Calculator Validates Savings
Calculator Validates Savings
The combination of taxpayers’ demands for a more efficient government, a shrinking government workforce, and years of budget shortfalls forced many entities to revise procurement operations. The results are in, and all levels of government are reporting savings, savings, and more savings.
Strategic sourcing alone has saved entities millions of dollars annually. One such entity realizing return on investment in strategic sourcing is the State of Illinois. Not only has Illinois saved, the state has taken efficiency initiatives to the next step–savings validation.
“Validating $529 million in savings required an enormously complex process,” says Paul Campbell, Director, Illinois Department of Central Management Services (CMS). “We had to create the savings validation ‘calculator’ and then run more than 100 efficiency initiatives through it to validate and document more than half a billion dollars in savings.”
The process met with such success that CMS chose to share the methodology.
“For other states to really understand and take advantage of what we learned in Illinois, we realized that we’d have to ‘walk them’ through our process–which led us to the workshop idea,” says Campbell.
On March 9, 2006, CMS held the “Measuring and Sustaining Government Efficiency Conference.” Procurement professionals from eight states, as well as a number of counties and municipalities, met in Chicago to benefit from the CMS experience and share their own strategic sourcing stories.
To begin, documenting and supporting savings measurements with evidence has allowed Illinois to establish a clear link to financial transactions. In measuring financial and non-financial benefits produced by the state’s efficiency initiatives, Illinois sustains its change efforts through an accountable, transparent communications tool.
From one-time vs. recurring savings to capturing incremental cost categories, a detailed process contributed to Illinois’ successful validation process.
Meeting efficiency goals in Illinois and other entities raises the question of what to do with the savings?
By reducing margins paid to suppliers, many entities are using savings as a tool to fund operational budget cuts.
Others are faced with the decision of where to deploy surplus funds created by strategic sourcing initiatives.
The savings achieved in Illinois are helping Governor Rod R. Blagojevich increase investments in education, public safety and health care–without making cuts elsewhere or raising sales or income taxes.
New savings measurement methodology proves that entities are no longer merely staying afloat, and that sustainability is critical to strategic sourcing initiatives. The idea that sustained savings may lead to adjustments in future budgets causes concern in agencies and departments.
So far, most entities do not have a good mechanism in place to arrive at equitable budget adjustments. This raises a second question: How do entities continue to drive savings in agencies and departments?
To encourage buy-in of savings efforts, entities are looking at various incentive programs, including performance-based models that allow departments and agencies to retain a portion of savings for other investment.
Incentive programs face a number of challenges including initiating policy changes, developing and validating baselines, as well as identifying savings opportunities, fixed share ratios, and payback periods, but the extensive due diligence may pay off in future savings.
Entity-wide collaboration, starting with elected officials and including finance, procurement, legal, departments, agencies, and end users, is necessary to create a culture of savings innovation. Maintaining existing programs that matter to the lives of constituents proves the enormous effort is invaluable. The funding of new initiatives is an added bonus.