Saturday, March 20, 2010

Can Big Be Beautiful?

Big - but also competing for customers

As you may possibly have gathered, Tyler isn't terribly keen on Big Government. Yet, in some ways, Big Government ought to have some Big Advantages.

Take procurement spending - something we've blogged many times on BOM. A Big Buyer, buying in Big Size, ought to be able to buy stuff much more cheaply than a load of small buyers.

The Institute of Directors has just published an interesting new report on this. Towards Tesco - improving public sector procurement reminds us that the UK public sector is one of the biggest buyers in the world, spending £220bn pa - 15% of our GDP. And yet, it has never fully exploited that size. It has never managed to emulate Tesco and the other big supermarkets in grinding their suppliers down to rock-bottom pricing for volume.

The IOD blames public sector procurement fragmentation, and the fact that it "still organises itself on the “corner shop” model, with the majority of purchasing organised in small scale silos – e.g. local authorities, NHS trusts, small central Government departments, each doing their own thing".

It argues we need more centralisation of the buying process:
  • Centralised buying organisations that handle all key supplier relationships and all national and major contracts on behalf of the whole public sector;
  • Where there are regional and local requirements, we need regional procurement hubs to provide expert contracting support to all bodies in the region;
  • A single leadership point (e.g. the Office of Government Commerce) for the above structure.
  • Mandatory use of the above structures by all public sector bodies.
If we did it right we could save "at least £15bn in the procurement process and £10bn in the outsourcing process" - a chunky £25bn pa, which would go a long way to filling our fiscal black hole.

Now, there's no doubt that public sector procurement is a shambles. For example, the report tells us that Greater Manchester's various local authorities "have over 100 specifications for tarmac, when seven are adequate – a potential saving of 10 per cent. Greater Manchester councils are unable to collaborate on dust cart procurement as they cannot agree on the specification and make – a potential saving on total cost of ownership of 10 per cent."

The question in Tyler's mind is whether more central control would actually deliver the mooted £25bn savings. After all, wasn't that the idea behind the Office for Government Commerce (OGC)?

Because as regular readers will know, the OGC has flopped. Indeed, as we blogged here, and here, the National Audit Office and the Public Accounts Committee discovered that it's actually managed to negotiate supplier prices that are higher than you or I could get (eg its cheapest price for a pack of 12 Post-It notes was £4.41, whereas they were freely available outside for £1.75).

The thing about Tesco - and its Big Difference from the public sector - is that it faces competition. Tesco may be Big, but it's been made beautiful by the constant day-to-day battle it faces to keep its customers. It's forced to wring every last penny of pricing concession out of its suppliers so it can deliver a better deal for its customers on the retail park.

The public sector simply doesn't have that spur. And unfortunately, experience from Stalin to the OGC shows that without the spur, Bigger all too often means Bigger Mistakes. And where the Simple Shopper is involved, much more costly ones.

As we've blogged to the point of miaow-miaow hallucination, the single most important step we have to take is to break up the public sector and find ways of injecting competition. And as far as possible, the ultimate buying power must rest in the hands of customers.

PS BOM correspondent PT has been monitoring the problems with the student grant/loan system. The delays in students receiving their loans have had much publicity over recent years, but PL points out that such delays were much fewer back when local authorities dealt with student funding. A key reason for that is that the new centralised system doesn't work properly. And whereas in the old days colleges and students could always find an individual at the funding authority who could sort things out, the only people you can speak to these days are call centre operatives with limited knowledge and limited discretion. And yet another dysfunctional mega-IT system.


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