generating economic benefit and growth through smarter public sector procurement

www.cut-the-deficit.com 1

Generating Economic Benefit and Growth Through Smarter Public Sector Procurement


This ground-breaking report shows how political leaders could create 2.2

million jobs through better purchasing of taxpayer-paid goods and services while cutting the U.S. deficit.

www.cut-the-deficit.com

Written by Colin Cram, Internationally recognized public sector expert

Sponsored by Rosslyn Analytics

http://www.cut-the-deficit.com/



Generating Economic Benefit and Growth

Through Smarter Public Sector Procurement

Table of Contents Page 3 Why you shouldn’t read this paper

Page 5 Purpose of this paper

Page 6 Main findings and conclusions

Page 7 Understanding how taxpayer money is spent

Page 9 Securing the benefits

Page 11 Selecting the appropriate procurement model

Page 13 Creating first class Procurement

Page 15 The optimum model

Page 16 The authors’ conclusion

Appendices

Page 17 Appendix A: Why public sector organizations can pay too much

Page 19 Appendix B: Re-structuring procurement. The potential benefits

1 Appendix C: Procurement Objectives. Delivering value and economic growth

Page 23 Appendix D: Selecting the Right Procurement Model: A Comparison between

Collaborative, Consortium and Integrated Procurement

Page 25 Appendix E: Understanding How the Money is Spent



Do Not Read This Report!

…if you want to go bankrupt, increase taxes, deliver poor services to citizens and change nothing for the better

Municipal debt in the United States amounts to $3.7 trillion. Many cities are facing bankruptcy and citizens are facing reduced services. However, much of this pain could be avoided through harnessing the purchasing power of public sector organizations in a new way.

Public sector organizations purchase an estimated $2 trillion a year of goods, services and construction, equivalent to $6,500 per adult and child. 75% of this is spent by the states and the cities, towns and counties within their boundaries. Astonishingly, given the unimaginable scale and importance of this expenditure, there is only limited knowledge of how much is spent, by whom and on what. This means it’s impossible for it to be managed effectively.

Why First Class Procurement Matters.

Experience in countries such as the United Kingdom indicates that first class, integrated procurement can deliver cash savings for the public sector of 5-10% overall, but up to 90% on occasion. A fragmented approach to procurement, such as that found in much of the United States of America, prevents such benefits being achieved.

Better purchasing of goods and services on behalf of taxpayers could:

1) Save Cities from bankruptcy. Effective management of procurement spend could prevent some cities from going bankrupt, resulting in fewer layoffs in the future.

2) Deliver huge cash savings. The author’s experience is that creating a first class integrated procurement organization can lead to overall cash savings of 20%. Even taking a lower range of savings of 5-10% overall, the better management of procurement expenditure by states, counties, cities and towns will save some $75 billion to $100 billion a year across the country.

3) Reduce budget deficits. Many states, counties, cities, and towns are running unmanageable deficits. Better control of procurement spend could help solve this.

4) Reduce taxes. Those states, cities and counties that are in a healthy financial position may be able to reduce taxes.

5) Deliver better public services or be able to maintain services that might otherwise have to be cut.

6) Create sustainable investment and growth. Understanding how taxpayer money is spent will enable authorities to target it more effectively at those companies that will create economic growth and jobs.

7) Maintain global economic leadership. The US, with competition from fast growing emerging markets such as China and India, will be better positioned to keep its top ranking as the world’s largest economy with the most political and military influence.

This ground-breaking paper provides a blueprint for harnessing these opportunities.



Acknowledgements

The author would like to acknowledge the advice and information provided by Bob Sievert, Director of eVA State of Virginia, Jon Hansen of PI Window on Business and Lance Mercereau of Rosslyn Analytics.



MAIN REPORT

Purpose of this Paper

Cities are going bankrupt. Services are being cut. Taxes are increasing.

This paper explains how the United States can harness the power of its $2 trillion annual public procurement spend to turn round this situation, deliver big cash savings, create jobs and deliver extra economic growth to lay the foundation for its future prosperity.

This paper offers readers a roadmap to navigate successfully the country’s woes by shedding light on unrealised opportunities for procurement savings and growth, and providing viable solutions which are not currently being discussed by taxpayers, city majors, state governors, and other elected officials in Washington, D.C.

This year is a pivotal time for the United States:

The country faces the largest deficit in its history;

Unemployment is at an all-time high;

Municipal debt amounts to $3.7 trillion;

States, cities and towns are facing bankruptcies.



