Legislature(2005 - 2006)SENATE FINANCE 532
03/24/2006 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB284 | |
| Electronic Commerce Pilot Program Overview Presentation | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | SB 305 | TELECONFERENCED | |
| += | SB 284 | TELECONFERENCED | |
| + | TELECONFERENCED |
MINUTES
SENATE FINANCE COMMITTEE
March 24, 2006
9:05 a.m.
CALL TO ORDER
Co-Chair Lyda Green convened the meeting at approximately
9:05:37 AM.
PRESENT
Senator Lyda Green, Co-Chair
Co-Chair Wilken, Co-Chair
Senator Bunde, Vice-Chair
Senator Donny Olson
Senator Lyman Hoffman
Senator Bert Stedman
Also Attending: DAVE STANCLIFF, Staff to Senator Gene
Therriault; SCOTT HAWKINS, General Manager, Alaska Supply Chain
Integrators LLC; BARRY JACKSON, Procurement and Contracting
Manager, Alaska Supply Chain Integrators LLC; DON PETERSON,
Senior Manager, Mikunda Cottrell Accounting & Consulting (MCAC),
VERN JONES, Chief Procurement Officer, Division of General
Services, Department of Administration; ART CHANCE, Director,
Labor Relations, Division of Labor Relations, Department of
Administration; MARK O'BRIEN, Chief Contracts Officer, Division
of Contracting, Procurement and Appeals, Department of
Transportation and Public Facilities
Attending via Teleconference: From an offnet site: Dr. OLIVER
HEDGEPETH, Logistics Professor, University of Alaska
SUMMARY INFORMATION
SB 284-SENTENCING FOR ALCOHOL-RELATED CRIMES
The bill reported from Committee.
Electronic Commerce Pilot Program Overview Presentation
The Committee conducted an oversight hearing in regards to the
State's Electronic Commerce Pilot Program. Remarks were provided
from representatives of Alaska Supply Chain Integrators, LLC;
Mikunda Cottrell Accounting & Consulting; a logistics professor
with the University of Alaska; the Division of General Services,
Department of Administration; the Division of Labor Relations,
Department of Administration; and the Division of Contracting,
Procurement and Appeals, Department of Transportation and Public
Facilities.
CS FOR SENATE BILL NO. 284(JUD)
"An Act relating to sentencing for the commission of a
felony while under the influence of alcohol."
This was the second hearing for this bill in the Senate Finance
Committee.
Co-Chair Green noted that CS SB 284(FIN), Version 24-LS0581\L,
was before the Committee.
DAVE STANCLIFF, Staff to Senator Gene Therriault, the bill's
sponsor, was available to answer Committee questions.
There being none, Co-Chair Wilken moved to report the bill from
Committee with individual recommendations and accompanying
fiscal notes.
Without objection, CS SB 284(FIN) was REPORTED from Committee
accompanied by previous indeterminate fiscal note #1 from the
Office of Public Advocacy, Department of Administration;
indeterminate fiscal note #2 from the Public Defender Agency; a
new indeterminate fiscal note dated March 8, 2006 from the
Alaska Court System; and a new indeterminate fiscal note dated
March 23, 2006 from the Department of Corrections.
9:06:56 AM
^Electronic Commerce Pilot Program Overview Presentation
Electronic Commerce Pilot Program
Overview Presentation
9:08:23 AM
SCOTT HAWKINS, President and Chief Operating Officer, Alaska
Supply Chain Integrators, LLC (ASCI), the State's procurement
agent, thanked the Committee for holding this "oversight
hearing" on the status of the Electronic Commerce Pilot
Procurement Program (PPP) to date. The findings of a Department
of Administration "State of Alaska Division of General Services
Cost of Goods Analysis" (Study) [copy on file], prepared by
Mikunda Cottrell Accounting and Consulting, would be addressed
in conjunction with ASCI's "insights and perspectives on the
Program" as depicted in an ASCI handout titled "ASCI State e-
Commerce and Supply Chain Management Program An Important
Precedent", [copy on file] dated March 23, 2006. Mr. Hawkins
reviewed the ASCI handout as follows.
Page 2
Presentation Overview
· About ASCI
· State Pilot Procurement Program:
*Background
*MCAC/State Cost of Goods Study
*Overall Performance
· Why It Matters
Mr. Hawkins overviewed the points the presentation would
address.
Page 3
ASCI Corporate Profile
· Established 1999
· Alaska LLC; Majority Alaskan Owned
· Employees: ~ 160
Mr. Hawkins noted that this "young" company is headquartered in
Anchorage and is primarily owned by Alaskans.
Page 4
What ASCI Does
· Full Range of Supply Chain and Related Technology
Services
· Overview at www.asci4materials.com
· Other Services:
*Maintenance planning
*Catalog data control and conversion
*Web site & web tool development
*Inventory optimization services
Mr. Hawkins reviewed the information on this page. The majority
of ASCI's "supply chain management services are very broad and
complete full cycle services" primarily in support of Alaskan
companies. ASCI began its operations in 1999 with 35 employees.
Today it employs 160 people with the anticipation of having 175
employees by year-end.
Page 6
Who We Serve
BP Alaska
· Full cycle supply chain management
· Web technology
· Maintenance planning and special projects
Exxon Mobil
· Web technology
Shell E&P
· Web technology
State of Alaska
· Began in 2004
· Full cycle supply chain management
· Web technology
Neal and Massey
· Trinidad Joint Venture
· Full cycle SCM
Mr. Hawkins overviewed ASCI's customer base; its largest
customer is British Petroleum (BP). While ASCI was initially
structured to provide services required by BP, it has expanded
to providing Internet technology services to other oil companies
and, approximately one and a half years ago, began providing
supply chain management services to the State of Alaska. It
recently established a joint venture in Trinidad in anticipation
of providing services to entities involved with that country's
developing oil field.
Page 7
Performance Based Approach
1. Balanced Performance Scorecard
2. Heavy Emphasis on Measurements
- Strong analytical capabilities
- Drives process management, improvement
3. Vendor Scorecard Management
- Web based tools
Mr. Hawkins stressed the importance ASCI places on performance
and performance measurements. The primary evaluation tool is a
measurement-based scorecard "with our customers". The company's
"profitability is tied to our measurable performance" on a
variety of performance indicators, including cost of goods
measurement. Due to the emphasis placed on accountability, ASCI
has "very very strong analytical capabilities". Due to the
emphasis on this structure, it is doubtful there are many
companies in the world that could match "the amount of expertise
that we have developed around measurements of the supply chain
management process". No entity in Alaska could compete with
ASCI's expertise in cost of goods measurements in this field.
9:12:18 AM
Mr. Hawkins shared that ASCI also "intensively" measures the
vendor industry. To that point, the narrow scope of ASCI's
procurements for the State of Alaska has limited this endeavor.
However, in its work for BP and other entities, ASCI maintains
scorecards on its "top 50 vendors". Those vendors also have
internal "balanced scorecard" performance measures, which are
reviewed regularly with ASCI in an effort to manage vendor
performance. The ability to manage vendor performance is another
of the performance indicators ASCI adheres to. Vendors
appreciate the "collaborative performance management
relationship".
Page 8
SOA "Pilot" Program
[ASCI provided the cost comparison chart depicted on this
page to the State in its 2004 proposal. The data projects
that ASCI's 2006 services would produce a savings of
$251,882 or 38 percent over 2003 State of Alaska (SOA)
Procurement and Warehouse Operations.]
· HB 313, 4 agencies, Cost Study, RFP Process
· Cost savings on administration only, not prices
· Scope: goods and services
· Scalable platform for expansion.
Mr. Hawkins reminded that HB 313 authorized PPP in 2003. It
pertained to four agencies, two departments, and two other
instrumentalities of the State. The Request For Proposal (RFP)
process proposed by ASCI had been adopted. The scope of PPP
included both goods and services, thus expanding ASCI's scope of
business from its previous concentration on goods contracting.
PPP also mandated the "installation" of an expandable e-Commerce
program.
Page 9
Program Framework
· Pilot agency: DOT/PF Southeast Region
· 11 person operation (12 w/ mgr)
· Full e-Commerce system installed, integrated w/ 2
systems, customized, trained
· Two years operating time to sunset
· Emphasis on overhead cost savings, staff reductions
(became 6-7 person operation)
· One-day operational transition
Mr. Hawkins reviewed the information on this page. The RFP
emphasized overhead cost savings; little emphasis was placed on
the cost of goods. Additional cost of goods language was added
by request of ASCI, as they viewed the original emphasis placed
on that element as insufficient.
Mr. Hawkins recounted there being a one-day transition in the
implementation of PPP. Existing SOA procurement personnel
departed on July first and ASCI employees assumed responsibility
on July second.
