Reengineer the State Procurement Process

The state should reengineer its procurement process to streamline its operations and achieve long-term cost savings.


Background
Texas state government buys more than $3.5 billion in goods and services each year. However, its process for making these purchases could be significantly improved, saving the state time and money.

This is the major conclusion of a study conducted by staff of the Comptroller s office, the General Services Commission (GSC), the Department of Information Resources (DIR) and consultants from Deloitte & Touche, an independent consulting firm. The detailed results of the team s study on reengineering the state s purchasing process will be released in February 1993.

The study will highlight the current process shortcomings, including duplicated effort, inadequate emphasis on quality, confusing regulations, excessive paperwork, frequent delays and inflexible procedures. An improved state purchasing process will benefi t state agencies, recipients of state services and taxpayers.

The report s preliminary recommendations show an estimated savings to Texas taxpayers of $200 million yearly over the next five years. At the same time, it would improve the timeliness and q uality of goods and services purchased by the state. Other benefits would include greater use of small, minority and women-owned businesses, higher state worker productivity, better information for planning and oversight and improved accountability for pur chasers, receivers and vendors.

Project Approach
The Comptroller s Texas Performance Review (TPR) worked with Deloitte & Touche to conduct a comprehensive review of the state procurement process from August to December 1992. Staff from the Comptroller s o ffice, GSC and DIR supplemented the Deloitte & Touche project team. A steering committee comprised of procurement professionals from more than 30 state agencies served as an advisory board for the project.

The project s scope included analysis and reengineering of GSC, DIR, the Claims Division of the Comptroller s office and the procurement-related functions of the Uniform Statewide Accounting System (USAS) operated by the Comptroller. The project also included documentation and analysis of internal procur ement processes of the University of Texas at Austin, the Texas Youth Commission, the Texas Department of Mental Health and Mental Retardation and the Comptroller s office, all of which served as volunteer test agencies in the project.

The project s scope did not include reengineering the internal procurement processes of state agencies and institutions of higher education, but did analyze the interaction of these customers with central state procurement functions. Project staff reviewed pertinent legislat ion and interviewed vendors and private- and public-sector organizations known for innovative or exemplary procurement operations.

The state procurement process was defined to include: procurement planning; the requisitioning of goods and services; the preparation of bid specifications; vendor selection and contracting, including initiatives related to disadvantaged business enterpris es; the preparation and processing of purchase orders; receiving and inspection of goods; accounts payable and cash disbursement to vendors; and reviews, approvals, authorizations and other internal controls.

Goals and Objectives
Based on background research and discussions with state procurement professionals, the reengineering team agreed on seven prioritized goals for the procurement process:

1. To support and promote agency business goals and strategies.
2. To procure goods and services at a lower cost.
3. To procure higher-quality goods and services.
4. To be more efficient, timely and customer-focused.
5. To increase the use of small, minority and women-owned businesses.
6. To generate better information to support the planning and management of the process.
7. To ensure an appropriate control environment.

The team evaluated the current procurement process in light of these goals and sought to design improvements to achieve them.

The project team also consulted with the steering committee, surveyed purchasing professionals in more than 100 state agencies, interviewed ten vendors and studied exemplary procurement operatio ns in a selected group of private- and public-sector organizations.

These activities yielded additional customer requirements for a reengineered procurement process. The reengineering process should provide automation support, emphasize quality, test and accredit products, account for full life-cycle costs, provide a supportive central organization structure and state procurement rules, align accountability and authority for purchasing decisions, avoid mandates, optimize turnaround time between purchase order and payment, improve vendor relationships, allow for vendor partnerships, provide for direct purchase orders to vendors and allow the state to exclude inferior vendors.

Principal Conclusions
With a few localized exceptions, the State of Texas has not taken full advantage of opportunities to improve its procurement process. State purchasing of goods and services remains a fragmented, labor-intensive, time-consuming and paper-bound process. The process is fraught with opportunities for error and delay. Some critical procurements have, in fact, been in process for years and still are not completed.

A complex patchwork of laws, rules, regulations and procedures wastes the time of users, suppliers and administrators, results in lower-quality goods and services than otherwise could be obtained, discourages small and minority-owned businesses from partic ipation, and suppresses innovation, excellence and effective service delivery.

