Lyndon B. Johnson School of Public Affairs Policy Research Project Report Number 146 Beyond the Bid: An Evaluation of State and Local Government Procurement Practices Project directed by Sherri Greenberg A report by the Policy Research Project on Public Procurement Practices in State and Local Government The LBJ School of Public Affairs publishes a wide range of public policy issue titles. For order information and book availability call 512-471-4218 or write to: Office of Communications, Lyndon B. Johnson School of Public Affairs, The University of Texas at Austin, Box Y, Austin, TX 78713-8925. Information is also available online at www.utexas.edu/lbj/pubs/. Library of Congress Control No. : 2004111604 ISBN: 0-89940-759-5 ©2004 by The University of Texas at Austin Printed in the U.S.A. All rights reserved Cover design by Doug Marshall LBJ School Office of Communications Policy Research Project Participants Students James Brandenburg, B.S. (Accounting), Clemson University Erin Eisenberg, B.A. (Political Science and Comparative Literature), Binghamton University (State University of New York) Camellia Falcon, B.S.E. (Operations Research and Financial Engineering), Princeton University Aaron Kaminsky, B.A. (Economics and Political Science), University of New Mexico Brian Kelsey, B.A. (Economics and History), University of North Carolina at Chapel Hill Darlene Lanham, B.A. (Speech-Language Pathology and Audiology), University of North Texas Sofia Lo, B.A. (Political Science and Sociology), University of California at Los Angeles Eli Massey, B.S. (Mechanical Engineering), University of Arizona Vanessa McMahan, B.S. (Architectural Engineering), University of Texas at Austin Timothy Patrick O'Brien, B.A. (Political Science), St. Edward's University Kenichi Nakamura, B.S., M.S. (Engineering), Kyushu University Fernando Rodriguez, B.A. (Latin American Studies), University of Texas at Austin Tom Schuette, B.S. (Political Science), Truman State University Peter Siegesmund, B.A. (Economics and History), University of Texas at Austin Aaron Smith, B.A. (Liberal Arts), University of Texas at Austin Erin Taber, B.S. (Economics), Arizona State University Reagan E. Weil, B.A. (International Studies), Austin College Amy Witte, B.F.A. (Studio Art), University of South Carolina Project Director Sherri Greenberg, Lecturer in Public Affairs, Lyndon B. Johnson School of Public Affairs, The University of Texas at Austin. Table of Contents List of Tables ..................................................................................................................... ix List of Acronyms ................................................................................................................ xi Foreword ........................................................................................................................... xv Acknowledgments ........................................................................................................... xvii Executive Summary ......................................................................................................... xix Chapter 1. Introduction ........................................................................................................ 1 Chapter 2. Centralization versus Decentralization .............................................................. .3 Overview .................................................................................................................. 3 Centralization ........................................................................................................... 4 Decentralization ..................................................................................................... 10 Current Trends and Recommendations .................................................................. 13 Conclusion ............................................................................................................. 17 Chapter 3. Contracts ........................................................................................................... 23 Overview ................................................................................................................ 23 Vendor Selection ....................................................... : ............................................ 23 Contract Characteristics ......................................................................................... 29 Contract Process Evaluation .................................................................................. 35 Current Trends ....................................................................................................... 38 Key Recommendations and Conclusion ................................................................ 46 Chapter 4. Oversight and Relationship Management ........................................................ 55 Overview ................................................................................................................ 55 Oversight ................................................................................................................ 56 Relationship Management ..................................................................................... 61 Current Trends and Recommendations .................................................................. 64 Conclusion ............................................................................................................. 67 Chapter 5. Personnel .......................................................................................................... 73 Developing Human Capital ......... _. ..........................................................................73 Training Academies ............................................................................................... 7 4 Professional Organizations and Professional Development .................................. 75 Mentoring Programs and On-the-Job Training ...................................................... 75 Ethics ...................................................................................................................... 76 Conclusion ............................................................................................................. 79 Chapter 6. Electronic Procurement .................................................................................... 83 Overview ................................................................................................................ 83 Web-Assisted Purchasing ...................................................................................... 83 E-Procurement ....................................................................................................... 85 ''Total Integration" ................................................................................................. 93 Current Trends and Recommendations .................................................................. 94 Conclusion ............................................................................................................. 97 Chapter 7. Summary of Recommendations ..................................................................... 105 Overview .............................................................................................................. 105 Centralization vs. Decentralization ...................................................................... 105 The Contracting Process ...................................................................................... 106 Oversight and Relationship Management ............................................................ 107 Personnel .............................................................................................................. 108 Electronic Procurement ........................................................................................ 108 Conclusion ........................................................................................................... 109 Appendix A. State of California Case Study ................................................................... 111 Introduction .......................................................................................................... 111 Overview .............................................................................................................. 111 General Background: Programs and Initiatives ................................................... 111 Commodities ........................................................................................................ 115 Construction ......................................................................................................... 116 Information Technology Procurement ................................................................. 117 Outsourcing .......................................................................................................... 118 Appendix B. City of Sacramento Case Study .................................................................. 125 Introduction .......................................................................................................... 125 Overview of Purchasing Department ................................................................... 125 Procurement Process ............................................................................................ 126 Functional Areas .................................................................................................. 127 Appendix C. City of San Diego Case Study .................................................................... 131 Introduction .......................................................................................................... 131 Overview of the Purchasing Division .................................................................. 131 Procurement Process ............................................................................................ 133 Construction Purchasing ...................................................................................... 135 Information Technology ....................................................................................... 136 Outsourcing .......................................................................................................... 136 Appendix D. State of Florida Case Study ........................................................................ 141 Introduction .......................................................................................................... 141 Overview of Purchasing Department ................................................................... 141 Procurement Process ............................................................................................ 143 Functional Areas .................................................................................................. 144 Appendix E. City of Tallahassee Case Study...................................................................157 Introduction ..........................................................................................................157 Overview of Purchasing Department ...................................................................157 Procurement Process ............................................................................................159 Functional Areas .................................................................................................. 161 Appendix F. State of Texas Case Study........................................................................... 169 Introduction .......................................................................................................... 169 Overview of Purchasing Department(s)...............................................................169 The Procurement Process..................................................................................... 171 Functional Areas ..................................................................................................174 Appendix G. City of Austin Case Study ..........................................................................183 Introduction ..........................................................................................................183 Procurement Process ............................................................................................183 Functional Areas ..................................................................................................186 Appendix H. New York State Case Study .......................................................................191 Introduction .......................................................................................................... 191 Overview..............................................................................................................191 Process ................................................................................................................. 191 Functional Areas .................................................................................................. 193 List of Tables Table 3.1 Advantages and Disadvantages of Procurement Methods in Construction Contracting .................................................................................................. 42 Table 6.1 Electronic versus Traditional Procurement....................................................... 89 Table B.1 Statutory Spending Authority Levels in the City of Sacramento, California ........................................................................................128 List of Acronyms AASHTO: American Association of State Highway Transportation Officials ACC: Austin Community College AHS: Amoore Health Systems AIS: Automated Information Systems AISD: Austin Independent School District AMEX: American Express A WI: Agency for Workforce Innovation Caltrans: California Department of Transportation CAM: California Acquisition Manual CCNA: Competitive Consultants Negotiation Act, State of Florida CII: Construction Industry Institute CIO: Chief Information Officer CIP: Capital Improvement Plan CMAS: California Multiple Awards Schedule CMBL: Centralized Master Bidders List CONA: Council of Neighborhood Associations, Tallahassee/Leon County COPES: Cooperative Personnel Employment Subsystem CPM: Critical Path Method CSCR: California State Contacts Register CSP: Central Store Program CSS: Central Supply Store DCG: Design and Construction Group, State of New York DOS: Department of General Services, State of California DIR: Department of Information Resources DLI: Department of Labor and Industry, Pennsylvania DMA: Department of Management and Administration, City of Tallahassee DMS: Department of Management Services, State of Florida DOIT: Department of Information Technology FDOT: Florida Department of Transportation FSS: Federal Supply Service FTS: Federal Technology S~rvice GAO: General Accounting Office GSA: General Services Administration HBA: Highway Beautification Act IIBS: Health and Human Services HR: Human Resources IIlJB: Historically Underutilized Business ISM: Institute for Supply Management IT: Information Technology ITB: Invitation to Bid ITN: Invitation to Negotiate LAS: Letting Award System, Florida Department of Transportation LCRA: Lower Colorado River Authority MBE: Minority-Owned Business Enterprise MWWD: Metropolitan Wastewater Department NAIS: NASA Acquisition Internet Service NASA: National Aeronautics and Space Administration NASIRE: National Association .of State Information Resource Executives NASPO: National Association of State Purchasing NIGP: National Institute of Government Purchasing OCTA: Orange County, California, Transit Authority OFf: Office for Technology, State of New York OGS: Office of General Services, State of New York OPP: Office of Policy and Procedures OSC: Office of the State Comptroller, State of New York OSDC: Office of Small Business and Disabled Veteran Business Enterprise Certification OSMIS: One-Stop Management Information System OVFM: Office of Vehicle Fleet Management PD: Project Definition PIA: California Prison Industry Authority PSG: Procurement Services Group, Office of General Services, State of New York PSSU: Pennsylvania Social Services Union QISV: Qualified Information Systems Vendor Program RESD: Real Estate Services Division RFB: Request for Bids RFP: Request for Proposal RFQ: Request for Quotations RFQual: Request for Qualifications RTS: Request for Training Services RWB: Regional Workforce Board SAM: State Administrative Manual SBE: Small Business Enterprise SCM: State Contracting Manual SCPRS: State Contract and Procmement Registration System SDDPC: San Diego Data Processing Corporation SIMM: Statewide Information Management Manual SPURS: State Purchasing Subsystem, State of Florida STO: State Technology Office TBE:TampaBayEngineering TBPC: Texas Building and Procmement Commission TGC: Texas Government Code TIP: Technology Integration Plan UPK: Universal Pre-Kindergarten UT: The University ofTexas WBE: Woman-Owned Business Enterprise WFI: Workforce Florida, Inc. WSCA: Western States Contracting Alliance Foreword The Lyndon B. Johnson School of Public Affairs has established interdisciplinary research on policy problems as the core of its educational program. A major part of this program is the nine-month policy research project (PRP), in the course of which two or more faculty members from different disciplines direct the research of ten to thirty graduate students of diverse backgrounds on a policy issue of concern to a government or nonprofit agency. This "client orientation" brings the students face to face with administrators, legislators, and other officials active in the policy process and demonstrates that research in a policy environment demands special talents. It also illuminates the occasional difficulties of relating research findings to the world of political realities. This report, Beyond the Bid: An Evaluation ofState and Local Government Procurement Practices, is the culmination of work by students during the 2003-2004 academic year. Procurement is a fundamental, but poorly understood, aspect of state and local government operations. The purpose of this policy research project is to provide an understanding of state and local government procurement and provide recommendations and options to improve the process. Accenture was the sponsor for this policy research project in state and local government procurement practices. The recommendations and policy options in the report are solely the results of the students' work and have not been endorsed or approved by Accenture. The curriculum of the LBJ School is intended not only to develop effective public servants but also to produce research that will enlighten and inform those already engaged in the policy process. The project that resulted in this report has helped to accomplish the first task; it is our hope that the report itself will contribute to the second. Finally, it should be noted that neither the LBJ School nor The University of Texas at Austin necessarily endorses the views or findings of this report. Edwin Dorn Dean Acknowledgments We would like to thank all of the participants in this project with special thanks to those in the procurement field who took the time to share their expertise: Marlene Ackee, City of San Diego Walter Bikowitz, New York State Office of General Services Bob Bisho, City of Phoenix Bill Black, LBJ School of Public Affairs Robert W. Bodine, Workforce Plus Terrell Breaux, City of San Diego Purchasing Division Fran Brooks, State of Florida Sue Brubaker, City of Austin Cathy ~avis, City of Tallahassee Don Del Rio, San Diego Data Processing Corporation Mariel Dennis, State of California Department of General Services Bill Fackenthall, State of California Department of General Services Ken Granger, State of Florida Department of Management Services Juanice M. Hagan, Florida Department of Transportation Audrey Harrell, Accenture Weaver Jackson, Texas Building and Procurement Commission Patricia Jones, State of California Department of General Services Dennis Kerhulas, City of Sacramento Procurement Division Larry Mcintyre, Agency for Workforce Innovation, State of Florida John Mendevil, City of San Diego Marcus Montemayor, SBC Juanita Moore, Aorida Department of TransJ>ortation Brent Paniucki, City of Tallahassee Bob Rawski, University of Texas System Office ofFacilities Planning and Construction David Reid, City of Tallahassee Bob Riola, State of California Michelle Roach, City of San Diego Purchasing Division Lindsay Roth, Accenture Russ Rothman, State of Aorida Department of Management Services Ed Serna, Texas Department of Information Resources Fred Springer, State of Aorida Department of Management Services John Stewart, Texas Building and Procurement Commission Michael M. Switzer, Workforce Aorida, Inc. Robert Thomas, City of Sacramento Mark Wal sh, City of Austin Monica Wilkes, State of New York Harry Williams, State of New York Executive Summary Overview and Purpose The purpose of this report is to provide an understanding of the public purchasing function and to suggest some recommended practices in procurement for state and local governments. Public procurement is a fundamental aspect of government operations, particularly important in a time of budget deficits. In general, procurement is poorly understood by many with vested interests in this function, such as suppliers, requisitioners, professional purchasers, legislative branch and executive branch officials, and citizens. Potential benefits of reviewing procurement practices are many, including the potential for better management of public funds, more responsive policies and processes supporting the government's mission, and a mutually supportive structure for suppliers, professional purchasers, and requisitioners. This report explores differences in procurement practices associated with traditional goods and services; technology hardware, software, and services; construction of goods and services; and outsourcing. Academic research, news articles, white papers, and vendor-side information sources were consulted. In addition, experts in the public purchasing field were interviewed and site visits were conducted in order to complete case studies of comparable cities and states. Municipal procurement practices in Austin (Texas), Sacramento and San Diego (California), and Tallahassee (Florida) were examined, as were the statewide practices of California, Florida, New York, and Texas. Recommended Practices Our research revealed five major areas of study: centralization versus decentralization; contracting; oversight and relationship management; personnel practices; and electronic procurement (e-procurement). An overview of each subject and some of our recommended practices follow. Centralization versus Decentralization There are advantages and limitations to both centralized and decentralized purchasing structures. Agencies should consider oversight needs, cost concerns, and resource management when deciding the appropriate degree of centralization that should be employed. Generally, public sector purchasing systems incorporate a hybrid approach in order to gain the benefits of each arrangement. Some recommended practices include these findings: • Centralization leads to unit cost and administrative savings. • Centralization reduces the risk of fraud. • Decentralized systems reduce the time delay between ordering and delivery. • Decentralized systems do not enjoy the reduced cost in savings that centralized systems experience. Contracting Procurement contracting is a critical function in that it details the terms and conditions under which services and remuneration are to be exchanged between vendors and public agencies. There are many contract methods available for a public agency to use; items to consider in contract selection are: scope and type of project; terms and conditions needed to meet specifications; price; deadlines; and administrative issues. The contract method, whether it be traditional, performance based, or by alliance, will vary with the procurement mission. Recommended practices in the area ofcontracting include the following: • The procurement office should establish an open and transparent bid process that will preserve both the vendor and public's trust in the system. • The procurement office should negotiate with vendors to determine the best ·cost per deliverable good or service. • All procurement offices should have procedures governing the dispute resolution process. Oversight and Relationship Management Oversight in public purchasing ensures the integrity of the commodities or services that are acquired as well as the integrity of the purchasing process itself. Comprehensive oversight practices employ techniques to monitor service/commodity quality as well as to measure performance. Professional relationships between vendors and public agencies complement the oversight function; these relationships are built upon access to information and effective communication of that information. Communication planning and interpersonal communication skill development can impact the performance results of a procurement project and underscore thorough oversight. The following are recommended practices: • Procurement officials should establish standards, or a benchmark, to which they can compare the work of their vendor. • Procurement officials should select a method(s) to monitor the performance of the vendors. • The procurement office should have a system that keeps all of the data pertaining to specific projects in an orderly fashion. Personnel Practices An agency's personnel practices can have a significant impact on the procurement process. As proper development and instruction of personnel can prevent a number of managerial problems, including waste, fraud, and high turnover, it is imperative that procurement offices invest in personnel through proper training, continued education opportunities, and mentoring programs. Some recommended practices in the personnel area are: • Governmental agencies should require fonnal training for procurement officials. • Procurement offices should use professional organizations to share infonnation on industry practices and to establish professional standards. • Procurement offices should implement mentoring programs, whereby a seasoned employee will train a new hire on the job. E-Procurement Use of electronic procurement systems is relatively new to governmental agencies. Originally implemented to facilitate communication with vendors via email, the growing popularity of e-procurement can be attributed to the numerous benefits it can offer. Unlike the traditional paper-based procurement approach, e-procurement is appealing because it allows public sector agencies to quickly gather and disseminate infonnation and to reach greater numbers of vendors with ease, which can translate into increased competition and lower costs. In addition, utilizing an electronic system has the potential to reduce administrative costs, increase efficiency, and enable more strategic use of human capital. Recommended practices concerning e-procurement include: • The procurement office must develop a strategic plan for the use of e-procurement. • The procurement office should phase in the implementation of the new systems and methods. • The procurement office should constantly solicit feedback from users of the system to ensure the long-tenn stability and efficiency of the e-procurement system. Chapter 1. Introduction Public procurement is the process of identifying, acquiring, and distributing services and materials required by state or local governments to serve their constituents. Procurement is a fundamental aspect of government operations. Unfortunately, the misunderstandings and vested interests of suppliers, practitioners, legislators, and citizens often inhibit the development of consistent, transparent, and effective purchasing processes. This report attempts to provide public servants with an understanding of the public purchasing function and make recommendations for improving the procurement process. Topics covered in this report include purchasing authority and organization, contract structure and oversight, procurement reform initiatives, price-saving strategies, purchasing officer training, and data acquisition and management. In addition to providing general procedural guidelines, this report highlights current best practices in procurement at the state and local government levels. Information is drawn from the literature on public procurement and case studies of several jurisdictions in the United States, including the states of California, Florida, New York, and Texas and the cities of Austin, Sacramento, San Diego, and Tallahassee. Innovative procurement practices identified within this report include reverse auctions, performance-based contracts, third-party contract monitors, and vendor education programs, among others. This report is organized according to major topics in procurement. These include centralization versus decentralization, the contracting process, oversight and relationship management, personnel, and e-procurement. Each chapter provides an overview, discusses key concepts, identifies best practices and current trends, and provides specific recommendations for how to improve the procurement function in state and local government. Given the numerous goods and services required for government operations, it would be impossible to address the entire scope of public procurement in a useful and meaningful way. Accordingly, this report focuses on four functional areas of public purchasing: commodities, construction, information technology, and outsourcing. In addition to the chapters discus~ed above, this report also includes case studies detailing purchasing practices and initiatives at the state and local level. This research is based on interviews with purchasing personnel, project managers, procurement experts, government reports, and current literature. The goal of the case studies is to provide helpful illustrations of how several states and cities of comparable size conduct their procurement operations and to provide practical examples of how the general recommendations of this report have been successfully implemented by actual government agencies. While the best practices and recommendations discussed in this report can provide procurement professionals with tools to improve their organization's purchasing process, some elements of government purchasing are necessarily beyond the scope of this publication. For instance, many of the practices discussed allow agencies to reduce the cost of obtaining goods and services. However, purchasing in the public sector is often not simply about obtaining the lowest prices possible. Government purchasing departments are charged with providing goods and services that meet public expectations while also adhering to standards that maintain public trust. In many cases, the public's view of the "best value" may not, in fact, be the product or service that is available at the lowest cost. This is particularly true when the purchasing function serves social or policy goals, such as those supporting Historically Underutilized Businesses (HUBs) or Women and Minority Owned Businesses (WBFJMBE). "Buy local" campaigns, and requirements that suppliers pay a living wage, are other examples of purchasing initiatives supporting policy goals deemed to be in the public interest: While these may not always be the lowest-cost method for purchasing goods and services, many governments continue to utilize them as a means of supporting broader policy initiatives. A second aspect of the political environment not discussed in this report is the influence of lobbyists and other interest groups. Of course, it is extremely important that procurement officials maintain the highest standards of propriety, since ethical lapses can lead directly to loss of taxpayer trust and confidence in government. Several chapters of this report deal directly with how to avoid these ethical issues through open, transparent, and clearly defined processes. Even so, procurement officials are often caught in a struggle between politicians, ordinary citizens, and various interest groups, all of which may have competing agendas as pertains to specific purchases or the purchasing function in general. Navigating these competing interests is often more art than science, and heavily dependent on the political culture within a state or locality. In short, the political environment of government, while noteworthy for its influence on the procurement function, is beyond the scope of this study. The goal of this report is to identify innovative purchasing practices and provide guidelines for optimizing public procurement at the state and local level. Elements of the political environment such as social and economic policy goals are the domain of voters and policymakers, and as such they are not directly addressed in this report. Chapter 2. Centralization versus Decentralization Overview A centralized purchasing system vests the responsibility for buying goods and services in one office or department.1 The goal is to install and maintain control over the entire procurement process, thus improving the efficiency and economy of all purchasing. Centralized purchasing involves more than just the acquisition of goods and services. It encompasses all of the functions associated with the purchase of goods and services, including preparing specifications, screening vendors, negotiating purchasing agreements, awarding purchase orders and contracts, and assuring the delivery of goods. Also, it may encompass functions that are only peripherally related to purchasing, such as receiving and inspecting goods, inventory control, or storage. A decentralized purchasing system is one in which departments buy goods and services or perfonn other procurement functions independently of one another. High-level coordination is usually absent in decentralized purchasing. The responsibility for decentralized purchasing decisions rests within each individual department or agency. Experts have debated for decades whether it is better to devolve purchasing power to individual agencies or to bring this task under the purview of a single, over-arching procurement agency. For the greater part of a century, most large corporations and government agencies handled purchasing in a largely decentralized fashion. This began to change in the early 1980s, as the widespread adoption of advanced infonnation technology gave purchasing officers the ability to establish standard coding systems for products, as well as "accumulate data, analyze it, and share it on a real-time basis."2 While this technology made true centralization a realistic aspiration for most organizations, it did not lead to a wholesale adoption of centralized purchasing techniques. Instead, both private companies and government entities have pursued increased centralization in a somewhat halting, ad hoc fashion. Certainly the overall trend has generally favored increased centralization, as organizations have "shift[ed] to more centralized procurement strategies and activities to orchestrate overall company spending and increase efficiency through economies of scale."3 However, numerous organizations continue to operate under a decentralized purchasing environment, while many others have adopted hybrid systems that combine the elements of centralized and decentralized 4 structures. The decision to centralize the purchasing function is far from straightforward. Certain organizations and types of purchasing better lend themselves to increased centralization than others, but often there is simply no obviously correct choice. Therefore, this chapter will offer little in the way of one-size-fits-all recommendations. Rather, it will examine centralized and decentralized purchasing structures within several specific purchasing functions, with the goal of providing a general set of ground rules for agency personnel to consider when assessing their own purchasing departments. Centralization The need "to reduce, make more efficient, and reform government services"5 inspired the initial move toward centralized governmental purchasing. Centralization allows for the establishment of consistent management practices within the organization that should enable the administration of contract awarding and monitoring in a consistent way across functional areas. Centralization provides increased purchasing efficiency in the areas of cost savings, specialization, increased agency control, and improved data management. Cost Savings Cost savings are typically cited by agency heads and purchasing managers as the primary or overriding factor in the decision to centralize control of the purchasing function. This decision can be summed up in one simple question that is no doubt familiar to anyone involved in purchasing: What is the point of allowing "departments or even divisions...to buy piecemeal when centralized procurement of most goods yields volume discounts and instills purchasing discipline?'"' Due to the economic pressures of the marketplace, large publicly traded companies have aggressively adopted centralized purchasing regimes. Within the past few years, this has led to some startling results in terms of cost savings. Sisters of St. Francis Health Services, Inc., in Mishawaka, Indiana, centralized its purchasing and accounts payable activities for medical supplies and equipment, saving at least $2 million since staggered implementation began in 2002. 