Driving down the costs of procurement

March 19, 2010 12:38 PM

Building The scale of the fiscal crisis means that there should and will be public spending cuts. But there are also billions of pounds to be saved through efficiency measures. The Institute of Directors (IoD) have today released research that says £25 billion a year can be saved through restructuring public sector procurement, which currently costs a massive £220 billion a year. Accounting for 0.75 per cent of global GDP (yes, global GDP), or a third of UK public expenditure, this is a massive outlay for the Government, so it’s all the more important to get it right.

The IoD’s pamphlet suggests centralising buying to manage key supplier relationships and all national and major contracts on behalf of the whole public sector. This would offset duplication, as many organisations use identical or similar products and services. The Office of Government Commerce should play a bigger role in this, acting as a strategic head office. Regional hubs would then offer more local expertise. There are many national private companies that are good examples to follow. (Hence the title of the pamphlet, Towards Tesco, Improving Public Sector Procurement.)

IT For big contracts, it’s clear that huge amounts of money are wasted, and projects are incorrectly priced to start with. Our report on capital projects showed that big projects overrun by 38 percent on average. Implementing new IT systems is an oft-repeated example of departmental waste, and it shows that perpetuating errors costs the taxpayer billions of pounds – hence the need to standardise procurement processes. Some bodies get it right, but far too many get it wrong.

The recommendations of this report may superficially seem like a contradiction to our calls for more local decision making. But this isn’t necessarily the case. If, for example, a school wanted to buy new IT equipment or extend their building, then that should be totally their choice. The advice they then receive on tendering this contract should come from a reliable head office (or regional hub) that replicates sensible business models across the whole of the public sector. Essentially though, the choice remains with the local organisation. Of course, many of the quangos that have sprung in this middle ground – Becta, for example – could be abolished.

Transparency will play a key part in driving down these costs in the future. If contracts were made public this would encourage competition and would break the cosy relationships that have no doubt developed between public bodies and contractors. Councils have found that publishing more items of spending has meant that they can save money – Windsor and Maidenhead publish expenditure of £500 or more and recently announced a 4 percent cut in Council tax. This is a formula that could be replicated in procurement, too.

Building The scale of the fiscal crisis means that there should and will be public spending cuts. But there are also billions of pounds to be saved through efficiency measures. The Institute of Directors (IoD) have today released research that says £25 billion a year can be saved through restructuring public sector procurement, which currently costs a massive £220 billion a year. Accounting for 0.75 per cent of global GDP (yes, global GDP), or a third of UK public expenditure, this is a massive outlay for the Government, so it’s all the more important to get it right.

The IoD’s pamphlet suggests centralising buying to manage key supplier relationships and all national and major contracts on behalf of the whole public sector. This would offset duplication, as many organisations use identical or similar products and services. The Office of Government Commerce should play a bigger role in this, acting as a strategic head office. Regional hubs would then offer more local expertise. There are many national private companies that are good examples to follow. (Hence the title of the pamphlet, Towards Tesco, Improving Public Sector Procurement.)

IT For big contracts, it’s clear that huge amounts of money are wasted, and projects are incorrectly priced to start with. Our report on capital projects showed that big projects overrun by 38 percent on average. Implementing new IT systems is an oft-repeated example of departmental waste, and it shows that perpetuating errors costs the taxpayer billions of pounds – hence the need to standardise procurement processes. Some bodies get it right, but far too many get it wrong.

The recommendations of this report may superficially seem like a contradiction to our calls for more local decision making. But this isn’t necessarily the case. If, for example, a school wanted to buy new IT equipment or extend their building, then that should be totally their choice. The advice they then receive on tendering this contract should come from a reliable head office (or regional hub) that replicates sensible business models across the whole of the public sector. Essentially though, the choice remains with the local organisation. Of course, many of the quangos that have sprung in this middle ground – Becta, for example – could be abolished.

Transparency will play a key part in driving down these costs in the future. If contracts were made public this would encourage competition and would break the cosy relationships that have no doubt developed between public bodies and contractors. Councils have found that publishing more items of spending has meant that they can save money – Windsor and Maidenhead publish expenditure of £500 or more and recently announced a 4 percent cut in Council tax. This is a formula that could be replicated in procurement, too.

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