9 Procurement Practices and Business Processes
9.1 Procurement Practices and Business Processes - Minimum Standards
Without sound business practices and processes, it is impossible to operate in a way that is internally efficient and that also delivers good value in procurement cost. Where practices are particularly weak there is also, potentially, an impact on accountability and governance needs. The following illustrates the spectrum of potential performance across a range that starts with a less than adequate performance and ends with excellent performance. These gradings result from evaluating an undertaking's status and performance across a number of key attributes including governance, resources and business practices. A table describing this in more detail is shown in Appendix B. The gradings are:
Level 0 - Non Conformance
Level 1 - Conformance
Level 2 - Improved Performance
Level 3 - Superior Performance
Given the structural weaknesses described earlier in this document it is a logical consequence that the adequacy of practices in some cases falls short of that required to meet minimum standards of accountability and governance. In general, practices are not anywhere near the higher standards necessary to deliver the capability and results which would deliver Best Value. Organisations in the Scottish Public Sector with basic shortcomings would feature in the "non-conformance" segment as described above. Others meeting the minimum requirements would be classified within "conformance". In my opinion only a few would be in the "improved" category and I have identified none that would offer "superior performance".
There are two distinct tranches of purchase cost savings available to the public sector. The first comes from bringing standards up to Level 1 where the basics have been met. The second tranche would come from the journey through Level 2 to "improved performance" and then to Level 3 "superior performance" and capture of very Best Value.
The minimum content for standards of procurement practices and business processes should be documented, deployed and fully implemented within all of the Public Sector in Scotland.
These minimum procedural needs should be the practices within procurement essential to satisfy legislation, codes of conduct and financial guidelines applying to Accountable Officers and all others in executive and non-executive positions with responsibility for public funds and in particular procurement expenditure. These minimum requirements should also be a review item within internal audit programmes and other corporate level infrastructure reviews and reports.
All procurement and procurement-related business processes and practices should be upgraded where necessary to minimum standards. The work associated with these definitions should be co-ordinated by the Scottish Procurement Directorate but be actively supported by other organisations across the sector.
9.2 Procurement Practices and Business Processes - User Groups
Within the public sector, there are goods and services of a similar type used by more than one department within the entity. Often there is the additional issue of technical or other complexity where procurement expertise alone cannot compensate for users' difficulty in specifying and agreeing upon common standards and technical requirements within the undertakings. There are also EU legislative technical issues to be understood and recognised.
Any weakness in users' capability to specify their requirements and also the absence of standard requirements within a public body undermines effective procurement. It also makes it difficult to establish catalogues and approved lists. User Groups have been formed in some organisations to facilitate agreement on common standards and to provide more intelligent technical input to Procurement.
Organisations should strongly consider the establishment of internal "User Intelligence Groups" to help co-ordinate requirements and specifications so that the procurement functions can rationalise the content of tenders and contracts to obtain Best Value and to ensure specifications to suppliers are comprehensive and accurate from an early point in the process. These User Groups can also provide feedback to Procurement on the services provided to the wider internal user community in that organisation. They can also provide, under procurement supervision, a forum in which suppliers can demonstrate their offerings including innovative future products.
9.3 Procurement Practices and Business Processes - Information Reporting
The importance of internal management information is an accepted principle within business whether private or public sector. It has many purposes. To focus on just a few in the context of procurement, I would emphasise its value in the following areas:
- Informing management of current results
- Informing management of current performance versus targets or plans
- Providing information for better decision making
- Providing information to support pursuit of improved performance
In procurement, often the effective analysis of information is a critical success factor, e.g. how much is actually spent externally? On what commodities and services is it spent? With which suppliers is it spent? Where are those suppliers based? How much does it cost to administer the spend? How does current value achieved compare with previous performance? Are financial targets being met? Is the content or format of the reported data consistent with that of other public sector organisations?
Obviously, while organisations can, in extreme cases, drown themselves in data, in most instances the absence of consistent and reliable data will inhibit understanding, proper attention and essential action. Indeed, without the reported information being translated into key performance indictors ( KPIs) it is difficult to create an environment in which performance can be properly assessed and its improvement encouraged.
While there are some good procurement information and reporting practices at the individual organisation level, there is not, organisation by organisation, a high standard of dissemination of procurement information and results to the appropriate executive and leadership levels. Even where information is reported there is often insufficient analysis for decision support and performance monitoring. In addition, because of inconsistent definitions across organisations and the absence of agreed and centrally defined reporting requirements there is an absence of aggregated information at an overall public sector level. There is also currently an absence of sound and consistent reporting on the cost benefits being achieved through procurement compared to Scottish Executive targets already established.
Every public-sector organisation should review and update their internal reporting on procurement. Also, the Scottish Procurement Directorate should develop, agree and publish the minimum reporting requirements that not only should be utilised effectively within organisations but also must be provided to SPD regularly so that they can assist the Scottish Executive to understand status and monitor progress towards already established financial targets within the Efficient Government programme.
