Part 3: A new approach to procurement

Inland Revenue Department: Procurement for the Business Transformation programme.

In this Part, we discuss:

Summary of our findings

Inland Revenue's new approach to procurement uses a new and centralised team of procurement staff and focuses on relationships and outcomes. The new approach seeks to get the best results and value for money.

Inland Revenue first introduced this approach to meet the needs of the programme's costly and complex procurement. Inland Revenue considered that this approach would support better procurement for the whole organisation and implemented it throughout the organisation from the end of 2016.

Although changing the procurement approach caused some disruption, staff feedback on the new team and its procurement work is increasingly positive. The new approach is encouraging Inland Revenue to think about procurement more strategically.

Inland Revenue has implemented the changes only recently, but there are early signs that its approach will improve the way it does procurement. Inland Revenue also estimates that it is making financial savings.

One aspect of the new approach is Inland Revenue's open and regular dialogue with its most important suppliers. This has helped Inland Revenue get a more comprehensive understanding of the performance of its suppliers and how they can improve. It also draws attention to ways Inland Revenue can improve. Inland Revenue has been responsive to feedback from suppliers and has made changes where it sees a need for improvement.

A centralised and collaborative approach to procurement

Inland Revenue has recently changed its approach to procurement. Previously, procurement staff in each business unit carried out the procurement process. This approach focused largely on following each step in the procurement process, rather than on the outcome desired.

Because the programme required more and increasingly complex procurements, Inland Revenue started to change the way it approached procurement. It wanted to deliver better results for the programme by focusing on relationships and outcomes.

Inland Revenue considered that this new approach, which was aligned to its overall vision for the transformation, could also deliver better results for the whole organisation. Towards the end of 2016, Inland Revenue began to implement this approach throughout the whole organisation.

As part of this change, Inland Revenue centralised and restructured its procurement function, bringing in specialists with the skills and resources to deliver its approach successfully.

Although the same Rules and policies apply, the new approach is more flexible and agile, and is intended to factor in the commercial needs of the whole organisation. For example, rather than automatically renewing contracts to supply goods and services to one business unit, Inland Revenue will now identify the need for those goods and services throughout the whole organisation and find the best way to meet that need.

Restructuring the Commercial and Procurement team

As a result of the restructure of Inland Revenue's procurement function, there are now three teams in the Commercial and Procurement team:

  • the performance and capability team, which focuses on processes and practices throughout the team;
  • the commercial corporate team, which focuses on the end-to-end management of corporate sourcing and contract management; and
  • the commercial information and communications technology team, which focuses on the end-to-end management of information and communications technology (ICT) sourcing, including software licences.

Role descriptions for positions in the Commercial and Procurement team clearly describe what the new staff are responsible for.

The Commercial and Procurement team is responsible for procurement and contract management for all business units in Inland Revenue. The Manager Commercial ICT, and the two Commercial Specialists who report to them, are also responsible for the commercial management of the programme.

Although the Commercial and Procurement team is responsible for procurement, Inland Revenue recognises that other teams in the organisation also have a role to play. Inland Revenue acknowledges that successfully managing suppliers requires the contribution of all relevant people within the organisation. This means empowering business units to manage their own procurement, with the Commercial and Procurement team providing specialist advice and support.

The Commercial and Procurement team has filled all the new positions that resulted from the restructure and has the capacity it needs to work effectively. Although the Commercial and Procurement team is structured into three different teams, resources can be moved between these teams when workloads are high. Capacity can sometimes be stretched, but this is expected to improve as business units take more responsibility for managing their more routine supplier relationships.

Inland Revenue accepted that abruptly changing its procurement staff would result in some loss of institutional knowledge. However, it expected the disruption to be temporary. Inland Revenue believed that a quick transition would enable staff to implement the new approach more effectively.

As expected, there was some initial disruption after the restructure. Inland Revenue staff we spoke to six months after the restructure said that the disruption had caused some delays. However, the speed of the Commercial and Procurement team's work is increasing. Importantly, the disruption from the restructure has not affected the programme's timelines.

The Commercial and Procurement team is receiving increasingly positive feedback from other business units in Inland Revenue. Staff from other business units were surveyed on how the team was performing in February and September 2017.

The February 2017 survey showed that the "churn in resources" was seen as causing confusion about who was responsible for what, but that there was a sense that this would improve once the new team structure had settled in. Of the survey's respondents, 73% responded positively to questions about the team's productivity, communications, business value, and culture. In September, 86% of survey respondents responded positively to these questions.

Internal support for the Commercial and Procurement team is also helping with the transition process. The new structure and function of the Commercial and Procurement team was communicated effectively in Inland Revenue before the changes were made. People told us that Inland Revenue's senior executives were open to new ideas to improve the ways the Commercial and Procurement team operated.

Induction for staff joining the Commercial and Procurement team after the restructure was limited. New staff were given standard Inland Revenue induction modules but not anything specific to procurement. There was a specific induction module available for staff involved with the programme, but staff were not aware of it when they started. Induction about procurement in the public sector would be useful for staff joining from the private sector and help them become effective faster.

Nevertheless, ongoing training and development is helping staff in the Commercial and Procurement team. A dedicated team in the Commercial and Procurement team is responsible for capability and performance. This team has arranged monthly forums and produced practice notes. It has organised negotiation training and is developing scenario training on conflicts of interest. Coaching and professional accreditation are also available from this team.

