Disputes over procurement “savings” are not unusual

We featured on Monday the Southwest One / Somerset County Council dispute over their outsourcing deal and the income IBM believe they are owed as a share of procurement savings.

This takes me back to stories about share of savings deals where the consultant found an immediate big gain, and promptly invoiced for some huge amount. “We didn’t think we were going to have to pay you that much – and so quickly” was then the answer from the client. A dispute followed – but the consultant usually won. Given that the share of savings contract had usually been written by the consultant, not surprisingly, it usually seemed to work in their favour!

We also know just how difficult it is to measure procurement savings accurately. I know we’ve featured this before, but here is an excerpt from my tongue in cheek “12 ways to fiddle your procurement savings” primer, which I wrote in about 2005 to help UK Government work out how to measure savings from the Gershon Efficiency Review!

  1. Claim savings against your own defined market ‘benchmarks’.
  1. Set a high commodity–specific inflation rate then beat it (e.g. catering – assume 8% inflation; we only paid 5%, so 3% saving)
  1. Take advantage of market prices naturally reducing e.g. most technology (although this is genuine ‘saving’, it is passive, not active.)
  1. Claim sourcing savings even if more quantity bought and overall spend rises (buy 1100 PCs at £800 instead of 800 at £1000 and claim a ‘saving’ of 1100 units x £200 = £220K although overall spend has risen by £80K).
  1. Claim demand management savings even if unit price and therefore overall spend has increased (e.g. buy 800 printers at £1100 rather than 1000 at £800 and claim a ‘saving’ of 200 units x £1100 = £220K although overall spend has risen by £80K again!)
  1. Just ignore categories where price is increasing .e.g. energy (unless we can work it in our favour – see points 1 and 2.)
  1. Claim savings against unrealistically high budgets for capital and project spend, or against high initial supplier bids.

If nothing else, that demonstrates how difficult it might be to establish the rights and wrongs of the SW1 case. And there may be an additional complication when different parties are involved in terms of proposing and accepting savings; what if IBM identified or suggested what they saw as valid initiatives to drive savings, but Somerset didn’t implement them – or only partially implemented? So if a contract only gets 30% internal compliance in the Council, might IBM argue the saving was available at the 100% level if the Council had implemented it properly? I guess it will depend on just what the contract says...

In a way, I hope it does come to court, because it might give some useful pointers and best practice guidance in terms of how to develop robust savings measures and share of savings agreements. However, less positively, I suspect the prospect of court action means it is less likely that the National Audit Office (who are gradually taking over responsibility for reviewing value for money issues in Councils from the Audit Commission) will investigate whilst legal proceedings are on the cards. Which is a shame, because we really could do with an independent investigation into what has gone so badly wrong here.

Voices (5)

  1. Chris C:

    Item 7 is the way the automotive industry works, as inherited from the Japanese – agree an unnecessarily high price with a supplier at the launch of a vehicle so he can offer year on year “efficiency” cost savings and then he keeps his fingers crossed that the vehicle doesn’t stay in production longer than planned…

  2. Roger Conway:

    Oh dear.
    Yet again Dave Orr has called it right.

    I’m absolutely amazed that there are still people around who just don’t get it – that outsourcing unless there are gigantic economies of scale (something impossible in service and people based operations) then the ‘squeeze’ will never cover anything more than the profits for the contractor, let alone give any savings to organisation.
    As Dave says, multinational companies are good at contracts and legals even if they are woeful at service delivery.
    There are usually good reasons why a contract wants to sign a contract at 3am on a Saturday morning, and you can bet your bottom dollar that the public benefit isn’t it.

  3. Dave Orr:

    It has come to court as formal legal proceedings started yesterday:

    http://www.bbc.co.uk/news/uk-england-somerset-19493731

    Your piece is excellent. In the case of SW1 procurement savings, they were not predicated on SCC implementing process changes, but relied on “Category Management” and directing all spend to the new contract agreed via (the expensive £30m) SAP ERP system.

    NOTE: It was IBM pre-contract signing who came up with the influenceable spend figures and ludicrous £200m of savings possible.

    There is a lot of (deliberate?) confusion over savings terms – not helped by the Chief Constable Colin Port of Avon & Somerset Police sitting on the Board of his contractor SW1 and also using them. Mr Port resignedfrom SW1 last September.

    The Duffers Guide to SW1 savings terms:

    a) “Pipeline savings” – A NeverLand dream state where massive savings up to the £200m claimed are just around the corner! Or IBM/SW1’s latest best guess.

    b) “Implemented savings” – Contract for a category of spend is agreed with clients. Contract implemented on SAP Buying Catalogue and now new spend channelled into it.

    c) “Realised savings” – Cash coming into SCC from actual savings rather than “best guess” in b) above..

    I suspect IBM will win legals, as they are better at writing contracts than Councils and Police and can afford to employ “World Class” lawyers!

    Did big frontloaded 27% Government cuts to Councils in 2011 lower spend and then trigger a contract compensation clause?

    Why didn’t this silly Alan Jones-led “Beyond Excellence” contract model for contraction as well as expansion?

    Lesson: Predicting 10 years out in complex public services and writing a watertight yet flexible contract is IMPOSSIBLE!

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