Page 10
Some Basic Challenges
a. Location and workforce (Juneau)
b. "Hard" transition (peak season)
c. Specialized nature of AMHS customer
d. Multiple computer systems to integrate
e. Short time frame to achieve cost savings
f. Extremely limited transition assistance
g. Quarterly "benchmark audits"
h. Undisclosed baseline staffing
i. Disconnect between the representations and the reality
of "Administrative support"
Mr. Hawkins stated that of the numerous challenges ASCI faced
during its transition into PPP, having to establish a workforce
in Juneau was very challenging, particularly as ASCI is
headquartered in Anchorage. The July transition time was quite
hectic specifically as that is one of the busiest times for the
Alaska Marine Highway System (AMHS), which is one of the
entities in the Program.
Mr. Hawkins also noted the SOA is a "very specialized customer",
as evidenced by the fact that AMHS needs are very unique. ASCI
was on a "vertical learning curve in the busiest season of the
year". The computer information technology (IT) interfaces were
very complex to develop. Such things as integrating a
maintenance program and a password validation program added to
that complexity.
Mr. Hawkins affirmed that while many of the transition
challenges were known as they were specified in the RFP, there
were some surprises. The RFP impressed how supportive and
committed the Administration was of the Program. However, when
ASCI assumed its role with the Southeast Region of the
Department of Transportation and Public Facilities, "that
commitment did not appear to extend to the operating agency".
Further discussion on this issue would be forthcoming.
9:17:43 AM
Senator Bunde pointed out that, "change is challenging and
threatening for us all". However, he asked whether Mr. Hawkin's
remarks were to imply "the change was resisted and perhaps
structured to make it difficult for your operation to be
successful".
Mr. Hawkins responded "yes". A combination of things might have
influenced the situation. As PPP was new to the State, "some
innocent but not particularly helpful decisions and judgments
that were made, made it extremely difficult." Upon ASCI's
"arrival at the agency, the misjudgments gave way to outright
hostility".
Mr. Hawkins informed the Committee the Anchorage Daily News
newspaper recently printed an article [copy not provided] on the
Study that had been conducted by the Anchorage firm of Mikunda
Cottrell Accounting and Consulting (MCAC) on behalf of the
Division of General Services, Department of Administration.
ASCI's procurement contractor manager, Barry Jackson, would
provide ASCI's and another independent consulting firm's "view"
of that study.
9:19:16 AM
Page 11
Cost of Goods Study
· MCAC reported 9% increase
· Based on "sample" of 167 transactions matched through
manual data sifting
· Summed unit prices of items, compared sums
· Attempted to ignore freight
· Inflation not considered
BARRY JACKSON, Procurement and Contracting Manager, Alaska
Supply Chain Integrators, stated the MCAC Study reported a nine
percent increase in the cost of items purchased by ASCI as
compared to the cost of identical items purchased by SOA
procurement staff. That was based on a sample of "only" 167
transactions out of more than 40,000 transactions "that were
matched through manual data sifting. The unit prices of the
items that were selected were summed up to a total and those
sums were compared between the State's former buyers and ASCI's
approach".
Mr. Jackson noted the Study specified "the desire to avoid
freight costs as an issue". In addition, while acknowledging its
importance, inflation was also not considered in the Study's
conclusions.
Page 12
Two Independent Reviews
· Altman Rogers and Co., Certified Public Accountants
Reviewed For Errors, Comparability, Quantity
Weighting, Price adjustments, Freight Terms,
Overall Validity
· Northern Economics, Inc.
Reviewed Methodology, Statistical Soundness,
Inflation Adjustment
Mr. Jackson recounted that after reviewing the Study and
determining there were inaccuracies, ASCI conducted its own
analysis. When ASCI "attempted" to discuss various issues with
the State, they were informed that any discussion about the MCAC
Study would only occur after ASCI "hired its own experts" and
conducted "their own studies".
9:21:30 AM
Senator Bunde asked who with the SOA had informed ASCI "that
they chose not to cooperate".
Mr. Jackson communicated that this directive came from two
individuals: Mark O'Brien with the Department of Transportation
and Public Facilities and Vern Jones, Chief Procurement Officer,
Department of Administration.
9:21:51 AM
Senator Bunde asked whether the reason for their not seeking
"further clarification" was disclosed.
Mr. Jackson disclosed the stated reason as being, "out of
fairness" to MCAC, ASCI must conduct its own study. Therefore,
ASCI hired Altman, Rogers & Co. Certified Public Accountants and
Northern Economics Inc. The companies' review responsibilities
were outlined.
Page 13 Conclusions of Reviews
· MCAC/State Study Found Invalid and Uncorrectable
· Identified At Least 9 Critical Deficiencies
*Critical Clerical/Invoice Errors (ARC)
*Critical Item Comparison Errors (ARC)
*Failure To Use Equal Freight Comparisons (ARC)
*Failure To Treat Alaska Vendor Freight Correctly
(ARC)
*Failure To Use Actual Purchased Quantities (ARC)
*Failure To Adjust For Inflation (NE)
*Failure To Achieve a Random Sample (NE)
*Failure to Use Statistics in Any Way (NE)
*Invalid Extrapolation Of Data (ARC, NE)
Mr. Jackson discussed the conclusions of Altman, Rogers & Co and
Northern Economics Inc. reviews outlined on this page. Some of
the items being compared were not identical and some did not
include "equal freight comparisons", as the price of an item
purchased by ASCI might have included freight while the price of
the same item purchased by SOA did not.
Mr. Jackson also questioned the comparisons of items purchased
through Alaska vendors, as, oftentimes, the freight charges
included in their prices were not properly accounted for when
compared to outside vendors. Furthermore, there was concern
about the actual consideration of unit price costs. Quantity
considerations are "important": were ASCI to negotiate a one
dollar per unit purchase price and SOA a two dollar unit price,
ASCI would generate a savings of one dollar on a single item
purchase. However, were ten units purchased, the savings would
be ten dollars.
Mr. Jackson was surprised the MCAC Study did not include
inflation adjustments; particularly as procurement comparisons
included items purchased up to 27 months apart.
Mr. Jackson stated the MCAC Study did not include statistics "in
any way" even though the Study "required statistically valid
sample pools".
Mr. Jackson expressed concern in regard to the extrapolation of
data as the 167 goods and services items, which amounted to
several thousand dollars, were "extrapolated to a spend of
eleven million dollars". Since the MCAC Study only included
goods, "a sizeable portion of that extrapolation is simply
invalid".
Page 14
Impact of the Errors
· Using MCAC's Invalid Methods, But With Known Errors
Corrected/Excluded:
*ASCI Saved 3.6 % ($244,800) On Costs Of Goods
· ASCI Saved State Additional $187,000 On Procurement
Operations
· Total Savings To State: $431,800
Mr. Jackson specified that when ASCI corrected "as much as" it
could of MCAC's invalid methodology, a cost of goods savings of
3.6 percent resulted as opposed to the MCAC determination that
ASCI lost the State "a million dollars". This combined with the
savings generated by ASCI's administration of PPP indicated a
total savings of $431,800. He reiterated that even this should
not be considered "a valid number", as it was based on an effort
to correct the invalidities of the MCAC Study.
Mr. Jackson declared that one of several reasons the MCAC Study
was "so bad" was because the Study was "manipulated". To support
this position, he read excerpts of an August 25, 2006 letter
[copy on file] he had received from Tom Mayer, Contracting
Officer, Division of General Services, Department of
Administration, in response to questions he had asked.
Does the State yet know exactly how MCAC intends to
determine a sample size that will be statistically valid?
· No, the state does not know how this will be
determined. As professionals in the field, MCAC will
independently determine a statistically valid sample
size.
Does the State know how MCAC will determine the
constituents of the sample and maintain statistical
validity?
· No, MCAC will determine the samples and create a
statistically valid pools.
Will the report include alternative credible explanations
for the report result?
· The analysis report will be created and developed by
MCAC. However, as indicated in the meeting notes
referenced above, MCAC is aware of variables such as
differing quantities, delivery dates, requirement time
frames, and price increases in the market place. The
state also discussed the application of a CPI
adjustment or other price adjustment indices in
appropriate circumstances.
Will the report include a discussion of potential market
conditions and other factors that could affect the results,
for each item selected for inclusion in the report?
· Report development is the responsibility of MCAC.
9:29:05 AM
Mr. Jackson interpreted the Department's responses to clearly
indicate they would allow MCAC to manage the Study; "the State
would have little to do or say with it".
Mr. Jackson conveyed ASCI's reaction to the MCAC Study was that
"several things were missing from it". MCAC "clearly" did not do
the things identified in Mr. Mayer's letter or as specified in
the RFP establishing the Study contract.
Mr. Jackson initially thought ASCI was unaware of changes made
to the contract. Thus, the Division of General Services was
asked to provide further information in that regard. A stack of
paper consisting of 1,040 pages "of communications between MCAC
and the State" was displayed as the response to that question.
Not "exactly what you would expect from an independent
evaluation".
Mr. Jackson described the communications: "the Division of
General Services (DGS) directed the consultant to use
methodologies and calculations invented by General Services;
they allowed the consultant to avoid using certain repetitive
data such as liquor and beer because it was too hard to compare;
DGS managed a narrative discussion of the Study in certain ways;
DGS committed certain errors of omission by not requiring things
that they said they were going to require." Through this manner,
"DGS actively managed the results toward an outcome that
coincidentally disfavored ASCI". The implication was that DGS
was interested in including things that "raised the cost of
goods conclusions" and omitted things that could have lowered
those conclusions.
