Procurement
May 14, 2012

Leverage procurement to save money and reduce risk

Every year government executives, like executives everywhere, spend time setting strategic goals. Often these are lofty, pie in the sky aims like becoming the most energy efficient township in the province by 2017. Next come the objectives, like reducing kilowatt hour usage by government buildings by 10 percent this year.  

All fine. All boring. The problem is that the economic machine that processes these objectives is operated by procurement, a function that often goes unnoticed at the strategic level. Like any small part that runs our cars, procurement is largely invisible. Governments assume it will always work and for the most part don’t think about it. Procurement is considered instrumental, not strategic.  

It’s time to change that thinking and make 2012 the year that procurement is brought into the strategic framework.

Governments make procurement “strategic” by leveraging those areas that will increase efficiency, reduce risk, and help achieve other strategic objectives. Government executives need to ensure that they are getting the best value from the procurement department. Three of the best ideas to ensure the most out of procurement are: using best and final offers; non-numerical evaluation of cost; and risk as an evaluation factor.

The BAFO option
Government agencies can ensure that procurement always structures the RFPs so that they can negotiate with the leading proponents and then request a best and final offer. BAFO is the one change in an RFP process that permits the agency to fine-tune the vendors’ proposals based on input from the evaluation team.

Few government bodies in Canada use BAFO, sometimes because they don’t know about it, sometimes because it’s new, and sometimes because senior management won’t support this approach. None of these reasons warrant accepting a mediocre proposal that doesn’t quite fit the requirements and costs too much.

Non-numerical evaluation
Cost is always an issue, whether one uses lifecycle costs or five-year costs. It’s always on the radar. Few agency executives and program managers ignore the importance of cost and how it is evaluated and scored.

Suppose the recommendation is to award the contract to Vendor A, who received a score of 80 and quoted a cost of $400,000. It is a certainty that management will be interested in the second place vendor’s score and price. If it was Vendor C who received 75 points and quoted a cost of $300,000, then questions will be asked: Why did Vendor A get the contract? Why did we pay $100,000 more for a proposal that scored only five points higher? Are five points worth $100,000 in these times of budget shortfalls, program cuts and staff layoffs? Can’t we revisit this decision?

There are many ways of evaluating cost. The most popular is arithmetic, assigning all of the cost points to the lowest priced proposal and then assigning points to the other proposals on a pro-rata basis. People like numbers. They are easy to understand everyone knows that a grade of 85 percent is better than a grade of 80. Numbers add legitimacy to what can be an arbitrary process.

While the conversion of dollars-to-points is an arithmetic process, the weight assigned to this factor is not. It is arbitrary. There is no theory of costing or model of how cost contributes to success that requires an agency to assign 10 percent of 60 percent of the available points to cost. It’s just that simple. The weight that an agency puts on cost is determined not by a theory or by an agreed upon standard established by ISO, but by the culture of the organization and the dynamics among the different stakeholders. Cost can receive a weight of 23 percent in one agency and a weight of 64 in another. Neither weight is “wrong” or “misleading” or “determined by the facts.”

There is one common approach to evaluating cost without using points and avoiding some of the common problems:
1.    Determine the score for each proposal for the Technical and Management factors;
2.    Calculate the cost of each proposal;
3.    Analyze the difference in points and the difference in price to see which proposal is “best value”; and
4.    Write a narrative discussing the strengths and weaknesses of each proposal, “best value” and why the recommended proposal represents “best value.”

Adopting risk
Many government entities such as cities or counties have risk managers who concern themselves with insurance issues related to known risks, such as a citizen being hit by a government vehicle. But few deal with RFPs.

Simply asking procurement to introduce a paragraph into RFPs demanding risk management information will markedly improve the quality of information received and the ability to evaluate the vendors and their proposals. Again, all of this helps support other strategic goals and objectives.  

Most agency RFPs could benefit from a large dose of risk management. Procurement shouldn’t simply be asking vendors to describe “their understanding of the project.” Rather, they should be asked to provide a three-page analysis of risks that identifies each risk, its source and the steps that can be taken by each stakeholder to eliminate or reduce it. The tasks should be included in the project plan and cost. And finally, agency RFPs should award points for the evaluation of the probability of success with a proposal, thus making risk one of the evaluation factors or part of each major evaluation factor.

Strategic objective
The next strategy session is coming. Put procurement on the agenda. Talk to the procurement professionals. They’ll have lots of suggestions and ideas about ways in which procurement can become strategic. Leveraging procurement to save money and reduce risk requires that procurement “be in the room” when strategic issues are being discussed. Make procurement activity a strategic objective; it will help achieve the agency’s goals.

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