Weather-wise, Day 2 (Monday) of the 2010 ISM Annual Conference started very much like the day prior—overcast and foggy. But that didn’t stop attendees from packing the exhibitor hall in the morning… It was more than the typical grabfest, with attendees spending some talking with exhibitors before loading themselves down with goodies. The exhibitors seemed to be pretty happy with the action on the floor and getting quality time with prospective customers. My company has a booth here as well—but instead of the usual products or services, we’re looking to “sell” our company as the employer-of-choice for a couple of top-notch procurement pros. Interestingly enough, Goldman Sachs had a booth right next door with the same idea—they’re looking for procurement talent as well (but they’re in Jersey City and we’re in DC).

The first session I attended was “World-Class Procurement: An Evolution of Value and Capability,” presented by the Hackett Group. The presenter, Chris Sawchuk, explained that procurement has become more “deliberate” since the economic downturn—focusing on “cost, cash, and risk.” I liked the description: “deliberate” implies “thoughtful,” and I agree that companies have become much more “thoughtful” in spending their hard-fought revenue on goods and services that they need. I also agree with the characterization of focusing on cash—companies are worried about reducing costs AND freeing up working capital.

In a recent survey, the Hackett Group determined that the economic downturn has been a boon of sorts for procurement pros—73% of the respondents reported that they were now involved in NEW spending areas where they had traditionally never been involved before, such as HR (sourcing benefits), Legal (hiring outside counsel), and IT. Chris cautioned that 2010 is the “Year of Agility” for companies and that procurement functions need to be onboard with corporate initiatives associated with preparing for lower growth, moving to global (not just multi-national) operations, and moving fixed costs to variable costs (meaning more outsourcing and contingent labor).

According to the Hackett Group, procurement functions are changing their priorities as well. In past surveys, the objective of cost saving was at the top of the list. Now, cost savings has dropped to third, being ousted by a focus on strategic sourcing (73% of respondents rated strategic sourcing activities such as supplier rationalization as numero uno) and upgrading procurement staff and skills (hallelujah, 63% respondents rated staff as the number two priority). Surprisingly, “going green”—greatly hyped in the media—was at distant number 13 on the list.

Fun Fact: The Hackett Group reported that world-class procurement organizations, on average, reported a 7% cost savings (which includes cost avoidance) in 2009. So, on average, if you’re saving more than 7% overall on your deals, you’re doing pretty good.

I was up next, giving my presentation entitled “Implementing Best Practices: The Procurement Maturity Model” to a packed audience of about 300 attendees. There’s only so much you can get across to a large group in around an hour’s time, but one of my goals whenever I give a presentation or conduct training is to offer some real-world job aids or at least tangible, useful advice. Based on feedback afterward, I think I did a good job of letting folks know how to use the Procurement Maturity Model in their day-to-day jobs to implement best practices.

After a yummy lunch of convention center chicken and what I thought was really bland fried fish (but what I later learned was a fried risotto) sponsored by Oracle, I was off to the next session. It was a tough choice in the afternoon, with “Critical Elements of Supplier Negotiation” barely beating out “Five Universal Best Practices That Help in Trying Economic Times” and what seemed to be some other very interesting sessions. The “Critical Elements” session was presented by Ernest Gabbard, Senior Director of Corporate Strategic Sourcing at Allegheny Technologies. Ernest has quite an impressive set of academic and professional credentials, including a law degree and a CPSM.

As a part of his presentation, Ernest provided a “Negotiating Plan Checklist” (which should be available on ISM’s website), with the stages of Preparation, Execution, Documentation, and Follow-up. I was happy to see that, of the one page handout, one side was dedicated to Preparation and the other side was dedicated to the rest. I agree with that philosophy 100%--successful negotiations are mostly a direct result of preparing.

Ernest first talked about what he considered the “most frequent negotiating mistakes” and they bear repeating here:

Inadequate preparation
Inappropriate strategy
Focusing on a single deal element (e.g., price)
Misunderstanding or misuse of power

So, how do you avoid those mistakes and ensure a greater likelihood of negotiation success?

