- By Jane Morrissey
- Mar 15, 1998
It should come as little surprise that in the "Show Me State," Missouri's purchasing executives demand proof of whether their PC provider is delivering value to state desktop buyers.
But by applying the state motto to its PC-buying practices, the Missouri state government has put in place an innovative statewide desktop procurement program that has saved taxpayers $2 million a year. At the same time, the state's PC prime vendor contract, which provides a single point of contact for all desktop-related purchases, service and training, has improved ordering efficiency and service levels for state PC buyers.
A key factor in the success of the 15-month-old program has been a tight partnership between the state's information technology purchasing executives and the prime contractor, Stamford, Conn.-based GE Capital Information Technology Solutions, which is required to show proof of its performance regularly. And while vendor relationships often were adversarial in the past, now a committee of state officials meets monthly with GE to air and resolve problems in a mutually beneficial way.
"This is an attempt to build more trust into this relationship between the prime vendor and the customer-going out there on a monthly basis and figuring out how to make it better, as opposed to unilaterally figuring out how they can make it better for themselves," said Dugan Petty, president of the National Association of State Purchasing Officers and director of Alaska's Division of General Services in Juneau. "It's one of those areas we are all talking about but are looking for successful models, and the state of Missouri has done more than talk."
Missouri's contract has already won plaudits from the National Association of State Information Resource Executives and NASPO. Of course, not everything has gone as smoothly as expected in the first phase of the contract. But both sides agree that the positives outweigh the negatives, and both sides are optimistic about future improvements.
"There have been a lot of growing pains with this contract. GE took on a major, major customer with a lot of demands from a lot of different quarters, and trying to keep all the people happy at the same time has not been easy," said Mike Benzen, Missouri's chief information officer in Jefferson City. "But overall I'm quite pleased with it. I think the question is, 'Would you do it again?' And the answer right now is, 'Yeah, I sure as hell would.' "
Birth of the Contract
Before the prime vendor contract, the state was grappling with more than 70 individual contracts for PC technology, each at a fixed price for a fixed period. Because these contracts did not take into account rapid advancements in technology and drops in price, users often went through the time-consuming process of calling vendors to negotiate lower prices or substitute new products and then amend the contracts. Even then, the new prices didn't necessarily provide the relative discount of the original bid.
"It was a continual nightmare from that standpoint," Benzen said. Under the prime vendor contract, users access a catalog-with current products and prices-on the Internet. "You look on the Web, and if there is a product still being made, it's out there. If they introduce the Pentium 325 tomorrow and it has general market availability, we'll be able to buy it tomorrow."
Aside from the administrative burden, the old approach also failed to leverage the state's $50 million in buying power-expected to grow to $75 million in purchasing volume this year-which caused finger-pointing among vendors whenever problems arose. A project team was formed to attack the problem, resulting in the decision to consolidate all contracts under one prime vendor. Officials examined other states on the leading edge of this trend, particularly Minnesota, but took the concept a step further.
For example, Missouri's contract features a broader array of items available to a broader array of customers-all via the World Wide Web for the first time. The entire product line of about nine hardware manufacturers and 10 software makers is readily available not only to state users but to county and municipal governments and school districts. There are no more bid cycles, hunting for contracts or jumping through hoops to garner approval to buy.
"It was a pain in the neck. Before, we had over 60 individual contracts that wouldn't fit in a single notebook 4 to 5 inches thick. And if you wanted to buy a computer for your desk, you had to learn these contracts," said Ken Lyle, assistant superintendent for administration at Missouri's Fulton State Hospital, a 500-bed mental health facility with 1,300 employees. "The prime vendor contract gives us immediate access to new products and the latest technology without going through a [multiple]-month procurement."
And the pact broke new ground by encompassing product support and training. The project team embraced the Malcolm Baldrige philosophy that neither customer nor vendor can succeed if the other fails. Thus, the contract requires formal performance monitoring by the vendor to ensure it is meeting service goals. The oversight committee looks at the statistics like a report card, grading performance and customer satisfaction in areas such as delivery and response time.
