Beginning in 2003, strategic sourcing became a well-traveled buzzword in government procurement circles, winding its way through state capitals across the country. A technique that had been proven to be highly effective at reducing costs through wide adoption in the private sector in the 1990s, it gained traction in the middle of the decade among state governments. Today, more than half of the states have implemented a strategic sourcing initiative of one variety or another, often with remarkable results.
However, in most states, those great results did not come without tremendous costs. In many cases, the states elected to retain the services of a management consulting firm to source individual commodities and to train the incumbent work force on how to implement strategic sourcing. In addition to consulting fees, strategic sourcing often placed an enormous burden on the procurement organization itself, with buyers being pulled from their “day jobs” and assigned full-time to a sourcing project.
As the economy has foundered in the final years of the decade and tax revenues fail to meet projections, governments at all levels are facing tremendous budgetary challenges. Local governments and school districts are seeking to benefit from the same kind of cost savings that state governments have seen through strategic sourcing. However, few municipal procurement departments have the resources to fully fund a sourcing initiative that their brethren in state government can afford. How can they see similar benefits without the resources to fund a sourcing effort? Officials in Indiana think they have the answer.
Change starts at the top
In 2004, Gov. Mitch Daniels was elected after a campaign in which he pledged to introduce private-sector management techniques to Indiana state government. One area of particular interest for the new governor was procurement.
“Gov. Daniels came into office in 2005 and asked us to look at how we were spending our money. Were we leveraging our spend on outside goods and services to save taxpayer dollars?” said Rob Wynkoop, deputy commissioner of the Indiana Department of Administration. “He led a similar sourcing initiative during his tenure as budget director at the federal Office of Management and Budget. He also saw what other states had done, like Pennsylvania and Virginia.”
To replicate the successes of other states, Indiana went through a competitive RFP process and selected Silver Oak Solutions (now CGI Spend Management Solutions). The state created a leadership team made up of commissioners and deputy commissioners from the Indiana Department of Administration, the newly created Indiana Office of Management and Budget, the governor’s office and the Office of Technology. Daniels was the sponsor of the strategic sourcing initiative, with day-to-day leadership provided by the Department of Administration and the state Office of Management and Budget.
The initiative had three phases. Like most states, Indiana had no idea how much it spent in individual goods and services categories or how that spend was distributed across its suppliers. In the first phase, the sourcing team went through the state’s myriad IT systems to conduct a thorough spend analysis.
Armed with the spend data, in the next phase, the team sourced 32 distinct commodities. The team chose those categories that offered the greatest amount of savings with the quickest timeline with the greatest ease.
Finally, the team was tasked with examining the current environment and diagnosing what obstacles prevented future sourcing activities. As a result of this examination, the team recommended a reorganization of the procurement group within the Department of Administration, which since has been implemented, and the revision of statutes that kept the state from conducting more competitive procurements.
Wynkoop noted that state leadership took the initiative very seriously.
“Every six weeks during our two year project, we had to present a progress report in person to the governor and his executive cabinet,” Wynkoop said. “He was personally active and engaged in this project. He wanted to know where our sourcing activities stood and where there were problems in specific agencies where he could help us.”
As a result of the sourcing engagement, the Department of Administration reorganized to give itself the ability to carry on the sourcing successes from the previous months. The department created two new divisions within its procurement organization — one dedicated to supplier performance and contract management, and another focused on strategic sourcing.
According to Wynkoop, the reorganization bore fruit soon after its completion.
“The success of the whole process is evidenced by the fact that within IDOA, procurement is the only division that received the Governor’s Public Service Award every year since its inception.” The award is given to individuals and teams that go “above and beyond” to make government more efficient and to save taxpayer dollars.
Director of Strategic Sourcing Jessica Robertson noted that the awards were a real boost to the morale of the department.
“It speaks well of IDOA,” Robertson said. “It makes you feel good to work for an agency that is recognized at such a high level. Getting this feedback from the governor himself was a great thing for our team.”
A morale booster
According to Erin Kremer, director of vendor management and supplier performance at the Department of Administration, strategic sourcing has boosted morale within the department.
“We went from an organization that just processed purchase orders to an organization that acts as a strategic arm of state government,” Kremer said. “We are constantly interacting with agency heads who proactively ask for our take on their important projects. That is the best way to describe the morale and overall tone of our division. We’re all focused on strategic sourcing.”
