State Purchasers Leverage a Bad Economy to Get Good Prices

In 2008, as the economy was diving into recession, Charles Covington saw an opportunity to save the state of Florida some money. State government buys billions of dollars’ worth of desks, software, professional consulting and other goods and services each year. And Covington, the man in charge of all that purchasing, figured the bad economy might be leaving some of his suppliers hungry. So he set out to renegotiate as many existing contracts as he could, hoping to either drive Florida’s costs down or get more for its money.

The strategy worked. Backed by a state law that gave agencies a three-month window to open any contract for renegotiation, Florida saved $420 million by re-working its existing deals. Covington even renegotiated Florida’s contract with the company that runs the online marketplace that powers most of the state’s purchasing activity. Florida offered to extend that contract for two years. In return, Accenture agreed to a price cap that allowed the state to avoid at least $2.5 million of costs and provided a $3.2 million hardware and software upgrade for free, along with 4,000 person-hours of work.

The savings from Florida’s flurry of dealmaking came at a crucial time, because the recession has been as rough on the state’s budget as it has been on the state’s vendors. That’s true in almost every state, of course — states have been facing record deficits for the past two years. Still, not many states have been as aggressive as Florida has about taking advantage of the weak economy to cut better deals with suppliers. By spending less on mundane things like tires, road salt and computer monitors, they’re hoping to have more money left over to spend on things taxpayers care about, such as schools and police officers.

Beth Fleming, of the National Purchasing Institute, says states need to remember that they have a lot of leverage as buyers in a down economy. At a time when overall consumer spending has declined, states are still spending nearly $200 billion per year on goods and services. “Vendors who never thought about bidding with government agencies are bidding now,” Fleming says. “We are some of the only entities out there with money.”

One state that understands this is Minnesota. The state spends about $2.5 billion per year on goods and services, and even before the economy turned sour, Minnesota was overhauling its procurement practices with an eye to wringing out some cost savings. Since December 2005, the state estimates it has generated actual and projected cost savings of $246 million by taking a more proactive negotiation approach. “Not too many people pay enough attention to this kind of thing,” says Minnesota procurement chief Kent Allin. “But it is really important and it can indeed generate significant savings.”

The Minnesota model

Minnesota’s efforts were examined recently in an issue brief by the Pew Center on the States, the parent organization of Stateline . The state’s purchasing approach pulls together several different strategies. One of them was to centralize procurement operations in Allin’s office. While small purchases remain at the discretion of individual agencies, a centralized procurement strategy has given Minnesota the ability to standardize some aspects of contracting. And that’s helped to drive prices of goods down, while improving quality.

If Florida won savings by renegotiating its existing contracts, one of Minnesota’s key strategies is to be negotiating constantly before deals get signed in the first place. That’s a big change from the traditional practice of treating vendors’ bids as their final word. In Minnesota, Allin’s purchasers bring detailed spending data to the negotiating table and try to leverage that information into better prices.

For the statewide IT contract, for example, the price began at $5.6 million. Eventually, Minnesota got that down to  .7 million — a $4 million savings. Not all of that decrease came at the expense of the vendor, however. During negotiations, the state offered to absorb some costs and provide services that allowed the vendor to decrease its price.

Another example comes from the Minnesota Pollution Control Agency. When a supplier asked for a 10-percent rate increase, the agency challenged it by asking for documentation that justified the higher price. Thirty minutes later, the supplier called back retracting the request. The savings: $13,000. These kinds of negotiations are projected to ring up about $90 million worth of savings.

Centralizing purchasing also has given Minnesota the ability to pool the purchasing power of its state agencies and local governments to get better deals from suppliers. Sometimes, Minnesota even bands together with neighboring states. In 2009 alone, Allin’s office negotiated or managed some 1,400 master contracts. State and local agencies bought $850 million worth of goods and services from those contracts.

Another big change has to do with how much consideration the state gives to getting the lowest price, compared with other factors that go into the decision of what to buy. It used to be that agencies only weighted price as 5 to 10 percent of the overall criteria. In 2005, Allin’s office mandated that agencies weigh price as at least 30 percent of the decision. Minnesota also requires agencies to report on their efforts at negotiating better prices. The focus on price is estimated to have saved Minnesota almost million.

According to Pew, this strategy and others to reform procurement could save states between 5 and 10 percent on their total expenditures on goods and services. “There are two ways to negotiate,” says David Yarkin of Government Sourcing LLC, a consulting agency made up of former procurement officials. “One is to pound the table and say give me 10 percent off. The other is to figure out how a supplier can reduce costs and pass that along to you.”