A call for bids went out in March 1996, and the contract was awarded in September to AmeriData Corp. (then bought by GE Capital) over four other bidders. In the bid evaluation, price was weighted at 40 percent, quality plan at 25 percent, method of performance at 25 percent, and experience, expertise and reliability at 10 percent. GE Capital did not have the least expensive proposal, but it scored highest in quality, had plenty of experience-including involvement in the Minnesota pact-and had a strong roster of partners, including IBM Corp., for service.
"They certainly did their homework on the front end as far as crafting their definition of a prime vendor," said Bob Grogan, GE Capital's Missouri state sales manager in St. Louis. "From our side, it's been a very good relationship. The key thing is commitment on both sides. There's plenty of opportunities for failure, and I think there had to be a keen interest on both sides or it would not succeed because it is a pretty radical change for most states to go this route."
Faced with 30,000 PCs in use throughout the state, Missouri opted not to slash its standard buying list to a handful of selections. To make things more manageable, however, the state did restrict buying to the Gartner Group's Tier 1/Tier 2 vendor list. For hardware, that list includes Gateway 2000 Inc., IBM, Dell Computer Corp., Unisys Corp., Compaq Computer Corp., Apple Computer Inc., Toshiba America Information Systems Inc. and Hewlett-Packard Co. For software, it includes Aldus Corp., Autodesk Inc., Corel Corp., Quarterdeck Corp., Delrina, IBM, Lotus Development Corp., Microsoft Corp., Netscape Communications Corp. and Novell Inc.
With so many choices, it's rare for anyone to go outside the contract, but the state is flexible when it comes to specialized items. "We prefer that they buy the standard products, but we've been careful to stay out of the argument of 'Why are you making me spend $60 on a Microsoft mouse when there's a perfectly good $19.95 [mail-order] mouse?' " Benzen said.
Under the contract, price is determined by the vendor's acquisition cost plus 6 percent. Missouri could have pushed for a smaller percentage had the state not required the online catalog, monitoring and other services.
"We'll always get nagged by cherry-picking. You can beat any one price any day if you try hard enough," Lyle said. "And that's fine. But if you look at the whole deal, this is the way to go."
Given that both sides were learning new ways of business, there were plenty of glitches. At the outset, GE Capital took over AmeriData and required they put in a new order-entry system during June, the state's busiest month. "It caused orders to be lost and people to become upset," Benzen said. "Now, it has since straightened out, but changing it in midstream was painful. They kind of bloodied us, and we kind of bloodied them in this process."
"We probably underestimated just how violent a peak it was," Grogan added. "That was a learning experience, and I think we're in a much better position this year when we head into the state's fiscal year end to be prepared for the influx of orders."
Administering the Contract
Another dilemma: Product delivery times sometimes exceed the 14 days spelled out in the contract. GE Capital does not have total control because it passes off orders to manufacturers, which ship directly to the state. But GE Capital and the state are working together to improve what they can control by getting orders into the system faster. "That's something that sounds painfully simple; unfortunately it's not," Grogan said. "We are trying to streamline some of the process we do. But a lot of things are also predicated on getting a readable, correct order from the state. We set up a task force team on both sides to see if we can reduce the lag time between when we physically receive an order and when it gets in the system."
Even with the difficulties, delivery times have improved. "Typical deliveries were in excess of a month, and essentially they are two to four weeks now," Lyle said.
Another hitch: Gateway's direct-marketing model didn't mesh with how the state wanted to buy. State customers would have had to pay a premium buying through a value-added reseller. After dealing with Gateway, the state was able to arrive at the 6 percent markup. "For the first time the customer was actually becoming involved in the vendor's markup," Benzen said. "Ordinarily we couldn't care less, but there was a contractual obligation that had to be met."
