Category Archives: Procurement Innovation

Public Sector vs. Private Sector Procurement : Does One Size Fit All? II

Yesterday we noted that if you were looking for a way to quickly and easily segregate the vast array of companies offering procurement solutions in the marketplace, you’d quickly find that they could quickly be divided into those that almost exclusively serve the public sector and those that almost exclusively serve the private sector. We also noted that public sector organizations operate quite differently than their private sector enterprise counterparts. We then discussed the differences in day-to-day procurement public sector organizations vs. private sector enterprises.

Based on the operational differences we identified, we reviewed the fundamental differences in workflow, awards, and approvals and discussed the underlying technology required to support both the public sector and private sector needs. And we found something quite surprising – pretty much the same solution was needed in both cases. Which left us scratching us head and asking, so what’s the difference?

Well, when you get right down to it, there are no differences in the fundamental e-procurement technology requirements for public sector and private sector organizations. They both need to create RFXs to solicit information, accept bids, generate awards, create and approve contracts, cut purchase orders and goods receipts, accept invoices, issue (e-)payments, and track and report on spending. And they need to be able to do it in a smooth and integrated manner that minimizes data entry (and eliminates rekeying of data already in the system, as that just leads to human error).

The fundamental differences are in the processes they use. Public sector organizations have one set of rules for whether it’s a public RFX, renegotiation with an incumbent vendor, or a direct award and private sector enterprises have another. Public sector organizations tend to use the RFX, Bid Management, and Contract Management solutions more heavily than their private sector counterparts who are free to chase the award with the greatest long-term value and use non-discriminating e-auctions and cutting edge decision optimization to get the best value for their shareholders. But the fundamentals of procurement don’t change.

So why are most e-Procurement companies either or?

I think the answer is two-fold.
(1) Most technology-focussed solution companies don’t understand the differences between public sector and private sector procurement, and thus focus on one or the other.
(2) Most technology solution providers are still selling B2B 2.0 solutions, which have been customized for one environment or the other. In order to support both environments on one platform, you have to have very flexible workflows that are extremely customizable by the customer (to meet their needs) and a user interface that is trivially easy to use. This is easy with flexible B2B 3.0 solutions, but almost impossible with rigid B2B 2.0 solutions.

And if you have the right platform, you can easily support both types of customers.

Public Sector vs. Private Sector Procurement : Does One Size Fit All? I

If you were looking for a way to quickly and easily segregate the vast array of companies offering procurement solutions in the marketplace, you’d quickly find that they could quickly be divided into those that almost exclusively serve the public sector and those that almost exclusively serve the private sector. And if you’re like me, you’d wonder Why Is That?

It’s true that public sector organizations operate quite differently than their private sector enterprise counterparts, and that’s good, because they’re supposed to. A public sector organization is supposed to first and foremost serve the public good, a private sector organization is supposed to first and foremost bring value to its shareholders. Public sector organizations need to be fair when awarding contracts in terms of minimum minority awards, small business awards, disadvantaged business awards, and woman-owned business awards, especially when all else is equal. Private sector organizations need to select the best vendor for the job — every time, as that is their duty to their shareholders.

But does it mean that the solutions have to be different? Are not the fundamentals of good end-to-end e-procurement the same whether you’re public sector or private sector? I guess that’s the Trillion Dollar Question, isn’t it.

Let’s start by examining your average public sector procurement organization a little more closely. Public sector is not only very policy driven, it’s very stake-holder driven. In the private sector, most purchases don’t require more than two approvals — the procurement specialist and, if the dollar value is high enough, her boss. Yes, the stakeholders need to be consulted and have to be given a chance to provide their input, but the contract can be inked once the procurement manager, and her supervisor with enough fiscal authority, sign off. In the public sector, most procurements require no less than four or five signatures. You have the procurement (or contract) specialist, her supervisor, the project/program/department manager who needs the product or service, the Equality Awards Office (EAO) responsible for insuring that enough awards are made to MWBE and disadvantaged vendors, and, if any clause or term in the agreement is non-standard, legal. If the procurement carries risk, you might need the signature of the officer responsible for risk management, if the procurement will result in recurring payments, you might need the approval of accounts payable or finance, and if the spend is significant enough, you might need a senior VP in addition to your boss’s signature. But all of this can be handled by a flexible workflow with a configurable approval chain.

In the public sector you primarily have RFPs and sealed bids where the award often HAS to be given to the lowest bidder who can fulfill the demand at the minimum level of quality, safety, and performance, whereas private sector organizations can select the bidder that they believe will generate the most value for them in the long run. This means that the public sector requires an extensive RFX application with weighted scorecards and good comparison reports … the same thing that the private sector has gotten for years since GE implemented the reverse auction and FreeMarkets made it famous.

