Improving Procurement: Progress by the Office of Government Commerce in improving departments' capability to procure cost-effectively (HC 541-I) Public Accounts Committee 21 Apr 2004

Evidence given by Mr John Oughton, Chief Executive, and Sir Peter Gershon KCB, former Chief Executive, Office of Government Commerce; Mr David Smith, Director, Commercial and Estate Directorate, Department for Work and Pensions; Mr Peter Unwin, Director General, Corporate Strategy and Resources, Office of the Deputy Prime Minister; and Mr Jeff Belt, Finance and Process Director, Vehicle and Operator Services Agency (VOSA).

Q13 Mr. Gerry Steinberg (City of Durham): The report tells us that if the departments use the online catalogues of G-Cat and S-Cat, there would be considerable savings of money when purchasing. Yet, if you read the report, unless I have read it incorrectly, only half the department agencies and quangos actually use this facility. They have not taken a lot of notice of you, have they? Why?

Sir Peter Gershon: I have nothing to be ashamed about our record on the catalogues. The record on the catalogues shows that when the OGC was created in 1999/2000, the turnover through G-Cat was just over £180 million. For the financial year that has just finished in March 2004, G-Cat revenues grew to £570 million. That is a growth of 2.25 times in three years.

Q14 Mr. Gerry Steinberg (City of Durham): Excellent but that is only half the departments.

Sir Peter Gershon: There are some departments which have their own frameworks, for example Inland Revenue, and I would point out that, in this case, the NAO has identified that I think in the case of G-Cat there is something like another £5 million of gains to be gained by greater use of G-Cat. When it did its review in 1999, it identified that it was £20 million of gains.

Q15 Mr. Gerry Steinberg (City of Durham): With only 50% using it or 100% using it?

Sir Peter Gershon: With the 50%. I never claimed in my review ---

Q16 Mr. Gerry Steinberg (City of Durham): I am not suggesting you were.

Sir Peter Gershon: I wrote in my review that we would get it all fixed within three to four years. Of course, there is a hell of a lot more to do. This report identifies some of the things that are left to be done.

Q17 Mr. Gerry Steinberg (City of Durham): You should not be so successful, then you would not get the criticism that it could be even more successful.

Sir Peter Gershon: I signed the report off. The criticisms in this report are very constructive and are perfectly valid criticisms. We have launched a major reform programme against a background that there were three previous attempts to kick-start reform in this area in the 1990s which did not get the traction. I think all the evidence is that this programme has the traction and there is a hell of a lot more to do, not just in the next two years but probably in the next five to seven years.

Q18 Mr. Gerry Steinberg (City of Durham): Mr Smith, if you look at page 20, figure five, we see that your Department, the Department for Work and Pensions, is clearly the most prolific spender. You spent virtually three times more than anybody else by the looks of things, again if I am reading the chart correctly. Why did you spend so much money? That is purely because the department is so big, I suspect.

Mr Smith: I think it is because the department is so big. It is a large and complex department with large responsibilities and like many other departments, it delivers its business through a significant proportion of external providers.

Q19 Mr. Gerry Steinberg (City of Durham): But you do not use the GCat and S-Cat, do you?

Mr Smith: We use S-Cat very significantly, and have used it quite significantly since the inception of DWP. In terms of GCat, as an enabling framework catalogue, we have used, as Sir Peter Gershon mentioned, framework arrangements which were let collaboratively and available ---

Q20 Mr. Gerry Steinberg (City of Durham): I put it to you, Mr Smith, that you are wasting money because Sir Peter has just explained to us how successful the other departments are by using this facility. You are not using this facility and you are telling us you are successful but you would be even more successful if you accept what Sir Peter Gershon says, so you are wasting the taxpayer literally hundreds and thousands of pounds a year, is that right?

Mr Smith: No. I think, with respect, we have been using S-Cat significantly over the past two years as an enabling framework and it has delivered value for money savings in line with the ones the OGC have suggested. In terms of our non use of GCat we have used, as I suggested, another pan-government framework that has delivered value for money savings equivalent to that which GCat is delivering.

