Put Your Spending Where Your Goals Are

Local procurement policies take money already being spent and direct it to local businesses to get more economic development benefit for the buck.

Small, locally owned businesses are the bedrock of thriving economies. They employ millions of people, they invest in their neighborhoods and cities, and they provide wealth-building opportunities for entrepreneurs. A dollar spent at a locally owned business stays in the local economy longer than a dollar spent with a company whose roots lie elsewhere, creating a greater ripple effect.

There are many programs out there designed to support these businesses directly with loans and technical assistance. But one of the most powerful ways to strengthen them is to increase the demand for their goods and services.

Many anchor institutions, such as universities, and governments are already spending billions of dollars a year on goods and services. By redirecting some of that money to local businesses through local-procurement, or buy-local, policies and programs, they strengthen their local economy and tax base without handing out subsidies or tax breaks.

But a successful local-procurement policy requires more than good intentions. It requires organization-wide commitment, and an understanding of and careful selection from a wide menu of tools and strategies. There is no one-size-fits-all approach to a buy-local program, but there are three broad categories of strategies that form the foundation of effective local procurement.

For more strategies and more examples of these strategies in use, see the Policylink Report: Buy Newark

CATEGORY 1: Institute Formal Local Preferences

Formal local preferences officially establish buying local as a priority. A formal local preference is an essential ingredient of a buy-local effort, but it is not the whole recipe. It must be combined with other strategies that help local businesses overcome longstanding disadvantages. Here are some examples of formal local preferences.

Give automatic bid and RFP preferences to local businesses

Many local governments in the United States have instituted automatic percentage preferences for local businesses in their bids and/or request for proposals. These policies are straightforward, explicit commitments to the local business community: We are willing to pay more to support you.

How it works: In standard bidding, the qualified bidder with the lowest bid wins. For an RFP, points are assigned for meeting certain criteria (including cost). To give a competitive advantage to local suppliers, automatic bid and RFP preferences change the rules for contracts below a certain size, often $100,000.

Commonly, the purchaser either reduces the total of the bid from a local supplier by a fixed percentage, typically 1–10 percent, just for the purposes of awarding the contract, gives the lowest local bidder a chance to match the lowest nonlocal bidder, or adds RFP points for being local.

Vendors may have to be certified as local beforehand to receive the preference, or may have to qualify for the preference with each bid or proposal. Local-supplier preferences within bids and RFPs are often combined with preferences for small, minority-owned, or women-owned firms.

Who uses it: Primarily local governments and other public agencies such as school districts. This is partly because governments benefit more immediately and directly from increased local economic activity through increased taxes, so they can better justify the potentially higher costs of some contracts.

Advantages: Formal preferences like these are automatic, so once in place they kick in routinely. They are consistent and support all local businesses, mitigating the “who-you-know” factor.

Disadvantages: Giving a fixed advantage to local businesses does not account for differences in how much local businesses return to the local economy or how much a particular business needs the help, so this may be an inefficient use of subsidy. Since these preferences contain no targets or changes to the system, by themselves they are unlikely to dramatically increase the participation of local vendors.

Automatic preferences are typically not applied to contracts over certain thresholds, and some practitioners believe that even smaller contracts will face legal challenges eventually. Many purchasing officials and their membership organizations oppose preferences on the theory that they discourage competition. Preferences may also reinforce the idea that local businesses are, by definition, not competitive.

Example: Washington, D.C., has for many years given a detailed set of advantages to local and minority-owned businesses. Businesses may get certified in any of six preference categories: Local Business Enterprise, Small Business Enterprise (local or metropolitan area), Disadvantaged Business Enterprise (doesn’t have to be local), Development Enterprise Zone, Resident Owned Business, and Longtime Resident Business. Collectively these are called “Certified Business Enterprises” or CBEs. Each category adds a maximum of 12 points to an RFP or reduces a bid by up to 12 percent of the total bid, making the cost more competitive with higher bids.

According to a 2002 evaluation, every dollar spent on a CBE preference contract generated an additional 55 cents of spending on goods and services in the District. Every two jobs created directly by a contract generated one additional indirect job. From October 1, 1999, to September 30, 2001, these contracts generated $66.5 million in direct and indirect tax revenues, including $19.4 million for the District government.

Require that large suppliers work with small local businesses

As part of contract negotiations with large national suppliers, some purchasing departments require them to partner with a local business in some fashion. This is a good way to get around a shortage of local vendors with sufficient capacity.

