Features: March 12th, 2004

The Shifting Landscape of Public Sector Procurement– A View From The Coal Face

By Marc Wood

The national local government procurement strategy seeks to change the tradition of individual purchasing decisions by local authorities, often buying the same thing. Collective buying power can then be used to negotiate lower prices. Putting the strategy into practice requires a better understanding between local authorities and suppliers.

The landscape of public sector procurement has undergone a paradigm shift in the last few years with radical central government-based initiatives that fundamentally affect the way that every local authority is being tasked to perform and be accountable for its procurement-related activities. In order to fully understand the relationship between authorities and suppliers, it is important to look at this market from both angles.

Areas of concern to local authorities

From the local authority perspective there have been five main areas of concern:

Decentralised Buying – local authority procurement has for decades relied on relationships between local officers and their (often local) suppliers. This traditional way of doing business has sometimes led to an emphasis on convenience rather than value for money and quality as the reason for making the purchasing decision. Local authorities can be in a position to dictate terms and conditions to great effect, but this decentralised approach to buying can severely negate that possibility.

Cost Versus Service – It is generally accepted that purchasing decisions based purely on price will inevitably lead to longer-term problems. Now quality and service components must be considered in all buying decisions. Many local companies provide good local service and help buyers manage risk, but cannot compete on price. The opportunity provided by e-procurement’s automated processes is to establish local government wide framework agreements with national suppliers, which offer lower price. However, a balance is required, otherwise aggregation may be a retrograde step to achieving quality and better value.

The Political Dimension – The principle of getting maximum value from each taxpayer’s pound is completely apolitical and every political party is aligned to seeking out as much value as possible from local and central tax income. However, procurement by its very nature focuses on the ultimate sensitive issue, spending taxpayer’s money. Each council approaches change in this area with a different set of priorities, sensitivities and influences.

Procurement Complexities – Within the local government market, procurement is not a simple issue. It is a multi- dimensional set of business processes associated with the scale and volume of purchase activity, compounded by the vast range of categories and type of spend, with a large dose of socio-economic and political influence added in. For example, no two authorities agree on sign-off levels for discretionary spend, written quotations or formal tendering. It is therefore unlikely that any new initiatives can have a “one size fits all” approach.

Macro Economic Impact – All local authorities are motivated both economically and politically to support their own local business communities. Any changes in procurement philosophy can potentially damage the local economy. Switching the procurement of previously locally sourced goods or services to a national or global supplier purely based on unit cost may result in increased costs to the authority because of small local suppliers being put out of business and the subsequent knock on effect of unemployment etc. Simplistically looking purely at the unit cost of say “pens” may result in significant savings at that level but the net effect of the impact on the local economy could negate any such perceived savings.

Areas of concern to suppliers

The viewpoint of the supplier, however, is somewhat different:

Existing Suppliers– All local authorities have a regular and sometimes close relationship with their supplier base. For the supplier, working with local authorities requires a large degree of understanding of both the people and processes involved. A supplier may have successfully been working with a local authority for many years, the style and process not having changed for decades. So the instant reaction by suppliers to any proposed change in the way in which they interact with their long established customer is: Why? What’s in it for me? Is this just another fad and can I ignore it? Can I get round this by using my personal relationships? This is further compounded if the change involves time and cost for the supplier to conform to the new initiative. So the key focus for existing suppliers needs to be one of explanation and buy-in to enable the supplier to understand the rationale, impact and certainty of the change in requirements.

New Suppliers – Many suppliers have chosen not to work with the local government market to avoid the perceived complexity, low margin and difficulty of dealing with authorities and the ‘closed shop’ nature of the sector. This group of suppliers would very much like to be able to gain access to the local government market but do not know how to go about establishing themselves obtaining the credibility to be considered.

New opportunities

This neglected sector of the market represents a massive opportunity for local authorities to broaden their supplier options, if they can find and attract them. It is a fact that all authorities have a number of categories of expenditure where there is an over-supply of suppliers and other categories where there is a lack of quality options. This may result in the authority being held hostage to price and poor quality. This has been the case in over thirty instances where Exor has constructed databases for authorities . In each of these cases Exor has identified opportunities to increase options and value for money.

Developing a procurement strategy

Supplier analysis is a precursor to Central Government’s e-Procurement Strategy which is due to come into force in 2005. Fundamentally all authorities will have to be capable of trading and managing their procurement strategies online. This strengthens the need to ‘accredit’ all suppliers, however, not just from ‘high risk’ sectors such as construction and services with an emphasis on Best Value Audit. The emphasis has changed to viewing the establishment of an accredited supplier database as a fundamental precursor to the implementation of e-procurement and the establishment of strategic partnerships, often in support of inward investment and urban regeneration schemes.

The rationale for this approach is that the first step in the establishment of a Holistic Strategic Procurement Plan is to understand exactly ‘where we are today’. For example: Who are our suppliers? How much do we spend with them? How dependent are those suppliers on our business? Where do we spend our money? In what categories?

The first step of any authority is to understand the current supplier base, creating an accurate understanding of suppliers, which can then be analysed and segmented. Known poor quality suppliers can be culled and initiatives put into place to recognise and protect the good quality local businesses, protecting them from being excluded by a purely cost-driven consolidation strategy.

The next step should be to assess the quality of the suppliers, determining if there are any unknown risks that the authority may not be aware of and ensure that all suppliers conform to the authority’s audit standards, i.e. a robust vetting process.

Once a clean database of suppliers has been established it is then possible to:

  • Analyse the actual requirements of the Authority
  • Determine how many and which categories of spend are necessary
  • Establish how many and what type of suppliers are available on the supplier list
  • Decide how many suppliers are needed in each category to ensure sufficient choice and ensure that the authority’s spend is fairly offered to all qualified suppliers
  • Identify the ‘gaps’ in categories that will require new supplier recruitment
  • Examine how the authority’s Standing Orders and procurement philosophy coincide or conflict with its political, social responsibility and environmental requirements.
  • Agree what accreditation standards are needed by Category of Work and Value
  • Consider National e-Procurement Strategy and other guidelines and decide the supplier adoption approach to be undertaken to get suppliers on board.
  • Discuss with external business support agencies how to help local suppliers to meet the required accreditation standards and over what time
  • Decide with which other authorities to collaborate and in what areas and establish how strategic partnerships will work with this initiative
  • Look at possible interfaces with other e-Gov initiatives.

Based upon the experience of both successful and unsuccessful supplier adoption programmes for accreditation it is clear that an authority must develop a delicate and correctly balanced stick and carrot approach.

The stick: it is imperative that the authority makes clear to the supplier base that accreditation is a mandatory requirement for the authority and that it is committed to the process. Initial reaction from existing suppliers will be to utilise their long-standing relationships and try to “short circuit” or ignore the process. This is difficult and will remain initially difficult for any change programme. Authorities can expect to get many phone calls and complaints in the initial launch stages and should be prepared to robustly support and confirm their position.

The carrot: be seen to have a considered understanding of the supplier’s situation; emphasise the continued long-standing business relationship that will be cemented by the programme for quality and good value goods and services provided to the authority. Additionally the authority should emphasise the support that is available to the suppliers who have problems with understanding or being able to comply with new legislation or requirements.

Marc Wood is CEO of EXOR Management Services, the UK’s leading provider of Public Sector Authority (PSA) accreditation services. The company creates accredited supplier databases on behalf of Public Sector Authorities in the UK and has implemented over 45 such programmes and is currently accrediting over 1,000 suppliers each month.