Scottish Government

In the 2007 Spending Review, the Cabinet Secretary for Finance and Sustainable Growth increased the level of efficiency savings that will be required across the public sector to 2% each year. This challenging target applies to all public sector organisations.

Procurement services within each organisation can help contribute towards this target by delivering financial savings through more efficient, effective and co-ordinated service delivery.

McClelland recommended that 'minimum reporting requirements ... should be utilised effectively within organisations [and] 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 following guidance will help procurement teams identify efficiency gains and help ensure that these savings are reported in a standardised and consistent manner.

This BPI is recorded within the profile update in the Hub. When you log into the profile data input page you will be asked the following questions:

• What is the total cash saving achieved through procurement for all procurement projects delivered for FY 07/08?
• What is the total non-cash saving achieved through procurement for all procurement projects delivered for FY 07/08?

Savings claimed should be reported quarterly on a retrospective basis.

The baseline for calculations will be 1st April 2007/08, and the start of each Spending Review period thereafter, i.e. every three years.

The same saving should not be counted twice, therefore extreme care should be taken that procurement savings are not also claimed by policy or delivery areas of the organisation. Procurement savings should be calculated separately and feed in to the organisation's overall Efficiency declaration. The only savings that should be reported against this BPI are procurement savings.

The following examples are intended to be illustrative of the types of activity that can generate savings. However, the examples shown here are not exhaustive that and ultimately the judgement of the reporting organisations' procurement lead must determine what should be claimed. It is their responsibility to ensure that claims are calculated on a realistic and prudent basis and are correct and justifiable should the figure ever be subjected to audit. Organisations may wish to check that the processes they follow are acceptable to their local audit function.

The following activities would generate cash efficiencies:

• Collaboration
• Cost avoidance
• Reverse e-auction
• Total cost of ownership
• Integrated logistics
• Technology improvements
• Reduced maverick spend
• Policy change
• Improved specification
• Increased competition
• Renegotiation of price
• Make vs Buy
• Early repayment rebate
• Better terms
• Improved quality - Change in Specification
• E-procurement card
• Consolidated invoicing
• Retail or commercial income (many publicly funded bodies such as local authorities and Historic Scotland have the facility to generate income through sports, tourism, outsourcing, etc. but please note that increased income from higher fees and charges to the public do not count as efficiency gains).

When calculating cash efficiencies the starting point should be the difference between the new contract price and the contract price in the baseline year (2007/08) or the last price paid if no contract existed, multiplied by actual volume/usage for the core period.

The particular contracts and the goods and services bought by the public sector change from year to year, but there is a continuing programme of procurement activity which in aggregate yields savings on a recurring basis. In this respect, we recognise that where an organisation has a planned programme of deriving procurement efficiencies, that this programme should be recognised in terms of the efficient government programme (relative to 2007/08 baseline and requirement that service delivery does not decrease as a result of efficiencies). As part of this we recognise that such a programme is likely to consist of a range of procurement efficiency activities, not all of which will span the three year Spending Review timescale. However the important feature is that when one contract ends, there is generally a commitment to continue to maintain (and perhaps increase) the delivery of procurement efficiencies in subsequent years within the programme as a whole.

It is anticipated that efficiency savings will be utilised by organisations to improve the quality or volume of goods, works and services delivered, however any decisions to reduce budgets as a result of efficiency savings should be taken locally principally by budget holders or senior finance managers.

Example 1: Baselines

2007/08 baseline year.

Widget costs £1 = baseline unit cost.

1000 widgets purchased.

Total expenditure £1000 = baseline total expenditure.

Example 2: Straight Saving (demand decrease - assuming that the relevant service to the Public or other customer is being maintained and that the demand decrease is a conscious procurement decision through purchase demand management).

2008/09.

Widget costs £1.

600 widgets purchased.

Total expenditure £600.

Total Saving = £400 (baseline expenditure minus BPI 08/09 expenditure).

Example 3: Straight Saving (contract price decrease)

2008/09

Widget costs 80p.

1000 widgets purchased.

Total expenditure £800.

Total Saving = £200 (baseline expenditure - 08/09 expenditure).

Example 4: Volume increase from budget holder - (not through the involvement of procurement but budget holder will need to justify increased volume in terms of service delivery).

2008/09.

Widgets cost 80p.

1500 widgets purchased.

Total expenditure = £1200.

Total expenditure in baseline year unit cost =£1500.

Total saving would be; £1500 - £1200 = £300.

Example 5: (Market fluctuation - unit cost above baseline)

For commodities that can be subject to rapid specification changes, such as IT, or extreme market volatility, such as utilities, baseline prices in a particular year may not be the most appropriate way to calculate efficiencies.

Where it can be demonstrated that the contract price is below the current market rate, due to procurement involvement, even though the contract price is above the baseline cost, an efficiency saving can be claimed.

In such cases savings can be calculated by comparison to current market rates where this can be established, for example by:

• benchmarking contract prices against an established recent contract or,
• reference to recognised market indices, for example Heren Energy
• taking the average regional or sectoral price paid for a given product or service and calculating a regional or sectoral average for each product or service (or a % based on spend depending on size of contract schedule). The regional or sectoral average price once calculated would then be used for baseline savings calculations. (It is recognised that there are particular difficulties in extending these conditions to the construction sector at the present time. Development of appropriate BPI's will be undertaken by the Construction Workstream in due course for incorporation into this suite of measures.)

