publicsector entities can cu 230856
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Public-Sector Entities Can Cut Spending by Leveraging Sourcing and Procurement BestPracticesTRANSCRIPT
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G00230856
Public-Sector Entities Can Cut Spending byLeveraging Sourcing and Procurement BestPracticesPublished: 16 February 2012
Analyst(s): Deborah R Wilson
Few public-sector entities (PSEs) have been left untouched by thetumultuous economic conditions and calls for budget cuts. CIOs, chiefacquisition officers and elected officials can use this research to build a casefor the changes needed to leverage established sourcing and procurementbest-practice processes, policies and tools from the private sector.
Impacts■ Public-sector organizations that eradicate poor buying processes can achieve a reduction of
10% or more in nonpayroll, managed spending.
■ Public-sector organizations that leverage packaged software solutions that incorporate supplierand user self-service dramatically improve sourcing and procurement productivity.
■ PSEs that configure procurement and sourcing solutions to expose the level of local contentand enforce spending distributions can help manage the balance of trade.
■ PSEs with procurement and sourcing systems that document activities and policies and makethem transparent to auditors and the public can expose and reduce procurement fraud.
Recommendations■ Negotiate strategic agreements that span multiple orders and multiple agencies, and feature
fixed pricing.
■ Leverage packaged procurement suites for governance, productivity improvements and quicktime to value.
■ Track spending by country of origin.
■ Configure sourcing and procurement solutions to create a transparent audit trail.
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AnalysisProcurement practices have been undergoing a steady but remarkable transformation during thepast decade. Most organizations, even the very largest, were entirely decentralized, with line-of-business employees placing orders as short-term requirements arose, and often with littleconsideration of sources beyond "the reliable suppliers that we've always used."
Trends including global competition, widespread pressure to reduce costs and the growingavailability of cloud-delivered, multienterprise software solutions have triggered the creation andadoption of a new set of professional sourcing practices and enterprise applications. Consequently,the vast majority of Global 5000 companies and many smaller organizations have radically changedtheir procurement practices by analyzing spending, aggregating demand, negotiating long-termagreements with a limited number of suppliers (strategic sourcing), extending contracts toemployees and suppliers for self-service, and proactively managing supplier performance. Thistransformation is delivering remarkable benefits, including cost savings of 10% to 40% ofstrategically sourced spending.
While some PSEs have introduced better procurement practices, evidence shows that they tend tolag their private-sector counterparts (see "Sir Philip Green says government waste 'shocking'" and"Bill would require greater use of strategic sourcing"). PSEs are behind because they are bound byconservative, traditional legal frameworks and the differing forces that shape their acquisitionpolicies. The private sector is mandated to spend money as efficiently as possible, to becompetitive in the global theater and to maximize shareholder profits. Elected officials, on the otherhand, are tasked with delivering economic opportunity and prosperity. Despite global budget woes,voters prefer leaders that focus on job creation.
Most PSEs already use competitive procurement processes, such as "three bids and a buy" and e-notification site RFP postings. Hence, elected officials can truthfully claim that they are trying to begood stewards of taxpayers' money. The problem is that fully leveraging new private-sector bestpractices means supporting significant change in procurement policy, including pushing suppliersto accept lower prices and to make changes in their own cost structures. At a time when the publicis crying out for economic growth and new opportunities, these outcomes may be seen ascounterproductive and, therefore, unacceptable. What elected official wants to be known for forcingcampaign-contributing constituents to sharpen their pencils? It can be more politically palatable toeliminate entire agencies or services than to support policies that result in reduced revenue forspecific suppliers. Thus, we observe that many PSEs that have engaged in procurementtransformation have downplayed the cost cutting aspect of their programs to avoid drawing thewrong kind of attention.
Nevertheless, PSEs everywhere are under extreme pressure to deliver significant cost reductions tooffset high government deficits, and improving procurement practices is an obvious place to start.This research details procurement and sourcing best practices that have been widely adopted in theprivate sector. PSEs should review their current processes against these best practices to identifyareas for improvement.
