Sourcing in the States

Like many newly elected governors, Minnesota Gov. Tim Pawlenty came into office in 2003 determined to make state government run more efficiently. Pawlenty launched an ambitious initiative that he dubbed “Drive to Excellence.” Dana Badgerow, commissioner of administration, describes the initiative as a “comprehensive reform of the executive branch to look at all our activities from an enterprise basis, removing the silo effect.”

Badgerow credits an inclusive governance structure for generating the buy-in necessary to make the reforms of the Drive to Excellence accepted and implemented across more than 100 state agencies. Badgerow chairs a sub-cabinet consisting of cabinet secretaries representing most of the largest agencies in state government. She notes that her fellow committee members are enthusiastic about bringing about reform – not only in words, but also in deeds.

“They don’t see the Drive to Excellence as a series of meetings that are a bureaucratic nuisance, but instead they understand that together we are instituting fundamental change,” Badgerow says.

Badgerow believes the best testimonial of the critical role that the Drive to Excellence has played in reshaping government operations is a recent request from a department head who had never participated in the initiative to join the sub-cabinet leadership team because “that is where the action is.”

Procurement Reform

If the organizing philosophy of the Drive to Excellence was to encourage the government to act as an enterprise rather than as a loose confederation of agencies, the area of procurement was ripe for change. Pawlenty recognized the opportunity to achieve efficiencies in the way the state bought goods and services by issuing Executive Order 05-07 on April 4, 2005. The executive order lent the governor’s credibility and political capital to procurement reform and gave Badgerow, Chief Procurement Officer Kent Allin and his team a mandate.

Regular readers of “Sourcing in the States” will not be surprised to learn that one of Minnesota’s strategies was to employ classic strategic sourcing tactics such as aggregating the volume of all state agencies and consolidating the number of suppliers to maximize its buying power. Like many states embarking on a sourcing initiative, one of Minnesota’s first successes came in office supplies, followed by a successful PC sourcing project in which
enterprise-wide standards were developed for the first time in Minnesota history.

The state recognized that there was a finite number of contracts that would be used by all agencies and that there was a nearly endless list of contracts specific to a single agency or program with a significant amount of spend. Many of these contracts fell into the category of professional/technical contracts. Badgerow and Allin knew that there was a significant amount of spend – and potential savings – in these contracts.

By statute, procurements in Minnesota break down into three categories: goods and general services; professional and technical services; and construction. The professional/technical contracts were overseen by Allin and the Department of Administration’s Materials Management Division (MMD), but individual agencies had the authority to manage the procurement process for each of these contracts. Historically, MMD got involved to review compliance with statutes and when there were complaints or protests, but otherwise allowed the agencies to operate fairly autonomously.

One of the recommendations that emanated from the Drive to Excellence was to have MMD play a more vigorous role on professional/technical contracts, particularly in two ways: implementing a statewide policy on allocation of points for cost in an RFP evaluation and encouraging aggressive negotiations of professional/technical contracts.

Minimum Points for Cost

Minnesota, like many states, allows awards for professional services to be made on a best-value basis, meaning that factors beyond cost could be considered in an evaluation. No one would dispute that making awards by considering factors such as a supplier’s past performance, references and understanding of the agency’s problem statement is a procurement best practice. After all, any procurement officer can relate instances of low-bid awards where the quality of the work was suspect and the project ended up costing more in the long run. This legitimate practice, however, may have led some Minnesota agencies to use “flexibility” to give too little value to cost in the equation.

Both Badgerow and Allin cite numerous examples in which agencies put the weighting for cost as low as 5 percent, essentially making cost a non-factor in the award decision. The evidence that cost was not weighted enough was not purely anecdotal.

“Data drives our decisions,” Badgerow says. “We did the analysis by looking at actual contracts that had been awarded previously. It was staggering how much money we were leaving on the table.”

Drive to Excellence staff reviewed 104 professional/technical con-tracts worth more than $22 million awarded by agencies in which there was no minimum number of points required for cost. Staff members found that if cost were equal to 30 percent of the total evaluation points, eight of those contracts would have been awarded to a supplier with a lower bid. If cost were equal to 40 percent, 19 contracts would have been awarded to a different supplier. On those 19 contracts, the state would have saved nearly $2.6 million, a savings of 27 percent on those contracts and more than 11 percent of all 104 contracts analyzed.

Since the contracts in question were for services of a technical nature that often were complex and of critical importance to the way that agencies operated, it was clear that cost should not be worth the majority of the points. But it also was clear, based on the data presented above, that an action had to be taken to make cost a more prominent factor in awards for professional/technical contracts.

