Public sector procurement – time to transform?
The growing role of procurement in the public sector
Almost a decade into a regime of austerity and cutbacks, the public sector landscape has altered dramatically.
Public sector employment has fallen to a 70-year low in terms of share of the labour market, with the loss of just under a million public sector jobs since 2010.
At the same time, demand for local public services has actually been rising, and cost pressures are increasing, yet government grants to councils have reduced markedly (by more than 49 per cent in real terms since 2010 according to the National Audit Office).
Consequently, the structure of expenditure in the sector has undergone something of a transformation, with the volume of 'non-pay' spend now forming a considerably larger part of the overall budget:
Finance Director, Local Authority
Spend used to be two thirds payroll to non- payroll. After several years of headcount reduction, particularly in middle management, that position has almost reversed
With further cuts planned and many departments already trimmed to the bone - or wiped out entirely - the question of how procurement can play a greater role in generating further efficiencies is increasingly in focus.
The National Procurement Strategy – the first strategy developed by and for English councils - was launched in 2014.
Making savings was a major theme of the strategy but, although progress has been made, with some excellent success stories reported, councils have continued to operate in a very challenging financial environment, placing a question mark over the sustainability of local public services.
The Local Government Association (LGA) estimates that by 2020 there will be an overall funding gap of over £5 billion.
Why does public sector procurement lag behind private sector standards?
The purpose of procurement in the public sector remains the same as in the private sector: to source goods and services from the supply market while maximising value for money
However, because these sectors operate within different contexts, trying to directly compare the two often amounts to comparing apples with oranges:
- The public sector is considerably more constrained by regulations than the private sector. In spite of views to the contrary, even after Brexit (in whatever form this ends up being) EU rules have been implemented into UK regulations which will remain on the statute book unless and until repealed.
- There are more complex customer requirements that go well beyond typical buying expectations - with factors such as social value, driving local employment and enhancing education often in the mix.
- The number of stakeholders involved is often wider and more complex. Contacts that sit outside the buying organisation, such as analysts, technical professionals and politicians often have major influence.
- There is a greater requirement for transparency as 'the public' have a particular interest in reviewing how the money they have paid in taxes is being spent.
Never-the-less, comparisons continue to be made.
Procurement in big business is a proven value lever, creating differentiation and adding, substantially, to bottom line financial performance.
But perceptions about procurement in the public sector are that it lags far behind:
Former Head of Local Authority Procurement
In the commercial sector you have the full range of capability from well run, well resourced, appropriately governed procurement units running efficiently and effectively. The public sector still lacks leaderships skills and teeth, is too easily told what to do and does not have sufficient support at Senior Director level
The path to transformation
Although significant differences between public and private sector procurement exist, a number of principles and best practices will be transferable.
Examining procurement maturity
All organisations have a unique procurement proposition.
In certain instances, often within public sector organisations, there is limited internal procurement resource and little organisational influence.
At the other end of the spectrum, many private sector organisations (in sectors such as car manufacturing for example) have highly advanced procurement operations, with an excellent level of internal influence and a focus on value creating activities.
Determining exactly how far a specific procurement function should progress along this 'maturity curve' is a logical starting point in the journey of transformation:
Assessing procurement performance
Running an assessment of procurement performance provides an effective way of creating a useful, early stage view on the effectiveness of an existing function, its positioning on the maturity curve and areas for development.
The first step lies in understanding exactly how the existing function is currently performing.
Areas to explore can include:
- how effective the function currently performs against existing organisational requirements
- how it compares, benchmarked against other public - and private - sector comparisons
- what areas might require enhancement in the light of longer term strategic aims
This exercise does not need to be time consuming, overly-complex - or expensive.
The 'Big Four' have dominated the procurement assessment industry, particularly in the public sector, for several years. But this doesn't need to be the norm and a growing number of boutique procurement specialists bring a more affordable - and often more practical - option to the table for consideration.
Creating spend visibility
Complete visibility of an organisation's spend data is the bed-rock of procurement excellence.
High quality spend data is the basis for the core procurement processes; from strategic planning to supplier management, category management and contract management, through sourcing and negotiation to compliance, governance and reporting.
