Managing Director & Senior Partner
US public spending is hot again, and that means that governments will be soliciting bids for more projects. But because funding is tighter than ever, public agencies will be under extra pressure to work efficiently. Fortunately, they have an immediate and practical way to save money: they can do a better job of presenting themselves to suppliers. Agencies can save on any kind of procurement, not just for infrastructure.
Over the decades, many well-intentioned public agencies have developed processes that have had the unintended consequence of preventing suppliers from bidding and working with them effectively. Although some of those processes are required, many of them are well within the agencies’ discretion to change. These are the processes that are tied to policies and behavioral norms rather than laws and regulations. To free suppliers to reduce costs, officials need to know which changes will promote the greatest payoff and then focus their efforts there.
BCG’s research into procurement practices has revealed ways that agencies can lower costs while adhering to the law and serving the public good. And once an agency has established a strong foundation with its suppliers, it can go on to adopt a variety of other best practices.
It’s an open secret that many contractors and other suppliers pad their estimates when they bid for work in the public sector. They expect public projects to involve more time and expense than commercial work in the private sector, so they build in a cushion to cover those outlays.
Some public-sector officials acknowledge the existence of this “public-sector premium,” while others believe that competitive bidding keeps it low. Both groups believe that, in any case, public agencies are constrained by law and regulation from doing much to improve their image as customers.
In our experience, however, agency officials have more discretion than they realize. It’s helpful to break down procurement practices by their source: laws, regulations, policies, or habits. (See Exhibit 1.)
Of course, it’s not easy to change any procurement practice. Because such changes require an investment of time and leadership, it’s essential to know which practices add the most to the public-sector premium.
To determine where agencies should focus their energies, we carried out a two-part study. First, we drew on client experience and research to generate a list of 12 practices that are associated with public agencies and that suppliers perceive as raising costs. The list formed the outline of a questionnaire that we sent to hundreds of suppliers throughout the US. The 158 respondents comprised businesses as varied and different as construction and materials and IT and professional services. This sample included small, midsize, and large companies located around the country.
The survey results provided a solid foundation, and follow-up telephone interviews with a dozen suppliers helped clarify ambiguities and add richness to the survey findings. Some of the 12 practices, for example, were essentially different sides of the same coin. From this work, we distilled three major opportunities and three secondary areas of improvement. (See Exhibit 2.)
We assessed two aspects of the 12 practices: impact and frequency. In the judgment of the suppliers, how much does each practice contribute to the public-sector premium? And, how common is each practice in the suppliers’ public-sector work?
Most important are the three practices deemed both costly and common. Majorities of suppliers said that they frequently encounter them in their agency work and that they prompt increases of at least 5% in their bids.
Vague RFPs. In the survey we referred to this as a long RFP process, and it presented the biggest overall opportunity. But the interviews indicated that process length per se is not the issue. Suppliers rarely add staff until a contract is signed, so they don’t suffer from simple delay. The real problem is dealing with vagueness in RFPs. Bidders are forced to guess at deliverable specifics and pester the agency with questions. And because many agencies aren’t sure how best to describe their needs, they push the challenge to the bidders, giving them vague language and plenty of time to come up with a solution. In some cases, the RFP process takes so long that requirements change midstream.
This lack of clarity raises costs directly and indirectly. Suppliers that stay with the process spend time and creativity struggling to come up with a workable proposal, padding their cost estimates in case the agency goes for a broader scope than the RFP suggests. Alternatively, they propose more than they think the agency really wants. The end result is higher bids.
One supplier told us, “I’ve had many customers who are pennywise and pound foolish. They try to save on defining the scope and think they can transfer the risks to the contractor. Suppliers are going to price in the vagueness.”
Also worrisome are the indirect effects on competition. Some suppliers—many with the capabilities to do the work—make the wrong guesses about the deliverables and find their bids eliminated early on. Others, frustrated by and wary of the RFP vagueness, don’t bother even to bid. The process is weakened by the low number of final bidders, undermining competitive tension and further encouraging an unnecessarily expensive winning bid.