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Figure 1. Impacts and Top Recommendations for Leveraging Sourcing and Procurement Best Practices
Impacts Top Recommendations
• Negotiate strategic agreements that span multiple orders and feature fixed pricing.
• Benchmark contract pricing with other PSEs.
• Rightsize the number of buying groups.
Reduce nonpayroll spending by 10% or more.
• Leverage commercial procurement suites.
• Analyze spending to prioritize opportunities.
• Track transaction cycle times.
Dramatically improve procurement efficiency.
• Track spending by country of origin.Improve balance-of-trade management.
Reduce fraud. • Capture prospective bids at the line-item level.
• Post requirements on procurement networks to maximize supplier participation.
Source: Gartner (February 2012)
Impact: Public-Sector Organizations That Eradicate Poor Buying Processes CanAchieve a Reduction of 10% or More in Nonpayroll, Managed Spending
It is well-known and broadly accepted in industry that practices such as aggregating demand,sourcing strategically and extending contracts to users via self-service tools deliver impressive costsavings. Price reductions of 20% or more are not unusual when poor buying practices areeradicated (see the Evidence section). These savings come from economies of scale: limiting thenumber of suppliers for a category of spending, and negotiating price for a year or more of forecastdemand, rather than for individual orders. Prices are negotiated directly with suppliers for goodsand services or for important components and pricing algorithms for large projects (e.g., concretefor dams and labor rates for program development).
Private-sector organizations achieve these savings by centralizing procurement. PSEs cannot "liftand shift" private-sector best practices because, unlike the private sector, there are typically layersof government bodies in a region, each with its own sourcing and procurement authority. For
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example, hospitals, universities, city government, state or province government, and a water districtmay all have acquisition teams, even though they operate in the same state or province. Left to theirown devices, and when given orders to spread business across as many suppliers as possible, thisdecentralization can lead to hundreds of contracts for the exact same thing. The challenge is torightsize the number of buying centers so that buying power is not diluted. The opportunity is toenable multiple groups to allow contracts for the same category of spending, to keep competitionalive and spread the business around.
Recommendations:
Chief acquisition officers:
■ Negotiate strategic agreements that span multiple orders and that feature fixed pricing. Identifyopportunities based on projected total spending for a category of items or services for a year,not on unit cost or projected requisition value. For example, it may seem silly to negotiatepricing for printer cartridges that cost only $29.99 each, but if an organization buys 10,000 ofthe same cartridge each year, then the value of the spending totals more than a quarter of amillion dollars and contract pricing should be negotiated.
■ Limit PSE awards for a particular good, service or material to one or two suppliers at most, tobuild economies of scale and maximize price reduction.
■ Benchmark contract pricing with other PSEs. For example, a university, city and water companyin the same province could share pricing or could all post their contracts in a shared e-procurement solution for transparency. Also, consider benchmarking with local businesses thatemploy best procurement and sourcing practices.
■ Leverage consultants and business process outsourcers (BPOs) to demonstrate best practicesand aid in employee training.
Elected officials:
■ Identify regulations that stand in the way of sourcing and procurement best practices, andsubmit or support legislation for change. For example, eliminate laws that require bid solicitationbased on the value of the requisition; instead, base competitive bidding laws on total spendingfor related items for the year.
■ Rightsize the number of buying organizations in a given region. One is too few, and 10 or moreis too many.
■ Remove cost savings from budgets. Take down budget line items by the amount saved;otherwise, stakeholders will shift the savings into other line items and spend the money anyway.
■ Realign employee compensation to acknowledge and reward cost savings.
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Impact: Public-Sector Organizations That Leverage Packaged Software SolutionsThat Incorporate Supplier and User Self-Service Dramatically Improve Sourcing andProcurement Productivity
Progressive private-sector organizations leverage user self-service and packaged softwaresolutions to dramatically improve sourcing and procurement productivity. Packaged solutions areoften purpose-built to speed up process cycle times and reduce unnecessary work, such asrequiring the purchasing department to touch every requisition or rekey supplier bids for analysis.This is an important impact because most PSEs must do more with fewer resources. Gartner hasheard from many PSE clients that packaged procurement and sourcing solutions can improveproductivity by double or more.
