Disciplining University Spend
Strategies and best practices for achieving savings from on-contract purchasing
This study examines the critical priority of reducing outside spend by working with faculty and purchasing departments to achieve greater efficiency in a difficult university operating environment.
Recent efficiency and effectiveness audits of university cost structures indicate that the decentralized nature of universities combined with other structural aspects of the university (shared governance model, decentralized budget authority, outdated state laws, etc.) combine to create a difficult operating environment for university purchasing staff. As universities seek to become more efficient, working with faculty and purchasing departments to reduce outside spend has become a critical priority.
Practice #1: Procurement rebranding campaign
Higher education procurement leaders agree unanimously that the first step in inflecting on-contract purchasing is convincing internal customers of the threshold desirability of managed spend. Traditional efforts have flunked the WIIFM Test (“What’s in It For Me?”), with procurement policies perceived to exist for the convenience of central administration, with no value added to the customer.
Why procurement has struggled to engage customers consistently
Low visibility and credibility of central procurement
Procurement staff is too small to build relationships with the entire campus community, with many customers viewing procurement at best as a transactional rubber stamp, and at worst as a bureaucratic hoop.
Overemphasis on price without reassurances of responsiveness
Procurement must present a compelling case that managed spend will not come at the expense of time; customers perceive buying on contract to involve extra administrative steps.
Inability to size local savings opportunity
Procurement is trapped in a vicious cycle of sparse data; off-contract spend limits data capture, rendering credible, unit-specific savings estimates difficult and leaving the case for managed spend an appeal to abstract, greater goods rather than customer self-interest.
Outreach efforts focused on business officers, not faculty
Procurement has “preached to the converted,” appealing to department business officers instead of doing the harder work of addressing faculty prejudices and ingrained buying behaviors.
All-but-impossible to build widespread customer awareness
Customers are too busy with too little personal incentive to learn managed spend policies on their own, and there are too few procurement staff to reach full range of campus customers with any consistency.
Too little feedback, too late
Most procurement departments review contract utilization patterns with customers quarterly or annually, too infrequently to influence behavior, and too distant from customer decisions to diagnose why in-place contracts were not used.
Cumbersome to generate timely data on maverick purchases
Universities lacking e-procurement systems must comb through purchase order records to identify units and individuals repeatedly ignoring preferred vendors or mandates, exceeding the bandwidth of central procurement staff, already arguably under-resourced.
Reduce Cost and Improve Resource Allocation
Practice #2: Department opportunity gap analysis
Without item-level detail, procurement cannot easily make the case for savings opportunities to individual departments; faculty and staff do not know how much money they personally can save from buying on contract. Department administrators, deans, and business officers lack frequent, granular reports on where and how their departments can save on purchasing to help them correct uneconomical behavior. Annual or ad hoc spend analysis provided to departments are rarely actionable because they are too “high level” and require decentralized buyers to remember purchases from months ago.
To increase contract compliance, the University of California, San Diego provides monthly department spend analysis reports to business officers, deans, and division vice presidents. The reports identify the hard dollar savings opportunity lost from non-contracted items and point to specific researchers and staff members who bought the most items off-contract. Department administrators can use the report as a conversation starter with faculty and staff to encourage their compliance with contracts.
Practice #3: Outlier education sessions
Leading practitioners target the highest spending departments and ask business officers to nominate the most influential purchasers to attend quarterly procurement-led education sessions. These sessions allow procurement to target their limited educational resources on those faculty and staff with the greatest influence over spend, while removing some of the educational burden from business officers hesitant to go head-to-head with recalcitrant faculty.
During these education sessions, procurement should tailor its message to the researchers’ priorities and concerns. There are three critical messages to convey: (1) off-contract vendors may include hidden costs or charges; (2) buying off contract may leave the customer personally liable for damaged or undelivered goods; and (3) procurement’s processes facilitate faster and easier purchasing than sourcing goods independently.
"“Our goal for selecting participants in education sessions is to go beyond those with highest spend alone. We prefer a more nuanced approach where local business officers provide input on holistic selection criteria through firsthand knowledge. Getting the right people in the room is critical to our success.”
"Senior Director of Procurement and Payment Services
Practice #4: Instant post-purchase feedback
Procurement lacks necessary information to identify cause of—and prevent— off-contract purchases as they occur. Typical procurement surveys are infrequent, requiring the respondent to remember details of past purchases; the delay prevents procurement from following up with effective education or relevant information.