The state also made the mistake of inventing its own service requirements when industry standards already existed and were more realistic. Through their meetings, the service aspect was reworked, but the quality of service remains a concern. "That was probably the weakest area that they've had all along," said Gerry Wethington, director of the Information Systems Division for Missouri's highway patrol. "We are starting to see reports come out that provide statistics on turnaround time on orders, returns, tech support and help-desk calls, and those really have gotten much better, particularly over the last six weeks. And I look for some marked improvements in the next eight weeks."
GE Capital has brought its own complaints to the table, such as late payments from the state. "The state's been very willing to work with us," Grogan said. "They were able to go to these people and say, 'Our prime vendor has an issue here, and we need to help them.' Just from an awareness standpoint that has helped, and we've still got some issues. But we have seen some improvement."
Users said it took a while to adjust their expectations, but they are over that hump. "Two months into the contract, you probably would have found a lot of people who said, 'I'm not sure this is going to work,' " Wethington said. "But you've got to keep in mind that we were changing the mind-set of the entire IT community. I would be surprised if you look at the contract when it's 24 or 36 months old, if it's not viewed as one of the models that other governmental agencies try to use."
"This contract has one of the best contractor/agency relationships," added Karen Boeger, IT section manager for the Division of Purchasing and Materials Management in the Missouri Office of Administration. "It's pretty easy on big contracts to quickly draw lines in the sand, but we've all worked very hard to establish and maintain that relationship over the whole period of time, and it's been very successful."
The Return on Investment
The contract eliminated the bid-and-amendment cycle, simplified access to products via the Web and drove better pricing through the prime vendor concept. "With us not having [all that bureaucracy], we are seeing a fairly significant price reduction," Wethington said. "Where we do find price increases, I'm confident-given what I would pay my contract administrator-that if he spends 45 minutes researching something else, he's already eaten up what that margin would be."
The contract also requires an independent accounting firm to confirm that GE Capital is following the terms of the contract. "We'll be watching how the auditor approach works," NASPO's Petty said. "One of the most difficult things that all of these master term contracts have been up against is how you ensure that you are always getting the best and most favorable pricing and [that] those price decreases get passed on in a timely fashion."
An actual return on investment is difficult to calculate, Benzen said. The only investment in the contract was the staff time in creating it-gauged at about $200,000. He estimates $10 million will be saved over the five-year pact. "But if I had to prove it, I would be hard-pressed," Benzen admitted. And the actual savings may never be tallied. "One of the problems you have in government is if you claim you are saving money, somebody will try and take the money," he said, "so no one's real anxious to always identify the savings, if the truth were known."
So how did Benzen arrive at the $10 million figure? "If you look at our discount, we think the price is less enough that over the course of a year we expect, out of that volume, that we will recover something in the neighborhood of 3 percent of gross savings. And I'm expecting the volume next year will hit $75 million. That's local, state and university savings. You put it all together, and I think that number is conservative."
While the product catalog is on the Web, orders are made the old-fashioned way: by picking up the phone or faxing them in to GE Capital. Electronic commerce is the goal, but the state is in the rudimentary stage of defining requirements to complete sales over the Web.
"We're doing it more for the convenience rather than for the real savings," Benzen said. "If you take one commodity out for electronic commerce, like PCs, I don't think you'll see a big dollar savings. It's only when you can do most of your commerce that way that you can cut down on the number of tasks required."
For now, the task is to work out the remaining kinks with GE Capital. "They certainly have a stake in our success and are trying to work with us at every turn," Grogan said. "They've helped us work with some of our vendors to try to make things easier for us because they know if it's easier for us to work with the manufacturer, it'll be easier for us to work with the state."
Benzen added, "We look at each other across the table at least once a month, and we bend over backward to work with them if there's a problem. It's a two-way street, and that has worked exceptionally well.
"If you get out your crystal ball and look at business in the next century, we're going to see a lot of closer partnering between customers and vendors if people are going to compete and survive," he said.
-- Jane Morrissey is a free-lance writer based in Denver. She can be reached at [email protected]