California Implements Strategic Sourcing: An Interview with Project Director Terese Butler

"The last couple years -- which have been low-spend years for the state in this category -- the state spent about $90 million, and if you assume the state is going to spend 25 percent less than that, you can start to see the huge amount of savings"

by / August 1, 2005
Terese Butler
For nearly 30 years, the state of California has recognized and attempted to remedy shortcomings in its procurement system. "It has long been recognized," states the Procurement Summary of last year's California Performance Review (CPR), "that the state's procurement process is complicated, costly, time consuming and unable to ensure that quality goods and services are obtained for state programs ... Today, the state's purchasing system remains fragmented, subject to delays and unable to deliver cost-effective purchases. The system needlessly taxes the time of users, suppliers and procurement professionals with laws, policies and procedures in such a patchwork fashion that they conflict in many areas." The summary goes on to say that the actual costs of the procurement process are unknown but likely to be above the national average, and that simply awarding a contract can take more than a year because of complex process approvals. As a result, the state does not obtain prompt-payment rebates, and in fact must pay millions of dollars in late fees.

"Since the 1970s," says the CPR, "the state of California has recognized the need to streamline and innovate the procurement process," citing studies and recommendations from 1978, 1993 and 2000. "In all cases," it said, "only limited improvement has occurred."

About a year ago, California contracted with a company to begin development of a procurement process known as strategic sourcing. Strategic sourcing -- according to the state's procurement Web site, is "a process designed to allow the State of California to purchase the best products and best services for the best value. Using this purchasing approach, the buyer (California) analyzes what it's buying, what the market conditions are and who can supply those goods or services. The buyer then uses that information -- plus innovative contracting techniques -- to find the best values available in the marketplace."

Terese Butler is project director of the California Strategic Sourcing Initiative, and she discussed the initiative with California Report editor Wayne Hanson.

California Report: What is strategic sourcing, in a general sense? What differentiates it from other methods of procurement?

Butler: I would say what differentiates it is the amount of data analysis that we embark upon in order to determine the most appropriate way to source a product or service. And, what I mean by that is a much more accurate and thorough look at the historical spend that the state has in a particular commodity or service, and any nuances associated with it, that will help us to craft the proposal or procurement in a manner that grants the state the best return on its dollars.

The fiscal crisis that the state has been under for the last several years was probably the biggest driver. The Department of General Services was studying it and getting ready to put a proposal on the street to bring in a partner to help with strategic sourcing at the same time that the governor's California Performance Review was going on and the two pretty much dovetailed.

CR: Do other states use strategic sourcing and what kind of results have they obtained?

Butler: It is relatively new to the public sector. The private sector has been doing it for quite a while. However, there are some states that have embarked upon it. Oregon, our neighbor up north, has embarked upon strategic sourcing, they've sourced several categories. Pennsylvania has actually been in the game longer than California, and has had some really good results. Arizona is in the process of strategic sourcing. However, they're doing it independent of bringing a partner on board to help them out. And then there are a couple of other states who are in the process right now of hiring or figuring out how they're going to do sourcing -- Iowa, Indiana and Massachusetts. But it is very new. I'll be speaking at a conference this weekend and next month also. It's just a very relevant topic right now.

CR: Is California bringing in a partner?

B: We have. We have teamed with a company called CGI-AMS, and they have partnered with a company called A.T. Kearney, and A.T. Kearney brings the sourcing expertise, that's what they do. And CGI-AMS brings in the public perspective and project-management applications to the endeavor.

CR: What kind of response have you had from vendors and agencies?

Butler: Well, if you're a vendor who's been awarded one of our contracts, then we've gotten a very positive response from you. It has been a tough hill to climb, because the topic of the day is "let's get the best price for the state," and, typically, that means lower profits for companies that are going to do business with the state. It also means aggregating the spend, so there probably aren't as many opportunities for suppliers. However, in the proposals we have let and the responses that we've gotten back from the bidders, we've worked hard to insure that our small business and disabled veteran business enterprise programs are included in the strategic sourcing activities, and in the PC-goods contracts that we've awarded, two out the three suppliers have contractually agreed to have at least 25 percent of their business go to small business and 3 percent to disabled veteran business. So, to that extent, it's pretty good. Departments as a whole are excited about it because we're looking to give them better pricing.