Mr. Jackson noted there being additional factors such as "bad
will".
9:32:44 AM
In order to further explain this remark, Mr. Jackson shared that
he had retired from the State DGS after 30 years of employment.
During his career with DGS, he was responsible for actions "to
improve the efficiency" of the Division, including developing
programs to automate the purchasing system. He had worked with
Vern Jones, DGS's Chief Procurement Officer. After retiring from
DGS, he worked as a programmer for Resource Data. It was during
this time the RFP for this Program was released. Resource Data
asked him to assist ASCI in their effort to respond to the RFP.
Subsequently, he worked as a consultant to ASCI before joining
them fulltime, as the objectives of the Pilot Procurement
Program were "near and dear to my heart".
Mr. Jackson credited his employment with DGS as the reason SOA
employees "dealt" with him "more candidly" than they might have
dealt with others. To substantiate his "bad will" remark, he
shared that during a conversation with Mark O'Brien with the
Department of Transportation and Public Facilities (DOT), he
asked Mr. O'Brien "how DOT had measured cost of goods on itself
in the past". The response was "we didn't, we never have, and I
don't expect we ever will". Thus, Mr. Jackson questioned why
this was considered important in regards to ASCI. Mr. O'Brien
responded that Mr. Hawkins' testimony before the Legislature
"that his program could save more money than State employees
could on the cost of goods … hurt our feelings. Because of that
… we're going to hold his feet to the fire."
9:36:23 AM
Mr. Jackson interpreted this as "bad will". Similar but "not as
blatant" discussions occurred with Vern Jones. Such actions
would undermine the "promises" Scott Hawkins made to the
Legislature.
9:37:26 AM
Mr. Jackson stated that forcing ASCI "to spend tens of thousands
of dollars" to develop its own study in order to talk to DGS was
further evidence of bad will. That discussion has yet to occur.
Mr. Jackson opined that another factor in the discussion is one
of "incompetence." He continued, "the folks in General Services
are seasoned pros who knew better. They failed to challenge
their expert. It's beyond comprehension that they would allow a
report like this to get out with no adjustments for inflation,
without dealing with freight inequalities, and leaving
quantities out of the picture. They knew better and yet they let
it happen."
Mr. Jackson determined that, due to "inexperience" the State did
not know what they were doing, in the sense that "the State has
never and would never try to measure its savings in this
manner".
Mr. Jackson recalled the State having measured "its own savings
in entirely different way. That method virtually never shows a
loss in procurements".
Mr. Hawkins remarked "this brings us back to the question of
overall performance".
9:39:21 AM
Mr. Hawkins reaffirmed his testimony "that there is tremendous
cost of goods savings potential in the program". However, those
savings could not occur simply by changing procurement
personnel. "Full deployment of all of the infrastructure that is
designed to deliver that cost of goods savings" must occur.
Absent the ability to combine volumes with other agencies, a
small procurement office, particularly when dealing with such
entities as the AMHS which has specialized purchases from single
source vendors, would require additional time to show cost of
goods savings. The ability to develop catalogs and secure vendor
agreements would be difficult to accomplish in a short period of
time, particularly under "an RFP that is designed to maximize
administrative overhead cost savings". The mechanics of PPP are
not "designed to deliver cost of goods savings".
Mr. Hawkins stated that cost of goods comparisons, the
information gleamed from reviewing the MCAC Study, and other
data, the indication is that ASCI "is doing about as well, maybe
a little better than" its SOA predecessors.
Mr. Hawkins praised the knowledge possessed by ASCI in the field
of cost of goods savings. Its professional procurement staff
delivers "millions of dollars" of cost of goods savings to its
customer base each year.
Page 15
Performance Categories
1. Cost of Operations
2. Workload Comparison
3. Processing Time
4. Alaska Vendor Usage
5. Cost of Goods
Mr. Hawkins opined that ASCI is "the most scrutinized and
measured procurement office in the history" of the State. ASCI
is subject to a DGS quarterly measurement and metrics
performance standard consisting of the five performance
categories reflected on this page.
Page 16
[The three charts on this page compare the labor costs
experienced by ASCI in 2005 to those experienced by the SOA
in FY 2004; the labor costs per purchase order for the SOA
in FY 2004 to those of ASCI in FY 2005; and procurement and
warehouse Operations Staffing of SOA in FY 2004 to ASCI for
2005.]
In calendar year 2005, ASCI invoiced the State of Alaska
$125,000 less than it had spend on staffing in FY 2004.
This is a cost reduction of 20%, and does not include
reduced office space needs, telephones, computers,
supplies, etc.
ASCI uses 4.5 people to do procurement office work
previously done by 8 - not including the previous manager.
In 2Q FY 2006 (calendar 4Q '05), purchasing workload was up
sharply with no staff increase. This put cost per
transaction 40% lower than 2Q FY 2004, indicating very
strong program expansion economics.
Data Sources: State quarterly "benchmark audits", State
baseline data, ASCI invoice data.
9:41:49 AM
Mr. Hawkins reviewed the information on this page. Staff costs
per transaction have decreased under ASCI from $85 to $51 per
purchase order line: a 40 percent reduction.
9:42:30 AM
Page 17
Workload Comparison - Calendar 2005
Purchase Orders and Warehouse Issue Transactions
[This graph depicts Calendar year 2005 workload percent
increases from FY 04 on a quarterly basis. First quarter
increase was 15 percent, second quarter was five percent,
third quarter was 12 percent; fourth quarter was 24 percent
for an average increase of 13 percent.]
Mr. Hawkins communicated that ASCI has no control over workload
levels. "The work comes to us." The information substantiates
the fact that ASCI has been able to manage the increasing
workload.
Page 18
Requisition Process Time Comparison FY 2005
[This chart depicts the medium and average process time by
elapsed days comparisons between the State in 2003-2004 and
ASCI in 2005. Both entities' medium process time was two
days with an average of 5.1 days for the State and 4.8 days
for ASCI.]
Requisition Process Time Comparison 2Q 2006
[This chart compares, by Elapsed Days, the medium and
average process time for the State in the second quarter of
2004 to ASCI's second quarter 2006 process times. The
State's medium process time was two days and ASCI's process
time was one day; the State's average process time was 4.4
days as compared to ASCI's 4.1 days.]
9:44:29 AM
Mr. Hawkins reviewed the information on this page. Even with a
lower staff count and increasing workloads, ASCI was able to
handle the workload. ASCI must adhere to a new requirement not
generally required of previous State procurement employees: any
item exceeding $2,500 must receive "specific not to exceed
budget authority". Were a procurement to exceed that authority,
ASCI must contact and receive authority from the approver.
Nonetheless, ASCI was able to obtain a decrease in requisition
processing time. ASCI's processing time has decreased over time.
9:46:34 AM
Page 19
Process Days - SOA Employee SmartTools Requests
[This graph depicts the decrease in processing days that is
experienced by those State employees using the ASCI
Webtools system.]
Mr. Hawkins explained that ASCI's Webtools catalog system has
allowed State employees to place and receive approval of their
requisitions and then submit them to ASCI. While most orders are
now processed in this manner, getting to this point "was a long
haul". In the fourth quarter of 2004, State employees using the
Webtools requisition system experienced approximately a four-day
processing timeframe; that was "quickly" reduced to a one-day
processing time; and today, "orders placed on the web
procurement platform" were "getting out same day" more than half
the time. The speed is increasing.
Mr. Hawkins shared a communiqué ASCI recently received from a
state employee on a vessel: "I know you guys get a hard time …
but I just want to say that I've really seen speed differences.
I'm looking at a pair of boots that I ordered just a couple of
days ago and I can't believe they've already showed up here."
Mr. Hawkins clarified not all requisitions are received via
Webtools. In addition, there are some "inherent" issues within
the AMHS that make the implementation of the Webtools system
"more challenging" than most State agencies. Nonetheless, ASCI
is continuing to work on implementing the system.
9:48:31 AM
Co-Chair Wilken asked whether ASCI developed the Smarttools
program and whether British Petroleum and other ASCI clients
also utilized it.
Mr. Hawkins affirmed the electronic commerce (eCommerce)
technology was developed to further ASCI business practice
processes. Such a program is invaluable to a supply chain
management company. The Smarttools program is on par with other
internationally used programs.
9:49:29 AM
Page 20
Percent Orders to Alaska Vendors
[This graph indicates 58.3 percent of the vendors utilized
by the State in FY 04 were Alaska vendors. Alaskan vendors
amounted to 63.6 percent of ASCI's vendors in FY 2005 and
68.6 percent in FY 2006.]
Percent Order Value to Alaska Vendors
[This graph reflects that Alaska vendors received 47.3
percent of the order values placed by the State in FY 2004.
53.2 percent and 59.0 percent of the order values placed by
ASCI in FY 2005 and FY 2006, respectfully, were to Alaska
vendors.]
