State Procurement: Strategic Positioning for the 21st Century

STATE PROCUREMENT: STRATEGIC POSITIONING FOR THE 21ST CENTURY

January 1999

SUPPLY CHAIN MANAGEMENT
KNOWING THE WAY
ELECTRONIC COMMERCE
PROCESS DELEGATION

Public procurement by state governments has been a mostly evolutionary, sometimes revolutionary, process throughout the 20th Century. As we move to the 21st Century, powerful external forces are reshaping government and the marketplace. Simply put, the world is changing. A variety of factors are woven into these changes, including:

  • The dynamic and rapidly diversifying marketplace.
  • The new global economy and marketplace.
  • The continuous pressure to downsize staff and/or operations.
  • The increase in customer service demands.
  • The explosion in information technology.

Traditionally, the National Association of State Procurement Officials (NASPO) has monitored changes and served as the focal point for the dissemination of policies and practices that have guided state programs. Through this white paper, NASPO hopes to impart its vision of the future of procurement and to assist states in managing these changes.

The most pervasive change factor has been the explosion in technology. It has accelerated modifications of policies and practices in state procurement and influenced what a state buys and how these goods and services are purchased. The increased efficiency gained by, and the knowledge available as a result of, technology advancements gives procurement officers the opportunity to be strategic business partners with their agency customers. How states respond to this opportunity will determine the position of state procurement in the environment of the new millennium.

That environment will vary and mature differently from state to state. But a commonly shared opportunity exists to use more sophisticated contract expertise and supply-chain management techniques to enable public agencies to meet their mission. State procurement has the opportunity to plan strategically to anticipate agency needs and to develop sources to ensure that goods and services are available to meet client agency operational decisions.

This paper identifies four critical strategies and then addresses their implementation. Effort has been made to emphasize those strategies that are most critical and most applicable to all the states. They include:

  • Supply Chain Management
  • Continuing Education
  • Electronic Commerce
  • Process Delegation

Combined, these strategies constitute the grand strategy: the movement from process-based to knowledge/accountability-based procurement organizations.
In the implementation of strategic planning by each state, and the sharing of these four important strategies, the process must be adaptation, not adoption. Presented here are roadmaps, not blueprints. Each state has its own political, administrative and managerial environment within which the strategies and their implementation must be cultivated.

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SUPPLY CHAIN MANAGEMENT
The Consummate Strategic Role of State Procurement
State procurement functions face a momentous change in strategic positioning as we approach the 21st Century. The movement is from a concentration on purchasing, which is only one aspect of procurement, to a management role embracing the entire procurement process from the initial identification of need through termination of the contract. The emphasis is shifting rapidly from just a “buy transaction” to supply chain management, which includes the requirement definition and disciplines such as supplier development and global sourcing. Procurement’s emerging strategic role is Rapid advancements in information technology have facilitated the development of procurement’s strategic role. One advancement is the application of sophisticated information technology that enables procurement officials to make informed decisions about the following:

  • How to structure the buy
  • How to advance appropriate partnerships with suppliers
  • Whether multiple award schedules should be established
  • Whether a master agreement should be developed
  • Whether the procurement requires a longer term contract

Additional advancements include purchasing cards and on-line ordering, both simplifying and expediting the contracting process.

The net effect is that an experienced procurement professional is no longer required to execute much of the process segment of procurement. Consequently, state procurement should be positioned at the most senior level of a state’s decision-making process to offer direction on goods and services that can be more effectively provided through contracts with the private sector. Areas that can benefit from procurement’s involvement include programs as diverse as health services, real estate management, and corrections. These decisions are being made today, often by default, as legislatures mandate new programs but fail to provide new positions to support them. These strategic decisions should utilize the best of the state’s intelligence from both the public and private sector.