Main Findings and Conclusions

There are certain pre-requisites to achieving the above aims:

1) An understanding of how much is spent on what and with whom. Such data needs to be obtained nationally, by state, city, town and county.

2) An integrated procurement structure within each state, with the authority and terms of reference to secure maximum benefit and advantage from this vast procurement resource. This requires partnerships between institutions, cities, towns and counties.

3) Much stronger joint procurement between states; the above procurement model for public sector institutions between states would facilitate this.

4) Ensuring the right organizational structures have the capability through employing sufficient specialist contracting, product and service category expertise to be able to deliver the potential benefits.

Overall, and despite some excellent initiatives and examples of excellence, these pre-requisites are not in place.

A second option for an integrated approach within each locality or city, but not the state-wide structure as proposed above, was considered; but this will not produce anything like the benefits of the preferred model.

Public sector procurement is improving through the increasing employment of procurement professionals, often externally recruited, and increasing collaboration between and, in some instances, within states.

However, procurement remains generally fragmented and therefore all too often unable to deliver the opportunities listed above to the degree required for sustained savings. This paper explains that it is vital for there to be a comprehensive understanding of:

How the non-Federal procurement spend of $1.5 trillion is spent; How that information could be used to deliver cash savings and help boost the

economy; and, How procurement could be organized to be able to deliver the cash savings needed and

other economic benefits.

But, without adequate data, it is impossible to develop the right strategies that will deliver the cash savings that are required and to support national, local and state economies. Nor will it be possible to measure their impact. But if it isn’t measured, it can’t be managed.

This paper describes how adequate data could be obtained relatively quickly and cheaply, despite the myriad of different finance systems in use by the government in various capacities.

The right analysis will enable public sector organizations to determine the right procurement structures and collaborative models that will realize the maximum cash and economic benefits.



This paper is a tool that can be used by the authorities to determine how to achieve this outcome. However, big benefits are rarely achieved without fundamental change, which public sector organizations tend to be loath to do.

Understanding How Taxpayer Money is Spent

Harnessing the potential of public procurement is not about central planning by the Federal government or the individual states. It is about the smart investment of money provided by the taxpayer.

However, it will require an intelligent dialogue between the states and the cities, towns and counties and other public sector bodies within their boundaries about how to secure maximum benefit from these assets. This would need to be based on evidence about how this huge resource is used and spent. Equally important, there would need to be an intelligent dialogue with business about current and future spending plans and trends. This is what the most successful businesses have to do, and the public sector should emulate them.

The United Kingdom has recognized the importance of addressing its public sector procurement expenditure in order to tackle its budget deficit. However, despite excellent work in some sectors, it has still not undertaken a nationwide public sector-wide data analysis of the kind proposed below.

The author’s experience in the UK is that an understanding of procurement expenditure, combined with an integrated procurement organization, can deliver cash savings overall of 20% – and up to 90% in some instances. In those parts of the UK public sector where unsuitable legacy structures continue, not only are potential savings often unrealised, but cartels have been able to operate (such as in the construction industry), which may have over-charged local government authorities by $500 million in three years. Suppliers will frequently have a more complete picture of public sector spend with them on particular product categories than public sector organizations.

In the United States, procurement data is patchy. This means that procurement spend cannot be optimised either in terms of best value, supporting innovation or investing most effectively in the overall United States, state and local economies. This disadvantages even the best procurement teams. For example, there is no national database on how much is being spent overall and with whom. The Federal government has much spend information and many states can provide a pretty good indication of their procurement spend – some in much detail.

However, within each state there is varied and often limited information overall on procurement spend by city, town, county and other public bodies such as universities. In particular, information is generally lacking on the amount of expenditure that is with suppliers based within their geographical boundaries.

An understanding of

procurement expenditure

combined with an

integrated procurement

organization can deliver

cash savings of 20%, and

up to 90% in some

instances



There are thousands – probably tens of thousands – of finance, procurement and other enterprise systems in use, often with little compatibility.

However, turning this into usable data for analysis in a common format, which can be combined to give local, regional and national pictures, can be achieved by downloading the raw payments data from such systems, converting it to a common format and manipulating it. The author has demonstrated that this can be done in a variety of environments. This enables the starting point to be established. Ordinary transactional payments data is adequate. Through the manipulation of the raw data, a wealth of information could be obtained nationally, by state, by city, by type of institution, by institution and locally. This would include:

Expenditure by supplier. Identifying spend with common suppliers. Where, geographically, the money is spent.