Mr. Hawkins noted another accountability measure built into
ASCI's performance benchmark by the State is its use of Alaska
vendors. He reminded the Committee about Mr. Jackson's earlier
concern about how the cost of goods secured from Alaska vendors
could be distorted by the manner in which freight cost is
accounted for.
Mr. Hawkins noted this page reflects the percentage of the
orders and the percentage of the values spent with Alaska
vendors. In summary, ASCI spent $690,000 more dollars with
Alaska vendors than the State had previously spent.
9:51:10 AM
Mr. Hawkins stressed the pride and effort taken by ASCI "to form
service relationships with Alaska vendors". The economic
benefits resulting from such relationships include the fact that
Alaskan vendors manage freight charges better and would have
goods and supplies on hand. This would increase service levels,
particularly in Southeast Alaska.
Page 21
More Performance Indicators
· Fully functional e-Commerce system
· Tailored to SOA needs, integrated
· Deployed with users, vendors
· 5000 item catalog
· Inventory reduction (office supplies)
· Customer feedback log
· Private sector performance management
· High priority order (P1) status log
· "Large" procurements log
Mr. Hawkins outlined this information. The customer feedback log
is reviewed and, combined with the private sector performance
management tool information, is "used as a management tool to
make needed changes". The changes enacted have served to produce
"high morale amongst staff even though they are up against a
lot". "That sense of being against all odds and pulling together
as a team" contributes to company morale.
Mr. Hawkins shared that ASCI maintains a priority one, two, and
three expediting process. High priority orders are tracked in
systematic manner. Other management tools are also used.
9:53:57 AM
Page 22
Just a Few Examples of "Dirty Tricks"
· Zero transition assistance
· Failure to stop or overcome sabotage
· Internal group formed during first month to accumulate
evidence for contract termination
· Misinformation campaign from beginning
· Concealment of baseline staffing
· Interference in employee relations
· Failure to issue timely web ordering procedures
· Regular "fishing" for complaints
· Double standards on operations and metrics
· Unilateral changes in contract deliverables
· Interference in "independent" studies
Mr. Hawkins pointed out that with all the positive things that
have occurred, you would anticipate "positive feedback from the
agencies" involved with PPP. This is not the case. None of
ASCI's performance accomplishments have been acknowledged. "The
response has been stone silence, and in fact the response has
been just the opposite." The "litany of … bureaucratic dirty
tricks have occurred, designed to sweep the good performance
picture under the rug, highlight any bad performance that can be
documented, and discredit the program."
Mr. Hawkins stated that the list of examples depicted on this
page is not inclusive. There was no transition assistance and in
fact, when ASCI entered the office for the first time, the
cubicles were not set up, the office chairs were "the worst in
the building", and the ink cartridges in the computer printers
were empty. "Little was done to ease" the ASCI staff's
transition into the operation.
Senator Bunde, considering "the word sabotage … as a very strong
word", asked Mr. Hawkins for further "elaboration".
9:56:24 AM
Mr. Hawkins characterized SOA actions as "petty sabotage".
Vendor lists, fax cover sheets to vendors, Rolodex information
including phone numbers and names "had been destroyed".
Warehouse staff "refused to show" ASCI employees the system,
refused to show them how the existing inventory process worked,
and how inventory transactions were processed. DOT management
"did nothing to stop" that behavior. The logbooks that recorded
the number of service trips the warehouse staff made to the Auke
Bay Ferry Terminal and to the Lemon Creek Correctional Facility
to exchange out laundry were hidden, and thus important
scheduling information was unavailable to ASCI staff.
Nonetheless, ASCI persevered and eventually overcame such
actions.
Mr. Hawker reiterated DOT management's lack of assistance in
addressing the petty sabotage. In the first few weeks of taking
responsibility for procurement for DOT, ASCI was told by
employees "that they thought it was wrong; that an internal
group had been formed under the auspices of Nancy Slagle
[Director, Division of Administrative Services, Department of
Transportation and Public Facilities] to accumulate evidence and
documentation on how to discredit the program." The
[unidentified] Contract Manager "who was supposed to smooth the
transition" told ASCI that he felt "this was a bad idea and that
this group had been formed to try to put a stop to it."
Mr. Hawker stated there was misinformation from the beginning of
PPP. Minor growing pains and other normal occurrences were blown
out of proportion. Any compliments directed at ASCI services
were viewed as being "undeserved". The aforementioned incidents
were some of the things that occurred at the onset of ASCI's
involvement. Unfortunately, the negative behavior "is not
abating", and could even be viewed as "intensifying" as PPP's
termination date nears.
9:59:33 AM
Mr. Hawkins opined that SOA reasoning could be "the time is now
to kill it if it can be killed, before it's extended".
9:59:43 AM
Mr. Hawkins perceived the MCAC Study as "part and parcel of that
process", regardless of the fact that the Department of
Administration staff would argue differently, "We know when
we're getting our chain pulled. We know when we're facing
hostility; we know when we're trying to be set up to fail. While
that's not the policy of the Governor's Office, and that's not
the policy of everybody in the two agencies that we deal with,
it is the agenda of too many of the people that are in a
position of influence over this Program."
Mr. Hawker stressed it is not "the nature" of ASCI to say such
things about its customers; however, at this point, the
Legislature should be aware of what has been occurring. It
should be placed on the record that, were "these dirty tricks"
to continue, ASCI would not be taking "it quietly and let it
happen in the dark".
10:01:04 AM
Senator Bunde remarked that, had State property been destroyed,
he would view it as "verging on a criminal act" rather than as
petty sabotage. Further investigation in this regard should
occur. The actions shared could be "a very disturbing trend or a
highly unfortunate coincidence". Continuing, he shared that the
Senate Labor & Commerce Committee had conducted an oversight
meeting the previous day in regards to "materials that were
essential to the Aetna Insurance/Blue Cross Insurance RFP had
mysteriously disappeared and then reappeared later." Due to
serious concerns, he has requested a Legislative Budget & Audit
(LB&A) audit of the State's procurement process to be conducted.
"I am very concerned."
Co-Chair Green acknowledged.
10:02:15 AM
Senator Olson asked for clarification as to whether State
property had been destroyed or had simply been made inaccessible
to ASCI.
Mr. Hawkins responded "both". Some of "the clerical tools" that
would have been "helpful" to ASCI had been thrown away; other
materials had been hidden.
In response to a question from Senator Olson, Mr. Hawkins stated
that he was not in the position to determine whether the
disposal of tools that were developed to support the procurement
process and which would have assisted ASCI in its transition
would meet the definition of destruction.
Co-Chair Wilken thanked Senator Bunde for his initiative to
request an LB&A audit.
Co-Chair Wilken, referring to the information on page 6 about
the other entities to whom ASCI provides services, asked Mr.
Hawkins to describe how the services provided in the private
sector could benefit the State. In other words, he was seeking
additional information about ASCI's experience.
10:04:27 AM
Mr. Hawkins responded that the services ASCI provides to Exxon
Mobil and BP include "websites and Webtools that we host for
them in connection with their Sakhalin Island [Russia]
developments. Those contracts … reflect our efforts to begin to
participate internationally in this new oil and gas province off
of the east coast of Russia". These small projects include such
things as hosting both entities' official bilingual project
websites as well as technology relating to international vendor
registrations.
10:05:30 AM
Mr. Hawkins, for business purposes, chose not to disclose the
company's gross income. Continuing, he characterized the SOA
Program as not being a huge piece of ASCI's business in that
only eight of 160 employees are involved in the project.
Co-Chair Wilken asked whether "the lessons learned" from ASCI's
private business practices are integrated into the State
program.
Mr. Hawkins affirmed the lessons learned from ASCI's
relationships with BP and the other private sector operations
are integrated with PPP. This would include ASCI's ability to
build functional Webtools cost effectively and the utilization
of its measurement and process management tools.
10:07:03 AM
Senator Olson, noting ASCI was structured as a LLC (Limited
Liability Corporation), asked regarding the owners of the
business.
Mr. Hawkins responded that Alaskan individuals, including
members of its management team, primarily own ASCI. Companies
such as Frontier Plumbing in Fairbanks and Engineered Equipment,
Alaska Pump and Supply, and Dowman Bock in Anchorage. Puget
Sound Pipe and Supply are also owners.
Senator Olson asked regarding Mr. Hawkins' background
experience.
10:07:58 AM
Mr. Hawkins communicated that previous to working with ASCI, he
had been a private practice consultant in the field of supply
chain management specializing in such things as inventory
optimization and vendor performance management. Prior to that,
he had been president of the Anchorage Economic Development
Corporation. That organization's effort to market Anchorage as
an international distribution center led to his interest in the
supply chain management field.
Senator Olson noted the private industry customer base depicted
on page 6 is comprised primarily of "oil industry related
entities". Thus he assumed Mr. Hawkins' background must include
oil industry experience.
Mr. Hawkins answered he had been "heavily involved" in supply
chain management in the oil industry for the past ten years
primarily because "that's where a lot of the action is" in this
State. His business partner's background was in the supply and
distribution industry. Other management team's backgrounds are
varied.
