6 Reasons not to use Standalone E-Procurement in Government (and many reasons for interoperability)

Enhance Spend and Public Investment Management through Interoperable Procurement Systems

The good news: electronic government procurement (e-GP) systems can reduce government costs and improve value for money

The bad news is that standalone e-GP systems open up multiple points of public finance failure in: commitment accounting segregation of duties compliance & anti-corruption procurement & budget planning assets & inventory

This paper describes why e-GP interoperability with numerous financial management systems is required in government, and how government procurement differs from private sector procurement. (This paper updates a blog entry from 2014). Scenarios are also explored:

  • Spend management for commodity purchases
  • Value for money in capital purchases
  • Effective public investments

What do we mean by “interoperability”? (because there is a lot of confusion in government organizations partly through vendor hype)

  1. Integration is automated with no need for any manual interface processes
  2. Metadata (chart of accounts, vendors, catalogs, organizational charts) is shared among financial applications
  3. Controls (commitment controls & segregation of duties) are shared among financial applications
  4. Any change to metadata or controls happens in one place and is updated in all applications
  5. Interoperability is aided by technology, like the FreeBalance Accountability Platform, that uses a unified design to support intra-suite seamless integration

What makes Government Procurement Different?

Why does it make a difference in government?

  • budgets are the law and governments use commitment accounting public sector
  • procurement often represents up to 30% of country GDP and is a major corruption risk
  • procurement is a major contributor to effective public investment management

As described in my previous blog entry:

  • 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

The big picture is shown below with:

  • procurement functions in red
  • controls in green
  • metadata in grey
  • audit in blue
  • added emphasis for critical commitment accounting functions
  • dotted lines for important functions that are typically not included in interoperability analysis


Critical elements across all public financial management applications includes integrated:

  • Segregation of duties to ensure compliance and anti-corruption efforts
  • Budget classifications as shared core metadata
  • Commitment accounting across all expenditures for budget controls

The diagram shows the logical interrelation of e-GP systems with budget planning, commitment accounting (core Financial Management Information Systems – FMIS), tax administration, human resources, and audit

Budget Planning to Execution

Budget planning results in budget controls in core financial management systems that supports commitment accounting consisting of:

  • Commitments at the purchase requisition stage to set aside funds in anticipation of a procurement cycle
  • Obligations at the purchase order stage that sets aside contracted funds after the procurement cycle has been completed
  • Goods receipts, expense vouchers, and payments following contract requirements
  • End-of-year processes to carry-over or roll-over budgets based on rules, including the support of multiple-year commitments

How does interoperable e-GP with commitment accounting help governments?

  • Ministries, Departments, and Agencies (MDAs) cannot assert that they have budget for items express in Charts of Accounts when they do not MDAs cannot take part of the obligation in the current fiscal year, and take on unauthorized arrears
  • Segregation ensures that the proper goods are properly received from certified vendors
  • Only received goods will be accounted
  • Vendor information including catalogs and framework agreements will be automatically used to achieve lower prices

Most importantly, the processes of commitments, de-commitments, obligations, de-obligations, are fully automated

Government Procurement

The core e-GP functions that need to be supported include:

  • Statutes that determine procurement rules like modalities (tendering, quick tenders, qualified vendors, framework agreements), and length of time that tenders must be available to vendors
  • Tenders are created and posted to e-procurement sites
  • Contracts are created as part of the purchase order process
  • Vendors are checked to ensure tax compliance
  • Vendor information includes catalogs that are used in framework agreements and short lists

How does interoperable e-GP help government procurement management?

  • Procurement processes automatically reflect statutes
  • Tenders are automatically created based on rules and posted to e-procurement sites for the proper length of time
  • Contracts and purchase orders are automatically created based on tenders and are compliant with procurement regulations
  • Vendors selected for procurement are compliant with taxes
  • Framework agreements are automatically when already coded

Additional Operational Functions

  • The other points of e-GP operational integration include:
  • Commodity purchases are placed in inventory
  • Capital purchases are placed in fixed assets registries
  • Fixed assets are assigned to public servants

Where interoperable e-GP help with these additional public finance functions?

  • Orders for commodities already in inventory are trapped, and all new commodities are placed and tracked in inventory (thanks to Chart of Accounts metadata)
  • Fixed assets are placed automatically in asset registries (thanks to Chart of Accounts), expenses against assets are tracked, depreciation is automatically calculated
  • Fixed assets are automatically assigned to public servants and managers are informed when staff leaves or transfers to other MDAs

There are also many budget planning advantages when e-GP is interoperable:

  • Vendor catalogs can be used to create cost drivers
  • Inventory trends can inform procurement plans
  • Asset registers can inform the need to procure replacements

Common metadata and controls enables audit processes:

  • Improves comparability across systems to track transactions
  • Reduces the need to audit all transactions because of interoperability, making for risk-informed audits
  • Supports ability to develop alerts directly from financial systems to trap potential non-compliance before payments made

e-GP interoperability improves government performance management:

Critical Success Factor: Segregation and Duties & Commitment Cycle Breakdown

It is very difficult to replicate and maintain identical segregation of duties and commitment controls between a financial system and a standalone e-procurement system. The standalone procurement system would need visibility into numerous financial processes while understanding who has requested and who has approved across the procurement cycle. This workflow diagram shows the importance of integrating segregation of duties and commitment controls across the procurement cycle.