How much is spent with local suppliers and Expenditure with small businesses.

A more complete list is to be found in Appendix E.

Analysis commissioned by the author in the United Kingdom suggests a much greater commonality than expected between different types of public bodies, e.g. universities, municipal authorities. A similar picture seems likely to emerge in the United States (paragraph 7, page 9 refers).

In short, such data analysis provides the platform to devise the best procurement strategies to deliver agreed objectives of public sector organizations and the most suitable procurement structure to do so.

Such data analysis is ideal for individual organizations, that do not have sophisticated procurement information systems, to understand their procurement spend better and identify opportunities to make savings, deliver better value for money, understand their impact on the local economy and how to enhance it.

Ideally, however, each state should work with the cities, towns, counties and other public bodies to understand how public sector procurement is being used and to obtain an overall picture state-wide, by type of public body, regionally within the state and down to locality. Not all organizations would agree to take part, but as long as enough did, it’s possible to obtain a picture that was good enough to be able to develop a strategy to deliver the agreed objectives.

Agreeing such an analysis could be protracted, and quick wins could be obtained in the meantime by individual cities, towns and counties in commissioning their own analysis for the public bodies within their boundaries.

There is no national

database on how much

is being spent overall

and with whom



Securing the Benefits

Establishing a suitable procurement structure, whether within a state, county, city or town or for collaboration between them, is critical to maximising agreed financial, economic and social benefits. A comprehensive spend analysis of the kind indicated above is vital to helping determine the most appropriate procurement structures, where and how value can be obtained and how the benefits of investment through procurement can be maximized.

The right structures, reasonably resourced, will be able to employ the best specialists – on behalf of all. Top class category managers, with suitable commercial freedoms, can deliver exceptional results compared to a good non-specialist. They can work up and down the supply chain, taking out cost. A positive development is the recruitment of first class procurement professionals by many public sector bodies - so the expertise to be able to make use of detailed data on procurement spend exists in many places across the country. There is also increasing collaboration between the states on procurement, supported by the National Association of State Procurement Officials (NASPO).

Any potential collaboration should start with:

1) A clear set of objectives (Appendix C refers). The procurement objectives would be integrated into those of the organization(s) as a whole. They would be measurable and would cover value for money (The National Association of State Procurement Officials has produced guidance on this), what is spent within the state geographical boundaries, how much is retained and how much is devoted to supporting innovation and small, developing businesses.

2) Comprehensive and integrated data on procurement expenditure and the achievement of objectives.

From this, organizations can determine the collaborative procurement structure that is fit for purpose, contains the expertise that is needed, is accountable for results and has the authority to deliver them.

A purchase spend analysis by the State of Virginia, using data from its first class ‘Total e-Procurement Solution’, indicates significant commonality of purchase spend between the state and the cities, towns, counties and other public sector bodies within it. It is reasonable to suppose that similar commonality exists within every other state. Therefore there are many categories of goods and services where all the bodies within each state could maximise their purchasing power in order to secure better value for the taxpayer and to achieve other objectives such as investing in innovative and potentially growing businesses.

According to the State of

Virginia, there’s significant

commonality of purchase

spend between the state,

cities, towns and counties. It’s

safe to assume this

commonality exists in every

other state.



However, as companies such as Wal-Mart demonstrate, securing best value requires specialist category product expertise. Such in-depth product expertise possessed by the top class category specialists tends to be rare. Were it available so that each state, county, city and town could employ all the specialist expertise they required, the size of the procurement teams would be unaffordable. Also, for each of these organizations the limited volume of work in most categories would mean that most category specialists would be under-employed. That means that most public sector bodies have to ‘get by’.

Specialist expertise goes beyond individual categories and includes activities like the letting of major contracts. One only has to be aware of the problems and added cost that badly let and managed contracts can cause in order to be aware of the value of such expertise. Again, few organizations within a state geographical boundary will be able to employ the expertise that is

required. An ideal model is to ensure that the expertise of the best would be available to all and collaboration can help achieve this.

Evidence that joint and collaborative procurement can bring benefits comes from the collaboration between state procurement officers and the number of collaborative arrangements that exist. It comes also from states such as Virginia, where collaboration between the state and other entities within the state boundaries is growing. It comes from other countries such as the UK, where collaboration has delivered some major benefits.

