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September 2018
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The Savings Crisis: Where to Start?

Paul Seddon is a consultant for Expense Reduction Analysts, the UK’s largest cost and purchase management consultancy.

The £6billion of government cuts announced on 24 May were designed as a shockwave, a first taster of the real challenge that public bodies will be facing in earnest over the next few years. It is no secret that massive savings in public spending will have to be found if the public finances are to be turned around.

For years HM Treasury has emphasised to every public body, great or small, the need to find annual savings through improved efficiency and better procurement. Ritually, there have been announcements of saving after saving from new contracts. If all those announcements are to be believed, control of public spending has already been taken care of.

So why is there a savings crisis?

While all these claims of great savings have won politically valuable headlines, I believe the reality is different. Try putting the following question to those public bodies that have claimed a saving: -A year after the new contract was let, can you demonstrate how much money you have actually saved?

The first part of the truthful answer tends to be: -We don’t know, our financial systems are unable to provide the data to answer that question. The second is: -Our gut feeling is that we haven’t really seen the savings coming through.

In light of this, it can be argued that the last ten years have witnessed a phoney war on savings. However, the public sector now has no option but to get real, spend management needs to move right to the top of the managerial agenda in all public sector bodies.

The ownership of spend management at the top is absolutely key. It is not enough to appoint a procurement officer or ten and assume that savings will follow. Political leaders, chief executives and directors of finance must own their organisation’s strategy for spend management; and be seen by managers and staff throughout their organisations to be doing so.

By putting in place good contracts, procurement professionals can only make potential savings. These potential savings can easily be lost by non-compliant purchasing decisions made by budget holders who are usually distributed throughout service departments in public bodies. This is the area that needs most attention. Expense Reduction Analysts has reviewed spend analysis from a large sample of public sector bodies that clearly shows a huge potential for savings purely from tightening up purchasing discipline.

To realise actual savings, managers must exercise purchasing discipline, using contracts that procurement teams have put in place wherever possible, alerting procurement if their needs are not being met or are changing. Discipline about contracting needs to start right at the top of the organisation.

Key to realising savings is to manage spend, which starts with data analysis that identifies how much is being spent, on what and with which suppliers. Spending needs to be tied back to contracts and reviewed on a quarterly, if not monthly basis to check that contract terms are being adhered to. Spend being made outside contracts must be identified and then corrected for the future through normal management processes.

Spend analysis has been increasingly adopted in the UK public sector but its proper use as a tool for spend management is not yet widely understood, certainly not outside professional procurement management. It is the single most important key to unlocking savings from purchasing in the public sector. Spend analysis tools that get right down to line item data are now available and must be put to use as a structured part of management reporting, not just as an occasional -nice to have.

Alongside internal improvements in spend management, procurement teams generally need to get more commercial about contract decisions. In too many cases, procurement is there just to provide assurance that when contracts are tendered, the process does not fall foul of the regulations (such as the Public Contract Regulations 2006). This is not sufficient to ensure value for money.

Critically, there is much to be done to improve areas such as drawing up specifications for tenders. Far too many specs are drawn up on the basis of inadequate knowledge of either what outputs or outcomes are needed; or of what is the state of the art on the supply side. Without being able to tap into supplier innovation, the scope for savings is dramatically restricted.

However none of these suggestions about getting more potential savings will count for anything if indiscipline in day-to-day buying decisions persists. So to reiterate, the message for the new public sector world is that savings start at the top or not at all.

www.expense-reduction.co.uk

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