States set battle plans in computer procurement war

States set battle plans in computer procurement war

By Wilson P. Dizard III

GCN Staff

State governments pay up to 20 percent more for hardware and software than companies. Why? Cumbersome procurement methods.

But by using emerging practices'such as flexible procurement tools, intergovernmental buying alliances and partnerships with system integrators'states' chief information officers are fighting to get better deals.

After reviewing 80 state and local government computer procurement contracts and 3,000 private-sector contracts, Michael Erbschloe, research director for the consulting firm Computer Economics of Carlsbad, Calif., said, 'I think the public sector is leaving 20 points'20 percent'on the table.'

State governments typically lose out by failing to take advantage of price changes and delivery terms, Erbschloe said.

Private-sector buyers exploit falling technology prices more efficiently, he said.

For example, manufacturers typically keep PC models on the market for about six months. 'After three months, they're getting ready to introduce a new model, and the price will go down,' Erbschloe said. 'So it's not a fixed price. The government will negotiate a fixed price.'

He also noted special delivery terms that government buyers could exploit to get a lower total price. 'If I am a private buyer, usually I have a contract with FedEx or UPS for shipping,' Erbschloe said. 'I tell the supplier to use my account number and get my volume discount.'

If the buyer fails to negotiate delivery terms, the PC manufacturer generally will make money on the delivery because it will get a commission from the United Parcel Service or FedEx Corp. for using their service, he said.

Government buyers need to make those shipping costs play in their favor, Erbschloe said. 'If I am a high-volume user, [reducing] that shipping cost contributes to my volume discount,' he said.

Erbschloe also recommends that buyers negotiate custom enterprise licenses for the software they have PC makers load on PCs'everything from Microsoft Windows to antivirus packages.

'Then my PC manufacturer loads my software at my price on machines they are making for me,' he said. 'What I am not doing is paying the PC manufacturer a profit for reselling software.'

Erbschloe said governments should take advantage of special deals that vendors offer in the last two weeks of a fiscal quarter.

Rise to the top

Lorrie Scardino, research director for the GartnerGroup Inc. of Stamford, Conn., said procurement procedures jack up the prices that state and local governments pay, especially if the buyer has to pass up vendors' special deals. She cited federal procurement scandals of the 1980s, when the Defense Department paid lofty sums for mundane items such as toilet seats, as the precursor to today's strict procedures.

'All that diligence requires a lot of people, paperwork and bureaucracy,' Scardino said. 'There are risks and costs for contractors in dealing with governments. Those costs are built in to their prices.'

Tennessee CIO Bradley Dugger echoed Erbschloe's contention that fixed-price hardware contracts generally don't serve states well.

Tennessee CIO Bradley Dugger, right, says he encourages vendors to offer quarterly specials on products.
Missouri CIO Gerry Wethington, below, says he is eying the possibility of cutting costs by buying through the Western States Contracting Alliance.

'If you set a long-term contract for a desktop, laptop or palmtop, you will probably start out with a very good price and end up with a really bad price,' he said. 'We've established multiple vendors as contractors and asked them to reprice every quarter. It gives us flexibility on price, and they can introduce new equipment.'

Tennessee also runs what Dugger called blue-light specials in its contracts, which let vendors offer discount prices at the end of a quarter. 'That only works with multivendor contracts,' he said.

Tennessee doesn't require PC vendors to use the state's licenses for applications software, Dugger said. 'That's something we may look at.'

Dugger acknowledged that procurement rules tie his hands. 'I think where we have trouble in our state is that we have no opportunity to conduct effective negotiations,' he said. 'If we had the opportunity to get into competitive negotiations, we probably would come out with better prices.'

As in most states, Tennessee's procurement laws are based on protecting the state from unethical practices, he said. 'The laws are written to prevent that, and as a result we probably lose,' Dugger said.

Because state and local governments operate in the glare of public disclosure, procurement scandals are a special political problem. Erbschloe observed that 'in the private sector, there are a lot of disasters nobody hears about.'

Bill Vetter, Illinois' state technology officer, agreed that state procurement procedures slow the process, but he emphasized that the state's Central Management Services Department pools the buying power of all state agencies to get the best prices.

'We have a lot of master contracts,' he said. 'We'll bid for PCs, and there will be an award that will provide all PCs for three months because that's how long you can go before the technology changes.'

When an individual agency seeks to buy several thousand PCs, Vetter added, Illinois has the flexibility to seek a special contract. 'Setting that up can lead to a lot of sales, so vendors tend to step up to the plate and offer good prices,' he said.

The Land of Lincoln, however, lacks the flexibility to respond to special deals that vendors often offer at the end of the month, Vetter said. Vendors build shipping costs into the delivered price for those end-of-month specials, so Illinois hasn't sought to take advantage of the deals, he said.

Missouri CIO Gerry Wethington tackles the PC buying task with a series of prime contractors, through which multiple subcontractors compete for business. The prime vendors acquire products at wholesale prices, 'so when the prices go down, we benefit,' he said.

Sitting on the dock

Missouri hasn't attempted to capture the benefits of doing its own shipping, he said; the state receives PCs on its freight docks. But it does cut it costs by installing its own Microsoft Corp. and Lotus Development Corp. software on PCs. 'We qualify for Microsoft volume discounts and Lotus volume discounts,' Wethington said.

Missouri now is looking to reduce its equipment costs with multistate buying through the Western States Contracting Alliance, he said.

Terry Davenport, information system procurement specialist for the New Mexico State Purchasing Division, spearheads the alliance. Fifteen state purchasing directors formed the alliance in 1993, and since September last year it has provided computers, peripherals, software and related services under volume-discounted contracts.

The core members are Alaska, Arizona, California, Colorado, Hawaii, Idaho, Minnesota, Montana, Nevada, New Mexico, Oregon, South Dakota, Utah, Washington and Wyoming. Agencies in 18 other states have bought products and services through the master contracts, according to the alliance's site, at www.state.nm.us/spd/WSCAmain.html.

States bought about $225 million worth of products and services through alliance contracts in the program's first year, which ended Oct. 1.

Davenport said the alliance contracts benefit states in three ways: initial volume purchase discounts, additional per-transaction volume discounts and cumulative volume discounts that kicked in as purchases snowballed.

'We earned five cumulative permanent volume discounts,' Davenport said. 'As the volume continues to grow we negotiate more discounts.''The alliance program benefits the vendors, too, he said, because a company has to negotiate only one price rather than hundreds of contracts.

The U.S. Conference of Mayors, the National Association of Counties and the National Institute for Governmental Purchasing, acting through the U.S. Communities General Purchasing Alliance, launched a similar joint buying program in late August.

Through this alliance, cities and counties have access to discounted products through contracts negotiated by Fairfax County, Va.

The sponsor organizations expect the alliance by next August to funnel as much as $100 million in sales through the discounted contracts. Information about the program is posted at www.uscmcitysavings.com/Computers2000.html.

To short-circuit the state procurement process, some states'such as Virginia [GCN/State & Local, September, Page 11]'are forging relationships with systems integrators. The hope is that the integrators will get better prices and be able to buy products more efficiently than the states can.

'An Electronic Data Systems Corp. or Computer Sciences Corp. or Science Applications International Corp. [of San Diego] can get better prices when buying products than the government can directly,' GartnerGroup's Scardino said.

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