Generating Economic Benefit and Growth Through Smarter Public Sector Procurement

Generating Economic Benefit and Growth Through Smarter Public Sector Procurement

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

www.cut-the-deficit.com 1


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

Page 21 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 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.

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.



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 An understanding of
individual states. It is about the smart investment of procurement expenditure
money provided by the taxpayer.
combined with an
However, it will require an intelligent dialogue between integrated procurement
the states and the cities, towns and counties and other
organization can deliver
public sector bodies within their boundaries about how
to secure maximum benefit from these assets. This cash savings of 20%, and
would need to be based on evidence about how this huge up to 90% in some
resource is used and spent. Equally important, there instances
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.



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.

There is no national A more complete list is to be found in Appendix E.
database on how much Analysis commissioned by the author in the United
is being spent overall Kingdom suggests a much greater commonality than
and with whom 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.



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 According to the State of
be measurable and would cover value for money Virginia, there’s significant
(The National Association of State Procurement commonality of purchase
Officials has produced guidance on this), what is spend between the state,
spent within the state geographical boundaries, how cities, towns and counties. It’s
much is retained and how much is devoted to safe to assume this
supporting innovation and small, developing commonality exists in every
businesses. other state.
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.



However, as companies such as Wal-Mart demonstrate,
securing best value requires specialist category product
expertise. Such in-depth product expertise possessed by the The budget for a
top class category specialists tends to be rare. Were it joint/integrated procurement
available so that each state, county, city and town could organization can be 15-25%
employ all the specialist expertise they required, the size of less than the combined
the procurement teams would be unaffordable. Also, for costs of the procurement
each of these organizations the limited volume of work in organizations it replaces
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.
A major government
organization, in the mid- Evidence that joint and collaborative procurement can
1990s, saved 20% – $96 bring benefits comes from the collaboration between state
million per annum overall – procurement officers and the number of collaborative
by bringing together the arrangements that exist. It comes also from states such as
purchasing spend of nearly Virginia, where collaboration between the state and other
1,000 cost centers entities within the state boundaries is growing. It comes
from other countries such as the UK, where collaboration
Appendix A
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.



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 / Independence Collaboration Consortium Integration

COLLABORATIVE MODEL
Score each box on a scale of 1-5

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 Procurement Hubs Local Procurement
Between for States and Major Units
Neighbouring City Regions
States

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 At $2 trillion a year, public
deliver cash savings, support economic growth and reaffirm sector procurement is the
the global economic leadership of the United States. The
biggest lever that the
alternative is already apparent in some states, cities, towns
and counties – bankruptcy, economic decline and government has to create
unemployment. 2.2 million jobs.

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.



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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