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Video transcript: Procurement functional leadership

Transcript for a video of a presentation about procurement functional leadership filmed at the 2018 Audit New Zealand client update.

Title: Procurement functional leadership, John Ivil, General manager, New Zealand Government Procurement and Property, Ministry of Business, Innovation and Employment

John Ivil

As stated, I look after government procurement and property; and, I’ll talk to this, a little bit about that today, in what’s actually quite a critical area. I’m just going to talk, provide a little bit of context. I am going to talk a little bit about property. Mainly, because I’ve got an opportunity, and you’re a captured audience; and then, I just want to talk about procurement more generally – an overview of some of our activities.

A bit about issues and opportunity, and I know Peter Davies is going to talk about some of the issues that he’s seeing, but I’ll just talk about a couple of things that I’m seeing, from a functional leadership perspective in this space; and then, talk a little bit about success factors.

It is going to jump around a little bit, but it’s a short period of time, and there will be time for questions at the end.

So, in terms of context, and I won’t go into it too much; 2009, procurement reform started in New Zealand. I’m hoping that at some stage over the last sort of eight years, that some of you have had a chance to, I guess, be briefed on what that was all about.

It was led by the global financial crisis, and the ability to try and provide a bit of cost savings for government, as well as a chance to build some capability. That morphed into procurement functional leadership, in 2012; and, at the same time, property functional leadership was established, but that was established in the Ministry of Social Development.

At the same time functional leadership was established, the rules of sourcing, the reach expanded from the public service departments, Defence and Police, right out to 135 agencies, including Crown entities; and that was done through a whole of government direction.

The key changes I see, in terms of the move to functional leadership, was actually about capability. We’d shown that we could actually provide cost savings. That was actually relatively easy. In fact, it was basically low-hanging fruit.

The issue to ensure that any reform was sustainable, was to improve capability; and, the then Minister of Finance, actually got that, and actually gave us new funding in a time when no new funding was being given out, to actually improve procurement capability across government.

Some would say, if you read in the press at the moment, they don’t think too much is actually happened in some areas, but perhaps I can talk a little bit about that as we go through this.

The key, I guess, for functional leadership is about driving efficiencies through economies of scale, developing expertise, and improving services and service delivery.

I guess a key point to note is that procurement functional leadership, and in fact, property functional leadership as well, is centred-led, not centralised.

What does that mean? It means the vast majority of all the procurement activities, still actually happens out in agencies. In fact, 96% of procurement activity happens in agencies, it doesn’t happen in the centre and MBIE, or with the functional leadership; and that other 4% is really around the all-of-government agreements, but if you look at those, all we do is really set up a framework that agencies buy against.

So, it really is 100% done out in agency land; so, the importance that agencies’ procurement capability is actually lifted, is paramount.

Now, if you don’t know, and I’m sure most of you probably do, given the audience, there’s about 41 billion dollars spent by government on procurement activities each year. That’s about 18% of GDP, and approximately 37 cents in every dollar is spent on third-party suppliers.

Now, all the noise around procurement tends to be on that tactical activity of tendering. That’s the bit where you can actually probably least influence what actually happens in procurement.

The real gold rests in the early planning, and the benefits realisation; and, they’re two things that government doesn’t do very well, but more about that later.

So, I said I’d talk a little bit about property. Property came to MBIE in 2016 – 1st of April. Interesting date to pass a functionality across to another department, and to be fair, it’s a bit of a gift that keeps on giving at the moment, particularly when you’re in the middle of some major property projects, and there’s a major earthquake that takes out a good chunk of Wellington’s stock.

But, we’re doing quite a bit in terms of shaping, I guess, the future of government property, so that it actually assists with the spirit of service – matches what the State Services Commission, are trying to do in terms of getting agencies to work better together; agencies co-locating and joining up in some of their services.

We’re hoping that customer engagement and with government will be streamlined; will be more assessable. Customers out there don’t look, they don’t care about what an organisation’s organisational chart is, they just want to be able to work with an organisation that’s supposed to be able to provide them services.

So, we shouldn’t let our organisational design and organisational charts get in the way of providing customers what they actually need.

We also need to provide more agility across the public services, and empower more modern, more mobile workforce.

We’ve got kids going through the education system that are learning in large open-plan environments that are used to being able to collaborate and work together in teams; and, they suddenly leave that environment, and they carry it on in university, then they come into the workforce and they struggle with single offices and everyone working to a particular agenda around certain things.

The government’s been pretty clear as well, in terms of the potential to stimulate economic growth in the regions, using government property and positioning of agencies; and, they’re also very interested in looking at changing the operating model.