7 Gillette turned very modest centralization reforms into nearly $90 million in savings, with further centralization expected to save $250 million over three years.8 Similarly, Japanese electronics manufacturer Fujitsu plans to save $3.85 billion over two years by revamping its purchasing function, largely through increased centralization.9 Academic literature is heavy with examples of private sector companies realizing huge cost savings through increased centralization. As we will see, however, government entities can also use this technique to achieve savings and efficiencies that, while not on the scale of some private sector firms, are nonetheless substantial in the context of city or state government. For example, the University of Texas at Austin is expected to save about $2. 7 million annually through the creation of a centralized purchasing program. The university has gone from purchasing office supplies from more than 200 vendors to purchasing from only two. The centralized purchasing of office supplies will provide substantial savings not only in purchase price, but also personnel costs, inventory reduction, space reduction, and process savings.10 In general, there are two distinct ways in which cost savings can be realized through a centralized purchasing function. The first involves unit cost savings from combining purchases across agencies, while the second results from administrative savings associated with eliminating redundancies in the purchasing function. Unit Cost Savings Cost savings are promoted through volume buying, establishment of term requirements for contracts, standardized specifications, and standard contract terms. The needs of several agencies can be combined to attract better unit pricing than would have been achieved through multiple contracts. A number of researchers have observed a direct link between purchasing unit size and the cost of acquisition, purporting that larger organizations are able to reduce acquisition costs through the use of large contracts. I I A 2003 General Accounting Office (GAO) report clearly states the cost-saving advantages of a centralized procurement system: "By using a more strategic approach to Federal Supply Service (FSS) and Federal Technology Service (FTS) procurement, agencies can leverage their buying power for volume discounts and thereby reduce overall purchasing costs."I2 The report goes on to provide an example of how the U.S. Air Force saved an estimated $3 million by using a centralized procurement strategy in buying more than 13,000 desktop and notebook computers that were previously purchased separately.I3 Administrative Cost Savings By combining the back office purchasing functions of multiple agencies into one centrally administered purchasing office, centralization has the potential for large administrative and personnel savings. This effect is particularly pronounced at the state level, where multiple agencies may duplicate the purchasing function many times over in terms of personnel, purchasing guidelines, facilities, and technology. This is because government agencies, like manufacturing groups in the private sector, tend to have redundancies in processes such as invoicing and procurement because separate operating groups retain control over those functions. In such an environment, cutting overlap and streamlining processes can directly affect the bottom line. I4 In addition to cost savings from headcount reductions and elimination of redundancies, centralized purchasing often is necessary for the realization of full-cost savings associated with e-procurement and other technology implementations. Consider the case of Houston­based Cooper Industries, which realized that its decentralized purchasing structure would be inimical to its planned purchase of an expensive e-procurement system. According to Cooper's purchasing director, the company "saw the software as a good investment, but only if we could build an organization that could act on the information once we had it."I5 By centralizing its operations, the company was not only able to realize multimillion­dollar cost savings, but was spared the effort and expense of implementing an expensive software system that would have been far less effective in a decentralized environment. An effective central procurement program also may reduce the cost of government by eliminating inconsistent practices and procedures that often confuse and discourage vendors from competing.I6 Specialization A centralized purchasing department will provide for more efficient purchasing within a government system because it allows for specialization in purchasing through extensive training and everyday applicability. Centralized systems can give vendors a greater degree of comfort in working with government. The State of California's review and analysis of its purchasing policies found that With the large variety of procurement methods available to departments, it is critical that some level of uniformity in procedures is developed, implemented, and maintained, and that there is some assurance that these uniform procedures are being followed. The easiest way to accomplish this task is by having a large degree of centralization throughout the purchasing process. Decentralized purchasing procedures cause buyers to use a variety of ad hoc methods to conduct their work. 17 Centralization facilitates a collaborative effort across the spectrum of purchasing functions and allows for constant improvement and increased efficiency through extensive purchasing. Centralization provides for constant innovation and reevaluation of the procurement process. Specialist procurement officials provide vendors with a contact who is knowledgeable in the procurement process and familiar with their specific needs. Specialist purchasing agents may be of particular importance in outsourcing in order for them to lead negotiations and apply their market knowledge and experience. These people can work with various agencies to make sure that the process is done effectively. Increased Agency Control Centralized procurement systems also can create efficiency by guarding against waste and fraud in the purchasing process. Placing the purchasing duties in the hands of a central agency whose sole mission centers around purchasing reduces the risk of fraud. Public contracting and procurement has historically been an area prone to weak management, or even corruption.18 Government procurement fraud is a salient public issue that if unchecked leads to widespread anger and distrust of public officials. The fear of fraud leads government officials to place a premium on the integrity of the procurement process, leading to a centralized process where managers believe centralization allows for better internal control and better integration with accounting systems.19 Cost savings and efficiency gains can often be achieved simply by centralizing the purchasing process while still allowing agencies a great deal of latitude in terms of actual purchasing decision making. In this type of centralization, agencies conduct purchasing decisions in an environment of relative autonomy, even as they share the same purchasing infrastructure with other autonomous agencies. While this type of centralization has its merits, as mentioned above, many states and agencies have gone even further along the centralization spectrum in an attempt to gain greater efficiencies from their purchasing function. The authority of the centralized purchasing office extends far beyond simply placing orders in an effective manner-it actually takes an active role in determining the types of purchases made by client agencies. This type of purchasing office role is typically prevalent in complex areas like technology, where interoperability is at a premium and the cost of failure can be immense-by one estimate, state and local governments spent over $9 billion on failed information technology (IT) projects in 2001.20 Attempting to reduce this failure rate, many states have increased centralization of the IT purchasing function. This typically takes the form of a Technology Office with sole responsibility for determining statewide technology guidelines and vetting agency proposals to insure adherence to state IT standards. This issue is discussed in more depth in the Information Technology section of this chapter. Improved Data Management Data collected and stored in a way that does not allow for easy access and analysis is useless, making the data storage system a vital part of the procurement process. All levels of government are charged with transparency and accountability in handling the public's money. Procurement officials need to be aware of this mandate. The public needs accurate data to hold those officials accountable. Procurement officials and agencies need to keep data regarding which vendors bid on the contract, what they bid, and who ultimately is awarded the contract; these records are typically required by law. Efficient tracking and storage allows public agencies to more easily analyze the data for a variety of reasons, including public accountability, vendor accountability, and benchmarking. The State of Texas purchases goods and services from thousands of vendors across the state, generating huge quantities of paperwork and data. Most of this paperwork must be sent back to the General Services Building for processing and archiving. Statutes governing public information also require the Texas Building and Procurement Commission (TBPC) to keep hard copies of all documents produced in daily business for a period of five years. When the paperwork is stored electronically, a hard copy need only be stored for one year. Nearly all the documentation required of both employees and vendors is done on paper, meaning electronic storage necessitates physically scanning documents into the computer if the one year rule is to apply. 21 Storing and managing data electronically saves on space needed to physically store paperwork, and also facilitates the retrieval of data for analysis. This move toward a system where information is accepted and stored electronically coincides with procurement done by the City of Austin, where many bids are posted online and information is stored electronically.22 Since data analysis is important in all forms of procurement, some current trends originate in the business sector. Spend analysis allows companies to use their data and find how much is being spent on various services, who is supplying the goods and services, and where opportunities exist for leveraged buying to save money and improve performance. ChevronTexaco, IBM, Bausch & Lomb, Delta Airlines, and Dell are all currently managing their data in such a way that allows for analysis and policy changes, saving billions of dollars each year. This is done by extracting internal data, organizing the data into categories of services/goods and suppliers, and having it analyzed. To quickly and efficiently obtain this data, automated systems store and consolidate information from various places and organize it for teams to analyze and develop reports for top managers. 23 This spend analysis requires data be collected, stored electronically in a centralized location, and sorted before serious cost-saving analysis can be done. Many technologies and systems tend to be department-, function-, or institution-specific. This "micro" level focus has, subsequently, erected walls within organizations preventing the sharing of information.24 Instead, systems need to be reevaluated starting at the "macro" level down. Evaluating the systems at the macro level is more likely to lead to a data management system that is compatible across all system platforms within the organization and, potentially, among external parties as well. Once macro-level processes and systems are put in place, sub-units within the organization should integrate, tailor, or expand the system to meet their goals, insofar as it does not conflict with overall organizational integration. Data management problems exist in almost every type of institution. For example, a recent audit report in California found "the State currently does not have the tools necessary to provide usable, accurate information on the State's contracting and procurement transactions. For example, the task force reported that General Services cannot determine with any certainty how much state departments spend each year on contracting and procurement."25 California's inability to accurately determine these costs is the result of its fragmented data management system for tracking contracting and procurement information. Pertinent information for tracking these costs are often stored in separate systems, often even within the same agencies. The State of Florida's School Readiness Program has been cited by the Auditor General's office for having insufficient data management systems and practices. The School Readiness Program is responsible for implementing the Universal Pre-Kindergarten (UPK) Program. The School Readiness Program makes use of government agencies and nonprofit organizations as well as contracted individuals in implementing the UPK Program. Florida's Auditor General cited that this "partnership has not adopted rules, established uniform reporting and data collection, or mandated the use of a Statewide system for all Coalitions, resulting in inconsistent reporting practices, the use of multiple systems, and inefficient use of School Readiness Program funds."26 One further benefit of centralized data storage is the use of inventory tracking to allow an entity to have complete information regarding the goods kept on hand. The inventory tracking system at the City of Austin is not centralized. Information on inventory is stored in seven different locations that are uncoordinated at communicating with one another.27 . This makes it difficult to know what the city has on hand at any given time and adds difficulty to purchasing decisions. A system such as this could be particularly detrimental to an entity in the case of an emergency situation, where it may be important to know how many first aid kits or other emergency goods are available. The Limits of Centralization Centralized purchasing regimes obviously have merits, but disadvantages associated with the centralized approach need also be taken into account. Communication problems can arise due to the added layer of a central office to an already bureaucratic system. Similarly, contract managers in the centralized office may not necessarily have the needed expertise or specialized knowledge for the particular contract or agency. This emphasis on "client responsiveness" is the primary factor behind the World Bank's recent movement toward a decentralized purchasing structure giving a great deal of autonomy to local field offices. 28 There can also be feelings of resentment or loss of control by the functional department staff, thus reducing the overall effectiveness of the process for the agency or department. Centralization often removes a "sense of ownership" from the front-line managers who may be the ones who best understand the service or good being procured: "The centralization and regulation discourages them from seeing the contracting process as theirs, as a series of decisions in which they have a stake and can make a difference."29 Decisions on contracting may not include the concerns or expertise of the program managers, resulting in contracts not exploiting the opportunities in the marketplace and producing the loss of intended cost savings. Internal political barriers may make the assertion of central control extremely difficult, limiting the applicability of centralized purchasing. The political environment is particularly relevant in the public sector, which, unlike the private sector, typically does not have the luxury of a strong CEO focusing on cost as an overriding factor in organizational decision making. This gives individual agencies and departments ample opportunity to thwart central purchasing requirements perceived as arbitrary or burdensome. There are several ways in which political factors can cause centralized purchasing systems to fail. At the most basic level, many agencies simply do not assign adequate manpower to the central purchasing agency. When a small number of managers in the central purchasing office are responsible for coordinating multiple component agencies, each with their own semiautonomous leadership, the result is often frustration and diminished authority for the centralized agency. This lack of organizational manpower has been largely responsible for the inability of the Department of Homeland Security to implement a coherent centralized IT purchasing policy.30 Lack of training and education among department-level personnel can also thwart successful implementation of a centralized procurement strategy. Simply crafting regulations is not adequate if agency personnel do not understand or recognize the existence of central guidelines. Purchasing will simply continue in a disorganized or ad hoc fashion. This is illustrated in the following quote from Leonard Weiss, former staff director of the Senate Governmental Affairs Committee: The problem wasn't that the central procurement regulations were at fault but that there was a management culture at the facility where this person was working that prevented the central procurement regulations from being applied in order to get what he needed To change the central procurement regulations and not train the people who are in charge of putting them into place is not going to solve the problem.31 A final political complication to implementing a centralized purchasing policy is that agencies may accommodate the role of the central agency in name but not in practice. One early example of centralization in federal government purchasing is the Paperwork Reduction Act, passed in the early 1980s. One of its most notable provisions was a mandate that all agencies appoint an Information Resource Manager who would. among other things, coordinate new technology purchases to comply with the new requirements. Unfortunately, most agencies simply added the title of1RM to an existing office, and continued to 9perate largely as they had in the past. 32 With the exception of the instances noted above, centralized procurement systems still require user agencies to retain ownership of most purchasing duties. Agencies must still develop requirements and transmit them to the central procurement office and monitor and report contractor performance and other oversight elements. 33 In addition, the oversight of a centralized process does cost money, and the need for additional rules and oversight may extend the timeline for the procurement of certain goods or services. Decentralhation For reasons enumerated above, many governmental agencies and private sector firms utilize a more decentralized approach to the purchasing function. Under the auspices of the .. Reinventing Government" movement, many contend government purchasing must be decentralized to provide more responsive support to end users, eliminate unnecessary and procedural obstacles to program flexibility, improve interdepartmental coordination, and empower service delivery managers to procure what they need without impediment by a centralized organization. 34 A decentralized procurement system allows agency staff to have a more direct involvement with the vendors. These managers may have expertise or specialized knowledge of the goods or service and may therefore be better equipped to negotiate a contract for those items. In this type of system, the front-line managers feel ownership of the process and have a significant impact on the process. This system also provides vendors with a contact person within the agency who is knowledgeable about the specific contract, not just the procurement procedures. This level of communication may be considered very valuable to the public and to the vendors providing the goods or services. In general, a decentralized approach to procurement provides two key benefits: reduced delivery times, and promotion of innovation and flexibility at the agency level. Reduced Time to Delivery While increased centralization can lead to cost savings through bulk purchasing and more effective technology implementations, it also has drawbacks limiting its applicability in all situations. Chief among these concerns is the issue of time delay between ordering and delivery. The rapid pace of technological change means anything prolonging the procurement process runs the risk of obsolescence by the time of implementation. For this reason, care should be taken that any centralized review process balances the competing requirements of timeliness and due diligence. Finding the proper balance in this respect can be difficult due to competing political requirements. In the wake of a recent scandal involving a $91 million software contract with the Oracle Corporation, the State of California's technology director recommended creating a public review board with statutory authority to stop large technology purchases. The logic behind this move was that "Public vetting...helps slow things down and ensures that appropriate deliberation has taken place before action is taken."35 Yet in an interview later that year, the state's newly appointed comptroller (a veteran of the private sector technology industry) pointed to long technology procurement times as a major problem area: Everybody is worried about short procurement, and you have to have shorter procurements. It lessens the politicization, and by the way, technology changes so much that an 18-month procurement time doesn't make much sense.36 For many years, and for good reasons, public jurisdictions have been exceedingly diligent, careful, and methodical, perhaps even slow, in making what seem like simple and routine technology purchases.37 Governments carefully deliberating purchases using public funds, and the Oracle example above, provide evidence for why this process­intensive system is used. However, state and local officials are beginning to rethink the traditional centralized system used to make purchases. In a 1996 report, officials from the National Association of State Purchasing (NASPO) and the National Association of State Information Resource Executives (NASIRE) stated that traditional, centralized procurement methods may no longer fulfill the government's technology needs. The report states that many of the strict, hierarchical procurement processes and policies used by governments today work poorly, or not at all, for the fast-paced, complex field of information technology.38 Time-to-delivery concerns do not just affect technology procurement. In a congressional statement, Marc Weisman, the deputy assistant secretary, Office of Grants and Acquisition Management at the Department of Health and Human Services, stated how decentralization has not only eased time-to-delivery problems but also proved to lead to significant cost savings: Decentralization of HHS's procurement system has given department employees the ability to rapidly acquire the items which they need. The new decentralized system has also enabled the acquisition workforce to absorb a decrease of over 300 full time positions ... Savings from this workforce reduction and administrative cost savings associated with the reduction of paper-based order transactions, invoicing and payments is estimated at over $40 million a year. 39 While Weisman's testimony deals with federal procurement, which differs markedly from state and local purchasing, the benefit of employees being able to quickly gain access to the goods and services that they need is critical at all levels of government and in all areas of procurement. Innovation and Flexibility A second concern with centralization is that a complete reliance on centralized purchasing can stifle innovation at the agency level. Agencies may chafe under what they perceive as rigid edicts regarding what they may or may not do to serve their constituents. This conflict was highlighted recently in Georgia, where incoming governor Sonny Perdue overruled a $1.8 billion telecommunications contract developed by the state's technology authority. In siding with state agencies that had opposed technology authority control of the purchasing function. Perdue expressed an interest in "letting departments pursue entrepreneurial efforts on their own many times. rather than letting this omnibus agency try to direct that ... 4o There is recognition that centralized. bureaucratic procurement systems stifle the flexibility of public officials. In 1993. the National Commission on the State and Local Public Service wrote: By far the greatest impediment to fast. sensible government contracting and procurement practices is the multiple layers of approval through which requisitions must pass. The process has become so complex and so expensive that many of our best companies refuse to bid on government contracts because it is simply not worth the time and effort.41 Further constraining the flexibility of governments, a rigidly centrali7.ed system may result in vendors' refusal to deal with a cumbersome process. Governments' flexibility and innovation are often affected by archaic procurement regulations. Many state and local procurement officials feel that the biggest roadblock to an effective purchasing system is that they are operating under outdated rules. 