrow, tactical, functional discipline to one that is central to the modernisation of government and the attainment of the Government’s major policy goals.

7. Using this framework, our views are:

(i)Transformational maturity: good progress under way, but we are barely out of the launch phase.

(ii)Professional procurement leadership: little real progress has been made; indeed the focus appears to have shifted more on to commissioning than procurement.

(iii)Organisational sponsorship, ownership and accountability: procurement is still seen as a necessary evil, rather than a key enabler of service transformation. Huge gaps in understanding. Very few public sector leaders have ever experienced or seen best-in-class procurement.

8. We also have clear views on progress elsewhere in public sector procurement:

(i)Public Finance Initiative: 650+ projects lasting up to twenty years, £267 billion of off balance-sheet liabilities. A national disgrace, and an industry that should not be exempt from reform and clawback of unacceptably high profitability. The wool was well and truly pulled over the public sector’s eyes.

(ii)Defence: the £36 billion of procurement black holes and cost overruns are finally being addressed. Attempts are being made to restructure and rebuild procurement. There is a need to embrace innovative solutions to achieve that. We agree with The Economist when they described MoD procurement as “dysfunctional”.

(iii)Health: has persistently suffered from chronic under-performance, and a lamentable and totally inadequate focus from DH central and Trust leadership. £40 billion+ of non-pay spend. Remains in need of radical transformation.

(iv)Local government: £50 billion+ of procurement in a sector that has had substantial front-loaded budget reductions. This is now driving real innovation in shared services and cross-council provision.

Addressing the Challenges & Obstacles of Achieving World-Class Procurement: a Nine-Point Plan

9. Top quality procurement is vitally important, so why isn’t it being done? Evidence from both the private and public sector is that it is surprisingly difficult to do. Procurement is poorly understood; teams are weak and under-resourced; and there is inadequate top-down executive focus and scrutiny.

(i)Elevate the transformation of public procurement as a policy goal of government: the scale of expenditure, its potential impact on the British economy and its contribution towards deficit reduction and growth at a time of austerity remain a relatively untapped lever of competitiveness. Transformation may have begun in central government in Whitehall, but the Cabinet Office’s influence and jurisdiction covers less than a fifth of total procurement expenditure (with less than 5% currently under managed control through the Government Procurement Service. There needs to be a significant raising of the game in the second half of this Parliament and throughout the next. The vision should be procurement transformation by 2020.

(ii)Dramatically change the ministerial and leadership model: we fully endorse the views of the House of Lords Science & Technology Committee in their pronouncements on Public Procurement as a Tool to Stimulate Innovation. Indeed we would extend the principles that they outlined. There should be a minister, represented in Cabinet, at the centre of government with full responsibility for total UK public sector-wide procurement. In turn, each government department should have a minister responsible for procurement. These ministers, together with permanent secretaries and chief procurement officers, should be held accountable for public procurement reform with their strategies and deliverables reviewed by a Public Procurement Reform Board. All major departmental plans should include explicit procurement improvement goals and requirements. Chief procurement officers, recruited and assessed against a more demanding specification, should report directly to permanent secretaries. This approach should be launched immediately and become fully operational through a three-year programme concluded by 2015.

(iii)Invest in a high-profile, professional procurement function: quality and depth of procurement talent really matters. Procurement remains a “Cinderella” function which is invariably overlooked and under-invested. Traditional calibre staff do not have the skills, attitude and capacity to provide the service needed. The transformation that is required cannot be devolved and deployed through the current structures. This has been tried on numerous occasions with procurement consistently under-performing. All major purchase points (across categories of expenditure, in major projects, infrastructure programmes, public finance initiative type deals, outsourcing ventures, and with all large prime contractors) need high-quality procurement professionals. High-quality commissioners, commercial directors, procurement managers, programme leaders, category directors and supplier managers with unavoidable mandates are the greatest lever for change. Procurement capability development currently evolves by accident in central government, with the notable exception of pockets of excellence such as the Government Procurement Service where their 0.5% supplier commission generates almost £6 million a year for the Procurement Investment Fund. This fund should be boosted considerably, with money channelled into fast-track capability building.

