The Use of E-Procurement
to Rationalize the Expenditure of Public Administrations
Background
Almost
two years ago, the Ministry of Economy and Finance (MEF) started a program
for implementing e-procurement practices within the public administration
as an important branch of the Italian e-government program. The two
main objectives of the initiative were to achieve spending savings and
simplify the procurement processes.
The
financial act for the year 2000 actually kicked off the above activity
making the MEF accountable for drawing up large frame contracts to which
all public administrations may apply. This way, the two objectives may
be virtually met. In fact, by standardizing the products and aggregating
the demand into national frame contracts you can usually get:
a better deal (i.e.,
lower price per unit and/or better service) than with contract drawn
by each single administrations due to the economy of scale of the frame
contracts;
a much more simplified
process as the administrations only have to apply to the frame contract
and order (on-line) what they need as opposed to executing their own
tender procedure.
Consip
Ltd. – On-line Procurement Division
Consip,
a limited company totally owned by the MEF has been entitled to manage
the program of e-procurement to rationalize the public expenditure for
goods and services. Consip was founded in 1997 with the former objective
of implementing and managing the information and communication infrastructure
of MEF. Later on, Consip has been formally delegated by the Ministry
(through decree dated February 24, 2000) to take care of the e-procurement
initiative. Thus, Consip created a new division totally devoted to this
scope, whose structure is depicted below:
The role of
the different sections is as follows:
Program management:
Monitors projects
advancement and trace measurable results
Supports management
in setting priorities via coordination of project initiatives
Leads communication
from/to division
Strategic Sourcing:
Defines the purchasing
strategies
Interacts with suppliers
both in selection and in operational phase
Marketing Account:
Promotes and sustains
the overall program within the public administrations
Leads new initiatives
for specific expenditure sectors (e.g., health, university, municipalities)
Supports the execution
of pilot experience of e-procurement vs. specific target of clients
E-procurement Technology:
Develops e-procurement
solutions
Design tools for
data warehousing and knowledge sharing
The Public
Expenditure Segmentation
In
order to correctly identify the right strategy of rationalization, firstly
the public spending for goods and services (summing up to about 90,000
million € - year 2000 estimate) has been properly segmented. We have
reckoned 2 main segments:
common expenditure,
that is the spending for goods and services whose features are the same
for most of the public administrations (such as, stationery, telephone
services, cars, meal coupons, etc.);
specific expenditure,
that is the spending for goods and services which are either relevant
to a specific sector (such as needles and syringes for the health agencies,
chemical laboratories for universities, etc.) or those goods and services
which require a different level of specification depending on the administration
(catering, facility management, etc.).
Hereafter,
a diagram showing some estimates related to the different segments of
spending, also divided by sector (central government, health sector,
municipalities, university and others).
So
far, the plan of the rationalization program is to progressively deal
with the whole common spending and only a part of the specific spending.
Indeed, there are some fractions of this expenditure (such as weapons
for the defense, drugs for the national health service, etc.) which,
at the moment, are not eligible for the program and cannot be treated
according to the operative model designed for the rest of the public
expenditure.
The E-Procurement
Platform
The
e-procurement platform lays on a portal which is the “big hub” of
the e-procurement model for the Italian public administration. On this
portal, we are going to make available three macro functionalities,
that is, three different ways of purchasing/selling goods and services:
electronic catalogues, on-line auctions and market place. They are quite
complementary to each other in terms of features, type of suppliers
and goods hosted, dynamics of trading.
The
electronic catalogues allow purchase within the terms of frame contracts
and are particularly well designed to trade standardized products with
low price volatility and slow obsolescence.
The
on-line auctions, on turn, are an excellent tool to address specific
requests of very specialized materials. They can be executed on spot
as the need from a specific administration or aggregation of similar
administrations is defined.
The
market place is the most flexible tool as it enables many offers for
the same good. So, benchmarking will be possible and the best purchase
is done on the basis of clear evidences available on-line. It is ideal
for acquiring frequently low cost goods.
The Operative
Model for Electronic Catalogue, On-line auctions and Market Place
In
the first two years, the core of the rationalization program has been
on the achievement of frame contract for some of the largest (in terms
of volume and spending) “common” goods and services to make available
to the public administrations through an electronic catalogue.
The
operational model for the electronic catalogue foresees three key players:
Consip, the administrations and the suppliers (the
market). It is Consip’s responsibility to interacts with the administrations
to understand their needs, so as to define the best purchasing strategies.