42 Katherine Frisch writes in Government Procurement: The inherent rigidity of regulations written in the not-too-distant past reflects the former, static nature of public procurement. Intractable statutes were the means by which entities helped to ensure public trust and avoid protest. There was seldom a need to make changes.43 These regulations and statutes force centralization on governments that may be better served by a decentralized system. The Limits ofDecentralimtion Problems with decentralization include decreased control. reduced cost savings, and untrained personnel. The increased fragmentation of outsourcing makes it difficult to effectively monitor and control service delivery. Also, the existence of multiple service delivery agents makes it more difficult for citizens and public officials to identify and communicate with relevant private providers and to know the exact nature and role of the government's responsibility.44 A report from the General Accounting Office (GAO) sums up the problem of decentralization at the federal level: Because agencies' processes for establishing requirements for Federal Supply Service (FSS) and Federal Technology Service (FTS) products and services are generally decentralized and uncoordinated, agencies lack knowledge of the extent to which purchases overlap and buying power is diluted.45 Although the GAO report deals with the problems of decentralization at the federal level, the same problems are involved in state and local procurement. Current Trends and Recommendations In the private sector, there has been a recent trend toward more centralized purchasing. In a 1999 survey by Purchasing Magazine, 55 percent of readers indicated that purchasing at their company had become more centralized while only 17 percent indicated that their company was moving toward greater decentralization of purchasing activities.46 In the public arena, however, most modem procurement functions incorporate features of both centralized and decentralized systems. This allows organizations to ensure the best control and cost effectiveness while providing timely and professional service to the customer. Many of these hybrid systems delegate responsibility for high-cost or complex procurement actions to the central procurement office while delegating lower-cost or routine actions to the individual agencies.47 Another combination of the processes involves leaving the purchasing responsibility with each department while establishing one centralized procurement policy by which all departments must operate.48 This approach incorporates many of the advantages of both centralized and decentralized systems. It allows for the central management and delegation of procurement authority under a set of standards, with adequate training and monitoring for all involved.49 Some of the centralized procurement responsibilities include managing the automated procurement system and data, establishing policies and procedures, training procurement personnel, maintaining strategic vendor relations, and providing overall procurement information. The current use of these hybrid systems is based on the principle that "purchasing should occur as close to the point of need and use as possible."50 This allows end users to maintain a critical role in the process while the central office retains control of complex, high-risk, high-dollar transactions where trained experts add value: By delegating the purchasing process to client agencies, within the framework of centralized authority, providing training and continuing management by the central procurement office, the integrity and critical contributions of the state procurement program will be maintained.51 The manner in which the combined system is established will be dependent on the government agencies involved, the size of the organization, applicable administrative or judicial statutes, and other issues related to authority. A study from Arizona State University states that as firms grow in size, they tend to use a combination of purchasing at a central location and at the division level. The study shows this structural combination should be based on the degrees of complexity and need for flexibility within an entity.52 Some organizations may choose to utilize one central procurement office for all purchases over a certain dollar amount; others may choose to use central procurement for only a set number of agencies while the other agencies are responsible for their own procurement. One way in which governments are structuring hybrid systems is by creating a centralized office of procurement policies and procedures while keeping the actual procurement system decentralized. The office of policy and procedure creates procurement regulations and then educates the decentralized purchasing agents within the separate government agencies on the policies. The federal government, as well as state and local governments, is moving in this direction. A 2003 GAO report states: we are writing to underscore the need for the Office of Federal Procurement Policy (OFPP) to ensure (1) that members of the federal acquisition workforce understand and appropriately apply this new authority, and (2) that appropriate data are collected and available to meet mandated reporting requirements regarding the effective use of share-in-savings (SIS) contracting.53 The State of California is also using a form of this hybrid system. The state's procurement system recently underwent a review in which a governor-appointed task force recommended that the state develop a uniform set of policies, procedures, and processes to apply to all state contracts and procurements to ensure the outcomes are consistent and fair.54 The result of this review is that the California Department of General Services (DGS) created an Office of Policy and Procedures (OPP) that establishes and maintains clear, uniform polices and procedures and educates other state government agencies on these.55 Local governments have long believed that a central purchasing authority ensures purchasing integrity, accountability, and the efficient transition of goods and services between the supplier and the consumer.56 Recently the decentralization paradigm has made inroads in local jurisdictions, and local governments are seeing an increasing trend toward decentralization. of the purchasing process. A 2001 Government Finance Review study found that approximately 50 percent of local governments surveyed have decentralized their procurement systems within the past five years.57 The study also found that larger local governments are decentralizing through two primary means: (1) increasing the dollar limits on purchases that do not require approval by the purchasing department, and (2) assigning additional purchasing responsibilities to department or division personnel.58 In contrast, smaller local governments have decentralized primarily through the issuance of procurement cards and identifying the individuals within the department who are assigned additional purchasing responsibilities.59 Commodity Purchasing Within the scope of commodity purchasing, centralized procurement leads to a more efficient use of government resources. This can be seen through a case study of the State of California. During the 1990's, California followed the lead of many other governments by attempting to outsource non-core functions that would in theory lead to savings. One area cut by the state government was the Department of General Services' (DGS) central supply warehouse.60 This system had previously performed the function of buying office supplies in bulk for all state agencies. When state agencies needed office supplies, they would purchase them from DGS. The new system essentially outsourced this function to a major private office supply chain. Now, state agencies are given a catalog from this office supply store and a budget.61 They are allowed to make purchases from this catalog with little to no oversight. The end result, in the opinion of several DGS employees, has been waste and meager savings. 62 In the past, DGS bought the most basic type of each supply (i.e., the most basic pen, the most basic stapler, etc.) and purchased them in bulk. Bulk purchasing allowed them to negotiate cheaper prices from vendors. Currently, state agencies purchase supplies parcel by parcel and use their limited budgets on high-quality supplies that are often unnecessary. Though decentralization certainly has its merits, in the area of traditional purchasing it can lead to waste. Decentralization allows agencies more flexibility in what they purchase and when they purchase it. It allows individual agencies to tailor procurement to their own needs. These factors may be important some areas of procurement, but it is doubtful that they are critical in the area of traditional purchasing. Construction The State of New York recently has overhauled its construction management organizational structure to a centralized system. It has changed its standard operational grouping from functional team organizations to business units that work together on individual projects. The client now has a single point of contact it can come to for information on its project. These changes have streamlined organization and led to more cohesive designs. New York also has recently increased the practice of contracting with outside consultants on design work. No dramatic change is without problems, and New York's Office of General Services is concerned that this change will result in a possible loss of institutional memory.63 Within the Florida Department of Transportation, there are seven districts plus a group that manages the turnpike. Procedures are set by the central office in Tallahassee, which provides direction to the districts on how the bidding process should work to comply with standards. This allows the district offices to be more closely involved in the local planning of roads and to the prioritization of projects, as well as to be more responsive to the needs of the taxpayers living in their district. Contractors also benefit from this structure because they are allowed to submit their bid to any of the district offices. The offices note the time a bid is turned in and then send all of the bids by overnight mail to the central office. These sorts of concessions to the contractors help make the somewhat centralized and decentralized nature of the Department ofTransportation fair. 64 For smaller governments, like most city governments, a more centralized approach to handling construction procurement needs would be advantageous. The construction process is so complicated it would be a more efficient use ofresowres to only have one group in the city master the system. Information Technology The issue of whether to implement a centralized or decentralized purchasing structure is particularly important in the area of IT procurement. In commodity purchasing, the uniformity and simplicity of the product makes the level ofcentralization a rather simple . cost-benefit decision. On the other hand, the inherent complexity and high cost of technology solutions makes the decision to centralize IT purchasing operations much more problematic. As such, there is no one-size-fits-all solution when it comes to the level of centralization that is appropriate to technology purchasing. In the private sector, centralized purchasing has gone in and out of vogue several times in recent decades, as large corporations have struggled to find an ideal mix of efficiency, cost savings, and freedom to innovate.65 In general, centralization decisions must balance three competing demands: cost savings, timely delivery, and the overall technology mission ofthe government as a whole (i.e., interagency coordination). Although the demands of delivery time and technology coordination weigh heavily in any discussion of centralized vs. decentralized technology purchasing, cost concerns are often cited as the most pressing factor in favor of greater centralization. In many segments of the private sector, the wild spending strategies of the internet boom have been replaced by a more sober assessment of technology strategies. In an attempt to pare costs in an unforgiving economic environment, purchasing has become far more centralized and the overriding purchasing decision is "no longer function or features or even technology, but cost of ownership.'.66 Given the widespread spending constraints of recent years, many states have been looking to increased IT procurement centralization as a way to reduce purchasing costs. A study commissioned by the State of Virginia recently estimated that by combining the IT operations of 94 state agencies, the state could save hmtdreds of millions of dollars, much of it due to cost savings from coordinated purchasing.67 Outsourcing A centralized purchasing system is beneficial to this task due to the staff specialization required to outsource effectively, and also when governments or particular departments are new to outsourcing or may need additional experience. A centralized system also allows for more consistent contract administration and reduces the possibility of contracts being awarded in a biased or unprofessional manner. DuPont Corporation pays special attention to outsourcing and the application of best practices. DuPont keeps its outsourcing function completely central and away from all other procurement tasks, which they believe is the only structure that allows them full advantage of their purchasers' specialized skills and market knowledge.68 Centralization can also be beneficial to the outsourcing task due to the oversight and contract management required. Ifstate and local governments chose to implement large-scale outsourcing, a centralized contract management function would allow specialized oversight of these outsourced services. The effects of centralization on outsourcing can best be seen in the outsourcing of IT where specific market knowledge is a necessity for purchasers. Conclusion As indicated throughout this chapter, there is no hard and fast rule for assessing the appropriate level of centralization in the purchasing function. Depending on a given agency's organizational structure, technological proficiency, size, political culture, available resources, and spending needs, various levels of centralization may be appropriate. The goal should be a process that "balances the needs for centralized control, procurement, and economies of scale in implementation against the needs to empower individual business units and business people with flexibility and rapid response to get their jobs done."69 Ultimately, agencies should bear in mind that centralization is a means to an end, not a goal in itself. The following statement from the CIO of United Technologies Corp. should serve as a guiding principle in determining agency needs: "Ifit isn't going to cut revenue, cut costs and improve employee productivity, we're not going to do it."70 Notes 1 Municipal Research & Services Center of Washington, Purchasing and Bidding: Purchasing Procedures, Policies, and Manuals (February 2002). Online. Available: http://www.mrsc.org. Accessed: December 8, 2003. 2 Anne Millen Porter, "Containing Total Spend: Corporate Procurement Organizations Are Gaining More Control, But Can It Last," Purchasing (November 6, 2003). Online. Available: Lexis-Nexis Academic Universe, http://www.lexis-nexis.com/universe. Accessed: February 2, 2004. 3 Institute of Management & Administration, "15 Steps to Transform Purchasing into Strategic Sourcing," Supplier Selection & Management Report (April 2003), p. 6. 4 Porter, "Containing Total Spend" (online). 5 John O'Looney, Outsourcing State and Local Government Services: Decision-Making Strategies and Management Methods (Westport, CT: Quorum Books, 1998), p. 23. 6 Robert Preston, "Centralization Re-Emerges with an Internet Focus," InternetWeek (May 28, 2001). Online. Available: http://web5.infotrac.galegroup.com/itw/infomark/. Accessed: February 2, 2004. 7 Matt Mayer, "How Centralizing Purchasing and AP Can Yield Significant Benefits," Healthcare Purchasing News, vol. 27, issue 9 (September 2003), p. 20. Online. Available: http://search.epnet.com/direct.asp?an=l0803034&db=buh. Accessed: September 30, 2003. 8 Anne Millen Porter, "Gillette's Chief Executive Puts Power into Purchasing," Purchasing (July 18, 2002). Online. Available: Lexis-Nexis Academic Universe, http://www.lexis-nexis.com/universe. Accessed: February 2, 2004. 9 "Fujitsu Cuts Procurement Costs and Suppliers," Purchasing (February 21, 2002). Online. Available: Lexis-Nexis Academic Universe, http://www.lexis-nexis.com/universe. Accessed: February 2, 2004. 10 Robert D. Meckel, "Best Practices Yield Savings at the University of Texas at Austin," The University of Texas News. Online. Available: http://www.utexas.edu/opa/news/04newsreleases/nr_200401/nr_financial040122.html. Accessed: February 23, 2004. 11 Atefeh S. McCampbell and Lucy Light Slaich, "Purchasing Efficiency and Staffing Benchmarks: A County Government Study," International Journal ofPurchasing and Materials Management, vol. 31, no. 1 (Winter 1995), pp. 30-36. Online. Available: http://80­search.epnet.com.content.lib.utexas.edu:2048/direct.asp?an=9502274483&db=buh. Accessed: January 28, 2004. 12 U.S. General Accounting Office, Contract Management: Restructuring GSA 's Federal Supply Service and Federal Technology Service, p. 2. Online. Available: http://www.gao.gov/new.items/d04132t.pdf. Accessed: February 4, 2004. 13 Ibid. Matt Hicks, "Inside e-Procurement: Centralized 'War Room' Approach Saves Unilever $902 Million and Counting," eWeek, vol. 19, no. 1(January7, 2002), p. 37. 15 Ann Millen Porter, ''Tough Measures for Tough Times," Purchasing (November 7, 2002). Online. Available: Lexis-Nexis Academic Universe, http://www.lexis-nexis.com/universe. Accessed: February 2, 2004. 16 "State and Local Government Purchasing," National Association ofState Procurement Officials, Fifth Edition (2003), p. 11. 17 State of California, Department of General Services, Review and Analysis of Uniform Purchasing Practices, by Eskel Porter Consulting (Sacramento, CA, 2003), p. 51. 18 John R. Bartle et al., "Procurement and Contracting in State Government, 2000," Government Performance Project. Online. Available: http://www.maxwell.syr.edu/gpp/pdfs/ProcurementContracting_in_State_Govemment.pdf. Accessed: January 27, 2004. 19 Ibid. 20 David Aden, "Work in Progress," Public CIO. Online. Available: http://www.public­cio.com/story.php?id=77919. Accessed: December l, 2003. 21 Interview by Aaron Kaminsky with Weaver Jackson, Procurement Official, Texas Building and Procurement Commission, Austin, Texas, October 29, 2003. 22 Class presentation by Mark Walsh, Programmer Analyst, City of Austin, at the Lyndon B. Johnson School of Public Affairs, Austin, Texas, October 2, 2003. 23 U.S. General Accounting Office, Report to the Subcommittee on Readiness and Management, Committee on Armed Services, U.S. Senate, Best Practices: Improved Knowledge ofDOD Service Contracts Could Reveal Significant Savings (Washington, D.C., 2003). Online. Available: http://www.gao.gov/cgi· bin/getrpt?GA0-03-661. Accessed: November 10, 2003. 24 W. Edward Back, Determining the Impact ofInformation Management on Project Schedule and Cost, RR 125-11 (Austin, TX, Construction Industry Institute, June 1998), pp 1-2. 25 California State Auditor, Bureau of State Audits, Statewide Procurement Practices: Proposed Reforms Should Help Safeguard State Resources, but the Potential for Misuse Remains, Rep. 2002-112 (Sacramento, CA, March 2003), p. 84. 26 State of Florida Auditor General, School Readiness Program Operational Audit, by William 0. Momoe, Report No. 2004-085 (Tallahassee, FL, July 1, 2000 to June 30, 2003). p. iii. 27 Interview by James Brandenburg with Mark Walsh, Programmer Analyst, City ofAustin. Austin. Texas, October 15, 2003. 28 World Bank. Procurement Policy and Services Group, Operations Policy and Country Services, Banlc.­Financed Procurement Manual (July 2001 Draft). Online. Available: http://siteresources.worldbank.org/PROCUREMENT/Resources/pm7-3-0l.pdf. Accessed: February 3, 2004. 29 Kevin Lavery, Smart Contracting for Local Government Services: Process and Experience (Westport, CT:Praeger, 1999),p. 77. 30 Wilson P. Dizard ID, .. Homeland Security Forges a Systems Cadre," Government Computer News, vol. 22, no. 25 (September 1, 2003), p. 10. 31 Tim Minahan, "Legislation Won't Fix Procurement, Senate Staffer Says," Government Computer News, vol. 13, no. 1 (January 10, 1994), p. 11. 32 "CFO," Government Computer News, vol. 10, no. 4 (February 18, 1991), p. 64. 33 Lavery, Smart Contracting for Local Government Services, p. 75. 34 Clifford P. McCue, "Organizing the Public Purchasing Function: A Survey of Cities and Counties," Government Finance Review (February 2001), pp. 1-5. 35 Steve Lawrence, "State's Information Chief Recommends Contract Review Board," Associated Press State and Local Wire (February 14, 2003). Online. Available: Lexis-Nexis Academic Universe, http://www.lexis-nexis.com/universe. Accessed: December 1, 2003. 36 Shane Peterson, "Trading Places," Public CIO. Online. Available: http://www.public­cio.com/story.php?id=62604. Accessed: December 1, 2003. 37 David Gragan and Margaret McConnell, "How to Sell a Changing State Government," Government Technology Reseller, vol. 1 no. 3 (November 1997). Online. Available: http://www.govtech.net/magazine/reseller/1997 /november97 /resellertocnov97 .phtml. Accessed: January 27, 2004. 38 National Association ofState Purchasing Officials, "Buying Smart: A Blueprint for Action." Online. Available: http://www.naspo.org/whitepapers/buyingsmart2.cfm. Accessed: January 25, 2004. 39 U.S. Department of Health and Human Services, The Usage ofthe Government Credit Cards for Procurement Purchasing at the Department ofHealth and Human Services: Testimony Before the House Committee on Energy and Commerce, Subcommittee on Oversight and Investigations. Online. Available: http://www.hhs.gov/asVtestify/t020501.html. Accessed: January 27, 2004. 40 Alan Judd, ''Perdue: Deal Had Too Few Bidders," The Atlanta Journal-Constitution (February 7, 2003), p. 4-F. Online. Available: Lexis-Nexis Academic Universe, http://www.lexis-nexis.com/universe. Accessed: December 1, 2003. 41 National Commission on the State and Local Public Service, Hard Truths/Fough Choices: An Agenda for State and Local Reform (Albany, NY: Nelson A. Rockefeller Institute of Government, State University of New York, 1993), pp. 34-35. 42 Katherine K. Frisch, "Regulation Flexibility," Government Procurement, vol. 10, no. 5 (October 2002), p. 6. 43 Ibid. 44 Ibid., p. 2. 45 U.S. General Accounting Office, Contract Management: Restructuring GSA 's Federal Supply Service and Federal Technology Service, p. 2. Online. Available: http://www.gao.gov/new.items/d04132t.pdf. Accessed: February 4, 2004. 46 Anne M. Porter, ''Firms Give Purchasing More Central Control," Purchasing Magazine (July 15, 1999), p. 3. 47 Ibid. 48 Ibid., p. 1. 49 Ibid., p. 4. 50 National Association of State Purchasing Officials, "State Procurement: Strategic Positioning for the 21st Century." Online. Available: http://www.naspo.org/whitepapers/whitepaper-21century.cfrn. Accessed: November 23, 2003. 51 Ibid. 52 Linda L. Stanley, "Linking Purchasing Department Structure and Performance: Toward a Contingency Model," Journal ofStrategic Marketing, vol. 1, issue 3 (September 1993), pp. 211-219. Online. Available: http://80-search.epnet.com.content.lib. utexas.edu:2048/direct.asp?an=5413949&db=buh. Accessed: January 30, 2004. 53 U.S. General Accounting Office, Contract Management: OFPP Policy Regarding Share-In-Savings Contracting Pursuant to the E-Government Act of2002, p. 1. Online. Available: http://www.gao.gov/new.items/d03552r.pdf. Accessed: February 4, 2004. 54 State of California, Office of the Governor, Governor's Task Force on Contracting and Procurement Review, Executive Summary (Sacramento, CA, May 2003), p. 3. 55 State of California, Department of General Services, Procurement Division, Policies and Procedures Office (PPO): Business Plan (Sacramento, CA, September 2003), pp. 3-4. 56 Clifford P. McCue, "Organizing the Public Purchasing Function: A Survey of Cities and Counties," Government Finance Review (February 2001), pp. 1-5. 57 Ibid., p. 3. 58 Ibid. 59 Ibid., p. 5. 60 Interview by Thomas Schuette with Bob Riola, Contract Analyst, Department of General Services, State of California, Sacramento, California, October 30, 2003. 61 Ibid. 62 Ibid. 63 Interview by Aaron Smith with Harry Williams, Engineer, Design and Construction, Office of General Services, State of New York, Albany, New York, November 14, 2003. 64 Interview by Arny Witte with Juanita Moore, Manager, Contracts Administration, Florida Department of Transportation, Tallahassee, Florida, November 14, 2003. 65 Porter, "Containing Total Spend" (online). 66 Melanie Wold, "Cost Counts More Than Function or Technology," eFinancialNews (February 9, 2003). Online. Available: Lexis-Nexis Academic Universe, http://www.lexis-nexis.com/universe. Accessed: December 1, 2003. 67 "Computer Cost-Saving Plan Battles High Expectations," Norfolk Virginian-Pilot (September 4, 2003), p. B-10. Online. Available: Lexis-Nexis Academic Universe, http://www.lexis-nexis.com/universe. Accessed: December 1, 2003. 68 Christopher Reilly, "DuPont Sharpens Contract/Specialties Buy," Purchasing, vol. 130 (January 11, 2001), p. 130. 69 Jack McCarthy, ''Trading on the Edge-Enron's Story Serves as a Warning-Good Technology Can't Fix Bad Business," Info World, vol. 24, no. 33 (August 19, 2002), p. 46. 70 Preston, "Centralization Re-Emerges with an Internet Focus" (online). Chapter 3. Contracts Overview Contracting involves the following basic steps: scope development, issuing documents for bids and agreements on terms, negotiating price, and addressing dispute resolution. Public agencies require a wide range of goods and services, and contracting processes vary according to the good or service being acquired. A purchase of pens, for example, may only require a request for bids from a government agency with the contract going to the lowest bidder. In contrast, complex technical services could require significant vendor participation in many stages of the process, from determining an agency's purchasing needs to establishing a payment schedule. The following sections will discuss the basic steps of the contracting process and provide examples. Scope Development In the contracting process, the definition of the item or service that will be bought with the execution of the contract is of central importance. In a request to bidders, the description of the goods or services is called specifications or statement of work. These specifications should clearly and accurately describe what the public agency wants to buy from the vendor. Aside from just the desired good or service, specifications should include issues such as delivery/timing, training, and maintenance that might be supplemental to using the purchased goods or services. Development of specifications is important because mistakes made at the development stage of the contract will need to be addressed with costly solutions. Ifan item is excluded from the specification, a more costly "add-in" will be necessary later. Another danger that can result from vague specifications is that the vendor may take more (or less) control than was intended by the government agency. 1 The procedure of defining scope and determining which factors will rate the highest priority can be overwhelming. For this reason, some procurement offices have documents to help their agencies in this process. For example, the New York State Office of General Services has compiled a Best Practices document to assist agencies in the determination of vendor responsibility. Each agency is responsible for determining the scope of vendor responsibility, and the review efforts increase as the dollar amount of the contract . 2 mcreases. Vendor Selection One of the most important and most visible aspects of the contracting process in public procurement is the selection of vendors. This section will focus on two separate methods of selecting vendors: basic or traditional methods and innovative or nontraditional methods. Basiclfraditional Methods Requests for bids (RFB) and requests for proposals (RFP) are instruments used dming the vendor selection process to solicit bids. There are variations of these two documents and different names used for the documents, including invitation to bid and invitation to negotiate. Even before releasing an RFP or RFB, a request for qualifications can be used to assess how much vendor interest there is for a specific project. The differences between the various documents are a result of the criteria being used to select a vendor and the information that the entity needs in order to make this choice. The most basic vendor selection method awards the contract to the vendor who can meet the specifications at the lowest possible cost. In this case, the information needed is an assurance that the goods can be delivered or that the work can be performed, as well as the price that Will be charged. The document used to collect this information is called a request for or invitation to bid (ITB). The basic process for selecting a vendor based on their cost proposal includes the following steps: • Entity defines scope and.creates an ITB. • Opportunity to bid is advertised according to applicable laws. • Bid opening. • Awarding of contract according to criteria (usually lowest bid). While certain items (commodities such as office supplies) lend themselves well to a low­cost model, some products (consulting services, for instance) are more appropriately chosen based on other factors. As one government official recently noted, "When you're hiring brain power, you don't want the cheapest brains available."3 For this reason, a method of choosing a vendor which allows for the consideration of factors beyond cost, such as previous experience, is necessary. Using these other factors in making a decision is only legal when bidding regulations allow an exemption to the standard practice of selecting a bidder on the basis of lowest qualified bid4 Typical exemptions include sole source, experimental project, services ofa specialized nature, or emergencies. Since the vendor will be selected based upon its qualifications, more information must be requested of vendors. Therefore, an RFP, which may request information such as the plan for meeting the specifications and qualifications of the personnel who will be perlorming the work. is used. When using an RFP, negotiation may be part of the bidding process, which would have been stated in the original request. In addition, since more criteria will be used in the selection process, the weight that each component will receive should be stated in the original request. The basic process for selecting a vendor based on its proposal includes the following steps: • Determining scope of service • Identification of providers • RFP: 1. Specifications 2. Terms and conditions 3. Request for price quotes (can be separate) 4. Factors for award 5. Format and deadlines 6. Negotiation (notify that may happen) 7. Records and confidentiality • Pre-bid conference • Receipt of proposals • Interviews • Selection Requestfor Proposals (RFP) RFPs, which were summarized above, are very important to the procurement process and are a best practice in themselves. An RFP is a simple concept, but the execution of one can be anything but. On the surface, an RFP is simply an invitation to external vendors to propose a solution to an organization's problems or needs. However, executing an RFP can pose challenges. A badly designed RFP can scare away potential bidders, or worse, it can lead bidders to propose inappropriate solutions that are ineffective to government agencies' desires. Unlike ITBs and RFQs, the RFP process is time consuming and contains many more steps than just looking for the lowest bid. James Powell of Enterprise Systems, an organization which compiles the latest news and practices in the information technology (IT) sector, provides three keys to avoiding RFP pitfalls and ten steps in a successful RFP process. The three keys are: communicating with your project team; coordinating with other departments, consultants, etc.; and cooperating with all parties involved.5 The ten steps to a successful process are: (1) build a team that bridges technical and managerial staffs; (2) write down both the problem and the necessary requirements; (3) submit the RFP to bidders; (4) reply promptly to questions; (5) accept tumdowns graciously and be open to multiple solutions; (6) eliminate nonresponsive and late RFPs; (7) apply your review criteria to each proposal; (8) invite top-scoring bidders to present their proposals to your agency; (9) ask for best and final offers then make your final decision; and (10) create a contract and award the project quickly.6 While Powell's list outlines the steps to include in an effective RFP process, it does not cover all of the items that should be covered in the actual RFP. The State of Nebraska has developed a framework for quality RFPs that does cover the necessary elements of a good RFP. RFPs should always: 1. clearly state the performance requirements and the scope of services that are to be provided; 8. include a statement of work that flows from the business needs analysis, and present a logical plan to address the stated needs; 9. identify constraints, schedules, deadlines, mandatory items, and allowable renewals; 10. specify required deliverables, reporting obligations, and payment terms; 11. clearly state pricing requirements and bid submission expectations, including closing time, date, and location (a standard bid price form is helpful to ensure an "apples to apples" price comparison); 12. clearly state the evaluation criteria and weighting factors for scoring proposals; 13. allow sufficient time for vendors to prepare good proposals; 14. avoid specifications that favor a particular brand or bidder; 15. specify the qualifications for the company and/or personnel who would be assigned to the project; 16. identify federal, state, and/or local requirements that govern the contracting process and the delivery of services; and 17. outline all procurement communication devices to ensure all appropriate bidders or potential bidders have access to the same information, e.g., pre-bid conferences, Q & A's, whom to contact with questions, etc. 7 Requestfor Quotations (RFQ) Another important part of the traditional procurement process is use of Request for Quotations or RFQs. RFQs are used to acquire well-defined goods and services below an advertising threshold. Since they are "informal" (not publicly advertised), they can be done by phone, fax, or email. The infonnal nature assures RFQs are accomplished faster. After a government receives RFQs, it typically awards the contract to the low-priced, responsive, responsible bidder.8 The processes described above represent traditional methods of choosing a vendor to provide the desired goods or services. However, there are some innovative methods that attempt to incorporate competitive methods to further reduce the cost to entities and allow bidders to craft solutions to meet the entity's specific goals. Innovative/Nontraditional Methods Strategic sourcing and innovative contracting methods can help maximize the value derived from procurement by going beyond the traditional method of seeking the lowest possible price. New contracting methods bring into play