Knowledge / Information
People and communication skills
Reasonable negotiation objectives / goals (not too low and not too high)
Planning and preparation
Appropriate strategy
Power / Leverage
Tactics and counter-tactics (to ploys)
Time and timing

Another interesting topic that Ernest touched on was what he calls “relational negotiation,” which is intended to assess the impact of negotiating elements on a vendor relationship. For example, the impact of employing ploys and tactics—do they build or destroy trust? Another example is the impact of the negotiation process—is it conducive to building trust? The point is to be aware of the impact of a negotiation on the more extended delivery process. Did you achieve a great negotiation result with the unintended side effect being that you better be looking over your shoulder because the supplier is, some how, some way, going to make it up when delivery the negotiated product or service? So, a word of caution—just because your vendors may have gigged you when the economy was going gangbuster, don’t try to “get back” at those vendors during this down economy because things (i.e., the economy) will change again.

        

The day in San Diego started off overcast and a bit chilly, with folks slowly making their way from the new Hilton to the San Diego Convention Center.  Oh, since I love good deals--just a quick word on the Hilton San Diego Bayfront.  What a fabulous hotel (at great rates)!  This waterfront hotel is brand-spanking new, combining casual luxury with the usual best-in-class Hilton service.  If you plan on going to a convention in San Diego or if you're booking a convention in San Diego, the Hilton San Diego Bayfront is the place to be.

The ISM Conference really gets into full gear on Monday, but there were a number of "kick-off" events for folks arriving on Sunday.  There seems to be a large number of attendees already here, but the ISM folks and their volunteers made registration a breeze.  The conference is in the new part of the San Diego Convention Center, with plenty of signage to get people headed to where they need to be.

I attended a particularly good session today conducted by Bob Engel of Resources Global Professionals who talked about 10 Best Practices for Supply Management Organizations.  Bob focused not just on procurement, but the entire supply chain.  His second recommended best practice is "Align and Staff the Supply Management Organization," where he cautioned attendees to have the "right mentality" by ensuring they're aligning themselves with the goals of the organization.  He also mentioned that he is seeing an emerging trend that contract management responsibilities are more and more being taken out of the business units and being placed into supply management functions.

        

I hesitated momentarily before I clicked that final "next" button on the screen in front of me at the Pearson VUE testing center in Washington, D.C.  I was just about ready to submit my final responses to the ISM Certified Professional in Supply Management (CPSM) bridge exam.  Once I clicked that button, I knew I wouldn't be able to review any of the questions or change any of my answers.  I was worried--I had sweated and toiled on almost every exam question over the past couple of hours.  I knew I would have to wait another 30-days before I could re-take the exam if I failed it.  I took a deep breath, steeled myself, and clicked the mouse.  I turned my head away as the screen blinked before me.

When I first walked into the exam, I felt a little uneasy because I had been sick for the two days preceding the exam and hadn't been able to do much final cramming.  I tried to find a little solace in the fact that I had studied for the exam pretty thoroughly and even took the diagnostic exams to learn where my weak areas were.  About 20 minutes into my three hour time limit, I became even more uneasy as I quickly realized that ISM wasn't making the Bridge Exam a rubber stamp hurdle to achieve the CPSM designation.  Not only did I have to reach deeply into my memory of what I had studied, I found myself using every one of my tried-and-true test-taking tactics to best the exam.  I was reading and re-reading questions to clarify the problem stem.  I was breaking down each of the answers, using the power of deduction to get to the best response.  I was flagging questions for review and re-review.  It was painfully obvious to me that ISM clearly took the exam seriously and intended to really challenge test-takers on their knowledge--broad and deep--of supply management expertise.  It was also obvious that just memorizing all of the exam study materials likely wouldn't be enough to pass the exam--practical experience in supply management is an absolute must.

When I looked back at the screen, my fate was instantaneously sealed.  Whew!  I was relieved that I passed and I was glad it was over.  Now on to the more mundane task of preparing the paper work for my CPSM application.

My message to ISM:  Your exam study materials were spot-on and good for you that you came up with an exam that really tests the skills and knowledge of CPSM candidates.

        

Stephen R. Guth was appointed as Chief Corporate Counsel and Vice President, Vendor and Legal Services of the National Rural Electric Cooperative Association, a large trade association located in the Washington, DC metro area that represents over 900 rural electric cooperative utilities and over 42 million consumers.  Guth is responsible for all of NRECA's corporate legal and procurement activities.  His third book,Project Procurement Management: A Guide to Structured Procurements, was recently published and is available on Amazon.com and through Barnes & Noble.

