By Mike Turley
10 September 2009
A quarter of all government spending is on goods and services provided by third parties but the public sector is still poor at managing suppliers. In these difficult times, organisations need to get a grip, advises Mike Turley
As the need for difficult political choices in the public finances grows, so does the debate about the future shape of our public services. Whatever the outcome, an issue that will certainly rise up the agenda is how the government, local authorities and other public bodies manage their third-party suppliers.
One only has to look at the sheer scale of the challenge to understand its significance to the public sector and, by extension, its finances. A quarter of all annual government spending, £175bn, is on goods and services. The UK is the second largest ‘market’ for government suppliers in the world after the US. In delivering its corporate functions, central government spends around £12bn on contracts for technology, facilities management and business process outsourcing.
Councils spend around £42bn on external contracts, more than 40% of all their expenditure, excluding national programmes. Together, local and central government issue around 600 contracts each week. The combined energy requirements of the public sector amounts to £4bn. And, despite the UK’s health care system being publicly owned, spending on suppliers is greatest in health (£24.2bn), followed by social welfare (£17.9bn), defence (£10.1bn) and education (£7.3bn).
The flip side of the coin – demand – is equally striking. Suppliers to government employ around 1.2 million people and collectively produce around 6% of gross domestic product.
No more them and us, a report by Deloitte, examines supplier management and the appropriate responses public bodies can make as budgets contract. It was prompted by, and is based on, conversations with clients and the firm’s experience of advising public bodies.
The report’s overarching conclusion is that as the configuration of the public sector’s supply chain has changed significantly, many public bodies have not sufficiently adapted their own capabilities, cultures and processes to reflect their new role. This change, which has taken place over the past 20 years, was driven by a political consensus that a mixed economy of provision produces value for money. The result is that many government suppliers now act as the principal agent of delivery of major public services, not simply as the recipients of outsourced corporate functions. As such, they have become a part of the critical national infrastructure.
Independent reports have repeatedly highlighted systemic problems where mismanagement of suppliers has led to high costs, late programme delivery and poor service quality. Of course, the notion that government must improve its management of contracts and suppliers is nothing new. But the prospect of a prolonged and dramatic period of austerity in public spending will significantly worsen the impact of ineffective supplier management. As budgets and supplier profitability contract, the margin for error on both sides will shrink.
So what should be done? The mismatch between the needs of government and its role is being addressed by initiatives such as Professional Skills for Government and the Departmental Capability Reviews. In addition, the Procurement Capability Review Model and Standards Framework produced by the Office of Government Commerce does a good job of identifying three common areas that should be addressed across government: systems, skills and leadership.
Briefly, improvements to systems involve the use of intelligent mechanisms to drive and manage supplier behaviour. The National Audit Office believes that around 40% of central government managers fail to apply financial penalties stipulated in contracts when services fall below standard. Beyond the unwillingness to use a stick there is a general lack of management information to guide decision-making and, when supplier failure does occur, it is not necessarily reported early to board level.
The skills element is a cultural issue that will need to be addressed on a number of levels. There is simply little support for the development of strong, commercially oriented procurement capabilities in many public bodies. The procurement or supplier manager role does not attract high-flyers and steps need to be taken to compensate for this. There is no defined career path for these posts and often no accompanying support of structured training programmes.
Local authorities are in many cases further down the road in this respect, having more mature procurement functions.
Leaders of organisations need to become much more involved with supplier management. This means priority and attention being given at board level, alignment between the governance of commercial relationship and policy objectives and the involvement of commercial managers at the initial stages of a project. The Public Sector Industry Review quite rightly recommended that in each department, a director of service delivery should be appointed to be responsible for the full commissioning cycle, not just for the initial procurement.
Each organisation should assess existing systems, skills and leadership to understand the role and involvement of suppliers, before designing and implementing an all-embracing central programme for managing suppliers effectively.
Our report builds on recent thinking from the OGC and analysis by the NAO and recommends three areas for immediate focus:
Improving contracting and compliance – increasing focus on outcomes, improving controls on supplier behaviour, and using accurate and independent information to improve transparency and inform decision-making. Specifically, the report recommends independent compliance testing and assurance and, where appropriate, enforcing contractual penalties.
Improving risk management – public bodies need to retain high quality data on the vulnerability of suppliers and their business models to changes in operational costs and other risk factors. Importantly, risk management needs to be applied effectively through the life cycle of contracts, not just at the start.
Strengthening contingency measures – including a monitoring regime to provide early warning of supplier stress and establishing procedures in the event of a supplier emergency.
The logical conclusion of budget reductions combined with the political will to open up the supply of public services will be a greater interaction between public, private and third-sector partners.
This cannot take place in a coherent fashion unless systemic problems in the management of suppliers across government are addressed. Some, such as contingency plans, are essentially rooted in improving capabilities.
Others, such as the skills required to manage an ‘extended workforce’ of partners, are more complex and require both top-down leadership and bottom-up involvement to push through long-term cultural change.
Our report suggests that an end-to-end review of the public sector’s entire approach to suppliers is needed. Given the breadth of the issues involved and the time it will take to implement the required changes, public bodies would be advised to start addressing the issue before it is forced on them.