A few representative examples from the report serve to illustrate the state s procurement problems.

A school bus vendor with 77 complaints on file remains on the state s bid list. An agency wishing to upgrade its current computer system needed 38 days to complete the required paperwork and reviews to justify the upgrade, even though the manufacturer was the only vendor able to supply it. Another agency has been trying to procure workstations for a major system for more than a year and has had to reissue invitations for bid three times. Finally, the GSC s Central Store items are on back-order with various vendors for an average of 63.5 days; the store manager routinely sends vendors 10 to 20 delinquent notices per month for items. Instead of using the store for convenience shopping, agencies stock-
pile and seek alternative sources for their supplies.

In all, Texas state government spends five and a half cents to process every dollar of purchases; the average processing cost in the private sector is one cent.

Given the customer-centered, goal-oriented direction for state government established by the governor and legislative leaders, a streamlined procurement process should be seen as an opportunity for cost savings and an opportunity for the state to do its many jobs better. Procurement is too important to remain a bureau cratic, paper-bound operation.
Many private companies and public-sector organizations have discovered that computer technology can be used to transform and simplify ( reengineer ) complex, time-consuming business processes such as procurement, as well as their supporting organizations. Organizations realize substantial benefits from such activities.

This is a particularly critical time for Texas to change its procurement practices. The statewide purchasing system is an integral component of the statewide accounting system, which is being upgraded to an accrual-based system. USAS will begin operation o n September 1, 1993. It will facilitate improvement in the purchasing process, and its efficiency also would be improved by procurement reengineering.


Recommendations
Drawing on information from sponsoring agencies, steering committee members and private-sector innovators, the project team developed the new design described in detail in the upcoming reengineering report. The report s recommendations would require organizational, operational and legislative changes.

These recommendations are interrelated and interdependent. They are parts of a whole rather than individual, stand-alone opportunities. Implementing the initiatives would require a substantial on going commitment of time, energy and resources from Texas state government. Texas Performance Review (TPR) believes such an investment is warranted.

Key elements of the reengineered process are described below. They provide a framework for state action in this area. Specific, detailed recommendations will be published in a separate report later in 1993.

A. The state should develop an integrated statewide procurement system to capture transaction detail on all purchases and to automate and streamline req uisitioning, receiving and payment activities.

A procurement transaction begins when a person making a requisition for a state agency identifies a need for goods or services and initiates a requisition to obtain them. Today, requisitioners face a maze of rules, procedures and paperwork even for the si mplest purchases.

Under the recommended system, a requisitioner could access an electronic catalog on a statewide computer network, enabling him or her to ascertain whether or not a needed good or servic e was available through a state contract, its price and other basic information. For these catalog purchases, the requisitioner would enter appropriate data into the system, including agency fund account and expenditure object codes.

This electronic requisition, once approved by agency management and accounting personnel, would generate a purchase order and an encumbrance (an accounting transaction earmarking funds for a specific purpose) in USAS. Most purchase orders would then be im mediately transmitted electronically to the vendor. In time, most requisitions would be satisfied by contract catalog listings.

Purchase order information would be instantly transferred electronically onto a statewide database. When goods or services were delivered, the agency s designated receiver would use the database to ensure that the goods were properly ordered. The receiver would then update the purchase order record to show that the goods or services were properly received, and an agency accountant would validate the fund source(s) for payment.

For most goods and services, the agency s electronic acknowledgment would constitute sufficient evidence of a valid liability to authorize payment. In other words, the electronic purchase order record, updated by the receiver s confirmation and an accountant s confirmation of fund source, would constitute an electronic voucher and an electronic authorization for the Comptroller s office to pay.

The Comptroller s Claims division would then pay vendors directly, based on these electronic vouchers. The data management features of the new process should enable the Comptroller s office to time payments to maximize Treasury float and discounts for timely payment.

The recommended system would serve as a framework for all state purchasing activities and as the central repository for all purchasing data. The system would support instantaneous placement of orders with vendors and direct payment to vendors immediately upon receipt of properly ordered goods and services.

This syst em should serve as the internal purchasing system for agencies without an automated purchasing system. Institutions of higher education and agencies with their own internal automated procurement and accounting systems would not need to abandon their curren t systems. The system should be designed to enable a seamless transfer of purchasing transactions from existing internal systems to the statewide system.

