Wednesday, 9 September 2015

All for one, innovation for none

Another public procurement price analysis article has made national headlines this week, found here on BBC News.

The Home Office conducted a study into police procurement trends across 20 common items including batons, uniforms and helmets. 

I haven't read the Home Office study in detail, but these kind of reports can err on the side of rudimentary:

Humberside bought police helmets for more than £43 each while most other forces acquired them for under £30.

This can indicate a savings potential and is undoubtedly a good place to start your evaluation for cost reduction opportunities.

However when you simply compare two purchase prices, rarely, if ever, does the analysis also delve into key contractual differences such as payment terms, rebates, catalogue pricing discounts, minimum order quantities, annual purchase volumes, inclusion of delivery costs, what delivery service levels, product warranties etc.  

Then you have the question on whether the specifications are the same.  Perhaps Humberside has identified a more costly product that leads to a 20% better safety record from head injuries.  Might that not justify the additional cost?

There is a long perceived view that rationalisation and aggregation leads to cost reduction.  For example, in the same article Policing minister Mike Penning was quoted:

"For too long the police have approached the market in a fragmented way, buying equipment in small amounts and to varying specifications.


"It makes no sense for forces to buy separately when money can be saved if they act together."

Bigger procurement is not always better procurement

Interestingly Spend Matters UK recently re-circulated an older post of theirs outling how bigger procurement is not always better procurement.  Please do have a read as it provides excellent insight that we won't duplicate here.

What we've seen is that many of our clients run reverse auctions on aggregated volumes, rather than spot-purchases.  They are very successful in doing so.  That said, even very low value auctions of a few thousand pounds have lead to 30%+ savings, so bigger isn't always better in our view too.

Large spend values attract large suppliers with the notion being procurement teams can exercise their leverage and use economies of scale to secure better pricing.  

Lower spend values attract smaller suppliers and generally there are a lot more of them in the marketplace, which can equate to increased competition and better savings.  

Perhaps the price differences seen with the police, assuming they are not associated with contractual or specification issues, are less to do with failure to aggregate demand and more to do with ineffective negotiations for their own requirements? 

One step forward, two steps back 

One adverse side-effect to bundling up contracts into an aggregated demand is that it diminishes competition.  

Taking say £200m of spend that is today fragmented across many hundreds of suppliers and bundling it into a single contract prohibits SMEs from retaining business.  As a result some may perish whilst others downsize.  The large company that wins the contract swells significantly to cope with the demand whilst other large businesses (if there are any) stay as they are or also downsize from losing their portion of the fragmented spend.  

Fast forward a year and the market only has one real candidate who can cater for the demand - the incumbent.  This becomes a very poor market to negotiate in.

And so the cycle continues whereby it is decided to fragment the contract into smaller packages to increase competition, except this time there isn't as much liquidity.  So we're back where we started except with worse market conditions.

Innovation triumphs over imitation

As we've just noted, consolidated contracts diminish competition.  With less competition, there is less imperative to differentiate.  There will be fewer SMEs in the market and they are typically regarded as the key source of innovation with their agility and drive to increase market share.  Local police authorities will have their hands tied and won't be able to engage with the SMEs and so those remaining will have little incentive to innovate. 

Furthermore, the other suggested strategy in the BBC article was to standardise the products. This again reduces innovation, as the product spec. would be based on what already exists, not would could be.  Once that spec. is agreed, the market is closed out to new ideas.  This contradicts with the relatively recent reforms to the EU Procurement Directives.

So what should we do?  

We should be focusing on driving the market forward and negotiating effectively within that market.  A fragmented market can be your best friend, not your enemy.  Procure on best value, not just best price.  Don't focus on Purchase Price Variance but on lifetime costs.  Improve through innovation.

We could go on but there's a risk we're sounding like a Baz Luhrmann song!  

Hopefully we make ourselves clear but more importantly, what do you think about this suggested police procurement strategy?


About: Market Dojo provides accessible eSourcing software. Find out more at www.marketdojo.com

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