No Small Change
Opportunities for Streamlining Procurement in New York City
In fiscal year 2001, the City spent more than $8.6 billion for construction, goods, and services. Amounting to nearly 20 percent of the City’s combined capital and operating expenses, purchased commodities and services are essential to the daily delivery of most municipal services.
The City’s rules and procedures governing procurement create a challenging environment in which to deliver services. Criticism of the system resounds throughout City agencies and among vendors who do business (or refuse to do business) with the City. The emphasis on process over professional judgement also creates a culture of caution among procurement personnel who are empowered only to find fault with or “rubberstamp” documents rather than innovatively seek the best value for the City.
Perhaps the best evidence of the need for streamlining is long procurement cycles. Contract purchases typically take a minimum of three months, but more likely four to eight months when preliminary steps are included. Long procurement cycles can be traced to four underlying problems:
1. Lack of Effective Governance and Management
Municipal procurement is intended to be governed by rules set by the Procurement Policy Board (PPB), managed centrally through the Mayor’s Office of Contracts (MOC), and implemented at the agency level by the Agency Chief Contracting Officer (ACCO). There are, however, problems at each level.
Procurement Policy Board. The PPB is composed of five members, three appointed by the Mayor and two appointed by the Comptroller. Only two of these members, one of the Mayor’s appointees and one of the Comptroller’s appointees, are required to be independent in the sense that they do not hold public employment, and all five serve at the pleasure of the appointing official. The members, therefore, reflect the views of the Mayor or the Comptroller and do not always exercise independent judgement. Consequently, rule changes are easily entangled with the political conflicts between the two elected officials. The PPB also lacks authority to change certain procurement rules, since the General Municipal Law of New York State, the City Charter, and the City Administrative Code govern procurement along with the PPB rules.
Mayor’s Office of Contracts. The Mayor manages procurement through the City Chief Procurement Officer (CCPO), who heads MOC. Since its formation, however, MOC has not acted as a comprehensive manager of procurement. Instead, MOC has taken on a narrower role as gatekeeper of large contracts and those that are let through special case methods. MOC’s role as the Mayor’s oversight agent rather than a service, support and planning unit for citywide purchasing has resulted in no agency with the authority or mission to be a comprehensive manager of procurement. MOC’s preoccupation with preventing the next procurement scandal slows down contracts and discourages vendors from working with the City. In addition, no one agency is responsible for managing vendor relationships with the City.
Agency Chief Contracting Officers. Management of day-to-day procurement is intended to rest with the ACCO and the head of each agency. This organizational structure acknowledges that agencies know the most about how to meet their needs, and it promotes end-user satisfaction. However, ACCOs do not always have the support or authority they need to manage their agencies’ contracting process. The ACCO may not have sufficient support from MOC to handle a complex, specialized contract and may require technical support from colleagues in other units or from a centralized procurement entity. Also, in practice, agency level officials are not granted sufficient autonomy to ensure procedural compliance with contracting rules. Other municipal oversight agencies must approve many key contract decisions which, in turn, delays contracts.
2. Burdensome Oversight
The City requires multiple authorizations outside of agencies before a contract can be let. Currently, oversight can involve up to 10 agencies with responsibility determined by contract type, size, method, and stage of the process. Although the process should have sufficient controls to prevent corruption and waste, the current oversight structure duplicates efforts and adds significant time to each contract cycle.
3. Excessive Paper
Multiple authorizations result in excessive paper. In this context, “paper” is a proxy for the time it takes to complete multiple forms justifying and documenting each purchase, and the physical effort it takes to move forms through the system. The latest estimate of paper produced to execute procurements is 12 million sheets.
4. Poor Use of E-Government Resources
While the City’s website provides information about how to do business with City agencies, it does not allow vendors to interact with agencies online. It also fails to integrate existing automated systems. Agency procurement personnel have no automated workflow system that allows them to move documents electronically through various authorizations.
The City is not alone in its procurement difficulties. State and local governments across the nation have been struggling to reduce procurement cycles while getting the best value for goods and services. With advancements in information technology, governments increasingly have turned to such technology and the Internet to streamline procurement. Through electronic catalogs, electronic vendor management software, and workflow imaging systems, state and local governments are transforming procurement into an efficient e-government application. As many as 42 states are expected to have some form of e-procurement in place by 2003.
The most advanced of these new e-procurement systems automate the process from request to purchase. This involves electronic request forms, workflow management software, esignature authorization, master contracts from which to purchase goods, and electronic payments.