The public sector needs to support the lowest common denominator in terms of issuance of POs and receipt of invoices. If a supplier still operates out of a 1970’s production plant and can only accept and receive faxes, then the organization has to deal with paper for part of its procurement process whereas a private sector organization can dictate that it will only accept invoices electronically. But e-Procurement solutions have been accepting attachments for over a decade, and allowing the user to define the appropriate meta-data (vendor, po #, contract #, line items, quantity, amount, taxes, total invoice amount, etc.) for just as long. So it’s still easy for a data entry clerk to create an e-invoice in the system on behalf of a vendor and print, and fax, an e-PO on behalf of the public sector organization.

And so on.

So what’s the difference?

Come back tomorrow for Part II!

(Supply Chain) Initiative Cost Justification

Last year, over on the e-Sourcing Wiki, I brought you The Quest For Purchasing Fire, a guide on how to develop the internal strategies for selling the procurement tools internally. This process had two key steps that, if not done properly, could be major stumbling blocks in getting your initiative off the ground. These key steps were defining the value proposition and building the business case.

The fact of the matter is, when you get right down to it, often the biggest stumbling block is to secure funding for your initiative. Unless the project happens to be a pet project of the CEO or CFO, chances are you won’t be able to secure funding unless you have a clearly stated and easily understood kick-ass value proposition and a well-researched and documented business case to back it up — preferably one that shows big dollar signs to the company’s favor. Thus, it’s important to zero in on the cost-justification in both of these steps and reduce the decision to one that should be a no-brainer ( especially since we know that, in some companies, it would appear that having a functioning brain is not a requirement for an executive position ). If your CEO and CFO can see a significant ROI, which includes an ROI in the near-term, which they know makes Wall Street and / or the private investors happy, they’re much more likely to find the money you need “in the budget” than if they don’t see a savings opportunity that will make them look good.

That’s why it was nice to see an article last month over on the Supply Chain Digest site that offered up “six steps to improved cost justification for supply chain and logistics initiatives”. Simply put, when it comes to understanding the best way to put together a cost justification for your project, you can use all the good, free, advice that you can find.

The article offered up six useful guidelines to consider when putting together your value proposition and proposal. At a high level, these guidelines were:

  • Understand your company’s investment analysis model
    What does your CFO care about? IRR (Internal Rate of Return), PP (Payback Period), NPV (Net Present Value), ROIC (Return on Invested Capital), etc? Make sure to use the measures your CFO is comfortable with and wants to see. It will help insure that your proposal makes it to the top of his pile.
  • Link funding requests to key corporate strategies and objectives.
    The CEO wants to further the corporate strategies and objectives outlined by the Board, because, simply put, his success in that area positively impacts his annual review, and bonus. Talk to those strategies. That will make sure your initiative gets his attention.
  • Develop a Strong Summary with a Detailed Back-Up
    Your CEO is busy. Very busy. Probably doing stuff that’s not all that important (but that’s not entirely his fault – boards and wall street like to waste an executive’s time), but stuff that consumes his or her time nonetheless. Therefore, it’s important that you have a strong, straight-to the-point, executive summary that says why the company should do this, and what results it will have … because that’s all he or she might have time to read. However, if your CEO likes what she hears, he or she will ask the CFO or another member of the management team to “dive into it” which is where the detailed calculations and supporting materials come into play.
  • Use the Numbers to tell a story.
    Remember, the CFO likes numbers. So base the story around those numbers. “We will generate a 300% ROI by implementing an e-Procurement system that … “.
  • Review Preliminary Justification with Key Stakeholders
    And make sure to to have them verify every assumption that you make. The last thing you want is for the manager tasked with verifying your submission to find that one of your key assumptions is wrong. Even if the affect is minor on the final ROI calculation, being overworked, he’ll likely assume that the whole plan must be faulty, throw it out, and vote nay without even giving you a chance to correct it. But if you meet with the key stakeholders and everyone agrees, you can get it more-or-less right the first time and not have to worry about your initiative getting killed off before it even has time to begin.
  • Triple Check to Eliminate Math Errors and Risky Assumptions
    A CFO is likely to assume that if you can’t add, since you have a spreadsheet to do it for you, you probably can’t do anything else you say you can do either, and deny your project without even considering it. And CEO’s don’t like risk, so if you can get (almost) the same results with less risky assumptions, you should use them.

Good advice all around.

The Purchasing Leader’s Guide to a More Successful Team

Recently, Next Level Purchasing (now the Certitrek NLPA) published “The Purchasing Leader’s Guide to a More Successful Team” that outlined Seven Steps For Improving Skills and Getting Better Results. Noting that many organizations only have one or two superstar team members that can handle the most challenging projects, that a purchasing department should be the organizational center-of-excellence, and that there’s no reason your entire team can’t excel, Charles Dominick, President & CPO of Next Level Purchasing put together a simple seven step process that any organization can follow to improve their team. The document might not cover every possible thing that one could do, but it’s a great start as any department that effectively implements and masters the steps provided will certainly be above average as a result.

