Promoting The Value of Public Procurement

1. Promoting The Value of Public Procurement Measurement Systems and Performance Metrics for Public Procurement Paul J. Brennan, CPPO

2. Procurement’s Problems • Lack of acceptance • Lack of strategy • Lack of methods • Lack of trust • Lack of know-how • Lack of competence

3. Why Salespeople Are Better Rewarded • They must reach goals • Their results are directly identified on an organizations profit and loss statement • They are assigned monthly and annual goals • The goals are easily measured How many public procurement professionals are assigned a monthly and annual savings goal?

4. Management’s view of Procurement • “It is much harder for top management to judge that their purchasing people are doing a good job. As a profession we have not been very good at measuring our performance, therefore we can hardly gripe when salespeople come to call in their latest BMW while we are driving around in ancient Nissans” (Roylance, 2006)

5. Are we willing to change the status quo? • Many public procurement professionals are happy with the status quo and do not want the requirements to meet similar performance targets that salespeople are required to meet (Roylance 2006) • Public Procurement Professionals must be willing to identify and adopt meaningful measurement targets in order to show we add value to the organization

6. Procurement Measurement Systems • If we do not measure the value we add; how can we expect others to recognize it? • Procurement Measurement Systems measure the effectiveness (and the efficiency) of the procurement function • Widely used in the private sector and the European public sector, they are just starting to be recognized, understood and implemented in the United States public sector

7. Procurement Measurement Systems • Provide the procurement professional with the information and data to tell their story of adding value to the organization

8. Balanced Scorecard • Establishes a set of strategic performance metrics to support the organization • Provides elected officials, senior management and even the taxpayers with a detailed view of the procurement organization’s performance over a period of time • Reviewing these metrics on a regular basis allows you to identify areas that may need improvement • Identifies the accomplishments of the procurement organization

9. Strategic performance metrics for a Balanced Scorecard • Reduce the cost of products and services • Identify new sources of procurement related revenue • Leverage organization buying power • Meet or exceed customer expectations • Increase spend with local suppliers • Increase spend with diversity owned suppliers • Update internal processes and redesign to improve efficiency, increase compliance and improve customer satisfaction

10. The Profit and Loss Measurement System • It is difficult for elected officials and senior management to judge if their procurement organization is doing a good job • Most elected officials do not know how effective their procurement organization is

11. The Profit and Loss Measurement System • As a result, many procurement organizations are considered a necessity that provides very little strategic value (Roylance 2006) • The procurement organization is viewed as a “cost center” that adds to the overhead of the organization • When this is the case Elected Officials and Management may even try to reduce procurement’s FTE’s during difficult financial times

12. The Profit and Loss Measurement System • How do we change elected officials and top managements view of procurement as just another “cost center”? • We must start thinking of the procurement organization as a commercial entity, as a business within a business

13. The Profit and Loss Measurement System • Two principal concerns for elected officials are taxes (revenue) and expenses. • Public Procurement has the ability to lower expenses, which would reduce the need for revenue (taxes) • Public Procurement has the opportunity to be a strategic player • We do no take advantage of this opportunity to sell this benefit to elected officials and other stakeholders

14. The Profit and Loss Measurement System • When procurement savings are discussed, quite often they are met with skepticism by top management and finance personnel • Procurement’s expenses are rarely mentioned by the procurement professional when discussing cost savings • There is no agreement on cost savings definitions between procurement and top management and finance

15. The Profit and Loss Measurement System • What top management and elected officials really want from procurement is a bottom-line profit (revenue or value) contribution • Most elected officials have a business or legal background • By presenting procurement’s contributions in a financial accounting manner (Profit & Loss Statement) you will be able to show the value the procurement function brings to the organization in a manner that both top management and finance executives understand (Roylance 2006)

16. The Profit and Loss Measurement System – How Does it Work? • Producing a simple profit and loss statement for a procurement organization is not a difficult task • The idea behind the P&L Statement is to identify all revenue and expenses associated with operating the procurement function • Start with your annual budget • You will also need to maintain some sort of cost savings record or log

17. P&L Statement - Revenue • Some common examples of budgeted revenue for the procurement function include: • Surplus Sales revenue • Vending revenue • Interfund revenue • Centralized Contract Fee revenue

18. P&L Statement - Revenue • A second source of revenue is various Cost Containment activities which include: • Contract savings – current contract prices compared to previous contract prices • Cost Avoidance • Contract Extension Cost Savings • P-Card Administrative Cost Savings • eProcurement transaction savings • Improved Terms • Logistics and Inventory Savings • Revised Specification Initiatives • Elimination of Purchase requests

