Applied Analytics - Public Sector (NIGP)
The Benefits of Better Spend Visibility in the Public Sector
The Business value of better spend visibility in the public sector
Savings, efficiencies, policy direction, better budgeting and planning, risk management and increased transparency.
NIGP: The Institute for Public Procurement
Since 1944, NIGP has been developing, supporting and promoting the public procurement profession. The Institute’s goal: recognition and esteem for the government procurement profession and its dedicated practitioners.
Reading between the lines of this white paper you will find a message of great opportunity for public procurement leadership, their institutions and elected officials. As strategic procurement is not possible without first collecting, organizing and rationalizing the data that best reflects the actual, collective behavior of the institution, spend management and the analytical processes that inform the practice are a natural extension of Procurement’s contribution to the success of public organizations.
Providing many real-world examples, this white paper demonstrates how spend management results inform the confident reporting of how taxpayers’ money is used. And confidence is contagious; fostering trust, goodwill and belief in institutions and their leaders.
NIGP and Spikes Cavell have worked in partnership together since 2009 to champion the adoption of spend management practices in the public sector. The successes realized by early-adopting procurement leaders and their agencies should serve as rallying point and clear demonstration of the value that all procurement practitioners can provide to their organizations – regardless of size, type or service focus.
Adopt spend management, report your results regularly and directly to your user departments and agency leadership. As you facilitate their greater understanding of the agency’s performance through effective procurement and financial management, you will earn the trust and recognition that comes from being an invaluable business resource in your organization.
Rick Grimm CPPO, CPPB
Chief Executive Officer - NIGP
As the foremost authority in public procurement, NIGP is unique for the wealth and depth of services offered to its members. Through premier educational and research programs, professional support and technical services, and time-saving resources, agencies reap the benefits of improved operating efficiency and expanded organizational capacity.
Over 15,000 professionals from more than 3,000 local, state, provincial and federal government contracting agencies across the United States, Canada and countries outside of North America gain immediate value through access to our library of thousands of bid-related documents, FREE Webinars and the largest network of public procurement professionals in North America.
The Benefits of better Spend Visibility
The benefits and relevance of solving the problem of poor spend visibility
Accurate, reliable and easy-to-access visibility of how much is spent, on what and with whom, is something which many public sector organizations lack. However, there are significant, recognizable, and actionable benefits to solving the problem of poor spend visibility for government leaders.
1. Better budgeting and planning is possible when government leadership understands how much is actually spent in each category of goods and services as opposed to what was put into the budget (which is often either inconsistent at best, inaccurate at the worst).
"There are significant, actionable benefits to solving the problem of poor spend visibility."
2. Better visibility provides the underpinning for identification of ways for the organization to save money (2-6% savings) and be more efficient in the procurement function (typically 25-33% of a government organization's overall budget is goods and services expenditure) including:
- using spend information as leverage to negotiate better prices and terms with existing suppliers;
- reducing redundancy of suppliers so that spend is consolidated with the right number of suppliers in each category to take advantage of economies of scale and buying power;
- utilizing cooperative and piggy-back purchasing vehicles to reduce both the time to procure and costs of bought-in goods and services; and
- being as efficient as possible in the procure-to-pay process so that the costs to administer a purchase don’t exceed the value of the goods or services purchased.
3. Set appropriate competitive procurement and transaction value thresholds which ensure the organization is focusing its efforts where the most value can be added instead of carrying out busy-work.
4. Become a data driven organization. Use accurate spend data to change buying behavior within the organization to create a culture of effectiveness and efficiency. Putting verifiable data in front of executives, staff or citizens can have a powerful impact on changing behavior.
5. Use real data to determine whether or not policy goals should be set for spend with small, minority and local businesses, identify opportunities to increase spend with these groups (as appropriate) and monitor progress towards those goals.
"Use accurate spend data to change buying behavior within the organization to create a culture of effectiveness and efficiency."
6. Get out ahead of any potential embarrassing expenditures which might undermine the public confidence and trust in government. Without the public's trust and confidence, it becomes difficult to accomplish great civic projects.
7. Provide real citizen friendly transparency to constituents in a form and format which doesn’t cater solely to journalists and “armchair auditors”.
8. Provide apples-to-apples comparisons: Where spend data has been consistently standardized and categorized, additional demographic information can be brought into the analysis. This enables comparisons between cities, counties, school districts and higher education institutions on a per resident, per student, per teacher, household, square foot or other metric in order to identify potential areas for improvement, efficiency and effectiveness of services delivered by the organization.