Mike Turley is head of Deloitte’s public sector practice. The report is available on:
www.deloitte.co.uk/nomorethemandus
10 September 2009
A quarter of all government spending is on goods and services provided by third parties but the public sector is still poor at managing suppliers. In these difficult times, organisations need to get a grip, advises Mike Turley
As the need for difficult political choices in the public finances grows, so does the debate about the future shape of our public services. Whatever the outcome, an issue that will certainly rise up the agenda is how the government, local authorities and other public bodies manage their third-party suppliers.
One only has to look at the sheer scale of the challenge to understand its significance to the public sector and, by extension, its finances. A quarter of all annual government spending, £175bn, is on goods and services. The UK is the second largest ‘market’ for government suppliers in the world after the US. In delivering its corporate functions, central government spends around £12bn on contracts for technology, facilities management and business process outsourcing.
Councils spend around £42bn on external contracts, more than 40% of all their expenditure, excluding national programmes. Together, local and central government issue around 600 contracts each week. The combined energy requirements of the public sector amounts to £4bn. And, despite the UK’s health care system being publicly owned, spending on suppliers is greatest in health (£24.2bn), followed by social welfare (£17.9bn), defence (£10.1bn) and education (£7.3bn).
The flip side of the coin – demand – is equally striking. Suppliers to government employ around 1.2 million people and collectively produce around 6% of gross domestic product.
No more them and us, a report by Deloitte, examines supplier management and the appropriate responses public bodies can make as budgets contract. It was prompted by, and is based on, conversations with clients and the firm’s experience of advising public bodies.
The report’s overarching conclusion is that as the configuration of the public sector’s supply chain has changed significantly, many public bodies have not sufficiently adapted their own capabilities, cultures and processes to reflect their new role. This change, which has taken place over the past 20 years, was driven by a political consensus that a mixed economy of provision produces value for money. The result is that many government suppliers now act as the principal agent of delivery of major public services, not simply as the recipients of outsourced corporate functions. As such, they have become a part of the critical national infrastructure.
Independent reports have repeatedly highlighted systemic problems where mismanagement of suppliers has led to high costs, late programme delivery and poor service quality. Of course, the notion that government must improve its management of contracts and suppliers is nothing new. But the prospect of a prolonged and dramatic period of austerity in public spending will significantly worsen the impact of ineffective supplier management. As budgets and supplier profitability contract, the margin for error on both sides will shrink.
So what should be done? The mismatch between the needs of government and its role is being addressed by initiatives such as Professional Skills for Government and the Departmental Capability Reviews. In addition, the Procurement Capability Review Model and Standards Framework produced by the Office of Government Commerce does a good job of identifying three common areas that should be addressed across government: systems, skills and leadership.
Briefly, improvements to systems involve the use of intelligent mechanisms to drive and manage supplier behaviour. The National Audit Office believes that around 40% of central government managers fail to apply financial penalties stipulated in contracts when services fall below standard. Beyond the unwillingness to use a stick there is a general lack of management information to guide decision-making and, when supplier failure does occur, it is not necessarily reported early to board level.
The skills element is a cultural issue that will need to be addressed on a number of levels. There is simply little support for the development of strong, commercially oriented procurement capabilities in many public bodies. The procurement or supplier manager role does not attract high-flyers and steps need to be taken to compensate for this. There is no defined career path for these posts and often no accompanying support of structured training programmes.
Local authorities are in many cases further down the road in this respect, having more mature procurement functions.
Leaders of organisations need to become much more involved with supplier management. This means priority and attention being given at board level, alignment between the governance of commercial relationship and policy objectives and the involvement of commercial managers at the initial stages of a project. The Public Sector Industry Review quite rightly recommended that in each department, a director of service delivery should be appointed to be responsible for the full commissioning cycle, not just for the initial procurement.
Each organisation should assess existing systems, skills and leadership to understand the role and involvement of suppliers, before designing and implementing an all-embracing central programme for managing suppliers effectively.
Our report builds on recent thinking from the OGC and analysis by the NAO and recommends three areas for immediate focus:
Improving contracting and compliance – increasing focus on outcomes, improving controls on supplier behaviour, and using accurate and independent information to improve transparency and inform decision-making. Specifically, the report recommends independent compliance testing and assurance and, where appropriate, enforcing contractual penalties.
Improving risk management – public bodies need to retain high quality data on the vulnerability of suppliers and their business models to changes in operational costs and other risk factors. Importantly, risk management needs to be applied effectively through the life cycle of contracts, not just at the start.
Strengthening contingency measures – including a monitoring regime to provide early warning of supplier stress and establishing procedures in the event of a supplier emergency.
The logical conclusion of budget reductions combined with the political will to open up the supply of public services will be a greater interaction between public, private and third-sector partners.
This cannot take place in a coherent fashion unless systemic problems in the management of suppliers across government are addressed. Some, such as contingency plans, are essentially rooted in improving capabilities.
Others, such as the skills required to manage an ‘extended workforce’ of partners, are more complex and require both top-down leadership and bottom-up involvement to push through long-term cultural change.
Our report suggests that an end-to-end review of the public sector’s entire approach to suppliers is needed. Given the breadth of the issues involved and the time it will take to implement the required changes, public bodies would be advised to start addressing the issue before it is forced on them.
Mike Turley is head of Deloitte’s public sector practice. The report is available on:
www.deloitte.co.uk/nomorethemandus