This will translate into preparing and running open tenders eventually
leading to signing frame contracts. Once this is done, all the “active”
frame contracts are posted in a catalogue-wise fashion on a dedicated
portal (named www.acquisti.tesoro.it) together with all the relevant information
both for the buyers and for the sellers. Therefore, the administrations
simply have to access the portal and see if the good/service they need
is within one of the active frame contracts and issue the order on line.
The supplier(s), once received the on-line order, deliver the goods/service
directly to the purchasing administration with no direct interactions
with Consip. The loop is then closed by the suppliers who send to Consip
the contract’s reports. This will allow to punctually monitor the
use of contracts and the relative spending. Last, the feedback we timely
receive from the administrations is of paramount importance to improve
our service and make it work better.
The
financial act for the year 2000 states that all central government administrations
have to buy within the frame contracts drawn up by Consip whenever the
product they look for is available on the portal. All the other public
administrations (such as local governments, municipalities, health agencies,
etc.) may buy within the active frame contracts if they wish. In case
they decide not to apply to the frame contracts, they ought to take
the price set in the frame contract as basis for the purchase of equivalent
products.
However,
it is important to underline that every administration (both those who
have to and those who may apply to the frame contracts) is totally autonomous
in deciding when and how much to order. This would mean that there is
no control on the amount of goods/services which are acquired whereas
the e-procurement within frame contract is a way to significantly reduce
the unit price of the products.
Regarding
the on-line auctions, we are still in the exploratory phase.
In fact, to-date, we have carried out some experimental on-line auctions
on a temporary platform which resulted to be very successful. These
first auctions where based on the “lowest bid criterion” only and
got price reductions vs. the base price up to 49% (note that the base
price is ever defined upon the averaged market price). However, in early
2003, the new platform will be up and running enabling also the most
advantageous economic bidding (weighing price, technical offer and service).
The very important thing to consider about the on-line actions is that
the maximum flexibility, the fastest process and the utmost transparency
is achieved.
The
key three active players of the on-line auction are: the auction
manager (that is the administration buying the product), the suppliers
(participating into the bidding) and the platform owner (e.g., Consip)
which is offering the infrastructure and the technical support. The
role of the auction manager is to define (if needed with the help and
consultancy of Consip’s managers) the type of goods, their features,
etc. and to “post” all the related documentation on the portal.
Consip will also define, together with the auction manager and according
to the relevant law, the auction “rules” (such as durations, criteria
for winning, etc.). All the potentially eligible suppliers will be warned
about the incoming auction and they will provide the necessary documentation
to be qualified and admitted to the auction. As they are, they will
automatically receive ID and password to access the portal and enter
the on-line auction area. At the defined date and time, Consip and the
auction manager kick off the auction and they will monitor the bidding
dynamics as the suppliers make their offers. Once the auction is closed
(as the defined duration time expires) the winner is automatically notified
and all the participating suppliers receive the final ranking.
One
of the most important features of the on-line auctions is that the utmost
transparency is guaranteed. Everybody may access the portal and observe,
as passive player, what happens. So, in real time, everybody
can realize what the public administrations are purchasing, how much
they are paying, who is going to supply. Hereafter, the sketch of the
on-line auction process.
The
market place will be the last trading functionality which will be
made available on our e-procurement platform. As said it will offer
the maximum flexibility to have the demand and offer matched as many
suppliers will be present for the same good. The selection of the good
can be made on the basis of different criteria (price, performance,
service offered). Also, it will be a powerful benchmarking tool both
for the administrations, who can use it to tune their spending, forecasting
and allocating their budgets and for the suppliers, who can understand
what their offer has to be to be distinctive and appealing. The market
place will be deployed in two phases: in the former it will only be
horizontal (national-wide) – in the latter a vertical segmentation
will be added. This way, we will have specialized areas which are devoted
to a specific territory or expenditure sectors or merchandising cluster.
To-Date
Key Results
The
first 2-year results we have achieved thru the use of electronic catalogues
are really satisfactory. The number of administrations registered into
our portal have increased by one order of magnitude in 14 months and
now are about 15,500 and in the same period the number of purchases
done within the electronic catalogues have really jumped from very few
to almost 72,000.
The
large use of frame contracts through the electronic catalogue is certainly
due to the significant reduction on unit cost of the goods and services
offered through our portal. We go from a 9% unit cost reduction of the
meal coupons up to an impressive 75% saving on the mobile phones contracts.
On average, we can claim about 33% of unit cost reduction within the
frame contracts drawn up from June 2002 till January 2002.
Almost
equally meaningful, the use of electronic catalogues for the frame contracts
represent a huge simplification of the process used so far to acquire
goods and services.
In fact, as
it appears from the below diagram, formerly the process was long, repetitive
and frustrating. Now, thanks to the electronic catalogues made available,
all the operations linked to the execution of the tenders are done only
once (per each good) and by Consip. The administrations no longer have
to worry about the bureaucracy of preparing and executing the tenders.
