Refining Procurement Processes for Big Gains

WHILE FINDING THE FUNDING for new projects is often one of a city’s biggest challenges, how well those monies are spent is equally important, as it has implications for the balancing of city budgets, provision of services to citizens and crafting of tax policies. In smart cities or smart states, procurement, which includes activities such as purchasing of goods and services, writing the specifications, calling for and evaluating bids, is a continually evolving function.

City administrators constantly grapple with issues that hinder efficiencies in procurement. Limited staff resources and time constraints are common obstacles. Contracts expire regularly for purchasing supplies that need to be replenished. If time is a constraint, such as a rush to spend an allocated amount by the year-end deadline, officials have to decide whether they realistically can float an RFP (request for proposal), invite bids, evaluate them and award a contract in good time.

“The biggest pain point that cities are starting to address now or come up against is procurement,” said Dominie Garcia, smart cities program lead at Battelle. “Their procurement processes are slow and cumbersome, and beholden to a lot of legacy contracting and policy rules and processes that may not be appropriate for very quickly developing and evolving technology.”

BENEFITS OF COOPERATIVE PROCUREMENT

Cooperative procurement is one solution, according to Tammy Rimes, executive director of the National Cooperative Procurement Partners, a nonprofit association of procurement professionals. Here, a city could piggyback on another city’s contract for similar products or services further along in the procurement process or already awarded. The addition would be entitled to the same price and other terms of the contract. U.S. law permits cooperative procurement. Of course, cities have to do their own due diligence and legal groundwork beforehand.

Rimes listed other areas where cooperative procurement could bring benefits. One big plus is that it helps cities leverage the gains of bulk pricing as orders from multiple agencies are bundled together. It is especially useful in the provision of emergency services, such as in the procurement of fire extinguishers. It also serves as a ‘gap filler,’ when a city needs an item that is not covered by an existing agreement and it cannot justify going through a time-consuming bidding process to get it. Also, some orders are too small to invite bids. “A purchase order costs $167 on average. What do you do if you need a $50 part?” asked Rimes. Here, the city could piggyback onto the contract of another city that has ordered the item.

Cooperative procurement is especially useful for maintenance contracts, such as for vehicles or other equipment. In many cases, cities enter into multiple maintenance contracts for equipment they may have bought at different times, such as electronic equipment. That clearly leaves room for wasteful expenditure. “Maintenance contracts are money spent every year but not really managed,” said Rimes. “This is an invisible expense.” In a presentation she made at the Smart Cities Week in October 2017, she offered the example of the University of California, which recently consolidated equipment maintenance contracts across its educational system. Early results in a pilot program at one of its 10 locations — the University of California, San Francisco — showed savings of $257,000. University-wide, the potential annual savings are a projected $30 million.

In one model similar to that of cooperative procurement, states come to the aid of their cities. In Illinois, the department of information technology floated an RFP in January 2017 for a statewide smart street lighting requirement. Once that contract is awarded, it will allow all city municipalities across the state to use it for their requirements, without having to renegotiate prices or other terms.

OUTSOURCING AND JOB-ORDER CONTRACTS

Outsourcing select services such as inventory management could also bring big savings to cities or counties. Here, one case Rimes cited was that of the County of Salt Lake in Utah, which implemented a fleet inventory management system for some 4,000 pieces of equipment, from chain saws to fire trucks. Instead of owning and managing a large inventory of parts worth between $700,000 and $800,000, it wanted to pay for parts only when it needed them, and brought down its inventory carrying cost to zero. The county outsourced to a third party, and sharply cut the number of monthly invoices from 3,000 to 4,000 to three or four. Moreover, it raised productivity and eliminated the obsolescence of parts that would occur in its own warehouses. “Most cities have a warehouse with all those parts,” said Rimes. Another way out of conventional procurement practices is job-order contracting. Here, a city would go through the usual solicitation process, but set up a contract in advance so that whenever a job comes up — fixing a leaky roof, for example — the service can be procured without loss of time. “I can have the contractor walk the job with me, and agree on the scope and price catalog,” said Rimes. The County of Sacramento in California has demonstrated gains from such job-order contracting since 2003, and has been able to roll out projects in four to six weeks instead of the normal four to six months. Job-order contracting is ideal for small projects, emergency work and repetitive work.

