November 2007As the sector examines the detail of the spending review, Emma Clarke finds their buyers are ready to rise to the challenge of making savings
The latest review of public spending has left the sector with a target of £30 billion efficiency savings to be achieved in the next three years. The 2007 Comprehensive Spending Review (CSR), announced by the chancellor last month, sets out public sector spending from 2008 to 2011. It means 3 per cent a year must be saved up to 2010-11 to release money to frontline services.
Whitehall departments charged with finding much of the money include the Department for Children, Schools and Families (£4.5 billion), the Department for Transport (£1.8 billion) and the Department for Work and Pensions (£1.2 billion). Local councils have been assigned a goal of £4.9 billion.
Yet while budgets are decreasing, demand for services - and for quality improvements in them - will only continue to rise.
The Local Government Association (LGA) has expressed concerns about councils' ability to meet this challenge. An LGA spokesperson says that local government already has an "impressive record on delivering efficiency savings", but there is limited scope for finding more cashable savings without putting services at risk.
Buyers across the sector, though mindful of the challenges, are more bullish. John Collington, group commercial director at the Home Office, says that CSR 07 presents an opportunity for buyers to prove their worth. "I am excited and enthused by the challenge, because we have to demonstrate even more value for money than in the past," he says.
Andrew Rudd, procurement enablement director at the NHS Purchasing and Supply Agency (Pasa), agrees. "This provides a focus of what needs to be delivered. And having a sense of direction can be exciting as well as challenging."Positive action
So what can councils do about it, and what are they doing?
Rob Sykes, chair of the Chief Executives Task Force and chief executive of Worcestershire County Council, says that local government purchasers need to find savings in authorities' big spend areas such as social care, construction and waste (see page 25), as well as addressing traditional commodity spend areas.
"The Regional Centres of Excellence (RCE) [set up to help councils improve procurement] have geared themselves up to support local authorities in this," he says, "helping them collaborate, and to look at e-procurement and at best practice in procurement." He quotes examples such as from the South West Centre of Excellence that helped authorities secure £1.2 million savings in one year by addressing residential care for adults with learning disabilities. But more is needed.
Co-ordination looks set to be the buzzword across public sector procurement as organisations step up to the CSR 07 challenge. Tony Hall, head of Welland Procurement which co-ordinates procurement shared services for local authorities in the East Midlands, says the key will be making this collaboration effective. "The more these efficiencies demand from us, the more we have to share our expertise," he says.Aggregating demand
Steve Holland, director of the RCE's National Procurement Programme (NPP), still sees plenty of scope for savings by aggregating demand. "The majority of authorities still go to the market for their individual requirements. This means there is a wide variation in the price that local authorities pay for the same products, from the same supplier," he says. Recent research by the NPP revealed that one council was paying 20 times more than another for the same item.
Best practice in this area is increasing. West Midlands Centre of Excellence recently developed a regional procurement hub, to support collaboration and share best practice and capacity building. And reverse e-auctions supported by the RCE for wheeled bins have brought about price reductions of more than 30 per cent due to aggregation of buying power. But more can be done.
Similarly, Holland wants to see greater use of pan-sector contracts and development of the "procurement landscape". At the moment, the buying organisations that can manage contracts on behalf of authorities - such as the Eastern Shires Purchasing Organisation or the Central Buying Consortium - cover less than 10 per cent of local authority third-party spend. "That is absurd," he says. "We want to see more local authorities use these organisations, effectively outsourcing their procurement activity to a smaller number of expert organisations."
Additional savings can also be achieved through increased use of common specifications, says Holland, as well as through better employment of e-procurement.
Jonathan Jones, regional procurement manager at the West Midlands Centre of Excellence, hopes to see £7 million savings by e-auctioning home-to-school transport across authorities.Improving buyer-supplier relationships
Central government departments, including the Home Office and Department for Work and Pensions (DWP), have already initiated strategies to achieve 5 per cent yearly savings.
