Cabinet Office put the procurement squeeze on UK Government’s top suppliers – are the savings real?

In our last two posts on this Cabinet Office programme, we've described what is happening, including the level of Ministerial involvement. Today we'll come to the crunch - are real benefits emerging?

Suppliers have proposed 'savings' under three categories; ‘guaranteed’ savings are just that; either they need no input from customer Departments (e.g. a straight price cut or end of year cash rebate); or they have been already agreed with the customer. 'Conditional' savings have yet to be agreed with the customer and generally require the customer to do or accept something, such as a change in specification or service levels.

The third category are the 'blue sky' ideas that suppliers have been encouraged to put forward; by definition, these may or may not prove to be acceptable, and often will be longer term and / or require more radical change.  The focus has been very much on savings that take effect in 2010/11, but some particular conditional or blue sky initiatives will obviously run on into future years.

I’m assured that there is no double counting with the savings arising from the moratorium on spend in the areas of consulting, marketing and IT projects. The key determinant here of whether a saving is genuine is pretty simple; is it a reduction in total spend with that supplier in this financial year? And the methodology is being applied at a detailed level; data on savings is being collected at a line by line level (e.g. agreed less frequent cleaning regime for Department X office estate; cost reduction £300,000 in 2010/11). The CO team gets sign-off from the Department for every line item, which means that the total savings by Department can be identified (although this has not been collated in total for the year).

My understanding is that the £800 million saving that Maude has quoted comes from the guaranteed savings numbers and a reasonably conservative estimate of what will be banked from this year’s ‘conditional’ numbers.

But what does that mean for suppliers? Well, clearly this is not pure margin / profit reduction.  And indeed, as a firms like Serco makes only around 6% bottom line margin it is hardly likely that they could give up a major slug of that without problems for their business and investors.  So, much of it from the suppliers’ perspective will be savings offered up from changes in specification or service levels; or a reduction in quantity of goods or service purchased, or changes to contract timings and profiles. I suspect there will be some 'hard cash' presented to Maude; but this will be a small part of the overall savings.

And personally, I'm quite happy with that. It partly explains the paradox we've discussed here around suppliers' lack of profit warnings or similar; because most of these actions don’t necessarily cut into profit, or at least not to a dramatic extent.  Reducing volume is never good news for a supplier, but it can be managed in many cases to have limited effect on profit. Changing specifications may even be positive for the supplier, even if it saves money for the customer. It would be nice however to think that we might see the profits per public sector-focused partner in the big consulting firms coming down a little in 2010/11….

It is also clear that suppliers will look to mitigate the effect by driving their own internal efficiencies (a natural response to pressure on sales or margin) and by looking to drive savings through their own supply chain. It is ironic that Serco, who were castigated for their approach to getting a 'contribution' from their own supply chain, were purely reacting very quickly and with a desire to be able to offer savings to government! They didn't handle it well, in our opinion, but there was nothing wrong with the principle of looking to drive value and savings out of the supply chain given the situation Serco themselves were in.

So, summing up; do we think the £800 million savings is 'real'?

Yes, as long as you understand it isn't a pile of £20 notes on Maude's desk.  It does it appears represent real savings to Departments' budgets though, which is, we would suggest, the most important thing.

So, while we'll wait for NAO's final validation, our view is that this looks like a well-structured and executed programme; we might even go as far as to say this is a case study worth promoting, certainly as a model for other parts of government and in some cases, for even the private sector.

On that – for us – remarkably positive note, tomorrow we'll look at what happens next, which will perhaps give us the opportunity to revert to our usual slightly grumpier approach!

Voices (5)

  1. Guy:

    Actually she didnt have the money in her budget, but was on the board and was going to spend the money anyway. Crazy times, and a good example of why that particular company is no longer independent.

  2. R:

    Again, another sound example. Though this is my perspective based upon reading your insight: if she had already profiled that spend within her budget (which it looks like she had) then, actually, whatever she spent on the hotel rooms, she subequently saved 25% of that specific aspect of her budget because of your negotiations. What she didn’t do was use the savings to spend on something else because she was given the discretion to do so.

  3. Guy:

    In resposne to R

    At a previous company we once reduced the price of hotel rooms by 25% and got compliance up to 95% – so a real saving.

    Within 3 months, and not related to the savinsg achieved, the HR director embarked on a major programme to train staff distributed across the network, and she chose to do that in a classrtoom environment. This necessitated overnight stays, which effectively increased volume by 25%, effectively wiping at the savings.

    But wouldnt you say that Procurement still made a saving, even though you wouldnt have seen a spend reduction at year end, all other things being equal.

  4. R:

    I won’t say which person said this, nor even indicate which private sector company they supported, but he was once quoted in a particular magazine in saying “we’ve generated £xm in savings for the businesses, but what the businesses then choose to do with those savings is up to them…”.

    So, let’s say a business is presented with a ‘saving’, but it then goes and spends it on something else, is it still ‘saving’ to the overall company?

    So, let’s say the Group FD proactively takes all of the savings out of the businesses’ budgets and ‘banks’ them? A ‘saving’?

    If the Procurement Director of a Footsie 500 company declares cash savings of £100m on an annual spend of £1000m, would you not expect to see next year’s projected spend to be £900m? But, what if the savings have been profiled over a number of years, or over the life of the contract? Or profiled against the price reductions in future contracts? What would the overall savings profile look like in those scenarios?

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