The Overall Problem
The Background and Challenges
Elected officials and public sector leaders are becoming increasingly interested in their procurement team’s efforts to extract the maximum value from every dollar their organization spends on goods and services.
In addition to savings identification, leaders are beginning to recognize the ways in which aggregated, consistently classified and enriched expenditure data can be used to guide policy decisions, enable better planning, budgeting, risk management, and increased transparency for the general public.
However, most public sector organizations lack good visibility of their own expenditure, let alone the ability to aggregate consistent and normalized expenditure across multiple cities, counties, school districts, universities, and state agencies.
The Data Challenges
Accurate, reliable and easy-to-access to data showing how much is spent, on what and with whom, is something many public sector organizations lack. From budget holders distributed throughout departments, all the way up to the organization's leadership, answering questions about how much was spent in professional services, with small businesses or with a specific contracted supplier often takes significantly longer than it should ‒ and the results are frequently unreliable.
Visibility over how much was budgeted in any given year exists, and is often published online for the public to access. However, budget and general ledger codes can be vague (example: Capital Equipment >$5000), misused (example: an equipment budget used to pay for temporary staff) or simply applied incorrectly as there are few controls in place to ensure consistency of data entry across all of the staff who procure goods and services.
Accounts payable invoices, purchase orders and purchasing card transaction records certainly exist, but public entities are complex organizations. Transaction data exists in many formats and is distributed across multiple systems, making it difficult to access and consolidate. It is also difficult to ensure consistent naming of suppliers, that correct classifications of spend are applied to transactions at the point of purchase, or applied to accounts payable data as it goes through the procure-to-pay process.
The table above shows the difference between what five organizations thought they spent on information technology equipment, supplies and services in a single year compared with what they found that they actually spent after a data classification and spend analytics exercise. The five examples above from individual organizations and while they do not represent the average for each sector, the issue of understating information technology spend is pervasive across the public sector.
The following white paper lays out the problem of poor spend visibility and the significant, recognizable, and actionable benefits of solving this data deficit for public sector managers and elected officials.
"There are few controls in place to ensure consistency across all of the staff who procure goods and services which leads to difficulty in assessing what an organization purchases. And this isn't just a public sector problem."
Data Based Decisions
DATA BASED DECISION MAKING
Spikes Cavell has collected, cleansed, classified, enriched, and collated the expenditure data from 338 public sector datasets which include 1.7m suppliers, 17.6m invoices, and $58.7B of expenditure. That data has been anonymized and aggregated to provide the statistics and examples in this white paper.
All examples and statistics below come from one or more public sector organizations, represent activity in one financial year, and where necessary, have been anonymized. All classifications shown are either real general ledger or budget code examples from public sector organizations, or follow Spikes Cavell’s vCode classification scheme. vCode is a three tiered supplier classification taxonomy consisting of Sector (30 classifications), Sub-Sector (100 classifications) and Category (550+ classifications).
Better Budgeting and Planning:
The budgeting process in public sector organizations often proves contentious. Inevitably, the budget requests far exceed available funds. Concessions must be made across the board to achieve a final budget which adequately reflects the policy goals of elected officials and meets the needs of constituents. However, because budget and general ledger codes have been applied inconsistently or inaccurately to expenditure data, the budgeting process is frequently based on incorrect input data from the start.
For example, in public sector organizations, there is often a significant difference between the amount reported as IT expenditure based on the organization’s own accounting codes, and the results of a spend analysis project where spend and suppliers are independently and consistently classified. For one large K-12 school district, the difference between spend by general ledger code and the actual spend following a spend analysis exercise was $19.7m in one year.
"For one K-12 school district, the difference between spend by general ledger code and the actual spend following a spend analysis exercise was $19.7m in one year."
When spend is based on general ledger codes, spend on information technology is frequently and considerably understated in public sector organizations.
Furthermore, the number of transactions (invoices and purchasing card transactions) classified as IT expenditure in the raw data were well under half the actual transactions on IT in the year. The pattern of understating IT expenditure and transactions is pervasive across city, county, K-12, state government and higher education institutions.
When spend is based on general ledger codes, the number of transactions on information technology is frequently and considerably understated in public sector organizations.
In another example, one budget code may contain spend on a wide variety of goods and services but have such a generic description that using it as a means of preparing the budget is virtually meaningless. In one city government organization, $14.4m of expenditure was classified as “Miscellaneous Professional Services”. Without additional classification being undertaken, this is the most detailed and only level of visibility that the city executive, finance and procurement teams would have. When the spend and suppliers were independently classified, “Miscellaneous Professional Services” actually meant expenditure in all of the following vCode Sectors:
Many public organizations have vaguely named general ledger codes which are adequate for financial accounting purposes, but do not support the level of spend visibility required to achieve the outcomes in this white paper.
