Whenever there is a question about what drives the costs of college, there is an obvious answer: Colleges employ a lot of people. But colleges also buy a lot of stuff. At a typical college, payroll and benefits might make up 60 to 70 percent of the operations budget, but purchasing constitutes the next-largest chunk: about a quarter of an institution’s annual budget, spent on copy paper, toilet paper, food for the dining halls, grass seed for the quad, wrenches, fuel, beakers, and much more.
Because purchasing makes up such a big portion of an institution’s spending, it offers great potential for savings. And during the recent lean years, more colleges have put their procurement departments under new management, started “strategic sourcing” programs to negotiate the best prices with suppliers, and set multimillion-dollar goals for savings. Just over a year ago, for example, the University of California system hired William Cooper, a chief procurement officer from Stanford University, and set a goal to save $200-million in purchasing by 2016. Mr. Cooper says that the system is already on track to save $120-million this year.
“I look at purchasing as a revenue-generating organization,” Mr. Cooper says. Institutions have all sorts of analytical tools they can use to track their spending and seek deals on the biggest purchases—technology that wasn’t available in the past. “For years, we had been trying to do intelligent procurement without intelligence.”
But the technical hurdles are the least daunting challenge. Centralizing a college’s purchasing decisions, especially in the typically decentralized environment of higher education, can be a touchy subject—a battle that university leaders are often reluctant to wage.
An Undervalued Role
“There is a mentality of many that says, I did the fund raising, this is my budget, so I should be able to do what I want to do with that money,” says Ralph Maier, who advises colleges for E&I Cooperative Services, a nonprofit purchasing cooperative for education and other institutions. “That is a culture largely unique to higher ed.”
The typical college purchasing department’s position, compared with the private sector, doesn’t help matters, Mr. Maier says. Before he worked in higher education, mainly as a purchasing officer at the University of Pennsylvania, he worked in purchasing at Johnson & Johnson. “When I was at J&J, purchasing had a seat at the highest level,” he says. “If you look at higher-ed org charts today, purchasing departments are buried within the organization.”
Given the financial pressures on colleges, that culture is changing. Ithaca College, for example, brought in consultants to find all the places on campus where the college could save or make more money: increase retention, draw more students for high-demand programs, eliminate redundancies in staff, charge for parking, and transfer more of the share of benefits costs to employees. Strategic sourcing in purchasing was one of the recommendations, worth at least a few million dollars.
Ithaca College’s president, Thomas R. Rochon, says administrators laid out those recommendations for the campus community. A couple of proposals—like charging more for parking and benefits—generated an “uproar,” he says.
“We were able to say, OK, we won’t do those things, but we will need your very active buy-in on these other big-ticket items, like strategic sourcing,” he says. “We have gotten so much more consent because we did not follow the usual pattern of looking at the recommendations as a leadership group, gulping, staring each other in the eye, and announcing the plan. People got to see the range of options, and they know the roads not taken, and those roads not taken are more painful to them directly.”
The college has set a goal to save $3-million on purchasing within the next three years. Mr. Rochon says he has heard one main trepidation: that centralized purchasing will mean people won’t be able to get the supplies they want when they need them.
Strategic sourcing is supposed to make getting those supplies easier, but it does take some of the choice out of the hands of people making purchases in the various departments on campus. Purchasing officers set up deals with various suppliers, looking for the best price on items with comparable quality to what people on campus have requested. That means if you’re fond of, say, a particular brand of copy paper, you might not get that brand but something like it. Purchasing officers say those deals can get more contentious with travel policies: You might like flying Southwest Airlines, where you’re racking up frequent-flier points, but the purchasing department might have found the best deals on Delta.
‘Control the Spend’
Robert Cree, associate vice president for business and finance at Ithaca College, who is helping organize the new purchasing system there, once believed what most people believe about finding bargains, based on their experience as consumers: that letting people shop around will get the institution the best prices. “I always thought competition was good,” he says. “Strategic sourcing flips that upside down.”
The problem is, thousands of shoppers in a university organization work against getting the best possible price for the institution over all. Again, think of copy paper: One department might order from OfficeMax, while others order from Staples or another online supplier. And each department buys only as much as that department uses. The university never gets the benefit of making its total purchase from one seller.
Controlling the purchasing process is key to getting deals. In strategic sourcing, an institution drives down costs by setting up a deal with a supplier on the front end, then shows that the institution can “control the spend” of its departments through procurement software like SciQuest. An employee goes to the program, orders the needed supplies or services, and that order is automatically routed to the preferred company.
In those situations, suppliers are willing to cut prices because they know they can make a high number of sales with less work. But “you have to show them that you can take market share from them or give them market share,” says Stephen G. Mack, the new associate vice president for procurement and disbursement services at Drexel University, where he is starting a program to save money on the university’s $250-million to $300-million in purchasing. If employees continue to buy copier paper on their own through purchasing cards (credit cards issued by the institution or department), that undercuts the leverage the institution can apply in negotiations. “You have to act as a single entity, to tell a vendor you either get our business or you don’t get our business. A relationship is worth something. It’s not just a hunting license.”
Faculty and staff members often insist that they can find better deals by shopping around on individual items, Mr. Mack says. But when he was a procurement officer at the University of Missouri, Mr. Mack tried to present the case that that kind of shopping around actually wastes time and money in various ways. Studies of procurement show that the cost in time spent on looking for, buying, tracking, and paying an invoice for a product was about $20 if an employee used a purchasing card; if the employee ordered the product through a procurement software, the transaction cost $7. What’s more, the prices on the products acquired through the procurement software were 12 to 30 percent lower than what an employee could get elsewhere.
Data like these helped persuade people at Missouri to make transactions through the purchasing department, but there was still a segment of the campus population who wouldn’t go along, and some reluctance among leadership to enforce the purchasing policies.
At Drexel, where he arrived three months ago, Mr. Mack has a lot of work ahead of him: About 2,200 purchases went through his department last year, while tens of thousands of purchases happened on an individual basis in the various departments on campus. The good news: He has the full support of John Fry, the university’s business-minded president.
“The whole culture of a university,” Mr. Mack says, “is one of the biggest challenges in finding ways to save money.”
Correction (4/15/2014, 6:40 p.m.): This article originally said Stephen G. Mack, of Drexel University, planned to save $250-million to $300-million in spending on purchases. Those figures represent the range of Drexel’s total annual purchasing. The article has been updated to reflect this correction.
