Yes Virginia! A Profile In Excellence White Paper


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Who Can Benefit from this Paper?

This thought provoking white paper is an essential resource tool for public sector organizations that are already in the midst of an established program, or ones who are contemplating a change. Although they do not operate within the same framework of a public or government entity, private sector companies can also gain important insight as the paper’s principles are universal in their applicability.

Utilizing an advanced research methodology, the primary objective of this paper is to provide policy-makers (and those affected by government policy) with a multi-dimensional “objective lens” through which they will be able to view the veracity of both existing as well as contemplated initiatives. The resulting insights will empower program champions to take the necessary steps to deliver tangible and sustainable results.

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Yes Virginia! A Profile In Excellence White Paper

  1. 1. Ottawa, Canada 2008 Yes Virginia! A Profile in Excellence White Paper Jon W Hansen, Chief Architect Hansen Consulting & Seminars
  2. 2. Yes Virginia! A Profile in Excellence Table of Contents SHARED SERVICES . . . ANOTHER NAME FOR OUTSOURCING?..................................2 THE EVA INITIATIVE: COLLABORATION OVER COMPLIANCE…………………….4 MORE THAN CENTRALIZATION . . . ....................................................................................5 AVOIDING THE PITFALLS OF A SHARED SERVICES PLATFORM .............................6 A PERSPECTIVE ON POSITIVE CHANGE...........................................................................12 THE BANDS OF PUBLIC SECTOR SUPPLIER ENGAGEMENT ......................................17 UNDERSTANDING AND QUANTIFYING STAKEHOLDER IMPACT …………………24 GOVERNMENT POLICY AND DOMESTIC CLUSTERS ………………………………...27 A NON-PARTISAN PLATFORM …………………………………………………………….33 RISK TRANSFERENCE: HOLDING VENDORS ACCOUNTABLE ……………………..36 MEASURING SUCCESS: SUBSTANCE OVER POSITIONING ………………………….39 PRIVATIZATION AND THE FLAWED NPM CONCEPT ………………………………..42 THE FUTURE OF PUBLIC SECTOR PROCUREMENT (CLOSING SUMMARY) ……47 ABOUT THE AUTHOR..............................................................................................................49 Appendices APPENDIX A ...............................................................................................................................51 APPENDIX B …………………………………………………………………………………...56 1
  3. 3. Yes Virginia! A Profile in Excellence Shared Services . . . Another Name For Outsourcing? “Shared Services is different from the diametrically opposite model of Outsourcing which is where an external third party is paid to provide a service that was previously internal to the buying organization, typically leading to redundancies and re-organization. There is an on-going debate about the advantages of Shared Services over outsourcing. It is sometimes assumed that a joint venture between a government department and a commercial organization is an example of Shared Services but in fact they are quite different. The joint venture involves the creation of a separate legal commercial entity (jointly owned) which provides profit to its shareholders. It is difficult to see what is being shared rather than bought. Such joint ventures are really a form of outsourcing.” Defining Shared Services GNU Free Documentation License Wikipedia Foundation Inc. Last Modified: October 10th, 2008 2
  4. 4. Yes Virginia! A Profile in Excellence The eVA Initiative: An Example of Collaboration Over Compliance In yet another example of the value of collaboration over compliance the Commonwealth of Virginia was ranked alongside the States of Washington and Utah as a top performer in the PEW Center’s Grading the States 2008 Report. According to the PEW organization’s web site the report, which is designed to assess the “quality of management in the 50 states,” focuses on four key areas of government practice; Money, People, Infrastructure and Information. While all four are undoubtedly key elements of a sound foundation for success, it is the people and information components that form the basis of this report’s findings on why Virginia is the glowing beacon in a sea of failed supply chain initiatives that has plagued organizations in both the public and private sectors the world over. Based on a series of interviews with key Commonwealth officials, combined with extensive research of comparable government initiatives, Virginia’s position that “Managing a state is just too complicated to yield to one-size-fits-all-equations,” is elucidating in that it is both contradictory to accepted mainstream thinking whilst being a key tenet of a program that has and continues to exceed expectations. This is a critical distinction in that a central coordination of understanding is often mistaken as being part of an overall shared services strategy. In the latter instance, there is usually a significant transformation component from both a process and cultural standpoint, whereby the execution is coordinated through a central group that then assumes total responsibility for delivering the “service” to departments who in effect become internal customers. In short, initiatives based upon the shared services model are in reality an internalized outsourcing program. In the case of the eVA initiative, a collaborative understanding of the unique requirements of key stakeholders both within and external to the Commonwealth, enabled the Virginian hierarchy to develop and implement 3
  5. 5. Yes Virginia! A Profile in Excellence a model that maintained operational autonomy under a single technological platform. Once again, the important differences between a shared services approach versus a collaborative exercise in which all stakeholders work towards a collective “best result” outcome cannot be ignored as illustrated in a 2007 Journal of Information Technology article. In an excerpt from that article, titled “e-government: towards the e- bureaucratic form?” by Antonio Cordella, the author referenced the consistently high-rate of public sector initiative failures when he wrote: “Fountain (2001), for example, asserts that approximately 85% of government information technology projects worldwide have been failures. Similarly, the assessment of the case of the UK has recently highlighted that e-government costs not only soar, but possibly even outweigh the stated benefits it aims to provide (Rogers, 2003; Timmins, 2003). In 2007, the CIO of the UK Department for Work and Pensions estimated a public sector IT expenditure of d14 billion a year, with only 30% of the government’s IT projects succeeding (Collins, 2007).” In the end, empowering individual departments to work more effectively toward a centrally established goal through a collaborative process is proving to be far more effective that expending tens of millions of dollars on usurping operational capacity through reduced budgets and arbitrarily imposed compliance measures. More than Centralization . . . “Shared Services are more than just centralization or consolidation of similar activities in one location. Shared Services can mean running these service activities like a business and delivering services to internal customers at a cost, quality and timeliness that is competitive with alternatives.” 4
  6. 6. Yes Virginia! A Profile in Excellence Avoiding the Pitfalls of A “Shared” Services Platform In an attempt to address or explain the high rate of initiative failures in the public sector, (it is worth noting that private sector outcomes have not fared any better), Layne and Lee’s assertion that e-government reforms should be viewed as “multi-layered projects that only provide the foreseen outcome when all different phases of the move online of the government’s activities are completed,” is questionable. (Note: Refer to the 2001 article by Karen Lane and Jungwoo Lee titled, “Developing fully functional E-government: A four stage model” in the appendices bibliography section.) This is due primarily to the fact that even if one can in theory accept the explanation that the high rate of initiative failures associated with the public sector’s pursuit of performance scalability through a centralized operating mechanism is a temporary hiccup on the road to eventual success, the inherent flaw of the underlying New Public Management (NPM) principles that govern the shared services mindset remains. (Note: the premise behind the New Public Management axiom is that private sector processes represents a model that public sector organizations should emulate as a means of maximizing performance in key areas (re Key Performance Indicators). The public sector’s move to a shared services platform has largely been based on the strategy’s purported success in the private sector. We will delve further into this area in the section titled “Privatization and the Flawed NPM Concept.) Therefore, it is reasonable to conclude Layne and Lee’s position that these “temporary outcomes” will be overcome when the project has finally been fully implemented is a combination of wishful thinking and irresponsible prognostication. This is because a final or complete implementation often remains an elusive carrot that is always just beyond the reach of the implementing organization. There are many case references illustrating how elusive a goal an end result or project completion can be. One example is the SAP initiative that was abandoned by Kings County, Washington after several years and the investment of millions of dollars. Or the State of California’s Oracle project that was scrapped after it cost the State tens of millions of dollars. If anything, the temporary blip on the road to “inevitable” success promise does more harm than good in that it can paralyze and ultimately delay the 5
  7. 7. Yes Virginia! A Profile in Excellence implementing organization from making the necessary change (re cutting one’s losses) in direction that proved to be a pivotal element in the Virginia program’s success. What few people may actually know is that like most public sector initiatives, eVA was originally launched in 2001 under the shared services model. A short time into the program however Virginia identified what senior bureaucrats considered to be insurmountable obstacles with the policies being pursued and changed direction. A change, that had the Commonwealth adhered to the Layne and Lee edict, may never have taken place much to the detriment of all stakeholders including the taxpayer. Fortunately, the Virginian hierarchy recognized that government was “not just a single business but is actually comprised of many different lines of business.” By acknowledging that “government goes beyond a mere org chart,” the team driving the eVA program began to recognize the “special needs, special rules and special challenges associated with the procurement practice of each entity.” This recognition of the inherent flaws of the shared services approach combined with the absence of a significant investment in a particular vendor technology meant that the Commonwealth was free to pursue alternative strategies. In short, eVA did not become a software project, thereby shifting the emphasis from being an exercise in cost justification, to one of process understanding and refinement. We will discuss the implications of traditional licensing models versus the greater flexibility associated with the Software as a Service (SaaS) model in the “Risk Transference: Holding Vendors Accountable” section. The obvious question is quite simply this, why is shared services still being actively pursued in the public sector such as in the case of the Government of Canada’s (GoC) Way Forward initiative? The Way Forward (and subsequent versions) was ironically launched at roughly the same period in 2001 as Virginia’s eVA program. The stark difference in results in key areas such as supplier development and utilization is certainly noteworthy. For example, when eVA was introduced the Commonwealth had 20,000 suppliers registered in the system of which 5,000 to 6,000 were awarded contracts. By 2007, the number of registered suppliers grew to 34,000, as did the distribution of contracts as close to 15,000 vendors’ generated 6
