Part 4: The Finance, Procurement, and Supply Chain programme

Inquiry into Health Benefits Limited.

What we considered when looking at the programme

In looking at the FPSC programme, we considered:

  • what was planned and what has been implemented so far;
  • the decision-making process for setting up the programme and the quality of information that decision-makers received during that process;
  • quality assurance of the programme;
  • how HBL managed its relationships with the health sector entities; and
  • whether the programme was governed and managed effectively.

What was planned and what has been implemented

In terms of cost and proposed benefits, the FPSC programme was the most significant that HBL led. The programme was meant to provide a common financial management information system (FMIS) for all DHBs, a centralised procurement function in healthAlliance, and a re-designed supply chain.

The FPSC programme was forecast to deliver gross benefits of $503.3 million over five years. The forecast cost was $87.9 million, with full implementation planned for November 2014.

However, the FPSC programme suffered delays. In May 2014, risks to the budget and timeframe led HBL’s board to “pause” implementation. At that time, the programme had cost about $59.4 million.

After this pause, work continued on:

  • support for Hutt Valley DHB, which partly implemented the finance system on 1 April 2014;
  • the Oracle financial system;
  • analysing options for completing the programme; and
  • introducing the National Procurement Service, through healthAlliance (FPSC) Limited, which went live on 1 July 2014.

The National Procurement Service centralises the procurement function of all DHBs for a range of equipment and services, for example imaging, laboratory, and non-clinical support services. The procurement service that was put into effect in July 2014 does not have the support of the new finance system, as proposed in the original scope of the FPSC. We understand that this is planned to be put into effect beginning in the second half of 2016.

Figure 5 shows the FPSC programme’s costs between June 2014, after parts of the programme had been paused, and March 2015.

Figure 5
Finance, Procurement, and Supply Chain costs, June 2014 to March 2015

Continued development of the Oracle finance system 1.9
Re-planning the FPSC programme 3.4
Operational support required to keep the development environment operating 1.4
Retention of staff required to implement the programme if approved 1.1
Costs associated with establishing the national procurement service within healthAlliance 3.5
Technology operating and licensing costs (such as Oracle licensing costs) 9.3
Total 20.6

Source: Health Benefits Limited.

The FPSC programme, planned to be fully implemented by November 2014, was forecast to provide benefits with a net present value of $412 million. The programme is still not complete, but three aspects of the programme have been put into effect:

  • Hutt Valley DHB uses a limited version of the FMIS.
  • The national procurement services was set up through healthAlliance in July 2014.
  • The national catalogue was set up on 31 March 2015.1

By 31 March 2015, $80 milllion had been spent on the FPSC programme out of a total available budget of $92.1 million. The total available budget figure includes the original budget of $87.9 million and $4.2 million budgeted to be spent on DHBs’ existing Oracle licensing costs.

We understand that, after the re-planning work, HBL’s board approved a “pared-down” version of the programme in March 2015, which was subsequently endorsed by all the DHBs. This removed financial shared services (centralising receivables and payables) and consolidating warehousing and logistics functions from the programme, which could be subject to supplementary business cases in future.

The pared-down option was forecast to cost $120 million, including money already spent.

The forecast costs of the FPSC programme increased from $92.1 million to $120 million because:

  • It took longer to put the programme into effect. The original business case assumed the programme could be delivered by November 2014. The forecast completion date for the programme is now in 2018.
  • The change required had been underestimated. The scale of the change of the FPSC programme and the effect on DHBs was more challenging than first anticipated. The programme’s goals were ambitious, requiring creating a single system that could replace 20 systems and different ways of operating. It appears that HBL underestimated the health sector’s fragmentation. This made achieving the programme’s objectives in the time allotted particularly challenging.
  • healthAlliance’s finance system could not be re-used fully.The original business case required that the FPSC programme use the Oracle finance system that healthAlliance had prepared. This could not be done to the extent originally forecast.
  • Unbudgeted costs were incurred. Many costs were not budgeted in the original business case.

Unbudgeted costs

Many costs were not budgeted in the original business case:

  • Including Pharmac on the FMIS increased the cost of building the system by about $1.0 million.
  • Integrating DHB clinical, business, and administration systems with the new national FMIS added about $5.0 million to the costs of the programme.
  • Hutt Valley DHB’s early use of the FMIS, despite the other DHBs not having access to it, meant that the system generated operating costs, including Oracle application licence support and maintenance fees, creating a funding gap of about $8.0 million.
  • Re-planning the FPSC programme cost about $6.0 million.

Decision-making process and information quality

Before HBL was reconstituted as the national shared services agency, the Shared Services Establishment Board2 had identified the three core objectives of FPSC (procurement discounts, rationalised supply chain management, and rationalised FMIS) as priority initiatives for meeting the goal of saving $700 million over five years. HBL took over the work that the Shared Services Establishment Board carried out on these initiatives and combined them into one programme, because a common FMIS was seen as important for helping to bring about the procurement and supply chain benefits.