10:09:37 AM
Senator Olson asked he be provided with a copy of the
correspondence from the two SOA employees who directed ASCI to
conduct their own study in order to discuss the MCAC report.
Mr. Jackson responded that one of these directives was
communicated via an email and the other was through a telephone
conversation. The email would be provided.
10:10:31 AM
Co-Chair Green asked whether the basis of the opposition has
been identified.
Mr. Jackson was "sad to say that it's an all too often situation
I observed during my career. I feel there's a certain amount of
protection of empire involved here. A certain sort of heartfelt
belief that purchasing for government can't be done by anybody
but government employees, and that this is a silly idea, and
cooperation just isn't going to be forthcoming." It could be
"the heartfelt belief that it's wrong to do business this way"
combined with "the idea that if procurement can be outsourced
what's next".
Co-Chair Green asked whether the opposition came from management
as well as "rank and file" employees.
Mr. Jackson communicated that in his capacity as an ASCI
Smarttools trainer, he had the opportunity to work in a variety
of State offices. He had a sense of the line employees' feelings
about PPP verses the sense he gathered from "higher level
management folks". The line level employees viewed it as just
another thing they had to learn how to do, and, as training
transpired, they accepted the change. He did not witness that
"sense of coming around" in the management team.
Mr. Jackson shared that, prior to becoming an ASCI employee, he
had conducted a management review on behalf of ASCI. During the
first month PPP was implemented, the State's contract
administrator at that time, Charlie Daringer (ph), who "was
managing on behalf of the State ASCI's performance", told him
"in a semi-confidential way in the sense that" they had
previously worked together, "that he was adverse to this
Program". He "did not see how it was ever going to save money,
and he had prepared or worked on preparing some form of a
document that was going to recommend that it not be continued."
Mr. Jackson verbally requested a copy of that document. After
failing to receive the document, he later made the request in
writing. Mr. Daringer's [ph] response was that he was "not the
custodian of records on this, if you want to get records, you're
going to have to request them" from the DOT Commissioner's
Office. At this point, Mr. Jackson informed Scott Hawkins of the
situation. Mr. Hawkins' decision was, considering this was
occurring at the beginning of a new situation, "let's try to
just work through this." Unfortunately the "attitude"
experienced at the onset has "prevailed throughout this contract
at the upper levels of management".
10:14:46 AM
Dr. OLIVER HEDGEPETH, Professor, University of Alaska, testified
via teleconference from an offnet site, and communicated to the
Committee that, as part of its free community service program,
the Logistics Department at the University performed an analysis
of the MCAC Study findings for ASCI.
Senator Bunde understood a University Masters Class had
conducted the analysis on to the Study.
Dr. Hedgepeth affirmed. The analysis was conducted by a graduate
course he teaches which focuses on measurements of supply chain.
He has 39 years of history as a mathematician. The class
conducted an analysis of both the MCAC Study and an evaluation
of the business process of ASCI's "cost of goods procurement
process as a matter of course in developing a case study which
we as a group are writing up to publish in a peer review journal
on how business can be done in a private company from a State
request".
10:16:12 AM
Senator Bunde inquired as to how the determination was made to
focus on this particular case study.
Dr. Hedgepeth responded that "former students" who are now
employed at ASCI communicated to him that ASCI was "a place that
had good insight on supply chain management". Mr. Jackson and
Mr. Hawkins asked him and his "team" whether they would like "to
gather more information about the business process for use in
our class". He characterized the logistics class he teaches as
"dirty logistics" in that he likes "his students to get out in
the field prior to graduation". Consequently the class
considered "developing a case study based on some of the work
that ASCI was doing". He asided that the class also conducts
such studies for other companies in its endeavor to understand
the mechanics of doing business in the Alaska supply chain
industry.
Senator Bunde queried as to whether an evaluation of "the
effectiveness and the accuracy of the procedures" of each
particular case study is conducted.
Dr. Hedgepeth affirmed, "that is investigated". He disclosed
that he had not allowed his class to see the reports from
Northern Economics and Altman Rogers & Co. until a few days ago.
The effort was to "investigate and try to understand the
business process from our standard view of how cost of goods and
services should be measured in any situation. We try to develop
a generic process. Now they've looked at these reports … and it
was interesting that our methodology seems to conform to
statements by Northern Economics and Altman Rogers."
Senator Bunde understood therefore that the class deemed the
Northern Economics and Altman Rogers studies to be a "more
accurate portrayal of the facts", and that the MCAC Study could
be characterized as "inaccurate".
Dr. Hedgepeth stated that in his terms, the MCAC Study would
receive an "F" grade. The Altman Rogers & Company and Northern
Economics, Inc reports on the MCAC Study would receive an "A"
grade.
Senator Bunde acknowledged Dr. Hedgepeth's expertise in this
field and concluded that the Study is flawed and that "the
reports of the report seem to be a good portrayal".
10:19:35 AM
DON PETERSON, Senior Manager, Mikunda Cottrell Accounting &
Consulting (MCAC), clarified for the record that there are two
Mikunda Cottrell firms in Anchorage. MCAC is not associated with
the Mikunda Cottrell auditing firm.
Mr. Peterson provided an oversight of the project MCAC was
requested to perform as well as "what was not requested of us".
MCAC compiled a Study titled "State of Alaska Division of
General Services Cost of Goods Analysis" [copy on file] dated
November 25, 2005 "which reviewed a number of items on the cost
of service for the State of Alaska". He summarized some
observations included in the Study. The purpose of the Study was
to gain an understanding of the process to place goods, and
methods for ordering the delivery of goods. "When we started
that process, there was an attempt on our part to obtain enough
matches within the State and ASCI system to provide statistical
information. It became very clear very quickly that that was not
going to be possible, and there's been a lot of comments here
that this is not a statistically valid sample. We agree with
that. The State, ASCI, and us very early on became aware that
that was not going to be possible. And the three parties simply
said should we go forward and perform an analysis that we know
is not statistically valid. The answer was yes, and we did."
In response to a question from Senator Bunde, Mr. Peterson
explained that even though there were 40,000 item transactions,
there were only approximately 167 exact matches in the systems.
Therefore, MCAC "tested 100 percent of the available items to
test".
Senator Bunde asked for further clarification as to whom MCAC
notified about the limited sample count.
Mr. Peterson responded MCAC had notified the State "about what
could be tested". The understanding is that the State then had a
discussion with ASCI in this regard.
Senator Bunde asked whom MCAC worked with at the State level.
Mr. Peterson identified Vern Jones and Tom Mayer with the
Division of General Services, Department of Administration as
the State representatives.
Senator Bunde understood therefore that even though MCAC had
communicated to the State that the Study would be statistically
invalid, the State's response was to continue.
Mr. Peterson affirmed the response was "to proceed". The Study
would only be "considered an indicator of information". MCAC was
"asked to proceed with that understanding, and that's exactly
what we did because those were the procedures that we were asked
to do".
10:23:40 AM
Mr. Peterson continued that "based upon the report that we
issued, ASCI, as they testified, hired Altman, Rogers & Co. and
Northern Economics Inc. to take a look at our information, and
both those firms concluded the results were statistically
invalid, and we agree. We knew that going in, and that was an
agreed upon procedure for the testing we were supposed to do.
Everybody understood that this would not be a statistically
valid sample. But again, the only items that were available were
the 167 items. Now Altman and Rogers brought up a number of
other issues. And I would like to address those at this time."
10:24:52 AM
Senator Olson asked "the validity of the Study if it's
statistically invalid".
Mr. Peterson stated the Study would serve as "an indicator, and
nothing more". MCAC informed the State of this and were told to
continue.
Co-Chair Green asked whether MCAC had a role in publishing the
Study as a public document.
Mr. Peterson responded "no"; the Study was delivered to the
State of Alaska.
Mr. Peterson read into the record his firm's response [copy on
file] to the Altman Rogers & Company Report as follows.
10:32:59 AM
Response to Altman Rogers & Company Report.
Mikunda Cottrell Accounting & Consulting (MCAC) was engaged
by the State of Alaska, Division of General Services to
conduct an analysis of the cost of goods procured by the
State's procurement agent, Alaska Supply Chain Integrators
(ASCI) at the Southeast Region (SER) of the Department of
Transportation and Public Facilities (DOT).
The purpose of this engagement was to document the percent
increase or decrease of the cost of goods procured by ASCI,
when compared to similar purchases made by former state
procurement employees at the SER over three separate
reporting periods.
A report was issued for the first reporting period dated
November 25, 2005. ASCI engaged the services of Altman
Rogers & Company, Certified Public Accountants to review
our report. Altman Rogers & Company issued a report dated
February 28, 2006, and MCAC has provided the following
responses to that report.