Each organisation within the Public Sector should be required to report quarterly on procurement cost savings achieved. The methodology used should be founded upon an agreed and clearly specified baseline which once established should be consistent year to year. It should also include the principle of a "basket of goods/services" described at 9.3.3.
To ensure consistency in reporting and performance evaluation a standard "basket of goods/services" should be agreed and implemented within each major element of the public sector. This index-based measurement should be used to report year-on-year savings in a consistent and comparable manner which can also be translated into, and reconcile with, absolute annual financial savings being claimed.
9.4 Procurement Practices and Business Processes - Efficiency and Key Performance Indicators
The management of the efficiency of procurement and procurement-related processes is important in a functional sense but also is a key element supporting the theme and the value of efficient government programmes. There are of course two aspects to this. One is the efficiency of internal operations and the other of course success in results achieved. In other words the effectiveness of procurement.
Only some organisations within the Public Sector have a precise view of or a unique formal programme of internal efficiency aimed at procurement. Where it does exist it is in the early stages so that measuring and managing improvements from an established and stable base is difficult. Also, measurement of the effectiveness of procurement, i.e. results is at best inconsistent and not well defined.
Every public-sector organisation should have a formal programme of procurement internal efficiency measurement and management. The programme should also measure the effectiveness of procurement in terms of results achieved. These data should be incorporated in the internal reporting recommended at 9.3.1. The reported information should rely heavily on key performance indicators (see 9.4.2).
In support of efficiency and effectiveness a standard set of key performance indicators ( KPIs) should be developed and regularly measured by all units within the public sector.
The list of KPIs must include as a minimum:
- Total Procurement Expenditure
- Procurement Expenditure Analysed by Spending Department
- Procurement Expenditure Analysed by Commodity or Service
- Procurement Spend by Geographical Spread
- Total Number of Procurement Transactions
- Total Cost of Resources in Procurement Department
- Total Cost of Resources in Procurement Process, i.e. including support departments, e.g. Accounts Payable
- Procurement Resources Analysed by Commodity or Service Procured
- Procurement Department Cost per £ of spend
- Procurement Process Cost per £ of spend
- Procurement Department/Process Cost per £ of Specific Commodity Spend
- Process Cost per Transaction
- Savings Achieved Year-on-Year in Absolute Terms
- Year-to-Year movement in Index of Basket of Procured Commodities Tracked
- Number of Suppliers (active/inactive)
- Spend Identified by Supplier
- Average Spend per Supplier
- Average Spend per Order placed
9.5 Procurement Practices and Business Processes - Benchmarking
In any environment understanding an activity's performance and results compared to those of other undertakings is not only interesting it provides the opportunity to recognise success or otherwise relative to peer operations. It also provides the stimulus for positive action and also potentially information which through additional analysis and understanding can drive improvement through the spread of best practice. In the private sector although companies do rely on benchmarking internal efficiency and external results there is often, for obvious reasons, a reluctance to share best practice with outsiders, particularly competitors. This inhibitor should not exist in the public sector.
There is very little comparative benchmarking pursued across the public sector although organisations such as the Local Authority Improvement Service have made a start on this. Given the level of spend there is a significant opportunity through benchmarking and subsequent spread of best practice to pursue efficiency gains internally and capture purchase cost savings externally.
Absolute information and performance data should be exchanged and shared across the public sector in a formally co-ordinated procurement benchmarking programme. The data elements should include the KPIs referred to earlier in this Review and such other data that would prove useful in identifying and spreading best practice through adopting the approaches that achieve the best benchmarked results.
The co-ordination of the benchmarking programme should be positioned centrally within each major element of the public sector such as Local Authorities, Health and other unique sections with multiple organisations.
A National Benchmarking and Best Practices Forum should be established and co-ordinated within the public sector. Its co-ordination should be undertaken by the Scottish Procurement Directorate and it should meet at least quarterly.
As part of the benchmarking initiative one of the first areas which should be approached is that of numbers of skilled procurement professionals related to value spent. Although there are wide variations in spending organisation to organisation and significant diversity in the mix and complexity of that which is spent my observations within the public sector indicate that in well-managed and staffed exemplary groups a minimum of £10m per annum and a maximum of £20m per annum per professional should be expected. Taking for a moment an average of £15m per professional, this would mean a procurement organisation spending £60m and might require four professionals. This staffing level together with all other costs would still offer a procurement process cost of less than 1% of spend which compares with private industry.
It is appreciated that this is a broad and raw measurement but the recommended benchmarking should provide a validated view of optimum levels for like organisations within the public sector. As indicated in Chapter 8 (People and Skills) some of the less effective organisations are operating well below this level.