The decision to approve the FPSC business case followed these steps.

With support from a consultancy firm, HBL prepared an indicative case for change that set out the programme and what it was intended to achieve. In mid-2011, HBL’s board endorsed the indicative case for change. In November 2011, the National Health Board’s Capital Investment Committee endorsed the case for change, after which it was released to DHBs and unions for feedback.

After hearing the opinions of DHBs and unions about the indicative case for change, HBL prepared detailed individual business cases for each DHB or group of DHBs (for example, a business case was prepared for the Northern Region), again with help from the consultancy firm. HBL distributed these business cases to DHBs in May 2012.

In answer to DHBs’ concerns about the accuracy of the business cases’ stated costs and benefits, HBL asked another consultancy firm to review the FPSC’s forecast savings and costs. The consultancy firm stated that the procurement and supply-chain forecast savings were reasonable, but that personnel cost savings appeared to be optimistic. The consultancy firm also stated that the forecast costs were reasonable, but noted that forecasts were based on assumptions that could not be verified and others that would be difficult to achieve.

In its report, the consultancy firm also raised concerns that all DHBs did not fully support the business case, and that it would be necessary to engage all DHBs in a consensus to manage change if benefits were to be realised.

After working with HBL to satisfy some conditions, DHBs approved all the business cases by 31 August 2012. This was two months later than the plan set out in the business cases, putting immediate pressure on deadlines and realisation of benefits.

In our view, HBL’s managers and board followed appropriate methods and good practice to arrive at a decision to approve the FPSC indicative case for change and business cases, and to seek DHBs’ approval of those cases.

Quality assurance

The programme had several independent quality assurance (IQA) reviews. The first, in December 2012, was a Gateway Review process. From October 2013, a third consultancy firm carried out IQA reviews every quarter. In general, managers acted on IQA recommendations. However, the consultancy firm suggested that HBL could have acted on some recommendations more quickly.

Relationship management and the FPSC programme

Good communication and engagement with the sector is important for a programme such as FPSC. Putting the FPSC into effect requires the involvement of a range of personnel and organisations, including DHB managers, other staff, and unions.

HBL used a range of channels to communicate and manage relationships with the health sector in all of its programmes, including the FPSC programme. These included a Change and Communication Framework that HBL, DHBs, and unions agreed, and the FPSC Communication and Engagement Plan.

Although HBL followed good practice in having communications policies and plans in place, some problems with HBL’s relationships and communications with the sector negatively affected the FPSC programme. The main problems were:

  • Communication from HBL was one way.DHBs felt that HBL used the forums it attended to disseminate information about the FPSC programme and did not take the opportunity to hear DHBs’ views.
  • HBL told DHBs what to do. Although the success of the FPSC programme was based on partnering with DHBs, DHBs felt that HBL was directing them what to do rather than letting them help to plan or develop the programme.
  • HBL had no dedicated mechanism for getting clinicians’ input to the programme until after the business case had been approved. HBL set up a Clinical Council in March 2013, months after the last DHB had approved the business case. Input from the Clinical Council resulted in several changes to the FPSC, suggesting that setting it up earlier could have resulted in a better business case and smoother progress.
  • DHBs lacked information about the programme’s progress. DHBs felt that they were not getting adequate information about the progress of the FPSC programme after they had already begun to restructure in anticipation of putting the programme into effect.

DHBs’ chief financial officers were concerned about the difficulty they were experiencing in getting information about progress on the programme from HBL, the FPSC Steering Committee, and the programme team through formal and informal channels. Some chief financial officers raised their concerns with their chief executives and HBL through the Steering Committee. On 7 March 2014, the chairperson of the DHB Chief Financial Officer Forum wrote to the chairperson of the DHB Chief Executive Forum expressing concern at the risks the programme posed and the lack of transparent and timely information.

In early 2014, HBL made organisational changes to engage better with the sector. These included:

  • changes in HBL’s executive management;
  • getting stakeholders more involved in programme planning;
  • changing the leadership and membership of the Steering Committee; and
  • improvements within HBL’s communication team.

HBL’s changes improved the relationship and communication with stakeholders about the FPSC programme, and DHBs had greater input into the planning and governance of the programme. However, we are aware that some stakeholders remained concerned about the accuracy of information that they received about the programme while it was being re-planned. Because of the difficulties they had in the past, it is understandable that some DHBs are sceptical about information on the future of the programme.

Programme governance and management

Problems with the programme’s management and governance contributed to it not achieving as much as it could have.