This calls for a proactive relationship between the central procurement staff and their customers, the client agencies. Today’s customer environment is, for the most part, reaction-based. Agencies react to problems, react to having or not having budgeted funds to buy something and react to political agendas. This scenario creates an environment in which the procurement staff, too, can only react. Agencies need to be convinced to forecast their needs in advance. This will enable the procurement staff to exercise their real core competency: working closely with the private sector to develop and deliver solutions. For example, if procurement staff could cultivate an understanding with Department of Motor Vehicles personnel of the comprehensive changes planned in the driver’s license of the future, that common understanding could lead to research and the subsequent development of contracts that would influence the technology of the license and its application.

Executive and legislative management needs to understand what the central procurement office can contribute to total cost management and involve procurement early in the acquisition decision process. Earlier supplier involvement, long-term procurement-supplier alliances, outsourcing and total involvement with the marketplace is also essential.

The supply chain management mission becomes one of knowledge and decision disbursement as opposed to just the laborious and sometimes technically complex formulation of contracts for goods and services. When contracts are created, central procurement should play less of a gate keeper role and become more of a facilitator of relationships between the client agencies and suppliers through cross-functional work teams. Central procurement staff must understand the big pictures of the agencies they serve and perform strategically to drive results that achieve client agencies’ missions. End users and agency procurement specialists must have equal status with central procurement on the cross-functional teams that develop the best acquisition strategy to get the end users what they need. This is the strategy of supply chain management.

Notwithstanding this shift in emphasis, state procurement officials must assert the continuing and rightful strategic ownership of the integrity and efficiency of the whole acquisition process.

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KNOWING THE WAY
The Strategies of Continuing Education

The strategy of supply chain management requires knowledge and appreciation by procurement personnel, program managers, potential suppliers, executive and legislative management, client agency heads, the media and the public. This eclectic audience must be kept up to date on all aspects of the procurement spectrum. Therefore, the central procurement office must develop broad-based, appropriate strategies of continuing education.

The skill levels of the procurement staff must be elevated to meet the changing needs of the 21st Century. Procurement staffs are becoming internal consultants, teachers and procurement process designers. Even with the existence of cross-functional teams, the central procurement office will generally be accountable for the complex, high-risk or high-dollar-value transactions. They’ll be called upon to solve the problems when something goes wrong. They’ll continue to review the legislation and write the policies and procedures. Thus, it is clear that the rapid advancement of technology, globalization of the marketplace and increased competition call for a more involved and knowledgeable workforce in the immediate future.

Professional procurement managers must have a thorough understanding of strategic global supply and market conditions. A comprehensive knowledge of private sector business and evolving technology is essential. Improved skills for handling, organizing and communicating information, primarily through electronic commerce, are required. Interpersonal skills must be sharpened to insure that procurement managers have a good relationship with customers, peers and suppliers; can work in diverse environments; and understand how to negotiate effectively.

Resources for ongoing professional education are limited. A few institutions of higher education offer courses in private sector purchasing, but they are all too often integrated with courses in sales management. These offerings are nevertheless valuable to the public procurement professional in gaining greater understanding of the supplier’s world. Most purchasing literature, magazines and books also concentrate on the private sector. NASPO represents a sizable market for procurement courses and publications and has an opportunity to shape and drive this potential market.

The seminars and recently added extension courses of the National Institute of Governmental Purchasing (NIGP) address core areas of public procurement. These offerings are invaluable to the beginning purchaser and respond to needs of the procurement journeyman. But, like the public procurement profession in general, this training focuses more on the past and present than the demands of the future.

Not always recognized as an important educational tool is the exchange of information among professional staffs across jurisdictions. Largely informal, unstructured contacts at meetings, exchanges through the NASPO and similar listservs, and casual telephone conversations provide some of the most effective education available today. NASPO members are aware they learn much at forums such as the annual NASPO conference.