WHAT VENDORS GET WRONG

Procurement officials in cities often encounter disconnects with vendors of goods and services. Vendors try to sell their wares without trying hard enough to understand the broader issues that cities face, according to Hardik Bhatt, who until recently was the CIO of the state of Illinois, and previously served as CIO of Chicago. Bhatt has led several smart-city initiatives in Chicago and at the state level as well. “Vendors could also share ideas in helping city or state administrations overcome some commonly faced challenges in introducing new technology such as with regulation and procurement,” he said. Vendors sometimes do not spend enough time to understand a city’s problems. Usually, “vendors try to take their solution and fit it onto a problem. They will tell me, ‘This is my solution. Let’s see if you have a problem that I can help you solve,’ as opposed to, ‘Tell me what your problems are, and let’s work jointly to find solutions.’”

Secondly, especially in the smart-city or smart-state space, cities are tackling large initiatives like smart street lighting or smart trashcans. These are often not broken down into smaller pieces for the municipality to take on. Instead, the recommendation is a broad shift such as infrastructure changes and creating citywide Wi-Fi. Remember that governments can change based on their election cycle. Try to see what can be done within two or three years and then create some sustainability that can withstand a potential change in the administration.

Here are some questions to answer: How do you identify the regulatory changes that have to be made to accompany new initiatives? How do you finance these large projects or show ways to finance them? How do you, as a government, overcome the procurement challenges you face? When vendors approach city officials, ask them to answer these questions, not merely to sell their technology.

It is also important that vendors speak “the same vocabulary” as the mayor as they make the business case for a particular investment. “The business case must have something that the mayor or the governor could use to sell it to their own stakeholders,” said Bhatt. “They have to sell it to their legislatures, their constituents, their departments, unions and others.”

However, some issues that dog the public sector procurement function do not have easy solutions. According to Rimes, the average procurement official in government is more risk averse than his or her private sector counterpart. That will be an impediment to procurement and it can slow down the process. It also creates a little bit of “a paranoia factor,” she said. Rimes listed the typical concerns in the procurement official’s minds: What will be the public perception? If this came out in the newspaper, how will it look? Will it be challenged in a court of law?

All said, the size of the opportunity is huge to make government spending more efficient. State and local governments in the U.S. spent $2.7 trillion on procurement in 2014, according to Rimes. Of that, local governments such as cities, townships, counties, school districts and special districts accounted for $1.5 trillion, with states making up the remainder. Together, states and local governments will spend $3.7 trillion annually by 2024, she projected.

INVOLVE PROCUREMENT EARLY ON

In general, government procurement in U.S. cities goes by the book. “We have very strict rules and regulations regarding public procurement,” Rimes said. “That is why people often complain that we are so slow. We have to be transparent, open to competition, etc.”

At a national level, procurement professionals generally follow guidelines set by the Universal Public Procurement Certification Council, a certification agency. At state and city levels, procurement rules and regulations vary, such as on spending limits for procurement officers. For example, Rimes had contract signing authority for up to $1 million in San Diego, Calif.

Purchasing departments may end up being blamed for delays or other lapses that occur because they were not involved in the process from the beginning, may face pressure to rush through orders, or if they were bypassed by other departments. The right way, of course, is to involve the procurement department from the beginning in making purchasing decisions. That would allow the procurement department to do the necessary research and follow the rules. “Many times they are not included in the ... meetings in the mayor’s office,” said Rimes.

When journalists report on government lapses in procurement, it is because an end-user department that was not properly trained in procurement made the unfortunate decision, Rimes added. “Purchasing is usually the one team that can keep you out of trouble, keep you out of the newspaper and help you get what you need,” she said.

“They’re a crucial member of the team, but are sometimes seen as transactional, rather than being strategic and proactive.”