Baker Tilly procurement guide for Social Housing - part of our VFM solutions suite

www.bakertilly.co.uk

Delivering VfM through Procurement A fresh look

2Delivering VfM through Procurement

A fresh look

Contents Introduction 4

Procurement – why is it important? 5

Common pitfalls 7

The Procurement Journey 8

Where to start your Journey 10

Case study 12

Baker Tilly Procurement Self-assessment 14

How can Baker Tilly help you? 15

About Baker Tilly 17

Our specialist team 18

Delivering VfM through Procurement

A fresh look 3

1. IntroductionIn today’s operating environment, affordable housing providers face a range of pressures which are driving them to be more efficient and to look hard at their costs.These pressures include:

yy The general economic climate, rising inflation and uncertain debt re-pricing costs;

yy The new funding regime for development, with its emphasis on reducing grants, sweating assets and increasing debt levels;

yy Increased regulatory focus on governance and viability, with the onus on landlords to develop their own approaches to the way they manage their business services and assets;

yy The introduction of fixed-term tenancies, changes in welfare benefits and the end of direct Housing Benefit payments.

All this combined with the rising pressure on tenants’ incomes ranging from increases in energy poverty levels and declining living standards, managing tenancies and collecting rent is likely to be more challenging and expensive.

External expenditure, i.e. expenditure spent with suppliers of goods and services, can make up to 30 - 60% of a provider’s total cost base, so you’d expect effective procurement to feature highly on the list of priorities for a provider. However, quite often the time and resources devoted to effective and robust procurement doesn’t gain the attention and priority that perhaps it should. This could lead to missed opportunities in freeing up cash to either build up surpluses or reinvest in the business.

The evidence is clear that those providers, who have embraced a robust approach to procurement in the sector, and beyond, have reaped significant financial benefits. However, today, there are providers who have not yet embarked on the ‘Procurement Journey’. This paper outlines how providers can transform their procurement practices and achieve sustainable benefits.

4Delivering VfM through Procurement

A fresh look

2. Procurement – why is it important?The combined turnover of housing associations in England in 2011/12 was over £13.8 billion.

In this period, total operating costs were £10.5billion. (Source: HCA Global Accounts 2011/13)

For each provider, the percentage of these operating costs that are bought in from suppliers and contractors will vary. For example, those providers who have their own direct labour forces will obviously spend less externally than those without a workforce.

Nevertheless, with or without a workforce the level of external expenditure could be between 30-60% of a provider’s total cost base.

In view of this, it is imperative that providers ensure that this money is spent wisely and effectively.

The benefits from effective procurement have been shown below in figure 1; the output of a study

carried out by the Audit Commission in 2007 of Social Housing organisations. Efficiency savings attributable to better procurement varied between £1.66 per housing unit and £220 per unit with an average of £40 per unit. Though a little out of date it still shows the level and variation of savings achieved at that time, and we are not seeing a great deal of evidence that this result would be any different if repeated today.

Other

Major Repairs

Planned Maintenance

Routine Maintenance

Care & Support

Service Cost

managment

27%

14%

21%

8%

7%

20%

27%Other

Major Repairs

Planned Maintenance

Routine Maintenance

Care & Support

Service Cost

managment

27%

14%

21%

8%

7%

20%

27%

250

200

150

100

50

0 10,000 20,000 30,000 40,000 50,000

saving per unit (£)

Number of units

5Delivering VfM through Procurement

A fresh look

Ease

of a

chie

ving

effi

ency

gai

ns

Figure 2The spread in savings made from improved procurement is in our view, to some extent, as a result of significant variations in awareness of, and willingness to realise, savings through procurement.

Some categories of expenditure have greater potential for savings than others and some are easier to achieve. ( see figure 2) Our experience shows that some providers have at least accessed some of the ‘quick wins’ such as stationery or telecoms contracts. Achieving savings here is usually relatively straightforward and since these types of contracts have minimal direct impact on tenants, they require little consultation. However, there is evidence to show that there are still a significant number of providers who have yet to make savings in these areas.

