A Procurement Transformation at Penn
By Ralph Maier -- Supply Chain Management Review, 3/1/2009
With a global economic crisis demonstrating the fallibility of institutions once thought immune to economic trends and media coverage detailing the impact of financial woes from Wall Street to Main Street, it's clear that today's financial storm will have lasting repercussions.
In previous economic downturns, the higher education sector emerged relatively unscathed. This time around, the economic impact is being felt from the quadrangles of the Ivy League to community colleges that are considered the bedrock of the areas they serve. Endowments are declining as costs are escalating. More than 41 states face major financial shortfalls forcing significant budget cuts for a great many institutions. With pressure to hold the line on tuition rates while at the same time maintaining or even expanding financial aid, colleges and universities are increasingly forced to look for new and innovative sources of revenue.
Challenging times for higher education, however, can also be the Golden Age of opportunity for supply management professionals. We have the ability not only to transform the role of the procurement function, but even more importantly to provide significant benefits to the institutions, faculty, staff, students, and parents we ultimately serve.
At the University of Pennsylvania, the work of the Purchasing Services Department and the resolve of our leadership to place procurement and supply management on the leading edge of Penn's cost containment efforts offer a compelling example of how procurement can impact the bottom line. In a time of much financial turmoil, such examples serve to illustrate the steps our profession can take to ensure the accessibility of higher education and maintain the quality of our research and teaching functions.
To date, Penn's transformation of its Purchasing Services Department has resulted in documented savings and cost containment of more than $89 million. This figure represents true gains, not budget cuts that impact people and academic programs or soft savings that equate more to efficiencies that while beneficial, do not translate into easily quantified financial returns.
To understand why our experiences in this endeavor are relevant to schools of all kinds and of every size—and indeed any organization that still approaches purchasing as an administrative task—one needs to first look to the past, when Penn first began its transformation.
A Little History
In the private sector, where I began my career, the mandate was quite clear: Make purchases at or below the cost budgeted, even in the face of market fluctuations. At that time, everyone understood that $1 saved in procurement equated to $50 in sales. However, after eight years in the corporate world, I had the opportunity to join the collegiate procurement community, which was a very different environment. In higher education, administrative functions such as purchasing understandably took a back seat to teaching and research. And, in contrast to the smoothly oiled supply chain accepted as a matter of course in the manufacturing world, higher education institutions are decentralized. The command and control corporate model was not going to fit with the culture of autonomy found in academia.
As a result, at Penn, as it was at most schools, purchasing was a processing function, a bureaucratic necessity that on the surface contributed little strategically and delivered few tangible results either to the bottom line or to the people it served. Academic purchasing departments were buried under paperwork. Maverick spending was rampant. Much of the work revolved around operational processes and ensuring that appropriate levels of control were met.
As a rule, leadership viewed procurement as a cost and suppliers considered it an obstacle. And everyone considered the procurement process a required, cumbersome, pain in the neck. Of course this characterization is based on the limited experience most end users had with the department. Our constituents knew little of the behind the scenes work occurring with contract negotiations and other high value activities. But the reality was, purchasing operations in higher education weren't able to take advantage of the benefits that could be realized through strategic sourcing.
New Focus Paves Way for Change
In the mid 1990s, leadership at Penn placed new emphasis on a set of goals that significantly changed the role of procurement and paved the way for cost containment efforts that would clearly demonstrate the potential of a strategic approach to buying in higher education. The new focus would make true reform of the procurement function possible.
What allowed Penn to move forward was the advent of the dot.com revolution when technologies capable of replacing time consuming and costly paper processes reached the mainstream. With a firm goal to make the school's administrative functions operate more efficiently and provide greater service to the larger campus community, Penn's senior leadership made the commitment to automate administrative systems and create a culture where change would be encouraged, demanded, and supported.
Charged with the task of identifying the greatest opportunities for administrative improvements, we solicited input from our colleagues in higher education to help us develop a new approach to procurement. With clear recommendations in hand, and strong executive leadership behind our efforts, the stage was set to effectively take advantage of the developing technologies and fundamentally change the way we did business.
The transformation of the University's Purchasing Services Department would be an important component of the larger effort to improve Penn's administrative systems. And it would represent the start of what has evolved to be a valuable case study of how procurement organizations can impact higher education.
The next phase in our development began in the spring of 1996, when Penn began the implementation of Oracle Financials as a core enterprise resource planning (ERP) system. ERP enabled the University to automate many of its administrative functions, while providing the leaders of our schools and centers with greater oversight and insight into the financial transactions of the institution. In conjunction with this effort, procurement processes would be automated within the system, paper-based processes would be eliminated, and the Purchasing Services Department, for the first time, would be formally presented with a cost containment goal.
The days as a processing function were over. At Penn, the Purchasing Services Department had the critical infrastructure it would need to successfully utilize new technologies to streamline our procedures and begin implementing a more strategic approach to procurement. From that day forward, progress and success would be gauged in financial terms.
