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GusThe Fraud/Red Tape Dilemma in Public Procurement: A Study of U.S. State and Local Governments Abstract Procurement systems in state and local governments across the United States are in transition. Growing uneasiness by elected officials, service delivery managers, and citizens about rule driven processes, inefficient delivery systems, and poor management of resources have resulted in a number of changes to the procurement function. Currently, state and local government purchasing professionals in the U.S. are being challenged to develop new dynamic, adaptable structures and processes that devolve purchasing responsibility, yet maintain accountability and control; what we term the procurement fraud/red tape dilemma. For this case study, the current state of the dilemma is examined and the roles of purchasing professionals in the transition of the purchasing process are presented. Specifically, this case study attempts to answer the following questions: What reform efforts have governments initiated in procurement policy, organization structure, personnel recruitment and training, expenditure authorization levels, review and oversight as they continue to attempt to decentralize purchasing control? And, what are the projected trends that will impact the success or failure of thc decentralization issues over the next decade? U.S. state and local governments provide a rich body of potential theory development given that there is sufficient variances in both control and accountability structures- each state has a unique procurement process, and this is even more manifest at the local level where little procurement guidance is provided. Through this research effort we have found that there is no generally agreed upon framework for determining the utility of devolution/decentralization, nor is there any particular answer to the fraud/red tape dilemma. Procurement professionals will be continually called upon to balance the inherent tensions with no direct guidance on establishing control structures which facilitate decentralization. We propose a framework for decentralization that can be applied in state and local governments in the U.S. Introduction The international community's concern with procurement reform is not a passing phenomenon, limited to the rhetorical comments of a few elected officials. Today, both developed and developing nations recognize that poor procurement practices hinder sustainable development and negatively impacts economic growth. For reform efforts to succeed, a finn commitment from all Research Paper: The Fraud/Red Tape Dilemma in Public Procurement 2 stakeholders - governments, businesses, and society - is required to develop and implement solutions. Such reform solutions within government procurement systems must include concrete measures- preventative as well as punitive- that address issues of accountability, transparency and inequity at various levels of the social, political, and economic systems. In this respect, the international community has a role to play both as catalyst and supporter for reform. The particularly complex nature of procurement reform makes international cooperation and coordination even more critical to the successful implementation of procurement strategies that promote accountability and improve governance. Public Sector Procurement Reform Within the broad policy concerns identified above, procurement reform over the last few decades has focused on four primary areas; 1) structural challenges confronting procurement processes, 2) value for money improvements and bench-marking procedures and performance to world class/within class standards, 3) professionalization and education of procurement personnel, and 4) redefining procurement processes (including information technology) to focus on procedural and substantive outcomes rather than process outputs (typically described as transaction costs). Each of the major reforms will be briefly discussed below. Structural Reform: To achieve the ideals of good procurement practices some fundamental structural reforms have taken place within systems. A major issue conceming structural reform is where to locate procurement accountability and control; the issue of centralization and decentralization of the procurement function. The question reformers must attend is how to balance the inherent tensions between service delivery managers requests to loosen the bonds of procurement regulations (red Research Paper: The Freud/Red Tape Dilemma in Public Procurement 3 tape) against the organizations need to maintain control against fraud/mismanagement in procurement. Traditionally, control is exercised by legislative bodies and central management through budgetary, financial, accounting, personnel, and purchasing systems. Reformers suggest that controls on the use of inputs - i.e., the factors of production - constrain the ability of service managers to meet service demands efficiently and effectively. Decentralizing the purchasing function is beginning to receive some attention in government. Value-for-money and bench-marking: The second reform effort has focused on increasing value-for-money in procurement and bench-marking procurement practices against a given set of standards. In the private sector these standards are promulgated through a host of generally recognized international and national professionals associations, and trade associations. The public sector is not so fortunate. The determination of value-for-money is often neglected in the procurement process and the accounting and control systems currently in place often inhibit effective cast analysis. Bench-marking procurement practices is also waning. In both cases a number of public sector professional associations and organizations are attempting to establish standards to judge the utility of public procurement. We have not at this juncture reached agreement as to what the standards should constitute, but a number of advanced analytical techniques have been developed to evaluate procurement spend. Professionalism and education: The third major reform initiative regards the need to develop professionalism in procurement agencies by enhancing the knowledge, skills, and abilities of procurement personnel. Not to minimize the value of procurement training, but procurement personnel are typically sent to training Research Paper: The Fraud/Red Tape Dilemma in Public Procurement 4 for one day and it is anticipated that they will, hence, have the requisite skills and abilities to effectuate sound procurement practices. The only way to raise the standards of procurement, both procedurally and ethically, is to insure that those charged with the delivery of procurement are provided with the education necessary to make sound (rational) decisions. Through an education process, where procurement personnel are constantly exposed to sound procurement practices and critical thinking, will both buyers and officers become more proficient in procurement and enhance organizational efficiency. Technology: The fourth reform effort looks at the impact that technology has on procurement. Over the last two decades many have contended that technology has transformed the purchasing process, in some cases moving procurement from a tactical to a strategic position within the organization. With the demise of the dot.coms and the virtual dismantling of the e-procurement industry (where only a couple of firms still exist) a number of governments have frozen their e-procurement initiatives. What we are finding is that rather than "off-the-shelf' packages that supposedly link the entire procurement system, governments are now slowly examining e-procurement solutions in a sequential and deliberate manner. The U.S. Context Procurement systems across the U.S. have established control systems and accountability standards attempting to balance the inherent tensions manifest in the procurement process. A major challenge confronting the procurement profession is how to effectively address the fraud/red tape dilemma: that is, at what point do rules become too burdensome to control against the potential for fraud (i.e. maintain accountability), and at what point is the risk for fraud too high (establish control Research Paper: The Fraud/Red Tape Dilemma in Public Procurement 5 systems). The question that public procurement professionals must attend, is, how do we develop systems and process that balance the inherent tensions in procurement? Given that research into the area is particularly arid, many organizations simply attempt to institutionalize internal control processes that become, in many situations, too burdensome for service delivery managers to effectuate the organizational value-chain, and inhibit public procurement professionals attempting to loosen controls and identify accountability networks throughout the procurement function. In contrast, some organizations fail to properly identify areas that are ripe for fraud, and perpetuate loosely-coupled procurement processes. Therefore, it is incumbent on the organization to articulate both processes and procedures to balance these inherent tensions, establish training and education processes for key stakeholders (not only procurement personnel, but elected officials, administrators, suppliers, and line services personnel), and to establish monitoring and evaluation systems to insure accountability is maintained and the controls on the factors of production are not overly burdensome. The environment of public sector procurement has become much more complex