Kelman: Beating retail prices

People might be surprised to learn that the prices government pays for commercial items are less

Thanks to the fable — I use this word advisedly — of the $600 hammer and the general perception of government incompetence, most Americans probably believe the government pays some multiple of retail prices for the common commercial items it buys. When I was in government and spoke to nonfederal audiences, I often asked the audience members how much they thought the government paid for a Federal Express delivery that retailed at $25. People typically thought the government paid between $50 and $500.

Contracting folks know that this impression is completely inaccurate in most cases. For the FedEx package, the correct answer at the time was $3.75 — less than half the lowest price negotiated by any Fortune 500 company, according to a McKinsey and Co. study.

Now more than ever, we need to get this message out. And I have an idea for doing this with the side benefit of adding some sparkle to the jobs of the — mostly young — people who are buying everyday commodities for their agencies.

I suggest that buying offices track the prices they pay for everyday commercial items, such as laptop PCs or office supplies, that are also available on the Web or in stores. They could find the retail prices of the same items, perhaps by doing a name and model number search on the Internet. If there are too many items, take a random sample including every fifth, tenth or even fiftieth, item.

I suggest that offices track two performance metrics: the percentage of items for which the price the government pays is below Internet or store retail and the average percentage discount the government gets — probably best done by weighting by dollar value of the buy. I suggest that offices set a performance target of paying less than retail 95 percent of the time — or is that too conservative? I also suggest that offices or teams enter into friendly competitions to see who can get the best numbers. Such contests would, I think, be fun for the people who buy those commodities, not the most glamorous contracting work. Perhaps offices or teams could win prizes — maybe a one-minute shopping spree at a department store.

As with most performance metrics, there’s a double idea. First, we need to get a simple-to-understand message out to Congress and the media about what the procurement community is accomplishing in the current awful procurement environment. The message should be sufficiently counterintuitive, given the $600-hammer prejudice, that it might even attract some attention. Second, setting performance goals motivates improved performance. My guess is that the government already pays less than retail in the vast majority of cases, except when people foolishly buy items using a government purchase card at a retail store with no negotiated discount. But I’m also sure we can do better, and tracking a performance metric will encourage improvement.

I’d love to hear the results from any office that does this so I can help publicize the success. The Office of Federal Procurement Policy might also be interested in the results. Indeed, perhaps OFPP Administrator Paul Denett or some agency senior procurement executives might promote this initiative.

Kelman (steve_kelman@harvard.edu) is professor of public management at Harvard University’s Kennedy School of Government and former administrator of the Office of Federal Procurement Policy.

About the Author

Kelman is professor of public management at Harvard University’s Kennedy School of Government and former administrator of the Office of Federal Procurement Policy.

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