Furthermore, moving from manual methods and aging software solutions to newer, workflow-basedenterprise applications can dramatically improve governance and process consistency. Forexample, a contract life cycle management (CLM) solution can be configured to mandate IT reviewfor all contracts before they are signed. Workflow-based solutions enable organizations to ensurethat the right individuals review a decision at the right time, every time.
Recommendations:
CIOs:
■ Educate yourself on private-sector best practices in procurement and sourcing so that you cantake a proactive role in cost cutting (see "Understanding Your Top Procurement Processes").
■ Leverage packaged procurement applications to make dramatic improvements in productivityand performance (see "Hype Cycle for Procurement, 2011"). The software market is awash withdozens of viable, off-the-shelf solutions; commissioning a proprietary solution is anunnecessary and costly alternative.
■ Build a portfolio of solutions with appropriate service life cycle expectations and platformcharacteristics using Gartner's Pace-Layered Application Strategy (see "Use Gartner's Pace-Layered Application Strategy to Structure Your Procurement Application Portfolio").
■ Increase productivity by enabling self-service in solutions whenever possible. Allow suppliers toupload proposed catalog content updates, and allow employees to create their own requisitionsand set up e-forms for requesting sourcing or a contract. However, ensure that the self-servicesolutions you deploy are intuitive and easy to use, so that the burden of buying isn't simplyshifted from the purchasing department to others.
■ Shortlist solutions that incorporate private-sector best practices can help you deploy moderntechniques. Insist that solution vendors demonstrate the ability to do more than slavishly adhereto long-standing procurement regulations.
Chief acquisition officers:
■ Analyze spending using software or services to identify and prioritize opportunities for supplybase rightsizing and cost reduction (see "Spend Analysis Best Practices").
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■ Track transaction cycle times for requisitions and contracts. Consider process changes thatshorten cycle times (see "Understanding Your Top Procurement Processes").
Impact: PSEs That Configure Procurement and Sourcing Solutions to Expose theLevel of Local Content and Enforce Spending Distributions Can Help Manage theBalance of Trade
Procurement and sourcing policies can impact the balance of trade between nations and regions byexposing the level of local content in contracts and for suppliers, and by enforcing policies todistribute spending in a particular way. These policies help PSEs decrease local content to improveties with neighboring nations, as well as aid those that desire to spend more locally to improveindependence and economic stability. For example, several EU nations are experimenting with localcontent tagging to increase member trade to support initiatives such as the EU Single Market forGoods New Legislative Framework. Other nations that Gartner has worked with are trying toincrease the amount of goods and services bought locally to strengthen their local economies.
Recommendations:
CIOs:
■ Configure procurement solution data models so that the location of value-adds can becaptured. Set up fields for location in supplier master files, item part master files, contract lifecycle management solutions and/or e-sourcing tools.
■ Create analytics/reports that capture totals and trends for spending by location of manufacturerand/or value-added services.
Chief acquisition officers:
■ Track spending by country of origin. Accomplish this by tying country-of-origin percentagecontent to supplier records, contracts and/or purchase orders. Leverage business intelligencetools and analytics to capture and share trend data.
Elected officials:
■ Use the resulting data as input for awarding business for new contracts and renewals, and fordeciding where and when to make investments in trade agreements and local economicdevelopment.
Impact: PSEs With Procurement and Sourcing Systems That Document Activitiesand Policies and Make Them Transparent to Auditors and the Public Can Exposeand Reduce Procurement Fraud
Well-documented transactions and processes discourage procurement fraud. For example, a hotelchain was able to allege procurement fraud because its e-procurement solution was found to bereconfigured to block preferred suppliers, so orders could be redirected to high-priced suppliersthat, in turn, paid kickbacks to hotel employees. The best procurement policy for the public sectoris to capture as much data as possible in solutions, and to enforce restrictions such as disallowing
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prospective suppliers that have not paid their taxes or that are accused of inappropriate behaviorthrough procurement and sourcing solution configurations.
