Making Spend Matter Toolkit - Koszalin basic and advanced spend analysis case studies

The following case studies provide practical examples of how Koszalin carried out the following two processes to understand, explore and adapt the Making Spend Matter Good Practice into their city:

Core transfer (basic spend analysis)
Optional transfer (advanced spend analysis, developing a strategic approach to public procurement, SME engagement and using social and environmental criteria)

Basic spend analysis case study

Koszalin is based in North West Poland and has been looking to change the way in which it undertakes procurement for the last five years. As a partner of the Procure Action Planning Network, Koszalin understood the basic principles of spend analysis; however, Making Spend Matter has been an opportunity to explore the methodology further and practically implement it. Koszalin recognises that the true value of spend analysis is as an evidence-based tool that can enable both changes in procurement cultures, and in the realisation of wider economic, social and environmental benefits for the City.

Koszalin has made a particularly strong link between spend analysis and economic development. They recognise that understanding their procurement spend in more detail gives them a more in-depth understanding of how much is spent with SMEs, who can then subsequently be engaged with through economic development to develop their knowledge of procurement processes and their capacity to bid. Linked to this, Koszalin has recognised that spend analysis and procurement cannot just be about the Municipality; indeed, there are several anchor institutions which are also based in Koszalin that are significant spenders through procurement.

Finally, Koszalin has understood that spend analysis should not be a one-off activity but rather it should be undertaken on an ongoing basis and be used as a means of shifting the way in which procurement is undertaken, notably in terms of SME engagement, the inclusion of social and environmental considerations and wider impact monitoring.

Adapting the methodology

Koszalin made some changes to the good practice to adapt it to local circumstances and contexts:

First, they only looked at one geographical area for their spend analysis, namely the Koszalin Functional Urban Area (FUA);
Second, they had to develop a mechanism to collect data on the size of businesses (i.e. Small, Medium-sized, Large business), as there is not a straightforward way of accessing this type of data in Poland. Koszalin asked suppliers to provide this information through a survey.
Third, rather than focusing its top 300 suppliers, Koszalin analysed all expenditure to provide a fuller, more robust picture of spend;

After series of discussions with partner cities on transferring the Good Practice methodology, we realized that despite the fact there are some differences between us e.g. different locality definitions, industrial classification and legal environment, we in fact face very similar challenges and barriers in our cities, among which are limited human and time resources (lots of data needs to be gathered and processed manually), engaging other departments and anchor institutions, collecting the required data from finance and procurement departments and filling the data gaps.
Adam Sawicki, Koszalin Project Coordinator

The spend analysis findings

Simply by undertaking the spend analysis and by transferring the good practice, Koszalin has recognised the scale of procurement spend in the city. Across all procurers and including anchor institutions, there is an annual spend of over 100 Million Euros: making procurement a significant contributor to Gross Domestic Product (GDP). In terms of the City Council, there was a surprise as to the extent to which procurement spend was already with organisations in the Koszalin Functional Urban Area (FUA) (83%) and with SMEs (91%).

The City Council also transferred the good practice to other anchor institutions through their URBACT Local [stakeholder] Group (ULG), with the Regional Hospital, Technical University of Koszalin, and Koszalin District Administration also exploring how much they spend in total, and where that money goes geographically. There were key differences in the extent to which the Regional Hospital were spending with local SMEs when compared to the City Council, for example, largely due to the very specialist nature of the goods and services being procured.

Interpreting the findings

Koszalin has used the findings of their spend analysis to inform other aspects of their procurement processes, both from the perspective of procurers and the market. In terms of procurers, and, recognising the relatively high proportion of existing spend with Koszalin FUA based organisations, they have sought to strengthen competences around the inclusion of adequate social and environmental considerations in the process of procurement. In terms of the market, they have sought to strengthen the capacity and capability of entrepreneurs to participate in the procurement process.

Re-using the transfer

Koszalin will continue to utilise spend analysis to inform procurement processes following the completion of Making Spend Matter. There are three things that they would like to improve at the local level to facilitate this:

First, they would like to improve the way in which businesses are categorised - currently this is as part of seven relatively narrow sectors. Koszalin recognises for more advanced spend analysis to be undertaken that needs to be investigated further, for example by breaking it down into sub-categories.
Second, the implementation of the spend analysis tool and particularly the manual data gathering around SMEs takes a lot of time - Koszalin will look to automate and customise this in the future.
Finally, Koszalin will look to include indicators associated with spend analysis in their City Policy, together with indicators which are more focused upon demonstrating social and environmental benefits through procurement.

Advanced Spend Analysis (SME engagement) case study

The City of Koszalin with over 107 thousand residents is the second largest urban centre in the West Pomeranian Province. It is located by the Baltic Sea coast in the north-west part of Poland. The City is an area of a sub-regional significance and it possesses a diversified economy with a special industrial economic zone, a well-developed sector of services and trade as well as companies with an export potential.

However, in spite of the low unemployment rate5, the level of wages, the purchasing power as well as the living standards of the residents of Koszalin still considerably and adversely differ from the level which is characteristic of the "old" European Union Member States, and this disparity is decreasing at an unsatisfactory pace.

Demographic changes due to low birth rates and a negative balance of migration (mainly of young people) resulting in the progressive ageing of the City's population constitute a serious long-term threat. The prevention of depopulation is one of the greatest challenges in the coming years (according to the current forecast by the Central Statistical Office, Koszalin will have had merely ca. 89 thousand of residents by the year 2050 as compared to the present 107 thousand).

