Tag Archive for: Suppliers

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UK Government Spend With Smaller Firms Declines

Without fanfare or comment, in the middle of the holiday season, the UK government recently published the data for spend with SMEs (small and medium enterprises) for 2021/22.  This covers central departments, and some associated bodies, although the definition of what is in and what is out is not always clear. The data is given as direct spend – money that goes straight to the small firms – and indirect, the spend that goes via larger firms that then use SMEs in their supply chain.

It is not unusual for it to take over a year from the end of the period in question before data is published. That is in part because it does take a while to gather the data, but I suspect the publication might have happened sooner if there had been a positive story to tell.

But the headline number was that SME percentage spend declined in 2021/22 compared to 2020/21.  The total was down from 26.9% to 26.5%, and the direct spend was down from 14.2% to 12.3%. That does not look good against the government target of 33% of spend.

Indirect spend was up by 1.4% but that was not enough to compensate for the drop in direct spend.  It looks like the main reason for the overall decline was a big drop in the Department of Health and Social Care (DHSC) SME spend year on year. I suspect that is the “PPE effect” – as we know, there was lots of PPE bought in 2020 and 2021 from smaller firms. They were often crooks, chancers and friends of ministers, but they were SMEs, nonetheless.

Until the pandemic, the DHSC spend was relatively small compared to MOD and Transport – the two “traditional” big spenders.  Most health spend was out in the Trusts so not captured in this data. But the huge amount of “central “ buying, on PPE but also track and trace and other projects, pushed up the significance of DHSC in the overall numbers.

In 2019/20, DHSC spend was just £3.1 billion against MOD’s £21.1 billion. But the figure shot up to £13.3B in 20/21 (MOD was £19.5B) and was still £11.5B in 21/22.  In 20/21, 23.3% of the DHSC total was direct SME spend, so that made the year look better, but by 21/22 that dropped to 14.2%, pulling down the whole percentage.

I’m going into some detail there because it does demonstrate how ridiculous looking at the overall number actually is. When one factor – PPE – in one Department can skew the whole data set, it is pretty useless. But let’s go back in time and look at how this target emerged.  

Supporting smaller firms was one of the first “social value” type issues government embraced. I worked in the Office of Government Commerce (part of Treasury, the UK finance ministry) as a consultant back in 2009 on the implementation of the 2008 Glover report – “Accelerating the SME economic engine: through transparent, simple and strategic procurement”.  (That link took some finding!)

But Sally Collier (OGC’s Policy director) and I didn’t really like the idea of targets for spend with SMEs for various reasons. One was the difficulty of setting sensible targets, which really needed to vary by department to be meaningful. We were interested in departments and buyers simply doing the right things, and therefore also worried that targets would mean effort going into the data, not the real action. But our advice was ignored and after the 2010 election a 25% target was set. 

It quickly emerged that 25% was unachievable. The Ministry of Defence and the Highways Agency (Transport) accounted for almost half of central government procurement spend and there was no way an SME was going to build a warship or the M25 motorway.  So the target was changed to an “aspiration”, a classic Francis Maude fudge, and then indirect spend was included to make it easier to hit the target.

But many of the first-tier suppliers to government have no idea really how much they spend with SMEs, so the data is pretty dodgy. Then the 25% target – which had never been achieved – was stupidly changed in 2015 to 33%, purely because the Cameron government wanted to say something positive for the “small business” lobby in their election manifesto.  And 33% is unachievable too, as we’ve seen, even including indirect spend.

The other issue is whether supporting SMEs is the right target today. We have become much more sophisticated in the 15 years since Glover and now most large private firms are interested in supporting diverse suppliers, not simply small firms.

So why not shift the focus to using government procurement to support charities and social enterprises, minority owned firms, innovative businesses, firms in deprived areas or those that employ lots of disabled people?  You don’t see Unilever or other admired private sector businesses defining some prospective suppliers as special just because they are small. Indeed, many SMEs are small because they want to be, or because they just aren’t very good.

But there has been good work in government over the years in terms of helping SMEs. For example, even back in 2009, MOD led some impressive initiatives to promote SMEs through their supply chain. But really, this element of public procurement policy is crying out for a refresh, a more nuanced set of objectives and – if we must have targets – something that is realistic and motivating, not a painful data collection exercise that is bound to end in failure.  

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Procurement “Transformation” and Supply Base Reduction

I’ve had a couple of abortive attempts at writing a book about “procurement transformation”. Perhaps one day it will happen. But my feeling over the years is that often presentations at conferences that claim to be about “transformation” are nothing of the kind. They might be about upskilling the function; or implementing a new piece of software; or launching a category management programme; but the ideas they describe are not really transformative. And in some cases, the central aim or achievement of the programme appears to be simply a reduction in supplier numbers.