IV. Clerical errors. We reviewed the unit price differences
noted on the Altman report and find that the prices that
were used on the Altman report were the prices on the
delivery order (DO). The prices that were used in the MCAC
report for ACSI were prices on the actual invoice paid. Our
sample of selected comparable items was 167; of the 12
items noted on the Altman report, only two items were in
fact errors, and they were clerical errors, and not
critical errors. The results of our review are located in
Exhibit IV. The two clerical errors resulted from an
invoice that was not clearly legible and the other was from
numbers that were transposed. The Altman report also
referred to item number 115 as a critical error because our
report does not include the item being comparable to an
ASCI purchase. We researched this and determined that item
number 115 is a comparable item; however, the Buyspeed DO
numbers were transposed and have no effect on the results.
We have determined that if we were to correct the two
clerical errors on our original report, the percentage
increase in cost would be 8.97%, instead of the 9.00%
originally stated in our report. We have made these
corrections in Exhibit A.
Date Discrepancies: From the selected samples of 167, we
reviewed the list of 41 date differences noted in the
Altman report and agree to one date difference. MCAC used
the date of order from the Buyspeed program when selecting
purchases in the reporting periods. We were unable to
determine where Altman obtained the dates listed on their
report. Copies of the delivery orders mentioned in the
Altman Report are noted as Exhibit IVa. The date difference
does not have any affect on the results of this report,
because it is within the date range used for Report Number
1. We have made this change in Exhibit A.
V. Review of Adequacy of Transaction Research. Of the 167
comparable items in our report, we reviewed the 9 noted in
the Altman report and found 4 where we would agree that the
comparable items were different. The results of this review
may be seen in exhibit V.
We would agree that Line item 1, 7 and 16 are most likely
not comparable. For item number 1, the ASCI description and
the State description were the exact same, except the
State's item said "diamond plate" and ASCI's did not.
Item number 7 is the same item name and description;
however upon further investigation we noted that the item
purchased by the State was purchased from Costco in a two
package container instead of a one pack container like the
ASCI purchase.
Item number 16 was for purchases of cellular telephones and
two year cellular telephone service contracts. We would
agree that these items would most likely not be comparable
because the purchase by the State included additional
items.
Items number 40, 44, 81, and 145 the State and ASCI DO's
were the exact same description, therefore, we did not
contact the vendors for additional information. Altman
stated in their report that item number 44 was further
researched and ASCI's order stated that the item ordered
"must be balanced". We reviewed the Buyspeed DO and the
actual invoice for ASCI and do not see anywhere on any of
the documents that the item "must be balanced".
Item number 24, Altman stated in their report that ASCI
ordered a T square and the State ordered a combination
square. Review of the actual invoices for ASCI indicated
that a combination square was in fact ordered by ASCI and
the items are comparable.
We would agree that items number 1, 7 and 16 are most
likely not comparable, and have been excluded from our
sample. Item Number 121 is a comparing item, however the
number was transposed. If you remove these items from our
sample, and make the other clerical corrections noted in
Section IV, the result would be an 11.57% cost increase
instead of a 9% increase in our original report. We have
made these corrections and recalculated our original
Exhibit A. The results of these can be found in A-1.
Shipping: Shipping was not taken in consideration for the
following reasons:
· Sometimes shipping was included on DO's where it said
"shipping was included in price, and the DO was for
more than one item. We could not determine how we
could fairly assign shipping to the "part or item" in
our sample.
· Shipping would be listed at the bottom of the Buyspeed
DO as a separate charge. We could not determine how to
fairly assign that cost if there was more than one
item on the DO.
· Different quantities were ordered for each item, by
the state or ASCI, since the quantities ordered were
not identical, we are to assume that shipping costs
(no matter how they are presented on the DO) must be
different and we can not determine exactly how must to
assign to each item.
· Additionally, we noted that the exact items may have
been shipped to different locations (such as the ferry
system) and would assume that shipping costs would
most likely be different.
· Some DO's noted shipping as an estimate of .05 cents
when it was obvious that it would cost more than .05
cents to ship an item.
Because of the above challenges dealing with shipping, we
determined that we would leave shipping out, when possible
as noted in our report.
Mr. Peterson interjected that shipping costs were not considered
in the Study because there was "no uniform reasonable method to
assign to it".
VI. Application of inflation factors. We noted that
Northern Economics Inc. was asked to provide information on
the application of inflation factors. We did not apply
inflation factors because we, like Altman are not
economists, and do not have the credentials to apply such
factors. We did however, make note in our report that the
passage of time should be noted when viewing the results of
our procedures. In addition, the State provided information
to us regarding the CPI [Consumer Price Index] and how it
relates to items procured on State contracts and we listed
that percentage in our report. We did not apply the
percentage because of the variety of items that were
purchased. We did not that several of the vendors that we
spoke to while we were conducting our procedures told us
that the price of steel had increased during the reporting
period and we noted that in our report.
The report by Altman also noted in this section that of the
167 matches, 82 were found to be beyond a 12 month period.
The date parameters that were established for this
engagement were very specific and exceeded a twelve month
span. The reporting periods were the following:
Report Number 1: July 1, 2003 to June 30, 2004 compared
with July 1, 2004 through June 30, 2005.
Report Number 2: July 1, 2005 to September 30, 2005
compared with July 1, 2004 through June 30, 2005.
Report Number 3: October 1, 2005 to December 31, 2005
compared with July 1, 2004 through June 30, 2005.
This section of the Altman report also mentions that
comparisons that included purchases under supply contract
and contained escalation clauses for inflation adjustments.
The state advised us of the following:
1. ASCI must utilize all mandatory contracts.
2. ASCI must utilize non mandatory contracts to the extent
practicable, but are not required to use non mandatory
contracts.
3. It is not possible to tell based on the data at hand if
the item purchased from the contract vendor was actually an
item under contract as vendors, for example may sell many
items that may not be on contract.
4. It is also not possible to tell if the purchases were
actually made from a contract as the DO's do not refer to a
specific state contract, therefore, the items may have been
purchased from a vendor without regard to a state contract.
The state has advised us that less than half the purchases
in the sample pool were from vendors with existing state
contracts. In addition, only about one third of contract
vendor purchases were from contracts that contained a price
adjustment clause.
VII. Weighting of transactions. We reviewed the information
that was provided by Altman regarding the weighting of
transactions. We clearly noted in our report that our
methodology was to look at price increase or decrease per
unit. The purpose of our report was not to determine cost
savings for items that are not similar, as noted in the
example regarding the paper clips and compressor.
Additionally, ASCI and the State purchased in different
quantities and accordingly, no uniform weighting system
could be established.
VIII. Extrapolation to a Larger Population. The state
provided us with the total value ($11.1 million) of
procurements conducted by ASCI for Report Number 1. The
State advised us that while they do not dispute that
services are included in the $11.1 million reflected in
Report One, the State or MCAC has not verified the cost of
goods reflected in the Altman Rogers reports as $6.8
million. In addition, we simply indicated in our Report
Number 1 that if you were to take the cost percentage
increase that was calculated using the data and multiplied
it by the total amount of purchases conducted by ASCI, you
would get that calculated increase in cost.
IX. Alaska Vendor Usage. We did not consider the percentage
of usage by Alaska vendor's verses usage of vendors out of
state. We would agree with the information in Altman Rogers
report that the State monitors the percentage of vendor
usage. The State provided us with reports that indicate
ASCI utilized Alaska vendors on 62.77 % of purchases during
the reporting period while the State percentage of use was
58.16% during the prior period.
Conclusion:
The methodology that we used to perform this engagement was
agreed upon by the State and ASCI and was changed several
times to accommodate the suggestions of both parties. Our
report was for the procedures that we performed. We
performed these procedures based on data that we received
from the State, and in some cases supported by obtaining
additional information from vendors and other
documentation. We have reviewed the items noted in the
Altman report and believe the vast majority of the noted
differences can not be substantiated. We believe there is
an unknown impact from inflation and it was noted in our
report. We also believe there are many alternative methods
in which to present this data, but that would require more
unknown assumptions. We believe our original report, as
amended, is essentially correct according to our agreed
upon procedures with the State of Alaska.
[NOTE: Copies of Exhibit IV, Exhibit A, Exhibit IVa,
Exhibit V, Exhibit A-1 are on file.]
10:38:52 AM
Senator Bunde characterized the final sentence of the response
as "very telling". Any criticisms of the Study or the "limited
applications" in it should be mindful of the fact that the Study
"did what it could do … according to" MCAC's "agreed upon
procedures with the State".
Mr. Peterson affirmed, "that's exactly what the report did. It's
nothing more than an indicator of what we found".
Senator Bunde voiced that the limitations of the Study limit it.
Senator Bunde asked the cost of the Study.
Mr. Peterson recalled the cost being in the range of $20,000 to
$30,000.
10:40:17 AM
Co-Chair Wilken asked whether Mr. Peterson would agree that the
amount of correspondence between MCAC and the State would equate
to approximately 1,040 pages of paperwork.
Mr. Peterson clarified that another of his co-workers was the
primary person working on this endeavor. He could attest to the
fact that "a significant amount" of correspondence had occurred.
