Cabinet Office plans to get suppliers to the public sector to deal with central government as a single customer
may sound a simple and attractive way of driving public spending down and procurement efficiency up, but the net effect of creating a central procurement function could prove counterproductive.
The publication of Sir Philip Green’s report on public sector efficiency
highlights the need for change. Visibility of data is the critical issue that needs to be addressed. But there is a significant difference between centralised information and centralised contracts.
Whereas there is a strong case for saying information made available centrally is more powerful than disaggregated information, it is another thing entirely to pull all your buying power together into a single organisation. The government should guard against the false belief that simple aggregation of contracts always leads to lower prices. There is evidence to suggest that aggregating contracts beyond a critical point can have the opposite effect.
The problem is that suppliers conducting business with a large customer, such as the government, cannot afford to price marginally. This may result in some companies dropping out of the process, leading to less competition. With such large contracts, what many suppliers have to do is price the whole contract at a substantial margin. As you might expect, if a customer makes up 5 per cent of your revenue you can afford to trim your margin to win the business. But if a customer makes up 85 per cent of your revenue then that customer will have to carry a large part of the cost of your business to ensure your profitability.
There is a need for centralised information and there is great value in having shared supplier information, performance data and spend visibility. But there is a huge leap to saying, now we’ve got centralised data we need centralised procurement. Is a vast centralised buying department responsible for purchasing hundreds of millions of pounds worth of goods and services really likely to be more efficient? What will this do to the length of time it takes to award contracts?
This is not to say there would be no positive aspects of creating such a large procurement department. Such an aggregation of contracts would enable better use of category management and perhaps more refined and process driven procurement activities, with a certain amount of continuity. However, the downside is that procurement will be an awful long way from the customer. How will a customer’s feedback play into a new homogenised, holistic deal? Will those experiencing the products or services provided through such a mechanism receive best value?
The danger is centralised procurement could become hugely bureaucratic and cumbersome, and may ultimately deliver deals that are more expensive, offering poorer value to both the government and the public. Many of the desired aims of such a scheme can be achieved through centralising information but leaving the final procurement decision to those closest to the end customer.
What is needed is centralised information, so decentralised procurement departments can see which suppliers are available, what contract framework agreements are in place elsewhere, what the performance was against those contracts, and provide a complete market overview of which suppliers are in the marketplace and what they could provide and where. Through having a central repository for this information and allowing access to a network of procurement functions across government departments, those individuals making purchasing decisions would be in just as powerful a position to make effective deals as those in a centralised role.
To achieve this result, the government must provide the highest quality data to all procurement units so they can see which suppliers are in the market, what the government’s experience of performance history is with them, what contracts are currently under way and what their loading is to government.
In addition, it would be sensible for the government to have one point of access for suppliers wishing to engage with the public sector. This ‘single gateway’ approach would not only deliver cost savings to suppliers and government by reducing duplication of effort, but would also ensure a transparency that is not presently available.
Centralising data would yield the government a substantial proportion of the benefits it is looking for, without exposing itself to the hidden dangers inherent in very large and possibly, less competitive, contracts.
* Colin Maund is CEO at Achilles Group (www.achilles.com)