If actual spend on information technology is $19.7m more than budgeted spend and “Miscellaneous Professional Services” is actually spent on Animals & Farming, Travel and Accommodation and Vehicles, how can managers and elected officials have faith in the budgets being proposed by their department heads?
If the organization's leadership lack visibility of accurate spend information, then the departments likely have the same blind spot. Accurately classified data and better spend visibility can ensure that budgets are set appropriately, departments have better insight as to where their funds are actually being spent, and the procurement team can assist both the organization's leaders and individual departments in their efforts to spend taxpayer dollars responsibly while getting what they need to perform.
"Accurately classified data and better spend visibility can ensure that budgets are set appropriately, departments have better insight as to where their funds are actually being spent, and the procurement team can assist both the organization's leaders and individual departments in their efforts to spend taxpayer dollars."
Spending taxpayer dollars efficiently & effectively
No matter how large or small the organization, there is always pressure to reduce expenditures and be more efficient with taxpayers’ dollars. The lack of spend visibility by most public sector leaders and procurement teams makes opportunity identification more difficult than necessary - and results in lost opportunities.
The following are five examples of savings and efficiency opportunities that public organizations could recognize if they had adequate spend visibility.
Getting More From Current Suppliers
Irrespective of the size and location of your organization, many businesses in your immediate local area and across the country rely on your spending. Does the procurement team know who the largest and most important suppliers are? How can you use that information to ensure that you are getting the best pricing and terms based on the value of your spend? The problem is that the suppliers know precisely how much you spent with them in the last year and what prices were paid. Unfortunately, due to inconsistent data and poor spend visibility, procurement staff are often forced to enter contract renewal and renegotiation meetings with little or no data to use for leverage.
Most procurement directors can name their top 10 suppliers. Naming the top 20 is a little bit more challenging. The top 50 would be almost impossible. However, being able to name, let alone effectively manage, the top 20% of your suppliers (which for the average public organization is 1,128 suppliers) would be difficult ‒ if not impossible ‒ without accurate spend visibility. On average, spend with the top 20% of suppliers represents 94.63% of a public sector organization's spend on goods and services. Spend is even more concentrated than the Pareto Principle (the 80/20 rule) would suggest.
The difficulty in getting spend visibility of the spend with the top 20% is that many of these suppliers are paid both through the accounts payable process (and there may be multiple versions of the supplier with multiple addresses in the financial system) as well as through purchasing cards, resulting in at least two different supplier names in any data analyzed. For example, in one large K-12 school district, 353 suppliers represented the top 20% of suppliers in the raw data, and those 353 suppliers appeared with 511 names before the supplier names were de-duplicated as part of a data transformation process.
The Pareto Principle (the 80/20 rule) does not apply to the expenditure of public sector organizations. On average, approximately 95% of spend is with the top 20% of suppliers.
The Pareto Principle also does not apply to transactions in public sector organizations. On average, over 72% of transactions are with the top 20% of suppliers.
"The Pareto Principle (the 80/20 rule) does not apply to the expenditure or transaction volumes of public sector organizations."
At minimum, public procurement teams need to achieve information parity with suppliers before beginning an RFP process or entering into negotiations with an incumbent supplier. Better spend visibility lets procurement teams see the leverage your organization actually has in your relationship with the supplier. There are a number of ways you can negotiate to derive savings such as reduced prices based on volume, avoiding price rises during an existing contract, rebates, extended or flexible payment terms or securing added-value – additional products or services included in your current contract at no additional cost to you. When entering into negotiations for these savings, the more information you have, the stronger your bargaining position.
Your supplier knows how much you spend with them and uses this information in business planning as well as to set the price you pay. More accurate spend visibility provides agency leaders and procurement teams with information not available to the supplier (such as how much is spent with that supplier’s competitors, and in the category as a whole). This data advantage provides leverage and can guide you as to what you can offer in order to get the best pricing and terms.
Reducing the Number of Suppliers Per Category
How many law firms does one government organization need to work with in a single financial year? Is 52 too many? What about 60 different software developers? How about 36 promotional item suppliers? Common sense would dictate that better prices and terms could be achieved by consolidating the expenditures above to fewer suppliers. But it is difficult to identify the categories of spend that need to be consolidated ‒ let alone determine how many suppliers constitute the ‘right number’ ‒ without accurate data and sufficient spend visibility. And the ability to compare average spend per supplier by category with other organizations or a sector average makes it possible to more easily determine the ‘right number’. Better spend visibility allows procurement teams to better understand which department within the organization is contributing to the problem of too many vendors in a category, which in turn helps to better target efforts to change buying behavior – a key driver to the delivery of savings.