Further growth and economic attractiveness are both important to stem (and even reverse) this decline. One possibility is to harness the potential of public procurement, because of the important role it plays in the economy. Through increased awareness of to how to use public procurement to bring about wider economic and social benefits to both the City and SMEs, procurers can use this market to a greater extent than they currently do, which in turn will contribute to better living standards and a limitation on the current unfavourable demographic trends.

What follows reflects a five-year journey to date in encouraging SMEs to engage further in public procurement in Koszalin, and it is not one which is finished yet. Many of the challenges and barriers identified are common across Europe no matter where the city is located and where that city is on its journey to better engage with SMEs. This case study seeks to act as an inspiration to others and provide information on what action Koszalin has taken and the lessons learned along the way.

Why engage with SMEs

Koszalin has employed exactly Preston's good practice methodology and exported all Municipality of Koszalin Office's non-salary expenditure in 2018 to MS Excel (about 5000 records, divided into 767 individual suppliers). Locality was determined based on contractors' addresses and postal codes.

To their positive surprise, it turned out that out of PLN 96 million (EUR 23 million) of the funds from the Municipality Office spent in the financial year, as much as 83% of the funds were used by local contractors, that is the money remained in Koszalin and its Functional Area. As many as 91% of city's suppliers were micro, small and medium sized enterprises.

The largest gaps in expenditure were identified in construction works, supplies regarding maintenance (e.g. IT, furniture, specialist equipment) as well as external expertise and consulting services.

Barriers/challenges

Through undertaking surveys with their businesses, maintaining an ongoing dialogue with business representative organisations, and discussions both internally and externally with other public sector organisations in Koszalin, the City has identified the following as the most common problems their businesses face:

Contract Price: Price is the dominating criterion; procurers engage in price-cutting wars which results in the lowering of contract values and consequently low salaries in the contract.
High requirements: High requirements in the specification, e.g. too high financial guarantees or experience (at least three years, or five in the case of construction contracts) and contract scale often mean that large businesses are favoured over SMEs because they are better placed to provide these.
Non-price criteria: In order to meet the legal requirement regarding non-price criteria, artificial criteria are often used, e.g. the contract delivery date or the warranty term.

There is a lack of experience across all businesses (large or small) in the use of social or environmental criteria which would benefit the local economy.

Other problems experienced by businesses include:

The lack of an IT system to inform entrepreneurs about bidding opportunities in the region;
The low statutory threshold for contracts in the sector of construction works;
Unwillingness to use statutory negotiating forms (e.g. pre-procurement engagement);
Insufficient awareness of local businesses of the possibility of participating in local public contracts;
The lack of potential of local businesses to form consortia to win larger contracts (e.g. especially construction companies);
The low competitiveness of the local business due to the small scale of their activities

Actions taken / changes made

Over the last five years the City of Koszalin has undertaken a number of actions which include:

Bringing together local stakeholders, both public procurers, and private enterprises, in one group to learn from one another about the barriers faced by both;
Developing the use of non-price criteria including social criteria;
Increasing awareness among their SME base regarding local public procurement opportunities;
Increasing the capacity of SMEs e.g. through training (see below);
Raising awareness among public procurers of the existing SME base through the Internet Local Business Catalogue (set up in 2006 by the Innovation and Enterprise Centre Foundation and regularly updated);
Planning on how to use the opportunities offered by the new public procurement law instruments which will come into force on January 1st, 2021 to support participation in the public procurement process on the part of micro, small and medium sized companies.

Capacity building training for SMEs

As mentioned above, as part of the actions to increase SME engagement in public procurement, training has been undertaken to build the capacity of the SME base.

Whilst the City of Koszalin has provided a number of capacity building sessions to both public procurers and SMEs since 2015, two training sessions have been undertaken in the framework of the Making Spend Matter Network, the first of these was in October 2019 and the second in November 2019.

The first session was organised by the City of Koszalin, Koszalin Chamber of Industry and Commerce and the Foundation for Innovation and Entrepreneurship (all stakeholder group members) and focused on sharing the City of Koszalin's spend analysis and Making Spend Matter Network findings: sharing good examples of Koszalin companies (e.g. construction and stationery suppliers) who have successfully bid for and won Koszalin-based tenders (to encourage greater engagement in the market); and discussing common barriers and possible solutions.

The second training session was organised by the Foundation for Innovation and Entrepreneurship and conducted by a legal company specialising in public procurement law in order to increase SME knowledge about Polish public procurement law and skills in the area of bidding for tender opportunities.

A further session is being planned on the topic of the new Public Procurement Law which, as mentioned above, comes into force on January 1st, 2021, in order to train and prepare public procurers. The new legislation includes a comprehensive package of tools, for example:

streamlining procedures and lessens bureaucracy;
catalogue of prohibited abusive clauses;
compulsory price indexation for contracts that exceed a period of one year;
advance payments;
conciliatory procedures to settle disputes.

What worked well

fruitful cooperation with identified key stakeholders;
integrated approach and complex action plan tailored to local context;
raising SMEs awareness and strengthening their competences.

What worked less well

hard to innovate in meticulously regulated area;
increasing the number of stakeholders involved;
sustaining momentum weakened by Covid-19 pandemic outbreak.

Lessons learned

Change takes time - it is an ongoing process;
Relationships take time to build;
There is no right or wrong way to engage with SMEs;
Pushing boundaries is good but there are some things you don't have control over, e.g. the law, and you have to learn to work with what you are able to.