a variety of tools and resources such as catalogs, forward buying, commitments, market inventories, and supplier requirements in different operational combinations to achieve maximum value.9 This section will concentrate on two innovative methods that are currently used in public procurement: reverse auctions and reverse RFP. Reverse Auctions Typically associated with the implementation of e-procurement systems, reverse auctions are an emerging trend in technology procurement. Reverse auctions involve open bidding by vendors, which usually occurs online. The process is quite similar to online bidding systems such as eBay, with the twist that the lowest bid wins the contract.10 Moreover, vendors can obtain feedback about their bids relative to those placed by other vendors. Ideally, this practice will induce vendors to bid lower than they would in a normal contracting process.11 Reverse auctions are more competitive because of the high-speed nature involved and the competition that can occur between venders who are trying to win the bid. The traditional procurement process gives vendors only one chance to bid on a set of products or services. A reverse auction "gives them many opportunities to come back and see how sharp their pencil can be-in a very ethical, upfront way," according to Bob Michel, the director of acquisition services for the University of Pennsylvania.12 Agencies who wish to implement a reverse auction should have a well-thought-out process. "Essential elements of reverse auctions include pre-qualifying bidders before the auction, clearly defining the bid scope so that all bidders understand it and clearly defining non-price items that affect performance, such as safety, quality, training and schedule."13 These elements are the basics needed for any good bidding process; however, due to the highly competitive nature of reverse bidding they are especially critical. The reverse auction concept works best in situations where an RFP would have been used, with price being the basis for awarding the contract. Ifthe product being sought requires additional factors to be considered, pre-screening bidders may help to avoid pitfalls.14 This assumes that the screening process can limit auction participants to only those qualified to perform the work. Although reverse auctions can be difficult many entities have found them to be worth the effort. "Experience is showing that governments can expect to save 25 percent to 30 percent off earlier prices."15 The actual savings may depend on the amount of competition already existing in different commodity markets. The benefits of reverse auctioning may be further complicated by the vendor response. Not surprisingly. many vendors are less than thrilled with a model that forces them to compete with other vendors based on price. The more margins are reduced by the reverse auction model. the more difficult it may be to induce vendor buy-in. 16 However. some reverse auction practitioners have attempted to deal with vendor concerns through alterations to the original process. For instance, in some reverse auctions all of the vendors cannot see the lowest bid ReverseRFP The reverse RFP process is a prevalent private sector method for choosing an outsourcing vendor and has recently been adopted in the governmental sector.17 This process turns the table on the traditional methods of seeking services. Instead of the government or public . agency deciding on an exact set ofspecifications and allowing the vendors to bid on these specifications. public officials will define the goals or programs that they need the goods or services to achieve. A reverse RFP allows vendors to demonstrate how its skills. product, or work plan can help the entity meet its defined goals. Potential vendors provide the customer with models from which to choose. These models will reflect the goals of the client. but the exact product to meet the goals may differ from vendor to vendor. This proves to be a very effective method to use for outsourcing services in highly specific areas. This process helps to avoid .. boxing in" a solution or defining a project or service in such a way that proves to be inefficient. Since a vendor may have more specialized expertise in the project area. it may be better able to provide the guidelines for a particular job or service provision. Organizations can obtain better results by using the reverse RFP approach of collaborating with vendors to determine the best avenue to pursue. The reverse RFP process involves simultaneous steps. I. Step One: Internal Feasibility Study. The customer (as part of a project team) develops a blueprint of its existing environment and infrastructure by: • determining the specific services and activities that can be displaced; • quantifying the costs associated with these services and activities (this is crucial to measuring the return on the investment); and • securing the required budget and time frames to make the outsomcing project successful. 2. Step Two: Cooperation with Vendors. While the customer analyzes its internal feasibility study, outsourcing vendors can and should offer: • front-end information exchange and help in determining process improvements; • long-term relationship commitment, as measured by their years in the industry and financial stability; and • key metrics, such as: (a) what can they deliver in what time frame, (b) demonstrate capabilities, such as answering calls within four rings, adhering to their maximum turnaround time, etc., and (c) price.18 In the reverse RFP process, working with the vendors to develop relationships is critical, particularly when conducting an internal feasibility study to determine vendor qualifications. Once the vendor is chosen, a service level agreement evolves to define the set of deliverables and the two parties' responsibilities, both stated in exact metrics. This service level agreement is similar to the typical RFP but provides for a much more effective definition of services that has been mutually agreed upon and determined by both parties.19 Contract Characteristics As mentioned earlier, contracts will vary according to an agency's purchasing goals and requirements as well as the nature of the good or service. Nonetheless, certain qualities or characteristics in a contract can help to ensure a sound procurement process. Two such qualities-flexibility and clear identification of service levels and risk rating-are described below. Contract Flexibility Not all events or needs that will be at issue during the course of a contract can be identified at the time of signing. Therefore, it is important to make provisions for flexibility within the contract. Contracts should clearly state duration of arrangement, circumstances under which participants may withdraw, and procedures to be followed in amending the contract provisions. Amendin~ procedures are necessary to keep up with changing patterns of cost and service levels. 0 Flexible contracts can allow decreases in the use of goods or services rather than jeopardizing an entire contract. All methods and processes, particularly of termination, should be carefully specified in order to minimize potential conflict. The City of Phoenix Purchasing Department, for instance, uses a cancellation for convenience clause, a budgetary out clause, and a breach of contract clause. In any instance in which a contract must be terminated, the city must pay out the contract for a predetermined and specified time period.21 These types of measures take on increased importance during times of spending deficits or budget cuts. Service Levels and Risk Rating When outsourcing, it is important to analyze how specific the contract must be and to plan accordingly. For example, a contract for janitorial services will be much less specific than a contract for technology services.22 One method of dealing with these differences is to segment services into categories based on their spending levels and business impacts, which can be accomplished with a risk rating methodology.23 This is an effective way to determine vendor qualifications and the specificity required in a contract. Low-level services such as janitorial or window washing can be treated almost as commodities regarding the types of contracts used to obtain them. In the survey of the National Organization of Procurement Officials, there are variations among the states as to whether there are set contracts for the procurement of services.24 Types of Contracts It would be impossible to describe the myriad ways that contracts can be structured in the public procurement process. Accordingly, this section will highlight a few trends in contracting, including innovative contract formats and joint purchasing agreements. The specific areas highlighted are: performance-based contracting, multistate alliances, and most-favored nation clauses. Peiformance-Based Contracting Performance-based contracts are useful procurement tools to integrate evaluation and oversight functions into the contracting process. Performance-based contracts are structured in a way that specifies payment per deliverable. Contracts that are structured properly have the ability to lower the costs of contract administration when compared to other types of contracting.25 Some of the criteria for determining whether to use a performance-based contract are • reduced fixed and labor costs, • increased flexibility, • access to more and better skills, and • reduced costs for training. However, there are some types of work that should be kept in-house because of the potential for conflict. Examples are • situations where tight control of sensitive information is required, • situations where an organization wants to avoid labor issues relating to outsourcing, and • situations where public opinion might be an issue. Cost recovery or cost reimbursement contracts, by contrast, are established to allow the service provider to invoice for completed work. Cost reimbursement contracts are currently being used frequently in the health and human services field. The State of Illinois' Department of Public Aid signed a reimbursement contract with the Doctors' Hospital of Hyde Park where the state reimbursed the hospital for each Medicaid patient served.26 For example, in many state workforce development systems, service providers operating under performance-based contracts are paid according to the number of successful job placements. Under cost reimbursement contracts, by contrast, service providers invoice states for costs resulting from placing those people in jobs. Perhaps the most difficult part of performance-based contracting is finding the right contractor. Because the contractor has the ability to effect the results of the contracting agency, the contractor selected must have the necessary knowledge and experience to successfully complete the task. Some aspects that an agency should examine when selecting a contractor are • previous history, • documented methods and systems, • financial stability, and • active risk management. Also, agencies must be wary of contractors who promise results that seem too good to be true. Hidden costs, such as technical support, can be a dangerous trap for the contracting agency. Another aspect of performance-based contracting that needs to be considered by the agency is how to structure award fees. Performance should be commensurate with the risks that the contractor is taking. A good practice is to set up award fees as a percentage of the contractor's actual costs and to use mutually agreed to performance metrics.27 Additionally, if the contractor is willing to front some of the resources necessary to complete the job, it might be possible to reward it for the risk by increasing the award percentage. Performance-based contracts result in many advantages for governments contracting out for service delivery. Robert W. Bodine, CEO of Workforce Plus in Florida and a statewide spokesperson for performance-based contracting, emphasizes that performance­based contracts allow governments to enter agreements with service providers in a way that establishes shared risk. In other words, if the contractor does not meet specified performance standards, public resources are not wasted on reimbursing subpar work, as would be the case under many cost recovery contracts.28 In addition, with a contract that stipulates payment per measurable deliverable, a government can avoid underbidding or unrealistic bids submitted by potential contractors. For example, if the deciding factor in a procurement decision is low cost per unit, then some proposals may include an unrealistic number of expected clients to lower the cost per unit in the bid amount. Under performance-based contracts, that problem is eliminated because payment is subject to successful completion of a specified result, and the number of clients who will be served in the program is not established beforehand.29 Finally, performance-based contracts provide a framework for establishing financial incentives and penalties in the contract. Incentives and penalties can be set up and administered in a variety of ways, such as quarterly or annual assessments based on client satisfaction surveys. On the other hand, performance-based contracts can also present challenges. Many public entities are not accustomed to contracts that involve payment for successful deliverables. This can complicate the procurement process or even discourage many qualified bidders from submitting proposals for a program. New businesses or small businesses can also be at a competitive disadvantage in the bid process for a performance-based contract because of the significant expenses required at the front end of a contract period. With payment based on successful deliverables, many businesses or organizations with limited resources cannot afford to wait for payments. Performance-based contracts can vary according to type of outsourced service, contract duration, and many other factors. The basic steps for setting up a performance-based contract, however, are generally consistent with the following approach: 2. Explicitly state in the RFP that the contract will be performance based. 3. Determine agency needs and the services to be provided in specific terms. 4. Estimate the number of participants and services to be included in the program to allow potential contractors to offer realistic and accurate bids. 5. Request a budget with a full description of how the total bid amount was calculated. 6. Select the winning bidder based on procurement criteria (e.g., low bid). 7. Determine a budget for each area of the program and negotiate with the contractor on scope of services to be offered based on an expected number of program participants. 8. Negotiate with the contractor on incentive payments and penalty assessments based on performance standards. Establish a schedule for payments or fees.30 Implementation of a performance-based contract takes time and a good deal of thought to do well. The following are the three fundamental phases to implementing a contract: • mobilization, • implementation, and • continuous improvement.31 Mobilization Mobilization is the process of getting the contractor's and the agency's team in place. The proper resources must be allocated and the communication mechanisms must be working if the contract has any hope of being successful. Implementation Implementation is the process of using the knowledge and skills of the contractor to fulfill the tasks that it has been hired to perform. This includes any and all needed equipment and personnel. Continuous Improvement Continuous improvement is the last phase of a contract. The contractor reviews the results up to that point and determines what changes need to be made to increase the efficiency of the operation. As with any contracting practice, there are best practices associated with performance­based contracting. Four of these best practices are listed below. 9. Outsourcing decisions should be selective in nature. 10. Senior management and area experts should work together to determine the best contractor and terms. 11. Agencies should look to both internal (within government) and external (private and/or nonprofit sector) bids for providing services. 12. Performance-based contracts need to be extremely detailed. Selective Outsourcing It is rare when an individual contractor can expertly provide every aspect of service required by a contract. Selective outsourcing allows the agency to select a vendor with expertise in certain areas while keeping the most important types of work in-house. 32 Shared Decision Making Decisions should be made through collaboration between agency executives and area experts. Senior management is in a position to know and do what is best for the organization as a whole while area experts -know the details ofthe tasks to be completed well enough to ensure that the contractor selected will be able to accomplish the job.33 Internal and External Bidding Typically, agencies have decided to contract out a service without giving the existing organization the opportunity to come up with its own proposal. By allowing internal bidding, an agency leader allows the organization to improve skills and remain dynamic rather than encourage stagnation. Detailed Fee-for-Service Contracts There are numerous ways to structure a performance-based contract. Regardless of the method selected, performance standards must be explicit and understood by all parties. It is impossible to foresee every possible permutation. However, every reasonably foreseeable event should be considered and stipulated in the contract. The workforce development system in the State of Florida constitutes a useful illustration of how performance measures can be passed down from an agency mission to a contract with a service provider. A summary is included below. Workforce Development System in the State ofFlorida The workforce development system in Florida is organized into four primary entities: (1) · Workforce Florida, Inc. (WFI), which is charged with policy, budgeting, and oversight for the statewide system; (2) Agency for Workforce Innovation (AWI), which is responsible for statewide program and procurement administration; (3) Regional Workforce Boards (RWBs), which carry out policies at the local level and provide oversight to the One-Stop centers; and (4) service providers that staff and run the One-Stop centers. Performance-based agreements and contracts are the mechanisms in place to ensure performance standards are met at each level of the delivery system. Performance agreements are established between WFI and AWI as well as between AWI and each RWB. WFI, for example, holds back 15 percent to 25 percent of federal funds on an annual basis to use as financial incentives for rewarding strong performance at the local level.34 WFI also assesses financial penalties to RWBs for poor performance. In addition, Florida Statute 445.007(11) mandates that the RWBs must use performance-based contracts for procuring workforce development services: "All contracts executed by regional workforce boards must include specific performance expectations and deliverables."35 Performance-based contracts are viewed by workforce development officials in Florida, as well as the state legislature, as a way to ensure local control and accountability, in effect allowing RWBs to decide what works best at the local level. The "Red and Green Report" is an annual performance report that benchmarks the performance measures established in the contracts with RWBs and service providers. It measures short-term performance on 17 indicators and is used by WFI to award incentives and assess penalties to RWBs and service providers. The "Red and Green" indicators have showed steady progress since being adopted under the reorganized statewide delivery system in 2000, a trend that WFI and AWI attribute to writing them into the performance-based contracts with service providers.36 Multistate Alliances A major trend at the state level is the use of multistate alliances in purchasing (this is especially true for technology purchases). The concept is quite simple: by combining their purchasing power under the auspices of an alliance, states can achieve far greater volume savings than they could individually. The use of multistate alliances has historically been most prevalent in traditional purchasing, with its high level of standardization and focus on low cost as an oveniding concern. For instance, West Virginia predicts that it will be able to save $25 million over three years by joining in a multistate prescription drug purchasing program. 37 While multistate alliances are more common in the traditional sphere, this approach is quickly growing in popularity with respect to information technology (IT) procurement. The State of Texas, for example, recently joined in a contract for personal computers with the Western States Contracting Alliance (WSCA) that has led to large reductions in unit costs for the state.38 New York State has utilized this approach not only with computer hardware, but with software as well. An example is the state's contract with ASAP Software, a leading software services provider, in conjunction with the State of Massachusetts. Not only has the ASAP contract saved on actual purchasing costs, it provided the state with great administrative cost savings as well, since all of the negotiation, legal work, and administrative processing was performed in advance. In effect, the state was able to achieve volume savings without having to perform any of the "dirty work" involved in contract development.39 Most-Favored Nation Clauses Another cost-saving measure that many public entities are taking advantage of is a most­ favored nation clause in purchasing contracts. A most-favored nation clause is an agreement between purchasing departments and private businesses that states that if another government gets a better deal from the vendor on the contracted good or service, then the vendor must provide that same price to the original government. This clause can lead to cost savings for public agencies. However, according to representatives from the San Diego Data Processing Corporation (SDDPC) many companies are straying away from using these clauses because vendors feel that they are too difficult to uphold. The difficulties in upholding the clause stems from the diverse 40 types of contracts and bargains stuck by various entities that are difficult to compare. Contract Process Evaluation Evaluating public contracts leads not only to greater transparency but also greater efficiency. Public officials must analyze the contract process to ensure that all bidders were treated fairly, and they must ensure that the government is bidding on goods or services that it actually needs. Though some of these topics are also discussed in Chapters 1 and 4, this chapter will focus on three main issues: (1) dispute resolution, (2) data management, and (3) government auditing. Dispute Resolution In order to guard against problems arising from differing ideas about how a project should progress, the project team must sit together at the beginning of the project and discuss all aspects of the project, from the timeline to defining each team member's responsibilities and how to resolve problems. By doing so, the team will be able to better manage expectations and deal with conflict on the job. Before a disagreement turns into a major legal battle, the project engineer, government entity representative, and contractor or contractor's representative should communicate about the problem. Ifthe issue is not resolved at this "informal" level, the government entity should provide a way for the discussion to occur in front of an arbitration board. Only as last recourse should the issue be taken before the courts.41 Dispute resolution should be an integral part to any contract or purchase agreement. For public agencies, dispute resolution language is typically required as a matter of law. In Texas, Chapter 2260 of the Texas Government Code lays out the specifics of dispute resolution to be used by public entities in the state. Actual contract language is typically provided by agency counsel under guidelines provided by the Office of the Texas Attorney General. 42 Data Management The tracking process begins with agencies knowing what they send out to potential vendors. A fair bidding process requires that all parties receive the same infonnation, and the simplest method of accomplishing this is to require the same written material be sent to all potential bidders. Documentation and specifications need to be detailed, with explicit written instructions to enable all vendors to understand and complete the fonns as necessary. Proper instructions also decrease the possibility of faulty infonnation stemming from a miscommunication between vendors and employees. Supplying standardized information both physically and electronically allows government agencies to more easily track what they send out on a daily basis. Ifeach vendor is sent the same infonnational packets and fonns, tracking the documentation received by the agency is much easier. Establishing a system where information received from vendors is promptly opened and stored allows for easier tracking and access. Managing construction contracts can be a very difficult and complex task. Governmental agencies often lack the specific construction management expertise or may be managing multiple projects at one time. The management of these contracts requires a very organized and effective data collection and management system. Each construction project will have multiple contractors, subcontractors, and suppliers, each with individual contracts and contract requirements. An effective data management system must be able to utilize contract standards and give access of information to multiple parties while maintaining the integrity of the data and controlling points of entry. A standardized cost control system must be in place that is beyond the typical accounting system. Utilizing the Cost Breakdown Structure-a basic structure for cost control that establishes the cost budget-should allow an agency to catalog budgeted and actual expenditures for the purpose of identifying cost problems, trends throughout the project, and provide cost data to be used in future planning.43 Part of this process is the tracking of work-hours for labor productivity analyses and quantity tracking for materials management. The project schedule is essential to effective management of a construction project. The level of detail of the schedule can range from broad milestone schedules to complex task­ level Critical Path Method (CPM) schedules and can be paper-based or generated by scheduling software such as Primavera or SureTrak. One of the difficulties in schedule control is accurately maintaining and utilizing the schedule that was developed. It should be the reference document for planning and scheduling project activities and should be modified only as a result of approved changes. A standard schedule fonnat should be established and any software requirements standardized across an agency at the highest level possible. The software programs are expensive, and too many changes or inconsistencies in these systems can generate excessive costs for constructors. Data Acquisition and the Contract Workforce The definition of outsourcing is "the practice of hiring an outside contractor to either perform a specific project or function, or to conduct and manage the work of an entire facility."44 In deciding to outsource a function or facility, the government agency must have a method of evaluating the need for the outsourcing and the requirements of a contract workforce. There also must be a way of evaluating and monitoring the success of these types of outsourced functions. Both of these concerns require a significant amount of information and data. The State of Texas, as with many other governments, has found significant problems in acquiring information and maintaining accurate data regarding its contract workforce. In recent years, the Texas Legislature has tried to control the number of state employees but has significantly increased the amount of money spent on contract workers. Contract workforce expenditures increased 58 percent over the period from 1994 to 1999.45 While cost savings are generally cited as the reason for using contract workers, research indicates that very few agencies are using any kind of cost-benefit analysis to determine if there are indeed cost savings from using contract workers.46 This lack of analysis is often due to a lack of information and/or compatibility of information across data management platforms. It is difficult to accurately calculate the average cost or benefit for contract workers due to differences in the work performed, length of assignments, and the nature of services provided to different organizations. Also, there is difficulty in determining the individual productivity of each contract worker and the overall productivity of the contractor agency. The government has two primary databases for collecting information on the state's contract workforce: The Uniform Statewide Accounting System and the Full-Time Equivalent Reporting System. There are several problems with these databases: they do not have similar definitions; there is often difficulty in capturing contractor headcount information; and there is inconsistent reporting by different agencies. Agency data on contract workers is typically decentralized at the department level, increasing the difficulty in maintaining consistency in reporting. The data collection system does not include all of the areas of contract work in the state, such as daily care and lodging for wards of the state, building construction, road construction and maintenance, and most other contracted maintenance and repair services. Also, many agencies consistently miscode expenditures and fail to correct previous reporting errors, further propagating the problem of inconsistent reporting. Government Auditing Just as vendors should be able to dispute why and how a contract was awarded to a particular bidder, public entities also should be able to dispute the contract process. Especially if a state or local government is operating under a decentralized purchasing system, it is necessary that outside officials or departments be able to question an agency's contract process. Though it may seem obvious that officials such as state auditors or local finance directors should be able to find out why a contract was awarded to a particular vendor, this is not always the case. The Pennsylvania State Auditor General has been unable to view documents regarding the process leading up to the decision to award Adelphia a $228 million telecommunications contract despite the fact that the Office of Administration (which awarded the contract) has been under official state audit for over a year. State officials have said that the law is unclear as to what the agency must turn over.47 State and local governments must allow officials to audit the contracting processes of their departments. Current Trends Commodity Contracts Soliciting Bids for Commodity Purchasing A government entity may use many different methods to solicit bids for commodities. The most common of these methods are: Invitation for Bid (IFB), Request for Proposal (RFP), Request for Qualifications (RFQuals ), and Request for Quotation (RFQ). Invitation for Bid An IFB is typically used to acquire well-defined goods and services. Normally, an IFB is awarded on the basis of lowest-priced, responsive and responsible vendor without negotiation.48 The term IFB is used when an agency is conducting a formal ("advertised to the public") solicitation. IFBs and RFQs are generally the same except for dollar value and public advertising. In addition, there are usually maximum dollar limits and advertising requirements stipulated by local or state law.49 Requestfor Proposal An RFP is most often used for the acquisition of services and high-technology procurements. RFP are not issued for well-defined, able to award on low-price-only acquisitions. In most cases, there is a problem that can not be addressed by the agency so the vendor community is asked to propose a solution. Awarding of the RFP is made on the basis of highest score on evaluation criteria (including price) to a responsive, responsible bidder.50 Additionally, there will normally be negotiation leading to execution of a contract. Requestfor Qualifications An RFQual is almost always used to acquire the services of professionals. These kinds of professionals are generally registered with either the city or state. Typically, the types of professionals being solicited are architects and engineering services. However, there are many other types of professional services that can be contracted. RFQuals tend to be discrete events. Since