Co-Chair Wilken asked whether Mr. Peterson would concur with
language in the Conclusion section on page 13 of the Altman,
Rogers & Co. Report titled " Alaska Supply Chain Integrators,
LLC Mikunda Cottrell Accounting and Consulting Costs of Goods
and Services Report Management Review and Analysis" [copy on
file] which reads as follows.
Based on these issues and other factors detailed in this
report, the conclusions reported by MCAC are unsupportable.
In addition, due to numerous noted deficiencies in the data
set and the methodology selected by MCAC, it is
unreasonable to expect that the MCAC study could be
corrected to provide reliable conclusions.
10:41:09 AM
Mr. Peterson responded that MCAC reviewed each of the issues
raised in the Altman, Rogers & Co. report. MCAC has determined,
as reflected in the MCAC written testimony Mr. Peterson had read
into the record, "the vast majority of … what they found was
incorrect". Both the Altman Rogers & Co. and the Northern
Economics studies addressed the statistical validity issue. MCAC
would agree that the Report should not be considered "in any way
shape or form" a statistically valid sample. "We don't pretend
that it was." MCAC was told to "proceed and tell us what the
answer is" even though there is a limited number of
transactions. MCAC never represented the Study as statistically
valid.
Co-Chair Green asked whether MCAC communicated that view as part
of the document when it was transmitted.
Mr. Peterson replied that while that issue was not addressed in
the Study's conclusions, it is very clear that it is not
statistically valid. Only 167 items were matched.
Co-Chair Green asked the reason the lead person on the project
was not in attendance.
Mr. Peterson pointed out that MCAC received short notice about
the meeting. The primary individuals who worked on the project
were outside the State.
10:43:02 AM
Senator Hoffman remarked that, while the Study might not be
statistically sound, it would serve as an indicator.
Mr. Peterson stressed that the Study should be viewed as "an
indicator of what we found". How the information is used is
another issue.
Co-Chair Green referenced remarks in the Conclusion of Mr.
Peterson's testimony as follows.
The methodology that we used to perform this engagement was
agreed upon by the State and ASCI and was changed several
times to accommodate the suggestions of both parties.
Co-Chair Green asked whether this information is documented.
Mr. Peterson deferred to the Department of Administration to
respond. The Department of Administration demonstrated to MCAC
that after MCAC raised the issue about the sample size that
"they went to ASCI and that they had discussions with them".
MCAC was not involved in those discussions.
Co-Chair Green suggested that the language she had referenced in
the MCAC Conclusion be restructured.
Mr. Peterson stated that, "the procedures in the report are what
they are. They're an indicator of what we found." Nothing more
should be drawn from them.
10:44:28 AM
VERN JONES, Chief Procurement Officer, Division of General
Services, Department of Administration, understood that "the
sole purpose and intent of the bill" authorizing PPP was to
produce cost savings. The RFP included "strong language" in this
regard. An emphasis on cost savings is also depicted in the ASCI
proposal and on the record of that bill. "Clearly the intent
here is to reduce the cost of goods and services that the State
purchases." DGS has conducted quarterly benchmark audits of this
contract. One of the identified "weaknesses" of the DGS reports
was the analysis of the cost of goods, and in fact, this
Committee criticized DGS in that regard in the past. While the
DGS analysis was not scientifically or statistically valid, they
had endeavored to find appropriate matches, and the information
supported the determination that ASCI activities were resulting
"in a significant cost increase." Because the results were
statistically invalid, DGS issued an RFP to hire an independent
third party to conduct an analysis. The "well known accounting
firm" MCAC was hired to conduct and analysis the cost of goods.
Mr. Jones "strongly objected to Mr. Jackson's characterization
of the State's handling of this contract. I object because it's
not true. We did not try and influence the outcome in any way.
We simply cooperated with them to get them information, to find
what they could find."
Mr. Jones responded to an earlier question regarding the
conversations about what to include in the audit. Those
discussions included himself, Mr. Hawkins, Cheryl Frasca,
Director, Office of Management and Budget, Office of the
Governor, and others. The use of State contracts, which is now
an issue objected to by ASCI, was one of the items discussed.
10:47:36 AM
Mr. Jones communicated the State instructed MCAC "not to include
purchases by ASCI off of State contracts. ASCI asked us to
include those at the audit, and we did." Continuing, he noted
the State's savings and other data figures "do not match those"
depicted in Mr. Hawkins' presentation. An executive summary of
the quarterly benchmark information could be provided. "Our
figures do not match what I saw here today."
Mr. Jones had read the Altman, Rogers & Co. report and did not
recall it specifying that ASCI had reduced the cost of goods for
the State.
10:49:27 AM
Co-Chair Wilken brought the conversation "back to the statistics
issue. It's hard to measure anything if your yardstick changes
its size every other day." This would also apply to the scope of
the project DGS engaged in with MCAC. While it was agreed that
the Study would be statistically invalid, the decision was made
to proceed. "But, clearly something changed" from the time of
the August 25th letter to Mr. Jackson from DGS and November"
when the Study was finalized. He referred to two of the four
aforementioned questions in that letter and read the following
excerpts.
· As professionals in the field, MCAC will independently
determine a statistically valid sample size.
Does the State know how MCAC will determine the
constituents of the sample and maintain statistical
validity?
· No, MCAC will determine the samples and create a
statistically valid pools.
Co-Chair Wilken determined from Mr. Mayer's responses in the
August 25, 2005 letter that "he clearly expected" that "the
measurements would be statistically valid and reliable". To that
point, Co-Chair Wilken asked, "What changed?" after that letter
was written and the time the Study concluded.
Mr. Jones reiterated that the internal studies conducted by DGS
were known to be statistically invalid, because the Division
could not find appropriate sample sizes. Thus the Division
issued an RFP for the development of a statistically valid
report and contracted with MCAC, an outside Certified Public
Accounting firm. They too "could not find" a sufficient sample
size. The sample size found represents "100 percent match of
every exact match". A lot of work had been done at that point,
and the contract was not halted. "What we want here is an
indication of what's happening under ASCI so we can assess their
performance." Thus the determination was made to continue with
the Study, as a lot of work had occurred up to that point.
Co-Chair Wilken stated that the response had not addressed his
question. There became a point in time "when this Study became a
waste of time and money because the yardstick was invalid". The
question is when did that happen and who made the decision to
proceed, knowing that the end result would be a study that could
"not be relied upon, let alone" publicly published.
10:53:59 AM
Mr. Jones was unsure to the exact date of when the decision was
made to continue.
Co-Chair Wilken asked whether Mr. Jones was involved in the
decision.
Mr. Jones affirmed he was.
Co-Chair Wilken asked whether the decision might have been made
in either September or October.
Mr. Jones could not recall.
Co-Chair Wilken asked whether the decision was made "early on in
the process when you found that the yardstick was going to
change" or whether it was made mid or late in the process.
Mr. Jones reaffirmed that he could not identify an "exact"
timeframe. At some point, we had a conversation with ASCI and
conceded to their request to include a number of other" State
contract items in the study "in an attempt" to enlarge the pool.
10:54:53 AM
Mr. Jones "objected" to the position that the Study was of no
value. It did provide an indication of the activity.
Co-Chair Wilken disagreed. The Study is statistically invalid,
whether it was the basis for ASCI to proclaim that their service
had saved the State nine percent or whether DGS claimed
otherwise. "You can't put this out as a work product if it's a
dartboard. And that's what you've done." MCAC must have informed
someone at some time "you are publishing something that is
worthless". While it is "a nice review of the facts", it is
worthless.
Co-Chair Wilken expressed appreciation for the fact that the
problems PPP has experienced have been brought forward. "It's
time that this become public…I'm so disappointed in why we're
here talking about this Study that professionals, including you,
should have stopped from ever being published."
Co-Chair Wilken asked whether Mr. Jones had been concerned that
the consultant hired did not have the expertise to incorporate
an inflation factor.
Mr. Jones countered that the firm was a reputable accounting
firm "fully capable of analyzing data". While they are not
statisticians they could conduct sample comparisons.
Co-Chair Wilken acknowledged; however found it "somewhat
strange" that a firm without such expertise had conducted the
study. He appreciated the firm admitting, "that … they don't
have the credentials to apply inflation factors".
Mr. Jones pointed out that ASCI's contract firm, Altman, Rogers
& Co. did not have that expertise either.
Co-Chair Wilken replied, "Altman Rogers didn't write this".
Co-Chair Green, voicing disappointment that the Study had been
publicly published, asked how that decision had been made. While
the immediate participants might understand that the findings
were statistically invalid, the public could perceive things
differently. "That's kind of below the belt."
Co-Chair Wilken noted that on various occasions, "we have … had
conclusions waiting for a study. This is another one."
