Breakout Session # 511 Bernie Donachie, Associate Partner, Accenture

1. NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

2. Strategic Sourcing for Public Purchasers Breakout Session # 511 Bernie Donachie, Associate Partner, Accenture David Gragan, Senior Manager, Accenture Date: Wednesday, April 28, 2004 Time: 1:50 p.m. – 2:50 p.m. NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

3. Objectives of this Presentation • Strategic sourcing versus routine acquisition • Public versus private sector strategic sourcing • Putting strategic sourcing to work for your organization NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

4. Strategic Sourcing… • Enables an organization to buy effectively and efficiently while maintaining the lowest total cost of ownership. • There are three critical components of strategic sourcing: • Understanding your requirements and developing a strategy • Contracting with suppliers • Monitoring and measuring your supplier and internal performance Strategic sourcing is the practice of taking information and end-user requirements to make informed buying decisions. Strategic sourcing leveraging information to drive results. A strategic sourcing approach will allow the buyer to get more value and lower total cost. NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

5. What is Strategic Sourcing? • Strategic Sourcing is a methodology… a disciplined set of processes through which organizations: • more efficiently and effectively determine procurement sources for goods and • services, • establish purchase agreements with the identified suppliers, and • monitor and manage the on-going supplier relationships. The intent of the Strategic Sourcing process is to select capable, qualified suppliers to provide goods and services in a timely manner at the lowest possible total cost. Strategic Sourcing in the public sector can achieve as much as 5-15% in total cost savings. NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

6. Does deliver tangible bottom-line savings Does focus on needs, not wants Does optimize decisions at the enterprise level Does establish standards for common goods and services Does facilitate a disciplined, fact-based decision process Does implement demand-management practices Does not just focus on “lowest price,” but includes total cost , quality and social considerations Does not take away decisions from agencies Does not dictate business strategy Does not subject organization to operational risk Does not sacrifice quality Does not require eProcurement in place prior to program initiation Some Characteristics and Myths Strategic Sourcing combines intense commodity/market insight with quantitative facts about your needs (not wants) and spending patterns to achieve lower costs and increased service NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

7. Spend, Screen Build Total Shape and Supplier, Conduct Develop Suppliers Assess Implement and Cost of Negotiate Auctions Category and Selection Opportunities Agreements Industry Ownership and Publish Value Strategy Factors Analysis Model RFPs Proposition Strategic SourcingImplementation Methodology Strategic Sourcing is a methodology that brings deep knowledge to bear on the cost and pricing aspects of your procurement spend Strategic Sourcing Methodology Phase 1: Savings Strategy Development Phase 2: Savings Program Execution NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

8. Data Analysis: The Basis for Savings • Spend by commodity/service area (NIGP Class, SIC, Object Code) • Spend by supplier • Number of invoices per year • Number of POs per year NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

9. Strategic SourcingCommodity Complexity Model High IT accessories Office supplies Envelopes Janitorial Radio Paper Office machines Safety Perishable Food IT software IT hardware Illustrative Paper & Plastic Furniture Fuel Paint Textiles Vehicles Electrical Staple grocery Savings Potential Metals Chemicals Clothing Bakery Dairy Low EASE OF IMPLEMENTATION EASY DIFFICULT NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

10. Critical Success Factors • A willingness to establish standards and manage compliance with statewide contracts • e.g., eliminating manual purchase orders, post-audit reporting • A mechanism to capture savings resulting from reduced costs • e.g., budget reductions, supplier rebates, transaction surcharges, placeholder encumbrances, etc. • An understanding of the impact that sourcing may have on the existing supplier base • A plan to enhance the strategic sourcing skills of State of Colorado to sustain savings • Project sponsorship by an executive with financial responsibility Successful implementation of Strategic Sourcing in the public sector requires the following: NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

11. Typical Environment for Successful Strategic Sourcing • Substantial spend in several discreet commodities • Fragmented spend within a commodity resulting in a large number of suppliers • Suppliers that provide the organization with multiple commodities • High volume of transactions for major suppliers • Significant purchasing conducted in decentralized fashion; limited standardization and ability to enforce compliance with central contracts • Lack of tools to optimally manage suppliers (e.g., supplier performance metrics, inconsistent data, external benchmarks) NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

12. Will you and your stakeholders benefit? • Hard Dollars returned to the general fund • Rapid realization of benefits, including process streamlining • The is an investment required Will you benefit?....Absolutely! NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

13. Strategic Sourcing • Solutions: • Increase management efficiency • Centralized procurement to achieve economies of scale • Take advantage of market conditions • Leverage buying power • Accelerate realization of savings • Reduce transactions, cycle time • Establish standards to match business needs • Enable best fit sourcing strategy • Lease instead of purchase • Turn physical capital into financial capital • Benefits: • Creates prices savings reducing budget needed for goods and services • Takes advantage of declining prices on term contract items • Reduces overall cost of material management operations • Accelerates payments to take advantage of vendor discounts • Promotes process savings • Verifiable cost savings • Productivity Increase • Case Studies: • New York City Department of Education • University of Texas at Austin • Potential Savings: • 5% - 15% on goods/general services costs NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

14. Other savings realized • Scholastic: $35 million in 18 months • Pennsylvania: $7.8 million in first 3 months • Virginia: $25 million in 6 months • Other organizations pursuing strategic sourcing • Delaware, Rhode Island, Connecticut, Ohio State University, University of Illinois, Oregon, New Mexico…. NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

15. Take Aways • This concept is not new • Commercial best practice • Rapid migration to government settings • This concept is working in government • Numerous states and universities are utilizing sourcing strategies to maximize savings and minimize total cost of ownership • There are real hard dollar savings being generated and returned to general funds today NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

16. In Summary In today’s environment, public officials are being asked to do more with less. Experience indicates that strategic sourcing allows that. Strategic sourcing is a disciplined methodology for uncovering and realizing cost savings in your procurement process. It relies on deep understanding of the industries from which you are buying, as well as of the procurement environment in which the public official functions. There is money to be saved in the acquisition process, and Strategic Sourcing supports that. NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”

17. Questions? NCMA World Congress 2004 “Maximizing Value to Stakeholders…Contract Management in the Business World”