Purchasing Power

Purchasing Power

New Procurement Strategies and Systems Save Time And Money--Serious Money.

"On a lot of campuses, purchasing is the whipping boy," says Victoria Windley, director of Procurement Services at University of Delaware. "But not here."

And with good reason. The school has rethought just about every aspect of its procurement system, beginning with the elimination of paper requisitions way back in 1992, to the development of a Web-based shopping engine for everyday purchases, to a new initiative that seeks to eventually eliminate paper checks to all regular vendors. The evolution of purchasing at Delaware also resulted in the consolidation of the Purchasing and Accounts Payable departments. The goal? Get Purchasing and Accounts Payable out of the transaction business.

"If Purchasing and Payable folks are so dragged down by transactions, and not doing strategic work, somebody should be looking at it," says Windley, who is also on the faculty of the National Association of Education Buyers (NAEB) (www.naeb.org) procurement academy.

The elevation of the Purchasing department to a strategic function represents a major advance in the status of a department long looked on as a bureaucratic necessity that faculty and staff tried to maneuver around.

"Procurement as a function, regardless of the industry, is incredibly strategic to the bottom line," says Doreen Murner, CEO of the NAEB. "And higher ed is realizing that there is a significant impact that procurement can have on campus."

So now is "career opportunity time" for execs in purchasing, and those above them, says Tom Fitzgerald, CEO of E&I (www.eandi.org), the largest educational buying consortium in the U.S.

"There's probably $20 to $40 billion in costs that can be cut from higher ed just through supporting preferred vendor contracts, reduction of maverick spending, higher and more uniform quality and processes, electronic commerce and e-business, and through collaboration with other colleges," Fitzgerald says.

Or, think of it in multiples of 20, says Lawrence Summers, president of Harvard (MA). Because most institutions can only spend about 5 percent of their endowment each year, they'd have to raise $20 million in new capital to equal the amount they'd realize from cutting $1 million in costs.

If you think this is starting to sound like the oft-repeated admonishment that higher education needs to run its operations more like Fortune 500 companies, you may be right. But it's getting a lot easier, with established best practices, case studies, the evolution of e-procurement solutions, and great advances in consortium buying practices.

If you follow Summers' multiples of 20 thought process, the University of Pennsylvania would have to have raised an additional $1.4 billion in new capital to equal the $72.2 million in bottom line savings that the Purchasing department has squeezed out of its operations in the past eight years.

Penn began by installing Oracle Financials, which would evolve into the Business Enterprise Network (BEN), a suite of integrated, Web-based financial and procurement applications. In 2002, it launched Penn Marketplace, an online shopping site that ensures users purchase within Penn contracts. With an updated SciQuest version of Penn Marketplace launched in 2004, Associate Director of Purchasing Services Ralph Maier has seen a 78 percent reduction in maverick buying since 2000. Moreover, 90 percent of purchasing orders are entered in the field and routed electronically to vendors.

"In four years we've doubled the spend through our purchasing application; we now do $650 million through the purchasing application and $20 million through the purchasing card," Maier says.

Penn currently has more than 80 of its vendor catalogues online, accounting for nearly 70 percent of purchasing transactions. And of those 80, 11 are EDI enabled, which has reduced the paper involved in processing by 45 percent.

"We have been able to shift the focus of the purchasing organization from tactical to strategic activities," Maier says. "Now we can focus our resources on value-added activities like negotiating contracts and managing customer relationships."

It's true that Maier's department has been cut from 26 employees in 1996 to just nine now, but that's not where the biggest savings comes from when schools move to strategic purchasing and e-procurement, says Andrew Bartels, analyst with Forrester Research (www.forrester.com).

There's a rule of thumb that the cost of processing a paper-based requisition ranges from $100 to $125, versus $10 in processing costs for electronic requests. But those numbers come with a large caveat, Bartels says, because "70 to 80 percent of what you get for those dollars are fractions of peoples' time."

"A lot of those costs are non-extractable; you can't redeploy 10 percent of a person. Instead what you may do is free up 10 percent of that time for more important things," he says.

"There's probably $20 to $40 billion in costs that can be cut from higher ed just through supporting preferred vendor contracts." -Tom Fitzgerald, E & I

So, yes, cutting the steps in an approval process from 27 to six saves lots of people a little bit of time. But the big money comes when you devise a system that forces the university community to stay within contract.

"We have found the largest savings really comes from compliance with sourcing agreements," Bartels says.

Capturing the benefits of contract compliance is a continuous cycle. Implementing e-procurement solutions, particularly Web-based shopping engines that are easy to use, increases compliance. Increased in-contract buying, when coupled with the spend analysis capabilities that come with most e-procurement solutions, gives universities ever greater leverage in negotiating more advantageous contracts.

Anyone who's been through the process knows that implementing e-procurement is a waste of time and money unless you've first de-constructed the purchase transaction. Before Penn began its transformation, it took a hard look at workflow.

"We didn't want to automate a flawed process," Maier says. "We took a step back and redesigned the purchasing process as best we could into a four-step process: Customer has a need, customer places an order, supplier ships and bills, supplier gets paid."