This reengineered system, with appropriate automated controls at the points of requisitioning, order ing and receiving, should substantially speed up the procurement process and eliminate millions of dollars of needless paperwork each year.

B. Texas should acknowledge the value of long-term business relationships with stable, competent suppliers. The state should develop several programs that will redefine fairness and facilitate agencies procurements.

Many of the concepts introduced in the reengineered system require a new definition of fairness to the state s procurement process. Fairness traditio nally has been defined in terms of providing a level playing field for all vendors, removing barriers to entry and maximizing the number of potential vendors in the interest of competition.

This definition places vendors interests ahead of the interests of the buying agency, its clients and taxpayers. It forces the state to do business with entities it knows little about and encourages vendors to maximize short-term profits rather than inves ting in long-term business relationships.

Competition and lo ng-term vendor relationships are not mutually exclusive concepts. This recommendation can be accomplished without sacrificing the critical goal of involving more historically underutilitized businesses as partners with the state.

C. Increased utilization of historically underutilized businesses must remain a priority of state procurement policy and should be a policy basis for the reengineered system.

D. The Legislature should give individual agencies greater authority to make the most appropriate purcha sing decisions, increase state-level technical and automation support for agency procurement functions and decrease state-imposed red tape and central involvement in individual procurements.

Decentralized requisitioning, purchasing and receiving functions at individual state agencies are focal points for the reengineering solution developed by the project team. Mandatory requirements that central agencies be involved in individual procurement transactions, based solely on a preordained threshold size or type of transaction, should be removed.

This recommendation would eliminate the Department of Information Resources (DIR) s current specification review functions and mandatory General Services Commission (GSC) open-market operations. Central agency involvement may be required in particularly complex procurements or in the event of an agency s repeated failure to properly execute its responsibilities.
The state should increase its use of automation tools such as electronic catalogs of contract items an d vendors, automated requisitioning and ordering, rule-based purchase authorizations and electronic approvals at the beginning of the procurement process. Central oversight agencies such as the Comptroller s office should use computer-assisted audit techniques for post-payment audits.

E. The Legislature should direct the General Services Commission s (GSC) Purchasing division to change from a process- and control-oriented central purchaser to the more supportive role of central contractor, standard setter, performance monitor and state-level procurement planning consultant.

In keeping with the general decentralization of procurement authority outlined above, a significant shift in the mission and organization of the state s central purchasing functions should be required.

State law should specifically define GSC s new role to include significantly increasing the number of goods and services available on state contracts, consolidating state contracting activity among a smaller number of vendors, deve loping longer-term vendor relationships, establishing a vendor and product performance evaluation program, creating technical assistance and consultative customer relations programs for agency procurements and expanding efforts to recruit and develop minority- and women-owned and small business enterprises.

To accomplish this shift in GSC s mission, the Legislature should authorize the use of and give GSC additional resources to deploy purchasers. These deployed purchasers would serve as customer serv ice representatives for state agencies by providing purchasing information and assistance as needed. Deployed purchasers should be able to execute purchases for smaller agencies who lack the expertise and staff.

To reduce overlapping responsibilities and duplication of effort in procurement planning, the Legislature should transfer DIR s planning functions to GSC. DIR s statewide planning functions and its technical assistance functions would be included in this transfer. This would consolidate procuremen t planning and procurement-related technical assistance in a single agency and eliminate problems caused by the current confusion of roles and responsibilities between these two agencies.

F. To enact the reengineered solution recommended by TPR, the Legislature should consolidate Texas purchasing laws into a single uniform procurement code.

The revision should not legislate procedure, but rather should legislate intent. The National Association of State Purchasing Officials advocates that a sound purch asing law should clearly express legislative intent without restricting the ministerial discretion of the procurement practitioners.

G. The Legislature should authorize a working group composed of staff from the Comptroller s office, GSC and Department of Information Resources (DIR) to oversee implementation of the reengineered solution.

TPR has developed detailed implementation plans which lay out step-by-step timetables for accomplishing the recommended initiatives. The projects range from informatio n systems implementation to policies and procedures documentation to reorganization of GSC, the Comptroller s Claims division and state agencies accounts receivable functions.


