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. Ottawa, Canada
2008
Yes Virginia! A
Profile in
Excellence
White Paper
Jon W Hansen, Chief Architect
Hansen Consulting & Seminars
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
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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
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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
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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.”
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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
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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
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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
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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
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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 Silicon.com 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 computing.co.uk, 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
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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 computing.co.uk
indicated that the Gershon plan actually produced £23 billion in savings
since 2004, an April 30, 2007 article in Silicon.com 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
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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-
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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.)
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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.
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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.
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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
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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)
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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.
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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.”
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“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
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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
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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
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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.
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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.
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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.
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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
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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.
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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
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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
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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.)
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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
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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
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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
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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
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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.”
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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
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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?
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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
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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
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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.
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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?
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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
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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.)
http://www.intelligententerprise.com/showArticle.jhtml?articleID=1643011
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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.
http://www.cio.com/special-reports/horror/erp
Whirlpool, Dow Chemical, Boeing, Dell Computer and Waste Management
In a January 2000 article in CFO magazine titled Blaming ERP by Andrew
Osterland (http://www.cfo.com/article.cfm/2987370), 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.
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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
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