price can not be made an object, a review of resumes and capability statements is made and then price is negotiated.51 Contracting for Commodity Purchasing Commodity purchasing covers a broad range of goods and services. Regardless of what is being purchased, the purchasing organization must receive the "best value" for its money. This raises the question, what is "best value"? Best value is an optimum combination of economy and quality to achieve the objectives of the end user.52 In order to determine this optimum combination, the purchasing organization must evaluate a set of criteria that it determines prior to making the purchase. Examples of the kinds of criteria that should be considered are price, quality, service after the sale, reputation of the vendor, and delivery time.53 This list is not intended to be exhaustive; rather, it should be used as a reference for the types of criteria that should be evaluated. Once a vendor has been selected for a particular commodity, it is necessary to implement a contract to establish the terms between the vendor and the purchasing organization. At a minimum, the contract needs to contain language that relates to the following areas: delivery, payment, insurance, dispute resolution, and contract termination. Delivery While it may seem intuitively obvious, the entire point of a procurement agreement is for the end user to obtain a commodity from a vendor. To accomplish this, it is necessary to establish clear terms that will be met regarding all aspects of delivery. Details covering such things as substitution or cancellation of products, handling of commodities classified as hazardous materials (chemicals, paint, compressed gases, etc.), time and location of delivery, and procedures to be followed in case of a foreseeable delay should all be included in the purchasing contract. Payment Most often, it is the intention of the vendor to be compensated for supplying a commodity to the purchasing organization. Before payment can be made, the agency must establish that the commodity has actually been received and that it meets the requirements of the purchaser. There should be language in the contract that indicates under what conditions the commodity will be considered received. Once the commodity has been received, the vendor should be provided with explicit instructions on how to submit an invoice for payment. Insurance Each contract must have a section covering insurance requirements. This section protects both the procuring agency and the vendor. Since laws are different in every jurisdiction, there is no single set of issues that must be addressed in this section. However, there are certain aspects that will most likely be universal. Examples of these aspects are liability while on the purchaser's site, property damage, and workers' compensation. Dispute Resolution A clearly defined process of dispute resolution is a necessary part of any procurement contract. As stated previously, the language used to specify the dispute resolution process is often provided by agency legal counsel in order to prevent unnecessary legal issues from arising in the case of a contract dispute. Contract Termination Occasionally, it is necessary to terminate a contract prior to the completion of the contract. Typically, there are two reasons to prematurely terminate a contract: termination for default and termination for convenience. When a contractor has not satisfied the terms of a contract it may become necessary to take legal action. This action includes but is not limited to withholding of payments, seeking of damages, and termination of the contract. Sometimes it is necessary for an agency to terminate a contract prior to its completion because of a change in circumstances. When this occurs, the contracting activity still has legal obligations. For instance, the vendor is entitled to receive compensation for that part of the contract that has been satisfied. Additionally, the contracting agency is typically responsible to provide compensation for the actual costs of terminating the contract early. An example of this would be to reimburse a vendor for materials that were ordered for the purpose of satisfying the original contract.54 Construction Contracts Unlike procurement of general commodities, there are several discrete stages to the process and contract administration for procurement of a construction project. These construction-specific stages will have to be done in addition to the contracting process discussed before. By paying close attention to these aspects, cost effectiveness may be better assured. The procurement process for construction projects can be divided into the following parts: conceptual planning, project development, contract planning, bidding, construction administration, and contract close-out. While planning and bidding are important to any contract, there are some aspects to which an executor of construction contracts should pay particular attention. Conceptual Planning During the conceptual planning phase, emphasis is placed on specifying the unique goals and objectives of the program while quantifying the performance measures that must be met. This is similar to the specification process needed for all contracts. For construction contracts, this process is handled internally by the agency responsible for the program. This does not preclude the agency from seeking information and support for the project outside the agency from consultants or vendors. This phase leads to the creation of either an Invitation for Bids (IFB) or a Request for Proposal (RFP). Early in the process, comprehensive plans should be developed and alternatives should be explored. The materials for construction will cost more if they are ordered on a last­minute basis. During the planning stage, alternatives need to be explored and feedback from stakeholders should be taken into account. Project Development and Contract Development The project development phase and the contract development phase of the procurement process are adjuncts to the conceptual planning phase. They provide specific and detailed requirements and identify the type of program management that is going to be used. Dispute Resolution The contract between the public entity and the contractor must include proper provisions for managing disputes on the job. Clearly defined dispute resolution procedures are essential to success in procurement of contractor, engineer, and architecture services for construction projects. Pre-Qualification A growing trend in construction procurement is the implementation of pre-qualification of contractors who are allowed to bid on construction projects. Among other criteria, pre­qualification takes into account a background check, technical ability, financial surety, previous experience, and performance on past projects. Compiling this data allows government entities to increase the quality of vendors available to perform construction projects and to increase efficiency in the selection process by screening out the unqualified vendors in advance. Types ofConstruction Bids There are several bid types for construction projects, including: Information about Lowest Bid, Competitive Sealed Pro.fsosal, Construction Manager at Risk, Construction Manager as Agent, and Design/Build. 5 This list is noncomprehensive; category names may vary, and all of the approaches have their benefits and drawbacks. The advantages and disadvantages of each of these methods can be seen in Table 3.1. Lowest Bid In this approach, the vendor that claims it can complete the specified project for the least amount of money wins the project. Competitive Sealed Proposal Unlike a Competitive Sealed Bid, a Competitive Sealed Proposal allows the government entity to negotiate on the price and nature of the proposal once the proposals have been reviewed. Since negotiation is allowed and expected, the entity can move the vendor toward a price that is lower.56 Construction Manager at Risk In Construction Manager at Risk jobs, the contractor is brought into the project in the early planning stages, which allows it to provide feedback on the constructability of a design. Construction Manager as Agent The Construction Manager as Agent (or Construction Management-Agent) is an arrangement in which the contractor is brought in and acts as the owner's representative, providing the management, administrative, and technical services for the construction project. Design/Build Design/Build is a system in which the each of the potential contractors submits the designs and costs for a specific project the government entity needs built. Table 3.1 Advantages and Disadvantages of Procurement Methods in Construction Contracting T Advan es Disadvan es Competitive Sealed Proposal Contains bidder qualifica tions Review process is time Bid for best value consuming Limited ability to fast-track a ro·ect Construction Manager at Risk Complex buy-out project Concern about price premium Design/Build Limited value engineering Limited ability to fast-track Source: Adapted from a class presentation by Bob Rawski, Senior Project Manager, UT System Office of Facilities Planning and Construction, at the Lyndon B. Johnson School of Public Affairs, Austin, Texas, September 25, 2003. Construction Administration Construction administration is the next phase of construction procurement. Governments differ in how they carry out construction administration, specifically in how project managers are incorporated into the project. The project manager should have the autonomy to direct resources as necessary to ensure the successful completion of the project. Additionally, the project manager may be responsible for implementing the dispute resolution language in the contract. Each Design and Construction Group (DCG) project has an engineering charge who oversees all aspects of the project onsite. This person serves as a liaison between contractors and DCG, tracks vendor costs for auditing purposes, and is often a former tradesperson or contractor.57 Contract Close-out The final phase of the contracting process is the close-out. During this period, the project manager and vendors work together to ensure that the project has been completed and is in compliance with all aspects of the contract. Close-out is significant for all parties involved. For the issuing agency, the contract close-out signals the end of the construction process and the beginning of utilization of the facility. It also marks the beginning of any warranty period as stipulated in the contract. For the vendors, contract close-out is equally important. Besides relieving them of their contractual obligations, it also is a determining factor in establishing how well they met program scheduling obligations and whether they qualify for performance bonuses or penalties. Information Technology (IT) Contracts General Rules for IT Contracting Due to the complex and rapidly evolving nature of technology purchasing, both private companies and government agencies have often been unprepared. Even today, much of the IT purchasing is done under a system where vendors "create market demand and tell companies what they can buy, when they can buy it, and how much they will pay."58 This paradigm, however, is no longer effective in a time of budget constraints that are constantly forcing governments to do more with less. As such, a huge shift is underway as purchasers start taking a more proactive approach to technology procurement. The new paradigm in technology purchasing manifests itself in several ways. Agencies can no longer rely on vendors to define their technology needs. Agency technology heads must constantly "do their homework," continuously evaluating IT requirements to determine exactly what functionality their agencies require in order to pursue their missions effectively. A solid understanding of needs in advance of negotiations will reduce the likelihood of purchasing expensive technology that fails to meet agency needs.59 More importantly, agencies need to acknowledge their position of strength in the purchasing process and utilize this leverage when negotiating with vendors. Many controversial technology purchases have been the result of inexperienced government negotiators. By being prepared and understanding that they actually hold the upper hand in negotiations, agency procurement teams can negotiate a contract that meets their needs and budgets.60 Tactical Contracting Options Beyond these general rules, the actual approach an entity takes in developing technology contracts will depend in large part on the specifics of the agency and the particular situation. Some options that are available to ensure that purchases are made at the lowest possible cost are described below. Nonprofit Purchasing Agencies Nonprofit purchasing agencies is an approach that was pioneered by the City of San Diego in the late 1970s and involves the use of a special nonprofit corporation to do all citywide IT purchasing. This innovative technique was inspired by long turnaround times on technology procurements due to onerous regulations and paperwork requirements. This time lag frequently caused technology to be outdated by the time it was finally purchased. Since they do not follow city purchasing guidelines and statutory codes, agencies such as San Diego Data Processing Cmfioration (SDDPC) allow for extremely efficient purchasing and quick turnaround times. 1 However, the benefits of this additional efficiency and speed should be carefully weighed before implementation of any such program. While statutory guidelines may seem pointlessly complicated and time consuming, they do serve many valuable purposes in terms of equity, fraud avoidance, and government transparency. These advantages should be strongly considered before turning purchasing operations over to a nongovernmental organization. Local Use of State-Level Technology Contracts In many states, the state-level procurement agency allows local government agencies, municipalities, and school districts to utilize centralized state technology contracts. For cash-strapped local governments, the ability to use centralized state contracts can be a huge advantage. State purchasing offices often are able to negotiate highly cost-effective rates on technology products through volume purchasing. Utilization of these contracts gives local and municipal governments a level of purchasing power that would otherwise never be available to them. Certainly use of state contracts may not be applicable in all situations. A local agency that only needs to purchase a few computers may find it far easier to simply order them from a commercial vendor. Yet, even here, state technology contracts can prove an immensely valuable resource. In New York state, for instance, the Procurement Services Group makes all of its technology contract information available online. This allows local governments to compare the prices they receive from commercial vendors to those negotiated by the state, providing them with extra bargaining leverage and allowing them to verify if the deal they are getting is reasonable or not.62 In this way, state contracts can provide value to local governments even if the contracts are never used to make an actual purchase. The 20 Percent Rule Overpriced (and often unnecessary) consulting or implementation contracts are one of the major sources of misused funds in technology purchasing. Many purchasing departments have awarded a "low cost" contract for hardware or software services only to later discover that successful implementation is contingent on supplying expensive, long-term consulting contracts to the firm that initially sold them the technology. To solve this, the state of New York has implemented what is known as the "20 Percent Rule" for technology contracts. This statute states that when agencies purchase hardware or software contracts, they may only purchase integrated consulting services on the same contract for up to 20 percent of the price of the hardware or software. Above 20 percent, the consulting services must be competitively bid out on a separate contract. This allows agencies to obtain the best possible deal on all elements of a technology contract, and forces them to critically examine their needs from a broader perspective.63 Multiple Award Contract Systems Some governments are beginning to use a multiple award contract system. This process allows several vendors to list the price they are offering for the same or similar products on a pre-approved schedule from which governments can purchase goods or services. The prices are the best a vendor can offer because the government customer is so large and because the vendor knows its competitors also are offering extremely competitive rates. From the vendor's perspective, being on a schedule provides a chance to be selected by the government customer, not a guarantee of any business. The actual business will be garnered only if the vendor is offering the government customer better prices and value than its competitors.64 One of the big advantages of the schedule process over traditional government procurement is the speed with which government customers can make a purchase. This is particularly important in the rapidly changing world of information technology. California's system, the California Multiple Awards Schedule (CMAS), has been a very successful form of schedule procurement. 65 Outsourcing Contracts Contracts for services, or outsourcing, require unique steps in the contracting process that differentiates outsourcing from other procurement practices. For example, when making a decision to contract out for services, a government agency must first decide if contracting out is cost-effective and consistent with the public good. A multitude of decision tools are available to procurement decisionmakers, including cost-benefit analysis, and many agencies even contract out for consulting services to help make the outsourcing decision. In addition, conducting a cost-benefit analysis and/or a business plan can result in identification of other important issues for implementing an outsourcing solution for provision of government services. In Florida, for example, the Department of Management Services (DMS) determined that outsourcing human resources (HR) services would allow state agencies to focus more time on core missions, rather than figuring out how best to handle HR needs and processes.66 Thus, cost-benefit analysis can result in both quantitative and qualitative evidence that can be used for decision making in the process of outsourcing government services. However, policymakers still must consider issues related to the public good that cannot always be included in cost-benefit analysis. The State of Hawaii is using an innovative new system to award outsourced contracts to professionals such as architects and engineers. Under a new state law, independent committees of professionals will determine who gets these contracts by analyzing published criteria. The names of committee members, their recommendations, and reasoning will be made public. Interested parties have the right to question the criteria before the deadline, and losing bidders have the right to find out why they did not win the contract. 67 ­ Key Recommendations and Conclusion Based on research and case study findings, the following recommendations are offered as Best Practices in the contracting portion of the public procurement process: (1) an open, transparent process, (2) the ability to negotiate with vendors, and, (3) a clear dispute resolution process. Transparency Cities and states need to develop an open and transparent bid process in order to keep both the vendor's and the public's trust. By advertising bid openings in local newspapers and advertising openings via the internet, governments can expand vendor bases and increase the legitimacy of the process. When contracts are awarded, cities and states should advertise the winning bid. The City of San Diego, for example, has constructed a very transparent contract process. The city runs a Bid and Contracts Opportunities Page online, which allows consultants, service providers, contractors, vendors, and suppliers to find out about current bidding and contract opportunities.68 Lack of transparency in the bidding process can lead to the breakdown of the entire procurement structure. One of the main keys to an effective procurement process is having a broad bidder base that competes for state and local contracts.69 The more competition that a government can attract for contracts, the better the deal the government gets.70 When cities or states ignore the need for transparency, many vendors tend to stay away. The State of California's main procurement agency, the Department of General Services (DGS), recognizes this fact. The department states that its top priority is maintaining an open, fair, and transparent bidding process.71 The Office of General Services (OGS) in New York provides an online bidder notification service, daily updates on its bid calendar, and an easily accessible customer service hotline. Recent contract scandals in Hawaii have lead the state government to consider massive overhauls to increase transparency within the state's procurement system. Governor Linda Lingle stated, "Hawaii needs an honest and open system, one that is open to the media and transparent to the public, because that will go a long way towards restoring trust in the government and it won't cost anything."72 State and local governments should be proactive in setting up a transparent procurement system; otherwise, they may find themselves in a similar position to Hawaii. Though there is no clear benchmark to tell governments when their systems are transparent, it is obvious that public agencies must do a better job of structuring procurement so that ordinary citizens can understand the process. A Hawaii official stated, "If people don't understand it, they are going to question it...the duty falls on the department to ensure that the public understands how procurement works, why it works, and the fairness issue. "73 Negotiation Negotiation with bidders can take place in virtually any stage of the procurement process for services, and in many different forms. For outsourced services, particularly under performance-based contracts, the most effective negotiation usually occurs after the vendor submits a budget and the contracting agency separately determines reasonable cost. After the contracting agency and vendor agree on reasonable costs for total services, another round of negotiation can take place to determine cost per deliverable. Agencies can set different costs for deliverables to establish priorities in the overall program. In workforce development service delivery, for instance, the contracting agency might determine that a successful placement in a job that pays more than the minimum wage is the most important deliverable for a local service provider. The agency could therefore negotiate for incentive payments for exceeding a minimum number ofjob placements in exchange for lower costs on other parts of the program. The point of negotiation is to get the best price possible in a fair arrangement to both the agency and the contractor. In traditional purchasing, the ability to negotiate with vendors is critical to optimizing the procurement process. When purchasing vehicles, it is necessary for city and state officials to be able to sit down with vendors and discuss exactly what specifications the government needs. In order to get the best deal possible, it is necessary to give procurement officials the power to go to those vendors and negotiate prices. The State of California, for example, recently saved millions of dollars in vehicle purchasing by going to each vendor that submitted bids and telling them what the competition was bidding.74 An individual can save thousands of dollars by negotiating with dealers when purchasing a car. Cities and states are no different. Automakers desire state and local contracts. These automakers give dealerships considerable incentives and price leeway when bidding on government contracts.75 Allowing procurement officials to take advantage of incentives and price leeway through contract negotiation is an excellent way to ensure that taxpayers' money is not wasted. Dispute Resolution Addressing dispute resolution is another "best practice" in the contracting process. Conflict resolution provisions can be divided into two basic types: prevention provisions and resolution processes. Prevention provisions take on many forms depending on the kind of conflict that one can anticipate. A common prevention provision is one that specifies which documents will take precedence over others. For example, in contracts awarded by the Alabama Department of Veterans Affairs, it is specified that in the event of a conflict in the language between the RFP and the final contract, the provisions set forth in the RFP will govern. The contract also specifies that where there may be a conflict between state and federal regulations, the stricter of the two sets of regulations will apply. There are basically three methods for resolving conflicts: negotiation, mediation, and arbitration. It is important for these methods to be defined in advance. It is also often a good idea to use the services of a third party who does not have any personal involvement in the case.76 Procurement officials are no strangers to disputes caused by vendors feeling that they were treated unfairly during the contract process. Large procurement programs (such as state governments or large city governments) face vendor disputes with many of the contracts that they offer. 77 Despite the frequent disputes caused by contract processes, many governments do not have clear dispute programs.78 Cities and states make the mistake of having several different employees or departments that vendors may go to in order to file their disputes. Governments need a single, identifiable point of contact where vendors can enter the dispute resolution process, and the same personnel should handle the entire process. The Texas Building and Procurement Commission prides itself in having a clear dispute resolution process. The dispute process is required to be outlined in the contract, and the purchasing officer is required to instruct the vendor how to file a complaint. In addition, the entire dispute process, including instructions on filing a report and contact information, is available on the internet. A single person manages all complaints. If the dispute is not resolved at this stage, it can be taken before the commission for a hearing in which both sides would present their case and any evidence they may have. If all else fails, the vendor can move the process and proceed to district court.79 There is a clause included in the contracts sent out by New York State that explicates the procedures for disputes; it is also included on the website. Initially, any dispute is attempted to be resolved informally; if it is not, then a letter is to be submitted. Henceforth, an appeal process takes place through the proceedings of Article 78. However, it is rare to advance up to this point, as only about one in 20 disputes arrive at the appeal process. 80 Notes 1 John Marlin, Contracting Municipal Services: A Guide/or Purchase from the Private Sector (New York: John Wiley, 1984), p. 41. 2 Interview by Aaron Smith with Walter Bikowitz, Director, Procurement Services Group, New York State Office of General Services, Albany, New York, November 14, 2003. 3 David Knutson, "State Tests the Limits of Internet Procurement," St. Paul Legal Ledger (July 17, 2003). Online. Available: Lexis-Nexis Academic Universe, http://www.lexis-nexis.com/universe/. Accessed: December 2, 2003. 4 Marlin, Contracting Municipal Services, p. 69. 5 Enterprise Systems, The Three C's ofRFPs: Avoid RFP Nightmares with Three Simple but Effective Project-Management Best Practices. Online. Available: http://www.esj.com/features/article.asp?EditorialslD=l22. Accessed: April 3, 2004. 6 Ibid. 7 Nebraska Auditor of Public Accounts, Best Practices in Contracting for Service. Online. Available: http://www.auditors.state.ne.us/content/Contracting_Services.pdf. Accessed: April 3, 2004. 8 Knutson, "State Tests the Limits" (online). 9 "White Paper on How Strategic Business Procurement Can Increase Profits and Quality," Business Wire (Geller & Company, September 25, 2003). Online. Available: Lexis-Nexis Academic Universe, http://www.lexis-nexis.com/universe/. Accessed: February 17, 2004. 10 Knutson, "State Tests the Limits" (online). 11 Speech by Larry Giunipero, NAPM Professor of Purchasing and Supply Chain Management, Florida State University Department of Marketing, to the State of Florida Purchasing Director's Meeting, Tallahassee, Florida, November 13, 2003. 12 Florence Olsen, "Reverse Auctions Can Save Colleges Money on Big-Ticket Purchases, Users Say," Chronicle ofHigher Education, vol. 47, no. 48 (August 10, 2001), pp. A47-A50. 13 William Krizan, "New Guidelines May Take Some Pain Out of Reverse Auction," Engineering News Record, vol. 251, no. 21 (November 24, 2003), pp. 14-16. 14 Giunipero speech. 15 National Academy of Public Administration, Internet Reverse Auctions-Bonanw for Local Governments? Online. Available: http://www.napawash.org/pc_local_state/pierce/pierce_2_4_01.html. Accessed: February 28, 2004. 16 Giunipero speech. 17 United States Conference of Mayors, Joint Center for Sustainable Communities: State ofthe Center. Online. Available: http://www.usmayors.org/USCM/sustainable/progress_report_0699_0500.pdf. Accessed: March 11, 2004. 18 ADP: National Account Services, Why Outsource: Tips for Outsourcing. Online. Available: http://nas.adp.com/outsource/tips.html. Accessed: March 11, 2004. 19 Jay F. Stright and Frank J. Candio, "Using a Reverse RFP Process to Assess Your Outsourcing Options," Employment Relations Today (Summer 2000), p. 7. 20 Bureau of Government Research, Contracting for Municipal Services: A Handbook for Local Officials, University of Oklahoma, Norman, OK (1979 handbook), p. 23. 21 Interview by Erin Taber with Bob Bisho, Purchasing Director, Purchasing Department, City of Phoenix, Phoenix, Arizona, November 26, 2003. 22 Interview by Camellia Falcon with Dennis Kerhulus, Procurement Officer, City of Sacramento Procurement Division, Sacramento, California, October 30, 2003. 23 PSB Group Website, Procurement Best Practices. Available: http://www.psbgroup.co.nz/Home/procurement-best-practices.html. Accessed: November 18, 2003. 24 National Association of Procurement Officials, ''2003 Survey of State Government Purchasing Practices" (2003), Lexington, KY, 2003. 25 Brad Cunic, "Performance Based Contracting," Hydrocarbon Processing (December 2003), p. 43. 26 "State's Right to Setoff Trumps Creditor's Security Interest Under UCC," Commercial Lending Liability News (August 22, 2003). Online. Available: Lexis-Nexis Academic Universe, http://www.lexis­nexis.com/universe/. Accessed: March 11, 2004. 27 Cunic, "Performance," p. 45. 28 Interview by Brian J. Kelsey with Robert W. Bodine, CEO, Workforce Plus, Tallahassee, Florida, November 13, 2003. 29 Ibid. 30 Ibid. 31 Cunic, "Perfonnance," p. 45. 32 Mary C. Lacity and Leslie P. Willcocks, "An Empirical Investigation of Information Technology Sourcing Practices: Lessons From Experience," MIS Quarterly (September 1998), p. 371. 33 Ibid., p. 374. Interview by Brian J. Kelsey with Michael M. Switzer, Vice President, Performance and Programs, Workforce Florida, Inc., Tallahassee, Florida, November 13, 2003. 35 Bodine interview. 36 Interview by Brian J. Kelsey with Larry Mcintyre, One-Stop Program, Agency for Workforce Innovation, State of Florida, Tallahassee, Florida, November 13, 2003. 37 "West Virginia Acknowledged for National Award," Business Wire (August 19, 2003). Online. Available: Lexis-Nexis Academic Universe, http://www.lexis-nexis.com/universe/. Accessed: December 2, 2003. 38 Class presentation by Ed Serna, Department of Information Resources, State of Texas, at the Lyndon B. Johnson School of Public Affairs, Austin, Texas, September 25, 2003. 39 Bikowitz interview. 40 Interview by Vanessa McMahan with Don Del Rio, Legal Counsel, San Diego Data Processing Corporation, San Diego, California, November 6, 2003. 41 Interview by Amy Witte with Juanita Moore, Manager, Contracts Administration Office, Florida Department of Transportation, Tallahassee, Florida, November 14, 2003. 42 Office of the Attorney General, Texas Government Code, Chapter 2260. Online. Available: http:// www.oag.state.tx.us. Accessed: January 31, 2004. 43 Construction Industry Institute, Pub 6-5 -Project Control for Construction. Online. Available: http://www.construction-institute.org/. Accessed: January 15, 2004. 44 Texas State Auditor's Office, A Report on the State's Contract Workforce Use and Contract Workforce Data Collection (Austin, TX, March 2001), p. 1. 