Procurement after Brexit: Six priorities for social landlords
Since Britain (well, 52% of it) voted for Brexit, the political shockwaves have been fast and furious. We not only have a new housing minister, Gavin Barwell, but an altogether different Government.
While we wait to learn when Article 50 will be triggered, whether the UK will continue to have access to the Single Market and how negotiations will shape our exit from the EU; this isn’t a time for procurement teams to sit back and wait. Quite the reverse.
We’re already seeing suppliers take advantage of economic uncertainties by marking up prices and creating new market rates. This is a result of ‘assumptions’ about what new trade agreements will look like and how they will impact tariff quotas.
Now, more than ever, social landlords must be robust, proactive and highly informed in their procurement activity. This is about carefully controlling the supply chain by thinking ahead and using market awareness to manage suppliers at the right level and contain future price increases.
There are a number of ways to do this. Here are six pointers to begin with:
1. ‘Mature’ management is key: The relationships and even the balance of power in your supply chains is changing: the buyer certainly doesn’t hold all the aces. If your own credit rating is subject to change, (22 housing associations have already had their ratings downgraded by S&P since the referendum result), suppliers may want to change their terms with you. And some of your suppliers may, for their own reasons, be exiting the industry. A sophisticated approach to negotiations is crucial here. In contrast to the ‘slash and spend’ philosophy of old, mature procurement promotes openness to new ways of working, fresh ideas from the supply chain and it learns keenly from mistakes. Ensure that suppliers work with you and not for you. Replace the procurement function’s reputation for ‘margin busting’ with a more flexible, educated tack, guided by market knowledge and the insight it gains from having visibility across a landlord’s entire spend.
2. Future-proof using forward contracts: The slide in the sterling exchange rate will be detrimental to many. But it’s already good news for some exporters. In the long-term, weaker sterling coupled with a continuation of low-interest rates may stimulate the economy. But sterling’s volatility may lead to a rise in the cost of a range of commodities, goods and services such as energy and building materials. If you are exposed to currency fluctuations then use forward contracts with your suppliers to future-proof what you’re paying, locking in costs and fixing margins. Forward contracts can be used to fix a currency rate for up to 18 months or more. Just be aware of the cost of fixing and make sure it’s worth it.
3. Build change options into contracts: Many housing associations are drawing up contracts now, knowing that by year two of the agreement they may no longer be in control of prices because a slice of the contract’s cost base is EU based. This is a particular concern for asset management contracts. It’s essential that your procurement team knows every contractual change option from review clauses to exit opportunities and everything in between. To what extent can a contract be modified before an entirely new procurement exercise has to be conducted? How do you build the opportunity to alter or extend service agreements into contracts so social landlords can guard against market price rises or protect themselves from flux in the EU supply chain?
4. Review your SME supply base: If you’ve previously found it difficult to get local, micro and small businesses and social enterprises into your supply chain because of a perception that this would increase risk, you may now find that a risk of continuing working with globally-exposed or EU-based suppliers is greater. What might happen to your supply chain if other countries now chose to leave the EU? Social enterprises are “nothing if not adaptable,” according to Social Enterprise UK. You may be able to save money by sourcing materials from the UK that were coming from Europe. And you’d contribute to reducing the balance of payments deficit, and supporting UK jobs by rebalancing your supply chain to small and UK suppliers.
5. Prepare for greater supply choice: In a post-Brexit suggestion for a corporation tax cut, former Chancellor George Osborne made the case for the UK as a global business location. New Chancellor Philip Hammond has ruled out an emergency budget – but said that restoring business confidence is now a priority. Whether this attracts more international firms or incentivises more entrepreneurs to launch businesses, you may find greater choice and further capacity available. Bear this in mind when preparing for new tenders.
6. Consider outsourcing: The fall in the pound should make using British outsourcing companies more affordable to foreign businesses. And outsourcing continues to make great sense for the domestic market. With research from ISG indicating that the average commercial outsourcing contract shaves about 16.7 per cent off the price of the service, outsourcing is likely to strengthen amid the economic uncertainty and cost orientated climate that the referendum result may usher in. This is good news for social landlords, many of whom already outsource functions such as IT and repairs and can look forward to greater outsourcing choice and competitive pricing.
Amid the political and economic turmoil of the past few weeks, it’s vital that procurement teams now step up to the challenges ahead. But this is also about opportunities. The commercial understanding and direction that procurement teams can bring to their social housing businesses is going to be invaluable going forward.
Andrew Carlin is commercial director of Procurement for Housing