Public and Private Sector Purchasing: One Purchaser’s Perspective
When purchasing professionals from the public and private sectors get together they often begin to debate which one has the most difficult job. The private-sector professional argues that he or she is in a constant state of change and uncertainty. The pressure to take risk is incredible, engineering clients are out of control, and purchasing is constantly under pressure to hasten the company’s interest in being first to the market with new technology. Combine that to constantly stay abreast newest and best purchasing techniques, and the private-sector purchaser is in a constant state anxiety—feelings of being over worked, under paid, and far too under appreciated.
Contrast that with the public purchaser who laments that antiquated federal, state, and local laws are becoming more and more difficult to deal with, given the best-practices techniques evolving today’s purchasing world. The public purchaser is feeling hated because his or her assignment is often that of “process cop.” They are tired of dealing with brain-dead politicians and outof-control engineering clients. Risk? On the public side, risk too often looks like an ethical (if not legal) violation that almost never includes an opportunity for reward.
For public purchasers, all these factors can combine to cause anxiety and frustration, compounded by the fact that they are over worked, under paid, and far too under appreciated.
Now rather than getting caught up with whose job is hardest, let’s take a look at some of the factors that make the two assignments different.
What are the reasons the respective organizations (public and private) exist? Private-sector businesses exist to make money. Profit, therefore, is the motive for the existence of any company. This factor is fundamental to every decision made, every protocol created, every risk taken, and the objective for the employment of every individual in each company. Those personnel who understand and consistently perform in a manner that supports this motive are viewed favorably.
The purpose of a public agency, such as city government, school district, or public works agency, is public service. This is not about maximizing profit, it’s about delivering desired services to all constituents of the agency. The objective of a civil servant (public employee), in addition to delivering the desired service, is to maintain the public trust. Unless this trust is maintained, the public will find a way to get so involved as to compromise the employee’s ability to deliver the service.
Public-and private-sector entities all have something called a board of directors (BOD). Some public entities have different names for their respective boards ranging from city council to school board, but the purpose is the same. These management councils are created to charter the course for the entity that they represent.
Members of the board of directors for private companies are stockholders, often very large stockholders. These people make decisions that are focused on the company’s motive— profit. From time to time they’ll try to make consumers believe that certain decisions they make are to support the common good by, for example, creating an environmentally correct place for migrating geese to rest. The bottom line in these decisions, though, is just that—the bottom line. The board believes that the better the general consumer feels about their company, the more the consumer will be willing to purchase from the company, which adds to profit.
Members of the board of directors for public entities are elected officials. They are not necessarily business people who know how to efficiently manage a business. They are often helped into office by special interest groups and/or have personal agendas that may or may not support day-to-day operating efficiencies. Their motive, when they vote on issues that affect the agency, is often not very clear and may be very different for each voting member.
A private-sector board member will vote for or against an issue solely because he or she thinks the strategy will contribute to profit. Reasonable and rational people sometimes have opinions that are different from one another even though they both firmly believe their view is more apt to lead them to their common goal.
Public-sector board members often vote for or against issues because of unrelated motives. For example, four of six school board members feel the community needs a new school. When the issue comes to a vote, and it surprisingly loses by a vote of four to two, people expect it to win by that same margin. It turns out that one of the board members in favor of the idea voted against it because the planned site for the new campus was not in his or her ward, and the other member voted no because the planned site will require the elimination of too many trees. Just when everyone thought the common motive was to create a better overall learning opportunity for the community’s children, unrelated political motives clouded the issue.
So then, who are the clients of the respective BOD groups? In the private sector, it’s other stockholders who have the same ultimate motive of the individual board members—profit. The constituent group for every board member is the same. Each member is motivated by his or her best judgement as to what is in the best interest of themselves and all other stockholders. Most decisions, ultimately, can be quantifiably calculated.