This shows the vCode Sectors where the number of suppliers is high relative to the percentage of expenditure in those categories. For example, while the spend in Business Support Services is relatively low compared to other categories, public organizations tend to have many suppliers.
While there are always some outliers, the categories of spend which frequently have too many suppliers are relatively common across government organizations. With better spend visibility, procurement teams should be able to identify which categories have too many suppliers, and thus, where aggregation and consolidation could help drive down costs. The clear candidates are categories with the highest number of suppliers, a sufficient value of spend to justify focusing effort there, or where the goods and/or services are relatively commoditized such as IT hardware or vehicles. Consolidating spend with fewer suppliers will allow for negotiation of better terms and reduce invoice processing.
Looking for consolidation opportunities may also highlight areas where one of the organization's suppliers enjoys a relative monopoly, and where introducing competition into the category could drive down costs. Savings may also be possible in categories with relatively few suppliers, where goods and services are very generic and there are many local companies who would compete for the organization's business, such as in grounds maintenance. The results may also provide the evidence required to consolidate or decentralize the purchasing function across the organization.
While the needs of government organizations vary depending on their sector, where in the country they are located and whether they serve mainly urban, suburban or rural areas, public agencies across the country do buy many of the same goods and services, and often from the same suppliers. They all require common non-specialty products and services, such as vehicles, cleaning supplies, waste collection, furniture and stationery. Across the public organizations in the analysis, 76.68% of spend was with a supplier who was common to at least two government bodies. Where entities are working with the same suppliers as other public organizations, there is the potential to save time and money through cooperative procurement practices.
This shows that of the government organizations in this whitepaper, 76.68% of spend was common to at least 2 or more entities, showing that there are many opportunities for cooperative purchasing with existing suppliers.
In some cases, using a contract which was awarded on a nationwide or regional level can result in lower prices due to the leveraged volume and more efficient purchasing processes. The time and effort required to go through a formal solicitation process can cost thousands of dollars. Using a bid that has been completed by another public organization can significantly reduce the cost of making a purchase. When multiple organizations' expenditure data is consistently standardized and classified, identification of an existing cooperative contract (or contracts) for a particular supplier, commodity or service is much easier than when the data is in multiple formats, with multiple spellings of supplier names and inconsistent classification.
Savings through cooperatives vary, but some research done by the National Association of Counties (NACo) estimates these savings to be around 10% overall. Common areas for cooperation include office equipment (copiers), maintenance products (MRO), furniture, and IT products. Cooperative procurement can help agencies identify price discrepancies between their existing contract and a national agreement to see if a better price is available through the contracts offered, sometimes without even making a change in supplier.
Across the government datasets analyzed for this study, there were over 3.5m transactions which went through the procure-to-pay process that were for sums less than $51. As the average cost to process an invoice through an accounts payable system is greater than $51 (according to multiple RPMG Research publications), this means that it cost government entities more to go through the procure-to-pay process than the actual value of the goods and services being purchased were worth, over three and a half million times. That is a significant amount of wasted time, money and resources.
There are many transactions which likely cost more to process than the goods and services being procured. For an average public organization, there were 11,900 transactions for less than $51 which equated to 0.15% of expenditure.
An overview of invoice value and transactions by category can again show where to focus attention on invoice consolidation. The ‘sweet spot’ for savings is where invoice values are low and transaction numbers are high. Categories that meet both criteria ‒ such as retail, construction materials and stationery ‒ are prime candidates for attention. Analyzing transactions within categories, as well as by individual suppliers, enables you to understand which product and service types are most susceptible to frequent transactions. Invoicing frequencies and procedures can be written into contracts in these areas to avoid this issue in the future.
The table above shows the categories with the lowest average transaction values across the public sector. Combining this data with transaction volumes would help to identify procure-to-pay efficiency opportunities.
If your organization can reduce the number of transactions that the accounts payable and procurement teams handle through greater use of pCards, consolidated invoicing, eProcurement or methods of automating the procure-to-pay process, those people can be focused on more strategic tasks, such as identifying further efficiencies, refining procurement policies, preparing for competitive procurement processes and negotiating contracts. Each of these can deliver further real dollar savings.