  8. 8. Yes Virginia! A Profile in Excellence revenue as a result of their participation in the program. That represents an increase from 26% to slightly more than 45%. In terms of throughput, 1% of the $3.5 billion targeted spend was processed through eVA in 2001. In 2007, that number grew to more than 80%. While the eVA initiative has thrived since the Commonwealth moved away from the shared services platform, the GoC shared services strategy has fallen victim to inertia, in which the greatest effort is on selling and enforcing change, (in the latter part of 2007, smaller departments saw their budgets cut as a means of “encouraging” their transition to the new model). Needless to say, there has been very little that the GoC has provided in the way of tangible data such as supplier growth and contract distribution. This of course reduces one to speculate on what the costs versus returns both now and in the future will be for a program that has seen many tumultuous days. The above comparison is certainly interesting in that it demonstrates the “end-result” mantra that the Layne and Lee tandem expressed as being an important outcome relative to quantifying the viability of a public sector e- government initiative. However, it only represents the surface of visible manifestation of two diverging programs. It doesn’t provide us with the mechanics that may have contributed to dynamic progress in the case of eVA, versus the static ineffectiveness that has become the hallmark of the GoC undertaking. As a means of drilling down further into the elemental roots of the shared services platform, and the increased risk the model poses relative to stakeholder exclusion, it is important to understand the origins of the strategy. Surprisingly (or perhaps not), the seeds of failure are actually sown in the misperception that the processes (re workflows) that define an organization’s procurement or supply chain practice somehow reside within the IT Department’s sphere of operation. Centralization of IT functionality in areas such as e-mail and scanning operations were logical first steps in the implementation of a shared services strategy. The challenges occur when this approach is extended to include 7
  9. 9. Yes Virginia! A Profile in Excellence enterprise content management (ECM) of which workflow is considered a primary element. Citing a variety of benefits including leveraging IT resources more effectively and improved ECM justification (re addressable seat costs versus utilized seat costs), proponents of the shared services approach believe that enterprise-wide adoption and utilization generates greater organizational efficiencies and overall savings. In fact IT companies such as IBM incorporate the principles of shared services into the very definition of enterprise content management claiming that it “helps companies manage content, optimize business processes, and enables compliance with an integrated infrastructure,” (emphasis on optimize business processes and compliance with an integrated infrastructure.) The problem of course is that technology has very little to do with the processes that define your business, or at least it should. Unfortunately, the majority of organizations allow technology to define their processes rather than accelerate or improve them. And this, according to the Director of eProcurement at Virginia, was a trap the Commonwealth was able to avoid. Specifically, eVA did not become a software (IT) project, thereby enabling Virginia to shift the emphasis from an exercise in cost justification and compliance to one of process understanding and refinement. Senior executive belief that the processes or workflows (including document management) associated with the Commonwealth’s procurement practice has very little to do with the technological platform that would ultimately be selected to run eVA, was another key to Virginia’s success. (Note: eVA currently runs on the Ariba platform, but in line with the process before technology tenet, Virginia’s position is that the program would have been equally successful with SAP or Oracle or for that matter any reliable application.) This is an important point as the majority of shared services strategies appear to originate out of the IT department, and therefore are unduly influenced by what should in reality be secondary or support-based considerations. Other notable shared services initiatives include the United Kingdom’s Gershon Review which starting in 2004 required UK public bodies “to cut 2.5 per cent a year out of their budgets right up to 2008.” An illustration of 8
  10. 10. Yes Virginia! A Profile in Excellence the prevalence of the IT influence is the follow-up statement which stresses that “the use of new technologies will be central to hitting these tough targets!” I am not suggesting that IT is not an important stakeholder in the overall success of an e-procurement or supply chain initiative. However, the heavy IT weighting or influence is often maintained at the expense of other stakeholders such as the procurement professionals for whom the system is actually designed to support, and the suppliers (the majority of whom are generally cynical about the public sector procurement process). It is worth noting that organizations such as IBM (Graham Murray, Tony Smith), Hewlett Packard (Martin Walker) and the technology-oriented PA Consulting Group (Gillian Magee, John Pendlebury-Green, Judi Stockwell, Andrew Ward and Alice Web) represented more than one third of Sir Peter’s Team. And if one needs further convincing of the existence of a “link” between shared services platforms and outsourcing services, the April 19, 2005 article in titled “Government outsourcing set to boom” should leave little, if any doubt. And I quote, “Whitehall outsourcing alone could reach £7bn a year “directly as a result” of the Gershon Efficiency Review, the December 2004 report says. The UK public sector is set to outsource a further £20bn worth of services.” Not surprisingly, in a May 12, 2008 article titled “Public sector spending review to focus on IT” in, Tom Young stated that “Gershon is widely seen as a success in the public sector and has helped deliver up to £23bn in savings since 2004.” He went on to state that “IT is one of four key areas of focus in a successor review to the Gershon programme that will be launched next year.” Young made a further suggestion that “with an annual spend of £14bn, the public sector has significant market influence, and could gain better economies of scale with more joined-up procurement.” However, in the one example that was given in Young’s article regarding consolidation it was noted that any purported savings of, “a joint personnel management system for all three armed forces,” were offset when “Computing was deluged with complaints from service personnel and HR 9
  11. 11. Yes Virginia! A Profile in Excellence professionals about the JPA system.” Amongst the problems cited were “unpaid wages, confused allowances and difficulty in sorting problems.” Similar problems plagued the City of Houston’s SAP initiative, as police department personnel routinely received $0 paycheques. What is worth noting, and similar to the GoC’s Way Forward initiative, the Gershon strategy proposed “radical” changes with the majority of the originally proposed £15 billion in savings derived through a more “efficient procurement” practice. In announcing a leaked report, in which the Gershon proposals recommended that “as few as four regional purchasing agencies responsible for all major spending by the whole public sector,” be established, a May 27, 2004 article in BNET confirmed that chancellor Gordon Brown was planning to simultaneously cut 80,000 civil service jobs. Response from public sector purchasing professionals were almost a mirrored reflection of their Canadian counterparts’ reaction to the Way Forward initiative’s forecasted savings, as claims that the report “is a million miles away from reality,” accentuated the general consensus that it “contains assumptions of significant cost savings that are simply not achievable.” So what is the truth? While the May 27, 2004 BNET article set the savings target at £15 billion, and the May 12, 2008 article in indicated that the Gershon plan actually produced £23 billion in savings since 2004, an April 30, 2007 article in titled “Shared services about more than cost savings” referenced The Gershon Report of July 2004 in which the calculated savings would be “as much as £20 billion annually if departments found a way of sharing back office functions such as finance, HR and IT.” Based on just these three variables, the program goes from being a tremendous success (£23 billion pounds actually saved when only £15 billion was projected), to a dismal failure – especially given the backlash that was linked to the prospect of 80,000 civil service jobs being cut – whereby £20 billion in annual savings or £100 billion in total was targeted, and only £23 billion realized in the period between 2004 and 2008. (Note: as one digs deeper into the forecasted savings associated with the Gershon program, the number of variables increases such as the BBC News post of 10
  12. 12. Yes Virginia! A Profile in Excellence July 22, 2004 that forecasted £21 billion in savings projected over a four year period.) Regardless of the numbers, and the circuitous route upon which they are arrived, a September 30, 2008 article in ZDNet Australia may actually signal a step back in terms of public sector investment in IT. And ironically it is Sir Peter Gershon’s latest report that was delivered at the end of August that has produced the headline “IT hiring freeze blamed on Gershon.” The net result is that IT, or for that matter any one individual stakeholder whether it be finance, purchasing or external partners such as suppliers should not be the driving force or dominant player in a supply chain/procurement initiative. While IT's impact as a key stakeholder cannot be underestimated, it is through a collaborative exercise in which multiple stakeholder interests are presented, understood and acted upon that a “best result” collective outcome can be reliably achieved. This collaborative approach that eschews partisan interests in favour of a collective win-win outcome was a key tenet of the Virginia program as three new Governors and a change in party dominance did little to slow the year-over-year success of the eVA initiative. A Perspective on Positive Change “Accordingly, e-government in a country like the UK will be able to provide the expected results only when the “hidden” functions of the PA, mainly back office activities, are fundamentally reorganised by the adoption of ITC solutions allowing new ways to coordinate the work of back office functions.” In the above excerpt from the Cordella article one immediately recognizes the paradoxical ideas that are presented relative to the correlation between “expected results,” “hidden functions,” and the purported need for an “adoption of ITC solutions.” The conflict or disconnecting elements of the author’s position are the direct result of the flawed lens through which e-government, and in particular e- procurement is viewed. Specifically, the erroneous references to “back office” functionality or activities as the foundation upon which a sound e- 11