        

If you've ever wondered what an RFQ for shotguns might look like, wonder no more!  The IRS has issued an RFQ for shotguns, specifically:

"Sixty Remington Model 870 Police RAMAC #24587 12 gauge pump-action shotguns...with fourteen inch barrel, modified choke, Wilson Combat Ghost Ring rear sight and XS4 Contour Bead front sight, Knoxx Reduced Recoil Adjustable Stock, and Speedfeed ribbed black forend."

Moral of the RFQ?  You better pay your taxes--or else!

        

I'm in the process of revising my employer's vendor gifts / entertainment / ethics policies and was doing a little Internet research when I came across a recent article that caught my attention.  Apparently, a Safeway Foods purchasing agent is facing 20-years in prison for steering tomato contracts to a specific seller.  Ouch!  I'm sure there's a good joke in there somewhere, but I'm not creative enough to think of a good one.

Update: For what it's worth, someone sent me a joke...  What did the purchasing agent say when he got busted for taking bribes to buy tomatoes?  Hey, I was just trying to "ketchup" on my bills!

        

Actually, it's really on topic since, without engaged staff, procurement departments wouldn't be able to provide much value-add.  Some managers find the Gallup Q12 frustrating--in my mind, it's an invaluable tool to build employee engagement.  I came across a blog post from an employee engagement expert, David Zinger, who does a great job at getting to some of the controversy of the Gallup Q12 by proposing a tongue-in-cheek Q13.  It's a short, enlightening read for any Gallup aficionados out there in my readership.

        

If you're a commercial buyer but do procurements under a CFR, you've probably run up against debarment and suspension.  One of my staff attorneys, Rebecca Mordas, took on the task of explaining the rules in the context of USDA.  Here is her analysis.

Understanding 7 CFR 3017 & 7 CFR 3018

 

 

Even experienced procurement professionals can become confused when delving into the world of government contracts for the first time.  Code of Federal Regulations (CFR), agency specific rules, define the responsibilities of recipients of both federal funding and direct federal contracts.  CFRs house rules pertaining to every stage of a contract procurement relating to government contracts.  This memo only addresses how and when recipients of federal funding, like RUS borrowers, must comply with the debarment and suspension rules and restrictions on lobbying in their contracts for procurement of goods and services. 

 

Debarment & Suspension Rules

 

The debarment and suspension rules grew out a response to President Reagan’s 1986 Executive Order 12549 instituting a government-wide initiative to curb fraud, waste and abuse in Federal programs and increase agency accountability, the Department of Agriculture drafted 7 CFR 3017 containing the debarment and suspension rules for non-procurement transactions.   Non-procurement is specifically defined in the regulations at 7 CFR 3017.970 as any transaction, excluding direct procurements with the federal government, including but not limited to grants, cooperative agreements, scholarships, fellowships, contracts for assistance, loans, loan guarantees, subsidies, insurances, payments for specified use and donation agreements.   

 

If your company receives any of the above referenced government funding, subsidized treatment or government backed guarantees, then the debarment and suspension rules are directly applicable to your organization.  As a recipient of federal funding, your organization owes several duties to the Department of Agriculture. 

 

First, prior to even receiving a non-procurement award, your first obligation to the Department of Agriculture is to certify that your organization or the principal on the prospective project is not currently excluded or disqualified.  An excluded person or entity refers to one who has been suspended or debarred by the Department of Agriculture or any other federal agency pursuant to each agency’s applicable regulations, whereas a disqualified person or entity is isolated to those who have been restricted through statutes, executive orders or any other official authorities from participating in federal programs.  Disqualification is mandated by an official authority while exclusion is discretionary within each agency.  Additionally, you as a prospective participant must disclose to the federal agency from which you are applying for aid or funding whether your organization or your principal have been criminally convicted within the past three (3) years for conduct enumerated in 7 CFR 3017.800 or have had any civil judgments rendered against you for conduct enumerated in the same section, whether your organization or principal is presently indicted or charged, both criminally or civilly, with any of the offenses referenced in 7 CFR 3017.800, and whether your organization or principal have had a federal, state or local contract cancelled with the preceding years for cause or default.   Chiefly, the Department of Agriculture is concerned with whether your organization has run afoul of the key standards of good faith and fair dealing in your regular business dealings.