Note that the existing market price, whether established in comparison to a recent contract or a market index, should be re-established on a quarterly basis - i.e. savings should be claimed on the basis of a current market value, never on a retrospective market value from a baseline year.

2008/09.

Widget costs £1.10.

Market price £1.20.

1000 widgets bought.

Totally Expenditure = £1100, however you would have bought (1000 x £1.20) = £1200.

Therefore the total cost saving = £100.

(Note that non-cashable efficiencies do not count towards the Scottish Government's target of 2% savings per annum and should not be included in your organisation's overall efficiency return to Central Government.)

The following processes can generate non-cash savings, but also have the potential to generate cash savings, if for example, there was a reduction in resources to carry out the same activity.

• Government procurement card (or other corporate procurement card)
• E-invoicing
• Consolidated billing
• E-procurement including tendering and e-auctions
• Redesigned purchase to pay processes
• Delivery consolidation
• Reduction in consultants and advisors - the group decided this was a cashable saving
• Reduction in queries and mistakes
• Reduction in 'reworks' (i.e. downtime/breakdown lessened)
• Reduced stockholding
• Order and acknowledgement
• Receipt documentation
• Invoice receipt matching and bill payment.

Example: Process improvements

To calculate a non-cash saving organisations should use the Process Cost per Transaction baseline as a comparator to the new process cost transaction.

(See Guidance on Financial Indices - Annex 3.)

(Number of transactions x higher process cost) - (number of transactions x lower process cost).

For one-off projects, or projects with no comparative data (for example, enterprise wide software, outsourced contracts, capital equipment projects, and infrastructure projects), the total saving should be calculated as follows:

For such high-value, high-risk projects most organisations will have adopted a robust project management methodology and produced an Outline Business Case ( OBC) that will include a budget for the project.

There are a number of options organisations could use to set a realistic baseline for calculating efficiencies depending on the procurement route chosen: Open, Restricted, Competitive Dialogue or Negotiated.

If using the Open or Restricted Procedure then the expectation is that the bidders will only be asked to submit one tender and the only available baseline is the Outline Business Case, or the accepted budget proposal.

Caution must be exercised if the procurement efficiency saving is to be baselined against the OBC, as the innovative nature of such strategically important projects and the lack of comparator data can mitigate against the validity of the OBC. In such cases it is vital that the organisation is able to demonstrate robust and logical reasoning to justify the use of the OBC as a baseline.

A structured negotiation process may share a number of characteristics with the Competitive Dialogue procedure, e.g. closing periods of negotiation by the submission of tenders.

Again, competitive tension is maintained by the possible elimination of a tenderer at each cycle. The Most Economically Advantageous Tender received to close each tendering cycle is a potential baseline.

In both the Negotiated and Competitive Dialogue procedures the Most Economically Advantageous Tender which is taken to contractual close becomes the comparator.

A number of potential baselines have been identified above that could be used to determine VFM savings achieved as a result of the applied procurement process:

• Outline Business Case [ OBC]
• Most Economically Advantageous First Tender
• The Most Economically Advantageous Tender to close each tender cycle
• The Most Economically Advantageous Final Tender leading to the award decision (Best and Final Offer [ BAFO])
• Final Contract Price.

The approach to selecting the most appropriate baseline is founded on a number of simple rules i.e. the baseline should be:

• Realistic
• Prudent
• Take a conservative approach, and
• Give recognition to the benefits achieved through the application of best procurement practice within the public procurement legislative framework.

The Pros and Cons of the four identified baselines are presented in Table 1 Appendix A.

Where the procurement process results in a higher initial tender being reduced and brought closer to or under the budget the reduction should be reported as:

• As a cost avoidance down to the budget figure, and
• As a cashable saving achieved below budget.

When reporting savings for one off projects care should be taken to avoid double counting, however it is vital that one off procurement related projects are noted in your organisations procurement BPI return.

Quarterly

Internal benefits tracking tools

Recording and reporting procurement efficiencies is the responsibility of the procurement function, or in smaller organisations whoever has lead responsibility for procurement/finance decisions.

Efficiency gains made through the use of all collaborative contracts should be assessed and claimed at organisational level, but savings generated through the use of collaborative contracts should be validated with the contract 'owners' (e.g. Centres of Expertise), who will have access to specific on-contract spend data from suppliers.

Centres of Expertise can calculate the total savings generated by specific contracts by aggregating the delivered savings claimed by organisations. This aggregated sum can be used by the CoE to demonstrate the contract's value for money, however, to avoid double counting it will not be counted towards a national total.

Responsibility for reporting the total efficiency gain made by a specific contract is therefore allocated as follows:

• Category C - locally (by organisation). Where there is local, regional or cross sectoral collaboration at a category C level, this will be calculated by the Contracting Authority, through a process of collation and validation by contract users and reported by the end-user organisation.
• Category B - locally (by organisation), through a process of collation and validation by the relevant Centre of Expertise.
• Category A - locally (by organisation), through a process of collation and validation by the National Centre of Expertise, via the sectoral Centres of Expertise.

Auditable

All public sector organisations have been tasked with saving at least 2% of their total budget each year. Procurement must ensure that it contributes effectively to this.

2% Efficient Government target set by Cabinet Secretary.

As a general guide Procurement should contribute a saving of at least 2% of your organisation's influencable procurement spend. Spend data is available from the Scottish Procurement Information Hub. Savings should not be achieved at the result of an unacceptable loss in quality, so this BPI should be examined in conjunction with feedback received from the customer satisfaction questionnaire.