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California Strategic Sourcing in Context

"Other states are doing similar things, but California is so large that it has had to be much more deliberate, and in the last several months, this initiative has really gained traction, and found some success."

by / September 28, 2005
Alia Mendonsa has served as research director for the Folsom, Calif.-based Centers for Digital Education and Government for the past four years and has studied state and local procurement practices for the Center for over six years. The Center follows IT procurement, said Mendonsa, "Because as we try to understand the trends in the use of technology in state and local government we are mindful that there is a process that governments must follow to buy that technology. Although the technologies may change dramatically from year to year, the basic principles governments must follow to purchase those technologies do not and are a critical component to successful implementation."

Q: How does strategic sourcing fit into the context of various trends in procurement -- things like low price or best value?

Mendonsa: Strategic sourcing can be summed up as more aggressively pursuing the original intent of procurement departments. When you look at the functions of a procurement department, its job is to look at what the state needs as a government to function and develop contracts for those products and services through fair and open competition so that various agencies can conveniently purchase those items. Strategic sourcing is procurement.

What has changed is that with all the fiscal issues over the last few years, states are more aggressively pursuing and empowering the procurement departments to do their jobs in the best way possible. Some of the states are doing that independently and many are working with a consultant to identify which contracts should be renegotiated and will provide the highest return in savings.

I think its net effect is to move more of the state's procurement activity back into a centralized agency, and is empowering those individuals with the authority and ability to best leverage the state's purchasing power. You have a pendulum swinging in government from conservative to liberal. In good times, agencies tend to be empowered to do things independently. We've seen the same with CIOs, centralized vs. decentralized. And the pendulum is now swinging with procurement. Now that we're in more fiscally conservative times, we're back to centralizing procurement to try and get the most bang for the buck.

Q: What is strategic sourcing exactly? How does it differ from lowest price?

Mendonsa: Ultimately it is looking for the lowest price for the best product. You tend to get what you pay for, and don't necessarily want to go with the lowest bidder. You want the product that meets your needs for the best price. To me strategic sourcing breaks out into two areas.

First, it is consolidating the number of contracts through re-bidding, limiting the number of vendors on those contracts to a reasonable amount and obtaining the best price possible for those products and services. In some cases, existing contracts are renegotiated directly with the current supplier holding a contract for lower pricing based on current market barometers. It also includes compliance -- ensuring that agencies are using mandatory statewide contracts and not engaging in maverick buying -- buying contracted items from non-contracted vendors.

Right now, if you were to look at a state that has no strategic sourcing initiative, you may find 10 or 15 vendors on a contract, and really, only one or two are getting a significant amount of business, while the others are getting very little. The state's spending is dispersed across multiple suppliers and in addition the state is expending resources toward maintaining contracts with suppliers who get little to no business. Strategic sourcing leverages the state's buying power by channeling its spend through less vendors who are now guaranteed more business and therefore will be more willing to negotiate lower pricing.

Second, now that you've got the contracts in place, you are empowering the purchasing office -- through spend management -- to achieve further savings. You've got the lower priced contract, now you're going to corral all the agencies' purchases that they used to do individually through those contracts. So this agency needs 15 PCs, another agency needs 20 -- aggregate all of those purchases on a quarterly basis, and within your pool of contracted vendors for that product, request a bid for two or three hundred PCs. By doing this you are theoretically going to get an even better price than if the agencies had all ordered separately. This strategy has been successful in states that are doing this.

Q: Is California a leader in strategic sourcing? How does it compare with other states?

Mendonsa: It's hard to compare California with other states. You are talking about a state that --if it were its own country - has the fifth largest economy in the world -- it's very complex. They are not the only state headed in this direction. Other states are doing similar things, but California is so large that it has had to be much more deliberate, and in the last several months, this initiative has really gained traction, and found some success. California has successfully engaged in many new contracts through this initiative -- as many as other states using similar strategies.

Q: States and localities have long been able to buy from the federal GSA schedule. But I haven't heard too much about it for some time. Is that no longer an option?

Mendonsa: When we discuss GSA Schedules most are referring to Schedule 70 which is for IT Services. GSA Schedules are definitely still an option. But there are a number of things going on with it. For a while GSA was heavily promoting its use, and it is still their intention to get more governments using it. I just recently saw a report that they have increased state and local usage by 20 percent over the last year or so. So it has gained some traction.

