Texas Uses Purchasing Projections to Strike Better Deals

Texas Department of Information Resources collects purchasing information to improve vendor negotiations.

by / April 8, 2008 0
Strength in Numbers

n Texas, as we all know, everything is bigger - that includes the state's collective purchasing power. In fiscal 2007, public organizations that bought IT products through the state's cooperative contracts spent $993 million.

When a buyer negotiates with vendors, that kind of volume means power. "Our perspective is that Texas is a Fortune 500 company, and we expect pricing based on that," said Cindy Reed, the deputy executive director of operations and statewide technology sourcing for the Texas Department of Information Resources (DIR).

Reed's office drives a hard bargain, she said. "But we're never satisfied. We're trying to do better."

One tool the DIR uses to advance its pursuit of better pricing is the Planned Procurement Schedule (PPS), an electronic spreadsheet state agencies use to report planned IT purchases.

Launched in 2006, the PPS initiative remains a work in progress, though it's already yielding benefits. If the DIR achieves its next goal - collecting PPS data from nonstate public entities that buy through state contracts - Texas officials hope for even more leverage at the bargaining table.

The DIR created the PPS in response to HB 1516, a comprehensive IT consolidation bill passed by the Texas Legislature in 2005. The law requires the DIR to negotiate prices for IT commodities based on aggregate demand, and for state agencies to buy through the contracts the DIR negotiates unless an agency obtains a formal exemption.

Agencies complete the PPS biannually by indicating the IT purchases they plan to make during the next four quarters. By collecting and assembling the data, the DIR can predict when vendors will see demand for certain products and what the volume will be.

The DIR developed the PPS with four goals in mind. The first was to use the data to discover when different agencies planned to buy the same products and combine those purchases to achieve volume discounts. "The theory is that if we had five agencies wanting to buy computers at the same time, we could aggregate that under our contract and drive an even better price than what we have on our contract," Reed said.

A related goal was to assemble numbers the DIR could use in contract negotiations. Rather than simply assert that Texas should receive volume pricing because it's a large buyer, procurement officials could refer to the actual size of the buys that government agencies planned to make.

A third goal was to improve the mix of products included in state IT contracts. "If we saw 50 agencies were going to buy surveillance cameras in the next six months, and we didn't have surveillance cameras on our contracts, then that would give us a lead time - an opportunity to get out in front and put those contracts in place," Reed said.

Finally the DIR hoped to attract new customers. Although all state agencies must purchase IT products through the DIR state contracts, their purchases represent only about 25 percent of the money spent through those contracts.

Three-fourths of the expenditures come from nonstate public entities - cities, counties, K-12 school districts and institutions of higher learning. "We have approximately 4,400 eligible customers," Reed said. "About 150 of those are state agencies."

Nonstate entities don't have to use the contracts, but many do take advantage of the prices the state negotiates. DIR officials hope to attract even more of those voluntary customers.


Some Is Good, More Is Better
DIR officials also would like to convince those nonstate customers to submit the PPS in order to bring their planned purchases to bear during negotiations. "If you look at our block purchases, some of the largest are outside state agencies," said Dave Ballinger, manager of the DIR's Supply Chain Support Office. "If a state agency buying 500 units of a product is

good, an [independent school district] buying 1,500 units of that same commodity is even better."

The DIR is making progress toward its goals, but some hurdles still exist. Trying to develop aggregated buys is particularly challenging because the PPS isn't binding. "It's their best estimate of what they want to buy at the particular time they're filling out the form," Reed said.

Changes in budgets and plans may prompt agencies to postpone or cancel some of their purchases. That's a problem especially when smaller buyers win a discount thanks to one agency making a very large purchase, and that large purchaser changes its plans. "If you can't get a solid commitment from the anchor agency, then it makes it difficult to ink the deal," Reed said.

The DIR also had to change some of its processing because of aggregation. For example, a vendor who agrees to aggregate demand from several agencies may want a single purchase order rather than a separate one from each agency, Reed said. "Sometimes that causes challenges on the agency side. Who's going to pay the invoice, and how are we going to split that up?"

Despite those challenges, data collected through the PPS has helped strengthen the DIR's bargaining position, Reed said. It also has helped the DIR learn about products agencies want that aren't already covered by contracts, helping the department improve the mix of products in its supply chain, Ballinger said.

Potentially the DIR could aggregate purchases even further by using PPS data to discover when different agencies plan to buy products that are almost, but not quite, the same.

In some cases, officials at the DIR could convince an agency to change its specifications slightly - by ordering computers, for example, with slightly more memory - to match another agency's requirements. That could allow them to order more units of the same item. "I think that opportunity exists," Reed said.


More Than $100,000
Since introducing the PPS in 2006, the DIR has made several refinements. For example, the department originally required agencies to report all planned purchases. Now they report only upcoming buys of more than $100,000. "Some of the initial analysis we did indicated that's where the opportunities would be," Reed said. There was no point putting agencies to the trouble of submitting figures the DIR couldn't use effectively.

The DIR also improved the PPS user interface by adding drop-down menus. "That's probably the main difference between the first iteration and now," Ballinger said.

In a related project, the DIR created a data warehouse that collects information on IT purchases made via state contracts, as reported by the vendors. "That has allowed us to perform a lot of analyses that we haven't been able to do before," Ballinger said. "We can be somewhat predictive as far as what price they should pay for that purchase because we have all this historical data to back it up."

The DIR also reached out to nonstate public entities, inviting them to submit PPS data. "The sheer volume made it seem like a palatable idea to us," Reed said. The DIR has received some positive responses, but it hasn't reached the point where they're ready to submit the paperwork yet," she said.

If they haven't opted in, it's probably because those agencies are focusing their resources elsewhere and haven't yet made the PPS a priority, Reed said. "We're working on helping communicate the potential benefits and value to them, and we're hopeful that will help them make it a priority."

Until they do, it will be hard to quantitatively measure how much the PPS strengthens the DIR's hand when it negotiates with vendors since the figures it reports represent only 25 percent of planned purchases through the DIR contracts. "Because we bring so much more purchasing value that's outside of state agencies to the table, trying to differentiate between using the numbers from the PPS versus the aggregated numbers historically that the entire customer base of DIR represent, is difficult," Ballinger said.

Nevertheless, the PPS offers definite benefits. "I would say the information has been useful in our negotiations," Reed said.

 

 

Merrill Douglas Contributing Writer