How to count an efficiency gain

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How to count an efficiency gain

• Office of Government Commerce
• Version. 2.0, 17th February 2006

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Document Outline

• Context
• Efficiency
• What is a Procurement Efficiency
• What isnt a Procurement Efficiency
• Whats the difference between VfM and Procurement
  Efficiency?
• How does CPD Contribute to the PWS 8.7 B of the
  21.5 B?
• Sustainability, One Offs and the Balance Sheet
• Step 1 - Counting
• How do we count an efficiency gain?
• What if we cant count the gain using the PWS
  Methodology?
• When do we count a gain?
• What doesnt count as a gain?
• The baseline
• Step 2 - Forecasting benefits
• Cash versus non Cash
• The Benefits Tracking Stages
• Validating benefits
• Step 3 - Reporting Benefits
• What is the reporting process?

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Context
NATIONAL AUDIT OFFICE
OJEU Process
Efficiency Methodology
Is this reasonable? Have they followed the
methodology?
CPD
Expertise
Efficiency Gains Other benefit types Softer
benefits

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Efficiency

• What is Efficiency
• What is a Procurement Efficiency
• What isnt a Procurement Efficiency
• Whats the difference between VfM and Procurement
  Efficiency?
• How does CPD Contribute to the PWS 8.7bn of the
  21.5bn?
• Sustainability, One Offs and the Balance Sheet
• Cashable versus non-Cashable

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Scenario
Hospital
Quality Healthcare
Process Wastage
Procurement Budget
e.g. Temp Staff
e.g. Drugs
e.g. Equipment
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What is Efficiency?
across WPS
Hospital
Efficiency is getting more or better service, on
an on-going basis
Quality Healthcare
for the same or less cost
Process Wastage
Procurement Budget
and measured as change over the SR04 period.
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What are Procurement Efficiencies?
Increase in quality More bang for the same
buck
Any where in the public sector
Hospital
Reduction in demand By eliminating Process
Wastage NOT by reducing quality
Quality Healthcare
Price reduction for the same or better
service Renegotiation of existing
contracts Aggregation of demand Creation of new
contracts Simplification of specification WITHOUT
reducing quality
Process Wastage
Procurement Budget
Reduction in cost of procurement OJEU
avoidance GPC related cost reductions Reduction
in asset management costs
Measured as a change in the situation between
March 04 and March 08.
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What are not Procurement Efficiencies?

• Gains made from applying the OGC Gateway process
  are not Efficiency Gains

Hospital

• Gains made at the expense of quality are NOT
  efficiency gains.

Quality Healthcare

• Gains made in other operating costs may be
  efficiencies for example increased staff
  productivity.
• BUT they are not Procurement Efficiencies
• Proceeds from asset disposal is NOT a procurement
  efficiency

Process Wastage
Procurement Budget

• Gains made after April 2008 are not Efficiency
  Gains
• Gains that are not sustainable are not efficiency
  gains

e.g. Temp Staff
e.g. Drugs
e.g. Equipment
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So, what is a Value for Money Saving?
in CCG, not WPS
Hospital
Quality Healthcare
Value for Money is about better quality of
procurement
Process Wastage
Procurement Budget
and gains from OGC Gateway
and including future gains.
e.g. Temp Staff
e.g. Drugs
e.g. Equipment
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Sustainability, one offs and balance sheet
EFFICIENCY GAIN Sustainable gains that will have
a long-term effect on quality and / or cost. NOT
EFFICIENCY GAIN One off gains that happen once
in the reporting period and have no long term
effect. NOT EFFICIENCY GAIN Balance sheets gains
are stock or asset reductions.

• Although we will track all three savings types,
  only sustainable gains qualify as Efficiency.
• To be sustainable, the gain must result in a
  permanent reduction in cost or increase in
  quality across the life of the commodity or
  service.
• For example longer term contracts for goods and
  services with better pricing, or better quality.
• For example shorter term contracts that support
  a general trend, such as our IT Hardware
  e-Auctions that will lead to a sustainable change
  in the market, and reduce costs in the long term.
  
• We track One-Offs and Balance sheet gains but do
  not count these at this time as part of the
  Efficiency Drive.