  13. 13. Yes Virginia! A Profile in Excellence government program is built, and through which expected results can be achieved. This of course is indicative of the risks associated with a heavily weighted bias through which the interests and perceptions of a single stakeholder (in this case ITC) has undue influence in the exercise to understand and respond to what is in reality the front line operational requirements of an organization. The fallout is that the ITC view creates a pre-disposition toward the utilization of technology as a means of addressing what is in reality a front line, operational challenge. In short, delivering tangible results is not predominantly a back office issue. While technology has a role to play to be certain, its introduction as the core element or component of a public sector strategy actually “locks” the implementing organization into a course of action in which the imperatives of investment justification gradually transforms the initiative into a ITC project. This is precisely the scenario that the Director of eProcurement for Virginia highlighted as being a situation the Commonwealth actively sought to avoid. Again, ITC does have an important role to play! But in line with the Virginian hierarchy’s stated position that eVA would have been equally successful regardless of the technological platform, viewing the operational challenges of a diverse procurement practice through the myopic lens of a technological mindset would have created blind spots in terms of effectively engaging and understanding unique stakeholder interests. This of course would go a long way towards explaining the Cordella article’s findings that the “adoption” of the policies associated with the heavily ITC skewed New Public Management’s (NPM) principles for transformation “are at least questionable.” In fact, an ITC-centric methodology actually creates rather than removes the barriers associated with the collaborative interaction that is essential to gaining a collective understanding of stakeholder requirements. These “barriers to understanding” ultimately creates unnecessary complexity as born out by the articles recognition that “the process of organisational change needed to achieve the expected result has in fact been more profound and complicated than expected. (Note: Cordella attributed this observation to a 1998 research article by B. Guy Peters and John Pierre titled, “Governance Without Government? Rethinking Government Administration.) 12
  14. 14. Yes Virginia! A Profile in Excellence In an ironic twist (ironic in that NPM principles contend that public sector operations would be more effective if they were to mirror those of the private sector’s), the Peters and Pierre observation is also worth noting in that underestimating complexity has not just been confined to the public sector. “Creating the technology to operate such a marketplace turned out to be more difficult than expected, while suppliers remained hesitant to compete for business online.” (Note: excerpt from December 31, 2003 c/net article) If we have learnt anything from past challenges it is that technology no matter how advanced or heralded, in and of itself has little impact on the ultimate success of an e-procurement initiative. The automotive industry’s failed Covisint program should be a shining beacon to all regarding the veracity of the above statement. Think about it for a moment. With Covisint, you had a consortium of automotive industry heavyweights such as Ford, General Motors, DaimlerChrysler and Nissan team-up with software vendor CommerceOne in 2000 to create an online marketplace involving more than 800,000 suppliers and billions of dollars in overall annual spend. Even with what many consider to be one of the greatest examples of collaborative industry expertise (which was backed by seemingly unlimited funding and immeasurable buying clout), could not prevent the Covisint program from being abandoned as an outright failure in 2003. While buyer resistance cannot be discounted as an important contributing factor, it was ultimately the unwillingness on the part of suppliers to participate that the decisive blow was dealt. 13
  15. 15. Yes Virginia! A Profile in Excellence Less than a year following the Covisint disclosure, an August 18th, 2004 c/net article headline announced “Ford Scraps Oracle-based procurement system.” One of the primary reasons that were cited as the basis for the Ford decision was the manufacturer’s realization that “not all of our suppliers touched a piece of Everest (the Oracle project’s name) . . . . Ford felt it was in its partners’ best interests to make this decision.” Other similar stories including Hewlett-Packard’s “lost $400 million in revenue from a failed SAP rollout” and the £12 million hit that Cadbury Scwheppes took in 2006 as a result of a “bad SAP supply chain” project provide compelling evidence of the perils of an ITC-centric NPM approach to public sector programs. And not just because of the apparent size and resources of the companies in question. Although the HP case study should be somewhat disconcerting given that organization’s level of sophistication and supposed expertise as an SAP integrator. As RedMonk analyst James Governor put it, “HP is trying to build an application management business to rival IBM’s. What better case study in proving your R/3 and Netweaver capability” . . . by showing “everyone how to merge two SAP systems.” The analyst concluded by saying “Who would want to go to HP now for large scale SAP integration? The CEO just publicly said HP can’t effectively manage such a project.” This being the case, if a high technology company who has extensive experience with the product can’t succeed, what does this say in terms of any organization’s (public or private) chances for success? Once again, this is not an attempt to somehow diminish the importance of technology. It is instead an effort to put into reasonable perspective, the role that technology can play in a public sector initiative. Once the lens through which a more “balanced” or “broadened” view of an organization’s requirements has been established, initiatives then take on a collaborative tone or atmosphere, which according the Virginia leadership is critical to a program’s sustainable viability. 14
  16. 16. Yes Virginia! A Profile in Excellence In my September 12th, 2007 article titled “Yes Virginia! There is more to e- procurement than software! (Part 1), I almost immediately noted a difference in attitude relative to the Commonwealth’s approach to introducing and managing a complex program across a diversified enterprise involving both internal as well as external stakeholders. As the initial interview progressed the exchange revealed “an extremely capable group of people whose passion for procurement was only rivalled by their commitment to a vision,” a collective vision. Achieving a collective vision according to Virginia’s leadership was “centered on gaining a thorough understanding of the processes that defined the Commonwealth’s procurement practice,” by engaging and viewing the operational challenges through the eyes of multiple stakeholders. A view, it is worth adding, that is in sharp contrast to the narrowly defined specification checklist of an ITC-centric program. The Virginian success, which started with an acknowledgement in 2000 that the then-current practice wasn’t delivering value to the taxpayers, and included the courage on the part of the Governor to admit it and do something about it, laid the foundation for what became a collaborative effort. Unburdened by the misguided belief that tighter controls produce desired results (something that contradicts the centrally monolithic approach associated with a shared services strategy), the Commonwealth brought a true service mentality or attitude to the eVA project. While there is almost always varying degrees of scepticism whenever, according to a senior Virginia bureaucrat, “big brother” initiates a program, the genuine effort to communicate with individual departments was invaluable in achieving the necessary buy-in for eVA’s eventual success. An important part of the effectiveness of the communicative process employed by the Commonwealth was directly tied to the fact that the exercise had not been confined to a pre-determined technological selection or investment. This of course does not imply that the Commonwealth did not ultimately establish a mandate which required individual stakeholder adherence. What it meant is that by the time the mandate was introduced (which was well 15
  17. 17. Yes Virginia! A Profile in Excellence into the initiative), the majority of obstacles had been identified and removed. So while participation wasn’t “voluntary,” by the time eVA had gained critical mass the program provided the right measure of departmental flexibility within a centrally established frame work. In short, potential issues of compliance were addressed through a productive and meaningful “all-for-one, one-for-all” dialogue. And though there were certainly program champions, it was not a unilateral Q&A exchange driven by a single area of interest, but instead an interactive dialogue between stakeholders with the project leads assuming a navigational role. This is an important distinction as it avoided the formation of what I refer to as an initiative oligarchy. While initiative oligarchies can in some instances become instruments of limited transformation, more often than not they are myopic in their efforts to understand and respond to the forces that shape and influence an organization’s supply chain. In his book titled “e-Procurement: From Strategy to Implementation,” Dale Neef referred to the “closed door meeting” mentality associated with initiative oligarchies as being the greatest impediment to a true internal collaboration process. Once again, the Virginia initiative champions realized early on that a shared services methodology did not stimulate stakeholder involvement. The decision to actively seek participation across the enterprise internally was, according to senior management, the only way to really understand and therefore address the diverse requirements of their practice. The synchronization of understanding internally was then extended to external partners such as suppliers. This is a solid example of the overall effectiveness of the collaboration versus compliance engagement protocol. The Bands of Public Sector Supplier Engagement As indicated earlier, the response to eVA by the Commonwealth’s supplier community is clearly demonstrated by the numbers in terms of the increase in vendor registration, as well as an equally impressive growth in the distribution of contracts over the entire supply base. Now I do not want to mislead you into thinking that the Commonwealth did not experience a degree of “pushback” from the vendor community. Quite the opposite, as incumbent suppliers (especially the larger organizations) 16
  18. 18. Yes Virginia! A Profile in Excellence were concerned that certain elements of the strategy represented a direct threat to their established revenue streams with individual agencies. The Commonwealth’s decision to introduce a “reverse funding model” whereby the suppliers would be required to “pay to play” also met with some initial resistance. Despite these challenges, including external pressures on the part of suppliers to rethink the program’s “consolidation” under eVA, the overall commitment to the initiative remained strong. According to one senior manager, this would not have been possible if the sincere effort to understand the objectives of all stakeholders internally had not been the cornerstone of the strategy out of the gate. Providing a unified front, the Commonwealth was then able to work with the supply base to gradually bring them around to the point where the program is seeing positive growth in key areas including contract or revenue distribution. (Note: I am not referring to the outdated and largely ineffective set aside programs of yesteryear, or the artificial padding of the numbers at the expense of one or more stakeholders – including the taxpayer. What I am referring to is a “universal” win-win best result outcome for all parties in which the savings are both tangible and quantifiable). The increase in business distribution is of course the primary starting point for suppliers relative to their willingness to come to the table and actively participate in the procurement process. This is more often than not the single most important challenge an implementing organization (either public or private) faces when they launch a new or revamped initiative. Certainly the example of a leading brand candy manufacturer gives testimony to this position. Through a series of acquisitions the manufacturer grew dramatically in a relatively short period of time. Unfortunately, an extemporal supply base was a by-product of the transactions leaving the acquiring company with a highly suspicious, deeply segmented group of suppliers. 17