But the core issues with adoption of Schedule 70 (or GSA Schedules in general) are that some states, because of their own purchasing laws, can't use it. It doesn't meet one or more competitive bidding requirements that they have. The vendor submits their best pricing in a proposal to the GSA and it is reviewed and either accepted or rejected. But the proposal is not formally compared against other vendors' pricing through a sealed bidding process and therefore doesn't meet formal bidding requirements for many of the states.

Q: So it's not a formal bid?

Mendonsa: Not according to a number of states, although the GSA may argue about that. According to a fair number of states, it doesn't meet their competitive bidding requirements.

Another key issue is that of pricing. While always under dispute, a lot of states think they can get better pricing on their own. In addition, GSA Schedules are generally thought of as having a ceiling pricing structure, meaning that the prices on contract are the highest price a government will pay and can be further negotiated when engaging in a particular project. So even if you use GSA Schedules as a state, you will most likely bid amongst schedule holders. In doing this, GSA Schedule 70 essentially becomes a pre-qualified bidders list for the states, not a contract that you would purchase directly from.

Several states have built their own schedules that are based on the GSA. California CMAS, TXMAS, Ohio's State Term Schedule (STS). They establish their own state contracting vehicle, based on the GSA Schedule pricing.

In the case of California, the DGS receives a one percent fee from the agencies each time they use a DGS contract. If California were to allow their departments to purchase directly from the GSA, the DGS would lose that fee for service which helps to fund them, so there is no incentive here to use GSA directly. This funding structure exists in other states too. So I suspect that contracting vehicles like CMAS are going to continue to exist. They are based on federal GSA Schedule 70, but GSA Schedule 70 will not be used directly for making purchases.

Local government processes -- because of their existing relationships with the states in cooperative purchasing -- have processes that are more conducive to cooperative purchasing, so if we are going to see any substantial increase in the use of GSA 70, it's probably going to be at the local level.

Q: If you look across different procurement and contracting methods, where do you think some of the best opportunities are for states like California in IT procurement? What should procurement officials be alert to?

Mendonsa: Across the U.S., we've seen a lot of the states renegotiating contracts in the context of strategic sourcing for things like PCs, servers, printers and hardware, along with office supplies, janitorial supplies, etc. The next phase -- and it's already happening in Washington state -- is looking at those big pre-approved IT services lists, and figuring out whether they really do need hundreds of pre-approved vendors. I think we are going to see those lists narrow down quite a bit, although they are a convenient way of doing IT projects, because they significantly shorten the RFP process.

In general, we're seeing wins in strategic sourcing, and we'll continue to see more of that. I think the next big IT area it will hit is telecommunications and cellular. I think networking hardware is another area on the list, and I think we will see IT services contracts with fewer vendors on the list.

Another development is that CGI-AMS just purchased Silver Oak Solutions. Silver Oak is the predominant consultant now on strategic sourcing. CGI-AMS and its competitor Accenture, have the two largest and most successful e-procurement solutions -- e-catalogs, e-bidding, reverse auction technology. So the merger with Silver Oak is going to be very interesting, because now we've partnered best practice process with a technical solution that automates that process.

Q: How would you assess California's performance in getting the best value for the taxpayer's dollar? And what tactics or strategies are there that you think could improve that?

Mendonsa: I think California had a slow start by virtue of how complicated the processes are -- there are hundreds of agencies in California, while other states have as few as 13. It is convoluted. It was clear that somebody had to take the lead to work with all the agencies, and I think Terese Butler has done an excellent job. You could actually see the change. The project was going nowhere, they put Terese in, and next thing you know, a bunch of contracts were successfully completed. And I think her leadership in partnership with a great team, was crucial to that result.

I think the state has picked up speed and has had some successes. I suspect there will be some confusion about these contracts and their impact on the CMAS schedules. That will need to be cleared up through training with both the agency buyers and the supplier community. And promotion to the agencies and local governments in the state so that they are all aware and are using the new contracts will be important too.

And then comes the issue of compliance. You can put together all these contracts, but it doesn't necessarily mean that the agencies will use them, even when they are mandatory use. And since, for example, you may have agencies that are brand-loyal to PCs that are not on the contract, you are going to have to make sure that they are using the state contract. So this is a potential issue to curtail quickly through a lot of communication with the agencies.

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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.

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