Purchasing power: new procurement strategies and systems save time and money—serious money

University Business, Sept, 2004 by Rebecca Sausner

"On a tot of campuses, purchasing is the whipping boy," says Victoria Windley, director of Procurement Services at University of Delaware. "But not here."

And with good reason. The school has rethought just about every aspect of its procurement system, beginning with the elimination of paper requisitions way back in 1992, to the development of a Web-based shopping engine for everyday purchases, to a new initiative that seeks to eventually eliminate paper checks to all regular vendors. The evolution of purchasing at Delaware also resulted in the consolidation of the Purchasing and Accounts Payable departments. The goat? Get Purchasing and Accounts Payable out of the transaction business.

"If Purchasing and Payable folks are so dragged down by transactions, and not doing strategic work, somebody should be looking at it," says Windley, who is also on the faculty of the National Association of Education Buyers (NAEB) (www.naeb.org) procurement academy.

The elevation of the Purchasing department to a strategic function represents a major advance in the status of a department tong looked on as a bureaucratic necessity that faculty and staff tried to maneuver around.

"Procurement as a function, regardless of the industry, is incredibly strategic to the bottom line," says Doreen Murner, CEO of the NAEB. "And higher ed is realizing that there is a significant impact that procurement can have on campus."

So now is "career opportunity time" for execs in purchasing, and those above them, says Tom Fitzgerald, CEO of E&I (www.eandi.org), the largest educational buying consortium in the U.S.

"There's probably $20 to $40 billion in costs that can be cut from higher ed just through supporting preferred vendor contracts, reduction of maverick spending, higher and more uniform quality and processes, electronic commerce and e-business, and through collaboration with other colleges," Fitzgerald says.

Or, think of it in multiples of 20, says Lawrence Summers, president of Harvard (MA). Because most institutions can only spend about 5 percent of their endowment each year, they'd have to raise $20 million in new capital to equal the amount they'd realize from cutting $1 million in costs.

If you think this is starting to sound like the oft-repeated admonishment that higher education needs to run its operations more like Fortune 500 companies, you may be right. But it's getting a tot easier, with established best practices, case studies, the evolution of e-procurement solutions, and great advances in consortium buying practices.

UPenn Leads the Way

If you follow Summers' multiples of 20 thought process, the University of Pennsylvania would have to have raised an additional $1.4 billion in new capital to equal the $72.2 million in bottom Line savings that the Purchasing department has squeezed out of its operations in the past eight years.

Penn began by installing Oracle Financials, which would evolve into the Business Enterprise Network (BEN), a suite of integrated, Web-based financial and procurement applications. In 2002, it launched Penn Marketplace, an online shopping site that ensures users purchase within Penn contracts. With an updated SciQuest version of Penn Marketplace launched in 2004, Associate Director of Purchasing Services Ralph Maier has seen a 78 percent reduction in maverick buying since 2000. Moreover, 90 percent of purchasing orders are entered in the field and routed electronically to vendors.

"In four years we've doubled the spend through our purchasing application; we now do $650 million through the purchasing application and $20 million through the purchasing card," Maier says.

Penn currently has more than 80 of its vendor catalogues online, accounting for nearly 70 percent of purchasing transactions. And of those 80, 11 are EDI enabled, which has reduced the paper involved in processing by 45 percent.

"We have been able to shift the focus of the purchasing organization from tactical to strategic activities," Maier says. "Now we can focus our resources on value-added activities Like negotiating contracts and managing customer relationships."

Reign in the Mavericks

It's true that Maier's department has been cut from 26 employees in 1996 to just nine now, but :that's not where the biggest savings comes from when schools move to strategic purchasing and e-procurement, says Andrew Bartels, analyst with Forrester Research (www.forrester.com).

There's a rule of thumb that the cost of processing a paper-based requisition ranges from $100 to $125, versus $10 in processing costs for electronic requests. But those numbers come with a large caveat, Barters says, because "70 to 80 percent of what you get for those dollars are fractions of peoples' time."

"A lot of those costs are non-extractable; you can't redeploy 10 percent of a person. Instead what you may do is free up 10 percent of that time for more important things," he says.

So, yes, cutting the steps in an approval process from 27 to six saves Lots of people a Little bit of time. But the big money comes when you devise a system that forces the university community to stay within contract.