  19. 19. Yes Virginia! A Profile in Excellence The biggest challenge as expressed by a senior procurement manager for the parent organization was convincing the former suppliers of the acquired companies that becoming part of a larger pool would expose them to opportunities for increased sales. What can only be classified as a common response, and in line with the “bird in the hand is worth two in the bush” saying, the suppliers weren’t buying the “increased opportunity” mantra and as a result the post- acquisition consolidation process was challenging to say the least. (Note: Interestingly enough, the external stakeholder reaction and the corresponding crisis it created had its origins in the absence of an effective internal collaboration mechanism between the parent company purchasing department and the purchasing departments of its newly acquired entities. Ultimately, the breakdown of communication was largely due to the failure of senior executives to recognize, let alone include purchasing in the M&A roll-out planning sessions.) The corporate disconnect served to fuel rather than douse the internal division fires resulting in both a practical and operational lack of cohesiveness. The end result was a territorial struggle that manifested itself in a divided supply base. This of course is hardly the ideal environment for a successful consolidation strategy.) Supplier cynicism in the face of new initiatives is nothing new. And it was certainly front and center in a keynote address I made at a 2005 conference for automotive industry suppliers. Consisting of more than 200 senior executives, here is a small sample of the comments I received regarding their clients’ decision to pursue an e- procurement strategy: “I do not think that buyers spend any time at all analyzing RFQ’s . . . once they have sent them out they go directly to the price auction and get on a phone and those who cut the price get the business.” “We spend too much time working on RFQ’s . . . the RFQ process chews up dollars and time for something that is going to bring us no return.” 18
  20. 20. Yes Virginia! A Profile in Excellence “It (RFQ’s) will have a negative effect on my business . . . we should charge the issuers of RFQ’s for responding!” These sentiments (which are even stronger amongst public sector suppliers) represent only the tip of the proverbial ice berg. There is a general perception that the electronic RFx process is ultimately little more than an elaborate fact finding mission that is designed to bolster and justify a pre- ordained outcome. At its best, the public sector RFx process can act as a negotiating mechanism to leverage down prices with a preferred supplier. This of course only works when the procedure is strategically applied to certain purchases, and has a means of providing a true reflection of market conditions and pricing. In the latter instance, ascertaining true market conditions including price is becoming increasingly difficult as public sector policies such as contract bundling are eroding large segments of the available supply base. At its worst, the public sector RFx process is considered to be an ineffective legislative requirement which needlessly lengthens the procurement cycle in which a “gravitational leaning” toward a particular vendor already exists. Certainly articles such as the one that appeared in the March 19, 2007 issue of ChannelWeb Network do little to alleviate vendor concern and cynicism with public sector initiatives. Titled “25 Public-Sector Channel Leaders,” the following comment stood out from the rest in terms of explaining the increasing level of supplier apathy; “To really leverage vendor partnerships, solution providers need an in. For the public sector, that entree has to go beyond the program to the individual behind it who understands the market nuances and challenges that can hold partners back.” When one takes the time to examine the backgrounds of the “leaders” featured in the ChannelWeb article, you cannot help but note that 11 of the 25 individuals listed have at least 20 or more “years in the public sector,” and for the most part all represent large, multinational suppliers. Even though experience (and expertise) is not the sole domain of the corporate goliath, the relationships that are developed over a period of two 19
  21. 21. Yes Virginia! A Profile in Excellence or more decades combined with a high level of what I refer to as “cross pollination employment,” certainly provided the pre-requisite “in” to which the article referred. An “in” it is worth adding, that is by its very nature exclusive and therefore not extended to include the vast majority of the supply market. Over the past several years I have extensively researched and where possible monitored supplier engagement practices in both the public and private sectors. While there are some elemental differences linked to political influences and considerations within the public practice itself, by and large the hierarchy of “class” distinction relative to suppliers has remained constant. I refer to this “hierarchical structure” as the Bands of Supplier Engagement. The “natural” evolution of these bands is not tied solely to the exclusionary nature of long standing relationships, but is also part of the fall-out from the erroneously broad application of a flawed vendor rationalization strategy, of which transactional reduction imperatives are also a part. This said one cannot logically suggest that relational influences do not provide the avenues of increased revenue opportunities to what is usually a limited number of “qualified” vendors. In fact to deny this as a crucial factor in public (and even private) sector decision-making would in and of itself raise an issue with creditability. However, there are degrees of influence that many would contend have contributed to the grey areas of ambiguity which is likened to a carton of milk in which the expiration date is within a day. The milk is not necessarily bad, but it nonetheless leaves a somewhat questionable taste in your mouth. It is within this context that the following description of the hierarchical bands or classes are identified and explained: The Masses: Representative of the majority of suppliers who are detached, somewhat cynical and for the most part disinterested in pursuing opportunities originating from the public sector organizations. The Strategically Displaced: Like gamblers buoyed by past windfalls, this group of suppliers are in the most unenviable position vacillating between 20
  22. 22. Yes Virginia! A Profile in Excellence stirring-up the emotions of the unsympathetic “masses” when a perceived injustice occurs within the public acquisition process and, delicately navigating the reefs of relational elasticity with bureaucratic taskmasters who hold out the carrot of replicating past victories. The In Crowd: Representative of the select few suppliers who through direct relationships (i.e. cross pollination employment) with key government decision-makers have nestled themselves and their respective organizations into the enviable role of incumbent. Referring once again to the March 2007 ChannelWeb article, very few suppliers have the needed “in.” The Bands of Public Sector Supplier Engagement The “Masses” The “In” Crowd The “Strategically Displaced” While the “In” crowd has become firmly entrenched in the government supplier landscape, the attitude of the other two “classes” (the “Masses” in particular) towards public sector procurement practice is one of half-hearted involvement. They will respond to bid requests if they have to, or have the available time. Otherwise, the general consensus is that their efforts can be best spent on other, more productive and fulfilling activities. Most public sector organizations will to certain degrees profess their intention to stimulate increased supplier participation. For example, and after significant backlash from the supplier community regarding the Way 21
  23. 23. Yes Virginia! A Profile in Excellence Forward initiative, Public Works and Government Services Canada (PWGSC) established an SME office in an effort to better communicate its objectives to a highly sceptical vendor community. A meeting with a senior PWGSC representative revealed the GoC’s concern that an increasingly large segment of suppliers were choosing to pursue public sector opportunities at the Provincial and Municipal levels, where the potential for success was believed to be greater. This migration of suppliers resulted in an alarming decrease in the response level to Federal government bids. In some cases as few as two or three suppliers would submit proposals. With fewer responses, the obvious concern was the advent of a trend known as “creeping margins” in which the buying organization would, through diminished supplier participation, lose real-world points of reference in terms of price competitiveness and service levels. This prompted the PWGSC representative to express the GoC’s pressing need to view vendor relations in a new light, one where suppliers were seen as being a customer of the Federal Government. Notwithstanding these moments of epiphany there are additional barriers to effective supplier engagement and utilization such as the restrictive policies associated with contractual risk mitigation. In many instances these belt and suspender clauses are exclusionary as they create onerous conditions from which the majority of suppliers (especially SMEs) will either shy away or be disqualified. In a recent interview, the President of a leading international association referenced a UK study which found that the government was paying a 27% premium due to its risk aversion policies. What is particularly troublesome for most suppliers is that in certain instances the prohibitive clauses that are included in most contracts are subject to being waived at the government’s discretion. This is a direct example of how prohibitive government policy reduces the level of supplier participation resulting in an unnecessary (nee creeping margins) increase in cost. Even before a vendor gets to the stage of having to contend with contractual clauses, the time and resources it takes to respond to most government RFPs represents aother insurmountable barrier for most suppliers. 22
