Best-in-class procurement operations can save a bundle, but they require investment, top-level support, and broad participation.
By Karla Hignite
While pens and copy paper are still in the domain of an institution’s purchasing function, procurement staff are as likely these days to spend time negotiating contracts for faculty and staff travel and health insurance or consulting with departments to help them gain inventory efficiencies. Those activities put a premium on data and relationship management skills for staff charged with helping the institution reduce costs and streamline supply chain processes.
Within the past 10 years in particular, technology has aided procurement’s evolution by introducing real-time commerce. “We no longer touch any paper,” says Rob Kelly, director of procurement services for the University of Notre Dame, Notre Dame, Indiana. The institution implemented its buyND e-procurement and sourcing system in 2003. Requisitions, bidding, and receiving all take place online. The move freed procurement staff from their time-consuming transactional role to focus on customer service and supplier relationships, concentrate on contract formation and negotiation, and better monitor university spend and other key metrics, says Kelly.
One critical measure by which procurement departments evaluate success is compliance, the amount of goods and services bought by institution customers through established contracts. Notre Dame has a largely centralized budget process, although once departments and units receive funds, they have a lot of independence as to how and where they spend resources, notes Executive Vice President John Affleck-Graves. Of the roughly $250 million Notre Dame spends annually on goods and services, approximately 40 percent is managed, influenced, or facilitated by the university’s procurement office. Staff are currently engaged in goal-setting to determine next steps. One likely objective will be to boost the spend actively managed by procurement to 50 or 60 percent within five years, says Kelly. “Some units purchase everything through us. While a large percentage of spend is well managed, a lot more opportunity remains.”
Other considerations factor into procurement’s role, including how to further an institution’s broader mission to be a good partner in its community—most notably by encouraging support of local and minority-owned businesses and greening the supply chain with environmentally sound products and purchasing practices. While the four institutions interviewed for this article represent large universities with sophisticated procurement functions, institutions of all types and sizes can learn something from the outlook and approach of these leaders.
New Era of Efficiency, Complexity
An important first step for every chief business officer, says Murner, is to critically assess where the purchasing function of its institution rests on the continuum from outputs to outcomes (see sidebar, “”).
On the outputs side, one way every institution can maximize its procurement dollars is to optimize purchasing and payment processes. The launch of a new enterprise resource planning system at the University of Colorado (CU) System became the catalyst for reviewing organizational structures, resulting in consolidation in 1999 of procurement and payables functions for the university’s system administration and its three distinct campuses. Sandy Hicks, assistant vice president and chief procurement officer for the service center, has been with the university for 27 years. She oversees CU’s entire $500 million annual spend. Because each campus is unique, says Hicks, a lot of up-front work was required to blend staff and ensure that all areas of commodity expertise were represented among the center’s purchasing agents. The center is a true service function, with fees assessed to each campus for services provided. That puts the onus on Hicks and her staff to provide value to customers.
In part, value is achieved through efficiency and by driving down costs with contracts that increase overall volume for suppliers. Instead of separate contracts for Boulder’s school of law or Denver’s medical center or the fast-growing campus in Colorado Springs, each institution now benefits from the contracts developed systemwide, explains Robert Moore, CU’s vice president for budget and finance. In 2007, Hicks hired a strategic sourcing manager to strengthen and streamline university contracts and improve customer satisfaction. “In nine months we saved about $500,000,” says Hicks.
Having a central service center has also allowed the university to identify redundant spending. In one example, two campuses had plans to hire consultants to assist with separate branding initiatives at just the time that the system was focused on a centralized branding effort. “We were able to stop individual campuses from moving forward with their own projects prior to resolving the systemwide initiative,” says Hicks.
Even as the procurement profession has uncovered new efficiencies, it has grown much more complex. Each year George Mason University, Fairfax, Virginia, purchases more than $80 million in equipment, supplies, and services. When Maurice Scherrens, senior vice president, joined the staff at GMU in 1977, most goods were purchased via state contracts, with little delegated authority to individual institutions. As the years have gone by, the state has granted greater leeway to procure higher thresholds locally. Big changes came in 2005 with implementation of a statewide electronic procurement system, eVA, through which all vendors interested in doing business with Virginia public agencies and organizations must register.
