Rising to the challenge

Steve MaloneManaging Director at PfH28th June 2016

Welcome

Agenda

Procurement in a housing context

The new normal – value creation Case study Talent

management

Context for Procurement

Seismic change

1. EU exit

2. Government policy

3. The regulator

HCA – Regression analysis‘As the sector seeks both to produce savings, and simultaneously deliver investment in new and existing homes, it will be increasingly important that providers optimise the use of their resources and assets’

‘around 50% of variation in costs cannot be explained……(and) are likely to be due to variations in operating efficiency’

‘Providers are forecasting making materially greater cost savings…..7% in absolute terms (11% in real terms)

‘boards of providers need to understand the costs of running their businesses….’

EU Exit1. The UK public sector spent £242bn last year on goods and services

2. It is unlikely therefore that procurement rules will change significantly

3. Housing providers are classed as a public body

4. Departure from the EU will not happen immediately

5. Supply chains may be effected by global market conditions

Other environmental conditions1. Fraud

1. The fraud challenge is estimated at £193bn per annum in the UK2. It is estimated that 88% of fraud relates to procurement3. Ranges from duplicate invoices, bribes, incorrect sourcing procedures,

incorrect pricing etc

2. National procurement strategy1. Failure to identify savings2. Little adoption of technology3. No change in investment in procurement even with devolution & greater

control of finances locally.

The problem for procurement…

9 9

Barriers:• spend analysis

• market intelligence• status• resource• reactive• structure

Barriers:• contract mgt• savings tracker• audit / compliance• externalisation of

expertise• no supplier

evaluation

Leve

l of i

nvol

vem

ent

NeedIdentification

Sourcing process Tendering Contract award Post contract

The problem with The market

Revenue pressure – welfare reform etcFunding & borrowing challengesSkills & materials shortagesRising labour costsEnd of decent homesProjected construction inflation between 2015 & 2018 is > 18%

Housing Spend

Utilities2.5%

Indirects30%

Property67.5%

Develop’t?%

Using HCA cost per unit of £3,950Assuming 50% of cost is spent with external providers

Planned28%

FM22%

R&M50%

The new normal

Housing providers need a relentless pursuit of innovation and operational excellence in the face of

risk and volatility to succeed.

This is an unheralded opportunity for procurement to evolve it’s value proposition to the business.

What should we be recognised for?

Delivery of cashable savings

Efficiencies to reduce

operating costs

Strategic supplier relations to

promote innovation & product

development

Demand management to

reduce operating costs

Mitigating risks in supply chainsBy delivering on this organisations will

be able to:

Reinvest in their businesses, stock and communities;

Have a lower cost to serve model

Procurements value modelValue Management

Demand Management

TCO

Reduction

Purchased Cost Reduction

Supply Assurance

Increased value (and capability

Value Proposition Procurements Role

Right goods & services, at the right time, in the right place

…..and at the right price……

…..by reducing total supply costs (not just supplier profits……

…..reducing unneeded demand activity, complexity, immediacy and variability ……

…..ultimately stimulating good demand and increasing business value derived from spend (and supply markets) rather than just reducing spend magnitude.

Site-level tactical sourcing, ordering and expediting

Negotiations

Cost modelling; supplier/market analysis; supplier management & SRM; supply planning; project management; risk management

Customer relationship management; money management; demand/specification influence

Safely harnessing the power of supply markets for competitive advantage

Where savings come from

1. Demand side

2. Supply side

3. Total cost side

Value influence40%

Sourcing & Category Man-

agement

30% Compliance, contract & supplier

management

20%Aggregation

10%Other Efficiencies

10 – 15% average indirect spend

savings

Construction - a case study

18

Client

ConsultantsProfessional

Services

Main contractor

Sub-contractor

1

Sub-contractor

2

Sub-contractor

3

Sub-contractor

4

Sub-contractor

5

Sub-contractor

6

Sub-sub contractor

Materials supplier

Materials supplier

Materials supplier

NEEDS: Low cost, good quality

NEEDS: High fees, acceptable quality

NEEDS: High final price to maximise profit

NEEDS: Payment on time

Potential for conflict & additional costs at each interfaceStructure re-assembled for each project

C

C

C

C

C

Why doesn’t the asset team involve procurement?

I have used this contractor before

They just slow the process down

It’s all about compliance –

compliance police We can get better pricing

This supplier knows us really

well

My supplier will meet our prices if we ask

them

We have no problems with our existing supply

chain

Not enough technical expertise and I am

worried over spec and requirements

No technical expertise so I seem to be doing most

of the work myself

Barriers to Value for MoneyProductivity, VfM & overall client satisfaction in the construction sector are low It is a multi-faceted problem:

Focus on surviving recessionsLow and discontinuous demandFrequent changes in specificationInappropriate selection criteriaInappropriate allocation of riskPoor qualityInefficient methods – little investment in innovationPoor managementInadequate investmentAdversarial cultureFragmented industry structureLack of stock information and data

What is the outcome?65% of contracts are unravelling before their full term

Costs are out of sync with other sectors i.e. New Build

Typical over-runs

Over specifications

Significantly more re-specifying than other sectors

Lower satisfaction levels

Higher lifetime maintenance costs

What is the issue with not involving procurement?

A lack of independence

Risk of fraud and/or collusion

No competitive tension

No review of requirements

Limited innovation

Status Quo

No understanding of cost or analysis of spend

Complete risk transfer – do you even know?

Old specs typically re-used

How should procurement be involved?

1. Analytics

2. Market knowledge

3. Category planning / sourcing strategies

4. Supplier & contract management

Don’t just rely on expertise on EU rules

Some thoughts on value creation?Analytics

Market engagement

Sourcing

Increase spend under managementConsolidate spendConsolidate supply chainReduce invoicing & payment requirementsReduce deviation from core listProduct lifetime cost analysisRestructuring existing relationships

Independent KPI managementValue executionPrice checkingPrice increase management

Transfer where appropriateMitigate supplier failureReputationChallenge & compliance risk

NegotiationAdditional valueCash flow

InnovationSpec. developmentDemand management

Risk managementContract &

supplier management

Talent Management

Talent

Administrator; process expert; price

orientated; limited commercial awareness

Procurement experts; EU experts; Policy &

process; Basic analytics; Basic

category management

Financial, commercial & category acumen; innovation focused – ideas not products & services; customer, supplier & business

centric; Collaboration skills; consultant,

networker, analyst

Increasing value (and capability)

How can PfH help?

A partner with complimentary resources and

capabilities providing…

Frameworks

Bespoke consultancy

Technology

Conclusion1. Have a detailed spend map across your entire organisation, updated quarterly

2. Be a driver of sustainable savings (when, where, why and how)

3. Be engaged with the wider organisation to understand how procurement can reduce cost across the value chain

4. Ensure that value is realised through contract management and SRM frameworks that are operationalised

5. Be delivering procurement within an operating model that connects commercial and technical capability to drive optimal outcomes

Thank You & Questions