Functioning examples of these sophisticated systems exist in the City of Wichita, the State of Maryland, the State of Virginia, and the State of Idaho. For each, e-procurement began as a pilot project for a few agencies and services, then expanded to become system-wide as technical expertise and vendor confidence grew. Wichita’s central purchasing unit adopted the system in 2000, after completing a feasibility study. Maryland, Virginia, and Idaho have more decentralized procurement structures and began offering e-procurement services to state agencies and local governments during 2001. Detailed descriptions of these systems are presented in the Appendix to this report.
NEW YORK CITY’S PROGRESS TOWARD PROCUREMENT REFORM
New York City has been addressing its procurement problems for over 15 years. The most comprehensive effort culminated in the New York City Charter revision of 1989 with the formation of the Procurement Policy Board (PPB). Since the mid-1990s, the PPB has reduced the number of rules and cut the contract rule book in half.
In addition, the Giuliani Administration instituted several process enhancements using the City’s Intranet and Internet website. Agencies now have Buy-wise, a portal for procurement professionals with links to various purchasing resources, and the City Record on-line, a daily listing of all contracting opportunities with City agencies for vendors to access via the Internet. The City also has introduced the use of purchasing cards for low value purchases, a program with enormous potential to reduce transaction costs for small purchases.
Significant reforms since the early 1990s have enabled the City to save time and money in procurement. However, much more remains to be done. Procurement reform is neither glamorous nor highly visible. It requires sustained commitment over a relatively long period. Consequently, elected officials tend to neglect it. But there is now good reason to raise the level of commitment to streamline procurement within the new Bloomberg Administration. A major initiative could achieve significant savings, at a time when they are sorely needed, and enhance the morale of municipal managers who are often frustrated by outdated and time-consuming procedures. The CBC recommends that Mayor Michael Bloomberg pursue the following threepronged strategy.
1. Replace the Mayor’s Office of Contracts with a new procurement entity that offers “one-stop” oversight, a central place for vendors to interact with the City, and improved agency support services.
Oversight should be reorganized, and a new procurement entity should be created to provide better agency and vendor support. The new procurement entity should have three primary functions:“One-stop” oversight and authorization; single point of contact for vendors wishing to do business with the City; and supporting the professional development and autonomy of ACCOs.
2. Implement an advanced e-procurement system similar to those functioning in several other jurisdictions.
The City should develop an advanced e-procurement system by integrating existing components and establishing missing ones. This system should include the following components:
- A central website through which all agencies communicate with vendors.
- The option for vendors to submit their bids, proposals, and VENDEX materials electronically.
- On-line purchasing access to requirements contracts for agency buyers.
- A central contract management system with workflow monitoring and digital authorization capabilities for all agencies.
- Annual subscription and transaction fees for vendors.
3. Change the legal framework for procurement to give the Procurement Policy Board more independence and to permit new, cost-effective procurement techniques.
As innovative procurement techniques are developed, the laws and rules that govern procurement should be changed to permit their use. In addition, the structure of the PPB should be changed to enable it to function with more political independence..
Implementation of the CBC’s recommendations would yield savings of at least $135 million annually, with a more likely payoff approaching $200 million annually. These savings derive from two sources: lower transaction costs, and lower prices from vendors for goods and services.
With respect to transaction costs, the City completes about 142,000 transactions per year. Based on the experience of other jurisdictions, it is reasonable to suggest that an advanced eprocurement system in the City of New York would save approximately $75 per transaction. At that rate, the annual savings for the City would approach $11 million.
Even larger savings would come from the reduction in the price of goods and services. These savings result from more vendors competing for contracts, greater use of bulk purchasing, and price reductions from vendors who have to spend less time and effort preparing and submitting bids. Most analysts estimate these savings at 5 to 15 percent of current costs. In fiscal year 2001, the City spent $549 million on contracts for goods and $693 million on goods through small purchases and purchase orders from requirements contracts. A 10 percent price reduction for these items would save $124 million annually.
Based on the foregoing assumptions, the City would realize a total of $135 million in savings annually. If the price savings were 15 percent, then the City would save an additional $62 million for a total of $197 million annually.
It should be stressed that these are conservative estimates, because price savings are applied only to purchases of goods. In addition to the $1.2 billion in goods reflected in the above calculations, the City spends another $7 billion on construction, social services, and other contracts. A streamlined procurement system likely would yield significant savings from these purchases as well.