Another significant shift at GMU has occurred with the type of services that university customers are looking to procurement staff to provide. Competitively bidding and facilitating third-party arrangements for developing and managing an array of highly complex procurements—including public-private projects such as faculty and student housing and a hotel conference center—are increasingly in the purview of procurement staff. “We in essence have become the drivers of these projects based on our strong network of relationships with third-party providers,” says Scherrens. One huge implication of this trend has to do with what it requires of procurement staff. “This core business area raises legal issues that procurement has not dealt with in the past,” notes Scherrens, “so we need staff to become much more knowledgeable about what they legally can or cannot do in these innovative contractual relationships.”
Procurement staff at the University of Pennsylvania, Philadelphia, are likewise expected to provide expertise. In his current role as chief procurement officer, Ralph Maier is responsible for the university’s $1 billion annual spend. He has witnessed a significant shift in his profession during his tenure at Penn. As part of the university’s division of business services, procurement has “progressed from a bureaucratic necessity to a strategic business partner,” says Maier. One of his bigger challenges these days is addressing all the requests he receives from schools and centers that want his department’s help in process improvement initiatives. For examples, Penn’s veterinary school recently asked for help in redesigning its inventory management system for pet supplies.
According to Craig Carnaroli, Penn’s executive vice president, the university’s strategic view of purchasing emerged in the mid-1990s from a renewed focus on cost-containment efforts. A task force recommended making a substantial investment in technology and systems infrastructure and fine-tuning business processes. That initiative gave rise to Penn’s integrated Web-based financial and e-commerce system and a hard-nosed approach to leveraging dollars spent institutionwide for goods and services.
That same scrutiny has continued to the present day and has netted more than cost savings. A side benefit of the increased attention that Maier must pay to documenting internal controls as required by SAS No. 112 is that critical review of how bills are paid led to improvements in the payment cycle and uncovered new opportunities to streamline other processes.
A prime example is staff and faculty travel, previously treated as an area of reimbursement rather than procurement. As of July 2008, travel procurement and Penn’s corporate business card programs started reporting to Maier instead of the controller’s office. “This change,” says Maier, “enabled us to redesign this business process to separate payment of suppliers from payment to individuals.” By partnering travel with purchasing services, the sourcing team can bring to bear their contracting expertise and e-commerce tools to assist travel services in negotiating new contracts with airlines, hotels, and car rental providers. Publications and mail services are now also in the domain of Penn’s supply management group.
In general, the higher education culture often resists mandates, even though—in the case of procurement—increased compliance rates almost without exception translate into greater savings for an organization based on higher volume generated for suppliers. Here are some ways to get purchasers on board:
Maintain reasonable flexibility. Before coming to Notre Dame, Kelly was in supply chain management at Honeywell, where he focused on inventory management, waste reduction, and standardization. He is the first to confirm that some stark differences exist between the corporate sector and higher education with regard to procurement practices. “At Honeywell, if you were told you were getting a Dell, you got a Dell. Here, if someone wants an Apple and has reasonable justification for it, we honor that,” says Kelly.
“We don’t aim to be 100 percent compliant, but we still need to strike the right balance,” says Affleck-Graves. Current analysis underway at Notre Dame will help procurement staff better understand who is not buying from established university contracts and why.
Affleck-Graves, who spent 15 years as a professor and was department chair before moving into university administration, knows that a more relaxed spending mentality is often prevalent among faculty. The tension that exists, he explains, means walking that narrow line between the negative impact of a too-strict procurement system on a professor’s research and an adverse effect on the budget when goods and services are not acquired in the most efficient manner. “At the end of the day,” says Affleck-Graves, “our job is to educate students and conduct research that will change the world. It shouldn’t be my aim to try to save $100 if that somehow impedes a professor from being the best teacher possible. At the same time, those $100s can add up.”