How it works: Custom agreements are written into the contract. National brands may agree to work through a local dealer, share their wholesale discounts with a local partner, or carry out some other collaborative effort. Large contractors, whether local or not, may agree to meet certain targets for using local subcontractors.

Who uses it: This requires a fair amount of capacity to negotiate individualized contracts, so mostly private institutions and corporations, rather than governments, use this strategy.

Advantages: This approach turns what might be an obstacle to buying local into an opportunity by leveraging the fact that much of an institution’s spending is going to stay with its established larger contractors, at least for the near future. Combining the price and experience of larger contractors with the creativity and service of smaller, more local businesses can even end up saving money for the institution.

The local businesses involved not only get the immediate benefits from this agreement, but they can also use their new relationships or advantages such as volume pricing to land other big contracts and increase their capacity. This further boosts the local economy without higher costs to the buy-local institution.

Disadvantages: Can be time consuming to negotiate and monitor; requires retaining large nonlocal contracts.

Example: The University of Pennsylvania wanted to work with a local office supply store, Telrose, which did not have the capacity or pricing to handle the contract on its own. The university negotiated a three-way deal between the nationwide chain Office Depot and Telrose. In exchange for cost reductions, Penn offered an unusually long contract, benefiting both the local and national suppliers.

At first, Telrose acted more or less like a subcontractor, handling primarily delivery and service. But over time, the company moved up to the primary contractor position, handling ordering and billing, while Office Depot supplied materials only. The university ended up with a lower cost contract than it would have negotiated with the national supplier, a face-to-face relationship with a nearby vendor, and a $5 million contract with a local minority-owned company.

Calculate local multipliers for bidders

The most targeted way to keep your procurement money circulating locally is to choose vendors or suppliers based on their local multiplier. A multiplier is essentially the ripple effect of a purchase—how many additional transactions that one purchase causes within the local economy. The New Economics Foundation, based in the United Kingdom, uses the image of a leaky bucket to describe the multiplier effect. The water pouring into the bucket represents cash from philanthropic institutions, spending from non-residents, commercial revenue, and federal dollars—money coming into a community. The water leaking out represents cash that leaves the community, perhaps to remote corporate headquarters or non-local contractors and vendors. A community’s bucket (economy) will be easier to fill if some of those holes are patched by picking suppliers with high local multipliers.

How it works: A local multiplier can be calculated on a per supplier basis or a per contract basis. On a supplier basis, this calculation involves gathering information about how many of a business’s owners, employees, subcontractors, and suppliers are local. A representative group of the owners, employees, and suppliers who are local would also be interviewed about their own spending practices.

On a contract basis, the purchaser asks similar questions: How and where would a potential vendor spend the money from that contract? Michael Shuman, author of Going Local and a founding board member of the Business Alliance for Local Living Economies, suggests asking for the percentage of the contract that will be spent locally, calculating the multiplier and then the tax revenues, and adjusting the bid by that amount; this gives an advantage to those bids with a greater local multiplier.

Who uses it: This approach has been used primarily in the United Kingdom, but any purchaser willing to do the research can use this tool. A tool called the LM3 (Local Multiplier 3), devised by the New Economics Foundation, can provide guidance.

Advantages: This is the only strategy that gives a concrete, relative measure of a business’s actual impact on the local economy. It also provides ways to compare locally owned businesses with each other and with non-local businesses. Finally, it is less likely to encounter legal challenges because theoretically, any business can reinvest money locally, though it is almost always the locally owned ones that actually do so.

Disadvantages: Calculating even an approximate local multiplier requires a lot of data, much of it sensitive and proprietary. This is time consuming to compile. Also, bidders may be tempted to misrepresent spending patterns, should they become a factor in assigning contracts. Purchasers have to fact-check and monitor compliance.

Examples: City officials in North Norfolk in the UK, used the LM3 tool to calculate the local impact for two contracts with similar labor and supply demands: a parking lot built by a non-local contractor and a sea wall built by a local contractor. Officials interviewed contractors in person at their offices. Of the total contract value, the local contractor spent 34 percent on local staff, 42 percent on local businesses, and 4 percent on investment purchased locally. The nonlocal contractor spent nothing on local staff and 17 percent on local businesses. City officials then surveyed the local contractor’s local staff and the two local subcontractors to determine their local reinvestment rates.

