Government negotiations with major suppliers – a progress report

I've spoken to a couple of very well informed people this week about the Government initiative to "renegotiate key government contracts to release savings".

They bear out the conclusion I've been coming to - this is a purely political "we need to be seen to be doing something" initiative. No-one in Government procurement I've spoken to over the last few weeks has any expectation that this will actually deliver immediate or even rapid savings.  Why would it; as we said here on the Supply Management blog, how could a large US / German / Japanese / French public company justify to their shareholders that they had given away margin to the UK Government for nothing in return?

So... we hear that the individual supplier meetings started this week. Francis Maude kicks off, for 20 minutes or so.  Then he leaves it to a two-person team; Adrian Kamellard, ex Partnerships UK, now Cabinet Office;  plus one of the top Commercial Directors from central Government (working in rotation I believe).  Adrian is a very smart procurement / finance strategist but I have no knowledge of his negotiation credentials....suspect he is there more as the programme manager once OGC directors were excluded / managed to exclude themselves from that role!

These two go off with the supplier to the "deal room" where this happens (OK, from this point on, this is my extrapolation).

Random commercial director (RCD):  So, please can we have some cash?

Random major supplier (RMS):  Well, clearly we need to discuss what our customers can give us in return for the major savings you seek.

RCD: No, we just want some cash.

RMS: Well we just can't do that.  And frankly, what are you going to so if we just say 'no'?  You have no BATNA.  But as we're nice people, here is our 57 point plan for taking cost out of our three major contracts with DWP, MOD and Home Office.  We can offer savings of 14%, 16% and 21% respectively.  But we need these 249 concessions in return.  We need; relaxation of a range of contractual obligations; some changes in specifications and service levels; elimination of a range of tedious KPIs it costs us a fortune to achieve and measure, a two year contract extension, and the hand of your daughter in marriage.  In return...all this gold can be yours!

RCD: err, I'm going to have to talk to my colleagues in DWP, MOD and Home Office about that.  But the daughter thing probably works....

The fact is, the Commercial Director of HMRC can't negotiate on behalf of MOD (etc  etc).  He can't possibly understand the detail of each key contract well enough to do that unless he spends the next 3 months doing nothing but getting up to speed on that detail.  With a few exceptions (which we will come back to tomorrow), the idea of 'central' negotiations of these huge, complex contracts is untenable. These are the procurement equivalents of show trials.

Now, one of the principles of this blog is that we will not be afraid to criticise, but we will be constructive.  So tomorrow we will consider what could be achieved, including some thoughts from my contacts on the inside, and (not that I expect he reads this) we'll offer some advice to Mr Maude.

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Voices (6)

  1. Makeman:

    I am a procurement manager at a local authority. In the course of formulating our approach to contract reviews, I was recently having a debate with a fellow procurement colleague about how savings from contract reviews should be counted. He thinks that savings gained from a reduction in service levels (e.g., reducing the number of home visits, or number of bin collections) should be counted as ‘procurement’ savings, whereas I was of the view that, regardless of where the initiative came from, in most cases reductions in service levels should really be counted towards departmental savings as it is the dept. who determined the service levels in the first place, as well as having responsibility for policy outcomes (and any fall out) as a result. Any thoughts?

    1. Peter:

      Great question! I think there are two elements here; the nature of the saving, and who takes the credit for it.
      What you describe is a cut in service level – an equivalent would be using lower specification product. Unless you can show that it has no effect on output this is not an efficiency saving, even under the ‘old’ Treasury definition! It is a “cost reduction / saving” but not an efficiency saving because although input has reduced, so has output. I guess if you maintain citizen satisfaction while reducing number of bin collections that is different; we would argue output has been maintained so it is an efficiency. I saw many claims of ‘efficiency savings’ when I worked with OGC post Gershon where people had just cut budgets and there was no accompanying action to get better value from the spend. NOT an efficiency!
      2nd point – who gets the credit? I’m with you, doesn’t really feel like a ‘procurement’ saving (although I have probably happily taken credit for such savings when I was a CPO!) I guess you could make a case where it is genuinely Procurement’s idea (you come up with a novel new way of scheduling bin collections) but where it is a pretty simple ‘cut’ then it feels like a Departmental cost saving.

  2. Rob:

    Recently (very), I led a significant negotiation of the largest (by spend and profile) supply contract for a high profile public body. It led to ‘annualised’ cost savings (measured at a budget level, ie not ‘projected savings’) of 39% – I was ever-so-slightly disappointed that we didn’t quite hit the 40% mark… Most notably, and relevantly, the supplier sits on Mr Maude’s ‘top 19’ list. The negotiation, from inception to receipt of the negotiated schedules, lasted just under three months.

    A fairly significant cross-functional team was formed comprising approx 20+ relevant people selected from both the client organisation and the supplier. To achieve the savings, we reviewed the strategy and focus of the service provision (to align it to delivering more relevant outcomes), refined the scope and specification, overturned every stone while challenging every existing cost (in some instances, with benchmarks), and even introduced a new incentivisation scheme to encourage the supplier to achieve, maintain, and surpass service levels, especially during transition which, due to the scope/profile of the service (and reduction in headcount) and its focus on supporting ‘front-line’ users, would last six months.

    We planned out our strategy, approach, and tactics in detail, and established a cross-functional team that brought together the right blend of ‘policy-lead’, ‘specifier’, ‘buyer’ and ‘provider’ together to enable every stage of the negotiation to take place on an informed basis, and at speed.

    I would expect to see similar dynamics underpinning these central negotiations, not simply because of my recent, personal experience (having led and delivered a successful renegotiation with one of these suppliers), but because, after more than two decades as a procurement practitioner, I know that this is simply best practice.

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