 

Your obligation to make these disclosures to the Department of Agriculture extends throughout the life of your non-procurement activity.  For example, if you have a loan from RUS due in 2020, your disclosure obligation extends until that loan has been repaid.    In the event that your organization or principal have a change in circumstances which would alter your initial response to any of the disclosure inquiries referenced above necessitating a new disclosure, you must provide the Department of Agriculture written notice of such additional information tending to incriminate your organization.  Failure to make the requisite disclosures at any time in the process could result in the termination of the transaction and could also potentially result in your suspension and debarment from future government transactions in both procurement and non-procurement transactions.  Debarment could be devastating to your organization as your exclusion from all government-wide contracts could last for up to three years. 

 

            Secondly, you have a regulatory obligation to do business with responsible individuals when entering into “covered transactions” where federal money is funding procurement activities for goods or services.  This requirement mandates that prior to entering into a “covered transaction,” participants in non-procurement transactions that are using federal funds actively determine whether the individuals in which they are about to do business are excluded or disqualified.  A procurement contract for goods or services will be considered a “covered transaction” under the regulations if a participant in a non-procurement transaction awards a procurement contract for goods or services and either the non-procurement award demands agency consent of all lower tier transactions or the amount of the contract is expected to equal or exceed $25,000.  Please note that the regulations specifically state $25,000 and make no reference to terms provided in other federal guidelines like small purchase threshold or simplified acquisition threshold.

 

In validating the accountability of a party to a covered transaction, the agency gives three options for the participants making the determination:  checking the Excluded Parties List System (EPLS), collecting a certification from individuals or adding a clause or condition to your contracts stating that the individual represents and warrants that he or she is and will remain eligible to participate in government contracts throughout the duration of the contract.  The EPLS is a publicly available source managed by the General Services Administration (GSA) which houses information regarding the disqualified and excluded individuals.  You may access EPLS through the Internet at http://epls.arnet.gov or subscribe to a printed version by calling the Government Printing Office Inquiry and Order Desk at (202) 783-3238. 

 

            Finally, 7 CFR 3017.330(b) requires participants to non-procurement transactions to mandate incorporation of the debarment and suspension rules into all contractor’s subcontracts which either require consent or are expected to exceed the $25,000 threshold, as well as create the obligation on the procurement contractor to determine the accountability of all its subcontractors in accordance with any of the methods stated above.  The inclusion of these clauses in a subcontract would not be subject to any negotiation, unless the subcontractor simply walks away from the negotiations altogether. 

 

            In the event that you find that your organization or principal or your business partners are excluded individuals, please be mindful that there are regulatory procedures that allow you to seek an exemption from the Department of Agriculture to enter into a contract or continue to fulfill a contract (7 CFR 3017.120) or appeal the excluded status (7 CFR 3017.720 - 890).  Please note that disqualification is not appealable under the Department of Agriculture’s regulations; however disqualification under a statutory scheme may not necessarily prevent the Department of Agriculture from entering into a non-procurement transaction with a participant nor will it automatically prevent a participant from entering into a contract with a disqualified lower tier participant.  The regulations emphasize disclosure allowing some room for agency flexibility if the parties act candidly in the initial disclosure phase.

 

Restrictions on Lobbying

 

Restrictions on lobbying originated from the notion that it is improper for the government to subsidize special interests.  This principle of responsible government spending attempts to ensure contracts are rewarded fairly, thus securing the public’s trust in their government and in their elected officials.  Codified at 7 CFR 1726.17, RUS Borrowers complying with 7 CFR 1726 must adhere to the restrictions on lobbying contained in 7 CFR 3018.  These regulations place constraints on how recipients of federal grants, loans or cooperative agreement may use federal monies.  The regulations restrict the advocacy voice of recipients by prohibiting the direct or indirect use of funding to “pay any person for influencing or attempting to influence an officer or employee of any agency, a Member of Congress, an officer or employee of Congress, or an employee of a Member of Congress” in connection with the receipt, extension, continuation, renewal, amendment or modification of any federal contracts, grants, loans or cooperative agreements. 

