Leveraged Purchasing Power is Not Just for States
By Nedi Telvi
As local governments struggle to stretch their budgets, they are also affected by challenges from the federal and state governments. Budget cuts at the federal level continue to reduce aid to state governments. States then pass some of those cuts in aid on to their major cities and municipalities. This financial situation puts mayors and city council members in the difficult position of having to choose between cutting programs or raising taxes.
More and more, cities are finding another answer: Leveraged Purchasing Power (LPP). LPP was created by Silver Oak Solutions, and is the application of strategic sourcing methodologies to the government sector. The purchasing reform principles that have helped 10 Governors cut the costs of their purchased goods and services are now being applied at the local level with similar results. The City of Portland, OR, is leading the way and reaping significant savings from the process.
The core concepts of strategic sourcing have been utilized in the private sector for many years. The public sector is just starting to benefit from the very same concepts. The goal of strategic sourcing is to maximize savings that can be achieved on purchased expenses, while maintaining or improving service and quality requirements. The process involves identifying qualified vendors; conducting negotiations with them; and forging agreements that fulfill the requirements for products and services. Strategic sourcing is one component of a larger overall process known as spend management. Spend management consists of identifying saving opportunities; creating savings; and through compliance monitoring, sustaining these savings over time. Simple enough? Not quite. The key issue is resource constraints, primarily with respect to qualified staff. The public sector cannot afford to allocate a level of time and money to spend management that is comparable to the private sector. And, although resources are tight for state governments, purchasing departments at the local level are surviving on even tighter fund allocations. However, there is still hope…
There are three forces that are helping the local purchasing departments in their quest for improved vendor relationships. First, they can tap the experience of state governments. Through the application of LPP, states have already proven that the key concepts of spend management and strategic sourcing work in the public sector. Secondly, if spend management concepts have already been applied at the state level, the negotiated agreements are often available for use by local governments. Thirdly, due to their relatively smaller size, local governments usually benefit from stricter purchasing policies and tighter control over purchasing through mandated contracts and sole source agreements.
Since resources are very limited for local purchasing departments, the largest return on investment can be obtained by focusing on three areas that yield maximum results:
• First, local governments need to do a much better job of category prioritization. Traditionally, procurement departments have taken a reactive approach to purchasing. Existing contracts are re-bid when they expire, and new contracts are negotiated when end-users express the need for a dependable source for a new product or service. The optimality of existing agreements is rarely challenged. Spend management techniques work best when the appropriate savings opportunities are clearly identified. Unfortunately, this is also the most time consuming, tedious, and resource-dependent step of the process. However, the investment more than pays off through a focus on the “right” areas of spend—those that yield the highest cost savings opportunities—as opposed to the “popular” ones.
• Second, knowledge building is critical. City procurement professionals have been forced to “do more” (new items, new problems) with “less” (training, manpower). Vendors usually have a considerable knowledge of their own industries. City employees are at a competitive disadvantage because they need to be generalists and therefore lack in-depth industry knowledge. LPP helps to balance that equation. Training existing staff on spend management concepts and LPP is critical to building the knowledge required to reap ongoing benefits from LPP. It also increases job satisfaction for the staff and acts as an incremental morale booster as employees build the skill sets that help them do their jobs more effectively.
• Third, quick wins can be obtained through process improvements and demand management initiatives, rather than through direct unit price reductions. Two process inefficiencies are common in local government purchasing, primarily due to the lack of time and resources to conduct proper analysis. First, most government procurement environments do not have an audit process in place. This situation leads to invoicing errors that are very difficult to detect. Second, most purchasing agreements are static and not designed to dynamically adjust with the changing needs of the end-users. As a result, contracts exist for items that are infrequently purchased from particular vendors. Products on contracts should be better aligned with purchasing behavior over time. For many spend categories, demand management can serve as a key savings generator because incentives are not in place for “right-specing” the product or service. Like the private sector, over-purchasing is a common practice in the public sector. An appropriate dose of reasonable reductions in specifications and requirements can lead to substantial savings for local governments.
The City of Portland, OR, is the leader in the embracing of spend management concepts in the local government sector.
Case Study: The City of Portland, OR
Beginning in May of 2004, the City of Portland, OR, partnered with Silver Oak Solutions to conduct a citywide feasibility and efficiency assessment. With a focus on identifying opportunities for savings, Silver Oak Solutions examined the procurement department’s organization; its purchasing methods; and its procurement policies, codes, and procedures. The team conducted a detailed analysis of current contracts and invoices (on a line-by-line basis) to determine pricing for purchased goods and services.
The study spanned all city bureaus with an annual spend of $338 million, representing 71,000 transactions. This effort resulted in significantly improved category prioritization for Portland. As a result, the City Council approved the pursuance of 16 categories with an estimated annual savings of up to $2.1 million as “top” priority strategic sourcing activities.
Sue Klobertanz, the Purchasing Director, City of Portland, described the initial effort as follows: “We have just completed the Opportunity Assessment Phase of the Strategic Sourcing effort. Although staff had attempted to review expenditure data in the past, we had neither the time nor technical tools to get the job done. Silver Oak Solutions was able to come in and review the data and provide us with clear decision points for moving forward.”
Silver Oak Solutions also conducted a two-week, seven-module Strategic Sourcing training program for the procurement professionals in the Bureau of Purchases. This training covered Silver Oak’s LPP methodology, customized to address Portland’s specific purchasing needs. As a result, Portland’s procurement staff is now equipped to execute spend management concepts independently.
Portland is also progressing rapidly toward realizing the initial savings targets. For one purchasing category, initial pricing audits showed approximately $80,000 in over-billing for two vendors. The city has reached an agreement for $20,000 in collections from one vendor, and is in discussions with the second vendor for the balance.
Early demand management initiatives have also shown potential. The city projects a savings of 38 percent per year through renegotiation of maintenance service contracts on their centralized high speed copiers. The city has also developed a draft convenience copier policy to match copier speed to user volumes that is expected to save approximately 14 percent over three years.
In addition, the team quantified a potential savings of $12,000 per month by pooling wireless plan minutes from the vendor’s existing, multiple plans into a single plan with the same vendor. Currently, discussions are in progress with the vendor to implement this accounting change to all wireless accounts for the city.
Portland is proving that there is more than just hope for local governments! Through the use of appropriate LPP techniques, local governments are able to significantly improve their current vendor relationships. As a result, realized savings are either returned to local residents in the form of reduced tax dollars, or utilized to execute critical programs that might have gone unfunded.
Editor’s Note: Nedi Telvi is a Principal at Silver Oak Solutions. “Leveraged Purchasing Power is Not Just for States” was reprinted with permission from Silver Oak Solutions. For additional information, visit: www.govinfo.bz/4590-287.