A Complex and Burdensome RFP Process. Although the RFPs might be vague, the bidding process can be highly specific and burdensome. Suppliers face mandatory prebid meetings, multiple forms to complete, and other hurdles rarely seen in the private sector. Blanket rules can force bidders—even for small projects—to invest a great deal of time. And rules that require the involvement of multiple agency constituencies can leave suppliers hanging. One supplier remembers a large transportation agency that didn’t have a single person designated as the decision maker. He said, “I would reach out to different people and get conflicting information.”
Mistakes along the way, no matter how small, can knock a bidder out of the process. In describing a metropolitan infrastructure agency, a supplier said, “Bid day is ridiculous. We have to send a guy to the authority early, so he doesn’t get stuck in traffic. And we keep three phone lines open to make sure all goes through. Otherwise we could be disqualified.”
Rigid RFPs and Contracts. While the deliverable is frequently described in vague terms, many public-sector RFPs include detailed specifications on exactly how the supplier is to conduct the work. And unlike the private sector, government agencies offer little flexibility. They discourage suppliers from offering alternatives that could save money and time—in both the initial bid and in carrying out the work. “With the private sector,” another supplier told us, “we do value engineering and scheduling. Our public-sector lump-sum jobs don’t do any of this.”
For all the required meetings for reviewing processes, it’s rare to hold discussions to promote collaboration. Yet another supplier said, “It’s going to cost me more to not work through problems, and that’s passed along to the customer.”
Agencies also fall short in calibrating requirements to the task at hand. Suppliers might, for example, have to carry expensive insurance for all phases of a contract even though only a few involve real risk.
The survey pointed to other troublesome areas, but suppliers found these practices either less costly or less common in the public sector.
Poor Contract Management. Once suppliers embark on a project, time does become money. They hire personnel and commit the necessary equipment. Inevitably, as the work gets going, either suppliers have questions about the intended results or unexpected events raise difficulties. If the client can’t or won’t respond with prompt decisions or offer quick feedback, progress can cease or slow down. Another supplier explained that “poor response time is a killer. If we know we have a client who responds slowly, we won’t continue to bid.”
In some cases, suppliers have to deal with excessive rules of communication: meeting, paperwork, and reporting requirements that are out of proportion to the size of the project. A real estate investment trust contracted with a major transit authority to deliver an information kiosk. Initially, the contractor expected to need only half an FTE as a project manager. Once it understood the requirements, however, it devoted 1.5 FTEs, and passed on the additional $100,000—10% of the total bid of $1 million—to the agency.
Such failings add substantial costs to projects. Still, the survey suggests that only half of public agencies manifest such shortcomings consistently. The financial impact can be substantial, but its prevalence varies a great deal.
Regulatory Requirements. Public agencies often require suppliers to buy only from US-based businesses or to meet targets for contracts with small, disadvantaged businesses (SDBs). While serving important public-policy objectives, these rules can add substantial costs. Yet agencies and suppliers can sometimes reduce these costs with careful planning. With regard to SDB contracting requirements, for example, suppliers can focus their spending on categories that are fragmented among a number of small businesses, reducing the cost premium. And agencies can give suppliers with multiple contracts the flexibility to meet targets across contracts rather than requiring targets to be met in each contract.
Slow Payment Processes. These can result in two kinds of additional cost: suppliers pad their bills as a kind of interest charge, or they decline to bid at all, reducing the competition. One supplier said, “We’re inclined to give a better price if we know we’ll receive quick payment.” Payment delays are common at public agencies, but they end up being a good deal less costly than the other problems.
The remaining issues that the survey highlighted turned out to be only minor concerns that agencies can safely disregard. Some suppliers suspected that agencies prefer bidders that have already been through the supplier registration process. But the full survey, backed by the interviews, downplayed this problem. This preference is only slightly more pronounced in the public than in the private sector and, in any case, has little impact on overall costs.
Likewise, auditing is not a significant concern. It seems that public agencies audit suppliers no more often than their private-sector counterparts. Furthermore, the process is not especially costly. Nor is paper-based processing any more common with the government. And at least at this point in time, it adds little if any cost.