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Cashable and non-cashable gains
EFFICIENCY GAIN Cashable gains generate cash
that can be used by the organisation to resource
additional delivery EFFICIENCY GAIN Non
cashable gains make better use of budget but do
not generate cash,

• Examples of cashable gains are
• Buying precisely the same item at a reduced
  price.
• Reducing waste in the process and thus reducing
  the requirement
• Examples of non-cashable gains are
• Increasing quality without increasing cost
• Increasing volume without increasing the cost

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Cashable and non-cashable gainsWorked Example

• For example
• You save 1 M off the cost of widgets to the tax
  payer from 2005/6 and for 5 years thereafter, by
  eliminating waste from the process. This is a
  cashable, sustainable efficiency gain.
• You save 2 M off the cost of widgets in 2006/7
  and for 4 years thereafter, by re-negotiating a
  better deal with a supplier. This is a
  cashable, sustainable efficiency gain.
• Under the same contract, you get a slightly
  better widget, which would have normally cost
  another 2 M. This is a non-cashable,
  sustainable efficiency gain.

5M
Quality Improvement
4M
Efficiency Gain
3M
Re-negotiate better deal
2M
1M
Eliminate Process Wastage
Mar 2005
Mar 2007
Mar 2008
Mar 2009
Mar 2010
Mar 2006
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Step 1 Counting

• How do we count an efficiency gain?
• What if we cant count the gain using the PWS
  Methodology?
• When do we count a gain?
• What doesnt count as a gain?
• The baseline

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When do we count a gain?Timeliness
The gain is counted as it is realised by the
departments, in each year in which it
falls.Efficiency is not cumulative or compound.
The Efficiency Gain is the actual change over
the SR04 period It is not the annual run rate
or the total saved.To qualify as an efficiency
the gain needs to be sustainable.
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When do we count a gain?Timeliness worked
example

• We set up three contracts in 2004/5,
• The gain delivered by each contract framework is
  1 M in each year, i.e. in each year we gain 1M
  in efficiencies as a result of the contract.
• Contract A begins to deliver at the start of
  2005/6,
• Contract B begins to deliver at the start of
  2006/7
• Contract C begins to deliver at the start of
  2007/8
• We forecast on-going savings of for all three
  contracts 5 M from 2008/9 to 2009 / 10
• In each year, we count the amount actually
  delivered within that year towards the years
  target.
• The Procurement Efficiency Gain is the change
  delivered over the SR04 period, between March
  2004 and April 2008 a 3 M gain.
• The total amount of benefit delivered over the
  SR04 period is 6 M.
• The annualised run-rate of the contracts is 5 M
  at full value and 3.2 M averaged over the life
  of the contract.

Efficiency Gain
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When does a gain not count?
Only benefits realised from April 2005 to March
2008 are counted. Benefits enabled after April
2008 are not part of the SR04 Efficiency Drive

• Anything outside the SR04 period should be noted
  on a separate line in the Future Periods Gains
  sheet.
• These will not contribute towards the SR04 8.7
  bn target.
• If you forecast a gain of 3M in each year from
  2005/6 to 2010/11, you should enter the SR04
  element of the gain in the Opportunities Report,
  and the SR07 element in the Future Period
  Opportunities Report.

Efficiency Gain
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Factors affecting the baseline
All efficiency gains must be inflation indexed
using the HMT GDP deflator Where you have a
variable price, you must use available HMT
indices to track it Where indices are not
available, you must use publicly available
indices and reasonable assumptions

• The GDP deflator can be found athttp//www.hm-tr
  easury.gov.uk./Economic_Data_and_Tools/GDP_Deflato
  rs/data_gdp_index.cfm
• At the time of going to press, the HMT GDP
  deflators were as follows

HMT GDP Deflators
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Factors affecting the baselineWorked Example

• You let contract A at the start of 2005/6
• This gains 3M in 2005/6 and the same amount in
  2006/7, and 2007/8,
• You should adjust the gains figures in 2006/7 and
  2007/8 to allow for inflation

3.20M
3.15M
3.10M
Efficiency Gain
3.05M
3.0M
Contract A
Mar 2005
Mar 2006
Mar 2007
Mar 2008
Mar 2009
Mar 2010
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How do we count benefits?Challenges with dept
returns

• Departments submit totals for projects, not the
  gain per commodity.
• Departments will use a baseline that is
  reasonable for them when calculating their
  baseline. This is not necessarily applicable
  across government. There are so many different
  baselines we cannot always track against all of
  them.
• Departments do not tell us how much we have
  contributed towards their gains.
• All CPD work should be included in departmental
  returns, but it is not possible to identify where.