This simplified workflow consists of:

  • Legal budgets are enacted
  • Person checks to see if there is budget available for a purchase (typically checks more than 1 aggregate budget control), with the option of requesting a budget transfer
    • handled by a different person to support segregation of duties
  • Sufficient budget moves the process to purchase requisition approval
    • handled by a different person to support segregation of duties
    • funds are committed
  • A tender is issued, the results of which include:
    • request for a budget transfer (or, use of available budget) if the price is higher than the estimate
    • decision to cancel the acquisition, resulting in a de-commitment of the entire amount
    • de-commitment of funds if the purchase price is lower (estimate – actual)
  • Purchase order is approved
    • handled by a different person to support segregation of duties
    • contract is issued
  • Goods (and services) are received
  • Goods and services are tested with the result that:
    • Items need to be returned, based on contract provisions
    • Items are accepted and expense vouchers are approved
    • (Items that are not received during the fiscal year can result in de-obligations)
    • Items are placed in assets and inventory
  • Payments are approved
    • handled by a different person to support segregation of duties
    • payment is recorded

What is not included in the diagram, for simplicity, are approval escalations  and alerts based on economic usage, region, asset type, and amounts.

Critical Success Factor: Automated Tendering

It is also difficult to integrate tendering in stand-alone procurement systems. Tenders are typically rendered in word processing software meaning that many important rules could be broken. The following diagram explains a more ideal tendering process:

  • The purchase requisition uses budget classifications
  • These budget classifications should determine whether the acquisition should occur through a framework agreement, tender, (or other purchasing vehicles)
  • Framework agreements should have standard contracts that are rendered with purchase orders
  • Tender rules based on budget classifications determines the complexity and stages for tendering
    • Multiple stage processes may be required, such as issuing Requests for Information or Letters of Interest
    • Requests for Proposal could have also have multiple stages, one to select a short list of approved vendors, and another step for financial proposals
  • Integrated performance structures with budget classifications can help to generate Value for Money tenders directly aligned to national development goals or SDGs
  • The integration of contract provisions and budget classifications can also partly render tender documents and full render contract documents (with exceptions based on segregation of duties)

Summary

Key benefits of full e-GP interoperability includes:

  • Compliance through controls, segregation of duties, and contracts integration
  • Efficiency through automation across the acquisition cycle
  • Effectiveness through aligning government performance with acquisitions

The lack of e-GP interoperability reduces effectiveness and compliance with:

  1. Controls and metadata
  2. Assets
  3. Inventory
  4. Human Resources
  5. Budget planning
  6. Audit management

Scenario 1: Spend Management

e-GP Goals: achieve lowest cost for commodities

Definition via the Gartner Group: “Spend management is a set of practices that ensure organizations make procurement and sourcing decisions in the interests of both the bottom line and company efficiency. Spend management is about maximizing value from company spend while decreasing costs, mitigating financial risk and improving supplier relationships. Spend management is primarily related to procurement and encompasses spend analysis, strategic sourcing and supplier relationship management. Spend management software helps chief procurement officers and chief financial officers maintain spend visibility”

Governments improve spend by integrating vendor catalogs, previous acquisition costs, and current inventory to determine whether to combine purchases or develop framework agreements leveraging Charts of Accounts to identify equivalent products and services

Scenario 2: Fixed Assets Capital Expenditures

e-GP Goals: achieve best Value for Money (V4M) based on Total Cost of Ownership (TCO)

Definition of V4M via the Government of Northern Ireland: ” Best value for money is defined as the most advantageous combination of cost, quality and sustainability to meet customer requirements. In this context:

  • cost means consideration of the whole life cost
  • quality means meeting a specification which is fit for purpose and sufficient to meet the customer’s requirements
  • sustainability means economic, social and environmental benefits, considered in the business case, in support of the Programme for Government”

Governments improve fixed assets V4M by integrating vendor catalogs, previous acquisition costs, total costs (especially maintenance), life spans (period of time asset lasts until replacement needed), and any revenue generated by selling assets

Scenario 3: Public Investments

e-GP Goals: achieve best value for money aligned with national goals

Definition of National Development Plans via UNDP:”Governments draw up national development plans and strategies based on the perceived needs and priorities of their citizens. Typically consisting of a 5- to 25-year horizon, national development plans define desired development outcomes to be achieved, build consensus on the obstacles to and opportunities for achieving those outcomes, define the role and contribution of different sectors and stakeholders in achieving the outcomes, and provide a strategic framework within which more detailed planning and budgeting can take place at regular intervals. National development plans tend to focus on economic growth and job creation and thereby reduce poverty. Consequently, these plans incorporate targets that address GDP, rates of employment and poverty levels.”

Government improve public investment V4M by integrating procurement value criteria directly with development plan structures, and through integrating performance results, actual budgets, and timelines

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