Procurement Threshold Decisions and Efficiency
Government organization's procurement review and process thresholds (3 bids, full RFP/RFQ, internal approval levels and purchasing card transaction thresholds) are often historical artifacts based on gut instinct, worry about lack of oversight, and round numbers ($10k, 25k etc.) rather than on actual data. For example, there could be one city where the threshold for an individual procurement card transaction is $250 and the spend threshold that requires a formal RFP is $10,000 across the board. In the city next door, the procurement card transaction threshold is $1,000, and the formal RFP threshold is $5,000. There was probably a reason why these disparate limits were set, but it is unlikely to be because the data was analyzed to arrive at the final thresholds. The thresholds may have been set by state law or originated with the City Council from a negative past experience. Worries about loss of oversight of spending often contribute to unsustainably low thresholds from a procurement and accounts payable process efficiency standpoint.
When analyzing public procurement thresholds and spend data together, for many organizations there is a natural level at which a rise in the competitive solicitation thresholds and procurement card transaction thresholds would result in a miniscule loss of oversight, but a significant reduction in non-strategic and non-value add work being completed. Gone are the days where the accounts payable team should be measured on how many invoices they processed, or the procurement team on how many RFP events they ran. These changes would allow departments (and very specifically the procurement and finance teams) to be significantly more effective, and focused on the right projects where they can add the greatest value back to their organizations.
For the average public sector organization, a small change in the competitive procurement threshold from $10,000 to $20,000 would reduce the number of competitively solicited contracts awarded by 272 which would be a huge reduction in workload for the procurement team, but would only result in 1.66% less of spend being competitively procured.
The effect of an increase in a purchasing card transaction threshold or increase in the value for which purchase orders require sign-off on the number of transactions manually processed and the corresponding reduction in spend being manually reviewed can be substantial. For the average government entity, an increase in the threshold from $500 to $1,000 would reduce manually reviewed transactions by 23,278, but only result in a 4.2% reduction of spend overseen manually.
Analyzing spend data and using it to determine rational thresholds which encourage competition and oversight while reducing the amount of ‘work for work’s sake’ makes sense for governments whose administrative resources were reduced during The Great Recession and are unlikely to be replaced. The specific threshold limits set will still differ between organizations, but all should be using spend data to strike the right balance between oversight and efficiency while working to remove the burden of unnecessary work by staff members.
"All organizations should be using spend data to strike the right balance between oversight and efficiency while working to remove the burden of unnecessary work by staff members."
Changing Behavior with Data
After achieving spend visibility so that governments can identify and prioritize key areas of focus, the second largest roadblock to saving money on goods and services involves changing buying behavior. Improving the efficiency of how taxpayer dollars are spent through improved terms with existing suppliers, category rationalization and cooperative purchasing requires that buying behavior changes within the organization.
Fostering a collaborative ‘buying culture’ throughout the organization in which budget holders and department heads seek savings and efficiencies as often as they seek to protect their own budgets from being reduced can be challenging. Many are worried that if they save 5%, that 5% will be taken from them the following year, giving them little incentive to make that change in behavior.
"Many are worried that if they save 5%, that 5% will be taken from them the following year, giving them little incentive to make that change in behavior."
Department heads need to have a say in the procurement process, but that say needs to be assessed in conjunction with the procurement and purchasing activity of the wider organization – not in a silo. One way to change buying behavior more quickly and effectively is to engage department heads with data about their department’s expenditure along with that of the wider organization. Very importantly, that data needs to be reliable, not based on general ledger codes alone, and needs to go through a data transformation process that is more rigorous and produces better results than a raw extraction of accounts payable data or that goes through an automatic software classification processes alone.
"One way to change buying behavior more quickly and effectively is to engage department heads with data about their department’s expenditure along with that of the wider organization."
The following charts show how spend appeared differently to one department in one county government organization when using the county's own budget codes as compared with properly categorized spend data:
This is the difference in spend visibility after spend has been consistently classified independently of the general ledger codes. Note the substantial difference in the top categories and the clarity of category names themselves.
How would it be possible for a department head to manage their budget appropriately, especially one this large when visibility of where the money is actually going is so poor?
The procurement team can be significantly more effective in changing behavior by engaging departmental buyers and budget holders with accurately classified spend visibility. The more frequently stakeholders are engaged and providing input in the preparation phase of any procurement exercise, the more the entity will increase use of contracted suppliers and reduce maverick buying. The long-term goal is to increase compliance throughout the organization, and spend visibility highlights where to start. The savings from bringing spend under management and reducing maverick buying can be substantial. Delivering increased buying power to each stakeholder is a viable mission and one that is less likely to face strong resistance when stakeholders are presented with accurate spend data.
"Procurement teams can be significantly more effective in changing behavior by engaging departmental buyers and budget holders with accurately classified spend visibility."
Enhanced spend visibility helps government organizations to better plan and evaluate policies related to spend with local, small and minority businesses and facilitate local economic growth.
