Lord Simon of Highbury - Former Minister for Trade Promotion in Europe and Competitiveness (May 1997 - Jun 1998)

The First Partnership Sourcing Lecture, Partnership Sourcing Ltd

I am delighted to be here tonight to give the first lecture, I hope of a series, sponsored by Partnership Sourcing Limited. And I am honoured to be invited, too. Because, as your Chairman said, I think I can offer some perspective not only from Government, but from the career I had in business. Particularly having worked in a business which developed a very strong, even though I can now say it from outside, performance in partnership sourcing.

I would like to do three things tonight. First of all, I?d like to stress the great importance that the Government places on creating genuine partnerships with business.

Peter Mandelson made this clear recently at the CBI Conference. He said, and I quote "the partnership I want to build is one where business and Government are clear about their respective responsibilities, both to each other, and to the wider community".

So my first task is to stress the Government?s support for this approach. Secondly, I?d like to mention a few exemplars of partnering in practice, because I always think a bit of practical application is helpful.

And thirdly, I?d like to finish with what I think is an important challenge to all of you in the audience who?ve been good enough to come, including the Board of Partnership Sourcing Limited and the Steering Group, to provide a new focus for the future. Because, as you heard, this isn?t a new organisation, but I think the Chairman and the Board, quite rightly, want to put some new perspectives into the work.

So let me start, if I may, with a brief overview, of what the Government is doing.

I hope many of you will be aware that it is our intention to publish a Competitiveness White Paper, next month. While of course, I cannot reveal what the contents are tonight, I certainly can say that the importance of partnering will be a significant theme in the White Paper.

The Government does have a continuing policy commitment to encourage all businesses, and especially small and medium-sized enterprises, to adopt the practices which are implicit in partnering. And let me say what I think they are - the practices - so that we?re clear.

Sharing knowledge, sharing business improvements and sharing risk through what may be a formal or an informal networking approach, and also using the supply chain. And the vital nature of the relationships that can be built up in the supply chain to maintain competitiveness, which I think is going to be increasingly important - in all sizes of business - as the global marketplace becomes both more complex and more competitive.

I think using partnership and partnering arrangements between companies - and if I can introduce other key partners; universities and business support organisations - really can help provide the essential skills needed for the small and medium-sized enterprises to keep ahead of the game.

So why are we here tonight? In the 1980s, I think many businesses realised that conventional procurement practices were leading to major inefficiencies. I had the pleasure of speaking to Eddy Nixon who was in at the start of this in the mid-80s, and we were comparing experiences from IBM and BP. I remember then that real inefficiencies were absolutely fundamental in the way both those rather large businesses went about their procurement. Because too often, the purchasing function - which wasn?t known to many people in the leadership of the business; you had purchasing, but you didn?t know much about it - was focused on achieving the lowest initial price. And certainly little or less consideration - I know from my own bitter experience - was given to lifetime cost, value for money, quality of service and delivery issues, if I can put it in the broader sense.

Indeed, the innovation factor that a customer-supplier relationship could offer, was only too often blunted - in my own experience - by the winner-loser philosophy of the purchasing game. Working with business and recognising the potential benefits to be obtained by adopting partnering, and encouraging - if I may so - the philosophy of win-win; was something that the DTI and the CBI set up in the Partnership Sourcing Limited, in 1990. So it took us a short while, through the ?80s, as cost pressures came through greater competitiveness, to actually promote the organisations - and this was one of them - to get the concept into UK industry and commerce, that there is a win-win in this relationship, rather than a win-lose.

And as the Chairman has indicated, since 1990, Partnership Sourcing Limited and its many supporters - and I would underline this - have done an excellent job in establishing the business case for entering into long-time supply chain business relationships. They have tried to change attitudes in the management of business. They have produced evidence for others to use and learn from. In many businesses - we know that now - the approach is taken as the norm for dealing with customers and suppliers. And Sir Clive Thompson, the President of the CBI, said recently, and I quote, ?teamwork is better than combat?. And that?s not a bad phrase, either.

Let?s just think back to Denmark Vs Germany in the European Championships in 1992, France Vs Brazil, earlier this year in the World Championships. Its classic examples of teamwork - in my view - overcoming superior individuals in both these cases, and actually, by handsome margins. So I think teamwork is better than combat, and it?s often better than a bunch of talented individuals.