9.6 Procurement Practices and Business Processes - Innovative Techniques
It is important that the services provided by procurement to its parent organisation are continuously updated and that Procurement Officers engage in a constant search for new ways to satisfy the needs of internal users, be it for flexibility, urgency or other response related requirements. Also, for many transactions the cost of the purchase to pay process can greatly outweigh the actual value of the goods or services obtained.
More could be done to simplify and streamline processes to satisfy special needs such as emergency requirements and the purchase of low-value items, for example the adoption of the use of purchase cards and payment on receipt is slower than it should be.
A programme to rapidly widen the use of procurement cards and payment on receipt should be initiated and organisations should be strongly encouraged to adopt their use.
The Benchmarking and Best Practices Forum should include in its agenda the topic of innovative techniques so that this opportunity is addressed and pursued as needs evolve.
9.7 Procurement Practices and Business Processes - EU Guidelines
There is no more complex an issue for, or influence on, procurement than that of EU legislation. Its requirements are not only exacting but also still evolving so there is a challenge in developing and implementing practices and procedures which are subject to ongoing revision. There are however a number of mandatory elements which should be regarded as basic processes and legal requirements and be subject to the operation of good governance and accountability. It is important that organisations strive for Best Value in procurement while at the same time conform with these requirements.
Finally, although at times bureaucratic the requirements do encourage essential disciplines in support of governance and accountability.
Policy and procedures are well documented and distributed yet it would seem that despite a strong awareness of EU legislation and OJEU requirements practical conformance is inconsistent. Sometimes where the required procedures are initiated their completion is partial or flawed in some aspect. Also, there is a tendency to attribute to EU legislation the reasons for not being able to achieve Best Value. There is also no central consolidated understanding of compliance rates for the Public Sector in Scotland. The most recent European legislation was enacted in Scotland on 31 January 2006 and within this local interpretation the value threshold for the competitive tendering has been lowered.
There should be a formal programme of EU legislation workshops. In addition to re-emphasising the strict legal and procedural requirements the workshop content should also focus on how Best Value can be achieved within their legal framework. Every procurement professional in the public sector should attend a workshop during 2006 and then at a minimum annually thereafter. The effort required to conduct procurement within EU legislation should also be channelled towards capturing benefit from the procedural disciplines stipulated.
Conformance with EU legislation should be a subject of focus for all internal and external audits. Conformance levels should be covered as part of the internal reporting to Governance levels within the organisation. This information should also be made available to the Scottish Executive.
9.8 Procurement Practices and Business Processes - Advanced Procurement
Earlier in this chapter of the report there was focus on the issue of upgrading procurement capability to "conformance", "improved" and then "superior" performance. The attributes attached to this ultimate status would require to include the following:
- An overall Procurement Strategy
- A market driven Commodity by Commodity Strategy
- A Supplier Strategy including features such as the rationalisation of numbers of suppliers and a supplier rating of scorecard system
- Procurement a top priority in the organisation
- Advance collaboration with aggregation of specific commodity spend optimised in Centres of Expertise (Ref. Chapter 11)
- Investment in more than absolute minimum resources with high skilled professionals
- Operation of "Best in Class" practices with adequate information systems
- Sound reporting and management information including KPIs
- Benchmarked internal efficiency and performance effectiveness
These attributes are consistent with the optimum envisaged within the vision for procurement described in Chapter 3 and it should be noted that these are incremental to the basic foundations of adequacy in resources, skills, practices and processes.
Pursuit and achievement of the above will upgrade capability and deliver significant financial savings.
There are few organisations that have goals and a structured plan to achieve superior performance and Best Value. Without these plans and some progress being made the existing savings targets will not be delivered in the medium term. However, full achievement of the above would deliver, in the longer term, financial benefits beyond those currently targeted.
Each organisation within the Public Sector in Scotland should develop, establish and pursue an advanced procurement plan which includes the attributes listed above. The plan should incorporate specific milestones of progress and financial savings targets year by year. They should seek through this plan to achieve "improved" and then "superior performance" status thus delivering Best Value and significant financial savings.
9.9 Procurement Practices and Business Processes - Corporate and Social Responsibilities
This aspect is important for the Public Sector and is becoming an issue for procurement practices. Its relevance in the context of the wider responsibilities of the Public Sector is obvious.
Corporate and social considerations such as sustainability are taken very seriously. There is, however, uncertainty as to the practical priority to be given to this issue, and also a lack of understanding as to how policy and principles can be appropriately applied to tendering and award processes, including legal questions, on how suppliers and their practices are addressed.
While the achievement of Best Value remains the primary goal, each organisation's adopted corporate and social responsibilities should be translated into guidelines and a specific practices document for each organisation. The requirements of that document should be deployed for implementation by the procurement organisation. Given legal sensitivities as to how CSR can be part of the award process, central Scottish Executive guidelines should also be provided to support this translation. In addition, workshops and education should be organised to assist procurement staff in the application of this policy including how to address this issue of suppliers being required to participate in and support, where appropriate, the undertaking's corporate and social policies.