  24. 24. Yes Virginia! A Profile in Excellence For example, purchases that would routinely be considered straight forward in the private sector usually require a public sector supplier to complete a 10 page document. For many SME’s the choice between tying-up limited resources to respond to a public sector RFP in which the opportunity for success is minimal, and pursuing tangible revenue opportunities in the private sector is an easy decision. Against this backdrop of declining interest, the proactive engagement mechanisms implemented by Virginia’s leadership continue to check the temperature of the vendor community, even going so far as to consult with their supply base on the Commonwealth’s contemplation of new technologies such as digital signatures. After being presented with a compelling argument to automate the contract routing process through the implementation of digital signature technology, Virginia sought feedback from suppliers as to the effect such a move might have on their ability to do business. An overwhelming number of suppliers expressed concerns that the introduction of the technology would prove to be detrimental in that it was too complex and expensive. Other concerns centered around the logistics of managing the process itself. For example, what are the procedures for bringing on a new supplier after a bid has been introduced to the market? How about a supplier whose card has expired part way through the RFP process? In the end, and based predominantly on supplier response, Virginia made the decision to shelve the digital signature program. Unlike Ford, whose decision to scrap the Everest program because they “felt it was in their partners’ best interests,” came after they had already spent millions of dollars and considerable resources, the Commonwealth’s proactive engagement avoided a similar outcome that would have proven costly for all stakeholders. Understanding and Quantifying Diverse Stakeholder Impact At the close of the previous section I made reference to Virginia’s method for determining the impact of a proposed technology on a key stakeholder, in this instance the vendor community. 23
  25. 25. Yes Virginia! A Profile in Excellence The Commonwealth’s proactive approach likely saved all parties a considerable amount of time, frustration and money. Unfortunately, the decision to pursue a particular strategy usually takes precedence over the interest of individual stakeholders. This ultimately results in a cost justification exercise that reflects a savings objective that is almost always out of touch with reality, or in the case of the City of Houston’s SAP project, non-existent. For those who might be unfamiliar with the Houston program, in a Government Computer News article from December 16, 2005 the city made the announcement that it would “standardize its administrative functions across all departments.” Emphasizing that the project would “fundamentally change how the city handles key business and administrative functions,” it was viewed as a necessary and “significant change for the city.” Amidst the fanfare, a question was posed regarding the level of anticipated savings. The response from city officials at the time goes a long way towards explaining why the program is languishing in a mire of unrealized expectations today. And I quote, “no cost savings estimate is complete yet, so officials are not sure how much Houston will save because of efficiencies.” While there are undoubtedly many factors that have contributed to the initiative’s ineffectiveness to date, the absence of tangible savings targets from the onset is a clear indication that critical information from key stakeholders was not obtained. It would be a reasonable assumption that had the city proactively sought the input of stakeholders both within and external to its operations, the insight that would have been gained might have influenced the municipality’s decision to proceed with a program in which the estimated cost was $23 million to start. Now Houston, like so many other public sector organizations find themselves in the unenviable position of trying to make something work as a means of justifying its decision versus delivering increased value. A task that is becoming increasingly difficult as real stakeholder needs and objectives are painstakingly introduced into the equation. 24
  26. 26. Yes Virginia! A Profile in Excellence So the real question that needs to be asked and answered is quite simply this . . . why don’t more public sector organization’s follow the lead of Virginia? Why, as was the case with the contemplation of the digital signature technology, do the majority of organizations not take a thoughtful pause to understand and quantify stakeholder impact prior to rolling-out multi-million programs? There are of course no definitive answers as the individuals who could shed some light on the thought process are usually long gone by the time anyone gets around to asking the tough questions regarding a failed initiative. However, and taking a page from my white paper titled “Talent Attraction and Retention in a Global Economy,” I made the following observations: “Like a politician stumping for votes, proclamations by senior executives (and many industry pundits) that people and not technology are what is important rarely translates from the realm of oratory pontification into meaningful real-world application. This is due in large part to the fact that outside of the frame work of political correctness, communication as Bill McAneny offered in his book “Frankenstein’s Manager – Leadership’s Missing Links” is actually a desire and not a skill, a skill that is in short supply according to his findings. In fact, second only to the ubiquitous lack of people skills complaint, ineffective communication said McAneny is the most common charge levelled at an organization’s leadership.” If McAneny’s assessment is true, and the primary cause of failure is due to the prevalence of initiative oligarchies, then the one defining element that separates a successful program such as eVA from the majority of those that fail comes down to leadership or the lack thereof. There is no amount of money or technological advancement that will overcome myopic, self-serving leadership. It is the Achilles heel of both public as well as private sector initiatives (a book by Manfred F.R. Kets de Vries and Danny Miller titled “Unstable at the Top” comes to mind). Virginia succeeded regardless of the individual who resided in the Governor’s mansion, or the political party that was in power at any given time. The success of the eVA program by the Commonwealth’s own 25
  27. 27. Yes Virginia! A Profile in Excellence admission had little to do with the technological platform upon which they operated. So what was the key differentiator? What distinguished the Virginia program from the rest? Why was the Commonwealth able to understand and quantify the program’s impact on key stakeholders prior to making an investment of time and resources in a particular strategy and technology? The answer is as complex as it is simple . . . leadership! By answering this question, an organization will go a long way towards predicting the success of a proposed initiative. With effective leadership, an organization has the capability to successfully navigate through the complexities of an enterprise wide initiative while avoiding most of the associated pitfalls. Without it, even the most advanced and innovative technology will fall flat. Government Policy and the Economic Impact of Domestic Clusters “From a domestic engagement perspective, public sector procurement practices are leading to an erosion of the overall supply base. This escalating level of erosion and its negative impact on innovation was initially presented as part of an October 2002 U.S. report by the Executive Office of the President. Specifically, the practice of contract bundling which resulted in a steadily decreasing number of Small – Medium enterprises receiving federal contracts was seen as a direct threat to the nation’s pool of “innovation and creativity.” This of course has paved the way for newer legislation which has resulted in agencies such as NASA unbundling contracts in an effort to make business more manageable for small enterprises, or groups of small enterprises. In turn, the strength of the supply base domestically (of which innovation is a key tenet), lays the foundation for a sound national economy by equipping suppliers to compete more effectively in the emerging global economy. 26
  28. 28. Yes Virginia! A Profile in Excellence In fact, a 2006 presentation by the Foundation for Advanced Studies on International Development (FASID) asserted that globalization will ultimately “reduce the number of industrial clusters in the world in each industry.” FASID concluded that “in an era of globalization, only efficient clusters can survive.” Therefore, the inability to build strong clusters of innovation domestically will directly threaten a nation’s long-term viability to compete globally in key industries.” (From the November 10, 2007 article by Jon Hansen titled “Reader Question: Is a strong small business sector important to the stability and growth of a nation’s economy?”) For those who may be unfamiliar with the term, clusters (which are mostly comprised of Small – Medium Enterprises otherwise referred to as SMEs), are a group of independent companies with complimentary products and services who team-up to collectively deliver a solution to an end customer. The above definition, which is aligned with the Commonwealth of Virginia’s program, is an over simplified version of the principles surrounding the concept of external economies of scale (ES). It represents a basic framework for cluster development within the public sector supply chain. However, and in an effort to provide a deeper understanding of the economic impact of effective cluster development in the public sector including the negative implications of policies that undermine supplier utilization such as a broadly applied contract bundling practice, we will review the elemental roots of the ES principle. A January 2003 article by Reem Heakal titled “What Are Economies of Scale,” determined that “external economies of scale (ES) occur outside of a firm, within an industry. Thus, when an industry’s scope of operations expand due to, for example, the creation of a better transportation network, resulting in a subsequent decrease in costs for a company working within that industry, external economies of scale are said to have been achieved. With external ES, all firms within the industry will benefit.” While the principles of external economies have traditionally been associated with the manufacturing sector, the emergence of clustering and the global supply chain has in effect redrawn the boundaries of its 27
  29. 29. Yes Virginia! A Profile in Excellence applicability. Ironically, the idea of looking beyond the “localized” or “regionalized” structure normally associated with external ES, is a concept that was first presented by E.G. Robinson in 1931 and expanded upon in his book “The Structure of Competitive Industry (Cambridge Economic Handbooks, 1959). Specifically, Robinson defined an immobile external ES as one which “require the firms to be in close proximity to one another” for benefits to be realized. As an adjunct point of interest, the benefits of proximity have recently been called into question in cases involving organizations like Canadian-based Bombardier. According to Goldstein, the absence of a dedicated public policy regarding the development of localized clusters “prompts speculation on whether the clusters built through the national lead firms’ (i.e. Bombardier) success will consolidate into a self-sustainable and durable regional specialization.” This is certainly a valid consideration as a recent article I wrote, “An Oasis of Creative Thought and Action in a Desert of Conflicting Policy (Procurement Insights, October 6, 2008) on the Associated Manufacturing Marketing Group (AMMG) provides a case study on the perils of total dependence on a regional client. A joint “venture” of what the AMMG web site refers to as “five well- established manufacturing firms,” this innovative, privately funded consortium’s main objective is to develop new business on a cooperative basis both domestically as well as internationally. Or as AMMG’s director so eloquently put it, “the AMMG is a private initiative which seeks to develop a collaborative, full-service supply chain network as a means to effectively identify and service viable export markets.” Certainly clusters of this nature are not necessarily new, however and as stated earlier, in the majority of instances their development have been historically driven by a centrally resident and somewhat monolithic enterprise “client.” This has meant that regardless of the “value chains governance” or framework, the model’s ultimate sustainability was tied to a specific customer or region. In the case of the AMMG, its formation was predicated by the challenged New Brunswick economy which created a vacuum in terms of supplying traditional “central” enterprise clients. In short, you have a group of 28