45 Texas State Auditor's Office, An Audit Report on the State 's Contract Workforce (Austin, TX, February 1999). Online. Available: http://www.sao.state.tx.us/reports/2001/0l-023. Accessed: September 17, 2003. 46 Texas State Auditor's Office, Best Practices and Guidelines for Effectively Using a Contract Workforce (Austin, TX, March 1999), p. 4. 47 David DeKok, "Pennsylvania Launches Audit of Adelphia Business Solutions Contract," The Patriot News (September 19, 2002). Online. Available: Lexis-Nexis Academic Universe, http://www.lexis­nexis.com/universe/. Accessed: February 17, 2004. 48 Email from Mark Walsh, City of Austin Purchasing Office, "Optimizing Public Procurement," to Eli Massey, February 2, 2004. 49 Ibid. so Ibid. SI Ibid. s2 The University of Texas at Austin, Purchasing Office, Frequently Asked Questions about Procurement. Online. Available: http://www.cc.utexas.edu/admin/purchasing/faq.html. Accessed: January 30, 2004. S3 Ibid. 54 The University of Texas at Austin, Purchasing Office, Terms and Conditions ofOrders. Online. Available: http://www.cc.utexas.edu/admin/purchasing/faq.html. Accessed: January 30, 2004. ss Class presentation by Bob Rawski, Senior Project Manager, UT System Office of Facilities Planning and Construction, at the Lyndon B. Johnson School of Public Affairs, Austin, Texas, September 25, 2003. s6 Texas Education Agency, Financial Accountability System Resource Guide, Update 10.0, January 2003: 3.2.3.2 Competitive Sealed Proposals/Requestfor Proposals. Online. Available: http://www.tea.state.tx.us/school.finance/audit/resguidelO/purchase/pur-14.html. Accessed: December 8, 2003. s7 Interview by Aaron Smith with Harry Williams, Engineer, Design and Construction, Office of General Services, Albany, New York, November 14, 2003. s3 Chris Conrath, "Power to the People: IT Procurement in the New Millennium Is Starting to Focus on Buyer's Needs," ComputerWorld Canada, v. 19(6) (March 21, 2003). Online. Available: Lexis-Nexis Academic Universe, http://www.lexis-nexis.com/universe/. Accessed: December 2, 2003. s9 Jack McCarthy, "A Contract's Cautionary Tale," Info World (July 24, 2002), p. 56. Online. Available: Lexis-Nexis Academic Universe, http://www.lexis-nexis.com/universe/. Accessed: December 2, 2003. 60 Ibid. 61 Del Rio interview. 62 Bikowitz interview. 63 Ibid. 64 "IT AA Says California Procurement Reforms Must Focus on Steps to Make a Good System Better," Business Wire (June 11, 2002). Online. Available: Lexis-Nexis Academic Universe, http://www.lexis­nexis.com/universe/. Accessed: February 17, 2004. 65 Ibid. 66 Presentation by Fran Brooks, Department of Management Services, State of Florida, "Service First & Human Resource Outsourcing Project." Online. Available: http://www.myflorida.com/dms/hrm/hrout/FranUpdate8212002SVCFIRST .ppt. Accessed: December 9, 2003. 67 "Hawaii New Law Removing Politics from Who Wins Bids," Associated Press State & Local Wire (May 12, 2003). Online. Available: Lexis-Nexis Academic Universe, http://www.lexis-nexis.com/universe/. Accessed: February 17, 2004. 68 City of San Diego Purchasing Department, Purchasing. Online. Available: http://www.sandiego.gov/purchasing/index.shtml. Accessed: October 13, 2003. 69 Interview by Thomas Schuette with Bob Riola, Contract Analyst, Department of General Services, Sacramento, California, October 30, 2003. 70 Ibid. 71 Interview by Thomas Schuette with Bill Fackenthall, Project Manager, Department of General Services, Sacramento, California, October 31, 2003. 72 Bruce Dunford, "Lingle Administration Launches Procurement Reform Effort," Associated Press State & Local Wire (January 10, 2003). Online. Available: Lexis-Nexis Academic Universe, http://www.lexis­nexis.com/universe/. Accessed: February 17, 2004. 73 Ibid. 74 Riola interview. 75 Ibid. 76 John O'Looney, Outsourcing State and Local Government Services: Decision-Making Strategies and Management Methods (Westport, CT: Quorum Books, 1998) pp. 1-25. 77 Interview by Thomas Schuette with Patricia Jones, Department Manager, Department of General Services, Sacramento, California, October 30, 2003. 78 Ibid. 79 Interview by Aaron Kaminsky with Weaver Jackson, Procurer, Texas Building and Procurement Commission, Austin, Texas, October 29, 2003. 80 Bikowitz interview. Chapter 4. Oversight and Relationship Management Overview After the government solicits bids, reads through proposals, and finally awards a contract to a vendor, it still has an extremely important function to perform. This function is two­fold in nature and is comprised of oversight and relationship management. Oversight is a crucial part of the procurement process because governments must monitor the performance of their vendors, yet it is easily neglected. Oversight ensures that governments are receiving the services they have requested the vendor to perform. Certain factors may result in a lack of thorough oversight, such as the lengthy process of awarding a contract, a lack of training and education, or a poor accountability structure. Particularly in regard to outsourcing of services and construction projects, the government may lose control without proper oversight protocol. The procurement official, as an individual, is always at risk for being held accountable for the vendors' actions. In addition to oversight, relationship management is also a vital component of public procurement. Relationship management refers to the system of communication that occurs between the vendors and procurement officials. Specifically, it structures the communication process in such a way as to avoid confusion and misinterpretation of information while facilitating open and effective interactions. When implemented together, oversight and relationship management mechanisms result in a strong purchasing system for many reasons. In particular, constant communication and periodic performance checks allow the government to better ensure vendor compliance. Oversight and open communication minimize the risk of poor performance that may result in wasted public dollars. Also, oversight increases the effectiveness of the service performed because the vendor has incentive to perform well if it knows the government may be evaluating performance. In addition, oversight and relationship management allow the government to evaluate the benefits that certain types of procurement may provide. This chapter begins with a discussion of how governments can effectively oversee the performance of their vendors. There are several considerations that the government should take into account during the oversight process, including the quality of the service being performed, employment of a contract manager, and an organized system of data management. Following the discussion on oversight, we tum to relationship management to address the importance of an open and professional relationship, clear communication, dispute resolution, and the need for consistent contact with vendors. The final section of this chapter deals with current trends that public purchasing departments have recently employed in the purchasing areas of commodity purchasing, construction, information technology, and outsourcing. Oversight Oversight is an essential part of any procurement process. It safeguards the government and often the public from receiving substandard services as well as allowing vendors to continually improve their performance through government feedback. There are many common practices that procurement officials can implement to enhance their oversight procedures. First, governments need to closely monitor the performance of their vendors through periodic checks and feedback from the public and government employees. In the event that the vendor is not able to adequately perform the service, it is up to the government to have a course of action prepared to deal with specific shortcomings. Second, governments need to ensure that the quality of the product or service being provided is commensurate with its cost. Ifthe government is paying too much for inadequate services, then it will need to confront this issue with the vendor. Third, the government should assign a contract manager who will handle all of the information transferred between the government and the vendor. This will prevent conflicting information and miscommunication between the two parties. Finally, governments need to document the actions of their vendors in order to maintain an efficient data management system containing an up-to-date assessment of past and present vendor performance. Each of these issues will be discussed below in greater depth. Monitoring Performance Before monitoring the performance of any vendor, procurement officials should establish a standard, perhaps a benchmark, to which they can compare the work of their vendor. The State of Florida implements this on a wide scale with its emphasis on performance­based contracts and local accountability. The Agency for Workforce Innovation (A WI) and its policymaking counterpart known as Workforce Florida, Inc., are responsible for the oversight of the statewide workforce development system. A WI monitors 24 Regional Workforce Boards (RWB) in Florida that contract with local service providers to deliver a variety of services. Workforce Florida, Inc., and A WI developed the "Red and Green Report" that benchmarks the performance measures established in the contracts with the RWB and local service providers. Measuring performance on 17 indicators, Workforce Florida, Inc., uses this to award financial incentives and assess penalties to RWBs and local service providers for short-term outcomes.1 In addition, A WI is using the automated workforce development procurement system, known as the One-Stop Management Information System (OSMIS), to develop monthly performance reports on indicators such as expenditures per service or the average cost per client served.2 Once the government establishes a comparable standard or benchmark, it can start monitoring the performance of its vendors and comparing them to the established standard. In addition to benchmarking, there are several other techniques that the government can use to evaluate vendor performance. One is a venue where citizens can voice their opinions regarding the service. The city of Lakewood, California, has a telephone hotline that citizens can call and express their opinion toward a public service such as trash collection, street sweeping, or street repair.3 This system gives the government an idea of how well or poorly their vendors are performing on the job. Another way of soliciting the public's opinion is to send out questionnaires to residents or ask them to attend a city council meeting. Construction projects require extensive monitoring for perlormance and adherence to contract specifications. The State of Florida Department of Transportation manages about $1.7 billion in construction contracts for roads and bridges. A tool they use for ensuring perlormance and quality control is the use of a software program called Site Manager. Project site managers use this tool to run daily totals to compare to the specifications in the contractor's original bid, such as track time, percentage completed, bad weather days, etc. This aspect of oversight can give public agencies valuable information about contract term compliance.4 An example o_f poor perlormance monitoring involves a school district in Washington, D.C., that paid $67 million over a 28-month period to private special education providers without reviewing their bills for accuracy. The original plan was for providers to send estimates of their costs per child, and in tum the school system would reconcile the differences between the estimates and the final costs.5 However, neither party bothered with the payment reconciliations, leading to overpayment and waste of public resources. Ifthe school district had made the effort to review the perlormance of the educational providers, it may have been able to see the billing discrepancy that the educational providers were reporting. 6 A similar situation occurred in the Llano School District in Texas. The Llano school board did not monitor Jack Patton, the superintendent of the Llano Independent School District. Patton made unilateral decisions to approve questionable construction contracts without checking invoices against contract documents.7 The district did not have set policies or procedures on handling cash, preparing deposits, and reconciling bank statements, allowing Patton to set his own rules. 8 The district may have been able to prevent Patton's action by simply having set policies and procedures in place regarding monetary transactions, and most importantly, by periodically monitoring his actions through audits or inspections. Having accumulated a budget deficit of several hundred thousand dollars, the district will have a hard time safeguarding public funds without implementing oversight mechanisms.9 As intuitive as it may seem, governments need to constantly monitor the actions of their vendors and make sure that they are strictly following the rules set forth by the contract. Quality Control The main reason for monitoring the perlormance of a vendor is to ensure governments that vendors are providing quality products or services. Many state and local governments have problems with vendors fulfilling their contracts, much less actually providing the quality work or goods.Io States and municipalities should use a quality control department or officer to verify all goods and services provided by vendors meet specified guidelines. When purchasing vehicles, the Texas Building and Procurement Commission now requires every vehicle purchase to be audited, making certain that the vehicle specifications in the contract end up in the vehicle delivered to the state agency. I I Vendors occasionally attempt to substitute lower quality office supplies for the higher quality supplies that governments believe they are purchasing.12 The same scenario is often played out in the purchase of goods for government vehicles.13 Purchasing agents sign contracts and pay for one type of oil or antifreeze and the vendor sends a lower quality product.14 Quality control agents should regularly test products that governments receive so that the governments can provide taxpayers and government employees with quality services and products. Employ a Contract Manager In order to ensure that all the information being exchanged between the government and the vendors is consistent and communicated in an organized and professional manner, the government should assign a contract manager to specific projects. This person or committee should conduct regular compliance audits and be available to clarify any points of confusion on behalf of vendors or internal agency support staff. A contract administrator who is available and knowledgeable about the project goals, design, and support structure can serve to prevent problems in development. The manager should be the primary contact person for the project so that the possibility of giving conflicting information to bidders may be prevented.15 The State of Florida uses a third-party contract monitor for oversight of local service providers in the workforce development system. Officials at Workforce Florida, Inc., the statewide policymaking body for workforce development services, made the decision to hire an outside firm for contract management for two primary reasons. First, third-party contract monitors are viewed as a "best practice" in Florida state government. Second, as a statewide policymaking board in charge of distributing financial rewards and assessing penalties to Regional Workforce Boards (RWBs), Workforce Florida, Inc., believes that hiring an outside firm is the best way to ensure objectivity in the evaluation process, removing any perceptions of regional favoritism at the state level.16 The Agency for Workforce Innovation (AWI) in the State of Florida, in coordination with Workforce Florida, Inc., is responsible for oversight of the statewide workforce development system. A WI hired KPMG, an international professional services consulting firm, to provide contract monitoring services in 2002. KPMG's responsibilities include quality review, financial management, cost-allocation, and performance measures. Specifically, as set out in the contract with the State of Florida, KPMG conducts the following activities: • Provide fully qualified staff. • Provide corrective action recommendations to the regions onsite as operational, programmatic, or financial management problems are identified. • Share best practices learned during the review process with A WI. • Negotiate new or revised contract deliverables with A WI. • . Revise the regional review schedule as requested by A WI.17 KPMG conducts misite reviews of local service providers at least once a year and submits reports to A WI within 30 days of the site visit.18 AWI conducted a cost-price analysis for monitoring services for fiscal year 2004 that was used to structure the first year of the contract with KPMG. Annual costs for contract monitoring services were estimated at $791,615.19 The State of Florida in 2000 initiated "People First," a statewide outsourcing project for human resources services in state government. The Department of Management Services (OMS) signed a contract with Convergys Corporation in August 2002 and implementation started in May 2003. OMS hired Acclaris, a Tampa-based consulting firm specializing in business process solutions, in 2002 to provide contract monitoring services for the outsourcing project. According to Fran Brooks, the project manager in OMS, the state decided to hire a third-party contract monitor based on recommendations in a Gartner Group report entitled The Five Major Failure Points of Strategic Partnerships, and third-party contract monitors are now considered a "best practice" for major projects in Florida state government.20 In addition, lessons learned from the Unisys project-a failed initiative to outsource some healthcare services that ended in a grand jury indictment in 1998-also suggested that a third-party contract monitor would be appropriate for a project on the scale of the human resources initiative.21 Acclaris is responsible for monitoring and evaluating the progress and deliverables of both the OMS and Convergys for the full seven years of the contract with Convergys. Specifically, Acclaris is offering the following services: program leadership support, monitoring program plans, quality assurance, vendor compliance, identification of risks and issues, communication, training, and technology/systems integration experience.22 The state expects the third-party contract monitor to result in several benefits, such as leveraging skilled partnering managers, robust process and partner support infrastructure, identification of clear goals and measures of success during the project, clear resource and budget authority from a "sole source" of contact, and the ability to take advantage of private sector innovations in monitoring and evaluation services.23 Data Management Governments also must maintain the public trust by ensuring that vendors are providing the goods agreed upon. When good records of vendor performance are not kept, states and municipalities run the risk of awarding contracts to businesses that have performed poorly in the past. Governments must keep accurate data on contract performance so that they can track which vendors have performed well on specific contracts in the past. Accurate data and records may also be used for benchmarking and performance reviews. Benchmarking and performance budgeting (performance reviews) have been a · catchphrase of government since Osborne and Gaebler' s work Reinventing Government, which instructed governments to act more like private businesses.24 Both of these tools can be used to improve agencies' results. By keeping data, procurement officials can set goals for improvement in the efficient use of public resources. Benchmarking and performance reviews especially make sense in the procurement of commodities where governments are often purchasing the same goods each year. The effective acquisition and management of data is essential to the successful management of construction projects. Data management is a key aspect of project controls, which include cost, schedule, and materials control.25 These elements are interrelated, necessitating an integrated data management system. The system should be structured so that the interdependent nature of the data is incorporated and allows for the minimization of data entry and reentry. This also allows for comprehensive information sorting and report building. In a contract or outsourcing system, there is a requirement for monitoring and regulation of the vendors~ contractors, and utilized systems. The oversight process requires a significant amount of data acquisition. Some of this data may include independent audits, regular data on revenues and expenditures, workforce data, etc.26 Governments often fail to invest adequately in acquiring and processing the data that is generated. This is most evident in the area of the contract workforce. Most con~truction projects will have multiple changes throughout the life of the project, which will often generate increased costs. Ifthese are not adequately tracked and managed, significant and unnecessary costs can be incurred. A report by the Office of the State Auditor of the State of Texas found that very little information was kept on change orders and bid histories. In fact, the Department of Transportation could not calculate the number and dollar amount of change orders that added items of work to the contracts.27 This report also pointed out that although the change orders were signed and approved, there was little documentation available to determine if the requests had been reviewed and the pricing verified. An agency can minimize any cost overruns generated from unnecessary or overpriced change orders by implementing standardized procedures for review, documentation, and approval of change orders. An information and knowledge management system should track this data. Materials management or materials control has become an area in which there is increasing reliance on information technology and electronic data acquisition. The materials required for a construction project can directly impact the cost and schedule of the project. An effective materials management system should track all materials used and the costs associated with each as well as the schedule requirements. Many companies employ bar codes and radio frequency tagging for materials tracking. The Construction Industry Institute (CII) has put together an Electronic Data Management Task Force to investigate data integration strategies.28 This task force proposed the adoption of bar code standards and common materials commodity codes. Standardization would greatly help in the establishment of a materials management system that could effectively track materials costs from one project to another and provide information that could be used in the cost estimates of future projects. It may also be beneficial to set up a nationwide bulletin board system where procurement officials in different states and cities can post information on various vendors. This data could be used to find new vendors who have preformed well providing goods in specific areas, as well as avoiding vendors who regularly disappoint their clients. Relationship Management Communication between governments and vendors should always be professional, effective, and clear. Both governments and vendors will be aware of the other's expectations and should reach the desired project outcome in a timely and favorable manner by adopting these traits. Often times, however, interactions between both parties may wane, posing difficulties for either to fulfill obligations. Interactions between the government and vendor may also become too informal and potentially lead to unethical behavior. To prevent these situations, governments need to reemphasize a professional relationship with their vendors, communicate effectively with their vendors, arrange a venue for dispute resolution, and continually keep vendors up to date on new policy and regulations. Maintain a Professional Relationship Governments must develop strong professional relationships with their vendors. The government should view the vendor as a strategic partner and take the time to discuss any problems or challenges associated with the service or project. This element of professionalism is especially important when it comes to contract renewal or adding services to a contract. Since the majority of service contracts are for multiple years, there is a strong tendency for governments to establish a close relationship with the vendor. As a result, the vendor gains insights and knowledge that can give it a competitive edge if the contract is bid out again.29 The vendor may view subsequent contracts as an opportunity to recoup any losses that may have been incurred with the first contract. The government also has incentive to continue employing the same vendor to reduce costs and labor time associated with seeking out another vendor through the bidding process. However, in order to ensure that the government is receiving the fairest price, it needs to continually monitor the market value of the products or services being purchased. There are many types of governmental purchasing alliances that can be used as benchmarks to determine if a more beneficial contract for a current service is available. Effective Communication Effective communication tools should be applied at every step of the procurement process. It is especially important for consistent information to flow between procurement officials and vendors. Two key components of effective communication are accuracy and delivery. Accuracy refers to the precision of the words, terms, and structure of the information contained in a communicative interaction. Delivery refers to how messages and information are conveyed and understood by the recipient. While accuracy and precision are critical at the project development level for information management, bid writing, and contract writing, once the procurement process is in place delivery of the message is critical to ensuring project success. Delivery of the message is vital in the implementation stages of the purchasing project and therefore emphasizes interpersonal communication. According to David Whetten and Kim Cameron's book Developing Management Skills, "More often than not, it is the interpersonal aspect of communication that stands in the way of effective message delivery rather than the ability to deliver accurate information."30 Communication between governments and vendors occurs at many junctures in the procurement process. Information management, bid writing, and contract writing are just a few important places where accuracy of information should be carefully considered. While information and contracts are covered in detail in other chapters and sections, it is prudent to consider bid writing here. It is absolutely crucial.for specifications for services to be as precise and well defined as possible. Ambiguous language, unclear definitions of project scope and goals, and poor organization can result in misinterpretations, whether intentional or unintentional. Public agencies and vendors may benefit from structured and timely communication. One of the biggest complaints from vendors who work with public agencies is the great length of time between requests for information and responses. 31 Agencies must establish clear points of contact via a communication plan, and timeliness of communication can reduce bottlenecks in information flow. Responses to requests should occur within a commonly accepted time frame, and arrangements should be made to refer the requestor to another contact if this is not possible. Similarly, communications should occur at regular intervals along a preestablished timeline for the project. Initiating status reports at regular intervals is a sound means of implementing communication structure. Clear expectations should be set regarding what the measures for status reports will be. A communication plan will aid in the reduction of confusion and the resulting delay in the procurement process. While there are many templates and types of communication plans available for use, Paul Niven addresses the topic at its most basic level in Balanced Scorecard: Step-by-Step for Government and Nonprofit Agencies. Mr. Niven suggests that governments use the W5 approach to design a communication plan: governments should address the Who, What, When, Where, Why, and How of the plan. It is important to identify the major players in the procurement project-Who will be involved? Who should speak with whom? Consideration of "Who" identifies specific audiences and matches them with appropriate message/information providers. Mr. Niven blends the "Why" and "How" aspects of communication planning to illustrate that the important messages to be conveyed should stem from the project goals and purpose. The frequency of communication should be established; the "When" must center on meeting specific needs and the "What" on what those needs are. While some project members may require up-to-date information to keep a procurement project in motion, others may not require daily or weekly contact. He states that too much communication is better than too little. Finally, to address the "Where" and "How," Mr. Niven states that the appropriateness of the communication vehicle that is selected should be considered. While technological communication devices such as intranets and the internet are useful to reach broad audiences, there is no substitute for face-to-face communication. The "Where" and "When" should be driven by the "Who"; audiences and their cultural, demographic, and organizational preferences should have a communication method that works well for their particular needs. 32 Interpersonal communication drives information and message delivery. Again according to David Whetten and Kim Cameron, "While most agree that proficiency in interpersonal communication is critical ...most people don't seem to feel a strong need to improve their own skill level." In an effort to help managers improve communication skill level, these researchers identified eight attributes of effective communication: problem oriented, congruent, descriptive, validating, specific, conjunctive, owned, and supportive listening.33 Dispute Resolution Dispute resolution is a key component of a government agency's plan for vendor relationship management. A negotiation process for resolving disputes should be addressed in government contracts. 