For example if you take the latest results from our Back Office Benchmarking programme typically members are spending £472 per unit on non-property related spend, however the best performers are achieving £250 per unit. For instance some of the biggest disparities are in example General Office Costs where we have identified on average a 73% difference from best to worst spend, in Cleaning we have identified a 64% disparity and in Advertising a 60% disparity.

Gas Servicing

IT Services

Responsive Repairs

Difficult

Easy

Low High

Planned Maintenance

Quick Wins

Utilities

Stationery

Agency Staff

Cyclical painting

Vehicles

Telecoms

Potential efficiency gains

6Delivering VfM through Procurement

A fresh look

3. Common pitfallsThe consequences of a poor and immature approach to procurement can be shown by the following diagram. Unless a robust procurement strategy is devised and implemented that aims to plug the leaks and inefficiencies, funds will be spent unnecessarily (See figure 4)

Quite often, providers only use procurement staff to oversee the ‘quick win’ categories, whilst leaving the procurement of more complex categories to subject experts. Sometimes these experts lack a predefined, systematic approach for reducing procurement costs across the entire breadth of expenditure, and in view of this, a lot of organisations under achieve in their procurement savings potential.

In addition we find that provider’s procurement efforts are particularly weak in categories where decisions are fragmented across many ‘buyers’ in the organisation, or the product or service is of a ‘specialist nature’.

Another issue involves the way that organisations consider (or don’t consider) the total cost of ownership (TCO) in price negotiations. A TCO approach breaks down all of the costs that go into the delivered item; everything from supplier overheads to raw materials or even the distribution costs involved in final delivery.

In our work with clients, we find that procurement initiatives usually push to do the right things. However, we’ve found some common reasons that procurement improvement efforts typically fall short for the organisation:

yy Lack of maturity: In our experience there is not a consistent pattern to procurement, with different providers showing varied levels of procurement maturity, awareness and approach. This diversity also extends to employees’ procurement skills, experience and capabilities.

yy Initiative overload: The association tries to simultaneously attack too many categories at the same time, without having the resource or time to implement and embed effective sourcing strategies.

yy Decision making: Too many providers delegate the improvement effort to the procurement function alone and don’t involve the business and finance teams early and often enough.

yy Changing priorities: After an initial flurry of activity, the organisation moves on to the next priority before an improved approach to procurement has been embedded.

Consequences of Immature Procurement Processes

Figure 4

Lack of commercial purchasing

skills

Poor specification

control

Poor use of leverage

Suppliers divide & rule

£££Money In

£Money Out

Lack of compliance

Inadequate systems

Demand not aggregated

Spend savings elswhere

buy more/bigger

4. The Procurement JourneyWorking with our clients we have seen what providers are doing to make procurement initiatives succeed and more sustainable, with some reaping significant, long-term rewards.

Our model of sustainable procurement (see figure 5) shows the typical journey organisations need to make to ensure sustainability of their procurement approach. Most

organisations begin their approach to procurement by taking a transactional approach. As the limitations of this approach become obvious, they progress into a transitional stage.

Although the move from transactional to transitional can be incremental, the move from transitional to transformational requires concerted leadership and management.

4-8%

Cumulative Savings

Years

The Procurement Journey- from tactical to strategic

50

1-3%

Transaction Transitional

• Recruit/utilise Procurement specialists

• Agree Procurement Strategy

• Establish Procurement mandate

• Create Spend Maps

• Deliver Quick Wins

• Implement groupwide sourcing strategies

• Optimise spending power

• Enforce mandate/compliance

• Embed Procurement processes

• Involvement in budget setting

• Deliver and embed savings

• Insource/outsource/ options considered

• Sharing best practice groupwide

• Contributing to sector agenda

• Full e-procurement processes

• Collaborative/consortia procurement

• Year on year savings improvements

• External accreditation

• Long term partnering supplier contracts

9-12%

Transformational Transformational

Typical Outcomes• 50 suppliers equate to 90% spend• 95% compliance to procurement contracts• Procurement oversees 95% of total spend• Procurement investment self financing

Figure 5

Evidence from our clients is that the vast majority of them are in the transactional or transitional stages.