  30. 30. Yes Virginia! A Profile in Excellence companies that have core competencies which ranks amongst the best in the world, but lacked the necessary regionalized client base that is essential to ensuring the collective long-term viability of the sector. This is the void to which Goldstein had referred. The question of course is what role, if any, should government and more specifically public sector procurement practice play in addressing the issue of cluster development and sustainability? And even more importantly, what are the consequences of nominal or non-existent action on the part of government, especially in a challenging economy? Looking beyond its “borders,” Virginia has actively contemplated its role in supporting the Commonwealth’s indigenous supply base. As one of only a handful of public sector programs that have been successful, senior leadership have investigated the scalability of the eVA program from the perspective of providing its expertise to other government entities at the state, and even municipal levels. This includes offering the registered supply base as a sourcing “package.” Putting aside the partisan proclivities and political machinations that can often douse an innovative flame, this is in its most basic sense an effort on the part of Virginia to create a “mobile” cluster. Mobility, as defined by Robinson is “external economies of scale which are available to firms located well beyond the territory in which they are provided.” One example of external ES cited by Robinson in the 1930s as being mobile was the Liverpool cotton exchange, which could be utilized by firms both locally as well as globally to the apparent benefits of all stakeholders. With emerging ideologies such as the “value chain perspective” which extends the concept of clusters beyond the traditional realm of manufacturing to include “other activities in the supply of goods and services, including distribution and marketing,” proactive involvement on the part of government is becoming increasingly important. (Note: to learn more about the external linkages that are reshaping cluster development, refer to the book “Clusters Facing Competition: The Importance of External Linkages” by Giuliani, Rabellotti and van Dijk, 2005.) 29
  31. 31. Yes Virginia! A Profile in Excellence Beyond the provision of subsidies to partially fund programs such as the AMMG, are there other ways in which government can assume the “role” of lead firm thereby leveraging the competencies of domestic clusters? Virginia has taken a positive first step by establishing a procurement practice that stimulates rather than deters supplier engagement. This is reflected in the previously cited growth in key areas of vendor registration and contract or business distribution. In this regard, failed public sector initiatives of which an eroding supply base is a natural consequence, ultimately undermines the vitality of a nation’s domestic supply base. The impact of course is tantamount to leaving businesses (the majority of which are SMEs) to “fend for themselves” in an increasingly competitive global economy. The key to leveraging domestic competencies and placing business on a sound footing is for government to fully understand and assess the capabilities of the heterogeneous domestic supplier community in serving public sector needs. Unlike the Virginia example, this strategy is often undermined by the failure of the public sector to look beyond the relatively narrow definition of the “sound bite” savings associated with a myopic reduction in spend mentality. This penny wise, pound foolish mindset manifests itself in programs that have been structured around a vendor compression strategy in which direct contracts (also referred to as bundled contracts) with larger entities are expected to drive volume savings. This approach is of course overly simplistic and unimaginative. In fact, focusing on the establishment of single source vendors under the auspices of increased savings actually circumvents the very policies that are usually in place to ensure fair and open competition in the public sector procurement practice. And as stated earlier, a public sector shared services strategy which is centered on a single or minimal number of vendors is for all intents and purposes an outsourcing arrangement. The negative implications of euthanizing the supply base in favour of a forecasted increase in savings associated with a shared services platform was the impetus behind the October 2002 U.S. Report by the Executive Office of 30
  32. 32. Yes Virginia! A Profile in Excellence the President and the resulting decision to dramatically reduce the practice of bundling contracts. The backlash over the utilization of sole-source contracts with large companies in Afghanistan, Iraq and the Hurricane Katrina clean-up accelerated this reversal in strategy as studies by three independent groups have identified an emerging trend in the U.S. Federal Government’s contracting practice. Referred to as a “major and growing bonanza for small business firms, particularly those run by veterans, women and minorities” by one study, the data points to a dramatic shift in favour of small business in three key areas; Information and Technology (IT); Operations and Maintenance (O&M); and Architecture, Engineering Construction & Environmental (AEC) has put them “back on top of much of the federal contracting world.” For example, the number of federal IT contracting opportunities available to small business increased from 35% in 2002 to 46% in 2007. And while “larger firms still tend to dominate more of the advertised IT opportunities,” the overall IT opportunities for large contractors declined from 71% in 2002 to 62% in 2007. The upward trend for SMEs also extended to include Pre-RFP contracting set-asides for small business which saw opportunities in this area increase from 40% in 2002 to 52% in 2007. Conversely, the number of full and open opportunities (which tend to favour the larger organizations) decreased from 65% in 2002 to 55% in 2007. Of the five emerging small federal contractor trends identified in the reports, the two that have the most relevance are the “demise of sole-source contracting and the resulting focus on heightened competition.” Based on these emerging trends and corresponding practices, effective cluster development domestically in which sustainability is ensured on a global basis is a one-two process. To begin, the procurement policies that are pursued by the public sector must shed the shackles of limited vision objectives normally tied to a shared services strategy of increased savings through rationalization. This means a 31
  33. 33. Yes Virginia! A Profile in Excellence proactive engagement of key stakeholders (including suppliers) in the early stages of initiative development. Stage two is a natural extension of a successful program, where a public entity such as the State of Virginia, seeks to share both its expertise and experience with other public entities. This includes making the finely tuned and highly motivated supply base available as a key component of a scalable program. With 85% of all initiatives failing to achieve the expected results, the Commonwealth certainly presents a compelling case for at least further investigation, if not utilization on the part of other public entities. The one-two approach will facilitate and strengthen domestic clusters, placing them on a firm foundation to transition to the “mobile” ES capability referenced by Robinson. And it is at this point that support outside of a government’s sound procurement strategy comes into play through ancillary funding such as that which was provided to the AMMG through the Atlantic Canada Opportunities Agency (ACOA). A Non-Partisan Platform On October 30, 2006 Sir Nicholas Stern released his Review, The Economics of Climate Change. Stern described climate change as an economic externality which is an economic transaction that generates a positive or negative (re pollution, global warming etc.) effect for an uninvolved third party. Practically speaking, you could refer to the third-party as an innocent bystander, and therefore due to the negative impact of carbon emissions, Stern’s suggestion for addressing this externality was to “allow the market forces to develop low carbon technologies.” He concluded that addressing the issue immediately represented the optimum economic outcome. While his review received international attention, fellow economists such as Kenneth Arrow, Partha Dasgupta and Robert Mendelsohn to name just a few criticized his findings as being more of a political dissertation versus a sound analytical exercise. The main difficulty according to the dissenting economists was that the Review’s assumptions followed from the desired conclusions.” (From the white paper “The Greening of Procurement: How 32
  34. 34. Yes Virginia! A Profile in Excellence Social Consciousness is Re-Shaping Procurement Practices” by Jon Hansen, 2008.) What is interesting and of course pertinent to this paper is the statement that Stern’s “assumptions followed from the desired conclusions.” In essence what Stern’s critics were not so subtly implying is that he had a pre- disposition towards a certain outcome and then shaped the report’s recommendations toward validating that position. More often than not, forecasted savings in public sector procurement policy are frequently driven by a need to justify a decision (nee investment) in a strategy that is usually centered on a particular vendor technology. One could refer to this as a “we need to save this much money, because we invested this much money” logic. Whether or not it is a realistic or achievable target is a secondary consideration to what becomes a “you just have make it work” imperative. Therefore, an example of partisan behaviour would be the GoC’s Way Forward program, in which a sizeable investment in the shared services platform (including the corresponding technology) is made well in advance of the realization of both operational efficiency and tangible savings. This “myopic absolute” approach ultimately skewed the lens through which the program was presented and implemented. Strategies of this nature create a partisan mindset in which operational realities are “moulded” to fit around a desired (or needed) outcome regardless of its ongoing viability and negative consequences. In a practical sense, partisan behaviour is usually represented by the decision to invest significant sums of money in a technology based on personal experience or limited input (re the initiative oligarchy). Once the decision is made, and money spent the focus then shifts to justifying said investment. Conversely, and not surprisingly a critical element of Virginia’s success with eVA was the fact that they did not have to focus their energies on an exercise in cost justification in which the initiative’s Return On Investment (ROI) was tied to a technological investment that was made in advance of any meaningful stakeholder dialogue. This in turn freed the Commonwealth’s leadership to focus on the essential elements of the strategy itself which included open and productive collaboration with key 33