In the public sector, the individual board member’s constituents are made up of both individual voters and special interest groups (who usually do the election funding). Each board member in the public sector has a different group of constituents, which only adds complexity to complexity. The motive for each board member in the public sector varies depending on what each board member perceives to be in the best interest of constituents. The rationale is often politically motivated, not motivated necessarily by good business judgement. It’s very difficult for a public purchaser to factor these considerations into contract recommendations that may be made to the board. Such thinking doesn’t necessarily compute mathematically.
There are certain basic legal constraints that affect every private-or public-sector entity that engages the marketplace for buying and selling purposes. Beyond that, day-to-day routines in private-sector companies are designed (or not) by each individual company. Because companies have jurisdiction over their own decisions in this regard, they are able to change their policies and procedures easily, if necessary, to respond to changes in the marketplace and/or the discovery of improved best practices.
Many day-to-day practices in public agencies originate in local, state, and/or federal law or ordinance. Local policies and procedures are created to ensure those laws are not violated. The laws in which these procedures find their origin were created when practices in which agencies were found to engage compromised the public’s trust. As a result, when new concepts enter into the realm of best business practices, public agencies find themselves unable to engage some of these ideas because they violate the concepts of the law. Unfortunately, some of those laws, from a purchasing perspective, represented the best purchasing thinking of the 1940s, 50s, and 60s. As many will remember, the war cry then was, “Three bids, low quote, and let’s go out to lunch.”
In short, the private-sector procedures are time sensitive and responsive. There is an incentive to be first to market—profit. Public-sector procedures are bureaucratic and focus on the protection of public trust. Public entities are increasingly aware of cost elements and how they impact rates or taxes. Managers in this arena are trying to close the gap between themselves and what many would believe to be opportunities for efficiency improvements easily engaged by their private-sector contemporaries. Public trust, however, is not something a public agency is willing to compromise to meet a cost-reduction objective. Public officials will elect to engage change at a slower pace to ensure this cornerstone of consciences is not compromised.
During the acquisition of materials and supplies, the public sector simply makes decisions based on selection of the lowest responsible bid. To do this, the public sector encourages, even advertises, to stimulate the interest of as many potential suppliers as possible. In all honesty, the secondary motive here is political. Part of the constituency of the board members is the business community that resides in their respective wards and employs the people who vote for them. The politician’s interest is to ensure that every company gets an equal opportunity to engage in the business offered by the public agency he or she represents.
The private sector is much more sophisticated in its decision-making process. There are many more factors to consider than price when deciding with which vendor to do business. What about the long-term view that would consider the full cost of owner-ship? How might a partnering relationship with one company as compared to another impact the overall operational costs of running the business? Why encourage the costs associated with competition when doing more business with fewer suppliers is administratively cost efficient if nothing else? The list of competitive-based selection criteria goes on and on. The private sector will argue, “Why not consider these factors if they offer the potential for improved profitability over the long haul?”
The laws that govern public-sector purchasing respond to this position by saying, “The competitive marketplace will always ensure the lowest possible price is obtained, and that’s verifiable through repetitive, competitive initiatives.” Public-sector purchasers are not blind to the opportunities that private-sector strategies offer. Because of factors already discussed, a public purchaser’s ability to take advantage of these strategies is compromised, although not eliminated.
Public purchasers do need to seek changes to the laws that govern them before some of the newer purchasing best practices can be implemented. Some laws just do not reflect current purchasing profession best practices. Public purchasers, however, are able to take advantage of many of the current best practices within their current lowest-responsible bid purview. They just need to do more work in the area of specification development. To the degree that they can describe the intended business relationships, as well as product specifications, in their proposals, they in effect are able to take advantage of many best practice strategies while selecting the lowest responsible bidder.
The term “responsible” is key and should not be overlooked by an informed public purchaser. It is difficult to change law. It’s also difficult to plan specifications so that long-term relationships with fair price adjustments can be cultivated. Progress in these two arenas is necessary for our public professional peers to take advantage of new purchasing techniques in behalf of their ratepayers and taxpayers.