Cost Containment Comes to Penn
In July of 1996, Purchasing Services set its first formal cost savings goal—to save $15 million through strategic sourcing techniques and agreements over a three year period. While this seemed like an ambitious goal, in reality we were simply picking the proverbial low hanging fruit. Just having the data needed—something that was impossible to attain when everything was done on paper forms—revolutionized our department's capabilities. We were now in the position to increase the number of strategic sourcing agreements and work more closely with our user community. These new capabilities virtually ensured our initial success.
Of course, everything wasn't smooth. While our efforts to provide training and to articulate the benefits of the new system resonated with many on campus, some simply didn't want to utilize the new procedures. Our customers—faculty, staff and the larger campus community—weren't all happy with the changes. Change, as it does in all of its forms, created discomfort.
But the cost containment goal served a valuable purpose. For the first time, procurement had tangible proof of its value and impact. We now had a platform on which to make our arguments for change and we had the leadership's backing to see that our processes were adhered to.
At the end of the three year program, we'd already amassed savings of more than $45 million. (See Exhibit 1.) And users, from department heads to tenured professors, could see for the first time how our work impacted their budgets and freed them to take more aggressive measures in Penn's pursuit of academic excellence. Perhaps most importantly, it proved that Purchasing Services at Penn was capable of achieving far more than had been originally anticipated.
At the end of our first three year plan, it was agreed that we would set an annual cost containment goal and focus on providing the campus community with more high-value services, in addition to our work negotiating more favorable terms and conditions with suppliers. Such efforts, together with us providing assistance with the purchase of big-ticket items and help in optimizing departments' budgets, converged to create a new mindset in the Purchasing Services Department.
To be clear, external challenges were not the only ones we faced. Within the department there were a lot of lessons to be learned from our initial foray into strategic sourcing. For example, part of the Oracle implementation included self hosted supplier catalogs. It became quickly apparent that the university didn't and probably shouldn't invest in the resources needed to manage electronic catalogs of suppliers and their products. We didn't have the time or the staffing needed to continually update product and price changes. The enablement of suppliers was simply too complex.
At the time, many suppliers were just beginning to explore the potential of e-commerce and its counterpart, e-procurement. Surprisingly, much of the early pushback came from our suppliers and our initial conversations with those we wanted to add to our catalogs were frustrating. Tasked with selling goods and services, suppliers' field representatives simply didn't grasp how being enabled in our system would benefit them or how our offers to increase market share in return for better prices could be achieved. We realized our conversations needed to start at a higher management level with our suppliers. Leadership was more likely to see the big picture and realize the growth in market share they could achieve through this process.
It also became clear that our new focus on cost containment demanded a new skill set. With our change from a processing function into a source of savings and with more services that stemmed from procurement acumen, the paperwork-related skills of the past were no longer needed. In fact, the increased efficiencies led us to downsize the department, freeing some individuals to serve the university in other ways. For those that remained, it became apparent that we had to ensure they had the skills and training they needed for the e-procurement age. Investing in our people was paramount.
Raising Cost Containment Bar
The first cost containment effort, which ended in 1999, had been an enlightening experience which helped prepare us to face the next phase of our transition. Purchasing Services knew the opportunity to exceed our initial efforts existed, but we would need to put the right people and right technologies in place.
This time around, our customers were actually leading the way. E-commerce was on the rise. The dot.com revolution was at full steam, making it easier than ever to buy anything imaginable with the click of a mouse. Users, who at first asked why we needed to change to an e-procurement platform, now asked why it wasn't easier. After all, why shouldn't it be just as easy to buy things at work as on the most popular e-commerce site at home?
Like home shoppers, our customers wanted more than ease of use. They wanted choice and they wanted a system that made it easy to find what they were looking for.
All of this boiled down to a truth we learned that is just as applicable today: Customers determine the success, and to a large degree the value of a procurement organization, by how easy it is for them to buy. With that in mind, in January 2002 Penn implemented on-demand procurement automation and supplier enablement software and services from SciQuest.
Delivered via the Internet, SciQuest's solutions required limited IT resources and support, offered users the intuitive shopping environment they wanted, provided financial leaders with the functionality they required, and solved our supplier enablement and catalog management challenges
To enhance our existing human capital, we recruited additional talented people into the organization. Many of them were procurement professionals whose experience demonstrated the mindset and determination necessary to achieve our new standards. Having both the technical and human resources in place positioned us to pursue even more aggressive efforts.
In June of 2006 the Purchasing Services Department at Penn again publicly announced its cost containment goals: A four-year effort to achieve $50 million in documented, hard savings. Now 30 months into the project, documented savings are at $40.3 million and we have the very real potential to reach our goal by 40 months. The department's cost savings to department operating budget return on investment ratio for the 10-year period beginning in 1996 was 9:1. In fiscal year 2008, the annual ratio has increased to 17:1. (See Exhibit 2.)
