What is procurement and why is it important?
Once regarded as a back-office, clerical activity for purchasing goods and services, procurement has grown in stature and importance to business over the past 30 years. It is now recognised as a core and sometimes key strategic business function for organisations.
Good procurement can have a substantial impact on an organisation’s ability to deliver its core business objectives through impacting budgets, freeing up resources and building organisation efficiencies through streamlined processes, categorising and aggregating purchasing. Procurement is not just focused on the process of purchasing, but should identify and align overarching procurement strategies with the business objectives to help organisations to deliver their core business more efficiently and effectively.
Procurement is a core function of the Victorian Government, used to ensure the efficient and effective use of public funds to deliver quality services to the community. Value for money, accountability, probity and scalability are the underlying directives for effective procurement of goods and services under the VGPB procurement framework.
The VGPB procurement framework
The VGPB procurement framework seeks to establish:
- good governance and accountability
- strategic planning
- alignment to the organisations core business
- better market engagement
- increased procurement capability and professionalism
- improved value for money
- reduce regulatory burden
- improved procurement planning, contract management and market analysis
- substantial efficiencies from better procurement practices
Why implement the VGPB framework?
The Financial Management Act 1994 (FMA) establishes the framework for the way the Victorian Government manages its funds. The Standing Directions of the Minister for Finance 2016 (Standing Directions) issued under the FMA establishes the overarching principles for the acquisition of assets, goods and services. Standing Direction 4.2.1 requires the Accountable Officer (AO) to ensure that the Agency:
- establishes, maintains and embeds appropriate governance arrangements;
- is efficient, effective and economical;
- has appropriate processes in place covering the acquisition lifecycle;
- has appropriate capability to manage the acquisition throughout the acquisition lifecycle;
- is able to demonstrate that any financial commitment, obligation or expenditure delivers value for money for the Agency and/or the State; and
- undertakes investment planning and evaluation of performance when Agency planning has identified the need to acquire significant services, assets or infrastructure.
Instruction 4.2.1 that supports the Standing Directions elaborates further on these principles.
When an Agency is acquiring assets, goods and services, the AO must ensure that the Agency:
- applies relevant legislation, standards, policies and funding arrangements;
- achieves value for money;
- understands and engages the market;
- encourages open and fair competition;
- supports probity, accountability and transparency; and
- manages risks appropriately.
The FMA requires Victorian government departments and specified entities to apply the VGPB supply policies for the procurement of goods and services. Other public bodies that are not specified are not mandated to comply; however, there may be considerable benefit to these organisations and the State for them to do so.
VGPB Policies apply to government departments and specified entities, the Victorian Public Sector Commission and those offices or bodies specified in section 16(1) of the Public Administration Act 2004.
For these public bodies not mandated to comply with VGPB policies, it is recommended that they align with the VGPB procurement framework to ensure an efficient and effective procurement function is in place and public funds are being used effectively.
Benefits of aligning
The VGPB procurement framework emphasises:
- good governance and accountability;
- forward strategic planning;
- early thorough market analysis;
- more interactive market engagement;
- high standards of probity and transparency;
- recognition of procurement as an end to end activity, with focus on better contract management; and
- better management of procurement risks to the State.
The VGPB procurement framework consists of five policies supported by guidance material, tools and templates. In applying the policies, organisations must ensure that all procurement activity meets the following directives:
- Value for money: A balanced judgement of a range of financial and non-financial factors, taking into account the mix of quality, cost and resources, fitness for purpose, total cost of ownership, and risk.
- Accountability: The Accountable Officer (AO) has the flexibility to conduct procurement activities using appropriate capability to provide value-for-money outcomes.
- Probity: High standards of behaviour and actions in the conduct of procurement processes. Equity, confidentiality, avoiding conflicts of interest, and consumer/supplier confidence in the integrity of government procurement processes.
- Scalability: The relationship between the complexity of a procurement project and the capability of the organisation to conduct it to achieve a good procurement outcome.