than ever before. Purchasing is no longer simply a clerical function performed independently by various people throughout a governmental entity. Today, the procurement professional confronts world-class competition, rapidly emerging technologies, increasing product choice, environmental concerns and the growing emphasis on quality and best value (not simply lowest price). They have to balance the dynamic tension between competing socioeconomic objectives, provide a consistent agency face to suppliers of goods and services, satisfy the requirements of fairness, equity and transparency, and at the same time, maintain an overarching focus on maximizing competition and satisfying stakeholders. Research Paper: The Fraud/Red Tape Dilemma in Public Procurement 6 At its most fundamental level, the job of purchasing is that of managing the business re- lationship between the end user and the supplier of goods and services. In other words, the buyer is inserted between the definition of a requirement or need and the satisfaction of that need. In carrying out their responsibilities, buyers are simultaneously pushed and pulled in a number of directions because of the pressures of balancing costs and risks (not only the risks of not meeting basic buying objectives, but also the risks of not optimizing socioeconomic, regulatory and political requirements). These are the elements that make a purchasing job so challenging and interesting. In most agencies, the scope of the purchasing activity may be defined as providing all of the materials and services that are required by the organization, beginning with the determination of requirements and usually ending with the disposal of the materials acquired. People speak of purchasing, procurement and materials management almost interchangeably. It is useful at this point to consider three basic definitions taken directly from the NIGP Dictionary of Purchasing Terms: Procurement: 1. (US)(CN) purchasing, renting, leasing, or otherwise acquiring any supplies, services, or construction; includes all functions that pertain to the acquisition, including description of requirements, selection and solicitation of sources, preparation and award of contract, and all phases of contract administration. 2. the combined functions of purchasing, inventory control, traffic and transportation, receiving, receiving inspection, store keeping, and salvage and disposal operations Purchasing: the act and the function of responsibility for the acquisition of equipment, materials, supplies, and services. In a narrow sense, the term describes the process of buying. In a broader sense, the term describes determining the need, selecting the vendor or contractor, arriving at fair and reasonable price and terms, preparing the contract or purchase Research Paper: The Fraud/Red Tape Dilemma in Public Procurement 7 order, and following up to ensure timely delivery. Material Management: embraces all functions related to the control and coordination of the movement of goods, and maintenance, repair and operating items to, through, and out of the organization, including purchasing, storage, disposal, material forecasting, inventory control, preparing requisitions, developing specifications, receiving, quality control and inspection. It can be seen that purchasing is encompassed within the broader definition of procurement which includes not just acquisition activities, but also those activities before actual purchasing takes place (e.g, requirements description or definition), as well as those activities after purchasing (receiving, inspection, inventory control or disposal). In turn, procurement is a sub-set of material management that includes all process activities relating to the movement and control of goods and services through an organization. This parallels the focus of the NIGP professional development program: a progression from purchasing through material management, just as purchasing positions evolve from buying responsibilities through the enhanced responsibilities of procurement and supervision and then to material management and management functions. There is an ongoing debate about whether the ideal purchasing person should be an expert in the process of contracting or rather an expert in a specific commodity area There is a need for both; indeed, this distinction represents the two ends of the spectrum of skills and knowledge required. Specific job expectations and the organizational structure of the agency will determine the correct mix for each situation. However, the attributes of purchasing professionals must include business knowledge, effective business communications, adaptability to rapidly changing priorities and the ability to negotiate (to effectively manage relationships within the agency and between end users and suppliers). The goal of every buyer should be to achieve best value (not necessarily lowest cost) in Research Paper: The Fraud/Red Tape Dilemma in Public Procurement 8 the face of the pressures, uncertainty, competing objectives and public accountability entailed in balancing costs and risks. If that goal is met, then all of the buyer's "clients" have been satisfied. Those clients include end users, suppliers and the public. Until very recently, the performance of public purchasing groups was measured on the basis of transaction counts and contract costs, document throughput time and the cost of running the purchasing department. These measures have evolved to more closely parallel those seen in the private sector. This is the concept of "value-adding benefits" which are added to the traditional focus on purchase price and continuity of supply. Dobler and Burr point out that purchasing groups in private sector companies should be pro active and focus on five value-adding outputs:' Quality. The quality of purchased materials and services should be virtually defect-free. Cost. The material management function must focus on reducing the total cost of acquiring, moving, holding and converting goods and services throughout the supply chain. Time. Purchasing must play an active role in reducing the time required to bring new products to market.., the time required to bring a new product to market can be reduced by 20% to 40% through the establishment and implementation ora world-class strategic supply system. Technology. [Purchasing] must ensure that the firm's supply base provides appropriate technology in a timely manner. Continuity of Supply. The purchasing and supply management function must monitor supply trends, develop appropriate supplier alliances, and take such other actions as are required to reduce the risk of supply disruptions. For public purchasing, value-adding benefits are very similar-quality, cost (including total cost of Research Paper: The Fraud/Red Tape Dilemma in Public Procurement 9 ownership), service, continuity of supply and time. All of these factors directly impact costs. For example, there is a considerable cost associated with keeping inventory, since inventory can be considered as a type of insurance against exigencies. In the private sector, it is estimated to cost firms 25% to 30% of average inventory value per year to maintain stock; in a recent audit of material management in a large federal department conducted by the Auditor General of Canada, it was estimated that inventory holding costs were 25%. This serves as a dramatic illustration of the value of a good public purchasing organization, one that seeks the best combination of quality, service and price relative to the end user's needs. Case Description Government Structure in the U.S. The structure of government in the U.S. stem from over two decades of debate and compromise by the founding fathers. The driving force regarding how the U.S. government was to be structured was based on the notion of separation of powers and "checks and balances." Separation of powers and checks and balances were viewed by the founders as a necessary "evil" to guard against tyranny. That is, the notion of efficiency was never a concept warranting attention of the creators of the U.S. government. As a result, we currently have one national government (the Federal Government), 50 sub-national governments (states), and 87,525 local governments. Each level of government has its own responsibilities, and yet many of the functions performed duplicate other levels. The federal government is primarily responsible for "national" concerns, ranging from food and drug administration, education, and interstate commerce, to name only a few. State governments Research Paper: The Fraud/Red Tape Dilemma in Public Procurement 10 are, as the U.S. Constitution states, concerned with all the rights and responsibilities not expressly enumerated in the U.S. constitution. Each state has its own constitution, and the majority of state constitutions emulate the federal system; where there is a chief executive (governor), a legislative branch (typically a House and Senate) and a judicial branch. On the local level, local governments are typically divided into counties, cities, towns/townships, and villages (although there are differences among the states - for example, New York has boughs rather than counties, even though they serve the same purposes). At the local level governments can be divided into general governments and special governments. All those entities performing general government duties (such as law enforcement, fire, education, recreation, and the like) are considered general purpose governments. All other local governments are considered special districts. Special districts are