34 In the State of Florida, for example, the dispute resolution process commonly found in contracts includes executive level negotiations, informal negotiations, formal negotiations, mediation, and resolution. Mediation is obligatory in the contract, and vendors or service providers are explicitly guaranteed confidentiality.35 It is the policy of New York State's Office of General Services and Procurement Services Group (PSG) to provide vendors with an opportunity to administratively resolve complaints or inquiries related to PSG bid solicitations or contract awards. Bidders are encouraged to seek resolution of complaints through · consultation with PSG staff. All such matters will be accorded impartial and timely consideration. When dispute resolution is necessary, the process involves a number of steps. There are responsibility hearings, contract interpretation differences, and vendor responsibility issues. These particular issues cover the spectrums of performance, financial, legal, and tax liability. Alternatives available in the beginning are liquidated damages, withheld or partial payments, a buy-against, and contract cancellation. Should the situation warrant, responsibility hearings will occur either informally or formally.36 Ifeither type of meeting takes place, all concerned parties will be notified, a third-party mediator may be present, problems encountered, actions proposed, and minutes will be confirmed in writing. A formal meeting will be tape recorded and might have legal representation and/or quality control staff present.37 The agenda for the meeting will follow the format of two action items. The first is a discussion of contract expectations and deliverables, and the second is a resolution of corrective actions required within a timeline. The intended results are to move closer to--if not accomplish closure-an award consisting of a partial award or surety protection, no award, or cancellation. This should be followed by a written agreement signed by both parties and documentation in the Procurement Record. Inform Vendors One of the best ways that governments can ensure good relationships is by utilizing seminars in which procurement officials meet with businesses to explain the pubic purchasing process. These seminars are excellent ways to cultivate new bidders and to keep existing clients aware of changes in procurement policy. The State of California has done an admirable job of conducting seminars throughout the state for potential vendors. These seminars have attracted a significant amount of local small businesses to state procurement.38 In New York, "Vendor Responsibility Hearings" are conducted to address 39 any need to terminate for cause.These hearings provide support, clarity, and convenience for both the state and the vendor. The contracts themselves remain flexible enough to allow thorough adherence to the amendments, the addition or removal of clauses, and the tweaking of terms and conditions in order to address this management concern.40 It is also important that vendors be made fully aware of changes in the bidding procedures. The internet provides a perfect arena for vendors and bidders to keep current on procurement practices. Current Trends and Recommendations Many trends prevail within the procurement context of oversight and relationship management. Often the idea of open communication becomes essential in meeting the needs of procurement officials and vendors alike. Within commodity purchasing, government officials facilitate communication by offering seminars to vendors and by giving vendors feedback on the quality of products. Construction procurement is beginning to rely on the practice of partnering with the vendor to increase communication between the two parties regarding project goals, project design, and areas of improvement. The procurement of information technology promotes the practice of establishing clear points of contact to assist with questions or concerns on behalf of the vendor in order to manage complicated information passed between the government and the vendor. Finally, with respect to outsourcing, governments are conducting periodic monitoring of the vendors' actions through audits or performance checks to encourage communication and feedb~ck. Commodity Purchasing Oversight and relationship management are important aspects of protecting a state or city's bidder base and protecting taxpayer dollars. Governments must ensure that vendors will continue to do business with them; otherwise, competition for contracts will diminish. Governments also must ensure that vendors perform according to their contracts. Therefore, the preferred practices in commodity procurement for relationship management and oversight are (1) seminars for vendors, (2) quality control departments or personnel, and (3) open communication between agencies and vendors. . Construction Construction procurement presents a variety of challenges to state and local governments alike. The size of many contracts means that transparency and competition are vital to ensuring governmental integrity. A large state such as New York spends upwards of $600 million per year on construction procurement alone, and unlike other types of procurement, construction contracting is less commoditized, operating in a less-efficient marketplace.41 Preventing over-budget and behind-schedule construction projects during the bidding process as well as during the administration of the project must be a major goal of government construction procurement. Oversight of contractors is one of the most important aspects of the construction process. Most public entities have regulations to ensure that good measures are being used to protect the city and taxpayers. However, many times these measures may seem tedious and burdensome, especially to a project manager who may be more concerned with budget and schedule. Entities should review their oversight mandates to eliminate any obsolete or repetitive requirements. Partnering One factor that leads to more efficient and cost-effective projects is the process of partnering with the contractor. Research has shown that conducting exercises focused on developing team-building skills can reduce friction between the government and contracting staff when difficulties arise.42 Though definitions of partnering vary widely,43 it is generally agreed that the term refers to collaborative efforts between the stakeholders of a project, with the goal of improving project performance.44 According to the Construction Industry Institute, who lists partnering as one of the best practices in construction,4s there are two types of partnering. The first, strategic alliance, is based on longer-term collaboration, whereas project­specific partnering, the second type, is intended to bring a team together to accomplish a set task, generally shorter in duration.46 As such, project-specific partnering is more applicable to construction projects. Some entities, such as the Office of Facilities Planning and Construction of the University of Texas System, place so much value in partnering that it is included in their standard contract.47 Partnering sessions are conducted at the onset of construction projects and are intended "to create a synergy of purpose to solve problems for the good of the project.,.48 Private sector companies that strategize with suppliers to gain industry insight have reduced annual expenditures by an average of 12 percent between 1992 and 1995.49 Researchers from the Department of Building and Real Estate of the Hong Kong Polytechnic University summarized the most commonly listed benefits of partnering: reduced litigation, better cost control, better time control, better quality product, efficient problem solving, closer relationships, enhanced communication, continuous improvement, potential for innovation, lower administrative cost, better safety performance, increased satisfaction, and improved culture.so Despite the deliberation about the tangible benefits and the ever-evolving nature of partnering, a survey of clients, contractors, and consultants has been conducted that illustrates the perceived effects of partnering activities on construction projects.s1 The top ten benefits of partnering projects, as determined by the mean response amongst the three groups involved in this study, are listed below. • Improved relationship among project participants. • Improved communication among project participants. • More responsiv~ to short-term emergency, changing project, or business needs. • Reduction of disputes. • Better productivity. • A win-win attitude was established among project participants. • A long-term trust relationship was achieved. • Improved corporate culture among project participants. • Reduction in litigation. • Improved conflict resolution strategies.52 These benefits clearly illustrate how open communication between governments and vendors creates positive results. The practice of partnering fundamentally relies on the relationship of the government and vendor. If the relationship is open, professional, and strong, partnering will enhance the outsourcing process and produce real results. Information Technology Due to the highly technical elements of information technology projects, it is easy to start a procurement project without a clear sense of the specific action that must be taken to satisfy project needs. Long-term or multiphase technology procurements are dynamic; an agency's needs may change quickly, before a project is even complete. Changes in the public and private sector can happen rapidly and may impact a vendor's or agency's capacity to meet obligations; an awareness of this dynamism is critical, and terms and actions must be agreed upon to protect the integrity of the procurement process.53 As a case in point, in 1999 the City of Tallahassee initiated a Technology Integration Project (TIP). The aim of the project is to integrate the City's main automated utility systems to provide better customer service. Services were contracted in a piecemeal fashion; it was negotiated in four separate components/contracts. Individual contracts for the whole project were broken into four elements: (1) a Call Center Business Process Evaluation; (2) Call Center Integration; (3) develop an architecture for HUB integration; and (4) TIP/Convergent Plan review.54 As with any project that requires the efforts of many people among multiple organizations, technology procurement projects can benefit from having clear points of contact established up front. The entity conducting the procurement should have a contact person on staff to assist with questions or concerns on behalf of the vendor(s). Vendors should assign a project manager to liaise with the agency. Outsourcing Faced with heightened economic pressure and an increasingly demanding public, the government has turned to outsourcing to reduce costs and to improve the services it provides to its citizens. In order to successfully outsource services, the hiring agency must have the capacity to closely monitor the work of the contractor. As important as oversight is in the outsourcing process, contract monitoring is one of the most neglected areas of contract management.ss One of the reasons for this is that there is a gap between what might be the ideal level of monitoring and the appropriate skills and resources available to conduct the monitoring.s6 It is tempting for public agencies to ignore the entire oversight process because it saves them time and money, and because they believe that their client can responsibly perform the service. A survey of local governments and schools revealed that many officials felt that the monitoring process was "the most commonly cited disadvantage to contracting out."s7 The findings also revealed that officials were uncomfortable with the monitoring role and the skills it requires.ss The most common way public agencies monitor a contract is through periodic inspections and complaints rather than formal monitoring.s9 Many agencies believe that they don't have the proper resources to monitor the contract. However, they fail to realize that the task of monitoring prevents future unexpected costs and is beneficial in the long run. A general guideline that public agencies follow when outsourcing a service is to establish a solid and trusting relationship with the vendor. According to a study done by Simon Tarsh at the PA Consulting Group in London, England, the most successful outsourcers have strong relationships with their suppliers, hold high-level strategic reviews, and have an effective process for continual improvement.60 In this study, four guidelines emerged for successful management of the outsourcing relationship. These guidelines include: creating a shared vision for the outsourcing that is reflected in the contractual arrangement; including effective performance measures that motivate the contractor to ensure that its actions serve the client's business objectives; establishing clear communication mechanisms; and developing a clear contingency plan.and exit strategy.61 Conclusion Two themes consistently appear in this chapter to underscore the significance of oversight and relationship management. The first theme is that governments must monitor the performance or quality of goods received in order to ensure that their vendors are providing adequate services. Many examples illustrate how governments give too much autonomy to their vendors, with poor results. Governments must set policies and procedures describing how vendors will be monitored and how data will be maintained and recorded. Also, they should assign a contract manager to the project in order to facilitate communication among all of the people involved. The second theme that appears throughout this chapter is that governments must ensure effective and professional communication with their vendors. Failed relationships between the government and the vendor are often attributed to lack of communication skills. By maintaining a strong, open, and professional relationship with the vendor, governments are able to express their opinions and ideas regarding a project. At the same time, they are preventing conflicts that stem from miscommunication and informal agreements. Effective and professional communication also requires a forum for dispute resolution and a forum where vendors can learn about specific projects and ask questions at the same time. By ensuring that performance is adequately monitored and that proper communication occurs, governments can responsibly handle the latter stages of the procurement process. Notes 1 Interview by Brian J. Kelsey with Michael Switzer, Vice President, Workforce Florida, Inc., Tallahassee, · Florida, November 13, 2003. 2 Interview by Brian J. Kelsey with Larry Mcintyre, One-Stop Program, Agency for Workforce Innovation, State of Florida, Tallahassee, Florida, November 13, 2003. 3 Kevin Lavery, Smart Contracting for Local Government Services (Westport, CT: Praeger Publishers, 1999), p. 115. . 4 Interview by Amy Witte with Juanita Moore, Manager, Contracts Administration Office, Florida Department of Transportation, Tallahassee, Florida, November 14, 2003. 5 Lisa Snell, "DC Special Education Contracts Failed Oversight Test," Privatization Watch (2002). Online. Available: http://www.rppi.org/dcspecialed.html. Accessed: January 28, 2004. 6 Ibid. . 7 Robert Gee, "Llano School Chief Lacked Oversight, Review Says," Austin American Statesman (August 28, 2003), p. B7. 8 Ibid. 9 Ibid. 10 Interview by Tom Schuette with Patricia Jones, Department Manager, Department of General Services, Sacramento, California, October 30, 2003. 11 Interview by Aaron Kaminsky with Weaver Jackson, Procurer, Texas Building and Procurement Commission, Austin, Texas, October 29, 2003. 12 Interview by Tom Schuette with Bob Riola, Contract Analyst, Department of General Services, Sacramento, California, October 30, 2003. 13 Ibid. 14 Ibid. 15 Constance Hornig and Kathi Mestayer, "The Procurement Process: The Five Commandments of Outsourcing," MSW Management (2000). Online. Available: http://www.forester.net/msw_0012_procurement.html. Accessed: September 13, 2003. 16 Switzer interview. 17 Agency for Workforce Innovation, State of Florida, Regional Monitoring Guide (Tallahassee, FL, October 2002), p. 5. 18 Agency for Workforce Innovation, State of Florida, Regional Monitoring Guide (Tallahassee, FL, October 2002), cover memo dated December 9, 2002, p. 3. 19 Switzer interview. 20 Interview by Brian J. Kelsey with Fran Brooks, Department of Management Services, State of Florida, Tallahassee, Florida, November 12, 2003. 21 Ibid. 22 Ibid. 23 Department of Management Services, State of Florida, "HR Outsourcing: State of Florida Update," presentation by Fran Brooks to the National Association of State Personnel Executives, Tallahassee, Florida, July 20, 2003. 24 David Osborne and Ted Gaebler, Reinventing Government (New York: Addison-Wesley, 1992), p. 9. 25 Construction Industry Institute, Pub 6-5 -Project Control for Con.struction. Online. Available: http://www.construction-institute.org/. Accessed: January 15, 2004. 26 Perry 6 and Jeremy Kendall, eds., The Contract Culture in Public Services (Brookfield, VT: Ashgate Publishing, 1997), p. 84. 27 Office of the State Auditor, State of Texas, A Report on Contract Administration at the Texas Department ofTransportation (Austin, TX, August 1997), p. 6. 28 Construction Industry Institute, IR7-3 -Procurement and Materials Management: A Guide to Effective Project Execution. Online. Available: http://www.construction-institute.org. Accessed: January 15, 2004. 29 Donald Hamey, Service Contracting: A Local Government Guide (Washington, DC: International City/County Management Association, 1992), p. 7. 30 David Whetten and Kim Cameron, Developing Management Skills (Upper Saddle River, NJ: Pearson Education, Inc., 2002), p. 219. 31 Class presentation by Sue Brubaker, Director of Purchasing, City of Austin, at the Lyndon B. Johnson School of Public Affairs, Austin, Texas, October 2, 2003. 32 Paul Niven, Balanced Scorecard: Step-by-Step for Government and Nonprofit Agencies (Hoboken, NJ: John Wiley & Sons, Inc., 2003), pp. 93-97. 33 Whetten and Cameron, Developing Management Skills, p. 217. 34 John R. Bartle and Ronnie LaCourse Korosec, ''Procurement and Contracting in State Government," Leaming Paper Series, A Report of the Government Performance Project, The Maxwell School's Alan K. Campbell Public Affairs Institute at Syracuse University (July 2001), p. 14. Online. Available: http://www.maxwell.syr.edu/gpp/pdfs/ProcurementContracting_in_State_Government.pdf. Accessed: February 19, 2004. 35 See, for example, the State of Florida's contract with Convergys for human resource services. Online. Available: http://www.state.fl.us/dmslhrm/FINALCONTRACT.doc. Accessed: February 19, 2004. 36 Interview by Aaron Smith and Erin Eisenberg with Monica Wilkes, Assistant Director, Procurement Services Group, Office of General Services, Albany, New York, November 14, 2003. 37 Ibid. 38 Interview by Camellia Falcon with Dennis Kerhulus, Procurement Officer, City of Sacramento Procurement Division, Sacramento, California, October 30, 2003. 39 Wilkes interview. 40 Interview by Erin Eisenberg and Aaron Smith with Walter Bikowitz, Director, Procurement Services Group, Office of General Services, Albany, New York, November 14, 2003. 41 Interview by Aaron Smith and Erin Eisenberg with Harry Williams, Engineer, Design and Construction, Office of General Services, Albany, New York, November 14, 2003. 42 Class presentation by Bob Rawski, Senior Project Manager, UT System Office of Facilities Planning and Construction, at the Lyndon B. Johnson School of Public Affairs, Austin, Texas, September 25, 2003. 43 Catriona Dodsworth, Partnering: What It Really Means. Online. Available: http://www.masons.com/php/page.php?page_id=meaningful9002. Accessed: February 3, 2004. 44 Mike Brensen and Nick Marshall, "Partnering in Construction: A Critical Review of Issues, Problems and Dilemmas," Construction Management and Economics, vol. 18 (2000), pp. 229-237. Online. Available: http://www.tandf.co.uk/journals. Accessed: February 3, 2004. 45 Construction Industry Institute, Best Practices. Online. Available: http://construction­ institute.org/services/catalog/bp.cfm. Accessed: February 3, 2004. 46 Construction Industry Institute, Partnering Toolkit (IR102-2). Online. Available: http://construction­ institute.org/services/catalog/more/irl02_2_more.cfm. Accessed: February 3, 2004. 47 Rawski presentation. Associated General Contractors and the Army Corps ofEngineers, An Introduction to Partnering. Online. Available: http://www.agc.org/Partnering_Project/intro.asp. Accessed: February 3, 2004. 49 Lisa Harrington, "Buying Better, Part 2," Industry Week (July 12, 1997). Online. Available: Factiva, http://www.Factiva.com. Accessed: October 15, 2003. so Albert P. C. Chan, Daniel W. M. Chan, and Kathy S. K. Ho, "An Empirical Study of the Benefits of Construction Partnering in Hong Kong," Construction Management and Economics, vol. 21 (2003), pp. 523-533. Online. Available: http://www.tandf.co.uk/journals. Accessed: February 3, 2004. 51 Mike Brensen and Nick Marshall, "Motivation, Commitment and the Use of Incentives in Partnerships and Alliances," Construction Management and Economics, vol. 18 (2000), pp. 587-598. Online. Available: http://www.tandf.co.uk/journals. Accessed: February 3, 2004; and Shamil Naoum, "An Overview into the Concept of Partnering," International Journal ofProject MamI;gement, vol. 21 (2003), pp. 71-76. Online. Available: http://www.elsevier.com/locate/ijproman. Accessed: February 3, 2004. 52 Chan et al., Construction Management and Economics (online). 53 Class presentation by Ed Serna, Texas Department of Information Resources, at the Lyndon B. Johnson School of Public Affairs, Austin, Texas, September 25, 2003. 54 City of Tallahassee, Auditor's Report. Online. Available: http://talgov.com/citytlh/auditing/auditpdfs/031 l-tip-progrpt3.pdf. Accessed: October 7, 2003. ss John O'Looney, Outsourcing State and Local Government Services: Decision-Making Strategies and Management Methods (Westport, CT: Quorum Books, 1998), p. 167. 56 Ibid., p. 168. S? Ibid. ss Ibid. 59 Ibid. 60 Simon Tarsh, "Managing the Outsourcing Relationship: A Shared Vision Produces Greater Rewards," The Outsourcing Institute. Online. Available: http://www.outsourcing.com/content.asp?page=Olb/articles/process/tarsh_managing_outsourcing.html&non av=true. Accessed: November 10, 2003. 61 Ibid. Chapter 5. Personnel Developing Human Capital Attracting, retaining, and managing quality employees is a challenge for any organization. In order to maintain the public trust, governmental entities must adhere to the highest personnel standards with regard to recruitment and development of human capital. As the General Accounting Office (GAO) has observed: Attention to human capital must be ongoing. To be effective, strategic human capital management requires the sustained commitment and attention of senior leaders and managers at all levels of the agency. Managing the workforce is not a problem for which the organization can supply an answer and then move on. Rather, managers must continually monitor and refine their agencies' human capital approaches to ensure their ongoing effectiveness and continuous improvement.1 According to the GAO, training plans should make use of modem public management practices aimed at empowering employees. To this end, the GAO suggests implementing "individual development plans at all levels." Employees should feel that their work and abilities are the means for advancement and that they are being fairly evaluated.2 This is important to the promotion of a workplace that holds institutional integrity as a core value. For procurement officers and employees of public entities, development and training of personnel is at the heart of implementing best practices. Training is important to purchasing organizations in several ways. Procurement officers should be knowledgeable about the market for the goods or work they are responsible for as well as the regulatory and organizational environment in which they act, and this often requires formal instruction. Training programs also should be integrated into information technology purchases together with service contracts. Unfortunately, training is often seen as a luxury in an environment of fiscal deficits and tight budgets. To the contrary, proper development and instruction of personnel is a vital investment that can prevent a number of managerial problems, including inefficient use of government resources, low morale among purchasers, and high turnover among procurement officials. There are a number of core competencies expected of professional purchasing officers, including, but not limited to the following: • State Codes and Regulations: procurement officials should fully understand the legal environment in which they operate. • Contract Law and Structure: public contracts can be complicated, and in order to provide the best value to the taxpayer, purchasing agents should understand all aspects of contracting. • Ethical Decision Making: purchasing agents should adhere to the highest ethical standards. • Acquisition Process: purchasing agents should be experts in planning, acquisition, and post-award administration or purchasing projects. • Leveraged Procurement Agreements.3 To ensure that purchasing officers are skilled in these core competencies, governments and private organizations have developed a number of complementary solutions that are discussed next. Training Academies A variety of methods have evolved to train public employees. One popular approach is to create procurement training schools that government employees can attend. The State of California has created the Procurement Training Academy, integrating much thought, research, and feedback into the school's design.4 Officials surveyed executives at the agency, line personnel who were responsible for procurement on a day-to-day basis, and vendors to determine the most important training areas.5 The state then contracted with California State University-Northridge to serve as the training academy.6 Now, all officials in California state government who are responsible for procurement must attend seminars at this academy. Other states have developed similar programs. The State of Texas requires all purchases over $2,000 to be conducted by an employee trained in government procurement and certified by the state. Purchasing officers (those with the ability to spend $25,000 or more) are required to attend 24 hours of continuing procurement education every year.7 The most formal techniques involve mandatory attendance of courses at a local university. The Arizona State Procurement Office runs such a program. The program consists of a series of classes that lead to an official receiving a procurement certificate. Officials must complete the training in order for their agency to continue to be a delegated procurement authority. Topics covered in the certification program include procurement developing, planning, and performance measures; contract performance and procurement benchmarking; protests and claims; dispute resolution; preparing for negotiations; and supervision of procurement practitioners. 8 Additionally, the National Institute for Governmental Purchasing (NIGP) has an established program for training. Ifan entity wishes, it can hire this organization to perform onsite training.9 Training programs such as these are becoming increasingly important. Many states and municipalities are going to experience large turnover in the near futur(! with the retirement of Baby Boom generation employees. Procurement officials in state government such as California's are now realizing the institutional memory and knowledge that will be lost.10 In the past, governments relied on senior employees to train new staff. With the anticipated turnover, this training method could become obsolete. Furthermore, the influx of technological procurement tools such as e­procurement will require all purchasing staff to effectively use new techniques and technologies. Technology procurement and a government staffs ability to utilize advanced productivity and data management tools have been the subject of much thought recently. The federal government addressed this topic in 1996 with the Clinger-Cohen Act (the Information Technology Management Reform Act). The intent of the act is to improve government performance through the effective application of information technology whereby each organization of federal government is charged with establishing a Chief Information Officer. 11 The CIOs attend a federal certificate program administered by Carnegie Mellon University.12 Carnegie Mellon's CIO Certificate Program emphasizes a variety of topics, including leadership, e-commerce and e-government, strategy and planning, and information technology (IT) management. Professional Organizations and Professional Development A different, decentralized approach is the use of professional organizations to disseminate information on industry practices and to establish professional standards to which members should adhere. It cannot be overstated that procurement processes need to be adequately documented and available to buyers and sellers to ensure that they are correctly utilized.13 Although they have their limitations-namely that membership is voluntary and their evolution is somewhat market driven-professional organizations can go a long way toward realizing this goal. Procurement officials should be encouraged to join professional organizations aimed at professional development.14 Many organizations exist to help officials perfect their craft, but these are not effective if they are not utilized. A survey was conducted by California State University-Northridge that showed how many officials did not think that certain key aspects of the procurement process were important. This can be corrected by placing a greater emphasis on professional development.15 A professional certification can complement professional organizations. The certification curriculum can help to ensure that procurement officers are well versed in the laws and policies of their jurisdictions. Professional certifications can also aid in establishing that the procuring agency has exercised due diligence in the procurement process. Additionally, certifications provide a means of demonstrating a level of unbiased professionalism and proficiency to people outside the organization. Mentoring Programs and On-the-Job Training While training, professional exchange, and certification can aid in implementing a high standard in purchasing organizations, there is no substitute for real-world experience. Some organizations have installed mentoring programs in which a seasoned employee will train a new hire. Mentoring has the benefit of being cost-effective and preserving institutional knowledge. It gives new employees an opportunity to work under close supervision and learn practical skills without the risk of making mistakes. Mentoring properly done allows less-experienced buyers to exercise their own judgment while still having a safety net until they can develop their own experience. Because of the complexities of purchasing operations, it is important to have a wide variety of experience with various types of construction projects or differing procurement methods. Until a significant level of experience is achieved, mentors should be available to ensure the new hires get the guidance they need. A second aspect of an effective training program is the availability of mentors to less-experienced buyers. By creating mentoring relationships, it is possible to pass along accumulated institutional knowledge. This is especially significant when establishing or moving to a decentralized purchasing model. In order to keep all involved individuals informed of the organization's functions, regular meetings among purchasers can aid in maintaining a good flow of information. With service contracts, information sharing is especially important because the project manager is often different from the contract manager. It is necessary for the project manager to be familiar with the functions of the contract manager, although a detailed knowledge is not necessary.16 While not all purchasers are able to have experience in the industry from which they are procuring, understanding the process from the sales side can be very helpful when negotiating specifications and prices. Though agencies often hire or promote a purchasing officer without prior experience, they should make every effort to put personnel in place who are trained, experienced, and competent in procurement processes. Ethics Structures and policies to encourage and enforce ethical behavior are important in any organization. Personnel training and development can have a dramatic effect on ethics as practiced in an organization. Education that promotes the dissemination of standards and the discussion of ethical issues promotes awareness of problems and helps create a climate of trust in an organization. One of the challenges of administering effective antifraud practices is the laxity of laws in many state and local regions. Essentially, purchasing laws are ethics laws; what differs between jurisdictions is the degree of stringency imposed on purchasing officials. For many purchasing officials, non adherence to ethics regulations result from their inconvenience rather than malicious intent. Fraud prevention programs are likely to be ineffective if they are not consistently applied. Most organizations are scandal driven, emphasizing training only after the fact. Ethics programs are often created from the top down, and they therefore train the wrong people. It is vital that management rigorously adhere to its stated ethical code. Governments have a responsibility to create a level playing field for all businesses with which they do business, and this responsibility is directly at odds with fraudulent behavior. To fill the need for ethics instruction, leadership training companies have arisen in both the corporate world and in government. In an atmosphere of shrinking budgets, managers and leaders realize the degree to which corruption is detrimental to productivity and investment.17 In government, fraud results in a loss of institutional credibility. Internationally, there has been a decline in tolerance not only for governments engaged in corrupt practices, but for businesses that take advantage of these systems. Ethics policies play an important role in effective and honest contract management and oversight. High-profile scandals underscore the need for new ways of approaching this problem. The State of California's Department of Information Technology was disbanded by the state legislature in July 2002 after awarding a $95 million contract for software and technology services to Oracle without a competitive bid. According to a report by the State Auditor's