Can local government save 20% on what it buys?

There has been a lot written over the years about public sector procurement, especially about the view that public bodies could get better deals than they currently have. As someone who has worked in public roles I know that the bodies seek the best value for money they can find, as far as the constraints on them will allow.

The fact that public money is involved means high standards of probity are expected. And for all but the smallest contracts (and anything involving national security) the EU’s procurement regime requires that the opportunity to bid for the contract is offered to any interested firm or person in the 25 member states. A public manager receiving tenders for some goods or service might feel that they could have negotiated a better deal but they would be reluctant to use negotiation for fear of being suspected of bribery or corruption. It’s rather like the adage that no-one got fired for buying IBM. In the public sector no-one gets fired for going out to tender and accepting the lowest bid.

The report referred to in this article by Ben Goldacre does not, in my opinion, help the situation. Making a sweeping generalisation from a small sample of data (if there is any data at all) is methodologically flawed. Perhaps the consultants have more data than they put in their summary report and it is not their fault that DCLG have broadcast in the way they have but the way to identify potential savings requires a detailed review of an organisation’s pattern of spending.

Experienced, knowledgeable procurement managers can analyse which products and services are being acquired, what the current terms of the contracts are and compare them with benchmarks. They might well identify some areas where the organisation could save 20% of its spending but I would be surprised if any organisation’s contracts were universally expensive. It is more likely that an organisation will have a poor deal on products A, B and C but have really good deals on D, E and F. This is because the price that the organisation gets depends on how the deal was procured, the timing, the extent of competition, the appetite of bidders to offer discounts, etc. What this means is that the potential for making savings through procurement is unique for each organisation.

This is also why moving to consolidated contracts might not save as much as predicted (by Sir Philip Green, for example). If a group of organisations form a consortium to procure something there is a chance that some of the organisations could have got a better deal for themselves than the consortium achieved. This used to be the case with schools when I worked in local government I presume it still is the case. A large secondary school might get a great deal on photocopiers. The smaller primary schools would like to get such a deal so they all club together with the secondary school. The consolidated contract prices might result in a lower average cost for the whole consortium but the cost to the secondary school goes up to “subsidise” the primary schools. If you were the headteacher of the secondary school and were under pressure to keep your spending down would you voluntarily offer to pay more for a service in order that your counterparts in primary schools benefit?

When local authorities controlled all their schools they could enforce this sort of deal (and adjust individual school budgets accordingly) because the authority benefited from the lower average cost. But now it is every school for itself—and every hospital, police station, fire station, library, etc—we are inevitably going to get some sub-optimal deals. Nevertheless, public managers should continue to get the best value for money deals that they can.

Competing for public audits

What does the OFT’s announcement that the audit market should be investigated by the Competition Commission mean for the audit of public organisations? When Eric Pickles announced in August 2010 that the Audit Commission would be abolished he stated that public organisations should be free to choose their auditors. One possibility is that the Audit Commission's own audit arm (formerly known as District Audit) could be floated off in some form to compete with the existing audit firms. I believe that Pickles's department has hired some management consultants to advise on how that might happen.

The abolition of the Audit Commission is, in its way, a classic piece of Conservative market deregulation. My personal view is that, generally speaking, market regulations were imposed by governments for good reason and deregulation makes things worse for most people, whilst allowing a few to make a lot of money. There are too many cases of deregulation resulting in a bad deal for consumers (eg price rises) if not worse (Enron-type frauds and scandals). Once local authorities and NHS trusts are in a position to choose their own auditor I am sure that the larger ones—the county councils, London boroughs, metropolitan boroughs, major acute hospitals—will receive suits from the 'Big Four' as well as some of the smaller firms. The process will be a beauty parade. The codes of practice that set out what comprises the audit of a major organisations means all the firms will provide the same service so the client organisation will pick the one they fancy. In the first year or two they might also get a good discount on the fee.