typically defined as a local unit of government created pursuant to general or special law for the purpose of performing prescribed specialized functions including urban functions, within limited boundaries. A Dependent Special District means a special district whose governing head is the local governing authority, ex officio or otherwise, or whose budget is established by the local governing authority. An Independent Special District means a special district whose governing head is an independent body, either appointed or elected, and whose budget is established independently of the local governing authority, even though there may be appropriation of funds generally available to a local governing authority involved. As figure 1 shows, in 2002 there were 50 state governments and 87,525 local governments in the United States. Of these local governments, 38,967 are general purpose local governments (3,034 county governments, 19,429 municipal governments, 16,504 town or township governments). The Research Paper: The Freud/Red Tape Dilemma in Public Procurement 11 remaining 48,558 are special purpose local governments, including 13,506 school district governments and 35,052 special district governments. Table 1. Type and Number of Sub-National Governments in the U.S. June 2002 Level of Government State Government Local Government: County Government Municipal Government Town/Township Government Special District Government; School Districts Other Special Districts As of June 30th 2002 50 87,525 3,034 19,429 16,504 48,558 13,506 35,052 Given that the focus of this case study is on state and local government procurement processes in the U.S. in 2000 the combined revenues for all governments (state and local) were 1,942,328,438,000. Of that amount, 1,260,829,249,000 was received by state governments while 1,013,824,631,000 was collected by local governments (the revenue of local governments also includes revenues from the Research Paper: The Fraud/Red Tape Dilemma in Public Procurement 12 state through intergovernmental revenue sharing). Expenditures were 1,746,942,699,000, where states spent 1,084,097,152,000 and local governments spent 996,266,752,000 (again, the difference reflects the receipt of state intergovernmental revenue sharing expenditures). Table 2 provides a breakdown of state and local government expenditures for 1999-2000 (the most recent data). Table 2. State and Local Governments Expenditures by Function 1999-2000 States Local Governments Direct Expenditures: 757,027,323,000 985,996,303,000 Current Operations 523,113,684,000 765,632,776,000 Capital Outlays 76,232,509,000 140,830,321,000 Assistance and Subsidies 22,136,147,000 9,239,297,000 Interest on Debt 30,089,074 50,410,148,000 Insurance Benefits and Repayments 105,455,909,000 19,773,761,000 (Salaries and Wages) 154,503,994,000 394,291,958,000 Debt Outstanding: 547,875,824,000 903,939,398,000 Short-term Debt 6,378,753,00 17,912,661,000 Long-term Debt 541,497,071,000 886,026,737,000 Research Paper: The Freud/Red Tape Dilemma in Public Procurement 13 Source: U.S. Bureau of Census, Table 1. State and Local Government Finances by Level of Government and by State: 1999-2000. Total Procurement Spend in State and Local Governments in the U.S. A question that typically can't be answered by state and local government officials is, how much money the government spends for all of its purchased materials and services in a given fiscal year? Some budget and finance professionals may venture a guess that approximately 30 percent of the operating budget is spent on these purchases. This answer is typically based on the notion that 70 percent of all government expenditures are related to personnel expenditures, therefore, the remaining must be on materials and supplies. From their perspective, knowing the exact dollar value is the task of the procurement officer and of no particular interest to their daily activities - after all they are managing what they know best. If this were true, then we would simply ask the procurement professional to find out how much money is spent annually on goods and services - but again we probably would not receive a dollar value, instead we would be referred to the finance and budget professional - it is their job to know this information. After all, the procurement professional is concerned with acquiring the goods and services needed to make the government function in a timely and efficient manner, and to make sure that supplies are available when needed and at the right place. In all honesty, most probably don't have any idea how much is spent, let alone know how it's spent or among how many suppliers. Or even more problematic, how does the government know that it is getting the most from it's tax revenues through the procurement process? The simple fact that we can't even venture a guess is symptomatic of the basic problem in government fiscal operations: Nobody really cares about this very critical governmental function! Research Paper: The Fraud/Red Tape Dilemma in Public Procurement 14 We might become more concerned if we had an idea just how much government spends on the purchase of goods and supplies. Very simply, state and local governments are spending, conservatively, 25 to 40 percent of every tax dollar on purchased materials and supplies for governmental funds, 60-70 percent for special revenue funds (mainly special taxing districts), 80-100 percent for capital project funds, and approximately 70 percent for enterprise funds. Trust and agency funds are typically "pass through" accounts, such as pension funds. The total costs for all purchases, including hidden payroll costs, waste and misuse, processing costs, and inventories, could bring the actual value to almost 50 percent of the total budget. Generalizing this to the entire population of state and local governments in the U.S., this value could range from $1.598 trillion (50 percent of all expenditures) to $2.396 trillion (75 percent). Carrying this argument a little further, if a local government, for instance, were to reduce transaction costs associated with the purchasing process by five (5) percent, this could net a 2.75 percent tax reduction. Although not an overly dramatic cost reduction, in some cases the savings from more sophisticated purchasing practices could net much larger savings. During difficult financial times, where governments are looking for ways to reduce expenditures, the procurement process may be one area ripe for cost savings. Given the dollar value and potential cost savings associated with the procurement process, a more appropriate question is, "How could any area of expenditure be so large yet so forgotten? Part of the answer may lie in the fact that it was buried by lack of interest and other priorities confronting managers, and has therefore stayed out of sight. This view may have been supported since centralized procurement became the mode of operation in government more than fifty years ago. Part of the problems could be attributable to the fact that public sector procurement is constrained by Research Paper: The Freud/Red Tape Dilemma in Public Procurement 15 numerous laws, policies, and procedures that many simply avoid changing the system because of the time and energy needed to change these constraints. And particularly, those charged with the responsibility of facilitating this activity may have hindered the professionalization of the field. Major Reform Efforts Impacting State and Local Governments in the U.S. State Governments The battle between those who believe hi the speed va~tl efficieucy of decentralizafiou mid those who carry the bmmer of added-value, purchash~g power and risk avoidm~ce fltrough ceuwallzed procurement is long m~d storied. There is a host of examples of the victories by the constituency of each army that are revisited with each wave of the cycle. There is a delicate balance that should be aclfieved. The balm~ce would have to exist betweeu the risk associated with too much deceutralizafiou by a large group of authorized procurers, the value that cm~ be added by combhfiug volume, the speed of pohlt-based decision makh~g, mxd takiug advantage of the specialized kuowledge of procurement professiomals. In the best case, the procurement function would negotiate broad contracts aald put h~ place other tools to allow end-users to obtahl what they ueed without exposhlg the orgmfization to hlcreased risk. Public procurement faces additional scrutiuy beyoud what a private enlity would though, because we must auswer to the source of the fuuds...the tax-payhxg public (or, as h~ the case of Oregon State Ulfiversity and others like it, the Federal govenmaent or other sponsorh~g agencies). Iix respouse to that hlcreased scruth~y, most public agencies are overly cautious and risk-adverse. Tiffs posilion causes public eutifies (more ofteu than no0 to phce more policies or procedures to avoid risk, or the perception of misappropriation, thru! are reasouably uecessary. However, it is typically the admixfistrafiou of those entities that must mxswer to the criticism of Research Paper: The Fraud/Red Tape Dilemma in Public Procurement 16 the pubhc, rather thm~ the end-user. Therefore, fl~e end-user is usually not as appreciative of the steps behg taken than those who are tryh~g to avoid beiug put m~der the microscope. Tiffs disparity of perspective causes some of the teusion as well. The cycles of pushes for ceutralization vs. decentralization may well be tracked to the level of scruth~y or h~terest behg shown by the public beh~g served by the ageucy. Iii times of prosperity when the pubhc