We see three related areas that public agencies can tackle to minimize the public-sector premium. Some agencies may already be well along in this process. (See “Getting the Payoff Through Collaboration.”) Agencies that move forward in the following three ways can help suppliers cut their costs and reduce uncertainty—and over time, encourage more suppliers to bid for public-sector work.
Working to minimize the public-sector premium can mean major savings, as one large government agency and BCG client found. The agency already had good procurement practices. In collaboration with its suppliers, however, it delved deep into three large contracts and identified multiple new opportunities.
In a $20 million network equipment contract, the agency discovered language calling for maintenance services that far exceeded what the supplier offered its other customers. The agency therefore requested a new proposal from the supplier. Freed to focus on what was necessary to maintain acceptable service levels, the supplier identified $2 million in potential savings—one-third the total spent on maintenance.
In another example, regulatory requirements drove increased costs in a $10 million contract for software maintenance and development. As a blanket policy, the contracting agency prohibited offshore outsourcing. A close look at the various aspects of the contract revealed that some parts of the software were not sensitive and could, therefore, be safely developed abroad. The supplier won approval for partial offshoring—a move that reduced the total cost of the contract by 6% even though the sourcing affected only a small portion of the overall expenditure.
For a $5 million facilities management contract, the problems weren’t so clear, but the agency believed that there were ways to cut costs. It recognized that it could further improve its collaboration with suppliers to encourage cost cutting over time. So the agency decided to conduct work-shops with the facilities manager to brainstorm alternative practices. Those efforts are still in process, but so far they’ve identified ways to cut additional costs significantly.
Understanding the Supplier’s Point of View. Many agencies adopt procurement policies that are legitimate responses to public concerns, but they neglect to adjust them to real-world supplier dynamics. Or they apply certain restrictions to all contracts out of fear of violating a law, without regard to the burdens the restrictions impose. It’s essential to keep supplier perspectives in mind when translating public concerns into concrete practices and to balance the benefits with the costs. Some policies, for example, might be safely limited to projects of a certain size or type.
Most suppliers are well aware of these problematic policies, as they generate substantial costs that are passed through in their pricing. Agencies can bring these concerns to the surface by asking their suppliers how their requirements differ from comparable private-sector dictates. This can be achieved through a broad survey or by setting up targeted calls or workshops with the largest suppliers in key categories.
Going Beyond Competitive Bidding. Many agencies take pride in their competitive-bidding process, assuming that it ensures a good final price. But the competition is little help if all suppliers apply the public-sector premium, or if many suppliers don’t bother to bid because they see the agency as a difficult customer. By their nature, these issues are rarely visible to agencies and appear only with a hard look at the RFP and contract management processes.
To boost the bidding process, agencies should design RFPs not only to encourage competitive bids but also to maximize competition. They should assess their practices relative to the three biggest issues described above: vague RFPs, burdensome RFP procedures, and rigid procurement practices generally. They can ask suppliers, “If we changed practice X, would that reduce your costs and thus your bid?”
Once an agency has identified its costly practices, it can work to change them. The first step is to clarify how much discretion the agency possesses: it’s usually more than its decision makers think, as explained above. Still, actually making changes can require investment.
In such cases, government agencies can take a cue from the private sector. For major building or infrastructure projects, companies typically hire an architecture or engineering firm to advise them through the bidding and construction processes. Public agencies rarely do this, and the lack of counsel can hamper their developing effective and value-creating RFPs and contracts. If an agency had access to such expertise, it could more confidently set out RFPs with specificity. It could also better understand which procedures and rigidities in the procurement process it could safely drop. The resulting savings would more than pay for the cost of retaining the outside consultants.
Investing in Collaboration. Several interviewees emphasized that the problem is not so much the policies themselves, as an agency’s unwillingness or inability to work with them to find less costly but more effective approaches. Agencies can usually gain more value from lowering suppliers’ costs than from pushing suppliers to cut their margins. They can also explore adjustments in requirements and service levels.
