Advice on how firms can survive public sector cost cuts

FIRMS that supply the public sector are being told to prepare for budget cuts as local authorities try to improve their own bottom line.

KPMG’s Leeds restructuring practice is recommending a series of actions that firms likely to be affected should take to help mitigate the effect.

The Government has forecast that public spending deficit will be £175bn this year with total public sector net debt just short of £1 trillion.

Fiscal tightening is expected to plug this gap from early next year and set to increase over subsequent months.

Procured spend – the amount the public sector spends with third parties – is estimated by the Office of Government Commerce to total more than £170bn and is sure to be targeted as part of this fiscal tightening.

This represents a threat to the many businesses across Yorkshire with turnover underpinned by the procurement spending of the region’s 22 local authorities and other public bodies.

According to KPMG Leeds City Council – the UK’s second largest council – spends £700m with third parties while North Yorkshire County Council spends £264m.Bradford Metropolitan District Council spends £180m.

East Riding and Calderdale, which both spend around £150m, have stated in their procurement strategies that 58% of their third party spend is with Yorkshire based companies.

Mark Firmin, KPMG’s head of restructuring in the North, said: “One of the quickest and politically easiest ways to cut costs will be through procurement efficiencies. It is likely that spending with third parties will be one of the first targets, and will be hit hard as part of any package of measures.

“Businesses that are reliant on income from the public sector need to consider the impact the ‘austerity agenda’ may have on their future performance and prepare strategies for winning business with a cost focused public sector in future.”

He added: “One of the biggest issues for businesses currently supplying the public sector is uncertainty about their prospects. If this is used as a reason to avoid thinking about the impact of public sector cuts, they will lose valuable time to plan for cut backs and prepare contingency strategies.”

He said that businesses delivering major capital projects, such as transport, housing and defence schemes are forecast to be hardest hit with capital spending facing an estimated 17% cut over the next three years.

Despite the threat of cost-cuts firms can respond by learning or enhancing skills sets such as conducting relationships with procurement offices ‘on line’.

Tender documents must be answered appropriately with comprehensive details provided even if already a contractor.

Costings need to be prepared ahead of e-auctions and value for money needs to be clearly demonstrated.

Suppliers will also need to deliver efficiencies year on year throughout the life of the contract. This makes it all the more important that prices in initial tenders and e-auction bids are realistic and sustainable.

Mr Firmin said: “Given the potential impact of procurement cuts, it is important that businesses which are reliant on the public sector focus on some key measures.

“These include identifying their most significant areas of risk, understanding the impact of a decline in public sector business on their cash flows, developing contingency strategies, planning innovatively for securing work and refocusing on a cost and value agenda, demonstrating the delivery of cost savings.”

Mr Firmin added that some companies could be set to gain from the new era of austerity.

“For example, companies that can offer outsourced services can help to deliver required fundamental service changes. Those supplier who deliver and demonstrate year-on-year costs savings stand to be winners.”