Developing procurement strategy based on the organisation’s procurement profile
The diagram illustrates the steps to develop a procurement strategy. The diagram sets out the following information.
Follow these four steps to develop a procurement strategy. The four steps form a cycle:
- Analyse the organisation’s procurement profile
- Establish a governance framework
- Develop a procurement strategy
- Measure the benefits and implement continuous improvement
Analyse the organisations existing procurement profile
Establishing an effective procurement system is dependent on understanding the organisation’s existing procurement profile. Understanding the organisation’s existing spend, contractual commitments and capability will help inform the organisation’s procurement strategy for moving forward.
- Spend analysis: Undertake an analysis of the organisation’s expenditure of goods and services to gain an understanding of the organisations spend patterns. What does the organisation currently spend on goods and services?
- Contract analysis: What contracts are already in place? What are the existing commitments? Who manages them and what are the governance arrangements? How much existing expenditure is procured through established contracts?
- Supplier profiling: Who is supplying to the organisation, what do they supply, are they under contractual arrangements and how important are they to the successful delivery of the organisation’s core business?
- Complexity analysis: Understand the level of difficulty involved in procuring a good or service is the supply market complex? Refer to the Complexity – Goods and services procurement guide.
- Capability assessment: Understand the capability of your organisation to undertake the procurement activity. Who currently undertakes procurement for the organisation? What systems are in place to support the procurement function? What is the complexity of the procurement they are undertaking? Refer to the Capability – Goods and services procurement guide.
Establishing a governance framework
Governance in procurement refers to the overall systems and procedures to ensure that the procurement process applies appropriate levels of control and probity. The VGPB Governance policy sets out a framework for organisations with the AO or their equivalent responsible for establishing the governance framework and its implementation.
The application of this framework will be dependent on the organisation’s procurement profile. At a high level it requires:
- establishing roles and responsibilities;
- developing a procurement strategy;
- developing a procurement activity plan; and
- establishing a complaints management system.
Establishing roles and responsibilities
The table below sets out the roles and responsibilities as detailed in the VGPB policies.
Your organisation will need to establish roles and responsibilities that give clear accountability for developing, maintaining, implementing and reviewing systems and procedures for the organisations procurement while giving consideration to the constituting legislation and the public sector framework within which it operates.
The governance framework will be dependent on the organisations procurement profile. The AO must be satisfied that the governance structures and reporting requirements are in place to meet the organisations obligations under the FMA.
|Role||Objective||Responsibility as per the VGPB policies|
|Accountable Officer (AO)||Ensuring there is a position responsible for establishing a governance framework and appropriately resourcing the organisation to undertake procurement effectively.|
|Internal procurement unit (IPU)||Ensuring there is a group of leaders from the organisation who can champion procurement, ensure procurement activity is undertaken in accordance with the governance framework, established process and procedures and review mechanisms are in place for continuous improvement.|
|Chief procurement officer (CPO)||Ensuring there is a position in the organisation that has experience and expertise in procurement that can provide professional advice to the leadership group on matters relating to procurement.|
Developing a procurement strategy
The procurement strategy documents how an organisation undertakes its procurement function. It provides an overview of the organisation’s governance framework, a roadmap of the way the organisation conducts its procurement activity and details how procurement aligns with the organisation’s business strategy. It must include a capability development plan, supplier engagement plan and contract management planning strategy. The table below details each of these documents. The content and breadth of the procurement strategy and supporting documents should be aligned to the complexity of the organisation’s procurement activity.
For more information on how to develop a procurement strategy, refer to the Developing a procurement strategy – Goods and services procurement guide.
|Procurement activity plan|
A procurement activity plan outlines the major procurement activity your organisation plans to undertake over the coming 12 to 24 months. It provides your organisation and potential suppliers with an overview of what you are planning to buy at the category and individual procurement level.
For the supply market, a procurement activity plan lets businesses know about potential procurement opportunities. The procurement activity plan must be published and easily accessible by the public. This ensures that the Victorian Government is meeting its Free Trade Agreement obligations.