Badgerow issued an informational bulletin on July 29, 2005, that for the first time mandated a minimum allocation of points for cost. In her memo, she cited the governor’s executive order issued three months earlier, which said:

“All vendor selection evaluations conducted under Minnesota’s ‘best value’ statutes must consider price to be of significant importance, as prescribed by the Commissioner [of Administration], unless otherwise provided by law.”

With the issuance of the bulletin, agencies were required to make cost worth at least 30 percent of the evaluation points if all responsive responders were to be evaluated at once. If, as is often the case, the agencies developed a short list of suppliers based on the strengths of their technical evaluations, cost would have to be equal to at least 40 percent of the total points.

In most states, attempts by a central procurement organization to direct the agencies on how they would procure services would be met by resistance and protest. But Allin says that this never occurred after the bulletin was issued.

“This was such an easy way to have some success,” Allin says. “It was a no-brainer, as long as the governor was willing to say that the Department of Administration would be more directing to agencies on how they would do consulting contracts. This significant reform required no staff time to implement and no consulting fees.”

Sharpen Your Pencils

It is difficult to document the amount of savings that the new policy has yielded since its inception. Clearly, the audience for the bulletin was not just state agencies, but also included the suppliers who closely monitor procurement policy. By saying that price may count as much as eight times more than it had previously, the message to suppliers was crystal clear: Sharpen your pencils.

MMD cannot possibly predict what price-winning bidders would have proposed in the absence of the new policy in order to show how much less they ultimately bid. However, MMD staff has tracked several procurements to see, based on the actual proposals that were submitted, what would have happened if price had been weighted at the historic averages of the agency rather than 30 percent or 40 percent. The state saved more than 23 percent on six contracts that were awarded to lower-cost vendors due to the implementation of the minimum cost policy.

Allin reports that as of the two-year anniversary of Badgerow’s bulletin, there has not been a single request for a waiver or an exception from the minimum cost policy on any competitive procurements – strong evidence that the policy was well conceived. It also is proof that the Drive to Excellence’s governance structure, which is a source of obvious pride for Badgerow and Allin, has succeeded in building consensus with their peers for procurement reform.

Negotiation

A second area of reform came with the introduction of negotiation as a standard operating procedure for state agencies in the establishment of contracts for professional/technical services.

Review of the procurement process by the Drive to Excellence team showed that although the RFP process explicitly allowed and encouraged negotiation with suppliers, it was rarely done – and even more rarely by trained professionals.

“State agencies were shocked that they had the ability to negotiate contracts,” Badgerow says. “They believed that once they went through the procurement process and selected a vendor, that was it. They thought they had to accept the price and the terms and conditions and sign the contract. They didn’t realize that the law allowed negotiation to occur. By not negotiating, they left money on the table and accepted disadvantageous terms.”

The Department of Administration made negotiation more prevalent in agency procurements of professional and technical services through a two-pronged approach. First, it would conduct a series of professional training sessions for agency procurement and program staff members who wanted to learn negotiation skills. Second, it would participate in agency negotiations with suppliers when invited to do so by the agency.

After an extensive search, the state hired Justin Kaufman to help develop MMD’s negotiations team. An attorney by trade, Kaufman brought negotiation experience from a successful career in dispute resolution in family court and from negotiating real estate development contracts.

Kaufman leads agency negotiation training sessions monthly in the capitol complex in downtown St. Paul. While no one should expect to become an expert negotiator overnight from attending a single five-hour class, MMD’s negotiation training aims to build a level of knowledge and – just as important – a level of comfort for how to structure a successful negotiation.

“I teach the people who attend my class to do their research before the first day of negotiations,” Kaufman says. “Try to figure out the history of the person who is doing the negotiation. What’s the history of the company doing work with the state? What’s the value of the contract with the state? How long have they been doing business with us? What is their interest in this contract? Are they trying to get in the door with the state for the first time? If so, this might give us more leverage.”

Kaufman teaches class members to use not just emotions but also data in their negotiations. Understanding how the pricing a supplier proposed compares to other prices that suppliers have charged the state in the past – or to what other states are paying for comparable services – allows the agency negotiator to offer a fact-based justification for a lower rate.

Kaufman also teaches agency staff how to play negotiation defense by recognizing negotiation tactics that are commonly employed.

“When you hear a supplier say something such as, ‘I would agree to that but my boss never will,’ or ‘We would love to do that, but we have a policy against it,’ that should be a red flag for a negotiator,” Kaufman says.