Examples from the author’s own experience include savings of from 10 to 50% (exceptionally 90%). Some of the savings resulted from the elimination of duplication, which reduced cost within both supplier and public sector organizations. Appendices A and B provide further information on these savings.

Evidence of the benefits of joint/integrated procurement comes also from the private sector. It is inconceivable that Wal-Mart would be the force it is today without a first class, integrated procurement organization accountable for delivering some varied and stretching objectives though the use of its purchasing power, detailed knowledge of its procurement spend and some sophisticated procurement techniques.

A major government

organization, in the mid-

1990s, saved 20% – $96

million per annum overall –

by bringing together the

purchasing spend of nearly

1,000 cost centers

Appendix A

The budget for a

joint/integrated procurement

organization can be 15-25%

less than the combined

costs of the procurement

organizations it replaces



Selecting the Appropriate Procurement Model

When considering collaboration within cities or between cities, counties and states, one has to consider what the right model is likely to look like, but also whether collaboration is likely to deliver additional value and benefit the local, state or national economies.

This can be done by considering the relative merits of 3 basic collaborative models and using the matrix at Figure 1. The 3 models are ‘Collaborative Procurement’, ‘Consortium Procurement’ and ‘Integrated Procurement’. The model at Figure 1 also considers ‘independence’, i.e. no collaboration as an option.

Appendix D explains the relative merits of each option in some detail. Briefly, however, collaborative procurement is normally a group of organizations working together to let specific agreements for joint use. Public sector organizations tend to be fairly undisciplined in using the agreements, so achieve less purchasing leverage than is ideal; hence less cash is saved. Only a small proportion of the procurement spend of collaborating bodies tends to be covered. Also, collaboration can carry large and hidden overheads.

Consortium procurement is more disciplined than collaborative procurement and there may be a central team coordinating on behalf of members and sometimes letting procurement agreements. However, again, only a small proportion of procurement spend tends to be covered and although the cost of any central team may be clear, members’ time and travel tends not to be costed.

Integrated procurement is capable of delivering significantly greater benefits. This is where two or more organizations create a single procurement team to provide a full procurement service to them. Benefits are:

Aggregation of procurement expenditure to provide maximum leverage and negotiating power;

Elimination of duplication; Making life easier for suppliers through consistent:

o Approach to quality o Contract terms and conditions o Specifications

Ability to employ the best category and commercial managers; Sufficient critical mass to ensure good development opportunities for staff; Sufficient critical mass to ensure avoidance of single point failures.

Normally such arrangements would have service level agreements (SLAs) with a diverse range of customer organizations. These would define its objectives, including local policies that it would be expected to deliver. The SLAs may also define performance measures and how they are to be monitored.

Full accountability would also be achieved as the full costs and benefits of procurement would become evident, often for the first time.



The overall budget for a joint/integrated procurement organization can be 15-25% less than the combined costs of the procurement organizations it replaces, but because matters are so simplified, it should be able to afford the best category expertise. Its joint structure means that it should be able to operate more efficiently.

It is possible also to introduce more effective fraud prevention measures in an integrated procurement organization and to be able to identify when fraud is taking place.



Creating First Class Procurement

The comparative benefits and weaknesses of the various models become evident through the use of the following matrix. Each organization that is considering collaboration in any form should make its own assessment using this model. Only those who reach a similar conclusion should try to collaborate. The UK experience has been that failure to put the right structures in place nationally means that delivery has often fallen well short of local and national objectives and aspirations.

As a first step, organizations proposing to work together should agree objectives. They can be expressed in procurement terms or the outcomes needed, for example lowest prices, maximising local economic development or better public services. Each procurement model should be scored according to how far it is likely to be able to deliver a particular objective. Using a range of from 0-5 works well. One can refine the approach further by weighting each objective according to its relative importance, though this rarely produces a different outcome. In nearly every instance, the assessment will show that there is no ideal collaborative model. The best solution is what fits best. All have some disadvantages, but the ‘independent’ approach will tend to deliver least benefit.

Understanding the procurement spends of the organizations that are proposing to work together is necessary if an integrated procurement organization is to be one of the options considered. The purchase spend analysis, described on pages 7-8, is an ideal way to do this.