Spending With Small/Minority Businesses
To be good stewards of taxpayer dollars, public organizations are frequently forced to walk a fine line between getting the best value for each tax dollar and promoting the often-intangible economic and social benefits of spending tax dollars with specific types of businesses. Each organization's political landscape, geographic location and demographics will impact how much of a priority spending with small, minority, woman, and veteran owned businesses (collectively Diverse or Diversity spend) is for that government. As with other examples in this whitepaper, the decision to create a set-aside program or implement a Diversity weighting in competitive solicitations is frequently based on a perception of lack of spend with Diverse businesses, and not an analysis of the data.
Most government entities don’t start a Diversity spend program by asking: “How much are we spending with Diverse businesses today?” If the city executive doesn’t know what percentage of spend is already with Diverse businesses, how will success or failure of the program be measured? There is also a plethora of issues related to what list of Diverse suppliers is used as the basis for analysis, whether or not they have to be certified, and whether or not certified businesses in a neighboring constituency are included or not.
The good news is that spend with small businesses is frequently under reported by government organizations, and the types of goods and services procured from those businesses is broad. On average in the public sector spend data analyzed, spend with small businesses was 64.55% of overall expenditure. In this context, small was considered to be any business with fewer than 250 employees, regardless of industry sector.
"Spend with small businesses is frequently under reported by government organizations."
This shows the percentage of spend with small businesses. Having visibility of the baseline value of spend with small businesses helps to determine if targets should be set, whether or not they are achievable, and to track progress.
The above are the top 20 categories and average percentages of spend with small businesses by government organizations. If an entity is trying to increase spend with small businesses, it is very useful to understand what types of small businesses already supply goods and services that the government organization buys.
Better spend visibility provides the basis for sound policy making, goal setting, and determination of success or failure of a Diversity program at a fraction of the cost of traditional Disparity/Diversity studies. In addition, the data can be used to provide better public transparency of spend with Diverse businesses, reduce the frequency of knee-jerk reactions to demands for and against Diversity spend programs, provide insight into the types of goods and services Diverse businesses supply so that those industry sectors can be fostered appropriately, and to identify potential suppliers amongst Diverse businesses which supply goods and services that the government buys already.
All public sector organizations have at some time been put under pressure from their constituents to increase local spending. Elected officials frequently have a history of starting, developing or bringing businesses to their cities or counties. They also want to be re-elected, so it is unsurprising that they may be at the forefront of implementing local spend preferences in their organizations. However, a government’s definition of a ‘local’ supplier can be tricky. Should a local branch of a national chain be considered a local business? A local branch creates local jobs, but any profit which that branch generates won’t necessarily be invested back into the local economy. Irrespective of how the city answers the question above, calls for or against local preference programs are not typically based on data, but the appropriate response to those calls should be.
As with spend with small businesses, government entities often spend more with local companies than they are given credit for. Spend with local suppliers by public organizations does vary widely, but based on the data for this whitepaper, the average is 28.13% across all types of organization. Significant differences in local spend can be because of the size of the city/county, urban/suburban/rural land use, the industrial history of the area, or many other factors.
On average, 28.13% of spend by government entities is with local suppliers. Comparison to this benchmark is useful in deciding whether to set local spend goals, enact local preferences, or not to do so.
This chart provides a comparison of spend with local companies between different sectors. On average, city governments spend more with local companies than counties and K-12 school districts. States have been omitted from this analysis because state agencies typically consider any spend in their state to be local while the other sectors have a much smaller definition.
The above are the top 20 categories of spend and average percentages of spend with local businesses by government organizations. If a public entity is trying to increase spend with small businesses, it is very useful to understand what types of local businesses already supply goods and services that entity.
Better spend visibility helps government leaders make sound policy decisions regarding local preference initiatives through better understanding of how much is spent with local companies, what is bought from local companies, and what is not currently being purchased from local companies ‒ but could be. Better visibility can be used to compare an organization's local spend to a benchmark average, and then either promote the organization's high spend with local companies, implement programs to increase local spend, or continue the status quo. Either way, sound policy decisions on local preference and maximizing the impact of taxpayer dollars on the local economy can only be efficiently accomplished if leadership knows how much it spends locally today and what that money is spent on.
"Better spend visibility can be used to compare an organization's local spend to a benchmark average, and then either promote the organization's high spend with local companies, implement programs to increase local spend, or continue the status quo."
Public Trust, Confidence and Risk Management:
In order to accomplish great civic projects, governments leaders must manage spend well and have the trust of the public that they serve. Poor spend data can cause distractions to the organization’s mission and be a ticking time-bomb which reduces or destroys faith in a government agency.