Craft competitive contracts. Kelly adds: “Our philosophy is that if we make a great contract, people will use it.” He points to Notre Dame’s office supply and scientific supply contracts as gold standard examples. “We worked hand in hand with suppliers to put together customized approaches offering competitive prices for university customers. Those partnerships have been bolstered to the point where we are seeing 80 to 90 percent compliance with those contracts,” says Kelly. He and his staff are counting on the confidence that university employees have in those contracts to push forward in other areas. “The first and most important point is great pricing,” says Kelly. “We have a sophisticated user base. [Our customers] are going to shop around and compare rates in our contract with what they can get elsewhere. That gives us leverage to challenge our suppliers on pricing,” he says. Suppliers must also exhibit exceptional service and efficiency. “If they can’t deliver products on time or are seen as unresponsive to quality issues, that dooms the trust of our customers.”
"Our philosophy is that if we make a great contract, people will use it."
Rob Kelly, University of Notre Dame
At Penn, Maier and his staff also compete against the notion held by some that they can find a product cheaper somewhere else. “Our job,” says Maier, “is to help others focus on not only the lowest cost they can get but also the least total cost to the institution.” Since mandating compliance is difficult to do, Maier takes a different approach. “We engage in subtle marketing acceptance to help others see that it’s in their best interest to use the technology and contracts we’ve put in place.”
Prove the point. Hard data can help make the argument for the need to comply. As Carnaroli explains, careful review of who is bypassing the system provides the rationale to approach a particular department head and say, “Do you realize you spent $300,000 more than necessary this past fiscal year?” That approach can make procurement staff unpopular at times, admits Carnaroli. Yet, it’s incumbent on purchasing departments to help others understand how dollars are spent. “As a starting point,” he suggests, “if you can show your deans that in the past year they paid $20 and $5 for the same product, then you can begin to bring everyone together to better understand the problem.”
It’s usually even more complex than that, notes Maier. “For any number of items, we can see the same product being bought from six different suppliers for eight different prices, simply because a sales representative for one company might offer a better price to a researcher who is buying more,” explains Maier. “What we buy, how, and from whom, are key drivers in managing our total spend.”
Setting Specific Goals
With regard to outcomes, two of Penn’s top procurement priorities—cost containment and staff performance—are inextricably linked as far as Maier and Carnaroli are concerned. “We track staff salary and benefits and procurement cost savings to develop a ratio of total compensation to institutional savings,” explains Maier. From July 1996 through June 2006, Maier and his staff documented a financial return on investment of $88.7 million as a result of cost-containment efforts. Based on an aggregate departmental annual operating budget of $9 million during the 10-year period, that accomplishment translated into a 9:1 (ROI) ratio. In June 2006, purchasing services launched a new four-year, $50 million cost-containment initiative to further improve its financial ROI, with a goal of achieving a 15:1 ratio by 2010.
The initiative has already achieved nearly $40 million in documented savings resulting from Penn-negotiated contracts as well as collaborative buying opportunities with external partners such as the Educational and Institutional Cooperative Service Inc. (www.eandi.org), a not-for-profit buying cooperative established by members of NAEP.
Mission Beyond Metrics
As the procurement function has matured and evolved from transactional to strategic in approach, it has also internalized the broader mission and vision of the institution. This is evidenced by increased attention not only to achieving the best possible price but also to ensuring that the institution is a good and responsible neighbor in the global and local marketplace.
In line with a growing number of institutions, Notre Dame works with vendors to promote and competitively price sustainable alternatives among available supplies of goods and services and to increase the visibility of environmentally-friendly alternatives on its e-procurement system. Staff are likewise in the process of establishing a database of participating local and minority- and women-owned suppliers to encourage customers to increase business with these firms.
Similarly, CU’s procurement service center recently launched an online database so that users can easily find local and small business suppliers. Center staff also meet quarterly with sustainability officers from all campuses to discuss green purchasing policies and practices and how procurement can do more to green the supply chain.
GMU tracks its volume of purchases from small businesses and from women- and minority-owned providers. While the state has certain requirements for the spend in each of these areas, GMU has its own aspirational goals above and beyond those, notes Bill Hardiman, director of purchasing. “We pinpoint specific product and service categories where we aren’t spending enough and then use that data to solicit business with these suppliers,” says Hardiman. He and his staff are likewise working closely with GMU’s sustainability department to develop specific policies and procurement goals.