Figure 1: Example Procurement Model Matrix

OBJECTIVE /

COLLABORATIVE MODEL

Score each box on a scale of 1-5

Independence

Collaboration Consortium Integration

1. Strategic Management of Procurement

2. Leverage

3. ‘A’ Class Expertise Available to All

4. Best Practice Techniques – Market Shaping/management

5. Consistent Specifications (to reduce cost and improve overall quality)

6. Consistent Quality of Products, Services, Works

7. Efficiency: Reduce Costs for Suppliers and Contracting Organizations

8. Consistent Process/Procedures and Legal Interpretations

9. Boost Economy (through increased and targeted investment in local economy and jobs, taking a broad view of value for money)

10. Boost Economy (through being a catalyst for innovation)

11. Minimising Procurement Fraud

TOTAL



The Optimum Model

The commonality of procurements between dissimilar public sector bodies has indicated in the UK that integrated ‘place based’ procurement would seem the best way forward, whilst allowing for specialist procurements for each category of organization, e.g. schools. The analysis in Virginia appears to confirm that this may be true in the United States. Without pre-judging the outcome, it may be that the optimum solution would be each state and all the public bodies within them, being serviced by an integrated procurement structure consisting of a central organization to handle the big, strategic and common products and services, with local hubs (e.g. city or county) to handle smaller and unique procurements. This is not a ‘Wal-Mart’ model, but is almost as powerful. The diagram in Figure 2 illustrates what this might look like. Figure 2: Completed Example Procurement Model Matrix

Lean Integrated Operating Model Collaboration Between Neighbouring States

Procurement Hubs for States and Major City Regions

Local Procurement Units

Major Regional/Sub-regional Contracts * *

Relationship Management with Main Suppliers

* *

Market Management * *

Common Categories * *

Major Project Support *

Industry Specific *

Small Local Contracts * *

Discipline/Implementation/Compliance * *

Where agreement within particular states for a state-wide procurement model proved difficult to reach, at the very least, cities should be seeking to integrate all public procurement within their geographic boundaries. A simplified version of the above diagram would be a suitable model. However, this option would not deliver the same benefits as the fully integrated state model.



Conclusion

This is a pivotal moment for the United States: Does it have the vision and grit to take the tough decisions that would enable it to remain the world’s economic super-power, or would it prefer to avoid them and accept relative decline, allowing other, more vigorous nations, to overtake it?

At $2 trillion a year, public sector procurement is the biggest lever that the government – federal, state, local - has to deliver cash savings, support economic growth and reaffirm the global economic leadership of the United States. The alternative is already apparent in some states, cities, towns and counties – bankruptcy, economic decline and unemployment.

What are the actions that need to be taken? None of them are rocket science:

Firstly, there must be a complete and detailed understanding of how this $2 trillion is spent – by whom, on what, who with and where. This can be achieved through a purchase spend analysis using raw payments data from finance systems. This needs to be done nationally, by state, city, county town and institution. The capability exists to do this.

Secondly, an integrated procurement structure within each state is required, with the authority, terms of reference, skills and capability to secure maximum benefit and advantage from this vast procurement resource. This requires joint working between institutions, cities, towns, counties and the state itself. There must be genuine and full commitment and no backsliding.

Thirdly, there needs to be much stronger joint procurement between states.

These actions require strong leadership from elected representatives, officials and decision-makers. This means abandoning out-of date-customs and practices. Protectionism must be overcome. The choice is stark, but the right choice will secure the prosperity of future generations.

At $2 trillion a year, public

sector procurement is the

biggest lever that the

government has to create

2.2 million jobs.



APPENDIX A: Why Public Sector Organizations Can Pay Too Much

Creating Excessive Costs. Excessive costs for the public sector come from several sources:

Procurement is often not coherently structured to be able to make best use of the data that is available or may have inadequate authority to bring together all the public procurement spend within a state or a city and maximise leverage and opportunity. Silos within many state funded organizations will often make this worse. Integrated procurement organizations created from previous independent ones emphasise the point.

o In its first year, the Research Councils’ Procurement organization, which took over the procurement functions of five independent bodies, reduced the costs of procurement staff by 15% despite an increased workload. For the first time, expert contracting expertise became available to all. Procurement savings of $300 million were anticipated over 10 years and much has been delivered.

o A major UK government organization, in the mid-1990s, saved 20% – $80million per annum overall – by bringing together the purchasing spend of nearly 1,000 cost centers and applying specialist category and contracting expertise to the collective purchasing spend.

o The UK central government is adopting a joint approach to procuring common categories. Use of the consequent agreements will be mandatory. The savings target by 2015/16 is 25% ($5 billion) on an annual spend of $20 billion. This will be achieved both through better procurement and demand management.