All three enable organisations to deliver savings: but in our experience a transformational approach to procurement is the most likely to deliver long-term and sustainable savings (see figure 6)

8Delivering VfM through Procurement

A fresh look

Transformational

Transitional

Transactional

Transactional benefits

Transactional benefits

Transactional benefits

Transitional benefits

Transformational benefits

Time

Long

ter

m b

enef

its o

f VFM

pr

ogra

mm

es

Figure 6

5. Where to start your JourneyTypically the journey needs to start with providers identifying and accepting the following two statements:

1. There are opportunities to reduce purchase costs

2. A robust approach to procurement will reap sustainable financial benefits

It is important to understand the current and future potential of what is achievable and to establish some targets for both.

The next step is to agree a set of procurement transformation principles which will guide your organisation over the journey. It is important that all senior management and boards sign up to the principles and adhere to them as compliance is a key factor for success in the long run.

Key Procurement PrinciplesA professional procurement team will be established

yy The Procurement Strategy will be endorsed/sponsored by the Executive and Board

yy The Team will have the mandate to oversee all expenditure

yy The Team will be at the centre of all sourcing strategies and lead all tendering and sourcing activity

yy A comprehensive set of processes, procedures and tools will be developed to facilitate the delivery of the strategy and subsequent plan

yy There will be a compliance culture for external expenditure

yy Good Procurement Practice will become embedded across the organisation

yy The Procurement Team will have a quantifiable and measureable savings target

yy Budget holders will contribute to the delivery of the strategy

yy The Procurement Team will be self-financing

10Delivering VfM through Procurement

A fresh look

Key Preformance Indicator

Time

Suppliers

Costs

Influence

Conformance

Compliance

The organisation then needs to establish at which point on the procurement journey and level of maturity it is currently at; i.e. transactional, transitional, or transformational.

Build capabilities for continuous improvement, not just one-time gains

As with any change effort, even the most proven tools will fail to yield results without a well-defined implementation program and a process to close the loop between agreed change and actual behaviour.

In our experience there are five critical elements needed to get results to stick outside the procurement organisation:

1. Involve the right people from the start. If the effort is dominated by procurement people alone, it will fail. Create an organisation-wide set of goals, and assemble a team of influential leaders across procurement, finance and the business. One approach that works well is to pair up “subject matter” experts from the business with procurement teams to help better identify potential opportunities and ensure the right process is followed to capture and sustain value.

2. Establish a savings target – make it challenging but probably achievable with effort. Ensure everybody buys into the target and understands that this is a corporate imperative.

3. Communicate changes both broadly and in targeted training.

4. Create a regular, simple dashboard across categories. Don’t overwhelm it with more metrics than are necessary. Focus on actual pounds spent and the one or two most critical metrics of desired behaviour. See figure 7.

5. Create a quarterly check-in process between finance, procurement and the business focused on dashboard metrics. Best-in-class companies focus on exception reports, creating the ability to take faster action on spending outliers. Profile spending trends, review categories where change is sticking and dig deep into those categories where results are slipping. Make sure targets flow into budgets, but also clearly show the business the bottom-line value and progress being made.

The payback of sustained results makes it a high-return investment. As input costs continue to rise, so does the need to keep them in control. Succeeding at that challenge isn’t easy, but it can spell the difference between a provider that is able to make the strategic investments to secure its future and one that struggles to keep up.

6. Case study: Transforming procurement in a housing association

In 2004, one of the largest traditional housing associations, faced with the challenge thrown down by the Gershon report and also facing significant expenditure levels in delivering the Decent Homes Programme, responded by transforming its approach to procurement.

