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Are Standalone Procurement Systems a Good Idea for Government?

 

May 16, 2014

We’ve encountered numerous governments around the globe looking to improve value for money through electronic government procurement, sometimes called “e-GP”. Many of these governments see a need for a standalone e-procurement system built from scratch or using commercial software designed for the private sector. This is often conceived as a quick-win, particularly if integration with other financial systems is kept to a minimum. Is this a good idea?

Public Sector is Different

  • Accounting and control is different in the public sector. Budgets are the law and commitment controls are needed throughout the procurement process otherwise governments run the risk of spending “over the vote”.
  • Procurement methodology is part of policy. Governments are interested in getting the best value for money. But this value is more than cost x quality. It’s also about economic development and seeding industries. Governments do not want to save money on procurement at the expense of lower tax revenue and high unemployment.
  • Some forms of procurement, particularly “public investment planning” is critical to policy. Policies for infrastructure development or health improvements have significant political implications.

Government Procurement Cycle

e-GP is much more than publishing and awarding tenders. There are some fundamental elements in government procurement:

  1. Policy: Government policy on economic development, public investment management and performance management
  2. Budget Planning: Taking policy and macroeconomic information to plan expenditures
  3. Budget Execution: Revenue and expenditure management with commitment accounting and budget adjustments during fiscal years
  4. Procurement: The back-office processes of creating tenders, evaluating and negotiating with vendors
  5. Contract Management: Managing multiple year contracts that can include complex criteria
  6. E-Government: The front-office procurement or e-Procurement
  7. Controls: Budget, commitment, approval, workflow and fiscal controls to ensure proper fiscal discipline, segregation of duties and compliance with the budget law
  8. Analytics: Forecasting budget surplus of deficit situations and using data to drive better procurement decisions

There are some important linkages among these fundamentals

  1. Policy
    • informs [2] Budget Planning
    • creates fiscal and procurement [7] Controls
  2. Budget Planning
    • precedes [3] Budget Execution
    • informed by [8] Analytics about budget history
    • sets [7] Controls that are used in subsequent stages
    • informs [8] Analytics about key performance indicators
  3. Budget Execution
    • precedes [4] Procurement in the requisition process
    • controlled by commitment [7] Controls
    • informed by [8] Analytics about budget surplus/deficit forecasts
    • informs [8] Analytics about expenditure and revenue information
  4. Procurement
    • controlled by obligation and workflow [7] Controls
    • informed by [8] Analytics about budget surplus/deficit forecasts
    • informs [8] Analytics about expenditure information that has changed
    • manages the back-office procurement functionality that integrates with [5] E-Government
  5. E-Government
    • publishes back-office information from [4] Procurement
    • controlled by procurement processes in [7] Controls to ensure meeting government regulations
    • informed by [8] Analytics about budget surplus/deficit forecasts
    • informs [8] Analytics about expenditure information that has changed
    • publishes [6] Contract Management information such as the name of the winning bidder
  6. Contract Management
    • controls payments based on contract and process [7] controls
    • publishes winning bidder to [5] E-Government portals
    • informs [2] Budget Planning for any multiple year commitments
  7. Controls
    • Set of policy, fiscal, budget, commitment, obligation, segregation of duties, compliance and approval controls
  8. Analytics
    • Set of analytical tools including reporting, OLAP, data mining and dashboards used for better budget and spend planning

Government Procurement Linkages in Detail

As a Government Resource Planning (GRP) vendor, FreeBalance supports the entire budget and procurement cycle. Many observers make the mistake of viewing procurement as one of many black boxes where there is limited and manageable data integration.

 

The reality is that there can be a significant loss of controls across the procurement cycle when deep integration is not implemented in government. Many off-the-shelf procurement systems, for example, have not insight into budget and commitment controls.

 

