Paul Brennan, CPPO, CPPB, director offor Rockland County, N.Y., is leading the charge to make the county's Purchasing Division a revenue-generating operation. At the same time, Brennan and his staff are producing some mega-sized cost savings — which is no small feat, since Rockland County (2007 population: 296,483) is a scant 12 miles away from high-cost New York City.
Revenue produced by Brennan's procurement staff of 12 full-time-equivalent employees is significant. For fiscal year 2008, total recognized revenue versus budgeted revenue reached almost $320,000, with vending income reaching $18,600, surplus property sales revenue exceeding $57,000 and interfund revenues totaling $244,125.
For the latest fiscal year, average net profit per Purchasing Division employee equaled $78,117.
Cost-containment efforts also have been impressive. Savings generated in fiscal year 2008 exceeded $1.32 million, with the biggest gains coming in these areas:
Price reduction, contract to contract — $794,691.
e-procurement transactional savings — $144,623 (estimate based on per-transaction savings calculations from Aberdeen Group).
Cost avoidance, contractual CPI increases — $139,441.
Price reduction, requisition to purchase order — $128,885.
Brennan noted that the county's procurement and finance departments worked together to create the definitions of the cost-savings categories.
“Gaining the finance function's agreement on the definitions of cost savings to be tracked is critical to the success of such a program,” Brennan told Go Pro.
Brennan began his purchasing career in the private sector, where he learned to focus on achieving bottom-line results. When he entered the world of public-sector procurement 15 years ago, he experienced a bit of culture shock.
“I originally started my career in the retail world in the furniture industry, and although I was a buyer, I had strict targets in many different areas to reach — inventory targets and sales targets, etc. — and it's one of the things when I came to government procurement that kind of amazed me,” Brennan told Go Pro. “It took me a few years really to start questioning [the concept that] we are not expected to hit any targets.
“You want to make sure that your procurements are being done correctly, but in many organizations there aren't any expectations from anyone that procurement can do something more, and I think that comes from a basic lack of understanding at the upper-management and elected-official level, because for the most part, they look at the procurement function as a cost center, and so they are not really thinking through to ask for more out of us than just being a cost center — because, historically, that's what we've been.”
Brennan, who co-developed and teaches NIGP's “Marketing 101 for the Procurement Professional,” noted that some of his views are based on research (which he conducted for the “Marketing 101” course) on local government purchasing practices in the United Kingdom. Brennan believes that the public purchasing practices there have lapped those in the United States, thanks to the U.K. government's national agenda for government procurement, which sets performance targets for all local governments in the United Kingdom.
“It's interesting that the direction they are taking appears to establish a mechanism where they want to provide the most funding to those local governments that are the most effective in spending it — something they call ‘Value for Money,’ or VFM,” Brennan said.
According to Brennan, the best way for public-sector procurement to get recognized as a profession is for the profession to prove its value, “and the best way to show the value in a simple way that people can understand is dollars and cents.”
“Create a profit-and-loss statement, because the powers-that-be normally only understand bottom-line types of dollars, and if you can show how purchasing is adding value in a monetary sense, they will understand that,” Brennan asserted. “It's something very simple for them to look at, and they'll say, ‘Hey, it's not just a cost center; they are actually adding value to the organization.’”
The profit-and-loss statement should capture the revenue and cost savings achieved by the procurement function as well as all related operating expenses for procurement, Brennan added.
“The difference between the revenues and the expenses is the net profit or ‘value’ provided by the procurement function,” Brennan explained. “In 2008, Rockland County's Purchasing Division produced a net profit of $937,406.”
The importance of the RFP process
Having an RFP process that's open, proper and thorough can go a long way to help maximize revenue for a purchasing entity, Brennan asserted. For example, his Purchasing Division recently used the RFP process to help negotiate $400,000 in additional revenue through the sale of a certified home health agency license.
“The county obtained an independent estimate of the certificate's value, which was placed at between $500,000 and $600,000. The original offer from the agency deemed most qualified was $500,000. The final sales price was $1 million. We captured the additional revenue from the highest estimate of its value to the final sale price, which was a $400,000 increase.”
Such an increase would not have been realized without the Purchasing Division's involvement in the process.
“The Purchasing Division suggested that an RFP process should be conducted to ensure we received the highest value for the sale of the certificate,” Brennan said.
The county department that was selling the certificate originally “wanted to just negotiate a contract with the agency they felt was most qualified, based on the independent estimate they received,” Brennan added.
