It is widely believed that the economic crisis that America now confronts is the worst since the Great Depression. Businesses, politicians, central banks and families all are working feverishly to devise plans to weather the storm that no one expects will pass anytime soon. This month, we interviewed procurement directors from five states to learn how this environment is affecting procurement operations in their states, how they are ensuring operational continuity in the face of severe budget cuts and what silver lining, if any, can be found amid the dark economic clouds.

Reading the state-of-the-state speeches or budget addresses from the nation's governors is enough to sober even the most wide-eyed optimist. Nearly universally, states face staggering budget deficits that threaten government's ability to maintain its critical infrastructure, protect its citizens, care for the needy and educate its children. Just as this article was going to press, President Obama signed a $787 billion stimulus package into law. While the package may mitigate some budgetary challenges, for states the picture is bleak from coast to coast. Forty-three states are running budget deficits. California's $42 billion deficit has been well-publicized, but smaller states are equally impacted. Arizona and Nevada's deficits are roughly 30 percent of their entire budgets.

Vikings helping Packers

Against this backdrop, states are taking actions today that few would have thought possible even six months ago. Government employment, once perceived as a lifetime guarantee, is no longer sacred. As of February, 11 states had announced layoffs totaling more than 7,000 positions to deal with budget deficits in the current fiscal year. As governors and legislators negotiate budgets to deal with even more crippling fiscal year 2010 deficits, those numbers will only rise. Twenty states have implemented hiring freezes, and nine have dipped into rainy-day funds. Education funding has been cut for the first time in years, with 18 states cutting higher education and 14 cutting K-12 budgets. Most states have asked or required their agencies to make significant cuts, either through an across-the-board cut or more targeted cuts.

A number of governors have mandated purchasing moratoriums. Brad Douglas, commissioner of the Georgia Department of Administrative Services, reports that Gov. Sonny Perdue has put a hold on the purchase of vehicles, equipment and supplies, and travel and conference attendance has been curtailed except for meetings deemed vital to the state's business.

States have become increasingly creative in dealing with their budget deficits. Among the more innovative concepts was an announcement by the governors of Minnesota and Wisconsin to find opportunities to consolidate and share services between the two states. That the announcement was made by Minnesota's Republican Gov. Tim Pawlenty and Wisconsin's Democratic Gov. Jim Doyle makes the initiative even more remarkable.

Minnesota's Kent Allin, the state's chief procurement officer, is optimistic that the initiative will bear fruit.

“The impact of the two governors' new directive has been to proactively review existing and pending contracts within the two states to identify additional short- and longer-term options for greater collaboration,” Allin said. “We are finding that, as neighboring states, our proximity may create some opportunities, particularly for services and for those commodities with unique shipment and distribution challenges.”

Allin noted that new joint contracts are under discussion in areas including vehicle maintenance, software, salt and law enforcement vehicles. The states also may pursue sharing existing contracts established by one of the two states in areas such as software licenses, courier services, tires, desktop computers, institutional food, copiers and purchasing cards.

Both governors have directed their cabinet secretaries to report back to them with cost-saving ideas. Highlighting the need to drive savings in the very short-term, Pawlenty and Doyle have asked for reports back by Feb. 27. The country will be watching to see how successful these two states are in finding efficiencies across borders. As Pawlenty said, “We're not proposing to merge the Vikings and Packers, but we are going to seek out every area where we can save money and improve services by working together across state lines. This is an historic agreement between our two states that can serve as a model for the rest of the country.”

Added leverage

There is no question that the financial crisis has caused enormous pain for the American people and threatens to cause additional hardship for the foreseeable future. But procurement professionals, to a person, expressed much hope and optimism about what the crisis means to the procurement profession in the public sector. Every procurement director I spoke to told me that the crisis helps to create an environment that is conducive to good procurement practices.

A number of states have begun renegotiating existing contracts as a way to drive immediate savings. With spending by the private sector drying up, government contracts have become all the more important and attractive for suppliers. Procurement directors have recognized that this fact tilts the balance in the government's direction, giving them more leverage in negotiations.

Alice Small, acting director of the New Jersey Division of Purchase and Property, explained that the state has launched an aggressive negotiation strategy with its incumbent suppliers, negotiating every renewal.

“I say to my staff now, ‘You have more leverage than you know,’” Small said.

Florida's Charles Covington, director of state purchasing, echoed Small's belief that the current environment makes renegotiation a successful strategy.

“Renegotiating contracts has been a lot more successful now and wouldn't have been in other budget times,” Covington said. “Any opening in our contract, we are jumping on it, trying to get better deals, better service and better cost avoidance. The suppliers' business has fallen off so badly, they want to increase market share in government to compensate for lost business elsewhere. This gives us more leverage.”

Covington warned that renegotiating an existing contract is not as simple as demanding a price reduction.

“At renewal time, we are telling our suppliers that we are considering rebidding rather than renewing. This is a real possibility, not just an idle threat,” Covington said. “However, to be successful, it requires us to get much more knowledgeable about the market and to fully understand the risks involved for both the state and the supplier.”

Rob Wynkoop, deputy commissioner of the Indiana Department of Administration (IDOA), encouraged procurement professionals to view renegotiations from the supplier's perspective as well as the government's side.

“It has to be seen as a win-win rather than just the state demanding lower prices,” Wynkoop explained. “Can we extend a contract for a longer period in return for savings now for the taxpayers? Can we ask the suppliers to help us find cost savings in our existing contracts?”

As an example, Wynkoop pointed to his office supplies contract.

“We have been working to have our agencies buy the supplier's branded product rather than the name-brand product. They are comparable quality and a lot less costly.”