Recommendations:
CIOs:
■ Choose procurement and sourcing solutions that capture prospective supplier bids at the line-item level so that proposals are fully transparent and auditable. Do not configure e-sourcingsolutions to allow bid submissions as attachments.
■ Shortlist procurement and sourcing solutions that are configured for control. For example, e-procurement solutions can limit requisitioners to preferred suppliers.
Elected officials:
■ Adopt legislation that requires periodical audits of procurement records to identify out-of-compliance sourcing behavior.
■ Require procurement to periodically benchmark pricing and explain significant discrepancies.
■ Require competitive bid solicitation for significant spending (as measured by projectedspending for a given good/service for the year).
Chief acquisition officers:
■ Post requirements to as broad an audience as possible to maximize supplier participation. Themore suppliers that submit a bid for an opportunity, the less likely there will be a fraudulentaward. There is also some evidence that higher numbers of proposals result in greater costsavings.
Recommended ReadingSome documents may not be available as part of your current Gartner subscription.
"The Impact of Cloud Computing on Procurement Applications"
"Strategies for Public-Sector Investment in Procurement Applications"
"Understanding Your Top Procurement Processes"
"Use Gartner's Pace-Layered Application Strategy to Structure Your Procurement ApplicationPortfolio"
"E-Procurement Market and Vendor Landscape"
"Hype Cycle for Procurement, 2011"
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"Best Practices for Choosing, Implementing and Using E-Sourcing Solutions"
"Magic Quadrant for Strategic Sourcing Application Suites"
"The Benefits and Drawbacks to Group Purchasing Organizations and Collaborative Sourcing"
Evidence
For an independent validation of the benefits and adoption rate of strategic sourcing, see:
■ Wikipedia entry on strategic sourcing
■ "Procurement: The Last Best Place for Results Improvement," A.T. Kearney
■ "Driving high-performance procurement initiatives," Zycus
■ European Union public-sector procurement policymaking, which estimates new policies coulddrive 4% to 5% savings per year on spending (see "Commission proposals to modernise theEuropean public procurement market — Frequently Asked Questions," question no. 14).
■ The U.S. General Services Administration (GSA) piloted strategic sourcing practices for buyingoffice suppliers. While there is argument over the large amount of savings the GSA reported thatagencies could achieve, the study confirms that buying from negotiated agreements, instead ofmaking one-off purchases, delivers double-digit savings (see "Strategic Sourcing: OfficeSupplies Pricing Study Had Limitations, but New Initiative Shows Potential for Savings").
■ Research by Luis Valadares Tavares, Professor at the Operational Research of the InstitutoSuperior Tecnico (Technical University of Lisbon), presented to the EU, estimates publicexpenditure savings of 6% to 12% with expanded visibility of opportunities to prospectivesuppliers through e-tendering.
■ "Reverse Auctions Generate Big Savings for Municipalities," K2 Sourcing
■ "Public eTendering in the European Union: Trust in eVolution," L. Valadares Tavares
Industry press routinely credits strategic sourcing and best procurement practices as drivers of costsavings and productivity. For examples, see:
■ "Miami University Plans Procurement Modernization with Accenture's Support," MarketWatch
■ "Strategic sourcing of IT Demand," InformationWeek
■ "John Hopkins Medicine Reduces Contract Costs by $41 million with MedPricer's E-SourcingSystem," MarketWatch
■ "Global Procurement Transformation: New Frontiers for Global Innovation" details LGElectronics' expectation that procurement will deliver $30 billion to the bottom line.
■ Unilever delivered €1.4 billion in savings in 2009 and 2010, in part due to a single, globalprocurement strategy.
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■ Keepmoat, a £570 million provider of community regeneration services to the U.K. publicsector, is saving 15%, on average, on strategically sourced spending (see page 4).
This is part of a set of related research. See the following for an overview:
■ DoD Must Do Better in Sourcing and Still Meet Warfighter Needs
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