Implications
The reengineering solution would generate short-term benefits from initial shifts in organization and responsibility, with substantial longer-term benefits to follow once management information on state procurement patterns is available to increase the sta te s purchasing power.

Lower operating costs and reduced prices will be the most tangible benefits resulting from the reengineered state procurement process.

Fiscal Impact
Implementation costs
Although precise costs associated with reengineering the procurement process are difficult to estimate, TPR has made conservative estimates of potential costs and savings based on industry measures and prior state initiatives.

A substantial investment of time and money would be needed to implement the recommendations of the upcoming report. Design and implementation of a stat ewide procurement system is the principal, one-time cost. Based on conversations with potential vendors and a review of similar systems, it is estimated that a one-time investment of approximately $20 million over a five-year period would be required to im plement the new system. A breakdown of this cost is shown in Table 1.

To offset general revenue costs, the Legislature could require state agencies and institutions of higher education to share in the cost of the system and adjust appropriations accordingly.

Table 1 - Summary of Costs of the Reengineering Solution

FY 1994 FY 1995 FY 1996 FY 1997 FY 1998

Statewide Purchasing
System $ 0 $7,001,000 $5,100,000 $5,100,000 $ 975,000 Electronic Bid System 0 700,000 50,000 50,000 50,000
Electronic Data Interchange 0 200,000 20,000 20,000 20,000
Electronic Funds Transfer 0 35,000 8,000 8,000 8,000
Electronic Specification/
RFP/IFB Library 0 200,000 90,000 20,000 20,000
Statewide Purchasing
System Specification
Development 500,000 ________0 ________0 ________0 ________0

Total $500,000 $8,136,000 $5,268,000 $5,198,000 $1,073,000


Benefits from improved operations
If the reengineered process is as efficient as the private sector, the state could save 4 cents for every dollar purchased or $1.4 billion over a ten-year period. However, it is probably unrealistic to expect that all these savings can be achieved, and the estimates are much more conservative.

The estimates assume that increased efficiencies in the purchasing pro cess (for example, less purchases made on open market) and the centralization of accounts payable activities will reduce the need for procurement staff. This should save about $6.5 million during the 1994-95 biennium, based on the elimination of more than 580 full-time equivalents (FTEs) in procurement-related activities by the end of fiscal 1996. (See Table 2.)

In the upcoming report on the procurement process, Deloitte & Touche recommends closing GSC s Central Store. Estimates show that this would result in a savings of $1.8 million for the 1994-95 biennium. This issue has received mixed reviews from the agencies working on the project team. In other states, like Ohio, the experience has been positive. This issue should be examined by the Legislature.

The state also should benefit from the use of improved procurement technology to better manage the process (for example, to obtain prompt payment discounts) and save nearly $8 million annually beginning in fiscal 1996. (See Table 3.)
Table 2 - Summary of Savings from Changes in Procurement-Related Employment

Administrative Total
Savings to the Administrative Administrative
Fiscal General Revenue Savings to Savings to
Year Fund 001 All Other Funds the State

1994 $ 0 $ 0 $ 0
1995 3,774,000 2,714,000 6,488,000
1996 7,244,000 5,428,000 12,672,000
1997 10,534,000 8,044,000 18,578,000
1998 14,168,000 10,660,000 24,828,000

Change in FTEs FY 1994 FY 1995 FY 1996 FY 1997 FY 1998

Comptroller s Office 0.0 -4.0 -4.0 -4.0 -4.0
Department of Information Resources 0.0 -28.0 -55.9 -55.9 -55.9
General Services Commission 0.0 29.0 65.9 74.4 84.4
All Other Agencies and
Institutions of Higher Education 0.0 -297.0 -594.0 -891.0 -1,188.0

Total Net Change 0.0 -300.0 -588.0 -876.5 -1,163.5



Table 3 - Summary of Estimated Savings from Other Improvements in Procurement

FY 1994 FY 1995 FY 1996 FY 1997 FY 1998

Eliminate GSC s Central Store $700,000 $1,000,000 $ 0 $ 0 $ 0 Technology: Electronic Funds Transfer 0 0 215,000 312,000 418,000 Electronic Data Interchange 0 0 113,000 165,000 220,000
Electronic Receiving 0 0 1,033,000 1,074,000 1,117,000 Electronic Catalog 0 0 100,000 104,000 108,000 Electronic Bid System 0 0 343,000 357,000 371,000 Prompt Payment 0 0 6,115,000 6,360,000 6,615,000 Reduced Paper Costs __ ____0 416,000 433,000 450,000 468,000