The seven steps outlined by the document are:

  • Document Departmental Goals
  • Identify the Necessary Skills
  • Develop a Methodology to Assess Skills
  • Determine Skill Gaps
  • Define a Skills Development RoadMap
  • Improve Skill Levels
  • Measure & Sustain Improvements

They are important because:

  • It’s hard to identify necessary skills without goals.
  • Once you’ve identified the skills, you can identify who should have them.
  • You need to know how competent your people are with respect to each required skill to assess gaps.
  • You need to know what the gaps are in order to identify appropriate training.
  • The roadmap helps you identify which skills are important.
  • Skill level improvements are accompanied by improvements in sourcing results.
  • Measurements let you know how effective each skill level improvement initiative was and helps you select the “training” that is most appropriate for your team.

And you should definitely download “The Purchasing Leader’s Guide to a More Successful Team” because:

  • It gives you some examples of the right way to state measurable goals.
  • It outlines common skill dimensions that you should be sure to consider.
  • It defines three different skill assessment methods.
  • It tells you what’s important when it comes to skill gap identification.
  • It describes five different ways you can prioritize professional development.
  • It outlines different ways you can improve skill levels.
  • It gives you some ideas for measuring skill improvements in a manner that can be communicated to management.

A State Gets Smart

Today’s guest post is from Mark Usher of Treya Partners and originally appeared on the 1 Procurement Place blog on July 31, 2008. It is reprinted with kind permission.

Those of you who follow the public sector space may know that the State of Georgia recently selected SciQuest’s e-procurement tool. State agency employees in Georgia who need to buy anything from pens to asphalt will shop in SciQuest’s web-hosted electronic catalogs which will be populated with pre-priced goods and services from the State’s existing supplier agreements. This decision by the State of Georgia is notable for two reasons – (i) it is another example of an organization electing to carry out its purchasing transactions in a best-of-breed e-procurement tool as opposed to the purchasing module its existing ERP system (numerous Fortune 500 companies have gone the EP route following sunk ERP investments and the State of Georgia already has PeopleSoft) and (ii) it is also an example of another state government that is moving ahead strongly with a strategic procurement initiative (other states moving to transform their procurement function include Virginia and Indiana to name just two).

The shunning of ERP’s historically much-maligned inbuilt purchasing functionality in favor of e-procurement is a trend that I would expect to continue both in the private and public sectors. Not so much due to application functionality (a gap that that I would say doesn’t really exist anymore since the ERP vendors have refined the workflow in their own e-procurement modules) but due to the fundamentally different way that the best-in-breed providers and ERP vendors handle catalog content. All of the e-procurement providers utilize web-hosted catalogs pre-populated with many of the vendors and products that most buying organization will need (and with the capability to have the organization’s specific contract pricing built in). And if a customer has vendors that are not already in the pre-populated catalog it is a simple task for the e-procurement provider to request product and pricing from those vendors and load them into their web catalog. With an ERP provider’s e-procurement solution, however, you are most likely going to have to build your catalogs behind your firewall, involving considerably much more time and expense. And now that the best-in-breed e-procurement providers all integrate so perfectly with ERP (e.g. with accounts payable to enable payment reconciliation), why would you ever go the ERP purchasing route? I wouldn’t.

As regards Georgia’s general procurement transformation initiative, expect to see a lot more of this from state governments in the next 2-5 years. State governments have long presented a massive challenge for creating value from procurement due to their extreme decentralization. Often hundreds of state agencies within a state making their own procurement decisions and developing their own price agreements with suppliers. To complicate matters even more, agencies usually have their own financial and purchasing systems meaning there is no centralized store of data from which to build a consolidated picture of total state spend by category, supplier and agency – key information for identifying and developing aggressively discounted price agreements with suppliers. Rounding out the challenges for states in the this area are a lack of a strong mission/vision/strategy for a center-led approach to procurement and a shortage of strategic sourcing skills among current state procurement staff.

As regards my state procurement crystal ball I would expect to see (or would HOPE to see) state governments address the following five areas:

  • Develop and broadly communicate a center-led strategy for procurement in the state with the centerpiece being a strategically focused, “center of excellence”-based central procurement group
  • Conducting a best practice spend analysis to develop a consolidated cross-state picture of spend by agency, supplier and agency
  • Based on the spend analysis, develop and implement a sourcing roadmap with the objective of maximizing the amount of state spend under cross-agency (“state-wide”) leveraged price agreements
  • Upskill the central procurement group with the required training in best practice strategic sourcing methods (or hire where needed)
  • Implement a state e-procurement system with web-hosted electronic catalogs to drive maximum spend through the new price agreements

Thanks Mark!