Its first steps was to recruit a procurement professional, who joined as Procurement Director in 2004, with a brief to professionalise the approach to procurement, provide a focal point and consistency of approach, and to ultimately oversee all external expenditure from stationery, repairs, and gas servicing, to IT, agency staff and eventually construction.

A five year Procurement Strategy was developed which included the following key elements:

yy a mandate to deliver agreed savings target of £25 million over 5 years; together with

yy an agreement that procurement will oversee all expenditure and lead all tendering and sourcing activity

yy that budget holders will contribute to the delivery of the strategy; and

yy that procurement will be self-financing.

By the end of the first year, bottom line savings had been made of £1.7 million. The bulk of these savings had come from ‘quick wins”, for example, stationery, print, utilities and telecoms, and some early savings for Decent Homes products, specifically boilers and kitchens. This helped finance the recruitment of the first procurement team members.

12Delivering VfM through Procurement

A fresh look

In subsequent years, working closely with subject experts and budget holders, the team became involved in more complex expenditure areas, such as planned maintenance programmes, reactive repairs, gas servicing, and even IT equipment purchases and contracts.

Just as important as saving money, processes and procedures that would help to embed the new procurement way of working into the organisation were also being established.

One key element from the start in 2004 was the establishment of a very robust communication programme

that kept colleagues across the organisation well informed of what the procurement programme of work was, and at the same time ensuring that wherever possible, colleagues played a part in the work and the subsequent achievements.

In an effort to increase its purchasing power, the organisation joined its first consortium in 2006, and two others in 2007 and 2010. Today this involvement in consortia remains one of the two biggest contributors to bottom line savings.

By 2009, the team had beaten its £25 million savings target and achieved £35 million. It was estimated that the organisation was spending between £10 million and £11 million less than it would have been without this procurement activity.

As a consequence, the team was the first winner of the Procurement Team of the Year Award at the CIH’s Housing Heroes Awards in 2009.

10

0

10

15

20

25

30

35

40Cumulative savings £m Reduction in annual cost base

2 3 4 5

Savings£m

Year

yy 92% of all expenditure with just 50 suppliers

yy 94% of all expenditure through document led contracts

yy By 2012 cumulative savings reached £60 million

yy CIPS Accreditation 2010

yy ISO 2001 achieved in 2011

Key benefits/achievements

7. Baker Tilly Procurement Maturity Assessment Try Baker Tilly’s Procurement self-assessment to find out where you are on the procurement journey

A score of 0-15 suggests that your approach to procurement is at the transactional stage, 16-30 at the transitional stage, and 31 or above suggests that you are at the transformational stage in the Procurement Journey, as shown in fig 5 on page 8 .

Maturity Matrix

Assessment 1 2 3 4 5

1. We have no procurement strategy We have a formal procurement strategy endorsed by the Executive and Board

2. We have not considered procurement to be a key contributor to our VFM strategy

Our procurement strategy is a key element of our VFM strategy

3. Procurement is undertaken by staff as part of their wider job role

We have a fulltime and professional procurement team

4. We have no savings targets for external expenditure

We have a formalised savings target that is embedded in our finance systems and budgets

5. We have no formalised purchasing guidelines and rules

We have formalised guidelines and rules that all staff are obliged to comply with

6. We have no P2P (purchase-to-pay) systems and do not use electronic tendering

We have a fully integrated P2P system that is used for all purchases and use an e-tendering system for all sourcing activity

7. We do not collaborate with others to maximise our spending power

We collaborate with others for major expenditure areas

8. We have no understanding of the social impact that the way we spend our money has on our communities

We have a full understanding of the way we spend our money and the impact it as on our communities and ensure that it is targetted to achieve positive outcomes

9. Total Score

14Delivering VfM through Procurement

A fresh look

8. How can Baker Tilly help you?Baker Tilly’s new 3Ps service:

‘Professional Proactive Procurement service’Baker Tilly’s 3Ps service has been established to help social housing providers develop an effective approach to procurement.