Public sector organizations fail to take advantage of opportunities by:

o Failing to make use of existing purchasing agreements;

o Being unaware of initiatives and opportunities created in other organizations;

o Leveraging their spend to negotiate and secure the best deals.

Disaggregation of spend and the limited expert category expertise available - there is not enough to go round, even if organizations could afford it – prevent the use of best procurement techniques such as supply chain management, market management (the US should be large enough to manage many of its public sector supply markets) and value analysis.

Public sector procurement creates cost for themselves, for private sector businesses and obstacles to small and medium sized businesses through:

o Reinventing the wheel – different organizations with different specifications for what should be identical products/services.

o A huge variety of contract terms and conditions. o Different procedures. o Multiplicity of tendering, contracts and contract managers.



o Multiplicity of attempts to manage suppliers, markets and supply chains. o Varied expertise of procurement personnel.

Tendering can be prohibitively expensive for small and lean suppliers – just the ones

with which public sector organizations might wish to engage. Even the simplest tender will cost a bidding organization over $1,000 if its time is fully costed; so, assuming a 10% profit margin and a one in four chance of winning, a potential supplier needs to gain an extra $40,000 of business just to cover its tendering costs. Complexity and inconsistency of procedures add to the cost of tendering and hence the cost of the procured goods and services. The most complex tenders cost several million dollars.

Integrated procurement reduces the number of tenders and, hence, the overall cost to both parties. If done well, it need not reduce choice and can take into account state, regional and local issues.



APPENDIX B: Re-Structuring Procurement: The Potential Benefits

The potential for savings, through much better structuring of procurement, the availability of top class category specialists and an understanding of one’s procurement spend through data manipulation, is well established in the UK and increasingly so in some US states and cities.

The following examples from the author’s career and personal knowledge show what can be achieved.

Office furniture. Through working with suppliers on their manufacturing processes and with customers on their reliability, costs were reduced by 35% ($10 million per annum) and quality improved compared to the use of non-commitment framework agreements.

Outsourcing facilities management. An integrated approach led to cash savings of up to 35 percent ($25 million per annum) against previously tendered agreements and improved service.

Laboratory consumables. An integrated approach led by a category expert led to cash savings of up to 90%.

Welfare milk. A category specialist saved 10% ($16 million per annum) with existing suppliers.

Postage. $12 million per annum saving on a $110 million spend. The UK National Health Service improved its procurement of drugs for hospitals,

saving 10 % of its $3.2 billion annual spend. Construction. Joint approach to construction procurement, led by an specialist team, is

delivering cash savings of 10% in schools construction and improved quality and timeliness. As more organizations join in with this initiative, cash savings may rise to 25% or 30%.

In most of the above instances, the use of procurement agreements was mandatory. That meant that suppliers were assured of the business, and therefore had an incentive to offer best prices, invest and innovate.

But why can a fragmented approach to procurement between public sector organizations and indiscipline within them lead to high costs?

Inability to take advantage of best supply management techniques Increased risk of those suppliers, with a greater understanding of how the public sector

spends its money, taking advantage.

The evidence for the benefits of integrated procurement is bolstered by examples of missed opportunities:

Greater Manchester authorities, a city region in the north west of England, have over 100 specifications for ‘tarmac’, when only seven are needed. A potential saving of 10% is achievable.

Potential to save 10% on procurement of garbage trucks by Greater Manchester councils. Unable to agree specifications and makes.



Finance systems in local councils have different operating systems and requirements

have been differently specified even though their functions are often identical, which means that separate finance systems are purchased. Potential savings from integrated systems of over 30% where groups of authorities work together appear to be possible.

One financially pressed council rejected a re-design of street lighting because the council was situated on “the wrong type of rock” – a wiser council saved 30%. The real obstacle was ‘not invented here’.

IT licences for HR and other back office functions are procured separately – potential saving from an integrated approach across the public sector should reach several tens of millions of dollars per annum.

Laboratory / medical equipment – potential saving of 20% on an annual spend of $225 million.

Indiscipline within organizations and lack of commitment creates much duplication of contracting, contracts management arrangements and cost for suppliers. Research has indicated potential savings, exceptionally of up to 35%, on total procurement and ownership costs.



APPENDIX C: Procurement Objectives: Delivering Value and Economic Growth

There is an argument that the focus of procurement should be to deliver best value for money and that giving it other objectives is likely to dilute this focus. This is a questionable assertion on two grounds.

