Industry Perspective: The cost for goods and services is the most significant expense for most organizations, including IT enterprises. Here’s what to consider before jumping into cooperative purchasing.
Editor’s note: Bill Shawver is the chief procurement officer for Miami University of Ohio. Jim Bard is a principal with Accenture Management Consulting’s operations practice
With the challenge to balance flat or declining budgets while maintaining service levels and competitive excellence, government and higher education financial executives are looking at every available option to be more efficient. Aside from salary and benefits, the cost for goods and services is the most significant expense for most organizations. As a result, procurement departments have an opportunity now more than ever to play a critical role in driving down the total costs of purchased goods and services.
Like the departments they serve, many procurement organizations are losing positions as a result of budget cuts, and have fewer training dollars to build their remaining employees’ procurement capabilities. This environment has put a premium on doing more with less. One strategy being considered more often these days is the use of cooperative purchasing agreements.
As background, cooperative purchasing agreements are typically developed through a competitive process that is led by a designated government entity. They generally do not include committed volumes (e.g., they result in indefinite date indefinite quantity ([DIQ] type contracts), but may contain volume-based pricing/rebate structures to allow increased savings as overall contract usage increases. Cooperative purchasing agreements have the potential to provide better pricing based on aggregated volumes, as well as to dramatically reduce efforts by procurement organizations to source, award and administer contracts.
With the option to choose from many cooperative purchasing agreements that exist for any given category of goods or services, it can be overwhelming for procurement organizations to identify, assess, and determine if using such agreements is a good fit for their organization.
We have identified eight steps to help procurement departments effectively evaluate cooperative purchasing agreements:
1. Obtain leadership and legal counsel’s support to use cooperative purchasing agreements when the procurement organization can show that it represents the best value approach for a given category.
2. Develop a solid understanding of internal customers’ business needs, item specifications, historical total costs, and future purchase volumes for categories being sourced to provide a good baseline for comparison.
3. Identify potential cooperative purchasing agreements when developing the sourcing strategy for a category, especially smaller categories that are in the bottom 20 percent of the spend. Some examples of cooperative purchasing agreements:
a. Educational & Institutional Cooperative Purchasing (E&I)
b. Minnesota Multistate Contracting Alliance for Pharmacy (MMCAP)
c. National Intergovernmental Purchasing Alliance (NIPA)
d. National Joint Powers Alliance (NJPA)
e. The Cooperative Purchasing Network (TCPN)
f. U.S. Communities
g. Western States Contracting Alliance (WSCA)/National Association of State Procurement Officials (NASPO)
The National Institute of Government Purchasers maintains a list of cooperative purchasing agreements on their website. They also maintain links to most states’ central procurement authorities, which typically have listings of statewide agreements (listing by state).
4. Evaluate identified cooperative purchasing agreements and develop a short list of potential best value solutions. Factors to evaluate include scope, geographic coverage, contract duration (including available extensions), awarded suppliers, requirements/costs to use (if any), pricing compared to baseline total costs, terms and conditions, and the competitive process to see if it meets applicable statute, rules and policies.
5. Contact suppliers on short-listed cooperative purchasing agreements to negotiate terms and conditions, and to discuss options to lower the total costs and additional pricing discounts/rebates (especially if you can provide committed volumes or have a concentrated delivery range).
6. If a cooperative purchasing agreement provides the best-value solution, prepare the business case and gain approval from leadership and legal counsel to award the contract.
7. Communicate to users the availability of the new cooperative purchasing agreement and how to best use the agreement.
8. Designate a procurement resource to manage the cooperative purchasing agreement, including monitoring the supplier’s performance, tracking accuracy of pricing and rebates, resolving escalated issues, assessing competitiveness of contract annually, and following the end date of the contract to ensure continuity of supply.
Although cooperative purchasing agreements are not the best-fit solution for every situation and category of goods and services, government and higher education procurement departments have an opportunity now more than ever to evaluate their use to help drive down total costs and free up resources for mission-critical operations.