CR: Now, is strategic sourcing the overarching strategy or will it operate concurrently with other methods of spend management? Is it, in other words, a very large umbrella program, or is it another sort of tool in the procurement arsenal?

Butler: It's another tool in the arsenal. We have a share and savings model upon which we've entered into with CGI-AMS. It's a benefits-based procurement model. So they aren't receiving any money up front from us and it's not time and materials. They get a percentage of savings. When we're determining what line of goods or services to procure we ensure that there's enough margin to not only have it be a great savings or value to the state, but then still compensate CGI-AMS for their effort.

CR: What kind of advantages have you noticed, are there projected or actual results you can talk about, in terms of some of the spend-management results?

Butler: Yes, we have several contracts in effect now. They include office supplies, of which we're looking for about 18 percent greater savings than what we had prior to this renegotiated contract, and we've already seen a savings of several million dollars in that category -- we've realized those savings over the last five months of data that we have. We also have one or two pharmaceutical proprietary drugs contracts that we've put into place, upon which we are starting to realize the savings from that category.

The two contracts that we just recently awarded were the PC-goods category, and the office-equipment/copiers category. And because there was such a pent-up demand for product, even though it's only been recently awarded, we already know basically how great the savings will be. The PC-goods category included several sub-categories. It included desktops and workstations, notebooks, printers, peripherals, monitors and PC servers. And we've awarded five of those six sub-categories and the savings look anywhere from about 15 percent for peripherals up to about 46 percent off of printers. What that means is that the state will be paying on average 46 percent less for printers than we did prior to strategic sourcing. If you blend that, it looks like about 25 percent savings on that entire category.

So, if you look at, historically, the last couple years -- which have been low-spend years for the state in this category -- the state spent about $90 million annually, and if you just look at that number, and assume the state is going to spend 25 percent less than that, you can start to see the huge amount of savings. In fact, we do have 32 million dollars' worth of orders in that category that we're currently in the process of filling for our customers.

CR: Will all state agencies be invited to participate, or be mandated to participate, and will local governments be included as well?

Butler: Local governments -- as long as their particular statutes or policies allow -- are allowed to use our contracts. We've always opened the door to them to use them. In the state-government sector, there are some departments that don't necessarily have to follow the state administrative policies. For example, the University of California System. If they'd like to use our contracts they can, if they don't wish to use it they don't have to. Not every one of these contracts is mandatory. However, in the PC-goods contract and the office equipment, those are mandatory contracts. And so, the idea is that the departments that fall under our jurisdiction will use the contracts.

The state CIO Clark Kelso -- last year in the strategic plan that was written and presented to the governor -- talked about the enterprise architecture for the state, trying to drive the state to become more common in its configuration -- not only from an interoperability aspect, but it's just easier with diminishing staff if we can all reduce the number of products that we are supporting. And this really aligned quite well with strategic sourcing.

CR: Will existing contracts be renegotiated or consolidated, is there some sort of plan to phase those out or in?

Butler: Yes, and once again it depends on the category or contracts that are out there. For example, we had a large PC-goods contract that expired. In the past we would have gone out to bid and replaced that. We aren't doing that in this case.

In other instances, for example, we have other leveraged vehicles that are available for departments to use and our WSCA contracts too. (Western States Contracting Alliance.) Those contracts aren't necessarily being canceled but what we've done is to mandate for state departments to use the strategically sourced contracts in lieu of those and then go to those other vehicles for products that aren't offered under the strategically sourced contracts.

CR: What commodities will be most affected, and is there a particular category of commodities that you're focusing on at the outset?

Butler: We've broken down the sourcing efforts into two waves, and the first-wave categories were those that were almost all commodities. So, in addition to the IT hardware/PC goods, we also have another procurement that is going through its evaluation process right now, and that's for enterprise servers and storage in the IT arena, and hopefully, that contract will be awarded by August. Cellular phones and services is currently under way. We have sourced pursuit vehicles, now we're in the process of sourcing the generalized fleet -- sedans, light trucks, etc. We're continuing to move on pharmaceuticals, and MRO, the janitorial-type products and the like -- we're getting ready to go out on the street with that contract also.

