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Weekly UpdatesWhile the economy is now showing signs of recovery, most government revenue sources have yet to turn the corner. As a result, many governments still find themselves struggling to meet increased demand for services with constrained resources. In this environment, governments must take advantage of cost saving opportunities wherever possible. Many governments have banded together to achieve savings, adopting such strategies as merging city and county services, sharing facilities, and combining buying power in joint purchasing bids.
There is nothing particularly unique about the cooperative procurement of products such as oil, gas, asphalt, salt, furniture, office supplies, and vehicles. For years, governments have known that they could obtain better pricing and service from vendors by aggregating volumes. However, this model has rarely been applied to the procurement of banking services. Many governments assume that the sheer number of providers, the disparate needs of public entities, and the nuances of paying for banking services make such a procurement infeasible. While these factors certainly add a layer of complexity, they are not insurmountable. This article describes how three North Carolina governments overcame these obstacles and successfully lowered their banking services costs by jointly procuring banking cards.
THE EVOLUTION OF AN IDEA
Sharing many of the same core issues and challenges, as well as the common goal of efficient government, the City of Raleigh, the Town of Cary, and Wake County have long enjoyed a good working relationship. The governments readily share information with one another, and finance personnel regularly discuss ways to collaborate on fiscal matters. Several years ago, we noticed that these discussions increasingly turned to the subject of banking services.
As it turned out, all three governments used the same bank, Wachovia Bank. While there were differences in the types of banking services required by each government, many of our needs were the same or very similar. These included the processing of transactions through central checking and payroll accounts, the use of lockbox and purchasing card services, ACH transactions, and the safekeeping of assets. As we delved into the matter in greater detail, we discovered that our respective jurisdictions shared two overriding needs: (1) to moderate ongoing fee increases that were not always consistent with the experiences of the other units and (2) to obtain state-of-the-art technological solutions for their rapidly evolving business needs.
As these discussions evolved, the idea of collaboratively procuring banking services became more and more appealing. All three governments were looking for ways to contain the costs of banking services, and the proliferation of e-commerce and e-government were creating new opportunities and challenges in this area. If ever there were a time to alter the nature of municipal banking relationships, this seemed to be it. Still, two fundamental questions remained about the viability of a collaborative banking services agreement. First, would combining service needs and business volume result in better services at lower costs for each unit of government? And if so, how would we go about soliciting proposals on a joint basis?
Raleigh, Cary, and Wake County appointed a project team consisting of finance personnel from each unit to study the viability of a collaborative banking services contract. This team soon identified a number of other important issues that would need to be resolved before the three governments could begin developing a request for proposals.
* What effect--either positive or negative--would the different financial characteristics of each government have on a combined contract? For example, county revenue streams are primarily large-dollar, seasonal tax receipts, whereas cities receive a lot of small-dollar, regular payments for utilities and other services.
* Would it be beneficial to combine under one request for proposals the core banking services of each unit, as well as the newer services that can be priced at a premium? There was a concern that banks might adjust the core services fees upward to make newer services more appealing.
* Should the contract combine all of the banking services under one financial institution or would it make sense to have separate contracts with multiple banks for different services?
* Would each of the three participating units be bound by the results of the joint procurement, even if some services were priced higher than the same services under existing agreements?
* Given the differences in service levels among the participating governments, would it be possible to obtain an "apples to apples" pricing comparison?
* Would it be advantageous to share contract savings with other governments in the county?
As with any new initiative, answering these kinds of questions requires much discussion, analysis, and inquiry. We benefited tremendously from the expertise of the University of North Carolina's Institute of Government, which facilitated a series of meetings designed to achieve a common understanding of the issues among the three governments and a consensus on how to proceed. At first, the governments struggled to understand one another's existing banking agreements. Over time, however, the issues became clearer and the group eventually achieved consensus in terms of its expectations for potential providers.
When the project team first involved banking institutions in its discussions about joint contracting, there were more questions than answers. The banks used different terminologies, packaged and priced their services differently, and offered different services. Nevertheless, one fact was clear--all of the banks were interested in pursuing the combined business of the three units and viewed such an arrangement as an attractive alternative to the status quo. Based on the positive feedback from the banks and a consensus opinion that a collaborative procurement would indeed result in cost savings and enhanced service, the project team decided to press forward, settling on the following approach to collaborative banking:
* Banking services would be divided into five separate service areas in the RFP--each to be bid separately, with the possibility of selecting a different bank for each service area.
* All three jurisdictions would commit to use the bank selected for each service area; however, each unit would contract with that bank and could choose not to utilize certain services.
* Each of the three governments would adjust the terms of existing banking contracts to concurrently begin a new three-year term, with the possibility of two three-year term renewals.
* Proposing banks would be required to provide the same level of service and pricing to any other local government jurisdiction in the county.
RFP DEVELOPMENT
The next step in the collaborative procurement effort was to develop and issue a request for proposals based on the approach outlined above. Each of the participating governments had previous experience procuring banking services for themselves, so they understood the importance of a well-organized, thorough, user-friendly RFP document. To facilitate the drafting of the joint RFP, the project team gathered previous banking services RFPs from each of the three governments and sought sample RFPs from professional associations such as the Treasury Management Association.
Exhibit 1 shows the table of contents from the joint RFP document. The final 73-page RFP included three sections: a general section containing important introductory information about the bidding process, an RFP section outlining the five service areas for which separate proposals were sought, and an attachment section providing the cost form and other important information.
The general section of the RFP included certain mandatory requirements that all proposing banks had to meet in order for their proposals to be considered. Banks were required to be FDIC-insured, registered online with the Federal Reserve for funds and securities, and in compliance with all general and mandatory requirements specified for each RFP on which it bid.
The five service areas in the RFP (core banking services, disbursement processing, wholesale lockbox service, retail lockbox service, and purchasing card services) corresponded with the banking services that the units were already using. The purpose of separating services in this manner was to enable the governments to take advantage of the strengths of individual institutions. While we were particularly interested in recommending a central banking institution for core services, we also wanted to ensure that we obtained the best possible pricing and service for the custom services. As such, the project team spent a great deal of time crafting the language used to describe how these services should operate and what the governments expected of providers. For this purpose, the project team relied on its own understanding, information gained from area banks, and sample RFPs.
One of the most involved pieces of the RFP was the cost schedule that each proposing bank was required to complete based on the expected transaction and volume levels specified by the project team. To facilitate the submission of cost proposals and the evaluation of these proposals, the project team provided an Excel template as Attachment 1 to the RFP (Exhibit 2). Proposing banks were required to seal the completed template (both a printed copy and the Excel file on disk) in a separate envelope, which allowed the project team to separate its evaluation of service cost from its evaluation of service quality. The cost proposal template included all five service areas.
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