So if I can leave the figurative world of analogy and return to hard facts. Highlights from market research over the last 7 years; 1990 to 1997, bear up the benefits of partnering beyond my figurative analogies. And here are - I think - some very impressive facts:

76% of companies report significant reductions in cost. 73% of companies have reduced their inventories. 70% of companies have increased their quality of supply. And overall, 90% of companies considered partnering practices to be a success.

So to round off, I think impressive statistics with yet another figurative statement, I want to quote your new Chairman, Sir Ian Dickson, who says, "when the construction sector accepts partnering, you?ll know things have changed!".

One very topical example from the construction industry, if I may say so, Sir Ian, which Peter Mandelson wouldn?t let me forget, is the Dome.

It?s been constructed by a partnership that has actually shared a vision, shared a culture and has a transparency of commercial management information. And the same culture has been transposed to the trade contractors, despite their contracts being competitively tendered. And the approach, clearly, works.

I am glad to say that completion dates are ahead of schedule and construction remains well within budget. Which is quite unusual for a project of this nature.

Now, in my own experience of construction, BP formed a partnership with Bovis to target 10% reduction in construction costs across Europe for all its retail outlets. And we worked on extranet - real-time transfer of information - to international teams that work in at least 15 countries, at the same time; all building retail outlets. And we used peer group assist, rather than peer group challenge, and all the teams were encouraged to hook-up, to add to the sum of knowledge for each individual team. The technology of the net - and I would stress that - is, of course, a vital communication link in this process.

And I have to say - without giving the numbers away, that the target was achieved in the first year. It runs into tens-of-millions of pounds when you?re building as many retail outlets as BP do, in the European theatre.

So I think even from these two very varied examples, we know the approach works. But with an eye to the future, I think it?s more important than ever that you all understand what the issues are that are going to be facing you within the next round of partnering. And I hope that you?ll get some hints and background for this in the Competitiveness White Paper which will focus - as Peter Mandelson has already said - on the knowledge-driven economy. And why?

Why, because UK companies will certainly have to take advantage of their knowledge base and bring products to market more quickly, and with improved customer applicability than ever before in order to maintain competitive advantage. And I think of that merely, say, in the European context, after 1 January 1999.

Across our economy, we will compete increasingly on our ability to generate and exploit commercially valuable know-how and adapting process at speed within complex organisations on a decentralised basis, will be a key competence.

So I can assure you, these major changes will make it much more difficult for UK firms to compete on price alone.

Their future competitive advantage lies in expanding our distinctive assets such as knowledge, know-how, innovation and process mastery. And I don?t think that that?s just applicable for high-tech industry. All sectors of the business community will need to react to the competitive challenge that?s coming, in one way or another.

We have a number of strengths already in this country. We have a world-class knowledge base. We have very modern and competitive companies in many sectors - not all, but in many. And our leader companies are often the best in the world. And we have very strong, global links. But we?re certainly not there yet, in terms of real world competitiveness.

An example that I would like to give - again, from my own experience at BP, is not just about external partnerships and partnership sourcing, but also internal partnerships within the business. And the example that I recall was in BP exploration - and I am not a technologist, but I certainly understood the costs, because the capital we spent in our exploration business, when I left, was running at $3bn a year, so you did, even at the top of the company, certainly t take a pretty handy look at that budget every year when it came in.

And one of the things that impressed me most of all in the changes that came across in the last 2 or 3 years, was our ability to bring an exploration technology, for instance, that we were using in sub-sea technology, where we are one of the foremost three companies in the world, and particularly in our drilling operations. We had an absolutely fascinating - to me, as I say, as a non-technologist - to bring the Gulf of Mexico deep-water operational experience, back to the North Sea in real-time. So that we had three-dimensional drilling at a field that we were operating in the Gulf of Mexico, in 1,000 feet of water, on screen we were developing in the Atlantic Margins.

I mean, to me, that?s just marvellous use of technology, know-how, process and teamwork.

And secondly, in the same area of our work, but with external partnership, we formed a very close relationship with our Norwegian friends at Stadtoil, to develop greater skills at horizontal drilling. And these were particularly helpful to us, in developing the Wytch Farm field from under Furzee Island, for those of you who know it, in Poole Harbour. Our ability to send a horizontal drill out for over 3 miles to adapt the reservoir to the shape we wanted it stopped us having to build a £300m island.

You will get my understanding of why real-time sharing of technology could save even our explorers a great deal. So we were very grateful to our external partnership with our Norwegian colleagues.

