How better procurement can deliver financial benefits

Procurement in the NHS could be described as being a “Cinderella” function: perceived as failing to fulfil its potential and frequently forgotten in the deepest, darkest recesses of hospitals.

However the review of NHS procurement by the public accounts committee finally brought into sharp focus the significant opportunity that exists for procurement to contribute to the financial challenge the NHS faces. But in what is a highly devolved organisation, with limited central control, questions must be asked about what the NHS can learn from what others do.

KPMG’s survey of procurement functions, The Power of Procurement, illustrates what “good” looks like and highlights the attributes of a high performing organisation. It provides a range of practical indicators that could help NHS procurement teams make strides to fulfilling their obvious potential.

Perhaps one of the most interesting findings of the survey is that organisations with centralised control were more effective in delivering savings on items bought for the organisation’s own use (direct spend) and for back office purchases (indirect spend). In the context of the NHS, the equivalent is the purchasing of materials used to treat patients (direct) and items that enable the efficient running of the hospital (indirect).

Intriguingly, organisations with a centralised procurement function also tended to exhibit more “excellence” in the way they managed spend on specific areas. Such a high rating is largely the result of achieving a high level of consistency by having all procurement operations managed from a single location.

Freedom vs value

Clearly, for the NHS, centralisation of procurement along the lines applied in large private sector organisations is not appropriate. Given the fact that the NHS is not one big entity, there is a continuing need to balance the freedom given to individual trusts to operate as they see fit with the desire to leverage value from the £20bn that the NHS collectively spends.

However there are a number of things the NHS can learn from this evidence. For one thing, centre-led organisations are typically able to “pool” skills and benefit from the critical mass that combined knowledge possesses. So, could the introduction of centrally supported and driven “category knowledge groups” for specialisms such as, say, orthopaedics and cardiology give the NHS some of the benefits of centralisation, without trying to control all things from the centre?

One finding of the survey was that 25 per cent of health respondents were operating at the lowest level when it came to strategic sourcing of materials and category management. Given that the survey also found a direct link between the skills an organisation possesses and the overall efficiency savings delivered, the suggestion is that there is a potential skills gap in the NHS.

While individual trusts are slowly recognising the importance of procurement, there isn’t currently any minimum national procurement skill threshold in the NHS. Certainly, many of those organisations that are operating at an “excellence” level have formally measured training programmes that are accredited by leading academic institutions. Perhaps this means the time has come for a pan-NHS standard of procurement skills?

But centralisation and skills are not the only answers. It is common sense to note that early involvement of procurement teams has been proven to deliver higher savings, the reality is that procurement specialists are usually only brought into the process to either close a deal or advise on the contract terms, when it is often far too late to add significant value.

Team up

Only 36 per cent of health procurement teams are involved in decisions about whether their organisation should “make or buy” products. Given the commercial input they offer, this is alarming. Procurement teams, therefore, need to partner with the organisation which, in the NHS, means two things.

First, better engagement with clinicians and closer clinical-procurement collaboration is essential to identify efficiencies. Challenging needs versus desires is something that every procurement team can do if they have an effective relationship with their clinical leads. It isn’t about establishing ownership of the buying process, but about working together for mutual gain.

Second, procurement needs to be on the radar of chief executives and finance directors. Although the Department of Health has recently worked with the NHS Institute and 40 chief executives to explore what they think of procurement, this is only the tip of the iceberg. Every trust needs to know what their procurement function can do for them and it should be measured and reported to the board.

The fact remains: most procurement teams have not moved as quickly as they should have to address (in)efficiencies in the supply chain. The result is organisations failing to raise their game beyond simple tactical activity such as the renegotiation of contracts, leading to lower economic performance and business effectiveness.

Procurement has always been seen as a back office, administrative function focused on delivering products at the lowest possible price, in the quickest possible time.

As much as the current economic climate means that cost reduction is critical to business survival, organisations failing to spot the difference between delivering value and reducing short term costs will continue to struggle. They will keep plodding along from one tactical purchase to another rather than ensuring decisions about what to buy are intrinsically linked to the strategic needs of their business.

It may be down to senior NHS executives failing to understand the true value of procurement teams, a misguided belief that they are already “best in class” and do not need to improve, or simply too much focus on the immediate need to drive out cost in other areas. Whatever the cause, the leaders of NHS organisations need to start to pay attention to the purchasing function they own.