One of the most difficult jobs in the UK at the moment must surely be managing procurement in any major government department or local authority.
Commercial directors in the public sector are not only facing the challenge of reducing spend in their own organisations, they are also under pressure to make a contribution to the fiscal shortfall in the UK economy as a whole.
Understandably, commercial directors are now taking action, and looking to take cost out of the supply base. While this is indeed a very difficult challenge, we are wondering now whether the pendulum has swung too far: that is, in the direction of a mechanistic procurement approach disproportionately focused on short-term cost and per diem rates.
Focusing on real and tangible cost reduction is, of course, understandable given the current climate. But there is a danger that overemphasising it could backfire, affecting central and local government's ability to deliver services to the citizen – not to mention the value for money and fiscal benefits so badly needed at the strategic level.
We would argue that taking a longer-term view and focusing on value for money, rather than cost, would help commercial directors in the public sector achieve their objectives, both within their own organisations and at a macro government level.
The current procurement process is based on a very simple set of cost criteria – often the comparison of per diem rates – for selecting suppliers.
But placing too much emphasis on cost can stifle innovation, making it difficult for suppliers to formulate ingenious solutions and deliver real value for money within the cost constraints. While any supplier worth their salt will endeavour to deliver the right solution within budget, innovation might fall by the wayside if the main emphasis of the selection criteria is on cost per diem or other simple measures.
Over the longer term, this could potentially have an effect on the make-up and structure of the supply base – perhaps even resulting in a reduction in the number of quality suppliers available to the public sector. It could also reduce competition, which most would argue is the last thing we want in terms of getting best value for money.
An alternative would be to take a longer-term view, recognising that getting the best value for money is about more than just choosing the supplier that quotes the lowest price. Those procurement directors who are willing to develop more sophisticated selection criteria will reap the rewards of better results, more innovative solutions, and increased return on investment from their private sector suppliers.
More risk-reward arrangements
The opportunity here is for more risk-reward arrangements. Further, we believe that much more emphasis should be placed on earned value; that input should be more closely linked to real benefit; that innovation should be valued more highly in terms of public sector reform and service to the citizen; and that lifetime costing principles should be incorporated into the commercial equation.
Of course, as a management consultant, I would say that. But this approach is also being recognised by some of the commercial directors we work with.
"Government procurement needs to continue to deliver effective commercial solutions and will seek every opportunity to identify further economies," David Smith, commercial director at the Department for Work and Pensions, told us. "But a singular focus on price alone, as the lowest common denominator of value, is often a false economy and may well lead to overall poor value for money for taxpayers, while vital projects can be delayed as suppliers struggle to deliver within unrealistic cost restrictions.
Enlightened and responsible 'buyers' assure the viability of pricing and delivery as well as exerting a sharp focus on reducing demand rather than simply driving down unit price."
The term 'responsible' is being bandied about a great deal at the moment, whether in reference to the banks, the government or, most recently, the consulting industry. We agree that it is vital that the consulting industry behave responsibly in the way it works with the public sector.
But it is just as important that the government extend this mindset to its commercial activities: by focusing on value for money rather than cost, and by looking to create the right environment to foster innovation and encourage the solutions that will add most value. Ultimately, this approach will help the government give citizens what they want: a stronger economy, reduced debt and quality public services.