Proactive and structured approach to managing relationships with suppliers

As part of its new approach to procurement, Inland Revenue is taking a more structured approach to the way it works with suppliers. This means that, for example, Inland Revenue is now working more closely, and in a different way, with its most important suppliers. These are suppliers that provide complex services and are critical to achieving the programme's objectives.

Inland Revenue currently identifies about nine suppliers as the most important. Inland Revenue has regular and open dialogue with these suppliers to help get the best outcomes for both parties.

Each month, the Commercial and Procurement team asks relevant Inland Revenue staff to score the performance of each of these nine suppliers and provide other feedback. The Commercial and Procurement team uses this information to identify risks and areas for improvement. The team also uses the information as the basis for monthly meetings with these suppliers. Managing contracts in this way gives Inland Revenue an up-to-date picture of the performance of its most critical suppliers.

Staff working in the programme said that this process helps to get the best performance from suppliers and identifies problems before they become serious. For example, the Commercial and Procurement team had monthly meetings to resolve an issue with the accuracy of one supplier's billing. The accuracy of billing improved as a result.

Suppliers we spoke to also told us that they see value in this open, regular, and structured way of working. They said that it helps them improve their performance and make sure issues get resolved before they escalate.

Inland Revenue produces a high-level quarterly report that consolidates performance information about its most important suppliers. Reporting performance like this helps Inland Revenue identify trends in supplier performance. It also helps Inland Revenue identify lower-performing suppliers and the areas that they need to improve in.

The most recent quarterly report showed that service levels were dropping slightly for all suppliers included in the report. The report gave Inland Revenue the information it needed to start addressing the issue.

Managing issues with supplier performance

Inland Revenue acknowledges the risk that suppliers may breach their contract and has steps in place to manage this risk. Inland Revenue believes its approach to managing relationships with suppliers is important for avoiding breaches of contract. Therefore, proactive contract performance and supplier management should be done as a matter of course.

The way Inland Revenue manages relationships with suppliers allows it to identify breaches of contract when they happen and to respond quickly and effectively. Most breaches are minor and are resolved through regular supplier meetings. If the issue is still not resolved after three months, staff will involve more senior personnel.

For more serious breaches, the process generally involves both Inland Revenue's corporate and legal department and senior executives. Inland Revenue can also withhold payments. Serious breaches that require escalation are rare. This supports Inland Revenue's belief that its approach to managing relationships with suppliers prevents breaches from occurring.

Two-way communication with suppliers

Suppliers also provide Inland Revenue with feedback about what is working well and what could be improved. Inland Revenue also looks at what it can do to help improve supplier performance, rather than just looking at what the supplier can do.

This two-way communication means that Inland Revenue can respond to any feedback or issues that suppliers have about how it operates. For example, Inland Revenue has improved its scorecard system so suppliers can rate Inland Revenue's performance. Inland Revenue has also been responsive to suppliers that have asked it to take more innovative approaches.

Early signs of positive results

Inland Revenue is starting to look at whether its new approach to procurement is saving money. The Commercial and Procurement team uses a spreadsheet to track savings. Savings can be achieved when the Commercial and Procurement team renegotiates a contract to get a better price or reviews Inland Revenue's requirements for a particular item or service and identifies a more cost-effective solution.

The Commercial and Procurement team then works out the value of any savings achieved. To date, the Commercial and Procurement team has estimated that it has saved $18 million for Inland Revenue. These savings have not been verified, so we cannot confirm them. Measuring cost savings from procurement will help Inland Revenue to see what effect the new team is having over time. We encourage Inland Revenue to continue measuring cost savings, have them verified, and report them publicly.

The Commercial and Procurement team has a focus on building strong relationships with other business units in Inland Revenue. Staff are now approaching the Commercial and Procurement team more proactively. These relationships within Inland Revenue are helping the Commercial and Procurement team understand business needs throughout the whole organisation and provide procurement solutions that best meet those needs. This has increased the team's workload.

The feedback the Commercial and Procurement team has received about its performance from business units throughout Inland Revenue – for example, from the survey of other business units mentioned in paragraphs 3.19-3.20 – shows an improvement in performance. By continuing to get this feedback on a regular basis, the Commercial and Procurement team can track its performance.

Inland Revenue does not currently assess how individual procurements contribute to the programme's intended benefits. We encourage Inland Revenue to consider how individual procurements help to achieve benefits for the programme as a whole and how to measure that.

Sharing lessons from the new approach to procurement

The Commercial and Procurement team is open about sharing information with other government agencies. Inland Revenue has shared procurement and contract management-related lessons with a range of government agencies, including the Treasury, the Accident Compensation Corporation, Land Information New Zealand, the Earthquake Commission, the Department of Corrections, and the Department of Internal Affairs. It has also shared lessons with the governments of Singapore and New South Wales.

One example of Inland Revenue sharing its experience and lessons learned is its "competitive dialogue"3 case study, published in 2014. The case study was targeted at government agencies that might be considering using competitive dialogue or were in the early planning stages of a procurement process. This case study has made information about the benefits of competitive dialogue and how to best use it available to the wider public sector.

The Commercial and Procurement team is also sharing information about supplier performance with the Government Chief Digital Officer. This means that knowledge about an underperforming supplier can be shared with other government agencies that are using, or thinking about using, the supplier. It also helps the Government Chief Digital Officer to monitor the performance of suppliers under all-of-government contracts.

3: Competitive dialogue involves discussing all aspects of a contract with a shortlist of suppliers before final proposals are requested.