Our range of services and support tools has been designed to accommodate all sizes of social housing providers from the very smallest to the major providers across the UK.

The service includes:

Procurement health checksWe will assess your organisation against a robust benchmarking tool and establish where your organisation currently sits in terms of an effective approach to procurement. The outcome of this health check will be a report on not only where the current approach sits alongside best practice, but will also give recommendations on how to progress towards a more effective and strategic approach.

Development of relevant procurement strategyBuilding on the findings from the health check we will work with you to develop a procurement strategy that will take you from your current state towards a more strategic approach.

The strategy will enable you to take a strategic and long-term view of your procurement activity, and will allow you to plan for both incremental and strategic improvements. It will go beyond just the next few months, or the next few tenders, or just today’s current cost problems.

Tender managementThe social housing sector is subject to the European Procurement Directive, which aims to ensure transparency and fairness to all prospective suppliers.

We can provide general advice and guidance on the workings of the Directive, and more specific advice on matters such as the best route to market (tender process), how to create effective pre-qualification questionnaires (PQQs) and tender documents, how to evaluate them for the best results, how to engage with prospective suppliers and how to publish and track tenders.

If you have resource issues we can even run the whole tender process for you.

Contract and supplier managementQuite often suppliers and contractors fail to live up to the promises made during the tender process and subsequent tender negotiations.

We can provide assistance in

Proactive

Professional Proactive

3Ps

managing and improving poorly performing contracts.

We offer a contract review process which will analyse current performance of a supplier against what was promised or contracted. From this we will establish an improvement plan that will facilitate contract improvement.

Customer (tenant involvement)Providers are increasingly expected to, and more often than not want to, involve their tenants in their decision making and operation of their organisation.

Our customer involvement offering shows you how to get your tenants actively involved in the workings of the procurement process, from deciding specifications, the workings of the EU Procurement Directive, to tender decision making processes and supplier management.

Public Social Values ActA pertinent topic in the sector at the moment, whilst most providers espouse their commitment to the intentions of the Act, many struggle to both understand how to apply the Act in their business and how to account for the value of the activity.

Using Baker Tilly’s unique tool, we can help you measure the impact of your activity.

Back Office Benchmarking ProgrammeBaker Tilly runs a Back Office Benchmarking programme that has been collecting non property related spend for the past 5 years. We are able to benchmark and predict the level of spend that your association typically should have and the potential savings that you could make.

16Delivering VfM through Procurement

A fresh look

9. About Baker Tillyyy Baker Tilly is the leading not for profit specialist and a leading mid-tier provider of

yy accountancy and business services. We specialise in providing clients like you and your business with an integrated range of services.

yy The firm has national coverage through its network of offices and is represented internationally through its independent membership of Baker Tilly International.

yy Our firm has national coverage through its network of 58 offices in 45 locations with 9000 partners and staff.

yy Baker Tilly has over 150 social housing sector clients, ranging from traditional associations to LSVTs, ALMOs and other specialist housing organisations.

yy We operate a national Social Housing Group, comprising over 20 partners and 80 staff, who advise our housing clients. We provide training and technical updates for staff and clients, run seminars and provide a technical helpline.

yy The backing of our dedicated National Social Housing Group and our strength in depth means that we have the capacity to provide a first class knowledge service.

yy A full range of advisory services is provided to our social housing clients, including tax planning, benchmarking, business process improvement, Social Return on Investment, IT and other management consultancy services.

yy Our specialist staff are fully conversant with the sector. Baker Tilly has representation on the NHF SORP Working Party. We are lead advisers to SFHA on technical and regulatory matters and are working with other regulators, trade bodies and HMRC on sector issues. In addition, we have advised regulators on the VAT partial exemption methodology frameworks for the sector, and are members of the Revenue’s Charity Joint Working Group.