The results were eye opening. Although the nonlocal parking lot contract was significantly larger than the local sea wall contract—£120,000 compared with £72,000—the parking lot generated less money for the local economy: £147,168, compared with the sea wall’s £154,587. For every £1 spent, the sea wall contractor generated £2.15 in the local economy, while the parking lot contractor generated only £1.23.

A good example of why local multipliers can be more effective than policies based solely on location comes from another municipal government in the United Kingdom, Knowsley, which found, to its surprise, that a nominally local company had a lower multiplier rating than a competing non-local company. It turned out the “local” company was a regional headquarters for a national company with national suppliers, while the “non-local” company was located just outside of Knowsley and employed many local residents.

CATEGORY 2: Build the Capacity of Local Businesses

Making the procurement process accessible and favorable to local businesses can have transformative effects only if local businesses are able to succeed as vendors for these purchasers. They must be able to provide relevant goods and services, and they must be sound and sophisticated enough to work with large clients. This category addresses how companies and public agencies can prepare small local businesses for larger contracts and connect them to emerging opportunities.

Provide targeted technical assistance to local and disadvantaged businesses

Decades of disinvestment and discrimination have left many small businesses at a disadvantage capacity-wise compared to major suppliers. A comprehensive buy-local effort must help local businesses meet the standards and qualifications of institutional and corporate purchasers.

How it works: In every region, many nonprofits, university departments, and city agencies provide small-business support services, from business plan coaching to incubator space to bookkeeping classes to micro loans to networking events. Companies or institutions committed to buying local can create in-house versions of some of these services, especially if they complement an existing supplier mentoring program. Or, purchasers can partner with outside programs to meet the needs of local vendors and buyers alike. Organizations and agencies can also support community- or university-based entrepreneurship programs by referring local vendors (or would-be vendors), providing funding, or serving as a clearinghouse to better coordinate the offerings.

Who uses it: Organizations with the capacity to train and coach local businesses.

Advantages: Allows purchasers to get beyond the frustration of “there aren’t any businesses that can do what we need” and support the development of businesses that will deliver. This helps supply meet demand.

Disadvantages: This is a long-term investment in the future that will not produce an increase in local spending in the next quarter or two. There are often turf issues when many organizations provide similar services, and attempts to add to, influence, or coordinate those offerings can be politically tricky.

Examples: The University of Pennsylvania (Penn) refers businesses that do not yet qualify as a Penn vendor to the Penn Wharton School of Business Minority Business Enterprise Center. There, businesses can receive technical assistance on the areas they need to improve. Also, Penn is one of the 15 members of the Philadelphia Area Collegiate Cooperative (PACC), a cooperative purchasing organization established in 2000. PACC works with the University Purchasing Initiative of Philadelphia’s Office of Economic Opportunity (formerly the Minority Business Development Council) to both support businesses and provide independent assessment of a business’s current capacity.

Refer local vendors to other purchasers

A business that does not qualify to be one institution’s vendor may be a perfectly good fit for another. Every purchaser has its rules and limitations. One may require the capability to use an online procurement system while another may not. A major corporation may be able to raise its bonding threshold while a city government may not.

How it works: Large purchasers commit to a buy-local strategy and work together to understand each other’s needs and supplier criteria. This allows all of them to refer promising local vendors to one another.

Who uses it: Anyone who has formed relationships with other purchasers interested in local procurement can make informed referrals.

Advantages: Personalized referrals help improve purchasing efficiency throughout a consortium and provide a ladder of opportunity for businesses not yet able to meet the most sophisticated vendor requirements. Referrals also promote goodwill between institutions and local businesses, which increases the chances for deals in the future as the business develops its capacity.

Disadvantages: It takes time to develop the networks and relationships to make worthwhile referrals.

Example: When otherwise sound vendors cannot work with the University of Pennsylvania because they are not technologically sophisticated enough to participate in Penn’s entirely online purchasing environment, the university often refers them to a smaller school in PACC, such as Drexel or LaSalle, which do not have e-procurement requirements.

CATEGORY 3: Adapt the Procurement Process to Encourage Local Purchasing

There are ways in which the procurement process at most large institutions is weighted in favor of larger, more established businesses, as well as existing vendors with whom the institution is familiar. There are a number of changes to the way purchasing offices work that can open the field to smaller and more local businesses without compromising quality or cost.