 

There are three specific exclusions from the bar on the use of appropriated funding to lobby.  First, the Department of Agriculture allows an employee or officer to receive reasonable compensation if acting as an agency and legislative liaison as long as the liaison’s activities are not directly related to the federal opportunities.   Pursuant to 7 CFR 3018.200(c), permissible liaison efforts may include discussions with the agency concerning the value of products or services, any specifics related to the terms or conditions of sale, or the potential to adapt or create products or services for agency’s specific use or purpose.  Only prior to the official submission for federal opportunities may the legislative liaison discuss the proposal with the agency or provide information requested by the decision-making branch of the government awarding the federal money. 

 

The second exclusion the Department of Agriculture allows on the use of appropriated funds is for professional and technical services.  According to 7 CFR 3018.205 and 7 CFR 3018.300, you may reimburse employees, officers or other contracted individuals for professional and technical services rendered directly in the preparation, submission, or negotiation of any bid, proposal, or application for the federal opportunities or for professional and technical services related to your contractual or regulatory compliance with the terms of the federal arrangements.  This exclusion is limited to professional and technical positions rendering advice or providing analysis that affects either the technical or legal aspects of your submission and would not extend to those who are in professional or technical positions who are advocating the selection of your bid or proposal.  Contracted individuals who are not employees are not required to file the disclosure discussed below of their lobbying activities related to the federal award under which they are receiving reimbursements if their services were employed only in the preparation, submission, or negotiation phase of the federal procurement or non-procurement process.

 

The third exclusion for utilizing appropriated funds extends to the reimbursement for the reasonable compensation made to regularly employed officers or employees involved in the preparation, submission or negotiation of any bid, proposal or application for federal support. 

 

In making a request for agency consideration for a federal contract, grant, or cooperative agreement that exceeds $100,000 or a federal loan exceeding $150,000, you must certify that you have not and will not charge the government for costs you incurred to influence your receipt or continued receipt of the appropriated funding.  In addition, you must disclose, at the same time, whether you have made or have agreed to be made any payments using non-appropriated funds to attempt to gain influence over governmental decision-makers involved in managing and controlling federal appropriations.  Any subgrants, contracts or subcontracts under any of the aforementioned federal opportunities which exceed $100,000 must make the same certifications and disclosures concerning their lobbying activity related to the federal opportunity under which they have contracted.

 

The regulations do not limit an organization’s ability to lobby with non-federal resources, the regulations do require disclosure of any lobbying activities related to the receipt, extension, continuation, renewal, amendment or modification of any of the federal opportunities referenced above.  Disclosures are collected by the head of the Department of Agriculture and then submitted in a report to the Secretary of the Senate and the Clerk of the House.  The reports become publicly available unless the information is deemed sensitive because it pertains to intelligence or contains classified information.  

 

If you are asking the government for a commitment to insure or guarantee a loan exceeding $150,000, you must file a statement with the appropriate government party indicating whether you have made or have agreed to make any payments to influence or attempt to influence any government body in connection with receipt of the loan insurance or guarantee.  If you have made or agreed to make such payment(s), you must file a disclosure with the appropriate department or agency revealing the proposed or actual amount(s), the identity of the individual(s) attempting to influence government behavior and the government officers, employees or Members that are potentially being influenced.

 

After receipt of federally appropriated money, you must determine at the end of each calendar quarter whether any events have occurred which materially affected the accuracy of the information previously certified to or disclosed to the federal agency.  The regulations give examples of material changes to include an increase of $25,000 in the amount of private funds given to influence the receipt of federal funding, a change in the person lobbying, or a change in the parties being lobbied.

 

There are costly ramifications for noncompliance.  Failure to abide by the lobbying restrictions or amend the disclosures may result in a civil penalty of not less than $10,000 per infraction not to exceed $100,000.  In addition, the federal government reserves the right to pursue other remedies, possibly criminal sanctions, for the same conduct that was the basis for the imposition of any civil penalties. 