This is a far cry from business as usual in purchasing. "One university we worked with had 25 separate steps to approve a purchase order," says Stephen J. Wiehe, CEO of e-procurement vendor SciQuest (www.sciquest.com). "They looked at it and said, 'This is woefully illogical.'"

Vendors agree that planning to buy an online purchasing application often forces an institution to make process decisions.

"It does force a lot of decisions that people have ignored or avoided making," says Kurt Sollod, CEO of Boston-based OrgSupply (www.orgsupply.com). "Like what's the approval rule? What's the dollar limit? Should we really be paying all invoices under $2,000 without auditing?"

Research outside of academia supports the need for re-engineering. Forrester Research surveyed 60 North American purchasing managers who had recently implemented electronic purchasing tools, asking them how much they changed processes, and what kinds of cost reductions were realized. Of those that reported little or no process change, only 11 percent saw "significant improvement" in the cost of goods purchased. Of those who implemented significant or dramatic process changes, 59 percent realized a significant reduction in the costs of materials.

"The impetus for change has to come from within the enterprise," Bartels says. "A vendor who has done a good job selling a product says, 'This is a tool. We're not promising terrific results unless you take the opportunity to change your processes.'"

Tackling e-procurement is one step in the re-visioning of the procurement department, and it's one that often requires incredible investments of money and know-how up front. But schools that don't have a budget like the Massachusetts Institute of Technology, which developed a homegrown solution, or Pennsylvania, can piggyback on the efforts of a number of higher ed purchasing consortiums that have made the pursuit of strategic procurement part of their mission.

"We didn't want to automate a flawed process." -Ralph Maier, University of Pennsylvania

E&I, which has 1,500 members and has been in business for 70 years, has paired with SciQuest to electronically enable the catalogs of some of its most popular vendors. These "portable" catalogs and contracts can be plugged into many e-procurement solutions, saving schools and vendors the expense of producing and updating catalogs. Even the Penn Marketplace takes advantage of this feature, incorporating a variety of E&I catalogs and contracts into its system.

The Boston Consortium for Higher Education (www.boston-consortium.org)is also getting in on the e-procurement scene with OrgSupply. The consortium gave a development grant to OrgSupply to develop its "Buyer" module, which began as an in-house project at MIT but is now in use at Harvard and several other Boston-area institutions. A low-cost approach to e-procurement, OrgSupply's solution helps institutions manage the online buying that's already happening by centralizing all online catalogs in a simple Web shopping experience.

WAICU, the Wisconsin Association of Independent Colleges and Universities (www.waicuweb.org), has also added e-procurement to collaboration project that could eventually lead to the consolidation of all back-end processes at its 20 member schools. The online shopping site will allow each school to set up its own authorization codes and requirements for each vendor, but give all the schools access to the WAICU negotiated contracts. For many WAICU members this will be their first foray into e-procurement, and first chance to do electronic spend analysis.

"The CFOs of the colleges, for the first time, will actually know what they are buying and what they paid," says Rolf Wegenke, CEO of WAICU. Capturing this data will also help WAICU when it's time to renegotiate its contracts.

Fitzgerald of E&I likens higher ed's adoption of strategic procurement principles and e-procurement to "the penguin principle."

"This is the phenomena in which all the penguins come to the edge of the iceberg and wait for someone to jump in," he says.

And now that schools like Penn, Notre Dame (IN), Arizona State University, University of New Mexico, and others have taken the plunge, and bobbed to the surface to say how great the water is, the rest of higher ed should soon follow.

"If the penguin principle is correct, we're going to see some pretty rapid adoption, if they can find the funding and the way to rationalize these investments," Fitzgerald says.

But what's next in the strategic evolution of the Purchasing department? Many schools, like Penn, are investing heavily in e-sourcing, which is the process of inviting potential suppliers to bid online on contracts.

"You can almost look at it as an eBay," says Ron Police, senior vice president, Higher Education and Healthcare at Oracle (www.oracle.com), which has a suite of E-Business products, including an iProcurement module. "Someone in Purchasing can go out and do an open bid online, whereas before that process was very manual, very time consuming."

"Institutions are starting to grade their suppliers' performance, identify the best in class, and continue to work with them." -Stephen J. Wiehe SciQuest

And after the materials procurement process is under control, some predict the addition of services like advertising, legal, and consultants to the e-procurement and supply chain management process.

"It's very common for services to represent 30, 40, or even 50 percent of total spending," Bartels says. "Just by focusing on goods, you're missing the iceberg under the water."

And if purchasing goes the way some are predicting, students won't be the only ones getting graded at the university. Electronic transactions allow for much easier assessment of supplier performance. Superior suppliers will retain their preferred status, with the rest weeded out as institutions seek to winnow their vendor databases to consolidate purchasing. (As is the case at Penn, where a 25,000-vendor database has been focused into the 80 to 90 that have been electronically enabled.)

"Institutions are starting to grade their suppliers' performance, identify the best in class, and continue to work with them," says Wiehe of SciQuest.

Universities grading performance--that seems to make sense. But first they need to embrace and master the strategic role of purchasing.

"As cost cutting becomes more imperative, the first thing consultants look at is supplier relationships," says Sollod of OrgSupply. "There's a lot more visibility for Purchasing; before they were just paper pushers."

Rebecca Sausner is a freelance writer based in Brooklyn, New York.


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