1) What is value for money? It could be defined as lowest price. Alternatively, it could be defined as what is best for taxpayers. The two can be very different as the list below (page 21-22) explains.

2) First class private sector organizations will often have a range of objectives and targets relating to the aims of the business of which they are part. Public sector procurement should be no different.

The definition of value for money depends on to whom one asks and how the question is put.

Ask a typical tax-payer and they may say lowest price (cheapest). Press them a little harder and one is likely to be told that quality is a factor. There is no point in paying for a service that doesn’t meet requirements. Pose the question of whether where the supplier pays its tax matters and it is a reasonable supposition that most taxpayers would feel that should be taken into account. Locally based suppliers would score over suppliers based in other states or abroad. One can take this further by asking if taking on apprentices and reducing the number of jobless in the area should be taken into account. This turns them from living off the community and state to contributing towards it. As employing previously unemployed people may reduce crime and disorder and other financial demands on taxpayers, as well as improving the quality of life in the neighbourhood, then it seems likely that few taxpayers would exclude this from the value for money equation.

One could go even further and suggest that the amount of innovation required by the public sector in the contracts they let also matters. A soon to be published piece of research by the Manchester Business School (part of the University of Manchester, one of the UK’s leading universities) has shown that 25% of companies in the UK that win public sector contracts which require innovation, go on to grow their export business. This means more jobs and more income, equating to more wealth generation. There is no obvious reason why the results of this research should not be broadly applicable in the United States.

Is reducing procurement fraud a part of the value for money equation? Information from Rosslyn Analytics suggests that around 2% of U.S. public sector procurement spend is lost through fraud. If correct – and there seems to be plenty of circumstantial evidence to back this up, the cost to the US taxpayer is some $40 billion a year, equivalent to $450 per taxpayer.

To summarize, there is an argument that the objectives of public sector procurement should be:

To procure the right goods and services; To the right quality; At the lowest overall cost, taking into account:



o Price

Lifetime cost Tax revenues from suppliers Saving taxpayers’ money through job creation and skills training to turn

people from dependency on taxpayers to net contributors To develop the local economy through growing small to medium sized businesses (and

local job creation, apprenticeships, skills training); A catalyst for innovation, thus creating more jobs and boosting the economy still

further; A good custodian of taxpayer’s money through reducing the $40 billion estimated

annual procurement fraud bill.

There is an increasing awareness in the UK of the above factors and a change in attitude from focusing largely on price.

It seems likely that those parts of the UK prepared to harness their public sector procurement spend to greatest effect will have an economic advantage over those that do not. The same is likely to be true in the United States.

Public sector procurement is a huge cost, but it also presents a great opportunity.



APPENDIX D: Selecting the Right Procurement Model: A Comparison between Collaborative, Consortium and Integrated Procurement

Collaborative Procurement

Collaborative procurement, without mandate, can deliver significant benefits, but the cost and effort of collaboration can sometimes exceed them. Also, its focus tends to be on price rather than delivering more complex and higher level objectives, such as supporting economic growth.

Collaborative procurement tends to require agreement, for each procurement organization, at every stage in the process, which can be expensive as well as time consuming. There is frequently passive resistance, where collaboration is seen as work that is additional to the day job, deadlines get missed and management information can be slow to be provided. In any choice of priorities between that of the collaborative group and that of one’s own organization, the latter always has priority. Lack of discipline within individual member organizations can undermine progress. There can be endless debates about specifications, terms and conditions of contract etc. Progress is frequently made at the pace of the slowest.

Unsurprisingly, collaborative procurement can require expensive structures to facilitate it. The annual cost of the overlay of collaborative structures in the UK public sector will have run to tens of $millions a year. At the same time, savings from collaborative procurement are often quoted as “potential”, since they depend on the extent to which organizations are prepared to adopt agreements. Without prior commitment to ensure procurement spend does not leak away and that suppliers can be confident about the amount of business they will receive, best value is unlikely to be achieved. Baselines against which savings can be measured are often difficult to determine.

A further weakness is that collaborative models depend on the expertise that exists within members. Often the resources are not available to appoint top class product category specialists. However, at its best, collaborative procurement can enable specialist expertise to be shared between organizations and can deliver benefits well beyond the means of the individual members of the collaborative group.