In addition to encouraging suppliers to identify products and services that promote environmental stewardship, Penn’s procurement staff try to make a real difference on the ground. For example, the university negotiated discounts with Penn’s office product suppliers for consolidating orders as a way to reduce the number of trips to campus, thereby minimizing associated carbon emissions.
Equally important to Penn is making a positive contribution to its surrounding community through socially responsible purchasing. In FY08 the university spent nearly $90 million locally—approximately 11 percent of its annual spend—and another $80 million (about 9 percent) on goods and services purchased from minority business suppliers. “One concern that emerges when we talk about strategic leveraging and consolidating our buy with fewer vendors is that you don’t want to hurt your local economy in the process,” says Carnaroli. “Our goal is not only factoring in the cost of doing business, but also what we do to create jobs in our community.”
To address issues of cost containment and economic inclusion, procurement staff began brainstorming how to leverage the horsepower that a national corporation brings to supplier participation from local women- and minority-owned businesses. The idea of a majority-minority partnership emerged. The university first tested the idea with its office supplies contract, pairing its corporate partner—the majority contract holder—with a local minority-owned supplier in west Philadelphia. The local supplier initially serviced the agreement by providing deliveries to campus.
“Over time, we flipped the relationship,” says Maier. The local minority-owned supplier is now the majority partner. It owns the contract, manages sales and customer support, and fulfills the orders while leveraging the corporate partner’s buying power and logistics. “The current five-year contract provides security in the relationship and leverage in the marketplace to obtain other customers, allowing our local minority-owned supplier to expand its business base,” explains Maier.
So what’s in it for the big guy? As Maier explains, the partnership gives its corporate supplier the opportunity to meet its own diversity goals. And, while it initially forsakes some market share, it can recoup some of the lost volume by helping to drive more business to the contract through other customers.
As the broker in an institution’s supply chain, procurement staff must always balance pleasing suppliers with satisfying campus customers. At Penn, adding value and increasing return on investment for stakeholders—whether suppliers, senior management, or customers throughout the university’s schools—requires Maier and his staff to continually evaluate what they do. Foremost, they assess operations with an eye toward answering, “What’s in it for me?” for each customer, says Maier. For the university community, that means helping preserve the operating budget by delivering lower costs, streamlining and simplifying order and payment processes, and providing better training and support. For suppliers, increasing their market share is a primary goal, along with making it as easy as possible for them to conduct business with Penn.
One way CU’s procurement service center advances its relationships between vendors and customers is by hosting an annual supplier showcase on each campus. At Notre Dame, strong relationships with suppliers have created additional benefits beyond price discounts. For example, these strategic partnerships have resulted in making discounts available to employees and alumni, collaborating on key initiatives such as sustainability, and offering internship opportunities for students. “We continually look to elevate the level of service and commitment of our key suppliers, because we understand the importance of establishing long-term relationships,” says Affleck-Graves. “In return, we need to be a reliable partner to our suppliers.”
Perhaps the best way to boost institution support of supplier relationships is by establishing the trust of internal customers to further drive support of vendor contracts. Moore credits the outreach efforts by CU’s procurement service center to individual units on each campus as critical to fostering that kind of trust. “When Sandy and her staff meet with departments,” he says, “they don’t start a conversation by raising concerns about purchasing practices. Instead, they go to learn all they can about the specific needs of each department and how they can help.”
For Scherrens, the one expectation from which GMU procurement staff can never deviate is their primary objective of instilling confidence throughout the university in procurement’s ability to aggressively and impartially get campus customers the most cost-effective rates possible for whatever they need. What that requires, says Scherrens, is a can-do culture. “Instead of telling faculty and staff why they can’t buy what they want, our job is to tell them how they can legally purchase it,” adds Hardiman.
Staying on message is paramount. “You can have the best technology and processes, but at the end of day, communication will always be central,” says Affleck-Graves. “Suppliers want higher prices and greater volume, faculty want lower cost and instant service. Procurement has to make each of those parties come to realize what is possible,” he adds. “Unless communication with university customers and suppliers is strong, it doesn’t matter what systems or policies you have in place.”
KARLA HIGNITE, Kaiserslautern, Germany, is a contributing editor for Business Officer.