Healthcare Matters

This article previously appeared on Spend Matters UK/Europe. A special thanks to Peter Smith for allowing us to republish his work.

We featured the new on-line supplier catalogue and price comparison website, Peto, last week. We liked it on first sight, and it could be even more transformational for the NHS than you might initially expect. It also throws up some issues that go beyond NHS or even public procurement. (That’s an encouragement by the way for our private sector readers to persevere with this piece!)

The first point to note is that the lack of transparency in the health supply markets is a major problem.  Studies by the National Audit Office amongst others have shown huge price disparities between prices charged to different hospitals for instance for the same item  – up to 100% differences.  And even if prices have been arrived at through a competitive process, that often ends up as a long-term framework type agreement, where the price may not reflect market changes, or competitive issues, through the life of the contract.

So the Peto ability – once it reaches critical mass – to allow users to compare prices simply across markets, could change the whole balance of power in favour of the buyer, while giving scope for new suppliers to enter the market more easily than before.

Secondly, there’s a fundamental and inherent tension in procurement, and it’s an issue that also leads to some misunderstanding of procurement amongst stakeholders.  We’re referring to the tension between two different approaches to the market. One the one hand, we have the aggregate / collaborate / leverage approach.  On the other, we have the search / compete / switch model.

The procurement approach will often start with an attempt to aggregate volume. Let’s get all the spend on laptops corralled together and approach the market with that total volume. That may move from internal aggregation to external collaboration – certainly in the public sector, that can straddle different organisations. For a Nestle or Ford, it may mean getting different countries or business units to work together.  Now that all sounds fine. More volume = a better deal.

But there are downsides. In some markets, economies of scale just don’t apply after a certain point. And collaborative deals in particular tend by their very nature to be fairly long term – because they take a lot of effort to set up. Whether they are single supplier or multiple supplier frameworks, they can concentrate spend and certainly act as a barrier to new entrants, or even just firms who are unsuccessful at the time of contracting.

Now there are advantages as well – obviously, If there is commitment, greater volume can result in a better deal, and there is an operational cost saving in terms of not having to run multiple procurement exercises.

The other approach is to use the market. Find out what is available. Run regular competitions. Be fast and nimble even if you lose some benefits of aggregation. Where markets are dynamic, this may well be the better strategy.

In the public sector, we often see the over-simplification of a Sir Philip Greene report. It’s all about aggregation, bigger deals, use your buying power, which tends to lead to complex programmes to try and drive collaboration from the top down. But as well as being difficult to actually implement, when the public sector does actually manage to use these approaches, there’s a danger that it just shuts out competition for years on end. (To be fair, I know that folk in the UK’s Government Procurement Service for instance are well aware of this danger).

And you have the paradox of the press complaining about different prices being paid for copier paper one minute, then complaining about how hard it is for smaller stationery firms to sell to Government the next!  (That would be because of the national copier paper deal perhaps)?

So one key strategic role for procurement people is to balance these two approaches. Skilled procurement people will constantly review their approach over time and look at the most appropriate strategy for each of the products or services they buy.

Back to Peto. It may just be that it can bring something of the best of both worlds. It is going to encourage bottom-up collaboration – people working together because they have a real requirement, now. So it isn’t going to get bogged down in huge bureaucracy. And it gives the opportunity for buyers to aggregate volume for spot buys, or for longer term deals. But it is also open to new suppliers, and encourages buyers to compare prices and look at dynamic market changes and opportunities.   It may well lead to fewer long-term contracts in some markets  – but maybe that’s a good thing on balance.

So, maybe Peto will be transformational. And in the final part of this series, we’ll have a look at how it might affect the dynamics of the health market place – for procurement organisations and suppliers.