A Steering Committee oversaw the governance of the FPSC programme. The Steering Committee’s main responsibilities included ensuring that the FPSC programme was delivered within the agreed parameters and resolving strategic and directional matters that needed the input of senior stakeholders.

The membership of the Steering Committee was:

  • HBL’s chief executive, who chaired the committee;
  • senior FPSC programme team members from HBL;
  • a representative each from Pharmac, the Ministry of Health, healthAlliance, and MBIE; and
  • one representative from each of the DHB regions (not necessarily the DHB’s chief executive or chief financial officer).

Weaknesses with the composition of the first Steering Committee that contributed to difficulties with the programme included:

  • The Steering Committee did not have the right DHB representation required to get commitment from DHBs.
  • Having HBL’s chief executive chairing the Steering Committee meant that the management of the FPSC programme was placed in a governance position.
  • The roles of the members of the Steering Committee were not well defined and it was not clear in what capacity they were contributing to the Steering Committee. For example, it was unclear whether DHB representatives were there because of their governance skills or because they were representing their DHB.

A Change Advisory Board might have improved governance. This could have controlled changes made to the FPSC programme so that implications of the changes could be assessed throughout the sector and then communicated if they were to be put into effect.

One of the consequences of the structure and composition of the Steering Committee is that the HBL board, which had ultimate governance responsibility for the programme, received overly optimistic reports on progress. In October 2013, the board received information that the programme was running to plan, albeit to a revised plan. At the end of 2013, it was clear that there were serious problems with meeting deadlines.

In April 2014, the Steering Committee’s terms of reference were reviewed and the membership revised. Changes included:

  • ensuring that both a DHB chief executive and a chief financial officer represented each DHB region;
  • appointing a DHB chief executive as chairperson; and
  • improving communications between DHBs, HBL, and healthAlliance.

The effectiveness of the governance of the FPSC programme improved after these changes. Since then, a substantial part of the FPSC programme was paused and re-planned. There was more involvement from DHBs in planning the programme and better communication with the sector about progress. However, we are aware that some stakeholders still have concerns about the role of the Steering Committee, including the timeliness of papers being provided to the Committee, and papers that are presented as reporting a decision rather than as matters to be discussed and decided.

Managing the programme

We found problems with the programme management of the FPSC, which contributed to delays in the programme and to a substantial part of the programme being paused and re-planned:

  • There was no project management office or similar function within HBL. IQA reviews identified this gap as a problem for the programme. The role of the project management office would have been to maintain standards of project management. The lack of project management disciplines were reflected in a lack of programme documents, deadlines missed, and changes made to the programme without enough control or communication.
  • The capability of the programme team did not change to meet the different needs as the programme moved from design to implementation. This hampered efforts to secure necessary engagement with DHBs as the skills needed moved from technical to communication and relationship management.
  • An associated problem was that not enough time and emphasis was allocated to recruitment, meaning that key resources in some work streams were not in place early enough.
  • Information did not flow adequately from the programme team to HBL management and the sector. This could be traced back to the lack of a project management office function to monitor information flows. This could also have contributed to the programme’s governors and HBL’s managers not understanding the true state of the FPSC programme.

Our observations

The FPSC programme is an ambitious, complex programme with many risks. The desire to achieve HBL’s savings target led to an overly ambitious drive to put into place the finance, procurement, and supply chain work streams at the same time.

HBL did not successfully communicate with DHBs and get input and support for the programme. This slowed both the delivery of necessary information from DHBs into the programme and DHBs’ approving the business case and other milestones.

Weaknesses in programme governance and management contributed to an inadequate and over-optimistic assessment of the position of the programme, which in turn made it more difficult for decision-makers to take early action to correct deficiencies or change direction if necessary.

HBL did make some changes to programme governance and management in early 2014, including a stronger role for DHB management in the programme steering group. This led to improvements in communication with the sector and programme processes.

Governance of the FPSC programme would have benefited from the outset by HBL:

  • ensuring that the Steering Committee had appropriate members, particularly from DHBs – the consumers of the services being introduced;
  • ensuring that the Steering Committee’s governance was separate from the operational delivery of the programme − appointing HBL’s chief executive as chairman of the Steering Committee compromised the first version of the Steering Committee; and
  • clearly defining the role of members of the Steering Committee.

Although DHBs approved the FPSC business case, commitment to the programme by at least some DHBs appears to have been limited. This is reflected in difficulties HBL had at times in getting information from DHBs, and DHB staff involved in the programme lacking sufficient authority. Although the way that HBL managed relationships contributed to this situation, DHBs shared responsibility for the programme and could have more actively worked for a successful outcome.

1: The national catalogue is a list of all goods and services that one or more DHBs can purchase at an agreed price. It enables the storage and sharing of information on healthcare products between suppliers and DHBs.

2: See paragraph 1.7.