NASPO and NIGP jointly sponsor the Universal Public Purchasing Certification Council. Certification is one method for providing structure to the learning process and encourages ongoing educational efforts. CPPB (Certified Professional Public Buyer) and CPPO (Certified Public Purchasing Officer) after a name are flags of professionalism. Certification is an easily identifiable mark of competency that will remain in demand as long as the underlying training and skills are aligned with the needs of the procurement organization.

Procurement managers realize, as they instruct and counsel agency customers that a teacher may be learning more than the students do. The core competency of the central procurement office is its experience in interacting with the private sector to develop and deliver solutions while ensuring fair treatment among suppliers. Customer agencies must be educated and will benefit from accepting procurement’s guidance to maximize application of this knowledge to their programs. Agency purchasing personnel exercising delegated procurement authority can benefit greatly from training seminars hosted by the central procurement office.

The need for training and certification of people exercising procurement authority has been recognized by several states. A few states, including Virginia, Texas, Oregon, Minnesota, Alaska and Wisconsin, have or are developing certification programs which couple increased agency authority with demonstrated competencies. Training and certification aimed at agency staff exercising procurement authority should seek to demystify the process, improve efficiency in business transactions and preserve the integrity of the system.

In many jurisdictions, supplier education is achieved principally through manuals and other publications. Some states have aggressive outreach programs on how to do business with the state or conduct annual trade fairs or education fairs. Suppliers should be encouraged to see these training opportunities as the door to a mutual exchange of information with the whole cast of a jurisdiction’s procurement personnel.

The education of executive and legislative management, agency heads, media and the public poses a significant challenge. One issue is that these audiences are constantly changing and may be predisposed to viewing procurement as a roadblock, at one end of the spectrum, to not being appropriate guardians of the taxpayer dollars at the other end. Education of these groups is essential to the success of a procurement organization. As procurement units evolve to a more strategic position, a public relations strategy to effectively convey information and improve communication will be needed.

In summary, the strategy for central procurement is to get smart and stay smart. Continuing education opportunities and certification of professionals are effective methods of acquiring, enhancing and maintaining a skill base. However, in order to deal with the procurement world of the 21st Century, we cannot rely solely on traditional training methods. An evolving profession needs evolving skills. NASPO members must experiment with non-traditional training for procurement officials as well as their eclectic audience. It is also important that they share what they learn so that collectively we prepare for the future of procurement.

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ELECTRONIC COMMERCE
The Strategy of Finding the Uninterruptable Power Supply

Electronic Commerce (EC), in its many forms, may be defined as any commercial transaction carried out or facilitated by the electronic exchange of information. EC utilizes many technologies, including card-based and Internet technologies, electronic funds transfers, document management and workflow.

Electronic Data Interchange (EDI) and Electronic Funds Transfer (ETF) represent the bulk of current commercial EC. Commercial transactions employing electronic media and closed networks are not new. The largely electronic global securities marketplace has radically changed the world’s financial trading structure. Electronic banking and credit card verification are familiar features of the commercial landscape. Expansive as the use of EC has been, the technology is undergoing unprecedented change.

This growth is the result of continuing development and explosive growth and use of the global Internet infrastructure, the backbone of the global economic system of the 21st Century, changing the business paradigm forever. The increase in the number of Internet users, the relatively low cost of access and the growth of the World Wide Web, with an estimated $3.2 trillion in Internet commerce by 2003, will fuel the expansion of EC. The impact is not confined to the private sector. Government is also a very active participant in this arena, building cooperative agreements for Electronic Benefits Transfer programs and establishing Internet websites for forms, applications, licenses, and solicitation documents. Government is also taking a leadership role in the development of security policy in the area of Public Key Infrastructure, a set of security services that enable secure electronic transactions.

The Implications and Benefits of EC to Government and Particularly to Public Procurement

The implications and opportunities afforded government by EC are tremendous. Every facet of public law and policy, e.g., taxation, privacy, security, intellectual property rights, ethics, trade law, will be affected. Citizens will expect the same level of service, enhanced by EC, from government as they receive from the private sector.

