Strategic sourcing initiative leverages state purchasing power:
The case of State of Oregon and Smart Buy
by Katherine Frisch,
Editor, Government Procurement
Reprinted with permission.
First brought to the table in 2003, Oregon’s Smart Buy initiative was introduced as a vehicle to deliver sustainable savings by effectively leveraging the state’s purchasing power. After two years, statewide collaboration, and a tremendous amount of work, the initiative has saved Oregonians millions of dollars. Smart Buy’s data-driven approach has also implemented a number of procurement best practices that further increase savings.
“The first thing we had to do was decide if we wanted to take on the project internally,” says Dugan Petty, Deputy Administrator, State Services Division, Department of Administrative Services (DAS), State of Oregon.
Next, the state had to decide if the statewide procurement office had the capability to handle the complex project.
“State governments buy just about everything, yet we have fairly small staffs,” says Petty. “We ask the procurement staff to do a lot of different things, so it’s hard for them to be anything other than generalists.”
A skill set that DAS found to be missing was the ability to gather the data, perform the data analysis, and create the benchmarks necessary to move the project forward.
After DAS formed a Steering Committee, the new group settled on a two-phase approach and issued a request for proposal (RFP) for consultant services. Silver Oak Solutions was selected to perform the first-phase opportunity assessment, evaluate procurement processes and practices, and provide recommendations for improvement.
“We wanted them to tell us, with a high comfort level, what they believed was available in savings,” says Petty.
Based on the consultant’s phase-one findings, the decision was made to move forward with a statewide strategic sourcing initiative.
Working towards the newly created Smart Buy Mission “to identify and create sustainable cost savings through more effective purchasing practices while maintaining high-quality government services to the citizens of the state,” Oregon set in place a number of goals, including:
- Improve and streamline current procurement processes to eliminate waste and foster a collaborative environment.
- Create savings for taxpayers by lowering prices and achieving better value on commonly purchased goods and services through effectively leveraging the state’s purchasing volume.
- Evaluate specifications of goods and services currently procured to ensure the optimal use of state dollars.
- Transfer knowledge and train state procurement professionals in procurement best practices.
“We’ve got good people working hard to cover the procurement waterfront, but what we were able to bring in with the consultant was additional expertise on what works in the marketplace,” says Petty. “With the consultant, we obtained an overlay of best practices.”
Guided by the cross-agency Steering Committee, DAS implemented recommendations presented in the phase-one opportunity assessment. End users from key agencies, subject-matter experts, and DAS procurement analysts participated in user groups and sourcing teams to identify areas and issues that the initiative should address. Each sourcing team was co-chaired by a state procurement office analyst and a Silver Oak analyst, and overseen by the DAS Smart Buy Coordinator.
Also during the second phase, DAS procurement analysts and managers participated in knowledge transfer sessions led by the consultants. The sessions were timed to coincide with various stages of the strategic sourcing initiative.
“We have just completed contract work for the first wave of categories identified in the opportunity assessment, and can declare the project to be successful,” says Petty.
“While we are wrapping up a few loose ends, the project is well on its way to achieving our goals,” says Petty. “Of course, there is always ongoing contract management in all of the Smart Buy commodity categories.”
The consultants were paid a fixed fee based on monthly rates for the resources necessary to complete the project. The consultants did not want and did not receive a share of savings. For this type of contract, the state believed such an arrangement would create the potential for conflict of interest and could lead to excessive payments.
Consultants and procurement staff analyzed spend data across all state agencies to better understand statewide spending. With this data, the state was able to identify important spend areas that provided the maximum benefit from collaborative procurement. By understanding and challenging existing purchasing specifications for each spend category, Oregon has ensured an optimal combination of price and quality for each agency and institution. The next step was to apply best-in-practice purchasing methods.
Best-in-Class Procurement Practices
As the Smart Buy initiative progressed, consultants and procurement officials benchmarked prices at a more granular level and conducted additional market analysis to further refine the savings estimates identified during the opportunity assessment phase.
“We had very good benchmarks on what kind of pricing was available, which we would not have had before the data analysis from the opportunity assessment phase,” says Petty. “Rather than simply settling for one bid and the lowest apparent bidding with one round, we had a pretty good sense of what kind of target pricing we should be after.”
Oregon has successfully implemented a more detailed and aggressive bid process with multi-round competitive negotiations.
“If you talk to our analysts that were involved in those negotiations, they will probably tell you that the multiple round strategy resulted in much better pricing in almost all categories,” says Petty. “It’s a dynamic that hadn’t been used before.”
Reworking specifications of goods and services, along with structuring the bids to best reflect the underlying cost structure, have also increased state savings.
“When we constructed the [Smart Buy] procurements, instead of using a cookie-cutter approach for each category, we leveraged the category expertise provided by Silver Oak to craft the optimal pricing structure that is specific to each category,” says Petty. “For example, in our office supplies contracts, aside from negotiating for steep discounts for a comprehensive spread of items in the catalog, we negotiated even more aggressive discounts for an essential products list of commonly purchased items and tracked those on a line-item basis.”
Additional best practices include executing contracts centrally, conducting fact-based negotiations, ensuring purchasing compliance with established contracts, practicing demand management, right-sizing copier and cell-phone plans, tracking savings, monitoring agency contract usage, setting standards on PC configurations, conducting periodic bulk buys on PC contracts, considering automatic renewals only in light of market conditions, applying a “managed service provider” approach to IT services, and comparing bid responses using cost/benefit and total cost of ownership models.
