What you should expect from your Procurement function?
Procurement currently finds itself incredibly high on the agenda for many executive teams in the Social Housing sector. Too often seen as a ‘back office’ function, it should now be playing a pivotal role in company’s’ decisions and strategic direction – but what should executive teams be seeing from their procurement functions?
The sector is under immense pressure, with the BBC recently reporting that ’three million social homes must be built in the next 20 years to solve a housing crisis’. At the same time, the industry is having to deal with increased financial pressures, regulatory constraints, risk management and intense scrutiny.
The sector has been under immense financial pressure, with rent cuts of 1% each year for the last four years coinciding with welfare reforms. This has meant that housing associations need to find ways of stretching their budgets to meet the need to build, refurbish, repair and maintain affordable housing. There are continued pressures to eradicate homelessness in the UK, with Shelter recently estimating that around 320,000 people are sleeping on the streets. Within the last 12 months, Homes for England have named their next wave of strategic partners, pledging £500m to build around 11,000 affordable homes in the UK, with 1,000 of these homes to be built by 2022.
Following the Grenfell disaster, Dame Judith Hackitt’s 2018 review identified procurement as “setting the tone” for relationships between clients, designers and contractors, and criticised “poor commercial practices”. She went on to say, “inadequate specifications, focus on low cost or adversarial contracting, can make it difficult (and most likely, more expensive) to produce a safe building”. This statement is supported by research from the Ministry of Housing, Communities and Local Government that found there were 266 tall buildings in England, including social housing, public buildings and student accommodation, with cladding that presented a fire hazard.
Furthermore, Carillion’s 2018 collapse demonstrated that there needs to be greater examination of the supply chain. Perhaps this was a wakeup call to many organisations, highlighting their dependency on certain suppliers.
With so many challenges, you would expect the procurement function to be involved in setting the board strategy, or to be at the forefront of these conversations. Yet, according to a recent report by McKinsey, procurement is in too many instances ’seen by executives as purely a transactional function that executes commands and delivers goods, rather than a potential source of value.’
The expectations of procurement are changing. McKinsey go on to state that ’traditionally, procurement has been the efficient workhorse for organizations, driving cost savings percentage point by percentage point, contract by contract. Yet despite the tremendous impact that strong spend management can have in value creation, the reality is that in many sectors, procurement is still primarily a transactional function with a limited scope of influence’.
So, what does this mean for the function within Social Housing and what should an executive team be expecting from a procurement function?
1. Strategic Category Management
Many leading housing associations execute ‘Strategic Category Management’. It has been questioned whether this approach can be adopted in the sector, with some arguing that the model is not fit for purpose. To succeed, it is essential that the procurement strategy is aligned with the corporate strategy. By doing this correctly, the organisation is likely to see tangible benefits.
Savings are a by-product of Strategic Category Management. When managing multiple projects across multi-site locations, it is easy to not leverage spend, or consolidate or rationalise your supplier base. Strategic Category Management can offer a centralised approach, limiting silo purchasing and improving benefits that exceed bottom line savings, which has often been procurement’s only metric or success. Deloitte state ’procurement must be engaged with the wider organisation to understand how procurement can reduce costs across the whole value chain”’ By understanding the total cost models of your supplier base, procurement can deliver savings across the life cycle of a project, for example, by reducing repairs costs by giving the maintenance team a clearer idea of exactly where their money is being spent.
2. Commercially astute thinking
Procurement must bring commercially astute thinking to your stakeholder community and be a voice of new ideas and positive challenge. Procurement should be at the forefront of all business decisions, not a back-office function, managing administrative duties and compliance. As McKinsey state, procurement should ‘evolve from an enabler of cost reduction to a creator of sustainable competitive advantage, by collaborating with strategy, operations and other functions to jointly uncover new sources of competitive advantage’.
Sir Edward Lister, Chair of Homes England, said, in response to the £500m funding boost to housing associations, that the new ways of working would “allow associations to use funding more flexibly”. It is imperative that this flexibility is maximised, ensuring that strong commercial agreements are in place to deliver the ambitious targets.
Your procurement function should be bringing new ideas to your executive team, helping to identify wider strategic opportunities, positively challenging senior management and shaping the corporate direction. It should be a key contributor in identifying potential merger opportunities and be the external eyes on the supplier market, looking for innovation opportunities that can be maximised whilst comprehensively managing risk. The function should be creating a bespoke service, enabling the business to hit its objectives.
As pressures grow for new builds to eradicate homelessness, in addition to Homes for England pledging around £55m to deliver approximately 4,000 new homes across England, it is imperative that your procurement function is driving the best commercial outcomes.
3. A centre of excellence
In many organisations, procurement is seen as compliance-led, ensuring the business is not overly exposed to risk and rules like Official Journal of the European Union (OJEU) are adhered to. Whilst aspects of governance and framework management are required, procurement excellence goes far beyond rules and processes.
Procurement should be a value creator for the wider business, creating a fit-for-purpose KPI structure for the supply chain, monitoring supplier performance and suitability throughout the life cycle of the contract. Leaders should be building capability within their team, ensuring that their reports are developed, and succession plans are in place.
Procurement interacts with all functions in the business and has a key role in being a navigator for the wider group. Processes should be slick and simplified with technology utilised wherever possible, using data and analytics to guide strategic direction.
Ensuring that the right processes and systems are in place will ensure the group can work with greater transparency, allowing greater opportunity for collaboration on initiatives.
4. Leadership
Above all else, you must have a leader within your organisation, who has the credibility and gravitas to elevate procurement’s performance and perception to the executive team.
They must have strong engagement and influencing skills and be able to inspire and transform the organisation, driving a competitive advantage in the marketplace.
They must be adaptable and be able to manage change and ambiguity in an industry that has been unpredictable in recent years.
Like any business or function, performance and value are created by the people in the driving seat and, to ensure your business is getting the best from the procurement function, it is critical that you have a strategic leader in place.
Whilst having its challenges, the social housing market is enormously attractive for transformative procurement leaders in the public and private sectors, with many wanting to do something for ‘the greater good’.
The industry finds itself in a remarkably favourable position, with an increased appetite for social purpose across the industry. With social housing remaining so high on the political agenda, there is a spotlight on an industry that perhaps has previously been in the shadows.
At Berwick Partners we specialise in recruiting Procurement and Supply Chain leadership roles across all sectors.
