The Perfect Storm – Part 1 (first half!)

Continuing our serialisation of our White Paper on public procurement.

Part 1                        The Perfect Storm

As soon as we move into the post-election world, procurement activities will be expected to start generating savings and benefits.  What could get in the way of that?  Here are six factors that concern us.

1.         Efficiency savings prove elusive

Over the last few years, ‘savings’ have been declared against a backdrop of generally increasing budgets.  While the National Audit Office and others have commented on the reality or otherwise of the savings, it has not mattered too much how ‘real’ they were for most organisations, who continued to have enough resource, and growing budgets, to at least preserve services even if savings were not made.  The world will be very different once budgets are being cut in real terms.  If real efficiency savings are not made, activities, services and staff will have to go.  This will put pressure such as we have never seen before on public procurement to deliver in order to avoid painful cuts.

And savings measurement will have to be real.  Organisations that declare savings that are not tangible will suffer a double whammy.  They will have to make real cuts anyway to balance the books, as the false savings will not help.  And they will also lose public confidence in the credibility of their savings numbers, which will be exposed as bogus when jobs and services go.

2.         The ‘stickiness’ of public procurement expenditure

Few appreciate how large a proportion of public procurement spend is not variable in the short or even the medium term.  PFI contracts; long-term outsourcing deals; committed contracts in areas as varied as Legal Aid or military equipment; all are difficult or impossible to cut in the short term.   Taps cannot be turned off overnight, or at least not without huge penalties or other consequences.

Even at a more mundane level, facilities and property costs do not drop automatically if (for instance) staff numbers decline by 10%.  Other areas such as consultancy, travel or stationery are more variable, but we are likely to find that in some organisations, at least 50% of procurement spend cannot be quickly or easily reduced. This could lead to a situation where, in order to reduce total costs by, say, 15%, staff numbers may have to reduce by 20% or more because of the non-addressable and contractually committed nature of much procurement spend.

Such outcomes would be presentationally difficult, politically and administratively, and would certainly lead to questions about the effectiveness of procurement and whether it was making the contribution expected of it.

3.         Procurement in the public eye

We have mixed feelings about the policy to publish all public sector contract details which the Conservatives propose.  We support publication of more information than is common now, but publishing everything is likely to lead to a new industry of lawyers and consultants analysing contracts in order to issue challenges and question legality, value or propriety.  It may be ultimately that this will lead to better procurement and more focus on spend control (it may simply deter organisations and politicians form spending money at all!)  But in the short term, the consequences may be bloody.

In Sweden, where greater access to contracts has been available for some years, around 10% of government contracts are challenged.  Such an outcome would put pressure on procurement functions and organisations generally.  We may also see political consequences as the media (and particularly the blogosphere) take delight in looking for inappropriate spend, badly drawn contracts, or links between suppliers and politicians. Freedom of Information requests are already occupying significant amounts of time for procurement teams; this will only increase.

At the same time, EU regulations such as the introduction of the Remedies Directive are increasing the risk to public organisations, with greater penalties if they get procurement wrong.

The net result may be to encourage better procurement performance over time, and more open access to the public and providers.  But in the short term it will all add considerably to the pressure on and workload for public procurement, and may focus attention on proper process rather than driving for value.

(continued tomorrow)

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