Taking too much time to answer public records requests or failing to answer questions which the public would consider to be simple (how much was spent on furniture last year and who with?) can significantly undermine public trust. Constituents’ lack of trust or confidence in government entities can make accomplishing real progress and change difficult – raising taxes/levies/tuition if necessary, getting through unpopular but necessary policy changes, or simply building a new park. If constituents do not believe that their tax dollars are going to be spent effectively or efficiently, the worth and viability of any project being proposed may not matter at all.
"There are many data points in government expenditure data which, without proper explanation, can undermine the public trust."
There are many data points in government expenditure data which, without proper explanation, can undermine the public trust. Ambiguous budget and general ledger codes, misclassified suppliers or spend, and lack of quick and decisive answers from public sector officials can undermine public trust and confidence in government.
The spend, number of suppliers and number of transaction in this table are examples of ambiguous categories of spend pulled from multiple different K-12 school district datasets. They show that there are large values of spend that are simply not categorized with any degree of accuracy or transparency, either for internal analysis or public transparency which have the potential to undermine public confidence in the administration and spending of tax dollars.
"There are large values of spend that are simply not categorized with any degree of accuracy or transparency."
The above table contains examples from multiple higher education institutions of suppliers where money was spent, probably with completely legitimate reasons, but the name of the supplier alone would likely be questioned if the expenditure data was made public, either through a spend transparency web page or through a Freedom of Information Act type request.
"The name of the supplier alone would likely be questioned if the expenditure data was made public."
The above table contains examples of spend by individual city governments in vCode Categories where the total overall value of spend would likely be questioned.
Spend visibility helps public sector managers officials spot the time-bombs before they explode, and provides the basis for asking the right questions of staff early to identify potential issues before the public does. However, if the data isn’t correctly classified, if supplier names are obscured, or if spend data isn’t visible in one place, these time-bombs may be impossible to spot. It is much better to be prepared to answer tricky questions than being caught off-guard or having to spend considerable amounts of time doing research to provide answers to what the public would perceive to be simple questions. It can also help identify internal changes and drive change management processes which make it easier for staff, leadership and the general public to better understand and interpret government expenditure data.
"Spend visibility helps public sector managers spot the time-bombs before they explode, and provides the basis for asking the right questions of staff early, to identify potential issues before the public does."
Citizen Friendly Transparency
Getting spend transparency right can prove difficult for government entities. Simply publishing a public checkbook, in a format which can only be engaged with people who are motivated to actively look for examples of government waste, fraud and abuse is not particularly good transparency.
While some aspects of expenditure data are readily and easily understood by the general public (supplier name, location, invoice date etc.), other aspects of government expenditure such as general ledger, departmental and funding codes are not.
Government staff are frequently worried about proactively putting too much spend information into the public domain, fearing that this will lead to more questions from a confused or hostile public, create distractions or make completing their regular job functions more challenging. Implemented correctly, spend transparency sites can actually lower the administrative costs of responding to Freedom of Information Act (FOIA)/open records requests because staff can simply refer people to the transparency website.
"Public spend transparency should be something which all citizens/constituents can engage with."
Public spend transparency should be something which all citizens/constituents can engage with, not just journalists and “armchair auditors”. A full review of city transparency sites is outside of the scope of this whitepaper, and anonymization of a government transparency site would be difficult when critiquing the sites of entities whose data is part of this whitepaper. However, there are some simple questions that should be considered when determining whether or not a spend transparency site is really achieving citizen-friendly transparency:
- Does the site work in terms of speed and usability? Transparency sites might work perfectly well with one year of data loaded into them, but as the volume of data gets larger in subsequent years, the IT infrastructure and website hosting speeds may be unable to keep up with the increased volume of data, and the site either crashes or searches time out. In other cases, the checkbook tool contains so much functionality that it will be overwhelming for any regular user.
- What kinds of Freedom of Information/Open Records requests about spend data does the organization receive and can staff get those answers internally without significant difficulty? If staff can’t answer the current FOIA type questions easily, internal processes need to be changed before any public transparency site is launched.
- Does the way in which spend is classified make sense to someone that does not work for the government? If a citizen sees that the largest category of spend is “Other Services” then the transparency is more likely to undermine faith in government than increase it.
- Is the data being put into the transparency site actual spend data or budgeted spend information? There can be significant discrepancies between the two different types of data.
Better spend visibility can assist government leaders, procurement, finance and IT teams in determining the right fields to display publicly, in assessing the likelihood of understanding spend that the general public will get from the site and to make adjustments accordingly. To make staff more comfortable with transparency, officials and staff need better internal spend visibility in order to be confident that the data they are putting out is correct ‒ and that they know about any potential $800 toilets before the public discovers them.