What the practice of the FTSE 350 companies shows is that once an audit firm is hired they very rarely are replaced. I suspect that's because there's little incentive. All the firms do more or less the same thing and charge more or less the same fee so why would a client organisation spend the time and trouble to have a new beauty parade every five or seven years? And if a new firm were selected as a result there would then be an element of disruption as the new auditors found out all they needed to know about the client's business and accounting system and so on. It's rather like changing your bank. Even if you could get a cheaper deal from a different bank, it would have to be a very significant improvement on your current deal for it to be worth the trouble of moving all your direct debits and all the rest of it.

Whilst the larger public organisations can look forward to being enticed by the Big Four audit firms I doubt that the smaller district councils, the ones whose budgets are still £10–20million and so are substantial organisations in their own right, will. They might see much the same effect, though, from the small and medium-sized audit firms who would be happy to have a regular income from organisations that will pay their bills and never go bust.

If the Audit Commission's audit division is floated off as a stand-alone organisation (New District Audit, perhaps?)then I expect it would compete for all shapes and sizes of audit. Its unique selling point would be its specialism in public sector audits and I expect that it would win some of the business. Prior to the Audit Commission's creation, local councils could choose between being audited by the District Audit or by a 'professional auditor'. (Back then hospitals were not part of trusts and the whole of the NHS was audited by the Exchequer and Audit Department, which was renamed the National Audit Office in 1983).  When local government was reorganised in 1974 202 boroughs had moved over to the professional audit, while 119 use the District Audit (Coombs and Edwards, 2004: 82). (There were 21 others who used the antiquated system of electing local people as auditors, a practice which I don’t think the secretary of state, or anyone else, is proposing to reinstate.) So back then the private sector held about 2/3 of the local government audit market. During its tenure the Audit Commission has favoured its own auditors with about 70% of the market. Would a stand-alone ‘New District Audit’ be able to hang on to 70% of the market. I doubt it. At least, I doubt it in terms of fees. There are about a thousand principal councils and NHS bodies currently audited by the Audit Commission (and many thousands more parish councils). The New District Audit might be able to win 70% of them as clients but the professional firms will focus on the bigger, more valuable clients and I can well imagine that they might secure 70% of the fees. And once they are in they’ll be very difficult to replace.

Reference: Coombs and Edwards, (2004) The audit of municipal corporations—a quest for professional dominance. Managerial Auditing Journal, 19(1), 68-83.

Are there too many middle managers?

Eric Pickles's latest move to improve transparency about the cost of local government is to publish a code of practice encouraging councils to provide the names and job descriptions for anyone being paid £58,000 a year. There are lots of problems and issues with this (sufficient to mean that the Civil Service has already backed away from a similar proposal). Clearly it is founded in the notion that  there are too many middle managers and exposing their "non-jobs" will result in the posts being abolished. Also, as an aside, I suspect that when county and metropolitan councils publish data about staff being paid over £58,000 a significant number will be not be middle managers but school headteachers and deputies and senior police officers, all of whom, technically, are employed by local authorities. Indeed, it is not unheard of for the highest paid employee of a council to be a headteacher rather than the chief executive.

How can anyone know how many middle managers is too many? Each council has its own way of operating and, therefore, its own requirements for senior and middle managers. Robert Winnett's conclusion in this article in the Daily Telegraph, that, "Over the past decade, the number of council middle managers has risen eleven-fold" is not sound. What has changed since 1997 is the number of people earning above £50,000 . As pay has increased annually, middle managers earning less than £50,000 in 1997 would now be paid more and thus be included in the figures. It is conceivable (though perhaps it is unlikely) that there are fewer middle managers now than there were in 1997. No-one can deduce what the true picture is from the data disclosed in council annual reports.

If councils do accede to Pickles's code of practice (I would like to see some councils stand up against his bullying and inconsistent messages) then I expect that every individual who is to be named for earning £58,000 or more, will demand that their job description is fully up-to-date before it is  published. It will be just like the process of job evaluation where the manager will have the incentive to expand every bullet point and to emphasise the strategic importance of the decisions that they make. All of this will, of course, be dull, boring and practically unreadable. So, whilst the average resident might be interested to know how much so-and-so who lives down the road was paid they are unlikely to look at the justification. Similarly, journalists on local newspapers might publish the data (one hopes without the kinds of flawed logic displayed by Robert Winnett) they are unlikely to undertake any analysis of job descriptions.