is, for the most part, happy with govenunent, levels of scruth~y will be lower m~d the agencies will look closer at the benefits of decenl~alizatiou. In times wheu public scruth~y is lfigh, either because of poor economic conditious or a specific flash4ssue or misappropriation, agencies will probably push for greater control and centralization. State Agencies coutillue to clamor for iudependence from their centralized purchash~g function. Iu most cases tiffs clamorh~g is through file efforts of the particular ageucy lobbyhtg to their legislators. This lobbyh~g uses the specific examples of perceived failures on the part of the cenll'al purchasing ftmction to justify file de-centrali/~tion. Iu Oregon we have seeu tiffs happen with the Oregon Health Scieuces U~fiversity, the Departmeut of Transportation and others. This activity con~h~ues h~to the current legislative session with tile Oregon Uuiversity System followh~g suit h~ attempts to gah~ greater iudependeuce. To battle agah~st titis, ceuWal purchash~g funcfious of States conth~ue to adjust their mission statements m~d thek offerh~gs to demonstrate to thek admhfistrators and the legislature that they are truly tile models of efficiency that they claim. They have also changed their offerh~gs to be uot o~fly file "processors" of the procurement, but to be a consultant function and a trah~h~g fimction to tile agencies they support up to the dollar level they have already delegated. Another form of ceutralizafion that has beeu seen is additio~tl layers of oversight behlg h~corporated h~ support of auy that may have been delegated by the central purchash~g fuucfion. Research Paper: The Fraud/Red Tape Dilemma in Public Procurement 17 Ail example is legislalion passed four (4) years ago hi Oregon wlfich requires that all contracts over a relatively small dollar level ($100,000) be reviewed mid approved by the State's Departmeut of Justice prior to being eutered hlto by rely agency regardless of their delegation level or exemption status. The recent budgetary challenges that States are fach~g has generally consumed the legislatures but has also giveu both sides of the centralizatio~/deceutralizatiou argument ammuxfition ill their arguments. Agencies seekhlg the decentralization speak of behlg able to be more creative mid flexible through deceutralizafiou. Tile central purchash~g functious agafll state that file current envirolm~ent is best served by centralization of purchash~g power, expertise mid efficiencies. Value-tbc-molley ~u]d be]~ch-marld~g at tile State level: At a State mid State agency level we conthme to see pushes toward more value-for-money wlfile behlg faced with budgetary cuts wtfich disallow the time mid effort necessary for effective cost m~alysis mid bench-markhqg. The end-users we are servh~g constmltly throw back at us the adage "I don't wmlt to be forced hlto takhxg the 'low bid'." Fortmlately as we have faced this statement mmly times, we have also become more mid more accustomed to issuh~g procurement documents that take hlto account factors other thaaljust the dollar price. Our ability to contillue to offer creative procurement expertise is a ftalction of trahth~g mid experience. Value-seekh~g has become available uot oldy hi the formal procuremela processes, but also in a general seuse hi a~ly procuremeut which we choose to hlcorporate it. State's are becomh~g more flexible hi their la~lguage a~ld regulations regardiug allowh~g for factors other than just price. Tile extent to wldch flexibility hi accepth~g other than the low bM is largely determhled by the local politics Research Paper: The Freud/Red Tape Dilemma in Public Procurement 18 which govern passage of such required empowerhg legislatiou. The ability to couthme to conthme to be creative and flexible requires conthxuous trah~h~g of the staff responsible for implementfllg it. [hffortuuately, with curreut budgetaxy constrah~ts, trahfing tends to be seen by upper management as one of those "dispensable" lh~e items. Another tuffommate victim of tight budgets is often the effective cost m~alysis emd beuch-markh~g that crux validate the efforts we expeud. Effective cost-analysis allows us to not ouly to determhxe how effectively we have procured a particular item, but also allow us to be more successful h~ negotiations (wheu and as negotiations are allowed). Because it coh~cides with negotiation, cost-a~alysis is a~l important part of the value-seekhg procurements h~cludhxg formal Requests for Proposals which almost always h~corporate negotiation as h~tegral to effectively utilizing that procuremeut process. Cost-m~alysis and beuch-markh~g can be t/me consumh~g, however, aud also occur at the conclusion of a procurement process. The effect of budget cuts is that we all have more m~d more projects waiting for our attention and once the bid closes, we are pressured to get onto the uext challeuge. More often thm~ uot, the tree cost analysis is all but forgotten and we bench-mark through hfformal e-mail conunuuications to peers through local hfformatio~al cooperatives or perhaps regional or natiou-wide listservs or professional associations such as NIGP or NASPO. The result is that the loss cm~ be compom~dh~g h~ not ouly faili~lg hi cost- m~alysis or benchinarkh~g, but may also h~validate a value-seekh~g procurement process. The overall effective reform that is behtg seeu is a tendency toward more value-seekh~g procurements Mille the budgetary constrah~ts and cuts often hxvalidate those processes by not allowh~g for effective cost-analysis and belxclunarking. ProFessio~ah'sm ;uld educaffoll hi the Stat~. As State's cenwal purchasing ftmctions have fought agah~st h;creashxg deceutrallzation, the Research Paper: The Freud/Red Tape Dilemma in Public Procurement 19 ageucies wlfich have been successthl hi decentralizh~g from the States often "steal away" die humau resources of the ceutral purchashig fuuctiou. This revolving door of State central purchashig professiolmls allows file States to theu hicrease the expertise and professioualism of their staff through recruitments. The advent of more widely fomid professional associations (NIGP, ISM, NCMA, etc.) said their assoeiated, relatively hiexpensive, trah~g and certification programs, has also beeu affecthxg a geueral hlcrease hi the kaiowledge, professionalism and certification of the procurement professiol~d. The hicreashig requirements by recruiters combhied with the hicreashg professionalism of those hi the professiou, has made certifications more common. It has long been stated that the professioualism of purchashig as a career was increash~g. Ill recent years, among State ageucies, we are finally seeing the hlstances where our procuremeut professiouals have degrees, advauced degrees and professional certifications. Ill addition, procurement professiouals are clamorh~g for coutfliuhxg education mid trah~g from their employers. Grmited, tiffs is a battle with shrhd~h~g budgets, but the State mid its agencies are takhig steps to provide more hi-house trahfixrg based upon the collective expertise of the agencies. With the budgetary coustrahits that curreutiy exist, agencies are now very frugally comparfl~g the quality of the programs offered by educational mid professional associations as well as the value of memberslfips to such orga~fizatious. With die variety of choices available, it allows for competition betweeu the associations mid once agafli focuses ou the value-seekfl~g that is occurrhig more often. Still, more than ever hi die past, the reform we are seeh~g now at the State level is mi hiterest hi hlcreased professioimlism, greater education mid efforts toward professioual cerfificatious. Teclmology h~ tile State. What we see at the State level related to the "e-commerce" part of teclmology currently is mi Research Paper: The Freud/Red Tape Dilemma in Public Procurement 20 attempt to make it a three-pronged tool wlfile dohig so with mhtimal budgets. E-commerce can: 1) Increase opemiess, oppormlfity and cmmection with our constitueuts; 2) Increase elticiencies through reductions h~ costs of bid/RFP package dis~bufion; and 3) Expmld the opporm~zifies to do hush,ess with the State to veudors near mid far. Two to three years ago, durhg the dot. eom escalation, State ageucies were bombarded by fLrms who wanted to sell us their "wares." Very few States actually set sail with these veudors and wisely so. With the crash of the dot. eom's just mouths later, we saw the vast majority of the promises beh~g made fall apart. The result is that most State agencies are still very reluctzmt to try m~d hivest hi the e- commerce tool for fear of signhtg ou with a compm~y that may not be arouud tomorrow. In the absence of a clear mid safe direcfiou, much has been spent on h~temal solutious, studies ~md consultmits. The safest way to protect tim h~vestment is to do it yourself and we see that happe~fing h~ a lot of cases. Web-sites are very easy to build if you are just wanthig to post your bids on-lillc and provide some mhfimal informatiou aud hiteractivity. Because of thc current budget crmmh, that is all that mm~y are behig able to do. There are a few States aud age~mies out there who have signed on to major emommerce providers offerh~g a range of solutions from bid development m~d distribution, to portals mid virtual shopphig centers, to electro~fic bid sublnissions, lockboxes m~d reverse auctions, to full hitegrafion with their euterprise thlmicial systems. It appears to be the lal/er who are able to fred some lfiche of success, particularly those veidors who can demonstrate a relationslfip with the ERP provider - eveu more preferably to go directly to the ERP provider for the solution. Teclmology remahis mi hlterest by most all States mid ageucies, the challenge is to ensure that the hxvestment will pay off not oldy h~ a solutiou that will come to fruition, but h~ a cost that is outweighed by the benefits m~d savh~gs garnered. Research Paper: The Fraud/Red Tape Dilemma in Public Procurement 21 Local Governments Within the political context, local government procurement reform is looking at four broad areas where its change in processes and techniques may have the greatest impact. Those areas are: 1. Structural changes (centralization versus decentralization of the process, and hence the accountability) 2. Obtaining best value and validating that best value 3. The professionalism and education of the procurement professional 4. Re&fining the procurement process, to become less transaction driven, and more focused on the value obtained Local governments are attempting to accomplish these changes in an environment of shrinking budgets and increased attention to the local organization by both the constituents and the media. Local governments are required to perform under a scrutiny not normally seen within the private sector, which requires the agency to implement processes and procedures that are cumbersome and force a lack of efficiency. Oftentimes the total cost of conducting a competitive procurement may exceed what it might in an organization not bound by the requirements of this amount of red tape. Nevertheless, without these processes and procedures in place, the perception of fraud and corruption is much greater. Centralization versus decentralization at the local government level Before the question "when is centralized purchasing justified," one must define "centralization." What does it mean for purchasing to be "centralized?" In basic terms, centralized purchasing simply describes the type of organization in which there is some form of centralized control over the purchasing function. Some districts may be unwilling or unable to afford or justify Research Paper: The Fraud/Red Tape Dilemma in Public Procurement 22 the creation of a centralized purchasing position (or department). Some districts may operate without standardized purchasing policies. Other districts may delegate, to the greatest extent possible, purchasing authority to the school site level. At some point, districts without a centralized purchasing authority, therefore, are considered to operate using, for lack of a better term, the "decentralized" purchasing model. Decentralized districts typically depend upon site (or department) personnel to make purchasing decisions, which are later ratified as a Board "consent" item. Benefits of Centralized Purchasing. It tums out to be easier to define the benefits of centralized purchasing than a definition of centralization itself. The Council of State Governments lists some of the benefits of centralization, not the least of which is cost savings: "An effective central purchasing program reduces the cost of government. It inspires public confidence in government. It directly improves the quality and timeliness of services rendered by program departments and agencies. It is government's meaningful link to the business community; it promotes honesty and integrity throughout governmental operations." (CSG, p. 10). As far as pursuing a more refined definition of centralization itself, the Council indicates that centralization is a continuum ranging from centralized policy formation to centralized purchasing functions: "Ultimately, centralization becomes a matter of degree. There are some duties that should be centralized. One of these, without question, is the formulation of policy, rules, and regulations. Others, to the extent practicable, are: · Developing or adopting product standards and specifications. · Preparing formats and contractual terms and conditions under which bids or offers Research Paper: The Fraud/Red Tape Dilemma in Public Procurement 23 are solicited. · Determining awards of large volume purchases and major contracts. · Prescribing standard forms to be used and standard procedures to be followed · Operating a central purchasing data system. · Mediating protests and disputes between using agencies, bidders, and contractors. · Imposing penalties for non-performance of contracts. · Developing a standard commodity coding system. · Designing a uniform inventory program. (CSG, P. 20-21) Key Purchasing Responsibilities, as defined by the National Institute of Governmental Purchasing include: Assisting user departments to select the most appropriate purchasing methods, and to develop and write purchase specifications, statements of work, bid evaluation formulas, and proposal evaluation methodologies. Compiling and maintaining lists of potential suppliers. Participating in decisions whether to make or buy services - that is, whether to provide a service in-house or contract it out. Securing quotes, bids, and proposals and working with the user departments to evaluate the offers received. · Awarding contracts on behalf of the user departments. Research Paper: The Fraud/Red Tape Dilemma in Public Procurement 24 · Maintaining continuity of supply through coordinated planning, and scheduling, term contracts, and inventory. · Seeking to assure the quality of needed goods and services through standardization, inspection, and contract administration. · Advising management and user departments on such matters as market conditions, product improvements and new products, and opportunities for building (proper) goodwill in the business community. Note that items on both of the above lists are technical and specialized in function. The necessary level of competency in a technical field makes it difficult to completely delegate the purchasing function to site personnel. While it would be tidy to have a concrete and unchanging definition of centralization, it is impossible in the world of school purchasing. Some of the advantages of centralized purchasing can: "...streamline and standardize the purchasing process, especially for major items such as offices supplies that all agencies use." (Lemov, p. 97). Centralized purchasing also allows a district to benefit from economies of scale. In contrast to decentralized purchasing, where every school (or teacher) acts as an agent for the district, a centralized purchasing department channels all transactions though a single responsible agency. The purchasing department then may be able to combine requests and solicit prices on larger quantities of a given item. This equates to lower prices. Further, commonly used items may be warehoused in order to facilitate quantity purchases and to be available when needed. Even on a single-item basis, a purchasing department can often save money by soliciting bids or quotes from several qualified vendors. Specialization of duties allows purchasing employees to develop expertise in negotiating with vendors, purchasing law, locating sources of supply, and so on. In addition, districts that utilize Research Paper: The Fraud/Red Tape Dilemma in Public Procurement 25 centralized purchasing provide a single focal point for vendor contacts. This frees site personnel from the purchasing function, and allows for less disruption of regular operations. The Institute of Supply Management offers the following advantages of centralization: "high level of buying expertise, lower operating costs through central coordination of purchasing activities, avoiding duplication of effort, better prices, and providing more time for line managers to manage (rather than engage in procurement activities). (NAPM, p. 95- 96). In summary, centralized purchasing has many advantages such as specialization of function, economies of scale, consistent application of board policy, and adherence to State law and local policy. To echo the Council of State Governments, "centralization, ultimately, is a matter of degree." (reference). This is to say that nearly every school district possesses, to some degree, some elements of both centralization and decentralization. Any organization must have an efficient structure to achieve its goals. This is true, whether the goal is to maximize profit, or to deliver services to a city's taxpayers. Traditionally, because local governments are under the scrutiny and attention of the media and its taxpayers, a framework has been established creating a centralized procurement function to control the expenses of the service departments whose mission is to deliver to the constituency. The elected officials repriofifize Many times these services and the service departments must be reactionary instead of proactive in solving problems and developing solutions. Consequently, there is an almost coming to lager heads between the service delivery departments and the procurement function. Procurement has been seen as the roadblock to effective service delivery in this centralized structure. Future Organizational Structure Research Paper: The Freud/Red Tape Dilemma in Public Procurement 26 In the future, there will be movement toward greater decentralization of purchasing decision- making authority. This will result from two forces working together. First, cost-reduction pressure will cause some organizations to reduce staffing levels in central administrative departments, including purchasing. Recent anecdotal evidence from industry suggests that several larger finns are reducing corporate procurement staffing levels to support corporate downsizing efforts. As this continues, it will clearly have the effect