Categories and Contracts
With the exception of construction and public works procurements, all other purchasing and contracts, including services, are within the scope of the Smart Buy project.
Oregon considers multiple choices as a possibility in all categories.
“When we put out a bid or RFP, we reserved the right to award one or multiple contracts,” says Petty.
An important project goal is to better leverage Oregon’s purchasing power. DAS champions the use of more mandatory contracts so that the state can engage volume purchase leverage during negotiations with suppliers. Each spend category and sourcing opportunity is evaluated independently, and recommendations are made based on the best value to the state.
“In Oregon, unless a price agreement is specified as optional, it is mandatory,” says Petty. “We allow agencies some exceptions around that, but they have to come to us with unusual circumstances.”
Though the contracts are mandatory, user agencies currently have two contracts to choose from in certain spend categories, such as PCs, laptops, PC servers, and PC peripherals.
Agencies and institutions not subject to DAS purchasing authority are highly encouraged to participate in buying off of the Smart Buy contracts.
For PC hardware, DAS worked with Oregon’s Chief Information Officer’s (CIO) Council to develop standard configurations that would be appropriate for most uses within state government. For desktop PCs, four standard configurations were created.
“We clearly defined the specifications of the standard configurations and then tried to drive best pricing around those configurations,” says Petty. “It enabled us to give our suppliers a little more idea of what it was that we needed in advance.”
This practice allowed suppliers to improve their supply-chain efficiencies, and, in turn, pass on the associated savings to the state.
Currently in the middle of its first refresh cycle of PC laptops, servers, and desktops, the state brought in Intel and suppliers to discuss where the industry is headed.
“The meeting gave us the opportunity to decide where configuration standards ought to be for the next six months,” says Petty. “It’s an interesting process that we have never done before.”
Checks and Balances
When the project was first conceived, the Steering Committee ranked the validation of actual savings as critical. The state brought in Merina and Company, a third-party accounting firm, to specifically review the savings methodologies. Merina reviewed all of the categories to determine that the savings methodologies accurately reflected savings achieved, as well as the savings tracking reports.
During phase one, Silver Oak Solutions developed and put in place tracking and monitoring reports that revealed how much was spent and how much was saved on a monthly basis. After reviewing reports for five categories, Merina determined that the savings methodologies were reasonable and that the accounting reports accurately reflected the savings.
Merina continues to provide ongoing oversight. At some point, the state may bring the review process in house, but, for now, the independent audits are invaluable.
Smart Buy savings are reported cumulatively. Initially, DAS projected that total dollar impact to state agencies would reach $4.3 million by the end of 2004.
“As of December 31, 2004, we had a reported cumulative total dollar impact of over $4.1 million, which is very close to the initial projections,” says Petty.
Some of the newly sourced categories had user groups already in operation (such as fleet managers and chief information officers), who had some constituency in state government. For categories without existing user groups, ones were created. Evaluation teams made up of agency and procurement staff also provided feedback and review of specifications.
“We wanted to make sure that we weren’t just getting something that was going to save money, but something that met the agency’s needs,” says Petty.
Now that Smart Buy has been successfully implemented, the Steering Committee meets every other month, pending substantive issues such as legislative sessions.
The Core Team, a subset of the Steering Committee, initially made the week-to-week decisions, but now meets every other week.
The Smart Buy Project Team is made up of staff from the State Procurement Office. This group collaborates with the consultants as part of the strategic sourcing effort.
“We received approval from the legislature to hire three additional positions to help run the project,” says Petty. “One of those is a research analyst.”
DAS procurement analysts work alongside the consultant’s analyst to lead the work of Smart Buy teams. For specific acquisitions, the buyer responsible for a commodity or service in the State Procurement Office handles that category through a strategic sourcing methodology.
“[Smart Buy] operates as a matrix kind of organization using a project management structure,” says Petty.
Oregon has a tradition of working cooperatively with its political subdivisions, and Smart Buy has been a terrific benefit to local governments and school districts that need to stretch their dollars as well. Over 300 political subdivisions have joined the Oregon Cooperative Purchasing Program (OCPP), taking advantage of the newly deployed Oregon Procurement Information Network at no cost and purchasing off of state price agreements and contracts.
Spending on Smart Buy contracts by political subdivisions has exceeded projections. Spending by these cities, towns, and counties was initially projected to be in the neighborhood of $8.5 million by the end of December 2004 with savings of $2.3 million.
“Local governments and school districts have exceeded savings targets by more than 60 percent—with spending of $9.9 million and approximately $3.8 million in savings by the end of December 2004.”
Committed to Success
Strategic sourcing, on the state level, has really come into its own in the last few years as identifying and “partnering” with the right suppliers becomes more important.
“It’s a terrific opportunity to strategically contribute to the mission of this organization,” says Petty.
The Smart Buy project has produced verifiable savings at a time that cost reduction has been fairly critical in the State of Oregon. Governor Ted Kulongoski laid out a charge for agencies to increase accountability and performance—the Smart Buy project met that challenge and then some.
Editor’s Note: For more information on the State of Oregon, visit: www.govinfo.bz/4590-103. For CDW-Government, Inc., visit: www.govinfo.bz/4590-104. For Merina and Co., visit: www.govinfo.bz/4590-105. For Silver Oak Solutions, visit: www.govinfo.bz/4590-287.
For background details Government Procurement, click here.
If you have an issue that you would like us to cover, get in touch at firstname.lastname@example.org.