Auditing can strike gold
Checking and verifying past contracts and payments is an opportunity for procurement departments to strike gold, according to Brennan. His group, for example, analyzes phone bills and other charges to the county on a regular basis.
“Auditing of contracts is, I think, a really key area where procurement can get involved, and capture additional savings and refunds, which then can be applied as revenue to the Purchasing Division,” Brennan said.
Brennan noted that his group is auditing the bills for school-busing services “to make sure that they are completely accurate with the number of days that transportation was provided.”
“We get a lot of snow days up here in the Northeast, and we are going back a couple of years to start with, just to make sure that there's not any revenue out there that may be sitting on the table,” Brennan said.
The division takes several approaches to auditing, including outsourced and staff-produced audits.
“Depending upon the contract and so forth, we do some audits ourselves, and we will also do RFPs to hire outside consultants to do audits on a contingency basis,” he explained.
Provide services to smaller governments
To bring in additional revenue, Brennan's team manages purchases for a small sewer district in the area.
“Rockland County does receive compensation for that; it doesn't hit my budget directly,” Brennan said.
Brennan believes that more and more small governments will follow suit and contract out their purchasing operations.
“We are going to be forced to look at that more and more as we go forward, for two reasons: One, everyone's looking to do more with less, so a lot of smaller organizations may look to bigger organizations to help them out. But I think the key thing is that most of the smaller organizations don't have the professional level of employee that the larger organizations do, so the small operations can really benefit by having certified professionals doing their work as opposed to someone that has had very little training doing their work.”
Brennan offered a number of other revenue-generating ideas for public-sector purchasers to consider, including:
Centralized contract fees — percent of sales on state or county contracts.
e-procurement marketplace participation fees.
Advertising on procurement Web sites and e-procurement systems.
Advertising in procurement departments' newsletters.
Increased revenues from online surplus auctions.
Fees to register for bidders' lists.
Negotiating additional or extended warranties at no cost to the government.
Brennan's Rockland County operation doesn't use specialized off-the-shelf software to track cost savings or revenue generation. Instead, “Our MIS Division developed a simple Access database program that is accessible to all buyers over our IT network,” Brennan explained.
“Buyers record cost savings and revenue-generation information as they process a purchase order or award a bid or RFP.”
Arapahoe County, which is in the Denver metropolitan area, achieved several operating efficiencies when it turned to an SAP financial and procurement application. The county's finance department was able to reduce full-time equivalents in accounts payable and purchasing by 50 percent after the software was installed. What's more, the software's ability to generate more timely and accurate reports boosted the department's negotiating power and helped it increase the number of vendor payment discounts taken.
“Because of the really comprehensive and rigorous contract administration processes and sourcing processes in software like ours, SAP's solutions can help organizations evaluate and qualify vendors based on various boundary conditions,” said Russ LeFevre, vice president, public services industry solution marketing, for Newtown Square, Pa.-based SAP. “Can they deliver the goods and services on time? Do they have a good track record of doing this? Do they provide good-quality goods and services? Are they providing favorable contractual terms?”
Using the SAP financial and procurement application can help public purchasers aggregate and consolidate demand among different agencies in a government, which can help encourage vendors to offer volume purchase discounts, according to LeFevre.
Josh Rose, director of product marketing at Cary, N.C.-based SciQuest, noted that government procurement and finance officials are being smarter and more strategic about how they spend in these tight budget times. Automated procurement tools, for example, are being used to provide detailed information on the pricing that governments obtain from suppliers, and those entities then can mine the data results from all of their transactions to identify opportunities to generate savings, according to Rose.
Those tools can help public purchasers “identify those suppliers that provide the best benefit for the state or other government entity — for example best price or best terms — in a way that enables the procurement organization to ultimately achieve the same results by impacting the bottom line without impacting services.”
“So rather than cutting costs, what we can and should really focus on is: How is it that your organization identifies opportunities to generate savings?” Rose said.
SciQuest claims that its e-procurement system for academic and government institutions helps achieve cost-savings while delivering a seamless purchasing experience to every user.
Current crisis = opportunity
Rockland County's Brennan predicts that public purchasers will become more revenue- and cost-savings-driven in these times of tight budgets.
“I look at this particular time of economic downturn as really our big opportunity,” Brennan asserted. “It's public procurement's opportunity to stand up and show their organizations that we can make a difference, that we can drive cost savings and that we can drive change overall in the organization.
“To quantify that, that's the big thing that I've tried to do — to sit down and quantify what we are doing, so there are dollars and cents attached to it, because that's what resonates with elected officials, and taxpayers.”
About the author
Michael Keating is senior editor of Go Pro and Government Product News.