"To make staff more comfortable with transparency, managers and staff need better internal spend visibility in order to be confident that the data they are putting out is correct."
Benchmarking Spend Per student, resident or staff member
How much does the average government entity spend per staff member on information technology?
Are there other categories of spend or related metrics where your organization spends significantly more or less than your peers?
Is there a reason for that spend, or is it an opportunity to deliver savings and efficiencies at the organization?
Benchmarking spend on road repairs per mile of maintained road, spend per staff member on information technology, and facilities maintenance spend per square foot are all metrics that would provide actionable insight to government leaders. By understanding where their organization differs from other organizations like theirs in both positive and negative ways, leaders can better direct and manage policies to maximize the positive deviations from average and rectify the negative deviations.
Without benchmarks, no one knows what ‘good’ looks like, and accordingly, find it difficult to strategically determine changes in spending behavior that would significantly impact an organization's bottom line. Better spend visibility provides a level of benchmarking which allows leadership to assess whether or not the organization is spending in line with its own strategic priorities, or if that the money is actually going to entirely different projects despite what the budget figures say.
The significant differences between budget and actual spend outlined earlier in this whitepaper make it difficult for elected officials, public sector leaders and managers to answer these questions without standardized and consistently classified spend data. By combining consistently classified and enriched spend data with publicly available information about populations, staff, households, students or other demographic information, government leaders can begin to see where their organization differs from average by spending more or less per unit than other organizations like theirs.
Some categories of spend such as those relating to construction and capital projects are going to fluctuate widely year by year for an individual organization and are going to differ widely between sector types. However, leadership of the city in the example below would be highly justified in asking why spend on Road Vehicles, IT Hardware & Software, and Marketing is cumulatively $51.19 per resident more than the average city. Are the city’s vehicles all breaking down or coming up for replacement? Is the city simply not managing IT spend well? Is there too much spend on marketing city services and events that could be done more cheaply in-house?
The table shows a comparison between the spend per resident per category between one city government organization and the average of all city government organizations, highlighting areas where the city is spending both greater than and less than the average in 15 categories, and providing areas for focused improvement.
Public sector organizations should use benchmarking of spend metrics as another mechanism for identifying savings opportunities, spotting, questioning and seeking to understand outlying data. Why is our one organization's expenditure vastly different than others like it? Where there are differences - is that a good thing or a problem? Benchmarking starts with better spend visibility at individual entity level, followed by collation of that data from multiple organizations and standardization of classifications in order to facilitate meaningful comparisons.
"Without benchmarks, no one knows what ‘good’ looks like, and accordingly, find it difficult to strategically determine changes in spending behavior that would significantly impact the organization's bottom line."
Conclusions and Main Findings
Each public sector organization whose data is included in this whitepaper had spend visibility challenges prior to carrying out a data transformation and spend analysis exercise. Some struggled to get the raw data out of their financial management systems in the first place. Every organization was ultimately able to extract the necessary raw data but was missing at least one key data attribute (and usually more) that without standardization, classification and enrichment of the spend data would have made it impossible to carry out many of the activities outlined in this whitepaper.
When individual procurement teams were shown their own data prior to it being included in this whitepaper, the consistent response was that while they saw some things which came as no surprise, there were many, many surprises, revelations, and eye opening points in the data which they needed to look into further. They also saw significant opportunities for saving money on bought in goods and services across the their organizations. Using their newly found spend visibility gave them the opportunity to work more effectively with their organization's departments and to increase the relevance of the procurement functions to elected officials and executives in their organizations.
"They also saw significant opportunities for saving money on bought in goods and services across the their organizations. Using their newly found spend visibility gave them the opportunity to work more effectively with their organization's departments and to increase the relevance of the procurement functions to elected officials and executives in their organizations. "
Importantly, they also now have the data to support their leaders and executives in making data based decisions about budget prioritization, spending policies, and prioritization of savings and efficiency initiatives.
While government entities often have fewer staff than they might like, staff time and resources are not typically the biggest roadblock to delivering the potential gains outlined in this whitepaper. Nor is there a pervasive lack of willingness to change behavior or deficiency in staff expertise. The highest hurdle to utilizing data to deliver the outcomes in this whitepaper is having robust and reliable data from which to make decisions in the first place. Public sector leaders who ensure that the spend data deficit is solved and provide reliable spend visibility across their organizations can move more quickly, on the right projects, and deliver significant financial benefits to their organizations, their employees and the constituents they serve.