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Does Procurement deliver any measurable value?

February 21, 2014

According to Jeanmarie Meyer of the Millennium Challenge Corporation, economists cannot identify any significant value associated with today’s Procurement function.

The Millennium Challenge Corporation is an off-shoot of the US State Department with substantial funds to support international development projects. To gain funding, a project must “help alleviate poverty through economic growth”.

As Jeanmarie explained at this week’s World Bank conference, she felt confident that a program to build public procurement capability in an emerging market would rapidly gain support. But she was wrong, because when the economists demanded evidence of benefit, she could not discover any research to validate that Procurement contributes to economic growth.

Modern Procurement has largely been measured on savings at the point of contract. To some extent, we know these can be illusory, but many would argue that such savings force greater supply efficiency and allow spending to be diverted to other purposes, hence driving productivity and growth. To some extent this must be true, though in many cases those savings have been achieved through moving to lower cost countries or supply sources, to the detriment of the national economy. And there is widespread debate over whether large-scale outsourcing led to value creation or value destruction.

There is perhaps a very real difference between Procurement as a function and purchasing as a policy. For example, executives may develop business strategies that use purchasing to achieve their goals – forming specific partnerships, creating a specific brand image etc. This makes Procurement an instrument of strategy, not an influencer. What Jeanmarie sought was evidence that Procurement could itself formulate and propose strategies that would drive benefit – in this case national economic growth.

Certainly there are some who seek to move down this path and I will feature a few of them in future blogs (share your story with me if you would like it to be included). But in general, it seems Procurement is still talking about its strategic role rather than being able to illustrate it. This section from a recent OECD report perhaps help us to understand why:

1. The lack of professionalisation remains the greatest weakness in many countries. Procurement is not recognised as a specific profession in a third of OECD countries.
2. Procurement is not approached as a cycle of measures to ensure efficiency and integrity, from the design of the project throughout the tender until contract management. Only half of OECD countries indicated that their procurement reforms have addressed the whole public procurement cycle in the last three years.
3. Performance-based monitoring of procurement systems is the exception to the rule. When reporting on progress made, very few countries indicated that they monitor the performance of procurement systems and processes based on data and benchmarks.
4. Risks and opportunity costs are rarely assessed when using procurement as a policy lever to support socio-economic and environmental objectives. In half of OECD countries there is no prior assessment to verify that public procurement is an effective tool to achieve these objectives.
5. Access to international procurement markets is still a major challenge. Even in an
integrated market such as the European Union, less than 4% of the value of contracts in the EU is awarded to firms from another member state.

The dilemma is simple. Without being able to show clear evidence of value, Procurement will not be regarded as a strategic function; and without being able to operate strategically, Procurement will struggle to show value. A break-through therefore depends on a leap of faith by executive management; but to sustain its status, any Procurement function that gains this support must then re-evaluate the way it performs and measures its value contribution.

  1. Stumbled upon this great article. Thank you!

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