There is no doubt that many organisations do have a supply base which is too large to achieve optimal performance or value.  So a reduction in supplier numbers can be beneficial – but the point is that it is usually not appropriate to consider supplier reduction as an end in itself. Rather it should be seen as one of the outcomes of a wider procurement improvement or transformation programme.

An excessively large supply base usually develops because of a lack of procurement spend visibility, control or influence. Budget holders decide where and how to allocate their money, leading to fragmented and un-coordinated spend. Hence getting such situations under better management will bring a number of benefits, and an effective procurement programme, probably category management based, will be needed to address matters. And even today, most organisations, in most categories, will find that the result of a well-planned and executed sourcing programme is fewer suppliers in that area.

So supplier reduction as an outcome of an appropriate programme can indicate real benefits have been achieved. Fewer suppliers means more concentrated spend, and there can be benefits from this aggregation. Although economies of scale are over-estimated in many industries and sectors, it is clear that when most organisations look carefully at a category, and find dozens or hundreds of suppliers, they derive benefits when they come to negotiate with a view to reducing that number.

But in some cases, the “right” answer once a spend category is considered will be more suppliers, not fewer. If the analysis shows that the organisation is worryingly dependent on certain suppliers, then that should be the desired approach, for instance. My personal baptism in procurement was a role where I was at the mercy of a monopoly supplier of a vital raw material. It was not a good place to be and I longed for “supplier increase” rather than supplier reduction!

Or even if risk is not the issue, there may be value opportunities through taking a more aggressive and tactical approach to a market, with frequent supplier switching. We should not be afraid of strategies that lead to more suppliers – as long as the benefits are weighed against the true costs of supplier management into account. So here is a summary of key points to consider.

  • Supplier reduction should be a potential outcome from doing procurement well.  It is rarely sensible as an objective or end in its own right, and it is not the most appropriate strategy for every occasion.
  • Understanding the starting point or baseline is important for any major procurement improvement initiative. And if supplier reduction is part of the business case, it is vital to have a clear and accurate view of the baseline. Supplier numbers are often overstated, though duplication or mis-categorisation, so a spend analysis maybe required as a starting point.
  • Similarly, if the savings from supplier reduction are going to form part of the business case for a procurement programme, the true cost of managing suppliers needs to be assessed, as well as realistic savings form any re-negotiations, so any savings can be calculated with realism and as much accuracy as possible.
  • For any category, and certainly before any supplier reduction initiatives are set in train, procurement must ensure that there is a good understanding of the markets, suppliers and associated risks that are being addressed.
  • Supplier reduction can be a sensitive issue amongst stakeholders and budget holders, who may see their favourite suppliers disappear. The benefits of rationalisation programmes may not be very visible to stakeholders either. So it is important to get the buy-in of your key stakeholders and engage them in the process, particularly if you are trying to make dramatic change.

That last point is important but often disregarded. Managing the internal stakeholder dimension is often more challenging for procurement than managing external markets, and needs significant focus. That is always true, but particularly applies when a major change in the supply base is likely. Indeed, I’ve seen that point in itself be enough to kill procurement change or transformation programmes stone dead.

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Four Days to Bad Buying Launch – Incentivising Suppliers and Sheer Stupidity

OK, I misspoke yesterday when I said it was six days until publication of Bad Buying – it was five. So today, not surprisingly, it is 4 days to go, and we’ll look at a few more of the chapters – the full contents list is here, at the end of yesterday’s post.

One of the most enjoyable and interesting sections in the book to research relates to supplier incentivisation and why it can so often go wrong.  Take a simple example, one I saw in my own work. If you outsource back-office financial management, including accounts payable, you might agree to pay the outsourced service provider per invoice that they process.

But then if one of your key suppliers comes up with a smart idea to reduce the number of invoices, and they ask the firm doing the processing to adapt to a new process, they may well say “no”, because it will reduce their income. You really should be incentivising that supplier to help reduce invoice numbers – but that’s surprisingly tricky to do contractually.

And how do you incentivise construction firms? That’s been a long running challenge for buyers. Agree a fixed price, and you risk the supplier cutting corners on quality of work or materials; agree to pay on a “time and materials” basis and the project may never finish. That’s led to all sorts of interesting contract variants, such as the “NEC3 Engineering and Construction Contract option C (target contract with activity schedule)” which was used with considerable success on the London 2012 Olympic constucion programme.

Away from traditional procurement, there are fascinating cases such as the Colombian government, who in trying to get farmers to switch away from growing coca, actually introduced an “incentive” that made them grow more of that crop! 

There is more on that in the book, and another chapter picks up those cases that I couldn’t neatly categorise as having an underlying cause based on lack of capability or knowledge. So I called it “stupidity” although sometimes “arrogance” might be a better term actually. Yes, political stories do feature here, as too many politicians think they know best (even if the professionals are telling them something isn’t going to work) or want to build a monument to their own vanity.

