Fiscal management can be taxing without the right procurement taxonomy in place

There’s an old saying that “For every minute spent organizing, an hour is earned.” In the context of government procurement, I would go further to say that every minute spent organizing is also potentially thousands of dollars – or hundreds of thousands of dollars – saved. (And several hours earned.)

As you all know, keeping track of every dollar spent by your organization is a taxing job. Some would say impossible. With the average agency managing 456 solicitations per year, it can be a struggle to monitor allocated and available spend levels in real-time. Things get even more complicated if you don’t have a well-organized way to document purchases and track category-specific spend.

That’s one of the many reasons why implementing a universal taxonomy such as the NIGP Code has become a best practice for public sector agencies at all levels.

Want to Improve Spend Management? Start by Improving Your Records Management

Every state and local government, education entity and special district is tasked with maintaining strict fiscal responsibility, and the highly-structured design of procurement classification systems like the NIGP Code* automatically track spending by individual commodity and services code groupings. Within a matter of minutes, you can see how your agency is spending, and how much it’s spending, both holistically and at a very exhaustive level.
The NIGP Code, for example, allows you to assign a product or service a 3-digit class code, a 5-digit class-item code, a 7-digit class-item-group code, and a detailed 11-digit code.

This makes it easy to report and analyze spend at a very deep level without having to dedicate hours to the manual dissection of spend for “vehicle docks” within the automotive/fleet accessories or mobile computing technology categories.

It also allows you to cross-index spend data against vendor categories or minority-owned business entity (MBE)/woman-owned business entity (WBE) classifications and even track “green” spending using a dedicated set of “Green Commodity Codes.” As a result, it becomes easier to monitor progress towards contract award goals and employ risk-based procurement strategies to help organize spend areas for evaluation of both waste and underutilization of budgeted funds. In fact, NIGP Code users can realize savings of up to 20 percent through the combination of effective spend analysis and strategic sourcing.

Supplier Management Is Also Critical to Spend Management – and a Benefit of Universal Taxonomy Systems

Speaking of strategic sourcing: one of the other prime benefits of using a structured commodity and services classification system to improve your procurement function is the supplier management toolset.

You can organize the suppliers you do business in a similar manner as you would the product or service categories, which streamlines the process of finding available suppliers for various products and services. Just as importantly, you can frequently gauge the volume and quality of suppliers in each product or service category down to the 11-digit code, if desired, to ensure adequate competition and determine if further supplier diversification is needed to meet MBE/WBE goals.

When it comes time to solicit, you have the option to facilitate spend rollup at the item level, leading to more competitive bidding and, subsequently, an increased value return for spending across the board.

Why Classification Systems Such as NIGP Code Become Even More Critical Tools During Crises

Though universal taxonomies are vital tools in maintaining day-to-day fiscal responsibility, balancing budgets, even more important when priorities shift or increased sourcing is needed.

The recent COVID-19 emergency effort is a prime example. In the early stages, before emergency funds were released, agencies were increasing purchases in key categories such as medical supplies, cleaning services, food kits and technology tools to assist with distance learning.

Though we’ve yet to solicit formal feedback, I would assume that agencies with a universal taxonomy in place, such as the NIGP Code, might have found it easier to track spend or even assign additional funding to particular types of purchases to maintain control of crisis-related spending, reduce fraud or earmark buys that exceeded normal operation thresholds so as not to skew future analysis of agency spend for budget assignment purposes.

At the same time, those same agencies may have been able to ramp up hyper-focused sourcing efforts with a little less effort due to the detailed product and service search capabilities. Instead of having to pick up the phone to call everyone registered as a “medical supplies” provider from the start, they would have been able to drill down to those with “personal protection equipment” (PPE) or ventilators or hospital beds to start and then broaden their search as demand increased and supply decreased within traditional sources. When it came time to expand the search parameters to find “outside of the box” sources of N95 masks, the NIGP Code most likely assisted with the targeted identification of construction companies, utility contractors and even tech companies that may have them in reserve for their field-based workers or employees assigned to fire, dust or other airborne hazard-prone areas.

Then again, since the NIGP Code serves to standardize descriptions for stock items, it is quite possible that they were actually able to locate these non-traditional supply sources from the start.

The uniform product numbering across suppliers – which eliminates duplicate items throughout inventory locations – can help to expedite sourcing when every second counts. As can the product/service grouping function, which allows buyers to consolidate similar requisitions together, order from blankets and contracts and facilitate procurement workflows based on commodity or service.

Is There a Classification System That Will More Effectively Help Me Improve Spend Habits and Supplier Utilization?

In the spirit of full disclosure, not all taxonomies are created equal and not all may offer the detailed 11-digit code option like the NIGP Code does.

Think of a procurement taxonomy like a filing system for your personal important documents: some like to categorize alphabetically, some by date and some by “type” of record. Others prefer to create their own filing system, one that would the average person wouldn’t understand without knowing that person well.

Procurement taxonomies can vary similarly. Though most take a categorical approach – medical, construction, food and beverage, technology, etc. – the challenge I’ve heard from agencies is that many only offer one or two tiers of “filing” within a category. This can be especially true of homegrown classification systems. Then again, it is possible to have too much of a good thing. Having to assign or apply too many codes to a single product or service could limit your results when conducting a wider-scope spend analysis. You may find yourself running too many reports and trying to reconcile them all to extract the information you need.

That’s why opting for universal taxonomies such as the NIGP Code is always recommended in the public sector. Beyond minimizing onboarding and ongoing training requirements, the use of a standard procurement classification system enables spend audits to be conducted quickly and results to be accepted with confidence. It reduces, if not fully eliminates, any potential discrepancies about how certain products and services may or may not be classified from one agency to the next and whether or not spend is being accurately calculated for each category on a broader level.

Plus, choosing a third-party-managed classification system such as NIGP Code means that your procurement and IT teams get to enjoy all of the benefits without having to do any of the work to update or remove codes, notify users of changes and other tasks that can become burdensome. This is a living and breathing system after all. Stagnation can be just as detrimental to your agency’s spend management capabilities as not having an organized records system at all. New products and services are coming to market every day and you need to be able to monitor your agency’s spend appropriately. Trying to force-fit them into the wrong category can skew future budget allocations and hinder your agency’s ability to effectively serve constituents.

Click here to learn more about the NIGP Code.

*The NIGP Code is the most widely used commodity/services code in the public sector and is utilized by 1400 governmental entities, including 30 states. It is currently maintained and supported by Periscope Holdings, an Austin-based technology holding company focused on the public sector and the sole custodian and marketer of the Code under an ongoing agreement with NIGP.

Jean Clark, FNIGP, CPPO, C.P.M, CPM is President of NIGP Code and Consulting Services at Periscope Holdings, Inc. She is an NIGP Past President and former State of Arizona Procurement Administrator.