Efficiency savings – sorting the sheep from the goats
Here we are, going into a critical election, with millions of people ‘economically inactive’, British soldiers being killed in two wars that many citizens don’t support, a drugs strategy that has failed for 30 years, our future prosperity threatened by the rise of the BRIC countries, and a future pension and social care burden created by my generation that my daughter’s generation won’t pay for.
So what is the biggest election issue? Whether we can save £6 billion this year by renegotiating public sector procurement contracts. And why Sir Peter Gershon has abandoned his Labour friends for the Tories.
I think we’ve gone mad. I’ve spent 25 years telling everyone how important procurement is, and suddenly it is apparently the most important issue in the UK, full stop. And that seems deeply worrying somehow. But in the spirit of every other newspaper, blog and comment, let’s look at some of the issues that underpin the political arguments.
The first is what we mean by public sector efficiency savings, because that is going to be important as we move into the constrained times ahead. I would classify them into four types (and this applies to non-procurement efficiencies as well but we’ll focus on procurement stuff here).
Type 1: Real, undeniable savings. We get the same output for less input. We negotiate a great new deal for furniture/PCs/legal services that gives us the same output for less cost. A saving that can be converted into a bottom line gain; more profit if it was private sector, less funding required if public.
Type 2: Worthwhile activity, an ‘efficiency’ benefit; but no bottom line gain. So the supplier quotes £10 million; through brilliant negotiation, we get them down to £5 million. BUT… the budget was only £4 million. Or last year’s cost was only £4 million. So this is a real procurement contribution; but not a ‘saving’ that we can use in any tangible sense.
Type 3: A real saving, but with possible consequential effects. Much of what we might call demand or specification management falls into this category. So we reduce the demand for goods or services (through procurement or other activity) or we adjust our specification to reduce the cost. We save money, and that could result in a bottom line gain, but often we will not be sure whether there are effects on services. We buy cheaper IT equipment; it might reduce productivity but it is hard to tell. At the extreme, we make a ‘saving’ by stopping all spending on prescription drugs; but we might assume there would be some negative effect from doing that.
Type 4: Smoke and mirrors. We create a notional industry benchmark, beat it and claim a saving (despite the fact that prices in real cash terms have gone up 10 per cent). We claim a ‘process saving’ through a procurement systems investment without identifying any real headcount – or even workload – reduction. This type of ‘saving’ brings no real benefit to the bottom line, nor does it reduce public sector funding requirements.
So that shows the complexity of defining and measuring ‘savings’. But arguably the most critical thing is the choice the organisation then makes, even where the saving is real. Does it take the saving as a bottom line increase in profit (private sector) or a reduction in funding requirement (public sector)? Or does it re-invest the saving and spend it within the organisation?
And that is the real issue. Up to now, it hasn’t really mattered that much whether public sector savings were ‘real’, because budgets were rising and efficiency savings were re-invested. If an e-auction reduced the price of laptops, the local authority bought more, or used the saving to fill a few more potholes. And if the ‘savings’ were questionable, the organisation still had enough budget and cash to carry on doing what it had planned to do.
But now (whoever wins the election) budgets will be cut. And suddenly efficiency savings are critical. If you can make real savings (type 1), they will offset the cuts and you can preserve jobs and services. If you make type 3, you save real money BUT there may be some consequential effects. That applies to much of what Sir Peter Gershon was talking about last week; stopping IT projects for instance.
And if you do things that don’t flow through to the bottom line (type 2), or you claim savings that are not real (type 4), then you will have to cut jobs and services.
So after the election, we will see what contribution procurement is really making. Can we help preserve services? Or will bold claims of huge procurement savings be exposed? My suspicion is that this will sort the sheep from the goats. Some procurement functions will be shown to deliver true value and savings; others will be exposed as merely good at conjuring up savings numbers that have little real substance.
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Some interesting points are made here Peter but which of these approaches to savings have any targets been established against? The OEP set out projected savings from back office services through to procurement collaboration. Martin Reed refers to the use of BPR to establish improved service provision against the proposed savings (efficiency?). He fails to mention that better IT systems and consultants are often required to implement BPR and as such ignores the cost involved with this approach. It is not a simple process to implement as many private sector organisations discovered. Hammer was quick to point out that organisations used this approach incorrectly and thus got themselves into major problems removing staff and consequently their corporate knowledge.
For the collaborative procurement which of your 4 suggested approaches have been used to establish the target?
What needs to be discussed is not so much (though it becomes important at a later stage) how claims against targets are measured but which of those 4 options have been used to establish the targets. Once we know what that is we can then consider how we should measure claims against the targets. We would be consistent. Remember the Peter Gershon claims to have reached £13 billion and the NAO disputing the claims and how these had been measured. Everything needs to be consistent and until targets are clearly prescribed as to what efficiency regimes they have been constructed under then unfortunately all 4 of your options may be used with the same type of outcome to any efficiency savings. A ‘mix and match’ approach perhaps.
PS I have never fully understood the term efficiency savings. Are we saying that we want to save on the efficiency? Or should it be cash savings made from increasing efficiency?
Mostly probably, the Conservatives will be the winner. Being cautious about costs as they symbolise the businessmen, they will not be too demanding about specifications. As long as the offered goods or service meet the minimum requirements, they are prone to accept it. That’s where and how procurement contributes to the corporate goals of an organization. Agree?
Savings and efficiencies are surrounded by a lot of misunderstanding and myths. The issue, especially in Public Sector, is a very complex one and sometimes complicated as well, but I agree with Peter Smith in principle. It is time to define the real and realistic value of Procurement and we this need very different notion than savings.
[...] As Peter Smith outlined this week, procurement features prominently in what all three parties aim to do if they come up trumps on 6 May. But who is best placed to deliver on spending and ease the pressure on the public purse? [...]
Determining true value for money remains ever elusive as a concept for both public and private sectors.
Therefore, true savings remain elusive, also.
I can’t answer the question about how the OEP savings were calculated as I wasn’t part of it, or privy to those details!
They certainly seemed like big numbers to me to be driven purely by ‘collaboration’. I think we’re going to have to look hard at better contract management, demand management, specification management, (including an element of what Felix Chan in his comments talks about in terms of going for more basic specs) if we’re going to hit the necessary savings targets. Lets face it, if everyone collaborates by doing a single government contract with a really expensive firm of consultants, it doesn’t save much!
[...] done a blog post for Supply Management looking at the definition of government procurement efficiency savings and (my favourite topic at the [...]
As long as the offered goods or service meet the minimum requirements, they are prone to accept it. That’s where and how procurement contributes to the corporate goals of an organization.
In this new business environment we find ourselves in, we are forced to keep ahead of the game. The business needs Procurement to come up with further so called ‘types’ of opportunity. In addition to the ones from Peters excellent piece, I would add:
Type 5. Cost avoidance, such as where through negotiation or tactical work, inflationary price increases are mitigated.
Type 6. Value Add or Revenue Generation, where procurement have found or developed a supplier that creates a product or service which in turn provides greater revenue, or competitive advantage to the business.
Type 7. Working Capital Benefits, where payment terms are adjusted, or stock payment liability reduced, through negotiation which release cash for the business.