Q21 Mr. Gerry Steinberg (City of Durham): They may be value for money but could you have saved more money by using Sir Peter Gershon's central purchasing system?

Mr Smith: I think I would say we are using an equivalent where we are delivering at least equivalent value for money savings.

Q22 Mr. Gerry Steinberg (City of Durham): Do you accept that, Sir Peter?

Sir Peter Gershon: Yes, and nor do I think there should be a situation in which OGC catalogues have a monopoly of what is a very, very large market, there needs to be contestability.

Q23 Mr. Gerry Steinberg (City of Durham): Presumably you have negotiated the cheapest prices otherwise you would not have a catalogue?

Sir Peter Gershon: Yes, but can I be clear about these catalogues. We negotiate these catalogues from a position that we cannot commit any volume.

Q24 Mr. Gerry Steinberg (City of Durham): Say that again.

Sir Peter Gershon: When we put these catalogues in place we cannot commit volume.

Q25 Mr. Gerry Steinberg (City of Durham): Right. So if your colleague, Mr Smith, was to guarantee that he would spend his - how many billions is it - four billion pounds or whatever it is a year, or whatever it is he spends on these projects, if he was to guarantee that he would use your system the price would come down, would it not, for everybody else?

Sir Peter Gershon: Wherever you have guaranteed volumes, you are always likely to get a better set of arrangements.

Q26 Mr. Gerry Steinberg (City of Durham): So Mr Smith's department might have paid a higher price by not using the system properly?

Sir Peter Gershon: Yes, but if he feels his own arrangements give him better value for money then he should use his own arrangements.

Q27 Mr. Gerry Steinberg (City of Durham): What is the point of having a central purchasing system then?

Sir Peter Gershon: When you set up generic catalogues --- We have not yet found a way in which we can meet the needs of all the potential users of a catalogue of this nature all the time. We try to set up generic catalogues which are easy to use and try to represent ---

Q28 Mr. Gerry Steinberg (City of Durham): I think you are waffling.

Sir Peter Gershon: No, no --- try to represent a generic solution to a large number of customers' needs. We keep enhancing them with various additions, as we have done with S-Cat in the refresh, but we can never develop a catalogue which can satisfy the needs of all users all of the time.

Q29 Mr. Gerry Steinberg (City of Durham): I appreciate that. I can remember when I was a head working for Durham County Council, you had to buy every single item, whether it was a drawing pin or a computer - although there were not computers in those days -through Arnolds of Leeds. Even when you could buy cheaper equipment elsewhere you still had to go through Arnolds of Leeds to buy it, which was farcical. Mr Smith, I cannot get over the fact that your Department is the biggest spender but if you were to spend your money on a central purchasing system it would bring down the cost of goods for all the other departments in Whitehall. Is that not a selfish attitude?

Mr Smith: I think in terms of the way procurement is enacted in either public or private sectors there are, of course, real benefits of aggregation. They are finite to a point in that if you kept adding volume against volume against volume the unit price would not come down. What we are looking to balance in tandem with the other large departments in OGC, as I think Sir Peter Gershon has suggested, is the competitive edge between providers to Government where we optimise unit price and we are able to use, in the right place, the purchasing power of central Government to deliver efficiencies across the pack. Frameworks, GCat and S-Cat, are themselves subject to competition within that framework.

Q30 Mr. Gerry Steinberg (City of Durham): I want to go on to that, Mr Oughton, because now I want to take a different track altogether. Mr Smith does not use your system all that much and apparently if you turn to page 39 and look at figure 26, the way I read that again, I reckon that only 40% of departments actually believe that this is the cheapest way of doing it. So have you got it right or is Mr Smith right by not purchasing through you or using your method?

Mr Oughton: It is going to depend on the circumstance of the department.

Q31 Mr. Gerry Steinberg (City of Durham): 60% have not.