Refer to the Developing a procurement activity plan – Goods and services procurement guide
|Contract management planning strategy (CMPS)|
A CMPS defines upfront how procurement categories and individual procurements will be managed at the contractual stage based on their complexity level. It is a high level document that is part of your organisation’s procurement strategy.
The CMPS provides an overarching standard for contract management based on the complexity of the procurement. It can detail governance and dispute management processes and contract management tasks based on complexity.
The CMPS tells your organisation what resources, systems, processes, tools, reporting and capabilities are needed to manage contracts based on the complexity of the procurement. It provides a consistent reference template for the head of your organisation and CPO to measure the ability of your organisation to manage its contracts effectively.
Refer to the Contract management planning strategy- Goods and services procurement guide.
|Supplier engagement plan|
A supplier engagement plan documents the processes, systems and communication approaches put in place to ensure the highest level of trust and accountability in all dealings with suppliers. It encompasses keeping the market informed about supply opportunities, managing supplier relationships during the procurement process, and managing complaints and debriefs. Providing timely, accurate and relevant information to the market is central to maintaining a positive view of government and supporting supplier participation in the government marketplace.
Refer to the Preparing a supplier engagement plan – Goods and services procurement guide.
|Capability development plan|
A capability development plan details how an organisation will develop its capability. Capability in procurement is the combination of an organisations expertise, resourcing, systems, policies and processes to execute and manage specific procurement tasks and activities.
The capability development plan should be established giving consideration to the capability assessment. It should take into consideration risks impacting the procurement undertaken by the organisation and reviewed annually or where there is a major change to the procurement activity or roles and responsibility impacting procurement by the organisation.
For more information refer to the Capability – Goods and services procurement guide.
Developing a complaints management system
The VGPB Governance policy requires an organisation to establish a complaints management system. A complaints management system gives a supplier involved in a procurement activity or an agent acting in the interests of the supplier, mechanisms to raise concerns about how an organisation manages a procurement activity or an organisation manages its procurement function. Effective handling of complaints demonstrates that an organisation places a high level of importance on the way it conducts procurement and how they interact with the market.
For more information refer to the Complaints management – Goods and services procurement guide.
Public bodies not mandated by VGPB policy cannot use the VGPB as part of their complaints management process unless agreed by the VGPB.
Public bodies should identify, through mutual agreement, an independent third party. This third party may be identified through an organisation’s constituting legislation or the public sector framework within which it operates.
Public bodies are linked to their portfolio department through Public Administration Act 2004, FMA and Standing Directions (e.g. reporting on compliance) and have obligations to attest annually to meeting the requirements of Standing Direction 4.2.1 in the acquisition of assets, good and services. Based on this, consideration should be given to using the portfolio department CPO or IPU as an escalation point in their complaints management process.
Alignment with the procurement framework will mean that your organisation will be continually monitoring the progress and performance of your organisation’s procurement function. This will include monitoring performance and compliance against the organisation’s governance framework. It may include internal audit, implementing a quality assurance program, supplier engagement initiatives, monitoring of complaints.
The review framework will be dependent on the organisation’s structure, the procurement activity undertaken by the organisation and the risks the procurement function poses to the organisation meeting its core business objectives. The VGPB Governance policy stipulates the following review periods.
Additional reviews should be undertaken when the governance arrangements or organisations procurement profile has changed. Refer to the Procurement performance management tool.
|Procurement strategy||Annually but the VGPB can request a review of the procurement strategy and component parts at any time||AO|
|Procurement activity plan||Annually||AO|
|Organisation’s procurement capability||Annually||IPU|
|Report to the AO on the organisations procurement activity||Annually||IPU|
Adding more to your procurement framework
Establishing one governance framework for all procurement
Procurement by the Victorian Government is regulated by separate legislative frameworks for goods and services versus public construction. Effective business planning would be improved by establishing a single business planning process and a single governance framework for all procurement within an organisation.
This will streamline processes, ensure effective use of resources, reduce administrative burden and help to deliver quality services to the community whilst making effective use of public funds.