Consortium Procurement

A consortium requires a more disciplined approach than ‘collaborative’ procurement, which will tend to have membership rules and require greater commitment. Frequently, there will be a central team appointed to manage the consortium, work with members to develop the programme of work and oversee or support implementation. Its income will come from funding by its member bodies or rebates from suppliers or a combination of both.

Some consortia may have the cash resources to appoint some first class professionals to handle commonly used items. A weakness is that commitment to use the agreements tends to be limited, which reduces the leverage of the consortium on behalf of its members. The more disciplined the consortium, the greater the benefits. Consortia can often provide good value compared to the resources employed. However, even the best suffer from some of the



weaknesses of the collaborative model and overall cannot be expected to deliver the same benefits as an integrated model.

Integrated Procurement

Integrated procurement (or joint procurement), in contrast to the two previous models, is the creation of a coherent procurement structure to do all the procurement and contracting on behalf of several public sector organizations. It has the authority to take decisions, to deliver, to sort out specification issues, to question the need for procurements, to question solutions proposed by budget holders and to commit. The sponsoring organizations retain their independence, but have chosen to join forces with others for procurement. It does not mean doing everything in one place. The structures can be central, regional, city or local, but each structure is fully integrated under a common line management.

Integrated arrangements require service level agreements, with commitments both by the procurement organization and customer organizations. An integrated procurement organization takes over all the procurement responsibilities of the members, so there is no duplication. Integrated procurement organizations are properly funded but, in return, are expected to provide management information and deliver pre-agreed objectives and targets, including pre-agreed service levels at an agreed cost. Full accountability would also be achieved as the full costs and benefits of procurement would become evident, often for the first time.

The overall budget for a joint/integrated procurement organization can be 15-25% less than the combined costs of the procurement organizations it replaces, but because matters are so simplified, it should be able to afford the best category expertise. Its joint structure means that it should be able to operate more efficiently.

It is possible also to introduce more effective fraud prevention measures in an integrated procurement organization and to be able to identify when fraud is taking place.



APPENDIX E: Understanding How Taxpayer Money is Spent

Ask yourselves how much money is spent in your state by cities, towns and districts:

With each supplier? With suppliers that are common to more than one body within the state geographical

boundary? Where, geographically, is the money is spent? With local suppliers? With small businesses? With foreign suppliers (which may pay little in terms of state and federal taxes)? On the various products and services that are purchased? (A good idea can be obtained

by downloading the raw data on payments to suppliers and running it against databases of the products and services supplied by each business).

By various types of organisation, for example schools? o What do they spend their money on? o How much do they spend on each product or service category? o Do they have peaks and troughs in their procurements that could be smoothed to

reduce costs?

Also:

Can the above information be provided for the United States as a whole? o What are the differences between different states and different regions of the

United States? o Are there different expenditure patterns between cities, towns and districts in

different parts of the United States? Do different organisations pay different prices for the same products? How big are the

differences? What annual peaks and troughs are there in spending patterns? Could one save money

through discussions with business as to how these could be smoothed and costs reduced (due for example enabling manufacturers to smooth their production schedules)?

Can the purchase data be used to highlight where fraud and corruption may be occurring?

Can the purchase data be used to highlight where cartels may be operating?



About the Author

Colin Cram is an internationally recognized expert on government transformation with a particular focus on public sector procurement. Colin, for the past 30 years, has worked for major public and private sector organizations around the world..

During Margaret Thatcher's premiership, he was responsible for developing the government's strategy to improve public sector procurement. During this time, Colin pioneered the UK's public sector outsourcing policy, which now has led to the government being at the forefront of service outsourcing.

Colin is regularly called upon by governments for his expertise and advice. Colin is an active member of European Union (EU) working groups on innovation, procurement and sustainability. Recently, he testified before the House of Lords' Science and Technology Select Committee on the role of “Public Procurement as a Tool to Stimulate Innovation.”

About Rosslyn Analytics Rosslyn Analytics, recognized as one of the fastest growing privately held software companies in the world, helps public and private sector organizations accelerate business performance and innovation by giving their employees the data they require to make smarter, timely decisions. Its revolutionary cloud-based RAPid enterprise data enrichment platform is serving 1,000s of decision-makers, developers and organizations deploy self-service analytics in the cloud including spend and supplier analysis.. Rosslyn Analytics is ISO 9001:2008 and ISO 27001:2005 certified. To learn more, visit www.rosslynanalytics.com and rapidlabs.rosslynanalytics.com.

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