  35. 35. Yes Virginia! A Profile in Excellence stakeholders. A task that is made considerably easier when the proverbial financial clock isn’t ticking louder with each dollar spent towards an increasingly elusive outcome. (Note: another critical component of the Virginia program’s success is the utilization of the Software as a Service (SaaS) pricing model. We will cover this in greater detail in an upcoming section.) Referencing the Virginian model, a non-partisan program is one where a targeted or desired outcome is established through a collaborative process prior to making an investment of funds and resources in a technological platform. This approach frees participants to focus on a “get it right, versus being right” methodology. For the sake of clarification, it is important that one does not confuse the critical differences between a single or shared strategy and a true exercise in collaboration. Once again, with the former scenario the strategy or investment becomes the defining point usually superseding the benefits (and interests) of the very stakeholders the program has been designed to assist. The organization or enterprise is then pressured to conform to the strategy, despite the potentially negative consequences. The focus on championing a flawed strategy transforms an initiative into a selling exercise in which “The Medium (becomes) the Message.” In his article titled “What is the Meaning of the Medium in the Message?” Chief Strategist Mark Federman observed that “Marshall McLuhan was concerned with the observation that we tend to focus on the obvious (in the case of public sector initiatives, the obviousis the justification of investment). In doing so, we largely miss the structural changes in our affairs that are introduced subtly, or over long periods of time.” Federman went on to say that “whenever we create a new innovation – be it an invention or a new idea – many of its properties are fairly obvious to us.” This means that we know, or believe we know, what it is intended to do and what it is intended to replace, as well as the associated advantages and disadvantages. What is interesting about Federman’s observations however is his position that after a long period of time, and at the point in which we look backward, we often realize that there were “some effects of which we were entirely unaware of at the outset.” 34
  36. 36. Yes Virginia! A Profile in Excellence Based on Federman’s observations, the key to success with public sector procurement initiatives is to take a holistic view of the organization’s purchasing practice through an active engagement mechanism in which the eventual strategy is formed around the operational insights that are gained through the process. This was the approach taken by Virginia’s leadership, and resulted in the establishment of a sound strategy based on the real-world capabilities and requirements of all stakeholders. Only upon the firm establishment of a viable strategy did the Commonwealth then introduce a technological platform structured around the SaaS model. In the case of the GoC, a decision was made to pursue a shared services strategy at the senior level, with an immediate and sizeable investment being made with little or no input from key stakeholders. Like Stern’s report, this created a pre-disposition to both justify and enforce compliance with the strategy even if said compliance contradicted the operational requirements of the government’s buying apparatus. This discounting of consequences creates an endless loop of inefficiency that can only be broken when the program’s architect(s) move on. By that time of course, the damage associated with the ill-conceived initiative has already been done, and will unfairly colour any future programs as they will be viewed with an increasing level of cynicism based on the past experience. Risk Transference: Holding Vendors Accountable The Software as a Service (SaaS) or On-Demand model as it was originally called is certainly part of mainstream thinking today. However back in 2001 when eVA was first introduced it was a relatively new concept whereby organizations would pay a fee for using the application versus owning or licensing the software. A compelling aspect of the Virginia model is that in the first 4 years of the contract, the vendor American Management Systems (AMS has since been acquired by Canadian-based CGI) absorbed the bulk of the upfront implementation cost. Hungry for business, AMS accepted the Commonwealth’s offer to be paid a percentage based on the transactional volume (re orders) processed through what became the eVA system. This 35
  37. 37. Yes Virginia! A Profile in Excellence provided AMS with the necessary impetus to ensure that eVA became operationally effective as quickly (and reliably) as possible. From the Commonwealth’s perspective, the SaaS model enabled the Commonwealth to eschew the commonly “forced” one plan-one mind precept that ultimately anchors or handicaps the majority of public sector e- procurement initiatives. The Henry Ford proclamation regarding the model T that a customer can choose any color they want as long as it was black comes to mind. As covered in the previous section, the SaaS model meant that Virginia’s leadership was not reduced to an exercise in cost justification that usually governs programs that are introduced under a traditional license or seating model. This paved the way for a true collaborative effort in which the barriers to adoption were identified and successfully removed prior to an enterprise-wide implementation. In essence, the cards were already stacked in favour of success. However, the SaaS model does require a heightened level of self- determination and project responsibility on the part of the client as they must take the lead in terms of creating and driving the vision. Fortunately, and based on my interviews with Commonwealth officials, the political climate was ideal for this type of innovative change, which was clearly demonstrated by the non-partisan support of three different Governors. Under the guidance of capable leadership, the eVA team maximized this opportunity to the Commonwealth’s full advantage. Given the success of eVA, it is hard to imagine that other public sector organizations do not possess at least the pre-requisite level of expertise and determination to generate similar results within the framework of an equally effective SaaS pricing model. Unfortunately, the majority of organizations in both the public and private sectors are locked-in to an ERP-centric pricing model in which variations of a seat usage metric and onerous maintenance/support program fees limit the flexibility for change. Even in those instances where a vendor such as Ariba or SAP have themselves introduced a SaaS model, the ability for existing clients to make the transition to a SaaS model may not exist as an option. The obvious question is why? 36
  38. 38. Yes Virginia! A Profile in Excellence Perhaps an August 2007 series of interviews with a senior executive from Ariba that included his marketing manager and representatives from the company’s PR Firm may help to shed some light on the situation. In 2007, Ariba’s PR firm contacted me regarding the vendor’s recent contract win with Horizon Blue Cross and Blue Shield of New Jersey, and asked if I would be willing to interview one of their senior VPs. I accepted. In the earlier part of the interview I listened to the senior executive provide insight into the reasons behind the company’s decision to “re-engineer” their software and how it led directly to their recent success. In particular, his assertion that the latest win was based upon the client being able to “leverage Ariba’s on-demand Procure-To-Pay offering to drive savings, efficiencies and competitive advantage.” Knowing that Ariba had come through a challenging period (between 2001 and 2005 the company lost $3 billion on $1 billion in sales), I asked a number of questions including what was the driving force behind the decision to “re-engineer” their software to adapt to the on-demand or SaaS model? I followed with a question relating to concerns they might have in terms of the potential for the new model to cannibalize their traditional business model in which clients paid both a license and maintenance fee? Finally I broached the subject regarding the possibility that they would one day arrive at a fork in the road and would be “forced” to embrace one model over the other? All valid questions for a vendor who is openly straddling the fence between the sizeable price tag associated with a traditional licensing model and the more progressive SaaS model in which their revenue stream is directly linked to performance. Ariba was unable to provide definitive answers to these questions. And while a member of the PR team gave assurances that they would get back to me with a response in time for inclusion in an upcoming post, almost 15 months later I am still waiting for the phone to ring. As is the case with SAP, who in 2007 introduced a $10K strategic sourcing trial license, Ariba’s size and infrastructure are built around the revenue stream that is derived from their traditional licensing/maintenance model. If they were to fully embrace the SaaS model and aggressively versus 37
  39. 39. Yes Virginia! A Profile in Excellence strategically promote it to the broader market the likely outcome would be an increase in contracts but a sharp decline in revenues. Besides the obvious impact on their share price, an open and complete embrace of SaaS would produce significant layoffs resulting in a monumental change to their current infrastructure. This kind of scenario poses many problems, some of which could potentially sink the company (although the Ariba war chest is as sizeable as that of a small country). Nonetheless, it creates a dilemma as smaller more mobile organizations are emerging whose superior technological capabilities combined with an aggressive SaaS pricing model are beginning to make inroads into what had previously been inaccessible client opportunities. Given the current vendor landscape, it will become increasingly more difficult for large vendors like Ariba to selectively offer a SaaS-based solution while simultaneously receiving considerable fees from existing license model clients. The irony is that the SaaS model under which the Commonwealth of Virginia’s technology operates is Ariba. Measuring Success: Substance Over Positioning Just referencing the case examples confined to the pages of this report demonstrate an alarming trend in which access to tangible data as a means of either quantifying or measuring an initiative’s progress and success is by and large unavailable. There are a number of reasons for the paucity of statistical results leading to the verification of a program’s effectiveness. In the case of the Houston SAP initiative, savings targets were never established – a “you can’t miss what you don’t aim to achieve” approach. The GoC's Way Forward initiative’s original projections relative to savings, which were in the billions of dollars, were roundly dismissed as being the musings of an imaginative mind. With the only numbers that have been made available being a $23 million expenditure over a 7 month period on what was originally budgeted as a $1.7 consulting project with AT Kearney, Canadian stakeholders remain in the dark in terms of the total dollars invested to date, and the corresponding savings. Even the UK and Sir Peter Gershon’s 38