Talking of European partnerships, brings me back nicely, to 1 January 1999. Many of you will know that I have a joint DTI and Treasury responsibility for working with business on preparations for European Monetary Union. And as you will know, 1 January 1999 sees the launch of the single currency in 11 countries, in Europe, and it?s only 6 weeks away.

Now, you?ll also know that we?re not joining in the first wave, but you all know too, that the euro will affect us all and it will provide opportunities for exporters as it becomes easier and more transparent to market products and services to nearly 300 million consumers. Pricing strategies will certainly become more transparent and I think that?s great news for all of us, as consumers, but it is a challenge for business.

Many companies are likely to ask their suppliers to do business with them in euros, and partnering will play a key role in developing business relationships with customers, distributors and suppliers in Europe. In addition to the single currency, I think electronic commerce will also be a strong competitiveness driver in the near to medium-term future. I think these two will come together. The impact of the currency in the single market and the impact of electronic technology with information and quotation and pricing. You see the links very quickly.

The DTI Futures Unit have recently reported on convergence of the Information and Communication Technologies, ICT. And these developments do offer great opportunities, both economic and social. For business, we all know what it means - changes in working practices, but it also does mean opening up new markets, creating new products and new forms of partnership. Competition will be keener and it will certainly be faster than before.

Where, in the past, there was perhaps one company, one product, one choice, soon, there will be many in real-time. And all business sectors would do well to check out, and if necessary, recognise the impact of E-commerce on their markets and their supply chains.

Governments will be impacted as well. The Interparle project sponsored by ICL - and I know they?re here tonight, with one of the Directors of the company - will provide a new opportunity for Europe?s parliamentarians to work together in ways which cross traditional national boundaries.

The 5000+ members of the European Parliament will exploit secure internet technology to improve their communications and widen their networking. And I can tell you, when politicians come up to speed in real-time, I certainly would have expected business to have done it long before. But, that?s not an inside comment on any kind of communication within Government. This isn?t Chatham House rules, I?m just saying there should be a sequence of things. I like to see the commercial world and the marketplace leading, and politicians easing the way.

Now partnership isn?t just relevant, therefore, for the private sector. And although my examples, to date, have been in the main, private sector initiatives, I?ve also seen the benefits of public- private sector collaboration. Again, it?s an oil issue. It happened in 1992, the last time the oil price was significantly below $15.00 a barrel. And back in 1992, a joint industry-government working party reviewed the oil industry?s competitiveness. And the evidence was clear.

In the late 1980s, the cost of developing oil fields in the UK averaged £13.50 per barrel produced. By early 1990s, oil prices were about £10.00 per barrel, so we can all see an unsustainable scenario.

We had to reduce costs in the UK by 30% and an organisation was founded then, with the unlikely name of CRINE - standing for Cost Reduction in the New Era. It was, and still is, an initiative to drive down the costs of developing oil and gas fields in the UK offshore sector. But it?s become much more than that, in terms of the innovation in engineering that it has actually spawned and catalysed.

It was actually very successful. It reduced the cost of production from £13.50 per barrel to just £7.00 for fields under development at the end of last year. That?s over a 7-year period, so it?s halved the cost of production, and more than that, of course, in real terms.

You may think that that would mean that CRINE had done its stuff and it could go home satisfied with a job well-done. Nothing could be further from the truth. The reality is that this £7.00 per barrel produced is roughly $12.00 at today?s exchange rate; just about, even slightly above the price of oil in the marketplace.

So over 6 years, the industry just ran to stand still at today?s market price.

I learned last week that the CRINE network has set itself the new objective of driving down costs from $12.00 a barrel, to around $8.00 a barrel, or less. So another 30% reduction.

Now a large oil company spends as much as between 60% and 90% of their turnover on outside purchasing - so expenditure at that sort of level demands some very careful attention. And the simple arithmetic which you can do as well, tells me that these levels - 2% improvement in purchasing performance - could create a 10% improvement in profit margins.

So partnering and the techniques of careful supply chain management are absolutely key to delivering value from the UK?s offshore oil and gas reserves.

And the last figure I remember when I left BP - which is now 2 years out-of-date - is that we have £60 billion of invested capital out there, and therefore, it is absolutely vital that it performs.

And I use, unashamedly, another industry example that I?m used to, because I think it makes the point of what partnership sourcing is about. We know it?s not new, but it needs impulses all the time to improve the benchmarks and keep the enthusiasm and work the process, yet again and again and again. The job isn?t finished, and the advantage for me is that I have the opportunity to try and persuade you yet again, that this is really one of the most important things that you can do with your company.

