Redesigning Public Procurement

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Redesigning Public Procurement

• Presentation to 2nd Annual Summit on
• E-Procurement for Government
• January 24, 2002
• Vern A. Burkhardt

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Redesigning Public Procurement

• The Business Imperatives
• Trends Impacting Government Procurement
• Planning Re-engineering of Procurement
• Justifying the Investment
• Selecting E-procurement Solution
• The British Columbia Experience

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The Business Imperatives

• Improve efficiency and reduce costs
• Streamline and improve work processes
• Increase quality and timeliness of services
• Leverage infrastructure investment
• Meet policy imperatives (fair and open tendering)

4
Trends Impacting Procurement in Government

• Growth in electronic delivery of Government
  services
• Increased outsourcing
• Increased procurement of services and human
  capital versus goods
• Productivity gains using IT solutions
• Increased size, market position and negotiating
  strength of suppliers

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Trends (cont.)

• Increased purchasing leverage while enabling
  decentralization of procurement
• Specialized skills required (e.g., negotiation,
  strategic sourcing, IT)
• Increased expectations for quality and timeliness
• Increased budget pressures

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Planning for Re-engineering of Procurement
Processes

• Executive commitment and sponsorship
• Clear deliverables
• Stakeholder involvement
• Secure required resources

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Planning for Re-engineering

• Manage risks
• Identify opportunities for high ROI
• Strategy must recognize E-Procurement still in
  infancy stage
• Focus on enablement, not control
• Early implementers and quick wins

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Planning for Re-engineering

• Solid project management is key
• Clarify the opportunity
• Problem with current situation
• How and for whom will things be better
• Performance criteria for deliverables
• Scope (boundaries and limits on the project)
• Constraints (cost, timeframe, required quality)
• Clear roles (sponsor, project manager, authority
  to make decisions)

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Justifying the Investment

• Spend analysis (sample of data)
• Process analysis and mapping
• Cost of current state
• Determine future state
• Benchmark with Best Practices
• Estimate return on investment

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Spend Analysis
Spend analysis involves looking at spend data in
different ways to help identify where improvement
opportunities lie
Analysed by
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Mapping Procurement Process for Each Method of
Purchase

• Identify procurement processes
• Map workflow for each process
• Identify re-engineering opportunities
• Inefficient processes
• Redundant processes
• Obsolete processes
• Flag policies and procedures to be updated or
  eliminated

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Example of Process Map
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Current State Cost for Baseline

• Average fully-loaded cost per transaction for
  each type of procurement
• Fixed costs (e.g., building occupancy, IT capital
  depreciation)
• Variable costs (e.g., procurement service fees
  salaries of procurement, line management and
  accounts payable staff)

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Future State Opportunities

• Identify desired state for streamlined
  procurement process
• Process simplification
• Appropriate delegation of authorities
• Avoid rework
• Eliminate duplicate data entry
• Technology as enabler
• Provide tool sets
• Streamline work processes

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Benchmark with Best Practices

• Business Processes
• Unit Costs
• Use comparable organizations, public sector where
  available
• With emphasis on comparability

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Justifying the Investment Estimate ROI

• Cost of E-procurement enablement
• Cost to reengineer procurement processes
• Policy simplification
• Streamline business processes
• Human Resource retraining, displacement
• Project savings after IT and process
  reengineering
• Savings for each type of procurement process

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Considerations for Selecting E-Procurement
Solution

• Procurement functionality supports
• Innovative procurement methods (e.g., reverse
  auctions)
• Electronic order processing
• Work flow
• Business rules capability
• Reporting
• Event notification
• Payment card usage
• Tax calculation modules

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Considerations for Selection

• Catalogue functionality supports
• Products and services
• Internal customized catalogues
• Supplier managed catalogues
• Supplier product configurators
• Catalogue aggregators

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Considerations for Selection

• Vendors customer base
• Targets large to mid-size customers
• Targets government sector
• Significant number of customers
• Canadian presence
• Significant market presence
• Underlying technology solution
• Mainstream or home grown
• Customer access to code

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Considerations for Selection

• ERP integration
• Supports users ERP(s)
• User interface
• Web based
• GUI based
• Vendor product support
• Support provided during normal business hours in
  applicable time zone, with no surcharges

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Considerations for Selection

• Technology supported
• Platform includes Unix
• Database includes Oracle
• Supplier connectivity standards
• Support includes XML, OBI, EDI
• Standalone or ASP
• Includes a stand alone version of the system

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Considerations for Selection

• Vendors financial strength
• Public or private ownership
• Financial strength rating by independent body
• Industry analyst ranking
• Rating in E-procurement competitive environment
• Costing Model
• One time licence fees/transaction fee
• Overall cost of solution

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The British Columbia Experience

• Current State
• Metrics for Affected Procurement
• Initiatives Underway
• Common Infrastructure
• BC Bid Electronic Sourcing System
• Procure to Pay

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The British Columbia Experience