AT EASE 10:58 AM / 10:59:21 AM
ART CHANCE, Director, Division of Labor Relations, Department of
Administration, informed the Committee that in his position he
works with the three organized labor unions that represent "the
employees who would be at issue in this matter of the 800 pound
gorilla in this …. As confusing and conflicting as the various
versions of the economic analysis might be, at some point", he
would be required to "submit those confusing and conflicting
versions of the economic realities to a labor arbitrator who's
going to tell us whether or not we've violated these
agreements." One arbitrator has already informed him that the
process the State used "to initiate this, at least under the
supervisory contract violated their agreement." While she had
not halted the process, she had expressed that any effort to
"expand or renew this process, we had to demonstrate feasibility
by a means other than that which we used to initially
demonstrate it … The initial feasibility method was basically to
take the contractor's proposal and compare it to our costs. We
went out and asked that there be proposals to do this for us and
we compared it to our known costs". The arbitrator "concluded
that that did not satisfy the requirements in the labor
agreements, all of which required demonstration of economic
feasibility in order to lay off State employees and replace them
with a private contractor."
Mr. Chance admitted not knowing "what a feasibility study would
look like under these labor agreements that would satisfy any
third party tryer of fact. Our collective bargaining law
absolutely militates against us outsourcing to the private
sector any work being done by State employees. The labor
agreements that control the employees that are subject to this,
labor trades and crafts, general government and supervisory, all
have 'contracting out' language that permit us to outsource
where there is a demonstration of feasibility". However, "there
is no definition of what a demonstration of feasibility is."
Mr. Chance reminded the Committee the State has, in the past,
outsourced and sustained that action through arbitration.
However, the State has also at times lost the arbitration of
those activities. He could not discern "what the difference is
between the ones where it was feasible and the ones where it was
not."
Mr. Chance communicated "that probably the only way that we
would change that 'contracting out' language in any of those
agreements is after the strike. These are very valuable pieces
of language to these unions." In this case, there are active
grievances with all three labor unions. While the Division has
collected as much data as possible in this process, he would be
"facing third party neutrals in an if lawful binding decision,
and they're going to be hearing the same thing that you are
hearing today. The State saying it's feasible using one body of
economic knowledge; the unions saying it's not feasible using
another body of economic knowledge. That's the situation." He
has "pressed for much of this measurement because" the situation
must be addressed.
11:03:50 AM
Co-Chair Green inquired as to whether a statistically valid
Study would have assisted Mr. Chance in this effort.
Mr. Chance was unsure as to whether "a cost of goods would be a
part of the feasibility study. One party's going to argue that
it should be and the other party's going to argue that it
shouldn't. The State's position would be that we're going to
maintain this process because the Legislatures told us to. We
would have to say that feasibility is only a measure of what our
labor and administrative costs are, costs of goods are not a
part of that." The union position would be that while some labor
costs might be reduced, "they're costing themselves a lot of
money on cost of goods". The arbitrator's position on this would
be the unknown.
Co-Chair Green remarked "what a travesty".
Co-Chair Green identified labor management as being the root of
the problem. This involves "lower level employees who would like
to see this scuttled who would do anything they can to make it
not happen and who would not want this to go forward".
Mr. Chance "would not go so far as to attribute individual
actions to individual employees" … as there is no evidence in
that regard.
Co-Chair Green agreed, however, declared, "collectively, I
would".
Mr. Chance stressed, "there are three organizations that have
intense institutional opposition to us doing this or anything
like it."
11:05:53 AM
MARK O'BRIEN, Chief Contracts Officer, Division of Contracting,
Procurement and Appeals, Department of Transportation and Public
Facilities indicated he had not been present earlier in the
meeting because he had not anticipated his Department being part
of today's discussion. However, after hearing his name mentioned
he decided it best to join the discussion.
Mr. O'Brien stated that Mr. Hawkins' remark about his feelings
being hurt when the Program was adopted "was not a fair
characterization. What is a fair characterization is is that
there was at that testimony and those hearings a discussion
about the cost of goods savings, and the number $20 million was
thrown out." Mr. Hawkins indicated that that was "a conservative
estimate". He, a 28-year veteran in the State's procurement
system, viewed this as "a little insulting to think" that the
years of efforts to enter into multi-agency contracts and to use
our professional expertise to achieve the best savings possible
for the State, that somehow we were missing the mark by a number
that large." To imply that his "feelings were hurt, I would say
it was frustrating and it was insulting to the profession of the
folks that had been doing the job up to that point".
Mr. O'Brien professed having no bias at the onset of PPP. The
Department of Transportation and Public Facilities commissioner
asked him to assume "lead for the Department in interacting with
the Department of Administration and ASCI in implementing this
within the Department."
Mr. O'Brien addressed the issue of destroying State property by
characterizing it as "a red herring". The activities being
referred to "were the result of frustrated employees who were
laid off as a result of the outsourcing."
Co-Chair Green interrupted to proclaim that any action of
employees who were frustrated "because they got released is
inexcusable".
Mr. O'Brien clarified that the material that was destroyed was
not State property, "and it's excusable because what they were
getting rid of were their own personal vendor lists and things
they kept as part of their job." An example would be "your
Rolodex on your own desk. In most cases, it was a process of
cleaning out the office before ASCI came in." …"One employee
stated 'Well, I'm not going to help them anymore than I can' and
he threw his Rolodex away into the trashcan."
Co-Chair Green stated that action is "inexcusable."
Mr. O'Brien stated it's frustrating.
Mr. O'Brien noted that when the Department became aware of the
behavior that was occurring, it conducted "numerous meetings"
and memorandums were issued. Department of Transportation and
Public Facilities management "instructed employees to actively,
voluntarily, and aggressively participate" with ASCI. He
recalled a meeting of the Southeast Region of the Department,
which was section to which the PPP would apply, which was held
around July first, the approximate time ASCI was to assume
procurement responsibilities.
11:10:56 AM
Mr. O'Brien continued that at that meeting, the Director of the
Southeast Region, Gary Paxston, addressed the entirety of the
southeast regional directors "and in no uncertain terms
described to the employees the participation and their role in
this Pilot. It was blunt, it was very clear…." Those employees
left "knowing what management's position was on their assistance
in rolling the program out." It would be incorrect to say that
the Department had not addressed employee behavior or had not
assisted in the transition.
Co-Chair Green appreciated that information.
Co-Chair Green asked Mr. Hawkins whether he had concluding
comments.
11:11:42 AM
Mr. Hawkins agreed with Mr. O'Brien that Gary Paxston had made
"a good faith effort to shoot straight from the shoulder and
help us where he could." He had provided "significant
leadership" to the Department and was a "lifeline for us." Mr.
Paxston has retired and has been replaced by someone new to the
process.
Mr. Hawkins puzzled between "the distinction in feeling insulted
and having one's feelings hurt."
Mr. Hawkins addressed the comments presented by MCAC. "Part of
what we're seeing there is just an unfamiliarity with doing cost
of goods research … It's clear that they're struggling to
evaluate the data. One of the first things that you do when you
take a data set like this and when you're going cost of goods
analysis, is you do outlier analysis. If you have 167
transactions, and you're doing what they were doing of adding
them all up to a bottom line result, and tallying it and
comparing it to the same column next to it, one or two or three
transactions in that list can have a disproportionate affect on
the bottom line result. That is why, everybody has agreed here
this morning, and I have to tell you I'm pleasantly surprised
and floored that everybody has agreed that this Study is
statistically invalid. But that's why it's statistically
invalid. Because when you use methodology like that, one or two
transactions can skew the thing wildly." Thus someone familiar
with this field would conduct an analysis and identify
"suspicious" transactions. Identify the best ten or 15 and the
ten or 15 "worst" transactions; "those that are
disproportionally impacting the results and research those
carefully and make sure that those are valid transactions.
Because when you're looking at 50 percent or 70 percent changes
in prices, there's an excellent chance that there's something
wrong there. It's freight, it's item comparability, it's this
item has a service included and this item doesn't". The MCAC
comment made in regards to the fact that "they could not tell on
the comparability question" whether this item required balancing
or shipping and "this item didn't" is indicative of their
unfamiliarity with the process. "You have to follow up and call
the vendors, you have to drill into those transactions and ask
the question of why are these so different. And then you'll get
to the bottom line answer. And nine times out of ten what you'll
find is the item for one reason or another that's not a 50
percent or 70 percent or even a 25 percent difference. Usually
it's not a fair presentation. Prices don't vary that much." ASCI
took the top ten and the worse ten and conducted that research;
they "called the vendors and followed up", and "we determined
that seven of the ten in both cases, top and bottom, were
invalid." Altman, Rogers & Co. conducted significantly more
comparability research.
Mr. Hawkins concluded that MCAC was simply unfamiliar with the
required work, and was unable, from a procurement standpoint, to
distinguish what the differences were.
Mr. Hawkins did not believe there was malice on the part of
MCAC. There was just "unfamiliarity and perhaps a failure to
recognize when the credentials aren't there and maybe they're
participating in something that's going to have a very bad
impact on both a local company and State policy."
Co-Chair Green, in consideration of an impending Senate Floor
Session, stated that the presentation must conclude. She
appreciated the information. Committee members should inform her
of any further desired action.
Senator Bunde determined the Program to be working, and in that
regard, asked that consideration be given to expanding it.
Co-Chair Green agreed.
ADJOURNMENT
Co-Chair Lyda Green adjourned the meeting at 11:17:39 AM
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