office, which prompted several resignations and the department's disbandment, the State of California lost approximately $41 million as a result of the no­bid award to Oracle.18 In response, the state legislature has proposed the creation of a new oversight committee in the Department of Finance for IT procurement at an annual cost of $2 million as well as other measures to reduce reliance on outside contractors.19 A report from the Pennsylvania Department of the Auditor General in 2001 provides another example of problems arising from lack of effective oversight and management in the procurement process. This report showed that officials in the Department of Labor and Industry (DLI) collaborated with a service provider on a proposal for services as a way to intentionally avoid the competitive bidding process and execute a sole-source contract. Officials in the DU's Office of Vocational Rehabilitation made several rounds of suggested edits to a proposal for services submitted by Amoore Health Systems (AHS) without contacting or acknowledging the 17 other qualified vendors for workforce development services on the state's procurement list.20 One comment from DU faxed to AHS, addressing the potential work in the contract, stated, "Employee placement is PSSU [Pennsylvania Social Services Union] 'covered work'-suggest you delete the offending language thereby opening the door to do exactly what you please!! (but on the Q-T!).'o21 This example illustrates the importance of oversight in both the contracting and contract management stages of the procurement process. DU had been contracting with AHS since 1997, and better oversight of vendor relationship may have prevented the scandal. The City of Tallahassee, Florida, spends approximately $275 million each year on purchasing.22 Interestingly, a member of the city Department of Management and Administration (DMA) procurement staff constantly rotates through the departments, "auditing" how the department is using the procurement system. After three to four weeks per department, the procurement staff member produces a report of her findings with recommendations and a training program included. Because such a thorough review has been initiated, the City Auditor often skips reviewing these departments again since the procurement staffer does such an efficient job.23 The State of Florida does mandate that the city be audited by an independent certified public accountant. Part of the test work is an annual disbursements review. The review is comprehensive and includes audits of purchase orders, payments made, contracts, and purchase-card transactions.24 Additionally, there is a fraud report hotline that goes directly to the City Auditor's office; this has proven effective in identifying and prosecuting public servants who violate the law. The creation of this hotline was spawned when a tip identified two fleet service staff engaging in collusion with vendors.25 The State of Florida also has a comprehensive auditing structure in place. Each executive agency in the state has an inspector general to perform internal audits. Internal reviews ensure more than compliance; there are also financial benefits. The State Technology Office surveys and pools technology needs on an approximately quarterly basis to make cooperative, bulk purchases from one of the state term contracts.26 Furthermore, the Florida public records law grants individual citizens the right to review records and the State Purchasing Subsystem (SPURS) gives them the capacity to audit transactions.27 Despite the lack of a large-scale focus on fraud prevention as a discipline, the field of criminology offers a number of best practice suggestions. Aligning the interests of the . purchasing official with those of his organization is a major organizational step. Focusing on this ideal can dramatically lower agency costs incurred in dealing with an unfaithful agent. This begins with the hiring process. Candidates should be rigorously screened and . backgrounds should be checked. During the interviewing process questions should be focused to attempt to determine the candidate's perspectives on fraud and what constitutes dishonest conduct. One key is to avoid hiring employees who feel that fraud is endemic-the "everyone steals" mentality. Creative incentive structures can help in aligning the interests of the agent with the principal. Market-based solutions, engineered to foster competition between purchasing agents, units, or between the agent and an outside competitor can help to create an environment where fraudulent behavior would be difficult to conceal. The effect of this is similar to a properly executed outsourcing initiative. It can create competition that can raise standards among purchasing activities. Once a purchasing agent has been selected there are practices that can be implemented to limit dishonesty. Rotation of personnel creates a situation where fraud is hard to conceal. It creates the opportunity to observe price differences between agents across several time periods. It also enables managers to collect evidence if fraud is suspected. Personnel rotation acts as both a catalyst for competition and as a diagnostic tool. Like rotation, employees should take material vacations, leaving the office for a week or more per year. More than a tool to reduce employee burnout, vacations make it more difficult to conceal fraudulent arrangements. It increases the chances that fraud will be exposed, thereby acting as both a preventative and an investigative device. Employed consistently and enforced rigorously, these recommendations may also have the effect of uncovering incompetent or fraud-bent agents during the probationary period that many agencies employ when it is easier to terminate them. Iffraud or questionable behavior is uncovered, it is important to have tough supervisors with few reservations about firing an employee caught in a dishonest act. Management must be determined to enforce rules and regulations in the face of the libel and slander allegations that prosecution may provoke. To this end, a good general counsel is necessary, both to enforce regulations and to create an environment where management feels safe aggressively enforcing ethics regulations.28 Conclusion There are a variety of measures that public purchasing organizations can take to reduce and eliminate fraud and waste, improve efficiency, and increase accountability. Professional certification programs and organizations are cost-effective ways to create professional standards and disseminate information. There are a variety of professional organizations in existence that focus on procurement. Schools and procurement academies offer another approach that has been successfully employed to enhance the abilities of procurement officials. Finally, on-the-job training and mentoring programs prevent procurement officials from being inserted into a situation in which they lack the experience and skills to be effective. Each of these practices plays a part in preventing waste and fraud. Demographics indicate that the number of retirements among government officials in coming years will greatly outnumber the pool of qualified replacements. Employing good personnel management techniques will help alleviate the stresses associated with this trend and help prevent the loss of institutional knowledge. Finally, managing public money inevitably creates opportunities for fraud. Prevention and detection of fraud begin with personnel practices. Hiring quality personnel with a proven record of integrity will create an environment intolerant of fraud. However, fraud prevention practices cannot end there. In addition to rigorous auditing, there are a variety of practices that can create an environment where fraud is difficult to engage in and conceal, even for a determined miscreant. Notes 1 United States General Accounting Office, Human Capital: A Self-Assessment Checklistfor Agency Leaders. Online. Available: http://www.gao.gov/special.pubs/cg00014g.pdf. Accessed: February 18, 2004. 2 Ibid. 3 State of California Department of General Services, Welcome to California. Online. Available: http://www.dgs.ca.gov/default.htm. Accessed: December 10, 2003. 4 State of California Department ofGeneral Services, California Procurement and Contracting Academy. Online. Available: http://www.pd.dgs.ca.gov/calpca/default.htm. Accessed: October 9, 2003. 5 Interview by Thomas Schuette with Patricia Jones, Manager, Department of General Services, Sacramento, California, October 30, 2003. 6 Ibid. 7 Interview by Aaron Kaminsky with John Stewart, Procurer, Texas Building and Procurement Commission, Austin, Texas, October 30, 2003. 8 State of Arizona, Arizona State Procurement Office, Certificate Courses in Public Procurement, pp. 2-3. Online. Available: http://sporas.ad.state.az.us/ProcurementTraining/. Accessed: December 3, 2003. 9 National Institute of Governmental Purchasing, Contract Training. Online. Available: http://www.nigp.org/professional_development/Contract.htm. Accessed: December 3, 2003. 10 Interview by Thomas Schuette with Bob Riola, Contract Analyst, State of California Department of General Services, Sacramento, California, October 30, 2003. 11 National Science Foundation, Clinger-Cohen Act: A Government Policy Relating to Information Technology. Online. Available: http://www.nsf.gov/oirm/clcoact.htm. Accessed: April 25, 2004. 12 Carnegie Mellon CIO Institute, Federal CIO Certificate Program. Online. Available: http://cioi.web.cmu.edu/programs/ccp.jsp. Accessed: April 25, 2004. 13 Class presentation by Susanne Brubaker, Purchasing Officer, City of Austin, at the Lyndon B. Johnson School ofPublic Affairs, Austin, Texas, October 21, 2003. 14 Interview by Camellia Falcon with Mariel Dennis, Procurement Officer, Office of Policy and Procedure, State of California Department of General Services, Sacramento, California, October 29, 2003. 15 Ibid. 16 Donald Harney, Service Contracting: A Local Government Guide (Washington, DC: ICMA, 1992), p. 22. 17 Business for Social Responsibility, Corruption and Bribery. Online. Available: http://www.bsr.org/BSRResources/Whitepaperdetail.cfm?DocumentID=4962l. Accessed: February 18, 2004. 18 William Welsh, "Procurement Scandal Puts California IT on Ropes," Washington Technology (May 17, 2002). Online. Available: http://www.washingtontechnology.com/newsll_l/daily_news/18297-1.html. Accessed: February 19, 2004. 19 William Welsh, "School of Hard Knocks," Washington Tech1:iology, vol. 17, no. 10 (August 12, 2002). Online. Available: http://www.washingtontechnology.com/news/17 _1 O/state/18769-1.html. Accessed: February 19, 2004. 20 "Casey Audit Finds Lax Oversight, Flagrant Abuse in State Procurement Process," Pennsylvania Department of the Auditor General, Commonwealth ofPennsylvania, November 29, 2001 (press release). Online. Available: http://www.auditorgen.state.pa.us!Department/Press/ Amoore.html. Accessed: February 19, 2004. 21 Ibid. 22 Interview by Amy Witte with David Reid, Director, and Cathy Davis, Manager of Procurement Services, Department of Management and Administrations, City of Tallahassee, Tallahassee, Florida, November 14, 2003. 23 Ibid. 24 Ibid. 25 Ibid. 26 Interview by Amy Witte with Fred Springer, Director ofPurchasing, Russ Rothman, Chief of Purchasing Operations, and Ken Granger, Special Projects Manager, State ofFlorida Department of Management Services, Tallahassee, Florida, November 13, 2003 27 Ibid. 28 Interview by Peter Siegesmund with Bill Black, Professor, LBJ School of Public Affairs, Austin, Texas, February 24, 2004. Chapter 6. Electronic Procurement Overview While procurement has traditionally been a paper-based process, the internet has significantly altered the way commerce is conducted. A natural progression of this application of internet technologies and methods to the purchasing function is electronic procurement, ore-procurement. The pace of adoption of internet-enabled purchasing methods in the government sector has been spurred by the belief that e-procurement brings increased efficiency and transparency to the expenditure of taxpayers' money. For example, in 1999 the Orange County, California, Transit Authority (OCTA) shifted to an e-procurement system, CAMM NET, that allows it to post bid solicitations for replacement bus parts in the morning, automatically notify pre-registered vendors, and receive near-instantaneous responses by the afternoon. CAMM NET bid solicitations routinely generate 25 to 30 responses, leading Neal Johnson, senior procurement officer at OCTA, to note that "the competition on procurement has increased quite dramatically... You can just about guarantee the lowest price when you can get that kind of competition."1 While e-procurement has many proponents, there are also detractors: "It's no secret that purchasing and supply management professionals are less than enthralled with the results they are receiving from their Internet-based e-procurement systems," reported a writer in a recent issue of Supplier Selection and Management Report.2 Following a presentation about e-procurement at the 2002 Canadian Public Procurement Council Forum, an audience member asked if "we could just drop the 'e' and have procurement in the most efficient and cost-effective manner possible, whether electronic or not?"3 While this suggestion may seem simple, it is important to recognize that e­procurement systems are not magical, and that they are based on the same principles as traditional procurement processes. The National Electronic Commerce Coordinating Council summarized e-procurement this way: "By the time basic e-procurement practices are mainstream, it will no longer be 'e-procurement,' but simply 'procurement.' "4 Are e­procurement systems a good solution for public procurement? In this chapter, the features, potential benefits, and drawbacks of e-procurement will be discussed and recommendations will be presented. The potential benefits of adopting an electronic procurement system are numerous, as are the potential drawbacks. State and local governments should consider both sides of this issue before committing to an e­procurement system. Web-Assisted Purchasing As technology has evolved, the procurement process has begun to take place in an increasingly digital environment. Initially, entities used technology to enhance the procurement process by advertising bid opportunities online and by using email to communicate with vendors. The ultimate goal was allowing entities to contact as many vendors as possible in order to increase competition for projects. Traditionally, government entities have been required to advertise bid opportunities in a newspaper of general circulation within a city or state, announcing the time, place, and method for delivering bids. With the widespread adoption of internet technologies, today many state and local government entities are dispensing with the print media entirely and · simply posting these announcements online. While some entities post bid guidelines to their own sites, others outsource this service to an external vendor. Subscription services through such vendors may be logistically easy to use, although agencies considering this route should keep in mind that the number of vendors accessing bid announcements may decrease if they are forced to pay for online access. For example, in 1998 the City of Tallahassee began using DemandStar, a contracted online procurement system linking governmental agencies nationwide, to store its information about upcoming requests for proposals.5 DemandStar requires vendors to pay a fee to register in a commodity area and receive information about upcoming projects in surrounding counties, municipalities, and school districts. A utility association recently brought suit against the city, claiming that its members should not have to pay to receive online bid information. However, the court ruled in favor of the city, stating in its ruling that DemandStar was providing a service by sending vendor-specific bid information and was, therefore, entitled to collect the fee.6 Many agencies using services such as DemandStar still advertise in local newspapers, so the major difference from the paper process is that packets are not automatically printed and mailed to a vendor list. Since the governmental entity is the custodian of the bid information, bid information remains available upon request.7 Public entities must make sure that the public notification method is accessible enough that technological or financial considerations do not limit competition.8 Agencies can also use email communication to send bid announcements to vendors, to send amendments to bid specifications, and to share contract modifications. This speeds up the procurement process by eliminating the time required to mail documents from agency to vendor, and vice versa. Supporting documents for bid opportunities can be made available to potential vendors in a much shorter time if they are emailed directly or posted on a website, since agency staff no longer must copy, collate, and prepare packets to be mailed. The Florida Department of Transportation, among many other agencies across the country, sends email announcements to pre-qualified vendors with project updates and notification of new contracts,9 In addition to shorter bid cycles, online posting of bid requirements produces cost savings by avoiding the printing and mailing of bulky project packets. When the National Aeronautics and Space Administration (NASA) switched to online advertisement of projects through their NASA Acquisition Internet Service (NAIS), it noticed a difference in its bottom line: "In the past, publishing a solicitation-with all the reproduction and assembly and mailing-cost about $15 per package. After mailing 400 copies of the solicitations, we might only receive three or four responses."10 Bringing the procurement process online in this fashion reduces production cost substantially and allows for greater dissemination of project guidelines than traditional print media. Special Considerations Satisfying all relevant legal requirements should be the first consideration taken when posting bid opportunities online and using email communication with vendors. In some cases, online advertisement alone is sufficient to address legal requirements, while in other cases a newspaper announcement may still be necessary. I I Procurement officials interested in this approach are encouraged to consult local statutes to determine whether online bid posting alone is sufficient. Since internet enhancements allow bidding to be conducted on a global scale, it may be necessary to craft specifications that would have been assumed under traditional circumstances. For example, the City of Sacramento has received bids that were not stated in United States dollars as a result of its internet efforts. I2 Information that once was implicitly understood must sometimes be explicitly stated in online bid guidelines. In addition to overcoming geographic barriers, online bids may attract vendors that have not traditionally worked with government entities. This may increase the need for additional vendor training on doing business with governmental entities. Potential Benefits As mentioned earlier, web-assisted purchasing can be beneficial for public entities because bids will reach a larger community of vendors, which can lead to increased competition and lower bids on contracts. In addition, administrative costs can be reduced if supplemental documents are available for download at an entity's website, or if they are emailed to potential vendors. Local regulations will have a significant impact on whether these administrative cost savings can be achieved-if the agency is still required to post bids in the newspaper, for instance, it may still spend a significant amount on paper-based mailings. Aside from monetary savings, online bid postings and email communication can aid in achieving a fair marketplace. Since any entity with an internet connection has access to the same information, all vendors will have equal access and equal time to prepare their response to the bid posting. Given these clear advantages, web-assisted purchasing is particularly relevant to the public sector due to its ease of use and low cost of implementation. Compared to more advanced e-procurement systems, which often require a third-party technology vendor to implement, automated e-mail and simple web forms are well within the fiscal and technological reach of even small municipal governments. E-Procurement Although bringing portions of the procurement process online in a piecemeal fashion offers a relatively simple and low-risk path to increased efficiency, in recent years many entities have moved toward a more comprehensive electronic purchasing strategy known as e-procurement. There is no generally accepted definition of what the term "e­procurement" actually means, a fact that adds to the confusion surrounding this purchasing technique. The State of North Carolina, for instance, broadly defines e­procurement as "combin[ing] the use of Internet technology with rrocurement best practices to streamline the purchasing process and reduce costs."1 The British organization Chartered Institute of Purchasing and Supply provides a slightly more operational definition: "using the Internet to operate the transactional aspects of requisitioning, authorizing, ordering, receipting and payment processes for the required services or products."14 Further complicating the issue of e-procurement is the fact that there are literally hundreds of e-procurement vendors, each offering a slight variation on the general theme. The specific functional aspects of each system will vary greatly, but nearly every e­procurement system will offer three general capabilities or features. As indicated by the above quote from the Chartered Institute of Purchasing and Supply, the primary function of any e-procurement system is the migration from paper processes to online transaction processing. A second feature that is common to most e-procurement systems is the ability to perform electronic contract management. Supplier Selection & Management Report points out that "Effective contract management requires integrating contract terms...directly with transactional business systems, such as ERP ore-procurement systems,"15 and nearly all e-procurement vendors provide integrated contract and data management capabilities in their products. A third feature typical to most e-procurement systems is the incorporation of purchasing rules and centralized policies into the software itself. These rules may include factors such as purchasing limits, sign-off authority, pre-approved online vendor lists, or other rules that are specific to a particular agency or locality.16 Nearly every e-procurement vendor allows agency rules and policies to be seamlessly applied across a wide range of end users. This software integration of policy parameters extends a wide range of benefits to users as well as purchasing staff, an issue that will be explored further in the sections below. Finally, it is important to note that while all e-procurement systems provide these three generic features, the actual technological approach by which these results are produced will vary widely from vendor to vendor. Moreover, different vendors will offer numerous features in addition to the ones discussed here. Due to space limitations, and because different agencies may have varying needs, the discussion that follows will generally avoid discussions of specific technologies or features. Rather, it will focus on the benefits and drawbacks of e-procurement in general, with an eye toward the three global capabilities mentioned above. Readers interested in implementing an e-procutement system after reading this discussion are strongly encouraged to contact a technology vendor to discuss how e-procurement can meet their agency's specific needs. Special Considerations Given that e-procurement is "like any other software implementation in that it can be expensive and may not go very smoothly,"17 great care must be given to how-and even whether-an e-procurement system is the right choice before making a significant investment of time, money, and organizational resources. Weighing risk is an important part of the decision process. In a recent study by the BuyIT Best Practice Network, the authors cautioned that "e-procurement... has three dimensions: people, process, and technology. All three dimensions need to be planned and controlled and will be a major source of risk."18 Organizations thinking of implementing an e­procurement system should carefully consider each of these dimensions to ensure that the potential benefits of e-procurement are not wasted. People: Overcoming the Steep Leaming Curve According to David Eakin of the nonprofit BuyIT Best Practices Network, e-procurement systems "are 10 percent or 20 percent about putting in a system and 30 percent about sourcing, but most of all they are about changing people's behavior-getting them to use the systems and that's all about internal culture, communication, and change management."19 Noting e-procurement's high rate of failure, Denis Kenny of Cap Gemini Ernst & Young stresses the importance of training and communication for employees who are accustomed to doing business in the traditional manner: "I am not knocking e­procurement, but I am critieal of the way that organizations have implemented it. One big reason why e-procurement implementations fail to deliver return on investment is because the majority of organizations fail to address change management issues."20 Web-based training and instructor-led, classroom-style training are two options for instructing procurement officers. Vendor training is critical as well. When the State of Florida launched its new e­procurement system, the state purchasing office conducted forums where vendors were taught to load their catalogs into the new system. Information sessions were also provided to introduce vendors to system tools, web-based training, and the registration application. At the conclusion of these training sessions, the vendor community was invited to provide feedback.21 Getting accustomed to an e-procurement system involves learning new tools and processes. One way to help ease the transition from a traditional to an electronic procurement system is by being sensitive to the use of technical phrases and terminology to explain procurement practices. In order to help buyers and vendors, the State of North Carolina system, @ Your Service, provides an online glossary of terms associated with e­procurement.22@ Your Service also highlights tips for using thee-procurement system, which helps users adjust to the change from paper-based to electronic processes. Through this feature, people are able to submit a question and learn about the system. Some past topics include "Requisition Features," "Registered Vendor Searches," and answers to questions like "What kind of reports does the NC £-Procurement Service offer?"23 In many ways, this is the most difficult aspect of implementing an e-procurement system. The director of e-procurement for Owens Coming describes the challenges faced in implementing their system in this way: "We are an old manufacturing company that has done procurement the same way for a long time. This was very different than what we were used to, so managing the internal processes around the switch has been increasingly challenging."24 Process: Technology Is Not a Fix-All A common point of failure for e-procurement systems arises when different departments or agencies have divergent policies, or when the overall purchasing strategy of the agency as a whole is not sound. Agencies frequently view technology alone as the solution to their purchasing problems, and fail to address underlying procedural issues. Ifthe underlying purchasing process is faulty, the true benefits of e-procurement will never be attained. As one e-procurement director puts it, ''The e-procurement process is only one piece of a larger integrated sourcing program... Before technology, and even before the development of a process, there first must be a clear vision for sourcing and procurement."25 John Corini, author of "Integrating E-Procurement and Strategic Sourcing," warns against adding an e-procurement solution to poor procurement processes: "Automating a mess yields an automated mess."26 Technology: Mismatch with Strategy? Ifthe agency has not defined its processes and developed a clear strategic understanding of its purchasing function, it will spend a good deal of money but never reap all the potential benefits that e-procurement has to offer.27 The features and setup of an electronic procurement system should match the strategic needs of the entity moving to that procurement system.28 As the director of Strategic Sourcing and E-Procurement at Allegheny Technologies notes, E-procurement is not just about automating the procurement process... It's about when the foundational issues are addressed, and the culture and process changes are accomplished prior to beginning the implementation process, that the success of the "e" project will be significantly improved, or substantially assured.29 · To successfully transition to an e-procurement system, benchmarks for success must be determined beforehand. If, for example, strategic success is based on a comparison of the money saved in the electronic system to the costs of the traditional, historical spend analysis must be available. According to Christopher Sawchuck, director for Answerthink, Inc., this can be problematic for public agencies. ''The information may have to be culled from accounts payable, general ledger, and other legacy systems across governmental entities," and also from external systems, such as the ones that track purchase card expenditures.30 Benefits There are several categories of benefits that can be derived from using an e-procurement system. These include transactional benefits, compliance benefits, management information benefits, price benefits, payment benefits, and intangible benefits.31 In this section, specific benefits including increased vendor competition, expanded data management capabilities, improved contract management, and faster purchasing cycles will be explored. Cost savings and increased efficiency Electronic procurement software focuses on recognizing need, generating orders, receiving materials, and settling invoices. These processes, when done manually, can greatly extend the length of the purchasing process. By automating these processes, e­procurement can lead to substantial time savings in the procurement cycle.32 As shown in Table 6.1, the purchase and fulfillment cycle for commodity goods can be reduced by an average of five days by utilizing an e-procurement system instead of a traditional paper­based process. 33 Due to the inherent complexity of the product, the time savings associated with the e-procurement of services have historically been smaller than those for commodities and office goods. However, thanks to improvements in technology, services e-procurement is beginning to produce savings that are nearly on par with these simpler traditional items.34 Table 6.1 Electronic versus Traditional Procurement TraditionaVManual Procurement Electronic Procurement Price of materials and services - 5% to 10% reduction Purchase and fulfillment cycles 7.3 days 2days Administration costs $107 per order requisition $30 per order requisition Inventory costs - 25% to 50% reduction Source: Tim Minahan, ''The Engines Driving Intelligent Trading Networks," Supply Chain Management Review (January/February 2001), p. 81. Online. Available: Academic Search Premiere, http://www.epnet.com. Accessed: January 30, 2004. In terms of cost savings, e-procurement produces gains over traditional purchasing in two areas: the actual prices paid for goods and services, and administrative costs associated with the purchasing process. Private sector e-procurement typically enables lower unit costs by making it easier to aggregate spending with a few strategically chosen vendors, or by allowing for the implementation of reverse auctions and other innovative bidding platforms.35 While these techniques have led to large unit-cost savings in the private sector, their applicability may be somewhat limited in the public sector due to legal requirements and equity concerns. However, many public sector entities have had success in lowering unit costs by using e-procurement systems to facilitate volume purchasing with other agencies. Several states allow local governments, libraries, and school districts to interface with state e-procurement systems, thus making it easy for small agencies to combine purchases and achieve volume discounts. As one university purchasing director puts it, In the past, schools have been criticized for not pooling their volume and not tal