• Current State
• BC Bid system
• Linked to Merx
• Shopping carts, internal catalogues, electronic
  charge back to ministries (distribution centres,
  publication sales)

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Metrics for BC Procurement

• Over 2 billion in spend by government
  ministries, over 8 billion public sector
• Suppliers to BC Government
• 38,422 suppliers
• Top 20 suppliers provide 585 million
• Top 40 suppliers provide 742 million

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Metrics

• 260 million purchases on Standing Offer
  Agreements
• 187,000 transactions for 51 million using
  procurement card
• Average 275 per transaction

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Shift in Focus

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British Columbia Initiatives

• Initiatives underway
• Electronic Service Infrastructure
• Enterprise Portal
• Integration broker
• BC Electronic Identification
• New BC Bid system
• Procure to Pay

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BC Initiatives

• Portal project
• To have a single gateway for public, suppliers
  and government employees
• Build on strength of common look and feel
• Security
• Authentication
• Integration Broker
• To implement a single standard for interfacing
  and transferring data between systems

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RELATIONSHIP - BC Bid Procure To Pay
Budget
Audit

Report



Pay
Procurement Management
Order
Requisition

Procure To Pay (Requisition to Accounts Payable)
Contract
Source
BC Bid (Sourcing to Award)
Strategy
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BC Bid Electronic Sourcing System

• To provide fair and open access to ministries
  and funded public bodies bid opportunities
• To provide a one-stop location for all BC public
  sector bid opportunities
• To enable suppliers to provide on-line quotes
• To provide templates for preparing solicitations
  and subsequent amendments

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BC Bid System

• To enable public sector buyers to evaluate quotes
  and issue awards
• To permit push of bid opportunities to
  registered suppliers
• To interface with governments Oracle Financials,
  SAP and ERPs of participating public sector
  bodies
• To provide comprehensive management reporting for
  procurement decision-making

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BC Bid System

• Anticipated benefits of BC Bid System
• Savings in procurement process and cost of goods,
  services and construction
• Increase access and reduce costs for suppliers
• Support implementation of procurement shared
  service agency
• Enable central strategic procurement
• Enable decentralized purchasing at ministry level
  and by funded public bodies

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BC Bid System
Public Bodies
Suppliers
Enterprise Portal
Interface to ERPs
Security/ Authentication layer
Hyperlink
Oracle
Catalogues
SAP
Other ERPs
Ministries
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BC Bid Functions

• Workflow
• Requisition creation
• Solicitation creation (templates)
• Solicitation posting
• Bid submission
• Bid receiving
• Award creation
• Online/ offline award
• Management reporting
• Hyperlink to existing catalogues
• Security
• Evaluation tool sets
• SAP Oracle interface
• Supplier file interface

Public Bodies
BC Bid System
Suppliers
Ministries
SAP
Oracle
Hyperlink
Catalogues
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BC Bid System

• BC Bid System project next steps
• Request for Proposal process completed
• Negotiating contract with successful supplier
• Target implementation June 2002

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Procure to Pay

• Result of cross-government financial benchmarking
  study
• Accounts Payable costs higher than best practice
  benchmarks
• Concluded significant savings required
  reengineering of end-to-end process
• From purchase order to payment of suppliers
• Initial focus is BC government ministries

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Procure to Pay

• Identified and mapped processes for 22 different
  types of procurement
• Sampled 9 ministries that represent 80 of total
  government spend

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Procure to Pay Opportunities

• Changes to government-wide policy and business
  procedures
• Procurement process improvement, even without IT
  changes
• Technology to improve procurement provide data
  for strategic sourcing
• Skill development to ensure sound procurement
  practices

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Procure to Pay Opportunities

• Projected process savings of 22 million over 5
  years
• 25 to 30 reduction for Standing Offer Agreements
• 30 to 40 reduction for Pcard process
  (reconciliation, reporting)
• Reduction of 98 minutes staff time per
  transaction for general contracts
• Reduction of 325 minutes staff time per
  transaction for complex contracts

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Redesigning Public Procurement

• Technology enablement can
• Streamline to reduce process costs
• Enhance strategic procurement activities to
  reduce cost of goods, services and construction

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Redesigning Public Procurement

• Determining potential ROI requires
• Analysis of current state (spend, procurement and
  payment processes)
• Agreement on future state (objectives to be met,
  business model)
• Estimate cost of change
• Benchmark with Best Practices
• Recognize it is a moving target

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Redesigning Public Procurement

• A moving target

Where are they? I am their leader
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Appendix A

• Procure to Pay Best Practices
• Developed by the British Columbia Governments
  Procure to Pay Working Group

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Procure to Pay Best Practices

• Manage Suppliers
• Structure purchasing organizations to facilitate
  supplier management and strategic sourcing
• establish cross-functional teams, i.e.
  specialists from areas such as purchasing,
  operations, and customer service combine their
  expertise to select and manage suppliers
• negotiate volume discounts with suppliers and
  pass along favourable pricing, terms, and
  conditions to customers