  40. 40. Yes Virginia! A Profile in Excellence Program’s numbers relative to set targets and achieved results fluctuates depending on the date and source of the information. While the absence of data is somewhat frustrating to those who would seek to justify the majority of public sector initiatives, the implications are clear. The numbers are not available because they are not favourable. If Johnny gets an “A” on his mathematics test, he is likely going to run home proclaiming his accomplishment to anyone along the way who is willing to listen. I think that it is a reasonable assumption that an “F” would not produce the same level of enthusiasm. In fact one might reasonably assume that Johnny would take the long way home and upon arriving stuff the offensive grade into the dark recesses of a drawer only to be discovered by his mother some twenty years later. The point is that the champions of a successful program will not seek to obfuscate the proof of their performance. The tangible data supporting Virginia’s success is readily available. Besides the data on supplier growth, Virginia’s number one ranking in the 2008 PEW Report provide ample evidence of the Commonwealth’s success in a number of key areas including their procurement practice under the eVA program. The clarity of the data that is presented leaves little room for doubt as to what Virginia achieved, and how they went about it. The level of disclosure is essential if public sector procurement practice is to make the transformation from a bureaucratic maelstrom that carelessly squanders hard earned taxpayer money to a professional vehicle of public interest efficiency. Within this context, in his book Good to Great, author Jim Collins made reference to the Doom Loop and Flywheel concepts. Collins defined a Doom Loop organization as one where leadership builds their strategy based on assumptions and misinformation and therefore lack a clear understanding of the real challenges their organizations’ face. They then attempt to implement a strategy which after failing to solicit feedback from key stakeholders does not receive the required buy-in. The initiative then flounders and as a result cannot gain the necessary traction to drive sustainable success. 39
  41. 41. Yes Virginia! A Profile in Excellence Alternatively, the good to great companies, relied on a “down-to-earth,” pragmatic, committed-to-excellence process – a framework – which kept each company, its leaders, and its people on track for the long haul, starting with the proactive engagement of key stakeholders. The leadership formed their plan of action based on real data, and implemented the new program on a small scale at first, gradually ramping-up as the initiative produced the targeted results and in the process gained critical buy-in. The first step towards accomplishing an effective transformation is to establish the communication channels with key stakeholders outside of the framework of an initiative oligarchy. Based on the collaborative process incremental goals both financial and operational are collectively identified and agreed upon. No swinging for the fences. The Collins’ approach will definitely take more time and require greater effort but it is a question of where an organization wants to be 2, 5 and even 10 years from now. Simply put, will they be one of the 85% of all organizations in both the public and private sectors whose initiatives have fallen far short of expected savings? Or have they realized the measurable returns that the Virginia program has enjoyed almost from day one. The following are a few basic questions, the answers to which will determine if an organization has laid the foundations for a successful program: 1. Has the organization established the necessary channels of communication with all of its key stakeholders? 2. Has the organization firmly established a solid foundation of understanding in terms of its current procurement practice (including areas of potential Improvement)? 3. Has the organization clearly identified a course of action that is capable of achieving its stated objectives prior to the introduction of a technological platform? 4. Has the organization received the necessary stakeholder buy-in to systematically achieve graduated results on a consistent basis? 40
  42. 42. Yes Virginia! A Profile in Excellence Taking another page out of Collins’ book, the following highlights a number of findings that challenge long-held corporate practices as being myths:  Companies that make the change from good to great have no name for their transformation – and absolutely no program.  These companies neither rant or rave about a crisis – and they don’t manufacture one where none exists.  Great companies don’t motivate people – their people are self- motivated.  There is no evidence of a connection between money and change mastery.  Fear doesn’t drive change – but it does perpetuate mediocrity.  Dramatic results do not come from dramatic process – not if you want them to last.  A serious revolution, one that feels like a revolution to those who are going through it, is unlikely to bring about a sustainable leap from being good to great. Of the many differences between the success of the Virginia initiative and those that have round aground, one component of the program that stands out is the quiet and assuming methodology of communicating that steered the Commonwealth’s undertaking from the beginning. There were no claims of billions of dollars in savings, or showboating proclamations of innovative procedural breakthroughs. It wasn’t given a catchy moniker like “The Way Forward” nor did eVA’s champions seek the spotlight. They simply went about their business quietly and purposefully with a determination to “get it right.” This is the hallmark of a sound strategy that leads to real accomplishment. Privatization and the Flawed NPM Concept “Of all the agencies and departments that have been discussed for privatization this year, the GSA would be one of the easiest to privatize. Its many services are available from the private sector, whose more successful 41
  43. 43. Yes Virginia! A Profile in Excellence firms offer a blueprint for how a privatized GSA could survive and thrive in a competitive environment. Moreover, because of the routine and commercial nature of most of its operations, as well as the performance benchmarks provided by its private sector counterparts, GSA is amenable to forms of privatization that allows for substantial and active participation by the existing federal workforce. Thus, besides saving a considerable sum for the taxpayer, privatization of the GSA could become a model for many of the other privatizations lawmakers and Administration officials say they intend to pursue. (From the May 26, 1995 article by Dr. Ronald D. Utt, Ph.D. titled “Privatize the General Services Administration Through an Employee Buyout”) Putting aside for the moment the recent crisis in which governments around the world have had to take an “ownership” stake in failing “private sector” financial institutions to circumvent a major depression, the premise that private enterprise processes are somehow superior to those of the public sector appear to based on the anecdotal examples of alleged incompetent buying (i.e. the $436 hammer purchased by the DoD). While there are certainly instances where decision-making within the realms of public sector procurement can and should be questioned, the private sector is not immune to the very deficiencies that are usually attributed to governmental incompetence – especially in the area of e-procurement initiatives. Here are just a few case references: Hershey Food Corp Beginning in 1997 Hershey tried to integrate Manugistics, SAP and Siebel applications to improve order processing. About 30 months and $112 million later, Hershey had to admit failure. With its order fulfillment process broken, the company found itself having to call its customers to find out how much candy they had received in shipments. While SAP calls Hershey’s experience a consolidation success story, experienced SAP integrators would tell you that Hershey dramatically underestimated the effort required to install and customize six SAP modules (finance, purchasing, materials management, warehousing, order processing and billing.) 26 42
  44. 44. Yes Virginia! A Profile in Excellence FoxMeyer Drug The FoxMeyer Drug example is the ultimate cautionary tale for any IT manager about to pull the trigger on a new ERP implementation. Following an SAP R/3 implementation in the mid-to late 1990s, the company’s bankruptcy trustees filed a $500 million lawsuit in 1998 against SAP, and another $500 million suit against co-implementer Anderson Consulting, claiming the companies’ software and installation efforts had contributed to the drug company’s demise. On June 23, 2004, SAP reached a settlement agreement with FoxMeyer pursuant to which SAP was required to pay a specified amount. Whirlpool, Dow Chemical, Boeing, Dell Computer and Waste Management In a January 2000 article in CFO magazine titled Blaming ERP by Andrew Osterland (, reference was made to the ongoing struggles associated with SAP implementations and “to a lesser extent,” as the story states, “competing products like those from PeopleSoft, Oracle, Baan, and J.D. Edwards.” Referencing the Hershey nightmare, Osterland wrote, “A week after Hershey’s disappointment, Whirlpool, a leading manufacturer of household appliances, announced similar though less severe problems with its SAP implementation. In fact, the two companies are just the latest additions to a long list of companies that include Dow Chemical, Boeing, Dell Computer, Apple Computer, and Waste Management that have struggled in varying degrees with ERP projects.” In light of these private sector examples, what is interesting about the Utt article is that his observations surrounding the apparent shortfalls in public sector procurement practice have a high degree of merit. However, his suggested methods for addressing said challenges are problematic in that they introduce a hybrid version of privatization principles which lead to what public sector organizations are calling a “shared services” strategy. 43
  45. 45. Yes Virginia! A Profile in Excellence One might even conclude that the shared services concept represents an initial, albeit discreet step towards achieving Utt’s recommendation to privatize certain government functions by disguising the transformation as part of a government-led program. The basis for this conclusion is the apparent contradiction between certain elements of the NPM’s proposed methods for reforming public sector administration to fall more in line with those of the private sector, and the isolationist methodologies that are employed by government bureaucracies under a shared services strategy. A strategy that when introduced as part of a public sector initiative takes on the characteristics of an outsourcing arrangement. An example of the contradiction between the NPM concept of adopting a private sector approach and current shared services programs is found in Anthony Cordella’s article: “It (NPM) also suggests structural or organisational choices that promote decentralised control through a wide variety of alternative delivery mechanisms, including quasi-markets with public and private service providers competing for resources from policy-makers. NPM has several manifestations, but most typically it is a management theory about how to reform government by replacing rigid hierarchical organisational structures with more dynamic networks of small organisational units; replacing authoritarian, top-down decision and policy-making practices with a more consensual, bottom-up approach which facilitates the participation of as many stakeholders as possible.” Key terms that coincide with Virginia’s approach include; decentralised control, replacing rigid hierarchical organisational structures with more dynamic networks, replacing authoritarian – top-down decision and policy- making practices with a more consensual – bottom-up approach, and facilitates the participation of as many stakeholders as possible. Now compare this with the seemingly arbitrary approach of Houston’s city officials who made the decision to select SAP despite the fact that outside of accounting, it was generally believed that the vendor’s solution would prove to be ineffective. Without establishing a clear savings target based on the 44