But spend transparency - and the ability to transform data into actionable insight - is often completely missing in the public sector.
The information required to create it is typically not readily available; many public-sector purchasing systems contain only an aggregated view for budget purposes (that is, the types of goods and services the organisation is buying) and an item-by-item record of purchases from each supplier.
And this is only the beginning of the issue because there is a gulf of a difference between conducting a spend analysis and creating the actionable insights that are required to inform excellent procurement decision making.
Getting the data piece right – if done correctly – requires specialist resource, very possibly in the form of consultancy support. It is that intellectual analysis, combined with excellent spend analytics that are proving a powerful combination in some of the most innovative private sector firms right now.
And the opportunity to create this exists in the public sector too.
It just requires the determination to make it happen.
Effective stakeholder engagement
For procurement to operate to its full potential, stakeholders must be effectively identified, brought on board and engaged.
The key to making this happen, in the private sector, is time investment.
The time required for effective stakeholder engagement is often underestimated, with many public sector procurement functions wrongly believing that more time should be spent with the supply market - when in fact this should be the other way round.
Subsequently, stakeholder misconceptions about the role of procurement remain:
Chief Operating Officer, Central Government
Procurement is still seen as a transactional activity, hidden away behind closed doors
This out-dated view should be challenged.
Every stakeholder should be identified, their influence assessed and an ongoing management approach and style created and deployed.
Without this, procurement excellence doesn't have a chance.
As organisations develop their procurement sophistication, a shift from a reactive ‘requirements-based’ approach to a proactive one where all spend is considered and ‘categorised’ has proven to be a highly effective approach in the private sector.
By focusing on specific supply-market categories and the strategies and workplans that are required to proactively source, address and manage them, significant enhancements (and cost savings) become possible.
Category Management is particularly well-suited to complex organisations where the management of multiple stakeholders through cross-functional teams is a key success factor - none more so than in the public sector:
Driving innovation and collaboration with suppliers
Some of the most successful private sector procurement initiatives have been delivered through direct collaboration with strategic suppliers.
And this could (and should) be a huge area in the years ahead in the public sector.
An interesting example of this is in the area of Supplier Collaborative Cost Reduction (SCCR).
SCCR is a carefully facilitated, structured and managed process (usually working at its best with the input of an independent external partner) which takes the buyer and supplier through a measured and analytical process to identify, quantify and implement a wide-range of cost reduction techniques:
Responding to the talent challenge
Having the tools, systems, quality of data and insights are all, of course, crucial components of successful procurement.
But its good people that really make things happen.
And identifying, developing and retaining good procurement people is not an easy task; in certain instances its very possibly the single biggest issue facing procurement functions in the coming years.
UK Public Sector Deputy Finance Director
The (financial) task in hand is, frankly, enormous and compounded by the fact that we struggle to attract the experience we need in procurement
There exists a huge amount of commentary on this subject and certain best practices and traits can certainly be investigated, as organisations consider their longer term procurement talent challenges.
Some of the basic areas include:
- Senior leader support and proper 'access' to the organsiation to get the job done in a genuinely meaningful way.
- Colleagues from across the business who are effectively involved and empowered in driving the change agenda
- A 'high engagement culture' where the effective management of behaviour occurs at all levels
- Excellent opportunities for progression
The future vision
With a ‘starting point’ defined (based on the current capability of the procurement function and spend transparency) an informed view can be made on how procurement can support the wider organisational strategy in the future.
Areas for consideration might include:
- what % of non-pay spend should be actively managed through procurement
- the structure and size of the team required to support this
- what cost saving/cost avoidance/value-for-money objectives should the team deliver
- the role of procurement collaboration
- options for supplier relationship management, category management and contract management
- the role of e-procurement
- what opportunities exist for supplier collaborative cost reduction
Points to consider
- Public sector procurement will have an increasingly crucial role to play in supporting organisational transformation and future cuts
- There are big difference between public and private sector procurement but a number of tried and tested approaches are still transferable
- Robust spend analytics and procurement performance assessment are logical starting points for any transformation journey
- Best practices such as stakeholder engagement, category management, contract management and supplier collaboration all have major roles to play