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A Revenue Positive Business Model in Public Sector Purchasing (Part 1)

Written by: Jon Hansen

Article Overview: The core “philosophy” behind the New Public Management or “NPM” concept (which has been part of the government lexicon since the 1980s), is the belief that a “market orientation in the public sector will lead to greater cost-efficiency for governments, without having negative side effects on other objectives and considerations.” While there may be merit in the NPM vision, in reality its practical implementation has for the most part been sidetracked into an imitate versus innovate approach. Specifically, the philosophy has been reduced to one of using the same technological platforms and methodologies in the public sector as the ones used in the private sector.

A Revenue Positive Business Model in Public Sector Purchasing (Part 1)

The core “philosophy” behind the New Public Management or “NPM” concept (which has been part of the government lexicon since the 1980s), is the belief that a “market orientation in the public sector will lead to greater cost-efficiency for governments, without having negative side effects on other objectives and considerations.”

While there may be merit in the NPM vision, in reality its practical implementation has for the most part been sidetracked into an imitate versus innovate approach. Specifically, the philosophy has been reduced to one of using the same technological platforms and methodologies in the public sector as the ones used in the private sector. The end result is a consistently high rate of initiative failures – approximately 85 percent of all public and private sector programs fail to achieve the expected results – costing taxpayers tens if not hundreds of millions of dollars. The Veterans Health Administration immediately comes to mind as the component of the United States Department of Veterans Affairs took hits totaling $650 million on failed JD Edwards and Oracle implementations.

The results are not much better overseas as demonstrated by the following excerpt from a white paper I wrote last year on automation within the UK health care system:

This does not suggest that efforts to automate have not been pursued. They have. Unfortunately, and as the study discovered, literally “dozens of health service projects and innovations are abandoned before they have any impact on (patient) care.” In fact of the close to $4 billion US that was spent on the creation of ideas within the NHS, only a relatively “small proportion” – approximately $224 million US – is actually spent on spreading the innovations down to the patient level. The old axiom “when everything is said and done, there is more said than done,” certainly takes on new meaning as the report concludes that “by spending nearly 16 times more on invention rather than diffusion, millions of pounds is being wasted in generating ideas that are never implemented.”

As indicated, the private sector has not fared much better as the cost of failed initiatives with companies such as Hewlett-Packard, Cadbury-Schwepps and Maytag to name only a few parallel the treasury of a small country. In fact, in one instance the receiver for a drugstore chain sued ERP giant SAP claiming that a failed implementation was one of the primary reasons for the company’s fall into bankruptcy. SAP settled out of court.

Once again, the NPM philosophy is not inherently flawed as the concept of balancing private market sensibilities with the social and economic imperatives of the public sector is quite sound. The problems that have arisen are directly linked to the assumption that the private sector brain-trust is somehow more capable and advanced than its public sector counterparts. In reality, and to be truly effective, it is not an either-or proposition, but one of blended values in which the best elements of both the private and public sectors are combined to create an adaptive platform or marketplace.

With the advent of the Software-as-a-Service or “SaaS” model, the practical realization of this convergence of excellence is more achievable today than at any other point in time. In essence, what I am talking about is a revenue positive public sector model that creates multiple streams of opportunity for all stakeholders . . . especially suppliers.

This is particularly important given the fact that companies looking to do business with the government face a daunting if not insurmountable series of obstacles in their efforts to capitalize on what has often been seen as the public sector bounty. These include:

• It takes a supplier between 18 and 24 months on average to receive their first contract from the point of starting to pursue government business.

• While the economy has driven many erstwhile government suppliers back to the public sector as a means of buoying sagging sales, the decline in private sector revenue streams means that these same companies have lost the necessary cash flow to fund their PS aspirations. Unless, as Washington-based expert author Judy Bradt puts it, suppliers have a “good” friend in their banking relationships, many will not be able to stay in the game long enough to win.

• The process for engaging, selecting and utilizing suppliers is for the most part an onerous task that requires significant resources on the part of both buyers and sellers. Specifically, the time it takes for a buyer to become familiar with new vendors and therefore expand engagement beyond “known” suppliers is not conducive within present models. Conversely, and from the suppliers standpoint, the administration associated with responding to even the most basic bids can be time-consuming. An exercise that becomes even less attractive with the perception that there is little if any likelihood of winning a contract in the first place.

For these as well as other equally compelling reasons, including misaligned and largely ineffectual initiatives such as vendor rationalization and transaction reduction strategies (an ancillary fall-out from the NPM philosophy), the platforms or marketplaces associated with traditional supplier communities such as Ariba, need to be replaced or at least revised. But by what?

In Part 2 of this two-part series I will delve into critical areas of supplier development and engagement including the importance of creating opportunities for all stakeholders from multiple venues through a single exchange, as well as review the importance of eliminating pay-to-play models in which an outlay of funds on the part of the supplier is required to simply get in the game. This latter point is particularly important as “access” as Bradt calls it, “is not the same as achievement.”

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Article Tags: New Public Management, public sector revenue models



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