Department A
Proc. Project 1
Proc. Project 2
Proc. Project 3
Y5
Y4
X4
X6
Z6
Z5
Department B
Department C
Proc. Project 1
Proc. Project 2
Proc. Project 3
Proc. Project 1
Proc. Project 2
Proc. Project 3
Y2
Y1
Y9
Y8
X1
X3
X7
X8
Z2
Z1
Z9
Z7
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How do we count benefits within CPD?

• We count our gains by commodity.
• We use a baseline that is reasonable and is
  necessarily applicable across the necessary
  constituency.
• We can state how much we have contributed towards
  departmental gains. We never count our work
  alongside departmental gains, as this would be
  duplication.

• Commodity X Gain
• Pan Government X Baseline
• New price
• x volume of demand
• Gain

• Commodity Y Gain
• Pan Government Y Baseline
• New price
• x volume of demand
• Gain

• Commodity Z Gain
• (Dept Z Baseline 1
• New price
• x volume of demand 1)
• (Dept Z Baseline 2
• New price
• x volume of demand 2)
• Gain

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How does CPD contribute to the 21.5bn Efficiency
Drive?
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How do we count a gain?
buying.solutions have identified a baseline of
10 per identical unit. We got a price of 6 /
unit. Thats 4 less.
10 baseline - 6 new price 4 gain / unit
The baseline minus our new price
AS A PERCENTAGE OF
4 gain per unit / 10 baseline 40 gain
4 / unit gain as a percentage of the baseline
of 10/ unit is 40 gain.
The baseline
TIMES
100,000 units X 10 1,000,000 demand
Our requirement is for 100,000 widgets.
The demand
EQUALS
100,000 units X 10 Baseline X 40 Gain
400,000
Our gain is 400,000 thats 40 saving x
100,000 x 10 market price 400,000
Our gain
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What if the gain cant be counted using this
methodology?

• Any deviation from this methodology MUST be
  agreed clearly and in advance with the PWS
  Programme Office.
• If you are unclear at any stage as to the
  application of this methodology, it is your
  responsibility to seek immediate guidance from
  the Head of the PWS Programme Office.
• Ultimate accountability for the methodology used
  lies with the Efficiency Metrics and Benchmarking
  Team lead Heather Savory.

All baseline market price methods used must be
agreed with the CPD Benchmarking Team All
benefits must be reported using a methodology
agreed with the PWS Programme Office
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Where do I get my baseline?

• All baseline data must be sourced using the
  following routes in this order of priority
• For Software, Servers, Printers, Consumables,
  Accessories, and Client PCs go to Retriever \
  Efficiency \ Workstream \ New Procurement
  Workstream \ Measurement \ Benchmarking \ OGC
  Benchmark Data \ ltyour category data filegt where
  you will find agreed benchmarking data for your
  category. See Appendix A for details of those
  files.and only if you cannot source baselining
  data from buying.solutions
• Where baseline data is not available from
  buying.solutions, use benchmark data that you
  have sourced from other government departments,
  and confirm that benchmark with the CPD
  Benchmarking team and only if you cannot get
  benchmarking data from your departmental
  sources
• Baseline your gains figures on previous period
  spend figures with certain assumptions to account
  for commodity pricing variance. NB all baseline
  methodologies must be agreed with the Efficiency
  Metrics and Benchmarking Team.

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Forecasting benefits

• The Benefits Tracking Stages
• Validating benefits

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What are the standards to validate against?
Opportunity is currently in development. -
business case is under development. -
opportunity which may form part of category
strategy, - further analysis is being performed.
We have a good idea of volumes, but weve not
necessarily validated them fully. We have a good
idea of a baseline and what we can realistically
achieve. We are 100 confident that the type of
benefit derived constitutes an efficiency gain
for the Procurement Workstream.
Opportunity is under consideration for
implementation. - business case exists but
implementation has not yet begun. - opportunity
that is being proposed in source plan, but has
not yet been implemented
We have documented our validation of the benefits
with the departments / public sector bodies. We
have ensured that our value baseline is realistic
and reasonable, and will hold water at audit.
We have signed off our implementation plan,
including ensuring that the benefits projections
are valid. All changes to volumes are supported
by clear reference back to departmental plans.
Opportunity is currently being implemented.
Opportunity is ready for tracking. Specific KPIs
are in place within the contract to satisfy the
MI requirement. We continue to monitor volumes
against departmental documents.
The opportunity has been implemented. We are
expecting gains to begin, but volumes have not
yet come through
As gains are enabled, volumes are identified and
tracked in the MI system.
Actual gains that have been enabled, volumes are
identified
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Example questions at each stage