This afternoon I'd like to welcome Peter Smith, Managing Director of Procurement Excellence Ltd., to Spend Matters. Peter is a professional leader with considerable expertise and experience in public and private sector procurement performance improvement. Before moving into consultancy, he was Procurement Director for the Department of Social Security (the DSS - the largest UK Government central Department) and the NatWest Group, as well as holding senior positions in the Dun & Bradstreet Corporation and the Mars Group. Please join me in welcoming Peter to Spend Matters.
Even from the UK, I noted Obama's interest in purchasing matters before his election, so it was fascinating to see the letter here from Busch, Minahan and Fogarty. I totally agree that leadership is key if this is to get anywhere, and it is worrying that key appointments have not been made. It was also interesting to see the White House memorandum on “Improving Government Acquisition” that spelt out the need for substantial savings.
So I want to relay some UK experience in implementing government purchasing savings programmes in the hope there may be some transferrable knowledge here. I've been involved with government procurement in the UK for many years; I was CPO for a large central government ('federal' in your terms) department in the mid-nineties, and have worked as a consultant now for some years, mainly around central and local government clients in the UK.
I note that Obama pre-election talked about already having "identified potentially $40 billion in savings..." What I get from the memo, however, is that the required 7% saving is an aspirational target. It may be realistic and easily achievable, but it strikes me that this is not 'already identified' savings; Obama is not going to tell everyone exactly how to achieve them. This fits with our UK experience; however diligent any review from above might be, and however much the headlines talk about big savings to be had ... it is usually down to local purchasing and budget managers to actually find the pot of gold!
In the UK, public organizations were set a target of 2.5% a year efficiency savings (on total spend, not just purchasing) following the publication of the Gershon Efficiency Report in 2004. This stepped up the focus on government purchasing and was very successful in raising the profile of our profession. Good work has been done since then in improving performance, much of it driven by the Office of Government Commerce (part of the Treasury, our Finance Ministry), but one response to Gershon was interesting. Every single organization in the UK as far as I'm aware, from police forces to central Departments, health authorities to the military, achieved those targeted savings! And procurement savings were by far the largest contributor to the total. But there has been much debate around how 'real' those savings are, and the UK's National Audit Office stated that only 25% of claimed savings "fairly represent the efficiencies made". Unfortunately, this has led to political and public cynicism about the savings; despite the fact that many organizations have used the programme to genuinely and significantly improve purchasing and acquisition performance.
So if you want to avoid that cynicism, the most important set of issues for the success of your programme will be around the methodologies for measurement and recording of savings data. This sounds boring but it is not -- it is central, and there are three vital questions:
- Are the 'rules' for claiming savings clear, well communicated and understood by relevant staff?
- Are they tight enough so that they measure only 'real' savings and efficiencies?
- How are you going to audit the data being produced to ensure that reported savings are genuine?
These questions get to the heart of the problem. I will bet a substantial sum that if you don't address these properly, all of the US organizations involved in this programme will 'achieve' the 3.5% savings and, on paper, the $40 billion will be comfortably achieved. I also predict that, unless these 3 issues are firmly addressed, you will all be asking in two years time, "so where did this $40 billion actually go? Why can't we see it?"
The savings methodology in the UK has been improved considerably from the first Gershon implementation, but initially it was too weak. Savings could be claimed that on investigation were not what any reasonable person would consider 'real' savings. There were many examples; from organizations that merely cut budgets with no real efficiency plan (so it was a saving, but through cutting services rather than efficiency), to situations where people claimed 'savings' because their bought-in prices were lower than some notional market price; even if their real prices had risen 20% that year!
So how is your methodology defined? I would immediately worry about the "ending contracts" process described in the budget memo. I can see an immediate ruse here. I'll terminate contract A, which costs $5 million a year. Now, it just so happens that most of the activities within contract A are now delivered by a new contract B, which costs $8 million a year. But that's OK, don't need to tell Obama about that, do we? Just claim the $5 million as savings. Or maybe I'll invent a few new projects, then terminate them before we even kick off, claiming those as cost avoidance savings.
It is good to see the focus on greater skills and better practices. But are the costs of all these extra people, and training, and systems going to be netted off against the savings? That wasn't done initially in the UK and was picked up by the NAO as an issue.
I also don't get much sense in the memo of the need to challenge requirements and specifications, which in my experience was one of the best sources of real savings in the UK. Do your contract officers have the authority to challenge budget holders (in a constructive manner of course) in areas such as demand management, rationalization and harmonization of specifications? The best performers in the UK have certainly moved to include that role in purchasing job descriptions. "Reengineering ineffective business processes and practices to reduce cost to spend" is great stuff but frankly won't deliver $40 billion. Buying less, and buying at lower specification just might. The focus on reducing the use of high-risk contracting is good, but a 10% reduction strikes me as not exactly a 'stretch target'! (Other than in some very specialist areas, I suspect we already use these 'high-risk' techniques less in the UK than you do).
But back to my central point; there is no mention of a detailed savings methodology in the memo and if that doesn't exist, someone better start writing it -- now. The note asks for plans but has no detail on how they will be assessed for feasibility; is OMB geared up to analyze and respond to submissions in November? Then how will the savings be reported; and how will they be verified or audited? All of this needs to be put in place quickly or I'm afraid this will become a theoretical exercise with little credibility. Don't waste this once in a generation opportunity to increase focus on acquisition practices and upskill the US government purchasing profession!
Spend Matters would like to thank Peter Smith for sharing his thoughts.