  1. Policy
    1. Performance taxonomy: government policy determines objectives – these objectives are structured and augment (2.1) Chart of Accounts for tracking and managing
    2. Performance policy: government policy determines approaches to tariffs, free trade, economic development (such as encouraging disadvantaged regions, minorities or industries)
  2. Budget Planning
    1. Chart of Accounts: budget classifications include performance taxonomy (1.1), organization, location, program and fund information that is used in planning and execution (3)
    2. Budget Controls: expenditure limits are created, typically at aggregate levels of the Chart of Accounts and often with multiple controls at different levels and different time frames depending on the control regime in use – this is the major input for controls (7) in Public Financial Management (PFM)
  3. Budget Execution
    1. Purchase Requisitions: created based on the (2.1) Chart of Accounts and managed by (7.4) Commitment controls and rules related to purchasing methods and amounts that requires approval
    2. Stores and Inventory: some requisitions are filled by internal government stores
    3. Budget Transfers: based on (8.1) macroeconomic analysis, (8.2) scenarios (8.3) budget forecasts, governments leverage budget transfers, virements and supplementals based on a set of rules – these changes are cascaded throughout the procurement cycle including commitments and obligations
    4. Assets, Facilities and Fleet: acquisitions that are (6.3) delivered become fixed and capital assets that are subsequently depreciated (and appreciated in some cases) if using accrual accounting (and asset replacement informs budget planning)
  4. Procurement
    1. Sourcing: process of identifying qualified bidders
    2. Vendor Catalogs: catalogs are used for simple to complex procurement such as identifying vendors who manufacture a product class
    3. Procurement Workflow: governments have different procurement and purchasing methods with different rules – these rules should act as (7) controls so that the entire procurement process is automated to meet government regulations – this includes multiple stage tenders such as a Request for Information as the first stage to a Request for Proposal or the use of reverse auctions. [Also: includes amendments, clarifications, extensions and cancelations are typical situations so procurement software needs to manage communications through portal, e-mails and case management tools]
    4. Evaluation Criteria: value for money concepts mean that evaluation criteria needs to be developed prior to tender release, or, in some cases, prior to tender evaluation
    5. Procurement Document: the tender document that includes terms and conditions, requirements, value information and vendor criteria should be automatically rendered based on the workflow to eliminate errors
    6. Tender Publish: tenders are published to (751) e-procurement sites that have vendor registration – workflow rules may also include e-mail notification of vendor
    7. Tender Receiving: government receive tenders physically and via portals – there is typically a lockbox design so that all proposal are open at the same time
    8. Tender Evaluation: government personnel evaluate tenders and select winners
    9. Vendor Negotiation: governments and vendors negotiate terms and conditions – this has to be captured because it affects contracts
    10. Purchase Order: (7.3) obligation controls are required to ensure that the budget is not exceeded prior to automatically rendering the PO and contract
    11. Winner Publication: winning bidders and contract amounts are published to the (5.1) e-procurement portal for transparency and to encourage vendors to become more price and value competitive
    12. Multiple Year Commitments: complex procurement contracts exceed a single fiscal year – the need to manage commitments includes (3) controls and is recognized during (2) budget planning that part of the yearly budget is already committed because of a contract
    13. Vendor History: can be used to inform tender evaluation
    14. Dispute Management: losing bidders may dispute part of the process and decisions made, or want to complete a win/loss report – there needs to be workflow that manages and tracks communications
    15. Vendor Blacklist: enables governments to eliminate vendors who have not performed well or are dishonest
  5. E-Government
    1. eProcurement Portal: manages vendors and tenders and shows winners
    2. eResults Portal: shows progress and results on public investment projects
  6. Contract Management
    1. Contract Rendering:the contract should be rendered automatically based on government (7.7) contract controls and approval workflow to prevent errors
    2. Delivery: Goods Receipt Notes, documentation  proves that vendors have delivered products and services that are subject to payment and are used to show (7.2) government results where citizens can view project progress
    3. Acceptance: acceptance testing may be required prior to starting any payment process
    4. Amendments: amendments made tot he contract, following (7.7) contract controls
    5. Payment Management: vendor payments should follow the contract,  (7.7) contract controls and (7.8) payment controls
    6. Dispute Management: workflow for any disputes over payments and deliverables needs to be managed
  7. Controls
    1. Segregation of Duties: ensures that one person cannot perform too many duties in order to prevent fraud
    2. Approval Rules: government rules related to multiple step approval methods based on the context of budget preparation, execution, procurement, hiring, payment etc.
    3. Budget Controls: the high level controls, typically more than 1 set of aggregate controls from the (2) budget preparation system
    4. Commitment Controls: sometimes called soft commitments or pre-encumbrances, set aside funds for estimated costs to ensure that (3.1) Purchase Requisitions do not exceed the overall budget
    5. Obligation Controls: sometimes called hard commitments or encumbrances, where funds are set aside for purchase orders (4.10) ensuring that contractual obligations do not exceed the overall budget
    6. Procurement Controls: often related to total amounts and purchasing methods
    7. Contract Controls: ensures that payments follow the letter of contracts that includes managing hold-backs, contract amendments, milestone payments, penalties etc.
    8. Payment Controls: the final stage of approving expense vouchers and payments
  8. Analysis
    1. Macroeconomic Analysis: analysis to determine expected revenue and available debt used primarily in (2) Budget Planning
    2. Scenario Planning: developing different models to enable rapid action during the fiscal year
    3. Budget Forecast: analysis of expenditure and revenue trends that informs making changes to (33) budgets during the fiscal year
    4. Spend Management: analysis of multiple contracts that enables updating (1.1) procurement policy and can also be used to bundle multiple (3.1) purchase requisitions to achieve volume pricing

Other Observations

  • Procurement software that is not budget aware increases the burden on governments for manual and duplicate processes where exceeding the vote is risk
  • Back-office procurement processes in government tend to be more complex than in the private sector as any government contractor has realized when looking at proposal automation software
  • Many procurement cycles are highly publicized. For example, in Canada, the last two times that national governments fell on non-confidence motions were because of procurement – aircraft procurement (2011) and events sponsorship procurement (1993-2006). (In fact, in Canada, procurement has been a huge issue since the days of the Canadian Pacific Railway – pacific scandal (1871) and includes reciprocity or free trade with the United States (1911), the pipeline debate (1956), “corporate welfare bums” (1972), and military helicopter procurement (1993). The results of these politicized procurement situations?
    • Change in party in power in 1871, 1911, 1956, 1993 and 2006
    • Party in power lost majority government in 1972
    • Minority government achieved majority status despite the situation in 2011
  • Procurement is a major source of corruption in developing and developed countries. The lack of integration across systems makes audit for difficult.
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Doug Hadden

Doug Hadden

Executive Vice President, Innovation at FreeBalance
Doug is responsible for identifying new global markets, new technologies and trends, and new and enhanced internal processes. Doug leads a cross-functional international team that is responsible for developing product prototypes and innovative go-to-market strategies.

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