Opening Doors

One interesting outcome of MMD’s monthly training sessions has been requests to have Kaufman lead sessions customized to a particular agency at that agency’s offices. In all, since training classes began in April, more than 250 agency personnel have been trained.

The training sessions have helped MMD convince agency procurement staff that negotiations are an acceptable component of the procurement cycle. Just as important, they have helped to open doors. Because agencies have the statutory authority to conduct their own professional/technical contracts, Kaufman has to be invited before he can lend assistance in negotiating with suppliers. The training sessions have introduced him to dozens of agency staff members who can offer such an invitation.

Those invitations already are paying off for the state. In all, since December 2005, state staff has led negotiations on 42 separate contracts, taking $976,613 – or 13 percent – off the original proposal price. And as Kaufman continues to prove himself on the lower-dollar negotiations and more and more agency procurement staff are introduced to MMD’s negotiating services through the training classes, Kaufman now is receiving invitations to participate in larger-dollar, higher-profile negotiations, including an upcoming $60 million procurement.

Badgerow believes that it is only logical for agencies to want to bring in Kaufman and his team to negotiate their contracts.

“Agencies are sometimes reluctant to ruffle the feathers of a vendor because they will have to work with them and manage their contract once it is in place,” Badgerow says. “They might not be able or willing to take a hard stand on an issue. By bringing in a third party to sit across the table from the vendor, they are able to take a stronger position. We can be firm. We can take the walk-away position that an agency would have a harder time doing. We can help the agency get what they want in terms of lower prices and better terms and conditions, and they can leave with good feelings intact.”

A True Partnership

Allin neatly summarizes the rationale for agencies to take advantage of MMD’s services: “They have very little to lose and a lot to gain.” He adds that Kaufman has been successful because “the agencies believe that this is a true partnership.”

“They want someone they feel is on their team,” Allin says. “Justin has proven to be a very good resource.”

This sentiment is echoed by agency staff members who used Kaufman’s services. Jayne Stilwell-Lamb from the Minnesota Pollution Control Agency (MPCA) attended a negotiation training session that she says provided her with a number of useful tools for future negotiations.

It did not take long for Stilwell-Lamb to put those tools to good use. At the time of a contract renewal, a supplier asked for a 10 percent increase to its contract rate. Stilwell-Lamb asked Kaufman to consult with her on how to negotiate with the supplier to minimize the size of the increase.

Kaufman suggested that MPCA conduct a simple phone negotiation, asking the supplier to provide documentation to justify the expense increase. They developed an agenda for the call, based on a lesson from the class. During the phone call, a contract specialist from MPCA told the supplier that the agency would consider an increase if the supplier could provide documentation to justify the increase and prove that the increase was going to the contractor, not the supplier. Thirty minutes later, the supplier called back, retracting the request for a rate increase – a cost avoidance of $13,000. Stilwell-Lamb says the important lesson she learned was, “It never hurts to ask [for rate reductions].”

Impressive Results

Negotiating was a novel idea pertinent not only to the area of professional and technical services. Goods and general services contracts established by MMD typically were awarded to the lowest responsive and responsible bidder before the advent of the Drive to Excellence initiative. Kaufman’s training efforts were directed mainly at state agencies, because MMD’s goods and general services staff was already, in Kaufman’s words, “very savvy and experienced” in how to interact with suppliers.

The results from MMD’s negotiations have been impressive. Since July 2005, the team led by MMD’s assistant director, Brenda Willard, has generated negotiated savings totaling nearly $18 million during the initial term of 49 individual contracts or one-time purchases. Taken out to the full length of those contracts, these savings, which benefit local units of government as well as state agencies, extend to nearly $34 million.

As I wrote last October (“Strategic Sourcing Here to Stay, States Say,” Government Procurement, Page 30, October 2006), a number of states that began sourcing initiatives in the early 2000s have reached a point where they have eaten the low-hanging fruit, by sourcing the high-spend commodities that cut across multiple agencies.

States looking to build upon these successes may find value in following Minnesota’s lead. Rather than allowing agencies to “do their own thing,” the Department of Administration intervened in its professional/technical contracts and in so doing has helped reduce unnecessary costs from state procurement.

About the Author

David Yarkin, former deputy secretary for procurement in Pennsylvania’s Department of General Services, is president of Government Sourcing Solutions LP, headquartered in Washington, D.C. Contact Yarkin via
e-mail at [email protected].