Next week’s Emergency Budget, and the commencement of the new Spending Review following closely on from the Chancellor’s earlier cuts package, are focussing council leaders and chief executive’s minds. There can be no doubt, whatever the economic justification, that the Conservative-Liberal Democrat Government is serious in its intent to reduce public expenditure. It has signalled that local government will not be exempt or protected. Indeed it is expected to be disproportionately hit.
Local authorities know that they are facing real cuts this year and that the next three to five years will be dominated by financial pressures of a kind not experienced for decades. They are seeking tactical and strategic responses to the onslaught.
Outsourcing and partnership working with the business and third sectors will be one of many tools in public sector managers’ tool bags that they will reach for to address these pressures. All procurement and consequently decisions relating to outsourcing should be driven by strategic commissioning. Procurement is only one a number of means of implementing commissioning decisions. Outsourcing should only be undertaken when it adds long term value.
There are ten critical factors that council leaders and executives should take into account when considering procurement and their relations with the outsourcer partners.
1. Narrow your focus to the things you actually need
Often senior managers in local government seem not to understand that a significant amount of money is spent by middle managers on things that their suppliers like to sell, rather than things that are needed to provide fit-for-purpose outcomes.
Often the appetite and capability to negotiate with suppliers effectively is so poor that buyers simply choose the cheapest tender received against a specification that would not survive close scrutiny if it was challenged robustly with the question “Why do you need that?”
This happens most frequently, perhaps, in software procurement, where end users can be seduced by the presence of features that are unnecessary and that end up being unused. Or where the client over specifies the requirement. In one case study, an authority was able to increase a budget for required drug and alcohol services by £300,000 simply by crossing things off suppliers’ proposals that management had previously agreed to pay for but which the service users did not need. Contracts must allow such flexibility.
2. Be clear about why and how you engage with suppliers
We’ve all heard horror stories about local authorities which outsourced their client functions and found themselves effectively at the mercy of their suppliers or advisors.
Some of the advice currently being given to chief executives by large consultancies on “become a commissioning organisation” - on the basis that this means all services will be procured - strikes us, perhaps unfairly, as having a similar intent. Indeed commissioning does not have to lead to outsourcing.
The reasons why, and the way, your authority does business with suppliers is part of your political DNA. Westminster’s character is in part defined by its entrepreneurial behaviours; those councils who remain committed to the employment of direct labour organisations have a particular character and orientation that reflects a judgement about the best way to balance a range of community obligations.
What is your council’s DNA, and what pattern of in-house v public sharing v privately-sourced service delivery fits its character and strategy with most integrity?
3. Set a clear framework for “Go without/make/buy/partner” decisions
Clarity about this issue will enable you to develop a clear framework to guide your Members and managers through decisions about whether to go without something, or reduce its quality or volume requirement; to provide it in-house; to share a public or third sector partner’s offer; or to source from a private supplier. These are not simply technical decisions; the mix you end up with has strategic impact on your authority’s capability, and you are the architect of its future organisational shape, not just temporarily employed to make tactical calls. Outsourcing should include service redesign not simply transferring the same service to be delivered in the same way.
4. Research supplier markets
It is always enjoyable the first time you sit down with an existing supplier, or indeed anyone from a firm that sells extensively to local government, and ask them about their year-end dates, or how their accountancy treatment of revenue recognition affects sales commissions. Typically, they have never heard such questions inside a town hall.
We have delivered large and enduring revenue savings for clients through the interesting discussions that flow from these questions, but even more from simple devices like actually approaching alternatives to incumbent suppliers; finding out about recent contract awards and introducing some of their innovative terms and conditions into our clients’ specifications and tender exercises; and looking beyond traditional sector markets for alternative sources of goods and services to the usual suspects – all of which introduce genuinely competitive dynamics and lead to better priced and structured deals. You must understand the commercial drivers for every supplier.
5. Get inside suppliers’ heads
Linked to the previous point, how well do your managers understand what is driving behaviours amongst their suppliers? Local government officers can often think that “making profit” is an accurate and comprehensive description of the objective of all private business activity.
It isn’t.
Is the firm you think you want to do business with working in a growing, mature or declining market? Are industry input costs reducing, flat or rising? Is the nature of the competition they face well-understood, or changing? Is the firm driven by revenue, margin or profit? Does the business want to be acquired or does it need cash to acquire others? Are its competitors local, national or global? Does it recognise all its competitors? Does it have alternative markets? What do its shareholders expect from its contracts?
The answers to these questions provide negotiating leverage and should inform procurement selection. That means you can achieve more value and better outcomes for your citizens while using less of their cash.
6. Ask for help when specifying requirements
It is still much more common for local government officers to talk about service user or community needs than demand. Perhaps this is because people in town halls get to define needs, whereas demand is in the ownership of the people presenting it.