Electronic Commerce allows government to:

  • streamline and integrate citizen services, providing convenient “one-stop” access to services and information,
  • enhance the quality and effectiveness of traditional government services,
  • stimulate economic growth and competitiveness by interacting more effectively with the private sector,
  • enhance quality, add value, and reduce the cost of service delivery.

EC applications are critical as state procurement offices search for ways to streamline operations. These applications are enabling procurement programs to successfully manage increasing and more complex workloads with the limited resources available. EC implementation delivers costs savings to the taxpayer. Posting bids, publishing policy, and maintaining bid lists electronically saves labor, printing and mailing costs. Enabling agencies to shop from electronic catalogs and other electronic sources saves time for the central procurement staff as well as in the acquisition process. Electronic posting of requests for competitive bids or proposals results in greater vendor awareness and competition and presents an open, easily accessible face of government to businesses and citizens.

The Strategy for Optimizing the Development and Standardization of Public Procurement Electronic Commerce

Central procurement offices have encountered significant impediments to utilizing EC. Programs have faced insufficient funding, reluctance to change by management and customer agencies, statutory conflicts, differing state and federal laws, concerns with privacy and security, and difficulty in obtaining support from management information services. The greatest hazard is the development of an EC technology marching to a different drummer that cannot be assimilated into the parade of standardized technology. As the Wall Street Journal noted in a March 27, 1998, article: “The earliest adapters can become the biggest laggards, by growing hooked on systems that quickly become outdated.”

Solutions will require a coordinated effort by the federal and state governments and the private sector to ensure interoperability. Cooperation between these diverse, yet interdependent, functions and operations is critical. In December 1997, NASPO joined the National Association of State Comptrollers (NASC) and the National Association of State Information Resource Executives (NASIRE) to host a joint conference on EC. This was a breakthrough in coordination and an indication of the importance of a unified approach in the development of state EC strategies. It was highly successful and was followed by another conference in December 1998. The 1997 conference emphasized the need for uniform, simple, technology-neutral legislative language.

In addition to this partnering initiative, these same associations banded together with the National Automated Clearing House Association (NACHA) to develop a common policy in the use of digital certificates in the EC environment. This bringing together of the public and private sector demonstrates that there is broad recognition of the need to develop common solutions for EC.

When embracing EC, the central procurement office must do more than simply automate current procedures. With the new tools of a networked society, all government should re-engineer to achieve fully the benefits of EC. This re-engineering should address the jurisdictional architecture and infrastructure to insure that information moves seamlessly within the departments and agencies of the jurisdiction, from government to other governments, to citizens and private sector entities. The goal is a network infrastructure sufficiently standardized to permit clear connection and operation with a diverse audience; the most important of whom is the citizen seeking information or assistance.

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PROCESS DELEGATION
Strategic Decentralization

Purchasing should occur as close to the point of need and use as feasible. The dilemma is often in determining what is “feasible.” Strategic decentralization means extending the reach of feasibility–decentralizing the purchasing process, while maintaining centralized procurement authority and management.

In implementing this strategy, a central procurement office must understand where it has been in order to understand where it needs to go. Most state purchasing statutes originated in the 1920’s and ’30’s and recognized the need for a centralized and standardized program. In those early years, states’ requirements and purchasing’s response were relatively unsophisticated. The program was manageable. Some agencies and departments were exempt from centralized purchasing and remain so today.

The past six or seven decades have seen quantum change, accelerating rapidly over the past 20 years. Requirements for state programs have grown in volume and complexity. The goods and services to meet these requirements involve equally complex technology. Budgetary constraints and other factors have severely limited the central procurement office’s response to these changes.

To lessen pressures on central procurement offices, and in recognition of the end user’s critical role in the process, the practice of extending delegation to customer agencies has spread. Most frequently, delegated purchases are defined by dollar amounts or by the need for technical expertise which is resident in the customer agency, but the process itself often is not precisely defined. Client agencies, particularly program managers, often confuse delegation with license.
The strategic move calls for a universal understanding of what decentralizing purchasing, while maintaining centralized procurement authority and management, means. Implementation includes basic and continuing education, application of technology and auditing to insure compliance.

