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Practice makes perfect
Supply Management public sector supplement – 5 October 2006

Councils are coming under increased pressure to deliver ever-greater savings over the next spending period. Mark Smulian looks at their progess

Despite the recent news that local councils had failed to save the amount they expected from procurement (see Web News, 20 September), local government has generally responded well in the Gershon efficiency programme. Councils were told to deliver 3 billion of efficiency savings in 2005-08 - although they could include those from 2004-05. They are on course to exceed that figure.

But efficiency is a never-ending process. Put simply, every pound a council cuts from procurement saves the equivalent from council tax, and allows them to keep up public service standards without raising taxes.

This agreeable formula means there is a strongly political thrust behind the search for savings.

John Healey, the financial secretary to the Treasury, made it clear that the efficiency drive would continue in a speech in July to the Government Procurement Service.

He said next year's comprehensive spending review would take place in, "a fiscal climate [that] makes this likely to be the tightest spending review so far", with public spending expected to grow at only 2 per cent a year.

"The challenge that we face is to deliver more from the resources we have," he said.

radical changes Council savings to date have come largely from applying procurement best practice to search out inefficiencies.

In the next stage, more radical changes are in the offing - and some are controversial.

The main innovation this year in local government procurement is the development by England's nine regional centres of excellence (RCE) of procurement action groups (PAG). Established as part of the National Procurement Programme, these small teams of specialists will help to drive efficiency gains in areas such as energy, IT hardware and telecoms. They will produce "how to" guides to help councils get the best deals in these sectors. The first, focusing on postal services, will be published this month and is expected, if followed, to yield savings of around 20 million.

Michael Worron, director of the East of England RCE, says the PAGs will, "identify opportunities where local government can have effective interchange with the market, so we can structure future requirements so that everyone has the confidence to invest in new technologies to drive that change".

He notes: "Local government has outperformed central government in gaining efficiency savings by applying itself, with the RCEs as the catalyst for change. The drive for efficiency will continue to grow and no-one can take their foot off the gas."

Shared services

Another innovation, slowly taking off, is procurement of shared services between two or more councils.

This is normally applied to back office functions that do not require the physical presence of staff in each council's area.

The East of England RCE, for example, has well-advanced plans for all 46 councils in its region to share a contract for back office revenues and benefits administration.

Direct dealings with the public would remain at local level, but work to a common system and IT platform.

This scale of shared service is still unusual, but may become more common. Treasury adviser Sir David Varney will report to chancellor Gordon Brown during the winter on how to extend the concept across the public sector as part of the next comprehensive spending review, expected next summer.

Peter Howarth, chief executive of the Society of Procurement Officers in Local Government, says: "Local government is travelling in the right direction in terms of savings. There is a head of steam emerging. The RCEs are starting to bite now and spread best practice."

Howarth, who is also managing director of consultancy SBV, says savings to date have been achieved by applying good practice, but he concedes this has been patchy.

"There is quite a gap between the best and worst local authorities. I go into lots of councils and am frustrated by what I see in some," he says.

"I think councils have to invest in procurement skills. It will not just happen on its own." Worron argues that further savings can come from better prices, but the real gains will be in strategic procurement.

"Procurement is not considered a strategic tool and it should be," he says.

"If you look at the motor industry, the head of procurement will have a seat on the main board. That is very unusual in local government, with the result that procurement is seen as an add-on and looked at belatedly after decisions have been taken, rather than as part of the decision-making process."

Olivia Thomson is strategic procurement manager, contract performance, at Cambridgeshire County Council - one of the procurement "beacon" authorities identified by the former Office of the Deputy Prime Minister as top performers in this area.

She shares Worron's view: "Quick wins are running out in many councils. There is plenty of opportunity for efficiency, but we need to be creative to see it.

"Efficiency in the supply chain is of great importance, and ensuring suppliers can harness economies of scale is essential.

"But there is also an onus on us not to assume that because we get a competitive contract price, there are no further efficiencies or improvements that could be made, either within the supply organisation or within our own."

Thomson points out that changes in local government's working will increase the importance of procurement, quite apart from efficiency pressures.