CR: Is information technology a big portion of this, or is it just a separate category?

Butler: It's a significant amount to spend for us. Cellular we spend a lot of money on, but, the IT is definitely up there. Two things helped to set the criteria for what we're doing in the first wave. One, we spend a lot of money on it, and secondly, it is a commodity, and something that's easily sourced, versus, say for example, services, utilities or rent that are not as easily done.

CR: You mentioned something about minority and veteran enterprises. How will the state balance achieving the best savings with including minority-business enterprises and women-business enterprises?

Butler: The state doesn't have a program for minority businesses. We have two separate programs, one is for the disabled veterans business enterprise (DVBE), the other is for small business. So those are the two programs upon which we're trying to insure that we still keep a good balance amongst work going to them, or sales going to them versus to our larger prime vendors. In some of the categories, there is an off-ramp from using them, and the off-ramp is that, if you're going to go to a small business, certified small business with the state, or certified small DVBE, you can do that, and it's OK to do purchasing with them. So that's one avenue.

Part of the effort has also been to identify how much of the purchasing over the last two years has been done by the state for the small businesses and DVBE, so we can see what the percentages are. Our goal on strategic sourcing is to ensure that we at least keep that amount of spend in that category or we increase it. That's why in the RFPs we give an opportunity for the vendors to do participation with the small businesses or DVBE -- in effect they get additional points in the bid for doing that. The other thing that we've done is when we've held our bidders' conferences -- and this is the first time that the DGS has ever done this -- when we hold the bidders' conference, when attendees register they tell us whether they believe, in this particular procurement, that they would be a prime or they would be a sub to a prime, and in the middle of the bidders' conference, we have a partnership effort. And the small businesses or DVBEs elect for a five- to 10-minute slot that they will have to talk with that particular prime, exchange information and talk about areas of potential partnering. And so we start the bidder conference and then we stop it for an hour, hour and a half, to allow this partnering to occur. We've received very favorable feedback from the community that this has been very helpful. So we're proud of what we're trying to do and that we keep small businesses and DVBE in the mix.

CR: Are you planning reverse auctions for some commodities, and, if so, have you selected a reverse-auction vendor of some sort?

Butler: We have just recently completed a reverse auction in the office equipment copier category and our supplier CGI-AMS, their partner A.T. Kearney actually has a reverse auction tool. Part of our contract with them has been the ability to use that tool at no additional charge to the state. So we have actually held a couple of reverse auctions -- one with copiers -- we're very pleased with the results that we got.

CR: Is there anything else that you'd like to say about the project, or anything I've missed that you consider to be important?

Butler: With regard to the IT hardware products we are sourcing, we didn't develop these configurations on our own. We used the California IT Council to set the configurations, get feedback and optimize the configuration so that it would meet the needs of the department. And then we vetted it to the entire CIO community so we're pretty proud of that.

CR: That's to help build the enterprise?

Butler: Yes, so departments would be willing to use these contracts., and the pricing we've seen has been better than any pricing we have ever seen for these types of products. We had brought in about 600 different POs from the last year of purchasing around the state. We did that because we needed to define the baseline -- what does the state pay today for these types of products? In order to pay CGI-AMS on savings, we had to be able to determine what's the difference? Not once did we see a PO come in with pricing with less than we've gotten through the strategic contract.

Most of these contracts are best value, it wasn't just about price, it is about total cost of ownership. So even if we have these contracts in place, and it's in print what we are going to pay, that price is not the entire picture.

CR: Where would people go to get more information about the state's strategic sourcing?

Butler: If you just log on to the DGS Web site, you'll find a link to strategic sourcing. In addition we have an e-mail address that people can use to get questions answered, as well as a number for contact information: 866.885.8344.
Wayne Hanson

Wayne E. Hanson served as a writer and editor with e.Republic from 1989 to 2013, having worked for several business units including Government Technology magazine, the Center for Digital Government, Governing, and Digital Communities. Hanson was a juror from 1999 to 2004 with the Stockholm Challenge and Global Junior Challenge competitions in information technology and education.