Total $700,000 $1,416,000 $8,352,000 $8,822,000 $9,317,000

Benefits from reduced prices
Many companies in the private sector have lowered their costs for goods and services by reengineering their procurement process. TPR found instances of cost avoidance as high as 10 percent. Such performance would generate more than $4 billion for the state over a ten-year period. However, given the diverse nature of state procurements, the state is not likely to achieve this level of cost avoidance. Specific cost reduction initiatives, including price reductions br ought about by improved contracting procedures and increased use of bundled purchasing, should save the state an estimated $32 million in the 1994-95 biennium. A breakdown of the areas for potential savings is shown in Table 4.

Table 4 - Summary of Estimated Savings from Reduced Prices

FY 1994 FY 1995 FY 1996 FY 1997 FY 1998

Vendor Partnering $0 $16,735,000 $ 1,340,000 $ 1,390,000 $ 1,450,000 Quality of Purchases 0 670,000 700,000 720,000 750,000 Transportation 0 370,000 380,000 400,000 420,000 Additional Items on State Contract 0 7,090,000 10,640,000 14,190,000 42,565,000 Non-Contract Item Prices Reduced 0 7,120,000 7,120,000 7,120,000 7,120,000

Total $0 $31,985,000 $20,180,000 $23,820,000 $52,305,000

Subtracting costs from benefits, the state would net annual recurring savings of more than $30 million beginning in fiscal 1995.

TPR assumed a growth rate of 4 percent in the costs and benefits of a reengineered process implementation. Due to the dynamic price variations invol ved in the procurement of technology, commodities and services, TPR excluded growth rate factors in the calculations of reduced prices paid for procured goods and services.

Assumptions for estimated time requirements, quality rejections and so on are based on data extrapolated from a customer survey conducted as part of the reengineering effort, as well as benchmark data, normative data and information collected from intervie ws with state employees, suppliers, industry experts and best practices companies.

A more detailed explanation of the fiscal impact is provided in the forthcoming report on procurement reengineering. Table 5 shows the net fiscal change to the state. These savings depend on the rate at which the changes are implemented. This project would require an initial investment by the state to yield long-term cost reductions.

Table 5 - Net Fiscal Implications from the Reengineered Procurement System

All Funds Estimates
Procurement Fiscal Implementation Staffing Operations Procurement Net Gain Year Costs Changes Improvements Cost Savings to the State

1994 $ 500,000 $ 0 $ 700,000 $ 0 $ 200,000 1995 8,136,000 6,488,000 1,416,000 31,985,000 31,753,000 1996 5,268,000 12,672,000 8,352,000 20,180,000 35,936,000 1997 5,198,000 18,578,000 8,822,000 23,820,000 46,022,000 1998 1,073,000 24,828,000 9,317,000 52,305,000 85,377,000

General Revenue Fund Estimates
Procurement Net Gain to the Fiscal Implementation Staffing Operations Procurement General Revenue Year Costs Changes Improvements Cost Savings Fund 001

1994 $ 500,000 $ 0 $ 700,000 $ 0 $ 200,000 1995 8,136,000 3,774,000 1,109,000 9,759,000 6,506,000 1996 5,268,000 7,244,000 2,186,000 6,157,000 10,319,000 1997 5,198,000 10,534,000 2,309,000 7,268,000 14,913,000 1998 1,073,000 14,168,000 2,438,000 15,960,000 31,493,000

(Continued on next page.)


Table 5 - Net Fiscal Implications from the Reengineered Procurement System (Continued)

Fiscal Net Change Year in FTEs

1994 0.0 1995 -300.0 1996 -588.0 1997 -876.5 1998 -1,163.5

Implementation
To achieve these savin gs, the Legislature should authorize across-the-board reductions in state agency and institutions of higher education appropriations for procurement-related operations. Appropriations should be made to GSC for the employment of deployed purchasers (describ ed in detail in the upcoming report). As an alternative, the Legislature could authorize the transfer of existing procurement personnel and associated salaries from selected state agencies to GSC to reduce the need for additional appropriations.