Many agencies resist collaboration because they lack the personnel to handle it, but highly qualified staff members are likely to pay for themselves over time in reduced contract fees. Collaboration starts with clear lines of communication, including a single point of contact, allowing suppliers to initiate problem-solving discussions and channel feedback. From that point, agencies can establish a process through which bidders suggest lower-cost alternatives to the RFP terms.
To promote collaboration on existing contracts, agencies should clarify who are their internal decision makers and establish responsive communication channels. For the largest suppliers and spending categories, agencies can hold workshops through which their procurement team and their suppliers work together to identify potential savings. Successful workshops are those that brainstorm a variety of ideas, review them, and cross most of them off for feasibility or quality reasons. Many public agencies shy away from this proactive approach lest their quest for lower costs encourage lower quality. But those agencies that have developed this collaboration have achieved lower costs without affecting quality.
Specifically for construction projects, agencies can supercharge their collaboration by following the lead of the private sector and embracing building information modeling (BIM). BIM is a software-intensive process with 3D blueprints and sophisticated analytics that can be shared with all the relevant parties in a project. It has the potential to greatly reduce costs while maintaining or increasing quality.
Many US federal and state agencies already use BIM and require contractors to use it at a basic level. But they tend not to take advantage of its capabilities for showing how different designs affect costs, performance, and other results. When agencies and suppliers work from the same online blueprints, they can easily suggest and implement significant improvements.
These three areas provide powerful ways to turn around an agency’s procurement approach. To get the entire process going, an agency can follow these general steps. First, go over the entire procurement budget to identify the highest-value categories and suppliers. Those are the priority areas. Second, for current contracts, engage priority suppliers in collaborative cost reduction exercises. Third, for contracts under bid, carefully examine the RFPs and seek feedback from potential bidders throughout the process. Finally, establish an ongoing engagement process—including, for example, monthly check-ins and quarterly business reviews—that ensures regular collaboration with all suppliers.
On the basis of our experience, we are confident that the procurement practices we recommend can reduce the outside spending of most public-sector agencies by at least 5%. Still, these are just the first steps to becoming a fully effective procurement operation. (See “Taking Procurement to the Next Level.”)
These are challenging days for executives at public agencies in the US and elsewhere. Voters want improvements to infrastructure and key services, but they are leery of changes that might mean higher taxes.
To solve that conundrum, we advise public-agency executives to shift away from a single-minded focus on compliance. We know of one major agency whose culture had become so cautious that managers were always finding excuses to resist good ideas—until the resource-strapped agency suffered embarrassing service failures. Fortunately, we’ve found a number of agencies that have succeeded in both meeting their legal and regulatory responsibilities and cutting their spending substantially. They’ve learned to balance compliance with cost by distinguishing between strict requirements and more general expectations that they can meet in new ways by collaborating with suppliers. They’ve also learned to consider all options and debate choices, rather than simply default to risk mitigation. In short, they’ve introduced a more cost-focused culture.
For agencies that are ready to build on what we’ve discussed here, we recommend a larger set of sourcing practices that have proved effective elsewhere. Many private-sector procurement departments manage according to major spending categories rather than by specific contracts. This focus prods managers to think strategically and creatively about these categories. Instead of relying on competitive bidding to drive savings, they work with tools such as bundling, demand management, and standardization. They are also driven to develop a fact base for these categories, including measures such as “should cost” modeling. These steps help shift a procurement team’s mindset from a reactive to a proactive approach and make them better negotiators.
The US public is currently paying an enormous price for inefficiencies in federal, state, and local procurement practices. A several percentage point reduction in discretionary federal spending alone—which is possible by taking the steps described here—would correspond to enormous annual savings.
It’s always hard for government agencies to change their practices—even those that are entirely at their discretion. But tight budgets are now forcing publicagencies to take a hard look at all their spending, including procurement. The framework presented here allows them to target procurement reforms in the areas with the greatest opportunity, minimizing the investment in change management.
Public agencies have a special mission: to serve the common good apart from commercial considerations. By rethinking their approach to suppliers, officials can achieve savings without diminishing vital services or adding to their organization’s workload.