So, this is where government is the landlord, and we have one Crown estate effectively, rather than a whole bunch of, I guess, fragmented agencies spread all around, all trying to manage landlords, quite often, in quite a difficult environment.

Property is very much the enabler as opposed to the end state though. Property is an enabler for getting things done. Leadership is going to be what it takes to actually change the State Services.

Now, some of the key things that we’re doing in functional leadership at the moment. As I said earlier, one of the highest priorities: capability development. Hugely important. That’s the stuff that makes sure that procurement reform is sustainable.

The key area in that, is a procurement capability index that has been developed, and it’ll actually get reported on 30th of September this year. It’s a series of questions that agencies need to be able to answer, that actually indicate strengths and weaknesses right across the broad spectrum of procurement.

Now, agencies actually are looking at this in many different ways. We’re getting a lot of agencies that are suddenly putting their procurement activity and where it sits in front of their chief executives to say, “this is where we’re actually sitting on a scale, these are the things that where we have weaknesses, and this is an opportunity to develop, or actually invest in this area.”

That is happening quite regularly, and a lot of big functions. Because, when you actually put it down on a questionnaire that spits out a grade at the end, which is going to be benchmarked across the 135 agencies and presented to ministers, suddenly it usually generates quite a bit of interest around the leadership tables, as to where agencies sit.

We’re not saying that agencies need to be five out five. They need to be where they need to sit, but they need to understand that and make some conscious choices around what development could actually improve their capability.

We’ve still got all-of-government contracts. I’m sure you’ve all heard of those at some stage. Of interest, they’ve delivered 553 million, in hard dollar savings, to date. The contracts that are forecasted, or the contracts that are in place now, at the moment, are forecast to achieve savings of just over a billion dollars.

What isn’t clear though, is the amount of soft savings that have actually been generated from this. The fact that we’ve got over 1,000 agencies signed up to one or more all-of-government contracts – so this includes schools – I mean, that’s 1,000 different agencies that haven’t had to tender for their own work. They’ve been able to benefit from economies of scale, make some money, and have considerable choice at the same time.

We’ve also got a commercial pool. Because when I talk about capability development, where actually it takes a long time to develop capability. In fact, quite often it’s generational change. The commercial pools been developed to help agencies with high-risk, high-value agreements, or contract areas, and they’re basically there on a user-pays basis. We farm them out to agencies to help with those contracts and charge them out.

They’ve been involved in all sorts of things: KiwiSaver; they’re actually involved in the rebuild of Scott Base in Antarctica at the moment; Dubai 2020; and a whole screed of different things, including the Canterbury rebuild.

So, they are a resource that’s available, to help out. And, it’s actually important, because one of things I’ll talk about later, is we’ve got, if you look at the 135 agencies, or even out wider in the public service, you’ve got some organisations that have some very large spends, very large projects, and often they want to keep it in-house and they’ve got people doing them that don’t necessarily have the skills to be able to do it; and that’s not a reflection on them, that’s a reflection on the size and scale of their organisation.

Now, we need to be able to get smarter at that and make sure that the right skills are in the right place at the right time for those projects.

We’re also look after a policy framework that we’re in the process of revisiting at the moment. That’s the rules of sourcing. That includes the principles, the government procurement principles, that sit above the rules, the rules themselves, and then a lot of guidance that sits behind them.

I’ll talk a little bit more later around what we’re doing with them, but there is a change of government, and there is a change of focus, and we’re right behind it.

In terms of issues and opportunity. I spoke to it just briefly before around, there’s been quite a bit noise around infrastructure procurement, and particularly specific capability. If you look across New Zealand, there’s a whole bunch of infrastructure that is coming to the end of its life. This is a lot of the infrastructure was put in place in post-war. In post-World War II, and it’s all starting to get quite fragile, and that has an impact on resilience in New Zealand.

We are trying to work with, right across the public sector, to be able to identify some of this stuff so that we can actually make sure that we’ve got the right resources, in the right place, to help with some of that, as opposed to individuals that have never done these multi-million dollar, multi-hundred million dollar contracts, in some cases, to deal with that sort of issue.

There’s been a lot around, and there maybe some work that’s done in this, and far from finalised, but maybe centralising some of that activity, and working how local government and central government, can work a bit better together.

There’s also been quite a bit in the press of late, particularly after the Fletchers issues around risk transfer and third-party advisors.

I must admit it always surprises me when firms complain about a whole bunch of risks that’s been transferred to them, and then when it fails, and they lose money, they get very anxious. You don’t actually see a lot of these firms turn around and want to hand back the money that’s been the risk premium that they’ve built into a lot of other work.

