Audit Commission

Presentation

Better Buys – improving housing association procurement practice

Janet WilliamsSenior Research ManagerSimon ReedProcurement Consultant - Cirrus Purchasing Ltd

Audit Commission

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Key finding from study….

Could do better

Audit Commission

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Study aims:

• assess housing associations’ use of modern procurement methods;

• help smaller housing associations to improve their approach to effective procurement; and

• assess the residents contribution to housing association procurement.

Study scope:– Housing associations > 250 units– Repairs and maintenance, and housing

management

Audit Commission

Presentation

Housing associations’ expenditure is significant

• turnover is over £9 billion• of which operating costs are £7.5 billion• of which £2.8 billion is spent on Repairs and

Maintenance

• more than two thirds of spending could be subject to competition

Source: Housing Corporation Global Accounts 2006

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… and is under pressure to be more efficient.

• Efficiency agenda• Role of the regulators

- HC: annual efficiency statements

- AC: emphasis on vfm in inspection• Higher expectations of residents – better quality of

services

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Procurement has a key role …

• Efficiency gains represented 3.5% of aggregate turnover & 4% of total expenditure of sector in 2005/06

• A third of efficiency savings in a typical HA are attributable to procurement

• HA Chief Executives expect procurement will play a bigger role in future

Audit Commission

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Its not what you do – it’s the way that you do it

“Our targets include annual reductions of 10% in construction cost and construction time. We also propose that defects in projects should be reduced by 20% per year. To achieve these targets the industry will need to make radical changes to the processes through which it delivers its projects."

"Sustained improvement should then be delivered through use of techniques for eliminating waste and increasing value for the customer.”

Rethinking Construction

Audit Commission

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Its not what you do – it’s the way that you do it

• Case Study: Liverpool Housing Trust• Partnered Heating Contract "2nd Generation"• Continuous improvement outside TPC2001, driven by

outputs• Business analysis of contractors by external consultants

to identify efficiencies and cost savings • Savings shared to offset inflationary increases• Model now an integral part of LHT partnering –

investment costs shared between partners as are savings

Audit Commission

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Its not who you use – it’s the way that you use them

Audit Commission

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Its not who you use – it’s the way that you use them• The benefits came from standardising product and

working with the supply chain to understand and eliminate the problems e.g.– Myson check radiator sizing sheets– Sentinel undertake chemical testing of installations – Worcester provide 'hospital kits' for installers– Wolseley stock and prepare plot packs for installation

• Process driven by the client, who has a clear vision of desired outcomes

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Its not what you fit – it’s the way that you fit it

• LHT had issues with high installation costs (£3,000 per system) and poor life cycles from installations (failures within 3 years in some cases)

• Introduced water quality analysis to tackle quality issues• Used manufacturer expertise to inform specification

issues (e.g. Danfoss room stat with red neon (boiler on) has reduced call outs)

• Manufacturer training for installers to improve quality

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Its not what you fit – it’s the way that you fit it

Audit Commission

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Its not what you fit – it’s the way that you fit it

• Financial savings• £1,013,400 reduced installation costs (£500 per boiler)• £90,000 (07/08) in reduced boiler failures• £112,000 per year reduced maintenance (200 repairs pa)

• “We do not see cost and quality as an inverse relationship. A decrease in cost does not need to mean a decrease in quality if you understand your processes and what you are trying to achieve.

Simon Brown, Director LHT

Audit Commission

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There are still savings to be made - £100 per home if all achieved top quartile performance

Stock size

Annual efficiency gains through procurement achieved by top performer

Number of HAs in this stock range

Potential annual savings if all adopt this approach

250-2499 237,000 254 60m

2500-4999 337,000 150 51m

5000-7499 597,000 65 39m

7500-9999 371,000 24 9m

10000-19999 1,734,000 32 55m

20000+ 1,819,000 8 15m

    Total 229m

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But some associations are not even picking the low hanging fruit

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E-procurement under used

• e-tendering can deliver average savings of 21 per cent for a non-Official Journal of the European Union (OJEU) tender and 25 per cent for an OJEU tender; only used by 18% of HAs

• e-auctions can deliver savings in process time and costs; only used by 5% of HAs

• e-purchasing can deliver average savings of £26 per transaction; only used by 48% of HAs

• procurement cards can deliver average savings of £33 per transaction; only used by 34% of HAs

Audit Commission

Presentation

It is the organisational environment that matters • choice of method or contract is not the most

significant factor in successful procurement • no clear correlation between performance in repairs

performance indicators and delivery method• no clear correlation between efficiency savings and

method of delivery.You need:• strong contract & performance management• skilled staff• open minds / performance culture

Audit Commission

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And its not just a matter of group structures and shared services …

• Real opportunities - but limited uptake• Process focus – losing sight of benefits

– “We are part of a group but it is early days and we are keeping our own identities”

– “We think we have a really strong partnering approach to procurement but this hasn’t been taken up across the group as yet.”

– “It was a requirement of joining the group that we bought in to payroll and HR”

Audit Commission

Presentation

HAs balance efficiency gains with other considerations …

• Diversity and equalities• Regeneration and local economic development• Sustainable development• Resident/tenant choice/involvement

And procurement can be a powerful tool in promoting these wider objectives – if HAs want it to…

Audit Commission

Presentation Small

associations are less likely

to have these features

Associations that use procurement effectively have:

1. A procurement strategy2. Procurement training for all staff 3. Explicit use of procurement to

achieve policy objectives4. Measurement of procurement

performance5. Resident involvement in

commissioning and procurement

6. Systems for addressing issues of equalities and diversity in procurement

7. Competitive neutrality / a mixed economy of provision

8. Critical appraisal of the costs and benefits of procurement options

9. Procurement methods and approaches that are proportionate and appropriate to their requirements.

10.A strong driver – business plan, inspection report, corporate direction

Audit Commission

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Key messages to contractors• SMEs – engage with housing associations 'We were a small family business employing

subcontractors. We did not really understand about partnering and all this European Union procurement legislation. The housing association has really helped us. We have a projected turnover of £5 million this year and employ 80 staff, whereas before the partnership we had a turnover of £450,000. The association was 80 per cent of our business but now it is just under 30 per cent’

• Larger contractors – make sure the culture of your staff is right – engage with residents – establish local bases – support apprentices

Audit Commission

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Four key messages…• Danger of partnering/consortia being seen as a

panacea: more caution and a more sophisticated approach needed in promotion & financial support

• The method of procurement is less important than the organisational environment

• Barriers to effective procurement exist in all types of housing association – but are more acute for smaller HAs;

• Effective procurement can achieve real benefits for housing associations and their residents; but the sector, and residents, are still not seeing the full benefit of good procurement practice – more needs to be done.

Audit Commission

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What next?

The Audit Commission will develop tools to help housing associations make more effective use of procurement:

DVD of case studiesBriefing for Board membersBriefing for Tenants/ResidentsModel procurement strategy

Audit Commission

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Thanks for listening.

Any questions?

janet-williams@audit-commission.gov.uksreed@cirruspurchasing.co.uk