The Home Office has put in place a "Supplier Value Awards Programme" - the first of its kind in central government - to encourage suppliers to identify ways to develop cost savings and efficiencies.
"We are placing a greater level of responsibility on our suppliers," says Collington from the Home Office. "This is not just a case of asking suppliers to cut their rate card back by 5 per cent. I am looking for more than that."
Responses that have come in from large and small suppliers include suggestions about how the Home Office can avoid cost from the outset, particularly, says Collington, in large and complex procurements and IT builds. Cost avoidance and demand management are also key ways to reduce costs (see Essential or excessive).
Home Office suppliers have also presented solutions that they already use with other government clients and countries. In the case of temporary labour, one supplier suggested the Home Office move away from a preferred supplier list to a master vendor arrangement, where one main supplier manages performance of second-tier suppliers.
The Home Office has also been careful to approach the supply market as a group, instead of as individual organisations that include the Identity and Passport Service and Border & Immigration Agency. "This puts across the message that the days of 'divide and conquer' are coming to an end," says Collington.
He is also keen to see greater collaboration across the public sector. The Home Office is leading a cross-government consultancy value programme that is looking to co-ordinate knowledge and experience in this area. "This is leveraging knowledge as opposed to leveraging spend, because the key to managing consultancy spend is demand management, not necessarily bundling it together," says Collington.
Pasa's Rudd is "excited" about the opportunities that CSR 07 presents, as he hopes it will provide a chance for procurement to get involved in contestability (see page 16). In the past, commissioners outside the procurement function have handled the purchase of healthcare services, such as for mental health provision or out-of-hours GP services. But with an increasing focus on reducing costs, he hopes to see a greater interest in getting procurement - and their commercial skills - involved.
Other uncharted areas include the purchase of education and training for the NHS, he says. "Making savings gets more dif. cult as time goes on, but there are areas worth revisiting and other unexplored areas."Shared services
The introduction of shared services is also set to pick up pace as the public sector seeks to create more economies of scale and efficiencies.
The Home Office's shared service centre in Newport, Wales will come into operation next spring, bringing together procure-to-pay with finance and HR. In local government, Surrey County Council was named Best New Shared Services Organisation in Europe, ahead of Reuters and Philips, for its shared service centre that brings together finance, procurement, HR and payroll.
But Welland's Hall says it can be distracting to think that shared service is the only way to achieve efficiencies. "For many people effective, informal collaboration will get you further than spending a great deal of time, effort and probably money, in trying to work towards a shared service."
So buyers are up to the challenge, but how confident are they that the savings can actually be achieved?
The RCE's Holland says: "There is a promising future for people with the right skills in procurement. But the problem is that purchasing is still seen by many as just a technical activity."
One of the factors holding buyers back could be a lack of skilled professionals across the sector. Hall says: "There is a patchy approach to the reality of what it costs to get and keep good people in procurement. But if you are not prepared to invest in the skills, then you are going to achieve only marginal success, and there will be wasted opportunities."
In response to this need, the Department for Children, Schools and Families is sponsoring 100 further education college buyers through training programmes to help them face the challenges of tougher budgets.
One warning from the LGA is not to simply stick to cost-cutting: "This is not about being ruthless or squeezing every penny, but about smart procurement."
Or, as Sykes puts it, it is not an efficiency gain if quality drops. "It is our job to make sure efficiencies are reducing cost but not volumes or quality."MORE INFO: 10 ways to cope with CSR 07
- Collaborate with others - both to share information and expertise and to aggregate demand to get a better deal
- Tackle large spend areas such as waste, social services and construction
- Outsource procurement - if you don't have the expertise in-house, send it outside
- Employ demand management and cost avoidance techniques
- Work with suppliers to get more for less
- Invest in skills and the retention of good staff
- Use e-procurement tools - they can save time and money
- Consider setting up, or using, a shared service center
- Apply contestability
- Use common specifications to save time and effort