The UK Spend Reduction Debacle: How Not to Get Suppliers to Cut Costs

The UK has finally realized that it is drowning a potential economic recovery in its own government spending. However, unlike the US, which continues to spend freely on entitlement programs and other "stimulus" activity (therefore going increasingly into debt), at least UK officials realize how bad the situation is. And we should all give them points for recommending some painful steps to reduce spending and the overall budget deficit. Yet personally meeting with suppliers, as the UK Cabinet Office Minister Francis Maude recently did according to the WSJ, to demand price decreases is a recipe for coming up short. According to the above-linked article, the UK minister is meeting with "the chief executives of the government's 20 largest suppliers to start 'renegotiating with them across everything that they do for government to get the cost down.'"

Perhaps we should give the UK some credit for attempting to "replicate the renegotiation of contracts that many private sector companies carried out during the recession." Yet I'm circumspect that there will be much replication going on here, and that what the UK will realize will end up amounting to wasted cost reduction potential. After all, when you're trying to cut your budget by over $10 billion dollars in the current fiscal year, it's like trying to turn an oil tanker 90 degrees in less than a kilometer.

Moreover, private sector companies often succeeded in these tactics by having the ability to more easily change suppliers than the UK government does. The organizations who were most successful at cost reduction during the downturn had an innate understanding of their supplier's cost structures and margins down to a level that goes significantly deeper than what a typical public contracting official could ever hope to have. Seriously, these are individuals who could probably tell you more about whether they're getting a good deal on a bottle of scotch or gin for their own consumption versus whether or not what they buy for the Queen and their fellow countrymen is a good value.

In my view, having just come back from a whirlwind trip to the UK, it would seem the country's best chance at getting the type of purchase cost reduction it expects would be to suspend the types of silly rules that always require "non-price" factors to be considered in just about every contracting circumstance. After all, such a model is a recipe for suppliers manipulating contracts in their favor, especially when former cushy relationships exist.

Simply demanding cost reduction from corporate executives without a BATNA (best alternative to negotiated agreement) that both parties are aware of will only further hinder contracting practices and minimize the potential for savings. If the UK is serious about procurement cost reduction, perhaps they should suspend the regular government contracting rules for 24 months and encourage private sector advisers to work with them on an implemented, gain-share savings basis. And no gin -- or free pints -- allowed in the contracting phase!

Jason Busch

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