Whitehall Procurement savings targets – the numbers just don’t add up

Here is the post I wrote as my regular Supply Management Magazine Blog over the weekend.  For reasons which we may discuss further tomorrow, it did not appear today, so here it is.

The Steve Bagshaw interview with John Collington provided a lot of interesting material, although in places John was obviously playing a very straight bat in the absence as yet of clear announcements about structure and process for centralised Whitehall procurement.  I’ve written here also about how this initiative aligns strategically and my fears on that score.  But today I wanted to pick up on a different aspect; the savings targets.  Here is the quote from the interview.

SB: So next year, that £12 billion will be £11.6 billion, then £11.2 billion, £10.8 billion to £10.4 billion as the £400 million each year is shaved off?

JC: That’s what we are headed towards because it is in line, and I believe that any procurement savings should be in line with the cost reduction targets that are in place for any specific department.  I don’t think it would be fair for procurement savings to be any less than the savings that the departments themselves are being challenged to make.

While John’s comment is spot on, the numbers are not.  Basically, they are far too low given the challenge facing central Government.

Most central Departments have to reduce admin costs by between 20 and 40% over the next four years – the average is around 33% (a third).

If a Department has to reduce costs by a third, it stands to reason that if it reduces ‘procurement’ spend by less than that, it will have to cut staff costs by more.  And of course, many of the target spend categories under this initiative will reduce naturally as staff numbers reduce – travel, desktop IT and stationery costs are pretty much guaranteed to reduce in line with staff numbers, even if procurement does absolutely nothing pro-actively.

So the savings target John Collington announced was £400 million a year; which is just over 3% on the £12 billion in scope spend.  That equates to 13.3% cumulatively over the 4 year period, way below the 33% procurement saving we need to see just to ensure procurement contributes its “fair share”.

Now, I believe that ‘procurement’ or third party spend represents around 40% of the total cost base for most Departments; the rest is staff costs.  So, according to my calculation, if ‘procurement’ only saves 13%, we will have to see a 46% cut in staff costs in order to get an overall one third cost reduction over the four years.

Is this evidence that Whitehall procurement just hasn’t quite got to grips yet with the scale of the challenge?  Or is it an attempt to make sure that this is a target that cannot fail to be achieved?  Because it will be achieved even if procurement contributes nothing – apart from anything else, budgets will be cut by at least that amount!

While I sympathise with everyone involved who is trying to make this work, realistically the £12 billion needs to come down to £8 Billion absolute maximum, not £10.4 billion, just to be in line with overall cuts.  And of course if we can drive that even lower, through a real procurement contribution, fewer jobs will go, and fewer services will be cut.

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