(iv)Build a permanent and motivated procurement cadre of professionals: the current procurement execution scenario of government, particularly in Whitehall and inside the M25, is highly dependent on interim managers and subcontractors who are paid on short-term contracts or a per diem basis. We estimate that 50% of all senior procurement staff are temporary and not permanent employees of government. This has arisen partly because of the embargo on the use of consulting companies, and partly as a mechanism for increasing remuneration in order to attract experienced staff. However, notwithstanding the significant cost of this approach, the real disbenefit is the lack of permanence as contracts end and interims depart. There is no sustainability and little knowledge transfer. However, we do not believe that one of the alternative mechanisms (insourcing expertise from consultancy companies) should be the default position either. Rather, there should be a step change in investment in high-quality, full-time procurement leaders, with a well-resourced talent management strategy created to underpin it.

(v)Extend the concept of the Commissioning Academy into a Procurement & Commissioning Academy. We wholeheartedly endorse, in the Civil Service Reform Plan, the intention to establish a Commissioning Academy to develop high-level skills in managing markets, negotiating and agreeing contracts, and contract management. A similar approach has already been adopted with the investment in the Said Business School’s Major Project Leadership Academy. But why has procurement been neglected? Good procurement is not an isolated function. Everyone working in commissioning, major projects and infrastructure and procurement operations has a duty to optimise the way in which taxpayers’ money is spent, and to apply the most modern tools of governance, programme management, lean process and value maximisation. Highlighting commissioning and project management at the expense of procurement is a very retrograde step, which should be quickly remedied.

(vi)Invest in fit-for-purpose, best-in-class procurement processes and operating models capable of delivering: there are at least seven core processes (drawing on both private and public sector case studies of excellence) that need to be properly embedded and applied with skill, diligence, rigour and governance. They cover category management, lean procurement, post-contract supplier management, outsourcing, shared services aggregation, risk management and major programme management. The Government Procurement Service has made a good start with its leveraging of £11.3 billion of common spend categories, making it the largest buying organisation in the UK. They have invested in modern category management tools and also spend analysis covering £60 billion and half a million suppliers across 17 central departments, with 80% visibility of procurement spend in central government. It is this type of endeavour that needs to be built into all departmental business plans, and with the outcomes reviewed regularly by a Procurement Reform Board.

(vii)Create a procurement team identity that people want to sign up for: several recent reports have argued that the key to talent management success is to double or triple remuneration, which will naturally attract the best staff from the private sector. We do not necessarily share that view. The best private sector companies value procurement individuals highly, select them carefully, offer market-competitive remuneration, incentivise them to drive through the necessary internal and external changes, and continually invest in their personal and professional development through mentoring, coaching, training and performance management. This is the way to address systemic and long-term skill deficiencies. Talent and skill acquisition requires a properly resourced, well-codified and holistic approach if it is to succeed. All permanent secretaries and CPOs should be held accountable for implementing that approach.

(viii)Adopt breakthrough strategies for cost management, value maximisation and economic growth: senior leadership needs to look beyond the traditional techniques of price negotiation, framework agreements and compliance to EU procurement rules and regulations. Modern strategic procurement is about supplier-led breakthroughs in innovation, service delivery, operational excellence and whole life-cycle costing. All who interact with major suppliers should be exposed to such breakthrough strategies via the Commissioning & Procurement Academy.

(ix)Push for greater speed and simplification in reform of EU procurement rules: this is already under way, with the European Commission having committed to making changes by 2014. However it is not just the rules that need changing, but the interpretation and application of them. All too frequently, procurement adopts overly risk-averse approaches and hides behind the rules. This calls for a major change in both mind-sets and operating procedures.

January 2013

Prepared 18th July 2013