of diminishing the central purchasing group's authority. Second, again in industry, there is a trend towards transferring decision-making authority to locations closer to design and manufacturing centers - the analog of a university's academic centers. This can also have the effect of diminishing the authority or importance of large, monolithic, corporate purchasing groups. The need for university-operated stores operations will decrease. Again, technology innovations, improved just-in-time techniques, and the expanded use of electronic data interchange will enable institutions to rely on their supplier partners to maintain and deliver needed stocks of supplies. Many industries are making dramatic improvements in their delivery capabilities. For example, Federal Express recently introduced same day delivery classes of shipments. In a recent test conducted in Florida, Cadillac customers were able to purchase a custom Cadillac and have it delivered within 72 hours. Previously delivery could have taken up to six weeks. These trends are expected to continue and, except where a particular institution has extreme distribution problems due to location or accessibility, the need for on-site stocks of off-the-shelf items will decrease. The purchasing function will continue to evolve in the other ways. Orders will be placed directly to suppliers by end users. Direct links between users and suppliers will be accelerated by use of the lntemet, where suppliers are now routinely placing catalog and pricing information. This Research Paper: The Fraud/Red Tape Dilemma in Public Procurement 27 capability, when coupled with the rapidly emerging use of procurement cards, will enable end users to enter the distribution chain directly without going through a central purchasing system. Value for money improvements and Total Cost of Ownership Traditionally government procurement has focused on the lowest cost to purchase or the "low bid". How many times of procurement professionals heard the phrase, or something sim.ilar, when a project or contractor fails "that's what happens when you buy low bid"? Although many times these failures are more the fault of poor bid specifications, and scopes of work, the perception exists that the issue is buying low bid, and everything would be fine if the procurement office would just let us buy from whom we think is best. However, if an organization were to allow this to occur, the dilemma of fraud versus red tape would again be the subject of much scrutiny. Documenting the Savings Any measurement requires a commonly accepted unit of measure, a yardstick. Lacking this standard, all the analyst has is an individual descriptive statistic or piece of data. Many of the yardsticks that industry employs are compilations of data or comparative statistics. They do not say if the statistics are good or bad, they are comparisons. For example, the volume of purchase orders is compared on a yearly basis to try to measure activity or productivity. These statistics can be juggled any way the analyst likes. An example is the city-purchasing agent who is proud of the fact that although last year five people in the department generated 10,000 purchase orders, this year, the same five people generated 12,000 orders. The conclusion drawn by the purchasing agent is that productivity has risen by 20 percent. If he decides to buy paper clips a box at a time, 100,000 purchase orders may be needed. That would be a 1000-percent rise in productivity. The moral is simple: Benchmarks for measuring are needed, but they must make sense. Research Paper: The Fraud/Red Tape Dilemma in Public Procurement 28 This is the reason for the difficulty of purchasing agents in selling the idea of cost savings or cost reduction. They have failed to come up with benchmarks that management is willing to accept as credible and reasonable. It has just been within the last decade that companies have begun to look at the material side of the product as a source of cost reduction to be obtained by gaining insight into their suppliers' cost structures. This effort has been limited to large companies, and some of their successes have been phenomenal. Yet the vast majority of purchasing agents in this country still grumbles about their suppliers and still has very little knowledge of why they are paying the prices they pay. They have failed to sufficiently educate themselves on the potential for savings and the legitimacy of those savings. If they have not educated themselves, how can they convince top management of the validity of their savings? There does not seem to be any appreciation of the competitive advantage offered by material- cost reduction. Ifa supplier charges all customers the same price for an item, then no one has any competitive edge. If the buyer's company gets the same item for 10 percent less, then it enjoys the flexibility that 10 percent of material cost offers in the total price structure. Sources of Benchmarks and Yardsticks Often a buyer depends on the supplier to provide the benchmarks in the form of price quotations. A quote can be anything the supplier wants it to be. The analyst must look beyond the quote into the structure of the supplier. In some cases, this is done for the analyst. A recent project taken on by the Center for Advanced Purchasing Studies (CAPS) at Tempe, Arizona, is benchmarking by industries. CAPS can provide broad-based data that the analyst may find useful. Included in the CAPS data by industries is the percentage of the sales dollar going to purchased materials and the size of the average source-base in the industry? There are numerous other Research Paper: The Fraud/Red Tape Dilemma in Public Procurement 29 benchmarks, but these are typical of the information collected through survey data by the center. However, what about the individual company? After all, that is the entity being considered. For the government agency, the journey into supplier price analysis begins in its own records. The first step is looking at the historical pattem of the purchasing operation. This begins with an analysis of the accounts payable files. Normally a company keeps these data in a cumulative format. The purpose of the examination is to determine where the company is spending the money. Who are the top ten suppliers? What percentage of the suppliers is getting the bulk of the material dollars? Thus, step one is the identification of the suppliers. This may be as simple as a printout of the cumulative purchase order records. The degree of sophistication on this report runs the range from the simple listing to sophisticated stratification by product or commodity codes, buyer codes, and where-used codes. The more sophisticated the stratification, the more useful the report for analysis purposes. Step 2 may involve purging the list. If the list contains all suppliers, it must be segregated into categories. The simplest division would be between products and services. One list would contain product vendors, and the other would show service vendors such as utilities, service contractors, and the like. Service contracts are of course different from material contracts. Once the initial segregation has taken place, step three is simple. The product list is arrayed from high to low, with the cumulative appearing on the list also. Now the procurement official has a list of product suppliers and their relative importance measured by dollars paid to each. The next step is to determine what is known about each supplier. Typical questions that might be asked about the top ten suppliers are these: 1. Is the supplier a manufacturer or a distributor? 2. Is this the principal business of the manufacturer? Research Paper: The Freud/Red Tape Dilemma in Public Procurement 30 4. 5. 6. 7. Is the manufacturer a publicly held company? Is the supplier a subsidiary of a larger company? How large is the supplier, as measured by sales volume? Can any type of advantage be exerted on the supplier because of volume? What documentation exists on the supplier in company files? Use of this three-step approach insures the flexibility the purchasing department needs in dealings with the supplier. Savings can be generated from any of these areas. The saving obtained from beating back a price increase is real if it is in line with the supplier's normal price structure. Simply avoiding bottom-line price increases and pinpointing the real increase elements can be the basis for a company not having to raise its prices. It has long been known that price increases are normally passed on until there is no one left to resell the product. The consumer is at the end of the chain. Yet if price increases were limited only to those costs that really rose and were contested, inflation could be partially controlled, since productivity would become the offsetting variable. Failure to question price increases simply institutionalizes the practice and encourages the supplier to ask for more and more by tradition rather than real need. One has only to look at many industries to see the pattern. This is especially true where the channel of distribution contains many elements. An Overview of Price and Value The essence of benchmarking is to determine if the procurement official is obtaining best value. An integral part of value is price; therefore, one must understand the interrelationship between the two. Of all of the famous Ps ofmarket'mg--Price, Promotion, Place, Product-the pricing decision is most important and most complex. Price is the tangible exchange of value between the buyer and the Research Paper: The Fraud/Red Tape