When we began this effort, we knew it would have a significant financial impact for the university. What we could not have anticipated is that how much greater the potential impact would be given today's economic realities. At Penn, like most colleges and universities, 53 percent of its budget is devoted to salaries and benefits. Purchasing, at 22 percent of budget, represents the largest chunk of leveragable spending. This speaks volumes about the potential procurement and supply management professionals have to help colleges and universities navigate the dangerous waters of today's economic storm and make a case for the need for change.
Our experience leads us to believe that procurement organizations in higher education simply can't continue to operate as processing centers. Nor can they afford to pass up the demonstrated and proven savings that arise when schools aggregate their buying power, or the benefits that come when e-procurement and supplier enablement solutions empower suppliers to do business with institutions at lower cost. Suppliers that have worked closely with us on this journey have gained greater market share and decreased their sales and fulfillment costs. And in response they have given Penn greater discounts and enhanced catalog content—something that benefits Purchasing Services' customers and, in turn, of course the university's bottom line.
Yet today fewer than 2 percent of the more than 4,000 colleges and universities in the nation have the type of e-procurement systems in place they need to gain visibility over spending or implement a strategic sourcing program. The reasons are many, but the likely underlying one is that other demands have been given priority—certainly, that was the case for us for some time. In the current economic climate, the benefits for strategically positioning and investing in procurement departments is both immediately recognizable and sustainable in the long run.
Higher education is not alone in these challenges. Indeed, the same can be said for any industry. There are many organizations that treat procurement as a processing function or ignore the proven savings and efficiencies that result when today's technologies are properly used, even though the financial benefits of an e-procurement strategy are clear.
So what might colleges and universities do to transform their procurement operation into the leading edge of their cost containment efforts? Our efforts at Penn of course only represent one institution's experience, but the things we learned in the process might be helpful for other organizations that want to give renewed attention to strategically approaching their supply management efforts.
Here are a few of the things we learned that contributed to our success:
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Seek out administrative support: The enterprise-wide change that any procurement transformation demands are more likely to be successful with the strong support of senior leadership. A strong advocate with the authority to make procurement's efforts an institutional priority is critical.
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Invest in e-procurement technology: Modern e-procurement technology is absolutely required to realize the benefits of a more strategic approach to procurement. It eliminates the day-to-day minutiae and frees procurement professionals to focus not only on generating savings, but also on providing end users with real service, which is instrumental in developing an organization that is mindful of cost containment. And it's crucial to achieve the necessary visibility into spending.
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Think "Big": Technologies such as the platform utilized by Penn are just as applicable to smaller schools—even where the procurement staff consists of only a few individuals. You don't have to be a large school to realize the value of a strategic approach to procurement. On-demand solutions for small schools to utilize the same tools as the largest universities and pricing is scaled proportionately.
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Make procurement easy: At the end of the day, cost savings alone will not prove the value of your efforts. You must make your new system easier than the existing one for end users. Strive to achieve the simplicity and ease-of-use they have come to expect in their own online shopping activities. A counterintuitive, overly technical purchasing system will not foster the user adoption you need to achieve success.
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Select proven partners: In your technology and consultative partners, choose companies with a proven track record for the solutions they provide. Seek out the word-of-mouth endorsement of your peers. Consider partners that are there 24/7, 365 days a year who are proven to deliver again and again and that know your business.
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Cultivate a new skill set: Negotiation and project management skills, as well as a relentless determination to proactively uncover savings, are the new hallmarks of excellence in higher education's procurement profession. The transformation of procurement from a processing function into a source of savings requires an investment in people with the skills and mindset cost containment demands.
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Listen to your customers: Users can become not only strong advocates of a more strategic approach to procurement, but also savvy, fiscally responsible buyers in their own right—but only if their needs are reflected in procurement processes. A continual dialogue with customers ensures that their participation extends beyond compliance with purchasing guidelines.
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Provide suppliers with tangible benefits: Make your answer to "What's in it for me?" compelling. Reward suppliers that provide you with deep discounts and with a greater market share. And continually look for ways to make their business with you easier and more cost effective.
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Invest in your institution's financial health: When budgets are being cut, it's tempting to postpone any project that calls for the investment of both money and time. But the reality is it often doesn't take long for schools to achieve significant returns. Muster the courage to ask for the funds you will need now.
Supply management and procurement professionals today have the opportunity to institute real change and play a key role in generating the savings that absolutely must be achieved to ensure that the education system continues to thrive. Indeed, current events offer a unique opening to make the changes that might otherwise be put on the back burner in less cost conscious periods.
Now, more than ever, purchasing departments are in a strong position to safeguard such accessibility and opportunity. Our willingness to contain costs will help our institutions prosper. The time for change is now. Are you ready for the Golden Age?
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