The Rendell Strategic Sourcing Initiative: An Analysis

Executive Summary

Gov. Ed Rendell’s administration has undertaken an effort to reduce the amount of money Pennsylvania taxpayers spend on goods and services used to operate the Commonwealth’s government. The governor argues that state government can consolidate its purchasing power as one large entity to negotiate lower prices, estimating that the Commonwealth can reduce such costs by $100 million in 2004 alone by using a “strategic sourcing” process for 20 commodities purchased by the state. These contracts comprise roughly $1 billion of the state’s $3.1 billion in total procurement spending.

The examples provided to date by the Rendell Administration appear to indicate that strategic sourcing can generate reductions in the cost of purchasing goods and services for state government. If the new procurement system is implemented and managed as asserted by DGS, the state should realize such reductions—but confirmation will have to be borne out through experience and rigorous internal and independent evaluation. Indeed, even “the Rendell Administration has acknowledged its projected level of savings from contract bundling is subjective and has a lot of gray areas.”

In addition, a number of questions have been raised—primarily by small business owners and legislators—as to whether or not strategic sourcing might have unintended consequences for Pennsylvania that outweigh any cost reductions it produces. Specifically, they believe that many small businesses could fail or, at the very least, be forced to cut jobs if they lose the opportunity to contract with the state. They also question whether or not consolidating state contracts in the hands of fewer and fewer suppliers will create less competition for those contracts, causing taxpayer costs to rise over time. Finally, they argue that the single award process will expose taxpayers to the risk of higher costs if a service interruption occurs that compromises the supplier’s ability to perform the contracted function.

Officials in the state’s Department of General Services have stated repeatedly that all qualified companies are welcome to bid through the strategic sourcing process, and that not all contracts will be sourced. Indeed, the Commonwealth has the fiduciary responsibility to establish demanding standards in order to ensure the lowest cost to tax-payers and the highest possible service quality—and many of the requirements set forth should not be problematic for bidders large enough to qualify.

Although large companies in the private sector have relied on such procurement procedures for years, the practice is a new one for state government. The federal government, however, has been using strategic sourcing (or “contract bundling”) for more than a decade, and that experience provides some insight as to what Pennsylvania might reasonably expect. In response to many of the same concerns voiced by Pennsylvania small businesses and legislators, a number of studies have been conducted on the impact of strategic sourcing on small businesses. Though most of the findings and recommendations generated by those studies are oriented toward concerns about small business access to government contracts, not a lack of savings or service quality for taxpayers, data exist to suggest that taxpayers failed to realize the promised cost reductions in at least one federal government agency where contract bundling was employed.

The problems encountered in a national-level supply contract by the United States Postal Service illustrate that if such contracts are not strictly enforced by both state government and the provider, little if any cost reduction can reasonably be expected to materialize, and small business participation of any type cannot be assured. If Pennsylvania is to avoid this outcome, it will be essential that requests for proposals (RFPs) be issued and reverse auctions conducted on a regular basis, perhaps every 12 to 24 months. Strict accountability and discipline measures must be enforced in order to ensure that poor performance by either the contractor or the state can be quickly rectified. The Commonwealth also has an obligation to ensure that price reductions resulting from strategic sourcing do not come at the expense of increased costs elsewhere, such as shipping, delivery or deployment delays.

Finally, strategic sourcing must also be considered in the context of the state’s overall fiscal policy goals. Any cost reductions achieved will not necessarily translate into lower levels of state taxes and spending. In fact, if the 2004-05 General Fund Budget is enacted as proposed by Gov. Rendell, the net result will be that even if all of the savings projected from the strategic sourcing initiative materialize, spending increases in other budget areas all but guarantee that taxpayers will pay more—not less—for the cost of state government. In order for strategic sourcing to deliver on the promise of lowering the cost of government to Pennsylvanians, the Rendell Administration and the General Assembly need to inject competition into the provision of goods and services provided by state government, not just the ones it purchases. Perhaps then Gov. Rendell would be closer to fulfilling his inaugural commitment to “find a way to make government live within its means.”

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Grant R. Gulibon is senior policy analyst and Matthew J. Brouillette is president at The Commonwealth Foundation, a free-market public policy research and educational institute based in Harrisburg, PA.