The Challenges of Procurement in the Third Sector

While the spending cuts announced as part of the Comprehensive Spending Review in the autumn of 2010 are only just starting to bite, the impact has been a central topic of conversation among many charities who find their grants are being cut at the same time as demand for their services increases. The situation is also not helped by the overall lacklustre economic picture for British households, who find their budgets increasingly squeezed and hence are likely to be more selective in their charitable donations.

Many charities also now face serious internal challenges; the economic boom of recent years got many third sector bodies accustomed to a regular stream of grants and donations, providing effectively an abundance of funding to support not only a fast growing number of worthwhile projects, but also, in some cases, expansion leading to an increase of over head costs.

Buyers in charities have historically been rather risk averse, where procurement decisions were being made, reassured by the knowledge that their peers are buying the same product for the same price, irrespective of whether this represents value for money or not.

This can lead to a culture of complacency, where procurement and investment decisions are not being challenged as long as they are aligned with an established overall public and third sector practice, irrespective of whether this represents good value or not.

In light of the challenges charities are facing, a few simple steps to increase internal efficiency, which, in turn, will lead to a more cost effective service delivery:

1. Set and manage targets Something which private sector organisations live and die by is targets. For the third sector this may be unusual, but in the current austere climate, proper budgeting and financial planning is crucial. Break operating costs down into individual cost centres’ and hold departments accountable for their budgets. Moreover, if your funding has been cut, ask your staff to come up with suggestions to make cost reduction suggestions.

2. Can you measure-up to the best? Having been sheltered for some considerable time from major funding constraints, third sector organisations often lack the appropriate tools and frameworks commonly used by the private sector to benchmark their costs against best in class. Simply setting targets, therefore, may not be enough. The award of grants and corporate donations is likely to increasingly favour charities, that can demonstrate that they obtain value for money. This offers a great opportunity to imitate private industry supplier selection processes and carry out rigorous tenders based on your organisation’s very individual needs, even in categories where public sector framework agreements may look appealing.

3. Not all framework agreements offer good value The purpose of public sector framework agreements is to offer a wide variety of public and third sector bodies a single source of supply at a competitive price based on the aggregate group negotiating influence. However, unfortunately, there are often situations where the use of a framework agreement is counterproductive.

The nature of this disadvantage is often the very purpose of the agreement: – its size and the very differing diverse needs of its participants need to be accommodated. Separate products and services, even within the same spend category, will attract different profit margins.

Many suppliers, therefore, in the absence of detailed actual purchase data, will have no choice other than to build-in extra margin into their framework pricing structures. For that reason, charities often will be better served by carrying out their own comprehensive tenders and negotiations, based on their very individual spend profile, while including the respective framework agreements in their considerations.

4. Supplier Selection Time spent sourcing the best supplier for your organisation’s needs is time well spent! In order to build a meaningful partnership, your needs and theirs should be well aligned. If you are a small, locally operating charity, it is unlikely that you will get the best service from a big national supplier whose main interest will be in large national accounts. A local contractor will have a much greater incentive to provide you with competitive pricing as well as excellent service levels, and will value your custom much more. Besides, remember that a supplier you develop a relationship with is also a prospective donor to your organisation.

5. Supplier Consolidation Many charities like to empower their staff; as a result, Expense Reduction Analysts often find that the same or very similar products and services are sourced from a broad variety of channels at widely differing prices. While staff involvement in supplier selection is very laudable, it also frequently means that a charity’s own collective negotiating influence is being undermined.

Again, this can easily be remedied by consolidating the contractors used but closely involving the staff in the vetting and selection process. These are challenging times for the third sector in many ways, but they also offer the opportunity to make some crucial changes in the way procurement is being handled.

The resulting process changes will not only increase funding available for the respective causes in the short term, but will also help instil confidence in providers of donations and grants, that funds are being spent wisely.

This article featured in the July 2011 Edition of the Profit News. You can download a free copy by clicking here