An unlikely cash drain – are procurement thresholds costing universities?

Most university finance and procurement policies require users to obtain multiple quotations when purchasing from ‘non-contracted’ suppliers. In some cases this is to comply with EU Procurement Directives but for most purchases these policies are to ensure institutions are attaining best ‘Value for Money’ (VFM) in line with good governance and funding requirements.

Typically guidance is not prescriptive on the method through which VFM should be demonstrated for low value items, however the practice of obtaining quotations as part of procurement processes is standard inside and outside Higher Education the sector. In reality, the move toward more ‘self-service’ procurement operating models means that the responsibility to demonstrate VFM is in the hands of the user: the academic, the student, the member of staff.

Are users concerned with Value for Money?

SUMS recently worked with a research intensive University to review their Purchase to Pay (P2P) operational strategy. Our analysis suggests the typical user is very concerned with value, not just in cases where hard-won grant money is concerned but more generally in recognition of their work benefiting from public funding. We invited general user comments on purchasing processes and received over 500 lines of feedback across a range of topics.

Unpromoted by SUMS or the University, over 20% of feedback was concerned that, for goods in particular, users themselves could obtain cheaper, good quality alternatives outside of University mandated sources. Our interviews with users at this University were clear that requiring them to submit multiple quotations for lower value purchases was an expensive box ticking exercise. While these policies are designed to safeguard VFM, the associated resource costs may outweigh any savings derived though their enforcement. These additional resource costs on the part of the user and supporting procurement team are typically unaccounted for.

Low thresholds for routine purchases cost in time, resource and user satisfaction

Our P2P review also found that the most frequent reason for procurement rejecting a Purchase Order (PO) was user failure to attach multiple competing quotes to a request (24% of POs) . This is a high proportion but not alarming in itself. On looking further into this however we found that the time taken for procurement to support these cases was 700% higher than if a user had not fallen foul of the multiple quotation requirements. Unsurprisingly, user frustration from having to wait 700% longer for their order, and manage added bureaucracy, was high – quite apart from the time and resources being expended to administer this process.

The good news is that many universities are recognising the benefits of adjusting quotation thresholds to align with the natural progression toward more user autonomy that we’re witnessing across all sectors. SUMS reviewed the quotation thresholds of 25 universities from a range of mission groups across the UK. We found that those maintaining multiple quotation requirements for low value purchases were increasingly in the minority. That said, there continues to be a large disparity amongst universities on this topic where procurement practices are otherwise aligned.

The universities we reviewed were almost uniform in agreeing the threshold at which more formal tendering procedures should kick in; about £50k.The largest disparity was at the lower end of the value scale where policies ranged from requiring multiple quotes for £1 items to institutions where multiple quotes were not required until £25k. It might be a question of individual institution risk appetite, but with the administrative and user experience cost of quotation thresholds being so high, institutions can’t afford to sleep walk into maintaining unnecessarily stringent thresholds.

Our review findings:

No quotation:

Most institutions (88%) required that at least one quotation be obtained by users. This was a relaxed requirement at the lower end of the scale often asking that users attach a screenshot of a vendor’s confirmation of pricing. For the 12% of institutions that allowed users to purchase items with no quotation at all, these items were capped at £500 – £1000 in value.

One quotation:

Most institutions (52%) had their single quotation threshold set at either £5k or £10k. 20% of institutions didn’t require an additional quotation until orders valued over £20k.

Two quotations:

Almost half of organisations had opted to simplify their processes and policies, removing the requirement for two quotations. These institutions applied the single quotation threshold for lower value items, followed by the requirement for three+ quotations for purchases above that threshold. This removed the ‘mid-value’ point in favour of policy simplicity for the benefit of the user.  In effect, universities which opted for this simplicity also of elevated their single quotation threshold to remove this task (and risk of error) from a larger proportion of purchases.

Three Quotations:

Most institutions required that three or more quotations be obtained by users for orders valued between £10k and £50k, after which point more formal procurement led tender processes were triggered.

So what is happening here? At present, active management of purchasing thresholds appears to be focused at the higher end of the value scale where institutions are moving in step, with the impacts of forgoing adjustments at the lower end of the scale not being fully understood. This phenomenon relates to the long standing balancing act Procurement professionals have to manage between cost & quality, availability, and risk. That is, considerations around the university’s financial position, weighed against the scarcity of products as well as the wider ethical/environmental/supplier risks (to name a few).

This balance is rarely static, indeed we saw the pendulum swing dramatically in favour of availability on the topic of PPE procurement during the COVID-19 Pandemic. Our review suggests that universities are not aligned in how priorities should be balanced for low cost items. Naturally, the question of cost & quality is supreme at the higher end of the scale (our review suggests £50k+), however some institutions are favouring principles around availability which encourage user autonomy for low value items, whilst cost is being prioritised along the entire value scale in other institutions.

Our challenge to the sector is to consider whether current quotation thresholds for lower value items are truly reflective of the ‘balance’ they are trying to achieve. Uniformly prioritising the principle of ‘cost’ is a false economy when we consider the time, effort and user satisfaction implications of this strategy later in the procurement journey.

Universities are likely to see increased user satisfaction and reduced operating costs by simplifying these thresholds. To achieve this, institutions should consider removing unnecessary ‘mid-value’ thresholds and applying threshold limits which encourage user autonomy and demonstrate trust in students and colleagues to maintain the VFM principle.

For support in optimising your procurement policies and practices, contact us at sums@reading.ac.uk to discuss your needs.