Kremer cited success with negotiations as another morale-builder.
“We haven’t always had the ability to negotiate on competitive sealed bids; in the past, we just accepted the supplier that met specifications and had the lowest initial price,” Kremer said. “Now, negotiating is part of our process. I think people saw this in action and saw that after a negotiation they could go back to an agency and say, ‘I just saved you $60,000 on this bid.’ It empowered them. They loved going back to an agency saying they saved money and knowing that they were a part of it. They saw the direct benefit of that, and the agencies really appreciated the buyer’s efforts.”
Now, Kremer added, saving money is “part of our culture.”
“When they are involved in saving money for the taxpayers, they feel like they are part of something larger than just a procurement organization,” Kremer said. “This is very different for [department employees], who never really felt much direct interaction with citizens.”
The reorganization brought with it an influx of procurement professionals from outside the Department of Administration and outside state government, mixing with veterans from the department.
“We’ve hired a lot of new staff,” Kremer said. “We recognized that we’d need skills we didn’t have in our division, especially within the newly created strategic sourcing and vendor management teams.”
“It’s a good confluence of people who have been here and new people coming in with new ideas,” Wynkoop added. “We look to people who have been here for expertise and guidance with state statutes, dealing with the various agency staffs, etc. But they were also willing to try new things. Those two forces come together to make us effective and help us save taxpayers dollars.”
Knowledge transfer was a critical component of the sourcing initiative. On each of the 32 teams sourcing individual commodities, a department representative was paired with a Silver Oak consultant.
“We worked hard to make sure that buyers were involved on every team so they could learn from the process,” Wynkoop said. “It wasn’t the type of project where we just brought in consultants without involvement from the state.”
“Just before they left, Silver Oak held a series of classes and workshops with the buyers where they reviewed the techniques they used so buyers had a great takeaway and a training guide going forward,” Kremer added.
Kremer’s team spends its time aggressively managing the contracts to ensure that the savings that are predicted come to fruition.
“For the first time, we are incorporating demand management into our process,” Kremer said. “For example, in office supplies, a team of people in my office review purchases before they go to vendor if the purchase contains a non-core list item. If so, they deny it and tell [customer agencies] to go look at the core list. Agencies can only purchase items on our IT contracts that are on the standard configuration. We manage the types of multifunctional devices they buy so we don’t overbuy in copier fleet.”
Early on, the department had to deal with some pushback from customer agencies, Kremer noted.
“But we stayed consistent and didn’t bend,” Kremer said. “Having the governor as the champion of our project was very helpful. There were times when commissioners would call our commissioner and say, ‘Someone in your office won’t let me buy the pen I want to buy.’ We had to explain the business reason for our decision. Now [customer] agencies understand what we are trying to do and when they have a purchasing issue, the first thing they do is call us rather than try to go over our heads.”
Wynkoop summed it up concisely: “People are creatures of habit — especially in government — and it took time for them to learn a new habit.”
Initially, the state did nothing exceptional to market the contracts to the myriad local government entities that could piggyback on their contracts. Like most state governments, when the Department of Administration went out to bid, it would include boilerplate language in its standard terms and conditions asking if the vendor would extend its pricing to local governments. For those vendors that indicated that they would, the department would make a notation beside the contract on the list of contracts on the state Web site.
The state’s approach to cooperative purchasing would change dramatically and rapidly.
“We had an epiphany and it came from our IT hardware contract with Dell,” Wynkoop said. “Our baseline spend was $18 million, but in the first year of the contract, we spent $34 million. We were getting double the spend and bigger rebates from Dell, but we couldn’t figure out how the state government was spending twice as much. Finally, we realized that all the spend came from local governments who saw the low pricing on our contract and gravitated to it.”
Wynkoop’s discovery would indelibly change the department’s procurement approach on high-ticket, high-volume contracts. The state realized that establishing a closer relationship with procurement professionals in local governmental and educational institutions would reap benefits for all stakeholders concerned.
“If the state spends $20 million and local governments and schools spend $10 million, we’ll be able to get better discounts,” Kremer said. “If we can get vendors to recognize all the spend, we’ll get higher rebates. At the same time, local governments are facing budget crises now. The governor has said to all agencies that we want you to try to find ways for them to save. It’s a win-win. Plus, our key suppliers are able to get more volume on their contracts. We can help local governments and save more money in the process.”
