The recent bankruptcy filing by the city of Detroit and ongoing economic problems in municipalities and states across the U.S. bring into focus the consequences of excess public spending. When cities and states encounter grave fiscal problems, efforts are undertaken to trim spending, chiefly through budget cuts and worker attrition.
This approach sounds sensible, but a recent briefing paper by the National Association of State Procurement Officials (NASPO) finds that state governments can torpedo money-saving initiatives by downsizing the organizations and staffs that run procurement and by imposing unnecessary restrictions on their operations — all in the name of fiscal accountability.
The title of the paper, State Procurement Adds Value and Jobs, and the fact that NASPO produced it, could raise questions about objectivity. However, several points in the paper are worth consideration in determining how best to achieve sustainable savings during fiscal turmoil and budget cuts.
Here and in my next article, I’ll look at key points the paper makes, the most important of which is that a professional procurement organization will save far more money in the long run than one that’s been arbitrarily downsized to meet budget-cutting directives.
The paper begins by referencing the obvious: Procurement professionals use states’ buying power to get the best prices for goods and services, and a strong central procurement authority is vital to this endeavor. In using Virginia as an example, the paper notes that the state’s central procurement organization generates $40 million annually in price-based savings on long-term contracts.
Moreover, adoption of web-based technologies have led to the implementation of broad e-procurement operations, which also increase savings. Since 2001, the paper notes that Virginia has generated savings of $380 million from reduced prices for goods and services, and $105 million through lower administrative costs, through e-procurement. The state’s recent introduction of mobile apps makes its procurement process even more accessible to suppliers, as well as more efficient.
Many businesses rely on state contracts for revenue and to create or sustain jobs. An Economic Policy Institute study cited by the NASPO paper finds that the economic multiplier of state and local government spending, in Virginia and elsewhere, is relatively large, at 1.24. In other words, for every dollar cut in government spending, another $0.24 is lost in purchasing power throughout the economy. And for every public-sector job cut or commensurate reduction in state spending, including canceled contracts, 0.67 private-sector jobs are lost.
Clearly, the tendency to mandate across-the-board cuts for state agencies doesn’t mean that savings will be inevitable in every case. And efforts to regulate procurement operations or influence how goods and services are bought can have unexpected and costly consequences. I’ll explore these issues.