Context

The Victorian Government is committed to delivering value for money in public funds expenditure Value for money denotes, broadly, a balanced benefit measure covering quality levels, performance standards, risk exposure, other policy or special interest measures (e.g. environment impacts), as well as price. Generally, value for money is assessed on a 'whole of life' or 'total cost of ownership' basis, which includes the transitioning in, contract period and transitioning out phases of a contractual relationship. It is often used in the sense of the 'long term sustainability of value for money', denoting that the State focuses on choices that ensure value for money outcomes are promoted and protected in successive anticipated contracts. To this end, the Victorian Government and the Victorian Government Purchasing Board (VGPB) are introducing a more strategic, data driven and analytical planning approach where informed procurement decisions lead to better value-for-money outcomes.

Strategic sourcing is a well established and proven method for managing large-scale, medium to long term procurement activities. It has been adopted as standard practice by numerous public and private organisations in Australia and internationally. Strategic sourcing has already been successfully used in the establishment and management of Victorian State Purchase Contracts, and its wider implementation will promote procurement excellence in general within government.

Strategic sourcing consists of two key capabilities - strategic contracting and category management. In strategic contracting, the emphasis is on developing a detailed knowledge base of the market and the category being sourced, and using this knowledge to develop optimal sourcing solutions. Category management focuses on managing contracts to ensure that the negotiated contract benefits are realised, and driving continuous improvement in contract benefits year on year.

Supporting the implementation of the policy are other existing policies, extensive good practice guidelines and comprehensive tools and templates, including standard contracts and tender documentation.

Policy Framework

This Strategic Sourcing Policy sets out the broad requirements for departments and agencies in implementing strategic sourcing. It applies to all public service bodies bound by VGPB procurement policies and the Financial Management Act 1994. It needs to be read in connection with other relevant government and VGPB policies and procedures such as the Victorian Industry Participation Policy and the Ethical Procurement Policy.

Key Requirements

Strategic sourcing is to be applied in developing, establishing and managing all SPCs, and other significant departmental sourcing projects that a department’s accountable officer considers would benefit from a strategic sourcing approach. Departments are encouraged to identify procurement projects (typically high complexity, high risk purchases over $10 million) for which strategic sourcing would be more beneficial than alternative planning and purchasing methodology. It is expected that, over time, relevant strategic sourcing principles will flow through into general departmental and agency procurement practices.

In line with best practice, strategic sourcing is to be implemented as two integral but distinct capabilities - strategic contracting and category management - and is to address the strategic contracting and category management principles and techniques outlined in this policy. Strategic contracting and, in medium to long term contracts, category management, are equally important in achieving sustainable value-for-money objectives.

Value for money denotes, broadly, a balanced benefit measure covering quality levels, performance standards, risk exposure, other policy or special interest measures (e.g. environment impacts), as well as price. Generally, value for money is assessed on a 'whole of life' or 'total cost of ownership' basis, which includes the transitioning in, contract period and transitioning out phases of a contractual relationship. It is often used in the sense of the ‘long term sustainability of value for money’, denoting that the State focuses on choices that ensure value for money outcomes are promoted and protected in successive anticipated contracts.

1. Strategic contracting

Strategic contracting is a data-driven, analysis-rich methodology for developing sourcing solutions and managing the market engagement, negotiation and contracting stages of the sourcing process.

Strategic contracting is based on the premise that optimal value for money can be best achieved by developing a detailed knowledge of consumption behaviour, the category being sourced and the supply base, before conducting tendering processes. This knowledge can then be applied to develop targeted sourcing solutions and market engagement strategies that are harmonised with the value drivers of both buyers and suppliers.

The broad principles and techniques of strategic contracting are outlined in the following figure, with a brief discussion of the general thinking and analysis required under a strategic contracting approach.

2. Opportunity analysis

The nature, scale and complexity of the category is analysed to determine if a strategic sourcing approach can deliver additional value over alternative approaches (e.g. more simple transactional purchasing arrangements). The deliverable of this phase should be an opportunity analysis with a preliminary estimate and documentation of the expected contract benefits.

3. Consumption analysis

Spend information is further collected and analysed to develop a complete and detailed understanding of the organisation's purchasing behaviour and requirements. This process assists in identifying inefficiencies and unnecessary complexities in purchasing behaviour and specifications. It also clarifies organisational expectations and requirements.

4. Market analysis

Market analysis involves developing an in-depth knowledge of the category’s supply market, supply chain structure and economics. An understanding of the supply market's value drivers is required to inform decisions on how best to approach the market, and how to access value-for-money opportunities to reduce supply costs without eroding reasonable and sustainable supplier margins.