There is a proper debate to be had on a case by case basis about the extent to which needs or demand should define service requirement specifications. There may be little demand for benefit fraud investigation, but it is needed to protect social bonds and the public purse.
But equally, insensitivity to the nuances of demand from service users is a financial risk. Often, the service redesigns that follow from “lean” or “systems” approaches are pivoted on a “Eureka” moment that reveals the pointlessness or inappropriateness of the way things are currently done.
We remember the occasion when an authority reduced the time it took to get onto a council’s housing waiting list from about 35 days to “overnight” by abolishing application forms and setting appointments for face-to-face conversations, supported by a full set of documentation, instead.
So if your managers run procurement exercises without having asked the people who will end up using the services being procured their views on what should be specified, perhaps it is time to insist that this is changed. Ideally involve them and front line staff in the procurement process.
Consider the option of jointly procuring with other public sector partners in your locality ( a form of the Total Place approach) or with other authorities to secure economies of scale; enhance your market leverage; and share the costs and benefits.
Focus specifications on outcomes and outputs wherever possible; and include social, economic and environmental ones too. Consider the implications for services if the workforce gets a shabby deal.
7. Look locally or more widely for public or third sector partners who may be able to substitute for or complement commercial suppliers
It is very easy, once a “make or buy” decision has been taken (…don’t forget the “can we now do without?” phase before!) to stop thinking and simply put an opportunity in front of the usual suspects. But stop and think. If you’re outsourcing payroll, perhaps your nearest NHS back office hub is as efficient and affordable as the market-leading suppliers. Maybe a neighbouring council could empty your trade waste bins at a lower cost than an incoming private supplier needing to invest in fresh fleet or drive many miles to get onto your territory.
Look sideways towards other public and third sector organisations, and up and down into your existing supplier networks, before assuming you have to go to a traditional competition between private suppliers.
8. Don’t revert to price-driven procurement
No matter how much precision our cost/quality bid evaluation spreadsheets appear to give us, the one genuinely reliable currency in competitive procurement is price.
Or is it?
We all know the stories about the reverse auction that was won by a supplier whose margin in the deal was so low the contract was unsustainable; or the retendered mobile phones contract whose lower unit price could only be achieved by increased call volumes whose cost swamped the incremental upside from the unit price reduction.
Whole-life costing may be a commonplace term nowadays – it is the essence of the Private Finance Initiative, for example – but that doesn’t mean your managers actually opt to use it as a decision-making device in tender evaluation. There is good reason and opportunity to procure for social and economic outcdomes as well – this is not the time to lose this opportunity.
Find out whether they do, and if they say they do, ask to be shown how. If it’s true, your finance director should be banking some cash.
9. Wherever possible incentivise long-term thinking and reward a willingness to accept risk
We don’t know any suppliers to local government who prefer cold selling to account management. Everyone wants long-term business, ideally framed by contracts which provide assurance of future cashflows. Listed and privately owned companies; businesses which are being prepared for sale or groomed for long-term dividend performance – all want the longest possible contracts, and all will forego a certain element of price in order to get them.
All deals between local authorities and suppliers contain risk to the suppliers and the customer.
Skilful commercial negotiation is all about persuading the other party to keep its own risks and take on some of yours whilst minimising the financial cost to your authority..
These topics are rarely debated explicitly in buyer-supplier discussions in local government, but they should be. Your counterpart understands their own risks, and probably has a better understanding of yours than most of your managers.
Change this. Make risk identification, risk allocation, risk price modelling and risk management parts of the required skillset for your buyers, and of the audit trail for the deals they do. And then use the audit trails to frame organisation-wide learning so that your buying capability steadily improves – meaning more good deals and fewer expensive ones.
10. Invest in your client capability
Many of you reading these tips will think – sadly, accurately – “There’s no chance of my teams pulling these things off!”
In our experience, there is no fixed correlation between the size, location or longevity of a corporate procurement function and the capability with which a local authority sources from suppliers.
Most of us, frankly, do this poorly; in spite of Compulsory Competitive Tendering; Best Value; World Class Commissioning and all the other initiatives that we have experienced.
It doesn’t have to be this way, however. Many councils who have taken a simple, methodical approach to building a high quality commercial capability within their organisations, which then acts as a hub for the improvement, training, culture change and business process change required to embed the more effective approaches we have outlined here.
This journey does need to be correctly planned and navigated, but the beauty of it is, the savings that are made along the way pay for the cost of the ticket and then deliver year-on-year cash savings and demonstrably better outcomes.
And in this most difficult of settings, who can afford to ignore that prospect?
John Tizard is director of the Centre for Public Service Partnerships (CPSP@LGiU)
Ben Ticehurst is director of V4 Services Ltd