Recognizing the shortcomings of annual customer service surveys, MIT plans to develop a new approach, sending a brief survey e-mail to purchasers immediately following each non-e-procurement transaction. Still a work in progress, the survey aims to pinpoint the reason for off-contract purchases so procurement staff can follow up with accurate information as soon as possible.
Practice #5: Vendor-submitted rogue purchase reports
Procurement often lacks the item-level detail that indicates exactly what was purchased off-contract and who bought the item; even those universities with e-procurement systems may only be able to review item-level detail on the small portion of spend funneled through that system. Vendors may over-charge universities inadvertently, either through billing errors or not realizing the buyer is from the university. Procurement often does not collect data, believing that sophisticated technology is required.
The University of Michigan requires 180 vendors to submit monthly electronic invoices that include item-level detail on every item purchased, regardless of purchasing method. Three accounts payable staff members store the data feed in simple Access databases that include contract pricing, enabling procurement to verify that the correct price was paid and follow up with customers who may not be following proper purchasing procedures.
An added benefit: Michigan receives prompt payment discounts from these 180 vendors, totaling $4.5 million annually.
Practice #6: Procure-to-pay customer care line
Procurement is competing with instant, familiar means of buying such as Amazon.com, p-cards, and calling vendors directly, and often does not measure up in terms of service, speed, and ease of use. Busy, distracted customers may not remember every purchasing protocol, and the procurement website may not provide accessible answers; if customers do not receive answers at the moment of purchase, they are likely to resort to non-preferred vendors or unapproved purchasing methods.
At Emory University, buyers were swamped by the volume of basic purchasing questions they received, and were often not able to respond in a timely fashion, causing university customers to purchase off-contract. To answer in-the-moment customer questions, Emory created a three-person hotline (for both purchasing and accounts payable questions) which now handles 175 calls per day.
Practice #7: Department spend specialists
There are too few experienced commodity managers to serve the number of departments on campus at an optimum service level, and departments often resort to sourcing on their own rather than wait for the commodity manager to conduct a proper negotiation or bidding. When customers do approach commodity managers for assistance, they often wait until the last minute, not giving the commodity manager enough time to find the best value. Universities buy many products each year that are “new to world” or have not been purchased in the last 12 months, leaving commodity managers scrambling to conduct a proper negotiation or identify a functionally equivalent and less expensive item.
The University of California, San Diego assigns procurement staff members to specific departments and tasks them with relationship manager responsibilities. The “spend specialist” becomes familiar with the purchasing patterns of the department, meets monthly with the department business officer to review upcoming purchasing needs, and serves as the primary liaison between the commodity manager and the assigned departments. With a dedicated advisor in the procurement function, departments have begun to view procurement as a partner and communication levels have increased.
Practice #8: Preferred vendor access privileges
Vendors’ unfettered access to departments and staff has made “back door” selling the norm, particularly in the sciences. Procurement lacks the political capital to ban vendors from campus buildings.
In an effort to increase contract compliance with preferred vendors, Princeton University partnered with environmental health and safety and public safety to allow only screened vendors into laboratories.
Princeton's four-step restricted vendor access process
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Partnership
Procurement partners with environmental health and safety to introduce a restricted vendor access program.
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Discussion of safety risks
Procurement markets new policy to campus departments through the lens of mitigating safety risks and unsolicited interruptions.
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Restricted access
If vendors approach a department without a pass, they are directed to the procurement office.
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Procurement vendor evaluation
Procurement evaluates vendors, and decides whether or not to award a pass. Typically, procurement will restrict vendors who sell items that compete with existing contracts, refuse to provide a standard price list, or are not recognized by researchers.
Practice #9: Rogue purchasing internal audits
Internal audit can lend its political capital to help procurement enforce purchasing policies. Procurement can notify the audit function informally about those departments that repeatedly purchase off contract. While not all notifications lead to an audit, practitioners note that audit appreciates the information, since those noncompliant departments may also struggle with other fiscal management issues. Even the threat of an audit is effective at improving behavior by indicating that executive leadership is paying attention to policy adherence.
The University of Pittsburgh acknowledges that departments will pay attention to contract compliance if there are repercussions and has developed an escalation process where repeat noncompliance offenders are turned over to the internal audit function for a business process audit.
Practice #10: Off-contract exemption letters
While many universities develop contract compliance policies, the policies lack enforcement mechanisms. Purchasing on contract is often slower than purchasing off contract, and faculty care more about speed than price.
Emory University created an administrative process to make off-contract purchasing more challenging. By requiring a signed letter from the dean for off-contract purchases, Emory encourages customers to follow approved purchasing procedures.
