In the first article on driving value in public procurement, I outlined four areas where you can achieve the many goals of procurement while also fulfilling your mission needs. In other words, ways to get the most value out of the work you do. Those levers were split into four groups: price-based levers, total cost levers, demand management levers, and supply base levers.
It is true that “pricing” is the simplest of the 4 spending value levers, but…
In that article, I noted that pricing is the simplest and most used of the four, and while that may be true, it is by no means a simple matter to achieve good, competitive pricing and fully realizes its benefits. Competitive pricing is predicated on a keen understanding of a number of factors, including a market and its suppliers, internal user requirements and their demand patterns, and alignment with the user community. Several sophisticated techniques can and should be explored to determine their applicability to the acquisition at hand to maximize value from the pricing. In this article, I’ll highlight key techniques and their required understanding in order to achieve good pricing outcomes and value – these techniques include:
- Maximize spending covered by negotiated contracts
- Collaborate across the enterprise for common requirements
- Ensure rigorous competition
- Leverage reverse auctions
- Set multi-year target commitments
- Optimize timing of the acquisition
Maximize spending covered by negotiated contracts
Every agency has negotiated contracts, and every agency has leakage. When the contracting staff goes out and gets a negotiated contract for a particular good or service, there will still be others in the user community who continue to buy those items on their own, likely at a less-optimal price. Engage with users to help them understand the contracts that exist and how bringing their spending under those contracts may enable more competitive pricing through better volume discounts. The federal government has found this to be true, adding “spend under management” as a key benchmark metric for procurement success.
Collaborate across the enterprise for common requirements
Collaboration is key when working with the user community, and it’s vital that you include all relevant members of your user community to make sure that the “common” requirements you’re outlining are truly common. Shared requirements exist for a number of spend areas, including IT hardware and software, office products and furniture, and even professional services, to name a few of the larger examples. The bonus is that not only will you be creating efficiencies by collaborating across the enterprise, but you’ll also often get better pricing thanks to the larger volume you’re creating.
Ensure rigorous competition
Competition is the name of the game in federal procurement, but employing a competitive process is just the beginning in ensuring competitive outcomes. It’s important to structure the acquisition to promote participation among the “right, most capable suppliers,” including small businesses. This can often be done by using the appropriate “lotting”—grouping similar items together to entice suppliers and motivate them to bid more aggressively. If you’re able to lot together items where suppliers have expanded their footprint—say office supplies and lab supplies—you may be able to encourage stronger competition by providing a better proposition to suppliers.
Of course this won’t always work: bundling requirements together can limit competition by excluding small businesses (and, in fact, doing so in some cases may run counter to small business contracting policies). In instances where small businesses have strong capabilities (e.g. in office supplies), it’s a good idea to structure the acquisition by combining the lots (as in the example above) as well as solicit bids on individual components of the lot separately. It’s crucial to keep capable small businesses engaged.
Leverage reverse auctions
The very engine that runs reverse auctions—when done correctly—is an intense form of competitive bidding, which potentially leads to even more competitive pricing in a short period of time. The Office of Federal Procurement Policy (OFPP) has just released a new memo offering guidance to agencies on how to get the most out of reverse auctions. And there are times when reverse auctions can lead to tremendous savings and other times when they may actually be a roadblock for suppliers.
Set multi-year target commitments
The budget uncertainties of public organizations over the past few years have made it difficult for many agencies and program offices to plan for the future. That’s why it’s more important than ever to work collaboratively with users across the organization to get a sense of their multi-year demand needs, especially for known recurring buys. You can then provide that visibility to the supply base, and can even offer volume commitments where suitable. This can further improve pricing, though you’ll want to ensure that price change mechanisms are included for acquisitions where price changes are common.
Optimize the timing of the acquisition
Often overlooked, the timing of an acquisition can be a simple way to get better pricing for the organization. For instance, timing the procurement of a new IT hardware system for when a new model is being introduced but the current model suits user needs, you may be able to get a better price. Staying with IT, you could also look for when there’s a glut of supply—say when IT spending has weakened—and use that abundance to find deeper discounts off list pricing. As you can see, there are many ways to leverage a better price, and there is certainly no shortage of factors to consider when looking to get the best price. From here we’ll move on to more complex matters, with the next article focusing on the total cost. I’d be curious to hear if there’s anything you think I may have missed when it comes to price, or even may have gotten wrong. Let us know in a discussion thread or your own blog post. You can’t advocate for collaboration and not engage in it yourself, right?