People & Skills
Public Sector Austerity – Are the Good Times Over for Suppliers?

The good times may be over for suppliers to public organisations, as we continue to see public sector austerity biting hard.

Most procurement professionals, for most of our careers, have been in a situation where our organisations were likely to spend more with suppliers next year than this year. That’s simply because global economic growth has meant most organisations have grown. Whilst we have had bad economic times as well as good, the global economy is still twice the size it was some twenty years ago.

Add to that the greater use of outsourcing and external suppliers, rather than in-house provision of services, and we can see that generally procurement departments have seen the spend that they manage or influence rise year on year.

But for many buyers, that paradigm has changed over the past couple of years. That is perhaps most noticeable for public sector buyers in many European countries. The state sector is shrinking in many countries that are faced with “austerity,” growing government debt and lower tax revenues. The direction in terms of outsourcing is less clear; we suspect it is still on the increase in many countries, but it is also being questioned as to the value provided in some cases.

BCG matrixManaging suppliers is quite a different challenge in the “bad times” compared to the good times. It is a different game if suppliers perceive that your future spend and therefore their future revenues and profit might decline. The Boston Consulting Group’s famous matrix laid this out clearly, when they looked at how organisations divide their customers into four categories.

Those where current profitability and future prospects are good are designated as “stars” for obvious reasons. These are the customers that every supplier loves to have. Good current profitability but a poor outlook are “cash cows” – exploit them for what you can in the short term, because the business will probably decline anyway in the future.

Where current profitability as a customer is poor but future prospects are good, this is a question mark – you need to do something, either grow profitability or realise the future potential quickly. And poor current and future outlook is clearly a “dog” – get rid of them as customers as soon as you can.

The danger for public buyers is that suppliers are increasingly seeing government clients as cash cows. If future business outlook is poor, they may decide to simply extract as much as possible in the short term, without too much worrying about the future. Or where austerity has put a real squeeze on current profitability as well, we might even be looking at some “dogs” amongst public customers.

We know of one supplier which has just re-organised its business because the current public sector work is not proving as successful as they hoped, and the prospects of winning more work has dropped as well. They may well close or sell that side of their business. If they do sell, it may be to a private equity buyer, who we suspect is very likely to see existing contracts as part of a cash cow strategy, given the uncertain future outlook.

We’re not today offering any immediate solutions to this problem. But it is clear that public procurement professionals, contract managers and budget holders will have to work hard to ensure suppliers don’t take advantage of them and pursue a short-term profit extraction approach.

Robust competition, effective contracts and contract management, good supplier relationships, use of benchmarking and other tools – all of these can mitigate that risk. They are also simply good practice in any situation. But be aware of the risks here, as we continue in an environment of public sector austerity, where the good days may be over forever for many public sector suppliers.