5. Sourcing strategy selection

The selection of a sourcing strategy involves developing informed and targeted sourcing solutions which incorporate, and capitalise on, the knowledge and insights gained through consumption and market analysis. Value for money of potential sourcing solutions is considered in terms of 'total cost of ownership'. Total cost of ownership is the net cost of ownership of goods or services, including actual purchase price, as well as procurement, training, holding, operating, maintenance, disposal and administration costs. The total cost of ownership also considers the net environmental and economic costs incurred throughout production, ownership, use and disposal of the good or service.

6. Market engagement strategy

A market engagement strategy is identified that is harmonised with the market’s value drivers and optimises the opportunity for competitive pricing. Structured, fact-based and incisive tender documentation and evaluation methods that support the required outcomes form part of the market engagement strategy.

7. Tendering

The tendering stage includes releasing tender documentation (tender evaluation criteria, draft contracts etc.) that addresses and supports the selected sourcing strategy and the category management phase of the procurement. Multiple-round, structured commercial negotiations can be undertaken to drive value-for-money outcomes.

8. Contract signature and commencement

Negotiation on the contract and signing of the final contracts is a critical phase that needs to be carefully and astutely managed. The completion of this phase marks the beginning of a transition phase, which can be an intensive activity. It signals the proactive management of the category.

Good Practice Guidelines for Developing a State Purchase Contract Business Case have been developed to assist in implementing these strategic contracting requirements. While the guidelines were developed to assist in implementing State Purchase Contracts, they also support the implementation of strategic contracting for significant departmental sourcing projects. The Department of Treasury and Finance will also make tools and templates available to assist in the implementation of strategic contracting.

9. Category Management

Category management expands on traditional contract management to encompass continuous year-on-year improvement in the benefits of the contract, as well as ensuring that those contracted benefits are realised.

The broad principles and techniques required as part of a category management approach are outlined and described below.

10. Transition In and Out

The Transition In phase involves introducing suppliers and buyers to each other and implementing a transition action plan for an efficient and effective transition into the new contract and out of any existing contract. It is also important to undertake pre-planning for the Transition Out phase of a contract to minimise future disruptions to business activities and unexpected costs.

11. Continuous improvement

Continuous improvement is a key aspect of category management and involves establishing effective continuous improvement practices for identifying and implementing initiatives to reduce cost and complexity and improve productivity and buyer amenity.

12. Benefits tracking

Benefits tracking is undertaken to monitor and ensure that contracted outcomes are being achieved, and that additional benefits are secured through continuous improvement.

13. Performance and compliance monitoring

This entails monitoring and ensuring buyer and supplier compliance with the performance requirements of the contract, and monitoring organisational expenditure compliance against the contract mandate.

14. Data collection, category research and analysis

Category management requires a systematic approach to collecting, collating and analysing supplier and buyer reporting data, as well as undertaking external research and gathering category intelligence (e.g. national and international category trends). It requires an accurate and robust data and knowledge base to be developed to support and inform other category management activities and future tenders.

15. Communications and relationship management

Structured and open lines of communication and reporting, with a focus on developing supportive and collaborative relationships with the main parties associated with the contract, are essential to enabling category management to be effectively performed.

16. Collaborative relationships with suppliers and buyers

The potential benefits of a category management approach can only be achieved with the cooperation and support of suppliers and contract users. All suppliers and contract users (or departmental contract managers) are to:

• undertake all transactions under the contract according to the business rules specified for the contract;
• support, cooperate with and contribute to processes to identify and implement continuous improvement initiatives;
• provide data and feedback when required by the category manager, in the required format; and
• participate in forums and workshops to review contract performance and continuous improvement initiatives.

To assist in implementing these category management requirements, DTF has developed the Good Practice Guidelines for Category Management (360 KB DOC).

Other Requirements

Nil

Related VGPB Policy and DTF Guidelines

State Purchase Contracts (SPC) Policy
Procurement and Local Industry Participation Policy (Victorian Industry Participation Policy - VIPP)
Strategic Procurement - General Guidelines (905 KB DOC)
Developing a State Purchase Contract Business Case Guidelines (723 KB DOC)
Strategic Procurement General Good Practice Guidelines (407 KB)

Related DTF Templates and Forms

Nil

Links to relevant Policy websites

Nil

Version Control Information

Version Number	1
Release Date	June 2006
Further Information	Strategy and Policy, Government Services Division, Department of Treasury and Finance
Phone	(+613) 868 32944
Email	vgpb@dtf.vic.gov.au

Note* - Value for money denotes, broadly, a balanced benefit measure covering quality levels, performance standards, risk exposure, other policy or special interest measures (e.g. environment impacts), as well as price. Generally, value for money is assessed on a ‘whole of life’ or ‘total cost of ownership’ basis, which includes the transitioning in, contract period and transitioning out phases of a contractual relationship. It is often used in the sense of the ‘long term sustainability of value for money’, denoting that the State focuses on choices that ensure value for money outcomes are promoted and protected in successive anticipated contracts.