19. P&L Statement - Revenue • A third source of revenue is from Revenue Generation Activities which include: • Negotiated Revenue increases on revenue generating contracts • Rebates negotiated/received • Refunds from Audits of contract payments (Utilities, Telecommunications)

20. P&L Statement - Revenue • The total of your Budgeted Revenue, Cost Containment Activities and Revenue Generation Activities is the total income entered on the profit and loss statement

21. P&L Statement - Expenses • Your procurement organization will have both direct and indirect expenses. Some examples of direct expenses include: • Wages • Overtime • Travel • Fringe Benefits • Training

22. P&L Statement - Expenses • Examples of indirect expenses include • Equipment • Supplies • Contractual Expenses • Telephone • IT • Repairs • Utilities (Light, Heat, Power) • Rent

23. P&L Statement – Net Profit • Net Profit is the total revenue less total expenses and shows the contribution to the bottom line of the organization

24. P&L Statement – Breakeven Goal • The goal of every public procurement organization should be to cover their annual expenses by the revenue and cost savings achieved during the fiscal year

25. P&L Statement – Market the Results • By using a profit and loss measurement system, the results can be marketed in a format that elected officials and finance executives are familiar with and one they can appreciate (Roylance 2006)

26. Savings Must be Factually Proven • All figures used in the profit and loss statement must be accurate and factually proven • You must work with your finance executives to come to agreement on what will be considered genuine savings, and what will not • Documentation of savings and revenue generation activities should be of sufficient caliber to satisfy the scrutiny of external auditors

27. Example – 2008 P&L Statement

28. Rockland County’s Results • Rockland County’s results from tracking cost containment activities, revenue generation activities, and budgeted revenues and expenses were a net profit of over $1 million in 2008 • The Profit and Loss Measurement System was the subject of an article in an issue of Government Procurement Magazine

29. Examples – Cost Savings & Revenue Generation Definitions

30. Other Procurement Performance Metrics • There are many other Procurement Performance Metrics that can be utilized to track the performance of the procurement function • Utilization of such performance metrics will enable the Procurement Function to quantify results of business goals such as cost containment, contract compliance, training, use of technology and other value added benefits the procurement function brings to the organization

31. Other Procurement Performance Metrics • Europe and the U.K. are far ahead of the U.S. Public Sector when it comes to measuring procurements performance • The national government in the U.K. sets Local Performance Indicators for Procurement • Download the publication Local Performance Indicators for Procurement at: http://www.idea.gov.uk/idk/aio/1721848

32. Other Procurement Performance Metrics • Strategy Implementation - % of milestone activities completed in the organizations Strategic Plan • Skills Development – Average time per Buyer spent on structured training in procurement-related skills • Aggregation - % of corporate spend aggregated through annual term contracts • Aggregation – % of corporate spend aggregated through cooperative purchasing efforts with other public sector organizations

33. Other Procurement Performance Metrics • Sustainable Procurement - % of annual term contracts awarded following best practice on sustainable procurement • Local Government Market #1 - % of corporate spend placed with small and medium enterprises • Local Government #2 - % of corporate spend placed with non-profit and social enterprise organizations

34. Other Procurement Performance Metrics • Local Government #3 - % of corporate spend placed with ethnic minority businesses • Internal Customer Satisfaction - % of all responses either very or fairly satisfied • Supplier Satisfaction - % of all responses either very or fairly satisfied • Predictability – Average time from publication of official solicitation notice to contract signature • Energy Price comparison of gas, electricity, oil and water

35. Other Procurement Performance Metrics • Commodity goods price comparison – a “shopping basket” of 10 commodity goods • Average minimum cost of issuing an order –total cost from requisition to payment • Average Invoice value – Corporate spend divided by total number of invoices • Accuracy of deliveries - % of orders that were correct when received • Average spend per supplier – Corporate spend divided by the total number of suppliers

36. Other Procurement Performance Metrics • Percentage of corporate spend through electronic orders • Percentage of invoices received electronically • Percentage of corporate spend through electronic sourcing • Percentage of orders raised electronically • Percentage of invoices paid electronically • Percentage of corporate spend through P-cards

37. Other Procurement Performance Metrics • Minority Business satisfaction with the Procurement Function • Small and medium sized business satisfaction with the Procurement Function • Non Profit sector satisfaction with the Procurement Function

38. Sources for Additional Information • Marketing 101 for the Procurement Professional – NIGP One-day Class • Purchasing Performance – Measuring, Marketing and Selling the Purchasing Function (Roylance, D.) • Procurement Marketing – A Strategic Concept (Koppleman, U.) • Measuring Purchasing Performance (The Chartered Institute of Purchasing & Supply)