Dilemma in Public Procurement 31 seller. A form of wealth, money, is usually the medium of exchange. When this event takes place, the buyer has removed all the alternatives save one. A decision has been made. This is not uncommon, for it happens in the smallest transaction. The child selecting from the array of offerings at the candy store probably pursues the selection process with more diligence than many adults do. As the price rises, the concern over value becomes more important. The concern is over total value received, not price alone. This means the perception of value received from the transaction must be greater than the value given up by the buyer. Value is an abstraction, and its perception lies within the individual. It can be defmed as Value -- Quality/Price Since the equation contains two variables, both must be considered in the buying decision. If price rises, the quality must rise to keep the equation in balance. The American Society of Quality Control, in its definition of quality, has identified eight components of quality. They include: 1. Performance 2. Features 3. Reliability 4. Serviceability 5. Durability 6. Conformance to specifications 7. Aesthetics 8. Perceived quality Conversely, perceptions of quality can raise implicit value to the point where price is almost ignored as a decision variable. If one adds to this perception the rationalizations possible in the Research Paper: The Fraud/Red Tape Dilemma in Public Procurement 32 buying decision, price itself may become a status symbol. As an example, consider the person buying a lawn mower. A basic human powered mower will cost $90.00, have few moving parts, and be very easily maintained. The reel-type mower is simple to operate and should give years of maintenance-free service. These mowers are difficult to find. A complex, gasoline-powered rotary mower costing easily five to ten times as much as the reel mower has replaced them. The power mower uses gasoline and oil, is complex, and requires periodic maintenance far beyond the capability of the average owner. Its annual operating costs may even equal the purchase price of the reel mower. Why then does the rational buyer purchase the more expensive unit, as opposed to the cheaper one? The rationalizations are endless. The power unit is faster. It picks up the grass. My neighbor has one. The yard is too big. Distill these excuses down and one fact emerges. The buyer sees greater value in the more expensive, noisier, complex, pollution-creating mower than in its simple, quieter, less costly counterpart. Value perception plays a significant part in the pricing decision. Any seller failing to recognize the role of perceived value is missing a large dimension of the buying decision. Appeals to status, vanity, and the desire for conspicuous consumption are powerful influences on the product decision and the rationale for purchasing. Therefore, in addition to use value, there is esteem value. A segment of the pricing strategy must focus on the esteem dimension of the decision. For example, consumers have effectively limited or discouraged large price increases on some major appliances by brand shifting. This market is very price sensitive. Part of the sensitivity can be attributed to the wide range of appliances carded by many dealers. Side-by-side comparisons are easily made. A more subtle reason is the low status of the appliance. No one parks a refrigerator Research Paper: The Fraud/Red Tape Dilemma in Public Procurement 33 in the driveway. On the industrial side, a significant dimension of the seller's strategy is market leadership. A firm that establishes itself in the market as the perceived value leader earns handsome dividends. Confidence in its product line will generate sales, as buyers base their purchases on pemeption of the quality provided by the leader. When purchasing a part or component, it is common for many buyers to specify an item by description as well as brand name. A number of consumer products hold the enviable position of being synonymous with an entire product line. These include Kleenex, Scotch tape, Xerox, and Coke. Engineers also exhibit this trait. They specify items by brand name because they believe its manufacturer's claim of quality and reliability. Whether or not the claim is valid, the use to which the item is put may not warrant the extravagance of paying a higher price. Often, however, there is less "implied risk" for a buyer purchasing the "top of the line." If a buyer insists on a certain brand of computer equipment--even though it is inferior to a less expensive brand--he takes little risk because the well-known brand is the industry standard. The buyer admits that the other brand is superior to the market leader, but he also suggests that he is not going to place his job on the line for some unfamiliar brand. Better to be safe than sacked is his philosophy. No one at higher levels will fault him for the decision if the perceived quality level of the leader is high and the prices are not far apart. The value of the leader is present in the mind of the buyer. To avoid risk, buyers will therefore go with market leaders. When the perception of quality is sufficiently high to offset price differences, that perception, not the actual quality, becomes the deciding factor. Professionalism and Education Professionalism refers to the continued development of, in this case, public administrators. Research Paper: The Freud/Red Tape Dilemma in Public Procurement 34 Thus, with regard to training, professional public decision makers should be keenly aware and interested in improving the process. In addition, for professional administrators to be effective, they must make decisions that accomplish goals in a rational manner. Following the "rational" decision guidelines suggested can make them more effective with other decision makers in a political world. At the local level, governors and mayors have also recommended reorganizations before or immediately after taking office. The reorganization efforts of local governments have been promoted as remedies for specific efficiency problems such as the lack of professionalism, fraud, abuse, and corruption. The reorganization efforts of John Lindsay, mayor of New York in the early 1970s, were centered on decentralization of service delivery to make the bureaucracy more accountable. In 1982, Governor Keane promised to overhaul the New Jersey state bureaucracy. His administration's reorganization enterprises (Governor's Management Improvement Program) were designed to reduce high costs, waste, and inefficiency At the local level, governors and mayors have also recommended reorganizations before or immediately after taking office. The reorganization efforts of local governments have been promoted as remedies for specific efficiency problems such as the lack of professionalism, fraud, abuse, and corruption. The reorganization efforts of John Lindsay, mayor of New York in the early 1970s, were centered on decentralization of service delivery to make the bureaucracy more accountable. In 1982, Governor Keane promised to overhaul the New Jersey state bureaucracy. His administration's reorganization enterprises (Governor's Management Improvement Program) were designed to reduce high costs, waste, and inefficiency. Speed in procurement is rooted in professionalism; faster procurement comes from better procurement. OGC leads this drive for higher standards. I believe that this is a further opportunity to Research Paper: The Fraud/Red Tape Dilemma in Public Procurement 35 engender sustained improvement by attending to the fundamentals of professional procurement." Two main areas of concern seeking reductions, wherever possible, in the: 1. Costs to both the public and private sector in the procurement process and Procurement time-scales. It is likely to examine the use of consultants by customers, the cost of bidding and the departmental procedures involved in such processes as advertising, pre-qualification, tender assessments, negotiation, accounting and paperwork. It will also examine departmental decision-making processes involved in the achievement of value for money Redefining Procurement Processes The field of purchasing has been changed forever by the development and commercialization of Intemet based technologies. The question is, are your ready for these changes? Experts in strategic management have argued that an organization's non-core operations should be out-sourced. ~ Properly applying these intemet base technologies will enable the purchasing function to move toward a strategic posture by finally freeing it from its clerical role and allowing employees more time to focus on more value-added activates. E-purchasing and technology is the buying piece of the equation that will enable purchasing to move into a more value- added orientation. The traditional industry view of the purchasing function centers on administrative, transaction-based processes. This viewpoint drives organizations to focus on the efficiency of the purchasing process (expense) and misses the real opportunities in effectiveness (cosffprice). ' Michael E. Proter, Competitive Adv'imtage, New York, The Free Press, 1985 Research Paper: The Fraud/Red Tape Dilemma in Public Procurement 36 Comparing the Traditional and New Business Models Traditional business model Based on traditional technologies and personal contacts High investment in assets High transaction costs in information acquisition, cross-organizational communication, purchase orders, crossing national boundaries High inventories in the supply chain Supply base