Because companies have jurisdiction over their own decisions, they are able to change their policies and procedures easily, if necessary, to respond to changes in the marketplace and/or the discovery of improved best practices.
Risk is an important factor that differentiates public-and private-sector purchasing. Stockholders encourage a degree of risk taking if there is a potential that a successful outcome will result in increased profits. The implication, of course, is that when risk is taken, the positive outcome for the stockholders is much more often positive than negative. When the reverse is true, the private sector is able to “remedy the problem” swiftly and efficiently, often to the dismay of the inefficient risk taker. A good record of risk taking, on the other hand, can be rewarded nicely, which reinforces and stimulates continuation of the behavior.
On the public side, risk is discouraged. The legal restrictions in this regard have already been discussed, but remember, a primary incentive to the public purchaser is to maintain the public trust. Risk taking sometimes has the appearance of impropriety. As all purchasers understand well, “an ethical act that has the appearance of unethical behavior is almost as damning as actual unethical behavior.” In the public sector the discussions about what actually happened or didn’t happen takes place in daily newspapers.
As all purchasers understand well, “an ethical act that has the appearance of unethical behavior is almost as damning as actual unethical behavior.”
In the private sector these discussions occur between two people in a private office. It should also be noted that in the public sector, “problems aren’t so easily remedied,” unless actual unethical behavior is proven. A seemingly conscientious person who is simply making too many poor choices, in the end, is still a civil servant who is protected by due-process laws. Salary structures are also often very inflexible, making it difficult to provide much reward for having a positive risk-taking track record. There is, therefore, not much positive or negative incentive for the public purchaser to engage in risk.
Private-sector decisions are often very difficult to make because the consequences of those decisions can be felt for a long time. Also, decisions include multiple personnel from various organizations who are involved in team decision making. Getting consensus is sometimes very time consuming. Once consensus is arrived at, however, the decision of the buyer (arrived at by team input and internally designed approval thresholds) is final.
In this regard, public-and private-sector purchasing, are very similar. Generally, public-sector approval thresholds are much lower than in the private sector, but this is not always true. The main difference is in the decision. In public purchasing, the decision is often just the beginning. Public-purchasing law includes public bid openings and decision protest procedures. Company representatives will be in attendance at the bid openings, and all the companies who are not the apparent low bidder review the bid/proposal of the apparent low bidder. The purpose here is to find some detail in the response of the apparent low bidder that will render that bidder non-responsive.
Almost every company who responds to a proposal engages in this post-award activity. The lower ranked, the more bids the company has to review and dispute. The apparent loser will write to the buyer to lodge a complaint. If turned down, the company will complain to senior management and ultimately the board of directors. Some suppliers will bring their complaint to the local media, the threat of which, often causes senior managers and board members to recommend the proposal just be set aside and a new competition initiated. Such tactics have been known to delay projects for months, even years.
Different by Nature
Neither sector should consider itself more or less professional or difficult than the other. They are different by nature, and each supports a segment of the economy as designed. One segment supports a capitalist, profit-oriented economy while the other supports values and services the general population agrees are for the common good, such as order (local, state, and federal governments), education (school districts), water, and public transportation. Certainly, one thing that all purchasers must deal with is out-of-control engineers. It just goes with the territory.
Editor’s Note: Paul R. Ghere has held management positions in both the public and private sectors of purchasing, contracting, and materials management for more than 30 years. He has assisted in the development of a procurement organization for a Fortune 100 company, benchmarked best procurement practices with multiple Fortune 100 companies, counselled briefly with U.S. negotiators during one phase of the GATT Trade/Treaty negotiations, and is now the Manager of Purchasing for East Bay Municipal Utility District, a large Northern California Water Utility. Mr. Ghere is a graduate of California Polytechnical State University at San Luis Obispo and has a Certificate in Purchasing Management from the University of California, Berkeley. He has been married to his wife, Sharon, for 35 years and they have four children and three grandchildren.