By Steve Kelman

Blog archive

The Lectern: Leverage buying power, save money

A few days ago, seven of my master's students took me out to lunch, with the meal (for them and me) paid for through a Kennedy School-financed program called “Take A Faculty Member To Lunch,” designed to encourage students to get to know their professors better.

It's a nice program -- and the lunch was a huge amount of fun (The personal high point for me was when I said that something or someone was "cool" -- I can't remember which -- and one of the students said, "We think you're cool").

But I write about it for another reason. This year, probably prompted by Harvard's economic crisis and the need to save money, the Kennedy School has negotiated deals with some of the local restaurants in the Harvard Square area, whereby they provide discounts for these lunches in exchange for the restaurants being the exclusive ones to which students can invite their professors.

This homey example should serve as a reminder to government agencies that, while it's always a good time for organizations to leverage their buying power to achieve savings, times such as now -- when government faces huge deficits and vendors are especially eager for business -- are especially propitious for redoubling such efforts.

It is Purchasing 101 that volume purchasing commitments produce both price discounts and better service from vendors (because one is a more-important customer). The government has made progress in negotiating strategic sourcing agreements with vendors over the years, including combining strategic sourcing agreements with a limited number of vendors along with reverse auctions among those vendors for individual orders (such as the DHS EAGLE contract). But a lot remains to be done, and now is the time to do it.

Strategic sourcing has often been opposed by small business. Some of this is just anti-taxpayer special pleading -- asking that government pay retail prices when it is a wholesale buyer. Sometimes, because of low overheads, small businesses actually can be less expensive, even for products, something that government can market test through reverse auctions for lower quantities. For services, government can mix strategic sourcing with opportunities for small businesses by negotiating strategic sourcing agreements that provide labor hour rate discounts (for contracts where such pricing is appropriate) from small businesses. Because a certain quantity of hours represents a much bigger increment of business for a small firm than a large one, the government should often be able to get more favorable discounts from small than from large businesses.

Posted by Steve Kelman on Oct 20, 2009 at 12:08 PM


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