That’s being a little bit facetious, but we are working quite hard on risk transfer, and helping agencies understand that any risk they transfer creates costs and risk to government through the failure of some of these projects.

It’s very important, and it’s probably driven a lot by third-party advisors, who in a lot of cases –well, I think, in a lot of cases – are conflicted because they’re the ones that are benefitting from extending out contract negotiations, rewriting contracts every time, to pass on more and more risk.

I would suggest that the government’s actually got a really good balance sheet at the moment, and they’re willing to take more risk. They just need to make sure that it’s transparent and people understand the costs.

Of interest, I was speaking to the Chief Executive of the Global Chartered Institute of Procurement and Supply, yesterday actually, and there is exactly the same problems that are actually happening in the UK and unfolding there, and they’re happening all around world.

When a construction industry booms, head contractors tend to do poorly, and sub-contractors actually tend to do very well, and it’s a cyclical thing, and we’ve got to do something to stop it.

Ethics, trust, confidence, and reputational risk.

There’s been a few things that have come up of late: Russel McVeagh, the Fuji Xerox incidents. Where we need to make sure that we have got, in the contracts that are established, the mechanisms to remove panel providers where, any of that, where ethical breaches are in place, where trust is lost or confidence.

We do have those measures available to us as government, with those agreements that we spoke about, but we also need to balance, to make sure that fair process actually happens, and we actually understand what the results of some of the inquiries going into those areas are.  

The last bit there, is broader outcomes for New Zealand. We’re actually looking at government procurement as a strategic lever to drive broader outcomes for New Zealand Inc, and that’s in the area of environmental, economic, social, employment. Looking to use and leverage some of the spend that we’ve got. Some of that 41 billion dollars. It’s quite a significant change from the current approach, but one that is of quite a bit of value.

Now, what we need to do is to get people thinking very much about value for money, as opposed to price. Good quality, good price, remains very important, and it always will, but we’ve got to make sure that we do take into account social factors – the well-being factors.

As I said, making sure that the market supplier skills development can happen, so the economy grows; benefits to disadvantaged groups, whether they be people not in employment; educational training; environmental – how do we use government procurement to support a zero-carbon economy? And that’s some of the stuff that we’re actually working on at the moment.

As I said, we’re also reviewing the government rules of sourcing, and there will be a new version out, once we get sign-off through Cabinet.

Of interest is part of the whole of government direction that requires us to consult broadly, including with Crown entities, so watch out for that.

We’re nearly there.

So, what I want to talk to now, is success. Quite often procurement, and I’m sure the finance and audit communities sometimes struggle as well, is finding time to celebrate success. Everyone’s happy when they’re paid, or when things are going well, but you don’t see too much that are happening, when things are, when procurement actually does something really good, or property does something really good.

How’s it go? “Success has many fathers, and failure’s a bastard.”

In terms of this, what we’re seeing here, this is MBIE’s “Grow New Zealand for all.” I actually think that makes a perfect organisational fit for procurement functional leadership and property.

We are there to grow New Zealand for all, and by working within the Ministry that has a subject-matter knowledge of these areas, particularly how growth can be sustainable and inclusive, and value-add in a New Zealand environment, it’s a perfect place to do it.

Hence, we report to the Minister of Economic Development. Quite important. In most jurisdictions, procurement reports to either Treasury or a finance function, but that tends to drive just an angle of lowest price, which isn’t actually what we want, we want better well-being.

So, really a reminder: centre-led not centralised. Choice – everything that we’ve done in terms of the all-of-government panels is about choice. The rules actually provide flexibility, and in fact the thing that annoys me most, is when someone says, “I can’t do something because of the rules of sourcing.”

I’ll always tell them to flip it on its head, and look at the principles, and see if there’s any breach against the principles, and don’t let procurement rules get in the way of good outcomes.

Good process and good outcomes, aren’t mutually exclusive, and we need to bear that in mind whenever we’re doing things.

The rules provide lots of flexibility for agencies, they just need to use it, but use it appropriately.

The last thing there: we actually play a role as part of the corporate centre. That actually means that we can have quite a bit of influence across the investment systems. We’ve actually found that quite valuable.

And the last thing here is around that flexible policy framework. It is based on standards of good practice, such as the rules of sourcing, but it does involve that good practice guidance in the principles.

So, you need to look at them in the whole, but it is something that is actually looked on quite favourably by overseas jurisdictions. They’re also surprised. I think we’re one of the only jurisdictions in the world that doesn’t have procurement legislation, that it’s just a cabinet mandate. That can actually work in our favour, can also be a disadvantage at times.

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