They only have to buy. And buy on-line!!
This way, the
administrations also save:
5 month for the
whole process (from the need analysis to the delivery of goods/services)
the cost related
to publishing the advise for the tender
the cost related
to publishing the tender
the cost related
to the commission entitled to execute the tender
An exemplary case of e-procurement
for public administration:
On-line auction for the supply of chemical hoods to an aggregation of
3 Italian Universities
As
said Consip Ltd., on behalf of the Ministry of Economy and Finance,
has started, in fall 2001 a phase to experiment the use of on-line auction
to acquire goods and services for the public administrations. In this
initial step Consip has been using a temporary platform (ex Microsoft)
where only the reverse auction functionality (lowest price as single
criterion to win) was available. As the e-procurement platform is up
an running, the most economic advantageous offer will be available too.
To note, during the experimental phase the base price for on-line auctions
had not to be higher than the EC threshold (set at 200,000 €). Very
recently, the Italian Government has issued a decree ruling the use
of e-procurement for the public administrations where, specifically
for the on-line auction, there is no upper limit for the base price.
On
February 14th, 2002 we have run an on-line auction to acquire
chemical hoods and the relevant services for an aggregation of three
universities. Importantly, the university of Padua and the university
of Bari have delegated the university of Bologna as unique responsible
of the auction on behalf of the whole aggregation.
The
uniqueness of this example is due, beyond the use of e-procurement platform
for auctions, to the demand aggregation of different buyers for very
specific goods. This translated into a thorough sharing of knowledge,
competencies and best practices amongst diverse and far away universities.
Indeed, the three universities after having shared their respective
needs (including a large portfolio of different optional tools and devices
and related services – such as installation, assistance and warranty)
have realized that they could be fulfilled by two different types of
chemical hoods. This would mean that, while aggregating the demand to
reach a higher economy of scale, they could keep a satisfactory level
of personalization of the products.
University
of
Padua
University
of
Bari
University of
Bologna
(2)Delegation to
University of Bologna and AP
vendor
vendor
vendor
(3)
auction
Consip
(1)Demand definition
and sharing of the technical specification
support and consultancy on
operations and technology during the whole process
Moreover,
the university of Bologna has been entitled to sign an agreement protocol
with Consip claiming that Consip provides consultancy and support beyond
making available the digital platform to run the on-line auction.
The
purchasing model used foresees three key steps (see the sketch below):
The first step encompassed
the definition of the demand and of the technical specification by the
three universities.
The second step
dealt with the preparation of the technical documentation for the tender,
with the formal empowerment of the university of Bologna and the signature
of the Agreement Protocol (AP) with Consip. In particular, the delegation
represents the formal act of aggregating the demand, whilst the agreement
protocol state the role of Consip as partner for experimenting the on-line
auction.
The third steps
is the true execution of the tender which requires the following: sending
an invitation letter and the documentation for the tender to all the
selected vendors, checking the consistency and correctness of the documentations
sent by the vendors to be qualified and accepted to the tender, sending
the ID and password enabling the access to the on-line auction platform,
executing a trial of the auction and eventually the execution of the
true on-line auction.
The on-line
auction has been run according to the lowest price criterion. The three
universities could monitor the bidding from their premises, whereas
the university of Bologna (as responsible of the act) was in charge
of checking the proper execution of the aucion. Once the auction has
been closed with the selection of the winning vendor, all the following
activities – e.g., draw up of the contract, delivery, maintenance,
etc. – have been led by each single university directly with the supplier.
The
auction has been closed with an overall saving of 31% vs. the base price
(set at 70,000 €) calculated on the basis of the current market average
price for the same type of goods. The five vendors who participated
into the auction have totally offered 32 bids while monitoring the “best
price” trend from their respective premises.
Next Objectives
We have very
aggressive objectives for the year 2005.
Firstly, we
are targeting of expanding the eligible spending up to reach more than
40,000 million €. This may take place by progressively increasing
the number of goods and services (both within the common and the specific
cluster) offered through frame contracts to the public administrations.
Secondly, the
inclusion of other key elements of the value chain. Specifically, we
will be working at (see sketch below):
tools for planning
and controlling the demand (e.g., definition of consumption and spending
benchmarks to help determine the amount of funds and of budgets to be
allocated);
re-organization
of purchasing departments within the public administrations;
development and
deployment of tools able to improve the efficacy and efficiency of the
payment to the suppliers while streamlining the internal processes (e.g.,
the procurement card);
development of a
set of tools to control and monitor the performance of the suppliers.