The EU does get a mention here, with their programme to build airports in places that quite frankly nobody wanted to fly into.  Kastoria in Greece cost €7.7 million to build and generated revenues of €176,000 in seven years… then of course we have the somewhat crazy UK Brexit-related ferry contract with the company that didn’t own any boats. Another big success for ex-Minister Chris Grayling there.

But it is not just the public sector that suffers from this madness at times. Carlos Ghosn, the ex-Nissan and Renault chairman, is on the run from Japanese prosecutors in the Lebanon now. But whatever happens next, hiring Versailles for a party costing €635,000, supposedly to celebrate a business alliance but holding it on his own 50th birthday, and (allegedly, I should quickly add) inviting mainly family and friends, hardly smacked of humility and a deep concern for shareholder funds. 

There are also cases in this section that might tip over into the fraud and corruption section. I get into the murky world of defence contract “offsets”, and if you don’t know about this mechanism, it is another fascinating aspect of our procurement and buying world. With offsets, the supplier agrees to spend a portion of the contract value in the country of the buying organisation. So, for example, if India buys fighter jets from France, they might insist that the supplier spends 20% of the contract value with Indian firms. Unfortunately, that leads too often to decisions that are just wasteful and inefficient, or outright fraudulent – offsets are a very handy way of concealing bribes to the politicians or defence officials who placed the contract.

So I hope this has given you a further flavour of the book. There is still time to order and get delivery on publication day – check out the links here. There is also a Bad Buying podcast now (“Peter Smith’s Bad Buying podcast”) and the first two episodes are available on most podcast platforms. There is also a Bad Buying playlist on Spotify (all my section titles are also song titles …) It is a “diverse” playlist, as my daughter described it, but I’ll take that as a compliment!  You can make your own judgment on that.

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Scoring Supplier Bids and Proposals – Yes, Even That Can Lead to Bad Buying!

Evaluating bids and tenders is not perhaps the sexiest topic within the buying world, and perhaps because of that it does not get the attention it deserves. I remember a few years back, the UK government issued a detailed 100-page guide to running public procurement competitions, but pretty much the entire section on evaluation read, “now evaluate the bids”!

And yet, if the evaluation process is not structured and executed properly, it can lead to problems – selection of the “wrong” supplier that will not best meet your needs perhaps, or unhappy suppliers and legal challenge in the public sector.

One seemingly minor but important point relates to how bids are scored. For major purchases, it is usual to have multiple people on the buy-side reading and scoring the suppliers’ proposals. So there might be three of four people all reading and scoring the same answers to questions like “explain how your quality processes will help to ensure you meet our needs….” 

I was recently advising a firm on how they could compete better for public sector business. I looked at tender documentation from a bid they had lost, and whilst the feedback from the buyer to the firm was somewhat ambiguous, it looked like the individual scores of the bid evaluators had been averaged. That is, in my opinion, the wrong approach, and this is why.

Let’s imagine you have three people doing that work, and that the scoring system is a basic 0-5 scale where 5 is a brilliant response and 1 is pretty rubbish. Evaluator A scores 1 out of 5 against that question. Evaluator B scores 5 out of 5, and C scores 3 out of 5. The average is therefore 3.

But we know that there is a very good chance that 3 is not the appropriate score. We also know that A and B have seen the supplier response VERY differently. One of them might be right in their scoring; but we really need to know why there is such a difference. They can’t both be right!

So we need a process of moderation. Someone, and I usually advise that the moderator should not score the bids themselves (although they do have to read them), chairs a discussion to arrive at an agreed moderated score.

It may be that scorer A has identified a major flaw in the response that the other two missed. Or A has herself missed a key part of the answer (I have literally seen a marker not notice a key project plan attached to the document). Perhaps B just loves this bidder, and needs talking down from his over-enthusiastic marking.  And if you only had two scorers who marked it 1 and 5, then 3 would almost certainly be the wrong answer!

We need to arrive at a single agreed score, which could in this case feasibly be anything from 1 to 5. Maybe it will end up as 3; but not via an averaging process. I’d also strongly suggest that in the public sector, you don’t document any initial individual marking; you record the key points of the discussion, which is important if the end result is ever challenged, and the end result.

So in our case, if the score ends up being 4, you might note that scorer A initially had some concerns but was reassured when she was pointed to the project plan in the appendix (or whatever). When I chair moderation meetings, I ask the participants to come along with their initial view of their scores, but I don’t want those in advance and I don’t want them formally recorded.

That’s not being devious; it is just recognising that we are going to do the scoring on a moderated, team basis. And yes, I admit, I don’t want a disgruntled supplier saying, “how come the CIO initially gave us a mark of 5 on that response, but we only ended up with a 3”?

Anyway, this might seem like a fairly technical aspect of potential Bad Buying, and indeed it is. But there have actually been some very expensive legal challenges that hinged to some significant extent on dodgy scoring and suspect averaging or moderation processes. There is a great example in my book actually, one that cost the UK taxpayer over £100 million believe it or not.  (Pre-order the book now… out on October 8th).

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