Efficiency savings - sorting the sheep from the goats

13 April 2010
Peter SmithHere 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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