Mr Oughton: If you are a small department which frankly does not have great leverage and purchasing power in the marketplace then I think the route through catalogue or through an aggregation deal will give you better value for money than if you have to procure in the marketplace directly. If you are a large supplier it may be that, as Mr Smith has found, he can get a good arrangement going directly. It will be the case, also, that large purchasers will use the catalogues, and we must be careful not to mix up two things here. Aggregation deals where departments collaborate together so that we can improve our purchasing power through collaboration, that is one issue, but the catalogues are about giving us a route into the marketplace through a range of suppliers who are all registered under the catalogue with an agreed price for their services.

Q32 Mr. Gerry Steinberg (City of Durham): You have 60% of departments saying that they can get it cheaper elsewhere.

Mr Oughton: It is going to depend what they buy. In cases where they have a requirement for a specialist provision - a service, a consultancy, legal advice - it may well be that they will find they get good value for money coming through the catalogue and, what is more, they will have speed of access because they will not have to go through the full curriculum regime.

Q33 Mr. Gerry Steinberg (City of Durham): How do you get on the list?

Mr Oughton: It is through a competitive process. An Ojec process will lead to the selection of the suppliers. We negotiate arrangements with them and then most suppliers are available to all departments and to all customers through the period of the arrangement. It is a quicker route in so there is a benefit to departments there if they need to secure either goods or services rapidly.

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Q146 Mr. Gerry Steinberg (City of Durham): I was going to question Mr Smith on small purchases and Angela Browning did it, but the one point which was quite outrageous which did not come out in the figures is you bought less than nine million pounds worth of goods and the administration costs were £63 million. That is quite outrageous, and you sat there and tried to explain that that was the norm - well, I do not think that is the norm at all. If it is costing £63 million to buy £93 million worth of goods, you really have to do something about it, because I could spend £63 million in my constituency quite easily on things people need.

Mr Smith: I entirely agree that the average transactional cost, which I would still maintain is very much a wider industry average although some organisations have through e-enablement and other techniques reduced it, is something we have to tackle and will, and it was a recommendation of the report and it is something we have planned to do.

Mr. Gerry Steinberg (City of Durham): I hope so.

Q147 Chairman: Again, there is a reference in the report, Mr Smith. If you look at volume 2, page 8, paragraph 1.15, it says "the Department deals with over 12,000 suppliers, most of which are small local suppliers used by the Department's national network of local offices." That is your problem, is it not?

Mr Smith: That is very much, as I referred to before, the nature of business in Job Centre Plus which is around local procurement actions in terms of facilitating and enabling job seekers to find employment. Our commercial strategy, which I referred to before, has a specific action to review our supplier base and to look at an optimum level of suppliers for the Department. I would concede 12,000 is too many even for a Department our size, and it is inherent within our commercial strategy to tackle that.

Q148 Mr. Gerry Steinberg (City of Durham): Could you give us some examples of what employees go out and buy for less than £100?

Mr Smith: I am in danger of straying into a business area but, for example, to enable job seekers to find employment there may be the provision of taxi arrangements to get them to interviews, maybe to get them to work - other things that they need to find a job interview and be successful in a job interview. That is localised low value purchasing, and what we are doing to tackle that, and indeed these are areas that are highlighted in the report --

Q149 Mr. Gerry Steinberg (City of Durham): So what do they do? Do they hail a taxi in the street?

Mr Smith: No. There are arrangements with local taxi firms that are available to facilitate helping job seekers into employment. That is a local purchase.

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Q154 Mr Williams: Then why do you not just make it a condition that, in order to be in the catalogue and to have their maximum prices quoted, they also have to show that they are then responsive to large volume orders?

Sir Peter Gershon: The nature of that responsiveness is through running a mini competition and for really large volume orders you would not use GCat anyway because, given the nature of the order and the size, you might find the standard GCat commercial terms were not appropriate for a project that demanded a large volume. As I said, you cannot vary the commercial terms and conditions in GCat. They are fixed.

Mr. Gerry Steinberg (City of Durham): I will interpret that as "We wish you to interpret this as you want to".

This is an uncorrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee. Neither witnesses nor Members have had the opportunity to correct the record. The transcript is not yet an approved formal record of these proceedings.