Procurement Outsourcing Vern Jones - Chief Procurement Officer State of Alaska

1. Procurement Outsourcing Vern Jones - Chief Procurement OfficerState of Alaska

2. House Bill 313 - An act authorizing a pilot program relating to state procurement and the use of electronic commerce tools..... • Effective date of law - July 1, 2003 • Procurement code waived for purchases made by the contractor, but they must apply two bidding preferences • Pilot scope - 2 state departments, 2 instrumentalities • Legislative Finding -- “...procurement and supply management represent appropriate opportunities for achieving cost savings through the use of process management specialists in the private sector;”

3. House Bill 313 - why was this bill introduced? • New Republican Governor and Commissioner's (looking for new cost saving methods) • Republican majority in House/Senate • Bill introduced late, passed in 10 days • Department provided neutral testimony • Bill introduced/passed even though General Services aggressively promoted purchasing and received NASPO's 2002 gold medal award for innovation, NPI’s 2003 Excellence in Procurement Award and was a top 3 finalist for NIGP’s best practices award in 2003.

4. Project Milestones • Select pilot agency • Advise unions (3) • Perform operational analysis of agency • Develop/issue/award pilot RFP • Complete feasibility study • Advise unions of outcome • Unions provide alternate plans • Evaluate alternate plans • Award contract if in state’s best interest

5. Project Milestones • Select pilot agency (DOT/SE Region) • high number of commodity purchases • procurement system with historical data • operated a warehouse • located close to DOT headquarters and DGS • Advise unions (3) • Perform operational analysis of agency • select consultant • scope - describe processes, verify employees, salaries, overhead, equipment, etc. • include operational analysis in outsourcing RFP

6. Project Milestones • Develop/issue/award pilot RFP • no existing RFP to use • RFP (49 pages), 8 attachments (26 pages), 10 appendices (44 pages) • RFP included results of agency operational analysis • 2 pre-proposal conferences, 6 amendments issued • extensive staff research re/ potential supply chain management vendors • two proposals received, one was nonresponsive • proposed award protested/appealed by one union

7. Project Milestones • Complete feasibility study • outsourced 10 state employees • state employee salaries vs. contract costs resulted in 2- year savings of $268,000 (22%), recently reduced to $200,000 due to continued warehouse operations • additional savings in overhead costs - office supplies, employee training, etc. • retained section manager to administer contract • Advise unions of outcome • bargaining agreements allowed 2 unions 30 days to submit alternate plans • one union could not submit alternate plan, but contractor required to pay union wages to employees

8. Project Milestones • Unions provide alternate plans • unions knew about the submittal of an alternate plan for about 7 months • two unions provided alternate plans, each about 1 1/2 pages in length • Evaluate alternate plans • reviewed/rejected plans, determined that award of a contract was in state’s best interest • Award contract if in state’s best interest • February, 2004 - contract awarded • July, 2004 - contractor assumed responsibility for procurement • October 1, 2004 - contractor assumed responsibility for warehouse operations

9. How Long Did It Take? • June 6, 2003 (bill signed) • February 19, 2004 (contract awarded) • 30 days - Select pilot agency • 5 days - Develop operational analysis RFP • 12 days - Select operational analysis consultant • 38 days - Analyze operations of pilot agency • 140 days - Select supply chain contractor

10. Key Elements of Contract Term - Two-year contract w/ 2 three-year options - contingent upon new legislation Contract Model Fixed Price - Contractor paid according to fixed price schedule Funding - Outsourced employee salaries used to fund contract • Contractor performs all duties previously performed by state employees, the state received a 22% (now 15%) reduction in costs and the contractor provided electronic commerce tools at no additional cost.

11. Electronic Commerce Tools Electronic Requisitioning, Order Placement and Tracking Electronic Catalog Contractor’s SmartTools Suite Electronic “At Sea” Interface Between the Ferry Vessels and Electronic Tools Electronic Receiving Electronic Reporting Capabilities System Integration With BuySpeed

12. Key Elements of Contract • Contract Scope • currently limited to SE Region of DOT • includes procurement and warehouse functions, does not include construction • includes supplies, services, professional services; • public use and intergovernmental agreements - contractor negotiates, state signs contract • contractor acts as an agent of the state, uses state contract forms • contractor’s personnel occupy state facilities, uses state equipment (computers, phones, etc.) • contractor must follow pilot procurement rules

13. Key Elements of Contract • Procurement Rules • $0 - $50,000 - one quote, although contractor utilizes judgement policy • $50,00 - $100,000 - 2 verbal quotes • $100,000 - $150,000 3 written quotes/proposals • above $150,000 formal ITB/RFP • brand specific determination above $5,000 • alternate procurement determinations • reporting requirements • protests limited to application of preferences, otherwise suppliers must pursue court action against contractor

14. Key Considerations Do not attempt this type of project if you have a heart condition, high blood pressure, suffer dizzy spells, or have an aversion to cramped meeting spaces with hostile attendees.

15. Key Considerations • Substantial resistance from pilot department • Pilot department overlooked a position during the operational analysis, another position was deleted from pilot but the contractor was required to assume the duties - contractor prevailed on both claims • Unions/state employees over zealous to prove pilot is a failure - many urban legends: • excess freight costs - however agency specified incorrect FOB point • new formed company - in business a number of years and has major clients (I.e. BP Petroleum) • where’s my beer?

16. Key Considerations • Substantial staff time -- contract administration and benchmarking efforts • Quarterly analysis - workload statistics , % of AK vendor utilization, time to process, mistakes/ errors, and cost of goods/services - EVERYONE IS INTERESTED IN THE RESULTS! • Recently hired a management firm to conduct cost of goods/services analysis • Unfair criticism of DGS and staff

17. Project Interest Do not, do not underestimate the level of scrutiny from unions, government officials, legislators, the press and state employees, or interest from vendors, non-profit organizations, national magazines, NIGP, NASPO, ABA, etc.,

18. Additional Legislation • Current pilot legislation sunsets June, 2006 • 2005 - multiple versions of expansion bills introduced: • expand pilot to all department, • eliminate sunset date, and • include additional state preferences, • 2005 - final version of bill includes only 3 year extension, scope still limited to 2 departments and 2 state instrumentalities • bill could be voted on in January, 2006

19. Where do we go from here? • Currently developing “What does success look like?” criteria to determine future expansion • labor savings - employee costs vs. contract costs result in some level of savings • commodities purchased are equal or greater quality • “time to process” is equal to or greater than before • cost of goods and services savings: at least XX%. • Continue to benchmark and analyze the pilot - fairly and objectively • Determine impacts and react to future legislation