And I think that partnership sourcing, through the experience already gained over the last 6 or 7 years in the supply chain network groups, is going to prove a very, very valuable resource for all sectors of industry; not just the oil industry, if it learns its lessons. And everybody in one sector can learn from the best of another.

I can remember when we were benchmarking originally in BP, we started by benchmarking the international oil industry, until we found out that supermarkets were actually selling gasoline cheaper per gallon, than we were. And then you suddenly had to start benchmarking supermarkets for a lot of your business.

So it?s an open game and it will move in many different directions. The Government, for instance, has continued with the public-private partnership initiative. It?s a very important part of the pre-budget analysis. A very important part of the reduction of Government spending, but with the increase in national value. And with advice from Partnership Sourcing Limited, the Ministry of Defence is now adopting partnering on capital projects, and a good thing it will be too, because the cost of procurement in the defence industry is exceptionally high.

Similarly, the Department of Social Security and the Benefits Agency and TNT have entered into a partnership programme. Together, the DSS and TNT Distribution Contract won the public sector category of the Premises and Facilities Management Awards only last month. So what the Ministry of Defence can do, and the DSS can do, I am sure private industry can do as well, and working in partnership is very, very helpful.

So I think these relationships in the public sector are clearly going to deliver significant benefits, through value for money, for enhanced quality of service to the end-users and to the partnering contractors.

You?ve probably gathered by now, I?m rather enthusiastic about this. I hope you have. And so I?ll sign off with the challenge.

I think partnership sourcing, as I?ve said already and I would want to say again, does deserve a pat on the back. But I learned in my last life, largely because of these oil price numbers, that complacency is a sentiment that you ought to avoid in industry. So where do we go from here?

Well, I think the challenge to you all, put simply, is to extend partnering beyond the first tier of suppliers. We need to have partnering all the way along the supply chain So how will PSL help drive this message home?

As a start, I welcome the commitment PSL has made to join with the CBI and DTI National Best Practice Campaign. The campaign - which will be branded as ?Fit for the Future? - is just about to be launched. It will be launched next month, by Adair Turner, Alec Daly and Peter Mandelson. Its targets are based on the CBI?s conclusions, which sound fanciful, but are extremely interesting; that the UK economy could achieve an increased GDP of £300bn annually, if it adopted the average levels of best practice currently achieved by our leading international competitors. And that?s an extraordinary number. And when I first read it on Alec Daly?s brochure when I spoke at the CBI in the West Midlands, a year or so ago, I thought he?d got an extra nought. So I thought £30bn, yes, but £300bn, is that possible? And then I did the sum I always did on these occasions, which was since BP was about two-and-a-bit-percent of the value of FTSE, I just tried to work out what we?d saved during our programme and scale it up by 50. And it was about right.

So if you get to an international benchmark across every sector - you don?t have to be the best, you just have to get to an international average benchmark - there is a potential opportunity gain in there, of £300bn annually to the GDP. Now, of course that?s a fanciful notion and I mean, even BP, would say that?s a bit more than a stretched target!.

But I think it is out there for grabs, particularly when we?re all making such an enormous effort of spending £40bn on schools and education, and being told by - not that this is political speech at all - by other people that this is ?reckless spend?. Well, if we only got 10% of the benchmarked improvement by meeting average benchmarks for industry, we?d have £30bn of the £40bn in our pockets already.

So I see these things as real targets. Again, the challenge for PSL and the organisations represented here today, is to provide people, to provide champions, practical support and advice, and of course, your enthusiasm and devotion for this process. But I think you need to be able to measure the impact. So my final challenge is for PSL to increase its reach through the supply chain extension. To back that challenge, it needs to set its own targets - in my view - its own benchmarks. I think PSL will be able to find them, benchmarks for progress, by looking at what the most efficient sectors and the most efficient companies have done. And thinking about that relationship for the supply chain and the smaller companies in the supply chain, it will be up to PSL and the companies to mark their own cards. And I think that?s right. It?s in their interest to do so, and it?s in Government?s interest to support the benchmarks when they?re achieved.

So, Chairman, in conclusion, I wish you and your Board the very best of luck with this task, and the Director General and his team, every success. I actually know it can work.

Thank you very much.

Other speeches by Lord Simon of Highbury - Former Minister for Trade Promotion in Europe and Competitiveness (May 1997 - Jun 1998)

(the following are available from the archive)
• The EMU Conference (03/03/99)
• The Franco-British Council (03/03/99)