managed but large Numerous levels of management Inter-organizational information flow restricted Lowest cost for supplies purchased New business model Based on electronically based communication and relationships Lower investment in assets Low transaction costs in information acquisition, cross-organizational communication, purchase orders, crossing national boundaries Low inventories, and rapid information flow replaces need for high inventory levels Focused and flexible supply base Few levels of management Free flow of inter-organizational information Best value for dollars expended, total cost of ownership Developing technology will influence purchasing organizations dramatically. Once the capability for electronic requisitioning exists in any organization, there is no longer a reason to have the purchasing function located centrally. Traditionally, the purchasing function at universities was located as close as possible to the center of the campus to facilitate personal interaction between buyers and their customers, and for moving paper requisitions to individual commodity buyers and purchase order copies back to requesters. Routing electronic requisitions by commodity code to appropriate buyers, regardless of their physical location, obviates the need for a central location. In the future, some pumhasing staffwill be co-located with its customers. This change will result in a more customer- focused program. The electronic distribution of work may progress beyond the customer location. For example, the ability to communicate electronically will facilitate people working at home. It will also enable users to access purchasing services from other organizations or even buyers Research Paper: The Fraud/Red Tape Dilemma in Public Procurement 37 located in other cities. Not only may it become unnecessary to have a buyer located on a particular campus or site, the buyer could actually be part of another organization without detriment. The day is foreseen when commodity experts functioning as virtual buyers may provide specific procurement services to many organizations for a fee under some public inter-agency agreement or private contract. Purchasing Systems In the future, the availability of purchasing systems to support increased professional productivity and departmental effectiveness will be critical to their success. Research indicates that business units rank the availability of effective computer-based purchasing systems as a key critical factor for the successful execution of future purchasing strategies. Consistent with this research, systems growth should occur primarily in two areas. First, firms will emphasize systems that primarily introduce efficiency into the purchasing process. These include electronic data interchange with suppliers, bar coding, and automated data input. Each of these applications removes time and manual effort from the purchasing cycle while providing greater material control. They also require technology that is readily available and need relatively fewer human resources for implementation. Second, firms will emphasize applications that increase the personal productivity and effectiveness of buying personnel and units. These include networking among purchasing sites, developing comprehensive buyer workstations, and developing decision support/expert systems (global databases). The development of these applications requires a high level of external MIS support and resources. Unfortunately, decision support/expert systems, while promising potential effectiveness and productivity breakthroughs, are largely untested or underdeveloped within purchasing. Thus, the Research Paper: The Fraud/Red Tape Dilemma in Public Procurement 38 availability of resources and MIS support for systems development will be a highly rated future concern for purchasing management. ViCtual reality technology will make it possible for users to test or experiment with products prior to placing an order. The day may soon come when, for example, through virtual reality, we can sit in the office we are designing, get the furnishings exactly as we like them in a precise configuration and color, and then simply, with a touch of a button, send an order directly to the manufacturer for the selected configuration. Research Paper: The Fraud/Red Tape Dilemma in Public Procurement 39 References Supplier Price Analysis: A Guide for Purchasing, Accounting, and Financial Analysts. Contributors: Richard G. Newman, 1992. The Future of Purchashtg, by Ray T. Jensen, C.P.M. Richard L. Mooney, C.P.M. Jolm F. Riley, C.P.M. Debra Seaman Lm~gdon, C.P.M. Brian K. Yeoman origh~ally published h~ the Professional Purchaser (Fall/Wh~ter 1996), the professional jounml of the National Associatiou of Educational Buyers e-purchash~g Plus, Changh~g the Way Corporations Buy, Larry C. Gimfipero, Chris Sawchuk, 2000 American Bar Association (ABA). Model Procurement Code for State m~d Local Govenunents. Washhgton, D. C.: Americm~ Bar Association, December 1987. Gordon, Stephen, B. Local Govenunent Fh~m~ce Concepts m~d Cases, ed. Petersen, Jolm, E. m~d Stmchota, Demtis, R. Chicago: Govenunent Fh~ance Officers Association, 1991. GFOA, Local Govennnent Fh~ance, Concepts and Practices, Ed. ByJotm E. Petersen mxd Derails R. Stmchota, Govennnent Fhxance Officers Association, Chicago, II\L. C. 1991. Hehu'itz, Stuart, F., and Farrell, Paul, V. Purchashxg: Prhxciples Applications. Prentice Research Paper: The Fraud/Red Tape Dilemma in Public Procurement 40 Hall: Eaglewood Cliffs, New Jersey, 1981. Lee, Lamar, Jr. And Dobler, Donald W. Purchash~g m~d Materials Cases. McGraw-Hill, New York, 1977. Mm~agemcnt: Text m~d Lemov, Penelope. "Purchash~g Officials Push New Teclmologies to Get Money." Govenfing, August, 1988. More for their Intematio~hal Encyclopedia of Public Policy and Admhfistration. Contributors: Jay M. Shafritz - author. 1998. Research Paper: The Fraud/Red Tape Dilemma in Public Procurement 41 Page 1 of 3 NIGP is Signaling a New CERTIFICATE PROGRAM for Government Contractors Cent?actor Certificate A new certificate from us and a stronger acquisition team for you. The Government Contractor Certificate (GCC)TM Program will soon be launched by NIGP. Contractors providing a myriad of goods and services to Federal, state, and local governments should have the knowledge and skill sets to interact effectively with the public sector buyer and manager. Knowledge and understanding of public sector contracting laws, principles, policies, and procedures by suppliers can eliminate confusion and ensure quality offers and proposals, and improve communications and partnerships. A certificate program involving 40 hours of training including four (8 hr) core acquisition courses and one (8 hr) elective involving one contemporary procurement topic will be the essence of this new program for government contractors. The Four Core: Introduction and Concepts to Public Purchasing Legal Aspects Souming: Solicitation, Evaluation, Award Contract Administration The Electives: Federal Supply Schedule Contracting Contracting for Services Government Contractor Tentative Schedule: The seminars run from 9:00 am to 5:00 pm Introduction & Concepts: Arlington, VA October 12, 2004 Legal Aspects: Orlando, FL January 11, 2005 Sourcing: Solicitation, Evaluation Award: Annapolis, MD April 12, 2005 http://www.nigp.org/gcc/ 8/12/2004 Page 2 of 3 Certificate Contract Admin NIGP Forum- Anaheim, CA July 29, 2005 GSA Schedule Contracting Las Vegas, NV October 11, 2005 Service Contracting Fort Lauderdale, FL November 15, 2005 Register Now: GCC Registration Form Registration Fees: The regi.stration fee is $395 per course. Fees include all course materials. They do not include meals or hotel accommodations. Information on how to arrange for accommodations will be sent to you approximately 8 weeks prior to the course date. 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Curriculum: For more information, download our Curriculum For more information, call us right now at: 800-FOR-NIGP (367-6447) Home Accreditation · Awards · Bookstore · Chapters · Governance · Links · Members Only · News · NIGP Code · Procurement Management Assistance Program · Publications · Speakers Bureau o Technical Resources · Virtual http ://www.nigp.org/gcc/ 8/12/2004 Page 3 of 3 Exhibit Hall Questions? Please contact gcc@nigp,org The National Institute of Governmental Purchasing, Inc. · 151 Spring Street, Suite 300, Herndon, VA 20170- 5223 · Phone: 703-736-8900, Main Fax: 703-736-9644 · Education/Membership/Enhanced Services Fax: (703) 736-9639 Copyright © 2002-2004 NIGP, All rights reserved. http://www.nigp.org/gcc/ 8/12/2004 http://www.nigp.org/gcc/" The Fraud/Red Tape Dilemma in Public Procurement: A Study of U.S. State and Local Governments Clifford P. McCue, Ph.D. Associate Professor Florida Atlantic University Kirk W. Buffington, C.P.M., MBA Manager, Procurement and Materials Management City of Fort Lauderdale kirkB ~ci.fort-lauderdale.fl.us Aaron D. Howell, C.P.M., CPPO Manager, Procurement and Construction Contracting (PaCC)/ Contracts Officer Oregon State University Aaron. Howell~OregonState.edu * This paper is being presented at the Public Sector purchasing and Supply Research Study Symposium, Budapest, Hungary, April 10-12, 2003. This DRAFT is not for citation without prior approval from the authors. ** The authors would like to thank the National Institute of Governmental Purchasing and the Public Procurement Research Center at Florida Atlantic University for their financial support of this paper. 1 Research Paper: The Fraud/Red Tape Dilemma in Public Procurement