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Manage Suppliers

• Consolidate the supply base
• target specific supply categories one at a time,
  and optimize the size of the supply base by
  drawing only on suppliers that meet standards for
  quality, price, delivery, service, and business
  integrity
• establish closer ties with suppliers that best
  meet needs, to foster closer co-operation between
  government and its suppliers
• Manage the supplier selection process
• carefully identify and document the requirements,
  and communicate them fully to all potential
  suppliers

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Manage Suppliers

• Partner with suppliers
• share information freely with suppliers regarding
  governments objectives and priorities
• evaluate suppliers performance by regularly
  tracking key metrics
• work with suppliers to achieve cost savings, e.g.
  commit to long-term agreements, in exchange for
  discounts, favourable credit terms and other
  benefits, and share the savings with suppliers
  when they identify cost reductions

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Manage Suppliers

• Partner with suppliers (contd)
• allow self-service web-based access for standard
  supplier inquiries and supplier registry
• develop strategic alliances with key suppliers
• facilitate supplier development, including
  proactive communication of business opportunities
  to suppliers

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Purchase Goods and Services

• Align purchasing strategy with overall corporate
  strategy
• include broad goals for the purchasing function
  in governments overall strategic plans
• purchasing managers then define the steps
  required to achieve these goals, and establish
  specific performance measures

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Purchase Goods and Services

• Use performance measures and controls
• quantifiable measures by bench-marking against
  comparable private and public sector leaders
• controlling costs
• establishing and maintaining supplier
  relationships
• satisfying key stakeholders (e.g. end users,
  policy makers) and
• making continuous operating improvements
• incentives that reward staff for meeting
  performance targets

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Purchase Goods and Services

• Establish cross-functional linkages
• involve purchasing in the strategic stage of the
  procure-to-pay process to help set standards for
  goods and services, and address product
  standardization and supplier selection
• Develop / apply supplier performance ratings
• establish and rank criteria like quality,
  delivery reliability, price, service based on
  strategic importance of the commodity

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Purchase Goods and Services

• Ensure that personnel involved in the
  procure-to-pay process are fully trained and
  knowledgeable
• plan for thorough training of staff and managers,
  including end-users
• communicate the purchasing strategy to all areas
  of government

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Purchase Goods and Services

• Implement integrated information system
• implement integrated on-line procure-to-pay
  solution that extends across all of government
  and to suppliers
• seamless flow of data to increase efficiencies,
  and ensure better tracking and reporting of
  information
• data captured once at the start of the process
• use of self-service purchase requisition system
  and centrally managed web-based catalogues

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Purchase Goods and Services

• Promote ethical supplier relationships
• create a policy that explicitly defines
  governments standards for ethics in purchasing
• train employees and suppliers so that the policy
  is fully understood
• boost employee professionalism
• perform regular audits of purchasing records for
  compliance

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Purchase Goods and Services

• Reduce costs for small orders / routine
  purchasing transactions
• rationalize use of procurement cards
• procurement card purchases replaced with
  e-commerce purchasing where possible
• designate a group of approved vendors and allow
  employees to make certain purchases directly
• rationalize employee spending authorization limits

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Accounts Payable

• Manage payment dates and terms
• eliminate late fees and interest charges with
  on-time payments
• pay early to take advantage of prompt-payment
  discounts

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Accounts Payable

• Streamline and automate processes
• avoid having to key data into the system (e.g.
  receive invoices via EDI)
• automate recurring payments, via direct debits by
  the supplier
• pay via EFT to save money on paper cheques
• eliminate invoices as the driver for payments,
  carefully control the purchasing and receiving
  processes, and pay by Electronic Receipt
  Settlement (ERS)
• store purchasing and financial records
  electronically to facilitate retrieval/sorting
  and eliminate filing furniture

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Accounts Payable

• Protect against fraud and over payments
• define and implement appropriate controls across
  all functions of government
• adopt code of ethics
• train employees in controls for fraud prevention
• segregate job responsibilities in purchasing and
  receiving, and finance and inspection where
  applicable

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Accounts Payable

• Establish controls appropriate to risk and value
• create optimal layers of approvals and audits,
  i.e. match the level and number of controls to
  the risk and value of the transactions, meaning
  stricter audits and approvals on high value
  transactions than on low-value ones
• eliminate invoice approvals, relying instead on
  approved POs and receipts
• rationalize payment approval thresholds

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Accounts Payable

• Integrate AP with procurement function
• implement shared services to operate with fewer
  people and fewer electronic transactions
• increase specialization

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Accounts Payable

• Link AP and AR systems
• build interfaces between the e-billing and
  e-payment systems
• customise the integrated AP and AR systems to
  flexible disbursements and ensure smooth cash
  flow

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Appendix B

• Example of map and identified tasks for Master
  Standing Offer purchases

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Example of Process Map
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