Finally, if transparency about public money is so important, why is only Eric Pickles pushing for it? As mentioned above, the Civil Service has decided that the appropriate threshold for publication is £150,000 a year. And I am not aware of NHS organizations being "encouraged" to provide details of the payments to doctors and other health professionals as well as middle managers but, then, I imagine Andrew Lansley has enough on his plate convincing GPs to take on £80 billion of commissioning work (the sort of thing done by middle managers) that insisting on full disclosure of their pay would be a tactical mistake. 

In praise of accountants

The following is the 27 January 2011 posting on the We Love Local Government blog. What more can I add?

"In one of my previous local government incarnations we were going through a restructure and the powers that be had made it clear that, as so often, they would do everything in their powers to ‘protect the frontline’. One of my colleagues, only half in jest I believe, suggested that he was going to print some T-shirts for my team with the slogan: ‘back office staff are people too.’

"I’m reminded of this frequently in recent times as politicians, managers, tweeters, bloggers and commentators all talk of implementing cuts that won’t affect the ‘frontline’. The hidden message in this language is that the back-office staff don’t really matter and cutting them won’t really make any difference.

"Local Government workers, and hopefully blog readers, don’t need me to tell you that this is baloney. For example, there is not a member of staff who is not 100% reliant on the work of their IT department.

"Despite this I recently found myself saying something similar about our finance department. I think my words consisted of something like: ‘there are quite a lot of them down there; what do they do exactly?’ I guess in times of cuts everyone looks for a scapegoat.

"I was wrong of course. Good local government accountants are indispensible.

"In a time of budget cuts it is the accountants who can tell us exactly how much money we have and what effect all the many cuts have on our overall budgets. It is the accountants who ensure that every team and service area is spending within its means and ensure that we don’t overspend the public’s money.

"More than this though; it is the accountants in the council who are crucial when looking at new forms of business or service model. If anything, this year will be the year of the accountant.

"Individual budgets for adult social care will mean that council adult services don’t have guaranteed budgets for the year. In order to properly plan for these services quite detailed projections are going to be needed. Who’s going to produce those projections? Yes, it’s the accountants.

"Eric Pickles is particularly keen on shared services. But a shared service requires two authorities to share costs and often one council to make a charge to another for a service provided. Working out which costs are appropriate to share between the authorities and how the cost of the service will be allocated (based on usage?) is a question for which we are entirely reliant on, yes, our accountants.

"Finally, outsourcing services is not as simple as simply comparing one price with another (I used to think it was). The cost and the risk models rely on projections and a deep understanding of the actual costs of services, including costs that maybe we don’t always take into account.

"In the past few weeks I have had lots of dealing with accountants and every time they have shown imagination, skill, mental dexterity and a deep understanding of how our council’s budget works. Without them I, and I dare say the rest of my council, would be lost.

"All hail to the accountants."

Source: http://welovelocalgovernment.wordpress.com/2011/01/27/in-praise-of-accountants/#

Apples and oranges

I read an article this weekend in which it was suggested that Eric Pickles will be asking local authorities to put a cap on their chief executive's salaries so that they do not earn more than the Prime Minister. I do find something ironic in these pronouncements coming from a man who was leader of Bradford Council over twenty years ago when it was amongst the first to break from the practice of paying chief executives using a scale that was based on the population of the area. (I'm tempted to say that Bradford were the first but I haven't done the research to verify if my memory is correct.)

Anyway, the other thing that strikes me about all the talk about whether the head of a local authority should be paid more than the Prime Minister is that it is comparing the allowances paid to an elected office-holder with the salary of an executive officer. To use a cliche, it is comparing apples with oranges. It seems right to me that the allowances paid to MPs and councillors should have some regard to the Prime Minister's allowance. If an elected mayor or council leader were being paid £150,000 a year I think there would be a case to answer. But the Prime Minister is not paid more than the executives who manage the government. Surely the benchmark, if there is to be one, should be with the salary scale of permanent secretaries. But, of course, if that were the case there'd be nothing for Pickles to say.

The engagement's off

In September I wrote this post about Islington and Camden's plans to merge their management teams. According to this article in the Guardian the marriage is over before it began.