Councils increasingly appoint and monitor suppliers, rather than run services directly, and so procuring these contracts is "key to the running of public-sector organisations, and must be resourced properly".

She says: "An increased focus on successfully providing public services has reduced the emphasis on 'widget' buying, which can be picked up by purchasing consortia, leaving public sector procurement staff free to focus on managing performance and risk and driving improvement."

Taking the initiative

But there is some scepticism about the initiatives from the RCEs and Whitehall.

Ros Aird, head of Hertfordshire County Council's Business Services and chair of Central Buying Consortium, which includes 17 south-east councils, fears procurement is suffering from government "initiative-itis".

"There is quite a confused picture, with lots of people doing things that are not necessarily coordinated," she says.

"Yes, we are consulted, but there is a sense that Whitehall knows best."

Shared services potentially comes in that category, as ministers have latched on to it as the next big idea for efficiency.

But Alan Kirkham, service director for strategic procurement and e-services at Wakefield Council, also a beacon, says shared services do not represent quite the change the Treasury imagines because it is not new.

"It is just a follow-on from strategic partnerships work," he says. "For example, our design and engineering service has been outsourced to Norfolk County Council, which is outside our region but has its own design company."

Such local initiatives need little central direction. For example, Kirkham has helped to develop an online facility for Yorkshire and the Humber, which allows any supplier to register an interest or join an approved list and be notified if any council in the region seeks a relevant quote.

There is also a contract management facility "so if I went to look at how a company performs I can see a history of its performance here or anywhere else in the region. It is quite a powerful tool", he says.

But while Kirkham has found 1 million of efficiencies in a year, he thinks there is "not much further we can go, and the further savings will come from back office functions".

Back offices can, as with the East of England project, be relatively easily combined as shared services.

Debate continues about the optimum size for a shared service contract - is it two councils, 46 or 400? - but it is an idea to which councils are generally receptive.

An additional consideration coming out of the National Procurement Programme is the national commodities plan, under which some goods and services could be bought on a national basis.

However, there is less consensus over this plan and the problem is one of scale. Can and should local government procurement be done nationally?

Aird says: "The national commodities plan is in danger of being a very unsophisticated concept. Expecting to put all councils into one contract will not work well with suppliers.

"Either the price goes down so far it cannot be sustained, or disadvantaged suppliers will find ways to subvert it by going direct to some councils with lower prices."

Kirkham admits: "I'm not sure what difference it can make. It can only shave a small amount off prices. They are talking about national purchasing for energy, but can that be better than Yorkshire Purchasing Organisation, which is already a pretty large buying power?

"I am not sure about the sustainability of national contracts."

Howarth also fears the effect on markets. "You have got to be very careful about understanding how markets work," he says.

"This has got to be done carefully or some suppliers may move out of the local government sector. We want a solution that gives good procurement and prices and that is a two-way street."

Worron, an advocate of the commodities plan, concedes it must be managed so that suppliers do not feel they must "in effect buy business, and then make cuts".

Steve Holland, programme director, says he is sensitive to the need not to damage markets and adds that aggregating demand doesn't necessarily have to be done on a national basis.

EU directives

Another change to councils' procurement work has been new European Union directives on public sector and utilities contracts, which have received a general welcome, though Aird notes that when working with new regulations, "nobody wants to be the first test case".

Fred Harvey, chairman of the CIPS European procurement directives group, says these are more flexible than their predecessors and facilitate both electronic procurement and competitive dialogue, which allows some pre-tender negotiation with potential suppliers.

"If you know the rules - and you do have to know the rules - they are generally helpful. It goes with the grain of changes in procurement practice here."

Thomson says: "The updated directives provide a clear framework under which contracts are awarded and ensure that the principles of equality of treatment, non-discrimination and transparency are followed.

"Without these directives, local pressures could place councillors and officers in a position in which these principles may not be complied with."

Procurement officers can expect a high profile in councils as the need for savings bites ever deeper. Indeed, the profile may be too high if senior managers and councillors assume that procurement offers an easy way out of financial dilemmas.

They will have to both apply good practice, keep abreast of RCE advice and rethink the way that many goods and services are bought.

Worron says: "It has all been a step change for local authorities, but it has allowed it to say to central government 'we can do the job'."