The first step in planning implementation of this strategy is a review of statute and administrative law, published policy and procedures. Does this platform support the strategy or is amendment necessary? Equally important, how are these legal elements interpreted or understood by all involved? Executive and legislative leadership, client agency heads and program managers should all agree on application of statute and rules.

The next step is to demystify the process through simplification and delegation of the routine processes where value cannot be added. This allows the central procurement office the opportunity to function as a knowledge/management-based organization, a strategic player in the business management of the state. The professional procurement managers serve as consultants, instructors, business process designers and problem-solvers. The central office retains control of complex, high risk, high-dollar transactions where trained experts add value.
The professional procurement managers, as consultants and instructors, work with client agencies in research and development to forecast needs, locate new products and determine new sources. The central procurement office/client agency coordination applies to both the purchases made in the field and the procurement handled by the central office.

As discussed in Section II, ongoing training is important to address changing technology and changing procurement policies. People empowered with purchasing authority must possess appropriate skills to perform. Certification programs are key to documenting appropriate training and competency. Equally important is monitoring of the delegated purchasing process. Through the application of technology, agencies empowered with procurement authority must utilize electronic commerce applications, enabling them to conveniently acquire their needs while providing central procurement with the data required for strategic decision-making.

Audit checks and quality assurance reviews must be components of procurement delegation. The audit staff should be responsible for managing compliance and monitoring the effectiveness of rules, policy and procedures. They must have a statewide perspective of the delegated procurement process and the ability to discern patterns of non-compliance. Ideally, professional procurement managers should not be involved with client agency compliance. Client agencies must see the procurement managers as resources and business partners, not adversaries. Like the procurement managers, the auditors should be instructors and problem solvers, minimizing the tensions an audit creates.

When in place, this strategy may seem to differ little from current practice. The purpose is much the same: to free the resources of the central procurement office. However, the new emphasis is to redeploy resources to assist agency customers in new, cutting-edge areas or to develop innovative approaches to meet agency needs. By delegating the purchasing process to client agencies, within the framework of centralized authority, providing appropriate training and continuing management by the central procurement office, the integrity and critical contributions of the state procurement program will be maintained.

THE GRAND STRATEGY
Movement from Processed-based to Knowledge/Accountability-based Procurement Organizations
The four strategies addressed in this paper–supply chain management, continuing education, electronic commerce and process delegation–are imperatives for a 21st Century state procurement program. Each strategy may be pursued independently. Each state must respond to its unique environment and determine priorities. But the grand strategy, the ultimate goal, is woven from all four strategies to secure the central procurement office the role it deserves in top state management.

That role is many faceted. With the day-to-day transaction traffic delegated, the focus will be on training and education, performance measurement, dispute resolution, system oversight, streamlining of the acquisition and business process, and embedding the best of supply chain management techniques in statewide policy and process. Some of this cannot be done well, or done at all, without incorporating procurement reform into state law to institutionalize change.

Does this nontraditional approach bring procurement organizations to a new strategic significance in the states? The answer is clearly “YES.” But in practice and perception state procurement programs have been reactive, stressing requisition to acquisition transactions. Without vigorous proactivity, change will be difficult.

If we choose to innovate and to boldly embrace technology, we will move as respected procurement organizations into a key role in the future. We must actively look forward. We must implement innovative practices, be receptive to new approaches to how we conduct our business, and seek to position ourselves as strategic members of our government’s business management team. Each day we must strive to find new and better ways to add value to our governments and the people we serve. If we fail to move, our respective governments, driven by the inevitable forces of change, will move on without us. As procurement professionals, we must establish ourselves as innovators and leaders-as a Corps of Discovery on the edge of a new government and management frontier.

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