Practice #11: Staff-only mandates
Purchasing policies that do exist are usually “one size fi ts all” with the same regulations for both administrative staff and research faculty, but only research faculty legitimately need purchasing flexibility. Universities could save hundreds of thousands of dollars from restricting commodity spend to a few vendors or by standardizing product offerings, but most decentralized universities continue to allow customers to buy from whomever they choose. Universities create “strategic” contracts, but without policies to drive volume to those vendors, the contracts rarely deliver the savings initially projected, and vendor relationships are risked.
The University of Notre Dame, recognizing the value of consolidating spend with one supplier and a few standard options, created a computer purchasing policy specifically for administrative staff. Administrative staff can choose from eight standard models from one preferred supplier; exceptions are approved on a case-by-case basis by deans and vice presidents. Notre Dame estimates $500,000 in savings in the first year of the policy.
Practice #12: Data-driven price negotiation
Most universities do not know what specific items are bought across the university or what prices they are paying, making it difficult to police vendor (or faculty and staff) compliance with contract pricing. In most negotiations, university purchasing executives are at a distinct information disadvantage as they often don’t know what they have bought or what prices were paid.
Universities are starting to take advantage of data available from various purchasing processes to build a spend database that includes granular information on what exactly is being purchased, when, and for how much. This information is then combined with price benchmarking information to help restore the balance of power between universities and vendors.
"“I always chuckle when we are asked for a university’s purchasing history because I know the next call will be from them, trying to beat me down on price. Of course, it does help that I have ample time to prepare.”
"Senior Vice President, Sales
Major University Supplier
Practice #13: Reverse auctions
Universities often lack price benchmarking capabilities that help determine if the prices they receive from vendors are fair; as a result, they often pay higher prices for the same products than similarly sized institutions in other industries. Reverse auctions may be an appealing sourcing tool for universities, but procurement directors are uncertain about which commodities are best for reverse auctions or how to mitigate the risks associated with the process. Universities do not have access to the technology required to run a reverse auction and may not conduct enough auctions to justify the expense.
Rochester Institute of Technology has sourced items via reverse auctions for the past five years, often joining with nearby universities to aggregate volume on the same commodity items and capture even larger savings. In addition, RIT outsources the online bidding process to a third-party vendor who runs the auction on behalf of the university. This strategy has resulted in 10 to 20 percent savings over previously negotiated contracts.
Practice #14: Shelf pricing
Vendors offer competitive pricing on a desired core item, but try to recover margins with large markups for complementary features and services not included in the initial negotiation.
After noticing expensive add-on costs from contracted items, the University of Michigan moved to a price per unit independent of add-ons. Setting a standard price for a good, regardless of brand or features, eliminates price “creep” and other vendor pricing tricks.
Practice #15: Objective-based RFPs
The RFP process is time consuming; crafting the language, selecting the vendor, and then negotiating contract terms can take a year for some major contracts. The RFP itself over-specifies requirements, some of which are not practical or reflective of current vendor practice; these requirements prevent the vendor from offering creative (and less expensive) solutions. Proposals make promises or offer solutions that are later scaled back during the negotiation process, further deteriorating savings.
When negotiating its dining services contract, Arizona State University adopted a new approach to evaluating vendors, writing an RFP that asked prospective suppliers how they would deliver on the university’s expectations of service and performance. Suppliers submit a short proposal, but no marketing materials. Evaluation is based on how the suppliers compare to each other in terms of financial performance, interviews, and client references. Once selected, the vendor’s proposal and submissions become part of the final contract.
Practice #16: Preferred vendor “premium position” packages
Universities often have high “costs to serve”—the thousands of buyers on a typical university campus, as well as paper orders and payments, increase both marketing and processing costs, which the vendor passes along to the university. Universities rarely discuss these costs with vendors; negotiations cover price discounts but not how the university and vendor can partner together to increase volume, increase process inefficiency, and subsequently decrease price.
For selected vendors with a large portion of university spend and transactions, the University of Pennsylvania trades access to customers and streamlined payment processes in return for low prices and adherence to procurement’s policies.
Attributes of preferred vendors:
- High transaction, high spend volume
- Mission-critical, niche commodities
- Local community-based or diversity suppliers
- Spend with vendor is at least $500,000
Practice #17: Vendor-led e-procurement campaigns
Purchasing lacks resources to mount an effective change management campaign. Procurement enters into vendor negotiations with limited data, focusing only on price; strategies to increase vendor-specific volume or electronically integrate the procurement process are not considered.
University of Pittsburgh pushes vendors to help them drive purchasers to the e-procurement channel. This helps them funnel volume to preferred suppliers, eventually lowering prices.
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