Who is the VGPB?
The VGPB is an independent body established under the Financial Management Act 1994 (Vic) to develop and implement a policy framework, monitor compliance and build capability in goods and services procurement. The VGPB is supported by the VGPB Secretariat located within Department of Treasury and Finance
Using procurement to meet broader organisational objectives
The core objective of procurement is to achieve value for money outcomes through making decisions that balance cost and benefits. There may be opportunities to use procurement as a tool to achieve broader government policy and program objectives. Organisations should give consideration to developing and incorporating a broader analysis of government objectives into their procurement strategy to meet the core objectives of their organisation.
For further information refer to the Understanding the supply chain – Goods and services procurement guide, giving consideration to incorporating social procurement into your organisations procurement framework.
Legislation governing procurement
Procurement by the Victoria government
Procurement by the Victorian Government is regulated by a number of legislative instruments, associated policies and directions. The scope and application of these rules differ depending on the nature of the procurement and the entity undertaking the procurement.
The Financial Management Act 1994 (Vic) (FMA) is applicable to all departments and public bodies and applying the VGPB Supply policy framework will assist entities in meeting the obligations relating to procurement under the FMA.
VGPB policy for the procurement of goods and services is established under the FMA and is mandatory to departments and some public bodies.
The Project and Construction Management Act 1994 (PDCMA) and the associated Ministerial Directions (MD) apply to construction related procurement undertaken by any department or ‘public body.’ The MDs apply to a broader group of entities than the VGPB supply policies.
Health Purchasing Victoria (HPV) is established under the Health Services Act 1988. HPV establishes the Health purchasing policies that cover the procurement of health related goods and services by public hospitals and health services. These policies are aligned with the VGPB supply policies.
Procurement by Local Government in Victoria is undertaken in accordance with the Local Government Act 1989.
Other procurement related legislation
- Public Administration Act 2004 (Vic)
- Victorian Industry Participation Policy
- Public records Act 1973 (Vic)
- Privacy and Data Protection Act 2014 (Vic)
Using this guide
This guide accompanies the goods and services supply policies. There are 5 supply policies:
- Governance policy
- Complexity and capability assessment policy
- Market analysis and review policy
- Market approach policy
- Contract management and disclosure policy
A diagram illustrates the procurement reform implementation roadmap. The diagram sets out the following information.
Procurement Reform Implementation Roadmap
Procurement reform transition has 3 phases:
- Phase 1 – Initial analysis of procurement in the organisation and planning for reform
- Phase 2 – Developing procurement strategy and procurement activity plan
- Phase 3 – preparing submission to VGPB requesting transition
Phase 1 - Initial analysis of procurement in the organisation and planning for reform has 5 steps:
- Establish governance framework –
- Establish key roles and define responsibilities
- Develop detailed plan for implementing procurement reform
- Spend analysis –
- Gather information for spend analysis
- Validate data integrity
- Develop spend analysis report
- Category assessment –
- Allocate spend data to high level categories and / or subcategories
- Identify major suppliers in each category
- Flag aggregate demand opportunities (internal and external)
- Identify high risk / close to core projects
- Complexity assessment –
- Plot categories of spend into complexity quadrants
- Touch point – self assessment
Phase 2 - Developing procurement strategy and procurement activity plan has 5 steps:
- Initialise procurement strategy -
- Identify and map governance framework for procurement
- Procurement analysis –
- Develop a supplier engagement plan
- Develop a contract management planning strategy
- Procurement capability –
- SWOT analysis of organisation’s procurement function
- Develop a capability development plan
- Procurement implementation –
- Develop procurement activity plan (internal and external)
- Touch point – self assessment
Phase 3 – Preparing a submission to VGPB requesting transition has one step:
- Consolidate procurement strategy and activity plan
- Prepare all documents on procurement process and procedures
- Undertake an internal audit to ensure compliance with the VGPB framework
- Touchpoint - self assessment
- Ongoing review
Reviewed 27 November 2019