Rebate dollars going back to the state of Indiana were one of the key provisions negotiated into each of the strategically sourced categories. Indiana takes a unique approach to the rebates earned through the spend of local schools and governments in that the state gives it back to the entities.
“In August of this year, we sent schools and local governments rebate checks totaling almost $900,000 just because they used our contracts,” Wynkoop said. “Local governments are facing very difficult budget years and they are looking for choices that can save them money. They can choose to do their own contracts, but more and more they are choosing our contracts and getting lower prices and more rebates than they ever could on their own.”
Marketing efforts pay off
The second light-bulb moment for the team at the Department of Administration came in a meeting with a company called Business Purchasing Solutions (BPS), which works closely with a number of local governments in the state.
“They told us that local governments would like to use our contracts, but couldn’t find them online,” Kremer explained.
In response to this feedback, the state invested in technology to make it much easier for local governments to find state contracts that could help them save money.
“We developed a searchable catalog that houses all state contracts,” Kremer explained. “It’s a credential-based Web site. The Department of Administration pays for the license, and local governments can access it with a user name and password. The site is very intuitive. It feels like Amazon.com. They will see not just what the state contracts are, but what the prices are. It will show them savings for each item compared to list prices. They will be able to use the contracts as a price point to do their own negotiations or they can piggyback on the state contract.
“Later this month we are going live with a new initiative to expand the usefulness of the program. As a secondary aspect to our contract with BPS, local governments will be able to purchase items directly from suppliers through the BPS system. They would buy an e-procurement tool from BPS that would allow them to cut purchase orders through it.”
Along with the revamped Web site, the Department of Administration has made a significant investment of time and effort into marketing its strategically sourced contracts to local governments. Management from the department travels across the state, meeting with local governments and attending trade association meetings. In an interesting turn of events, the department reserves a booth at these meetings as if it were a vendor. The department’s marketing efforts are paying off. To date, more than 600 local-governmental and educational entities have pre-registered with the state to begin taking advantage of the contracts.
The increased spend levels will benefit state taxpayers in two ways. First, with increased usage on state contracts, the volume rebates that the department negotiated will increase. Second, the state intends to use the spend data to show suppliers the larger volume available to them if they win the next contract.
“We can’t guarantee to vendors that they’ll get all this business, but it will show how much spend came from state agencies and how much from others that have historically followed the state path,” Kremer said. “We anticipate getting lower prices and more savings from this.”
The state will compile its spend data from two sources: its own accounts payable system and from suppliers. On the Dell contract, for example, the state will have very good line-item data from its accounts payable system. For spend from local governments, it will rely on data it receives from Dell. The supplier already is sending line-item data from purchases from six different categories of governmental and educational entities within the state.
A reasonable question to ask the state is whether it is able to transition to a new supplier not only for state agencies but also for potentially hundreds of local governments when an incumbent supplier loses a contract. While state officials are well-aware of this concern, they point to the success in transitioning the state’s office supplies contract as an example that such a transition is doable.
“A lot of locals used our OfficeMax contract, but Staples won the new contract,” Kremer explained. “Staples had to go out there and market their new contract and convince the local governments that they should piggyback on the new state contract. For our part, we will help them show the locals that the Staples contract will save them money compared to the old contract. Since the transition, we haven’t had any negative feedback from the change to Staples. It has worked very well.”
Wynkoop concluded: “The transition was seamless.”
While piggyback purchasing has been a well-established best practice for more than a decade, the team at the Indiana Department of Administration sees local governments piggybacking on the state’s strategically sourced contracts as a way for them to implement strategic sourcing at the local level.
“A big part of strategic sourcing is knowing your market and what you should expect the price to be,” Kremer said. “Oftentimes the locals see our pricing and realize they can get the best price tapping into the state’s volume and using state contracts.”
By virtue of the aggressive marketing effort of its strategically sourced contracts, local governments in Indiana are among the first in the country to implement strategic sourcing. As tax revenues continue to plummet at the state and local level, other state and local governments across the country likely will follow the example set by Gov. Daniels and the talented team at the Indiana Department of Administration, helping to drive savings for taxpayers not only at the state level but also locally.
David Yarkin, former deputy secretary for procurement in Pennsylvania’s Department of General Services, is president of Government Sourcing Solutions LP, headquartered in Washington, D.C. Contact Yarkin via e-mail at [email protected].