Public sector purchasing: a value for money approach

13 March 2012
Tom McGuffogIt has been argued that £37 billion could be saved from UK public expenditure through improved procurement. But we cannot rebalance the nation’s accounts merely by aggregating then salami-slicing chunks of expenditure, any more than we can remedy areas of neglect by casting money at them. Real progress comes from setting well-evaluated near and longer-term objectives, and managing their achievement. Simply aggregating total public expenditure per government department or by category of spend will achieve little. For example, spending on electrical spares gives a mouth-watering total to attract a major generalist prime contractor, but ignores the nature of the supply markets and the special capabilities of the best suppliers. Too often, we emphasise total price paid at the expense of the key objective – achieving a defined performance. Thus, contracts are too often awarded on the basis of price and quality, weighted in various curious ways. Quality is rather subjective – what does it mean pre-contract compared with through-life? Given realistic customer objectives, four factors must be specified before awarding a contract:
  • Performance – delivery of value, outcomes, service, quality and achievement of objectives.
  • Contract cost – spend with the supplier(s).
  • Through-life cost – total direct and indirect costs over the whole life of the project/activity, which can be many times the contract cost.
  • Timeliness – results delivered on time when people are ready and trained to make best use of them. Nevertheless, certainty is more important than speed.
Also uncertainty (opportunity and risk) must be analysed and mitigated by systematic trade-offs both within – and also between – performance, contract cost, through-life cost, and time. Furthermore, demand must not be fixed independently of the capability of the supply markets. All complex projects should be evaluated and de-risked on a small scale before ‘going for broke’. Unfortunately, risk is poorly understood in much of the public sector. The Treasury maintains that risk can be positive or negative and that its ownership can/should be transferred to the supplier in contracts. But risk is always negative and its ownership can never be transferred. Let us now rigorously re-define how public sector procurement can optimise its added value. ☛ Read Professor Tom McGuffog MBE’s full article on value for money in public sector buying here ☛ Have  a rant. Something you want to get off your chest? Get on the SM Soapbox. Send a brief outline of your proposed article to Rebecca Ellinor
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