 

Conclusion

 

            If already receiving a federal grant of money, whether it is a loan, grant or cooperative agreement, you should consult the terms specific to your agreement before looking to the regulations.  The regulations contain a standard for conduct, however, each agency reserves the right to set conditions for receiving funds within the actual award documents.  Remember the intent of these regulations is to foster the public’s trust which rests upon the government being openly accountable for its decisions to enter contracts with responsible individuals like you.  Therefore, you must be particularly cognizant of the public’s trust when carrying out obligations under government contracts. 

        

Did your organization get a grant from a Federal agency under the American Recovery and Reinvestment Act?  If so, congratulations, but you need to start thinking about the process by which you go about spending the grant money.  Your procurement process will need to conform and comply with the corresponding Code of Federal Regulations (CFR) and with any grant-specific procurement requirements.  If you've just started looking at this, you know there's an appropriate amount of red tape involved (hey, it's my tax money and I want to make sure it gets spent properly so I'm OK with a little red tape).  The good news is that most Federal agencies have very similar CFRs as they relate to the subject of procurement.  For example, the procurement regulations in USDA's 7 CFR 3019 look very much like those contained in USAID's 22 CFR 226 which look very much like those contained in DOE's 10 CFR 600.  (However, there are nuances from CFR to CFR.)  I recently drafted a procurement policy and a Master Purchase Agreement to comply with the DOE codification of OMB Circular A-110 at 10 CFR 600.  My work (attached below) is yours for free.  As implied above, you can easily convert this work product from DOE to USDA to USDAID to any other Federal agency.  The attached Master Purchase Agreement contains all of the contract provisions required by 10 CFR 600.  Both the attached policy and the Master Purchase Agreement contain specific CFR citation references, so you don't have to figure it out for yourself as to where the content was derived from.

P.S. and a disclaimer:  The attached are "as-is" without any representations.  The Internet is still the wild, wild West and my work product is free, so use it at your own risk

        

A blog reader recently asked me this question (I'm paraphrasing): "How do VMO / procurement roles differ and how are the responsibilities divided organizationally?"

Roughly 10-years ago, companies with large IT consumption became dis-satisfied with their purchasing departments' attention and focus.  It was hard to get the purchasing folks engaged, and when they did get engaged, their focus was lowest cost.  That lowest cost focus didn't work when it came to complex IT goods and services because the consumers of those strategic, competitive edge-providing goods and services were worried first about getting what they paid for and less about squeezing costs out the old-fashioned way (i.e., vendor bashing). 

These IT departments also wanted to establish strategic relationships with value-adding vendors--predominately, IT systems have a lot of "stickiness," so IT departments want long-lasting (read "maintenance and support") relationships.  So, unable to control the purchasing departments (usually buried many layers below a CFO), CIOs went on the hunt for procurement talent that had the ability to get a fair (fair for both parties) deal but, more importantly, could extract value out of IT vendors without decimating the relationship.  These small groups of procurement talent commonly took on the name of a "vendor management office" or "VMO."  One reason for the name was to mask the purpose of the group: the organizational redundancy and budget questions that a corporate procurement department and an IT procurement department raised wasn't something a CIO wanted to explain.  The other reason was to emphasize the mission to manage vendors, not dollars.

The CIOs implementing these types of vendor management departments could have been wrong, but they weren't.  In fact, VMOs were such a success that other C-levels, also tired of crusty and grizzled purchasing agents, wanted their own VMO function to boost their business lines.  That presented an organizational problem--the CIO could get away with having a psuedo-procurement department but everyone having their own little VMO in addition to the purchasing department wasn't going to fly.  So, around 2004, companies started to implement enterprise-wide VMOs. 

There were, and are, two major variants: one is with the vendor management and purchasing functions combined and the other is with the functions are separate.  Having the functions separate (in my opinion) is a symptom of a problem--the leadership doesn't want to take the time or energy to revamp the purchasing function...  So, the thought is, just push purchasing to the side, build-up the VMO, and hope the purchasing folks take early retirement.

The better organizational move is to combine the functions, horizontally / vertically align the staff, and have it report into the C-level.  Some staff cut POs, other staff order piece parts, other staff just do competitive bids, and other staff manage / monitor strategic vendor performance.  While there may be distinct differences in skills, roles, and focus (you have to match job requirements to staff strengths), the overarching benefit of having a combined VMO is to drive the right attitude when it comes to managing vendors--and that's to get value.