yy We can demonstrate continual involvement in and commitment to the sector. Over the last year we have conducted national surveys on the continuing impact of the “Credit Crunch” to the RP sector (for Inside Housing), Board Effectiveness and Back Office Benchmarking.

yy We operate a national Back Office Benchmarking Programme for the Registered Providers (RPs) sector, with over 50 members ranging from 2,000 to over 60,000 units.

yy We are regular contributors to sector magazines such as 24 Housing (monthly article / advice column) and Inside Housing.

yy Regular meetings are held with HCA (at national and local levels), SFHA and other sector bodies.

17Delivering VfM through Procurement

A fresh look

10. Our specialist team

Head of Social Housing Advisory Practice [email protected]

ProfilePeter Lunio is a Director in Baker Tilly’s Business Improvement Practice and leads the Social Housing consultancy team. He brings a wealth of both strategic/operational knowledge and expertise in business process transformation, change management, large scale programme management and Value for Money (VfM). He primarily specialises in working with clients to help transform their organisations.

Peter is an MBA graduate having previously worked with Ernst & Young and Logica. He has over 15 years’ experience in international consulting working with clients such as 3M, Black & Decker, Boots the Chemist, Chevron Texaco, and BT. He has also held senior operational roles with Colgate Palmolive and RS Components.

Peter is a leading authority on the key trends in VfM having published many articles in leading journals on the subject. He has also been a guest speaker at many associated conferences and has spoken at the National Housing Federation conference for the last three years. He has led on the national development of Baker Tilly’s Social Housing Back Office Benchmarking (BOB) programme, and over the past few years, he has been involved in the delivery of number of projects in Social Housing including Value for Money strategy reviews, cost reduction schemes, detailed benchmarking exercises and organisational change programmes.

Peter Lunio

18Delivering VfM through Procurement

A fresh look

Head of 3Ps Service [email protected]

Profile

Kevin is the Head of Baker Tilly’s 3Ps Service and a member of the Business Improvement Practice. He is a senior procurement professional with over 30 years’ experience in senior procurement roles. Kevin has wide experience across many sectors in developing and implementing procurement strategies, recruiting, developing and leading procurement teams, delivering cost reduction and value for money solutions, strategic supplier management and robust corporate governance.

Kevin’s most recent role, prior to joining Baker Tilly, was as the Procurement Director at Home Group, one of the largest UK providers of social housing. During his time at Home Group he was also a Board member of two procurement consortia – GM Procure (now Procure Plus) and North East Procurement (NEP). Previous roles included Head of Purchasing at Lloyds TSB, and International Procurement Manager at IBM UK Ltd.

He has also spent time as a consultant working with clients ranging from The National Trust to British Nuclear Fuels, and assisting the Chartered Institute of Purchasing and Supply (CIPS) in delivering its Corporate Partnership Programme to over 30 major organisations.

Career highlights include playing a key role following the merger of Lloyds and TSB in the delivery of over £200 million procurement merger savings and leading the Home Group team that won the Procurement Team of the Year at the 2009 Chartered Institute of Housing’s Housing Heroes Awards.

Kevin Grainger

Baker Tilly UK Audit LLP, Baker Tilly Tax and Advisory Services LLP, Baker Tilly Corporate Finance LLP, Baker Tilly Restructuring and Recovery LLP and Baker Tilly Tax and Accounting Limited are not authorised under the Financial Services and Markets Act 2000 but we are able in certain circumstances to offer a limited range of investment services because we are members of the Institute of Chartered Accountants in England and Wales. We can provide these investment services if they are an incidental part of the professional services we have been engaged to provide. Baker Tilly & Co Limited is authorised and regulated by the Financial Conduct Authority to conduct a range of investment business activities. © 2013 Baker Tilly UK Group LLP, all rights reserved.