Smaller/Longer/Faster

Local businesses are often smaller and may be unable to fulfill the demands of a traditional purchasing contract immediately. To make contracts more accessible to businesses like these, some purchasing departments adapt their practices to address common obstacles these businesses face, without sacrificing price or quality. The goal is usually to groom businesses that will be able to grow into the standard expectations.

How it works: Some of the most common changes are:
• Smaller or graduated contracts. With new local vendors, contracts may be broken into smaller parts or assigned for just one department, building, or product to make them more manageable for smaller companies. These vendors can take on more as they grow and gain experience.
• Longer contracts. Some national-local partnerships receive longer than usual contracts, allowing them to lower costs and take time to establish themselves.
• Faster payment. Small businesses often struggle with cash flow, and institution payment schedules are often very slow, leaving vendors with gaps they cannot sustain. Some purchasing departments have committed to a 30-day payment cycle to lower this barrier to participation. The UK government guide Small Business Friendly Concordat, which many local governments in the United Kingdom have adopted, stipulates that governments will require that their general contractors do the same for subcontractors.

Who uses it: Anyone can.

Advantages: Faster payment schedules open the door to more vendors without costing the purchaser anything much beyond an initial transition period. Smaller contracts allow for fine-tuned matching of the strengths of vendors and contracts, resulting in good performance, lower risk, and greater accessibility for small local business.

Disadvantages: Having smaller contracts contradicts the trend in purchasing toward fewer overall contracts to increase procurement efficiency.

Examples: The construction department of Case Western University instituted a 10-day payment cycle to help emerging minority-owned businesses overcome cash-flow obstacles. Combined with changes to its bonding practices (see the following strategy), the shift led to $70 million in contracts with minority-owned firms from 2002 to 2007.

Columbia University tries to balance shortening its supply chain with recognizing the value of dividing procurement needs into smaller, more discrete pieces. For example, the university had identified several temporary staff positions that were particularly difficult to fill. Its main supplier for temporary staffing resisted taking on more sub-vendors in order to have some that specialize in staffing those jobs, so the university directly hired a local firm to fill that need and the improved service made up for the inconvenience of adding an additional contract.

Penn does not break down contracts, but it sometimes offers national-local partnerships five- or ten-year contracts instead of the standard three years. This gives local businesses room to grow. Ralph Maier, former purchasing director for Penn, offers, “They’re going to give us part of their profit margin, but what they are losing in margin, they make up in volume and security.”

Use procurement cards for smaller purchases

Many small local businesses are not set up for delayed payments through purchase orders or checks. Procurement cards—essentially business credit cards—can get around this problem in settings where many people have the authority to make purchases below a certain threshold with them.

How it works: Procurement cards are given to those with purchasing authority.

Who uses it: Institutions with decentralized purchasing.

Advantages: Procurement cards encourage the use of small local vendors because purchases can be made in person without printing checks, and the vendors can get paid immediately.

Disadvantages: Collecting data on purchases can be difficult. Many of the smallest local vendors don’t have the capacity to accept any sort of credit card, including a procurement card, which puts them at a disadvantage compared with bigger companies and chains in the neighborhood. This can be addressed through a companion strategy: Help local vendors get merchant credit card accounts.

Example: Columbia University, which has decentralized purchasing, instituted a procurement card system to give “end users” better access to local vendors. However, the university quickly discovered that many local vendors did not accept credit cards. So the university partnered with a local bank, which agreed to give participating businesses the same reduced rates and fees that Columbia gets if they set up merchant accounts. This gave local firms a significant cost break and opened up more vendor possibilities for Columbia.

Make the application process more accessible and streamlined

Often local businesses have trouble getting institutional contracts because they do not know how to enter the process, or even that the opportunity exists. They may be quite competitive at providing their goods or services, but they may not have been moving in the right circles, learning from the right mentors, or looking in the right places for notifications. Large multinational companies have people who specialize in seeking new business or writing contracts; for small business owners, it’s one more task on a very long list.

How it works: Purchasers can take many steps to expand access for smaller and local firms, such as:
• Supplier mentoring: Build one-on-one relationships to coach business owners on bidding and demystify the process.
• Outreach and marketing: Work with community groups, small business development groups, and ethnic business organizations to promote contracting and vending opportunities, explain how to get involved, and publicize any local preferences that exist.
• Streamlining materials: Remove or reduce repetitive, expensive, or unnecessary hoops in the registration, qualification, and bidding phases. Provide clear, readily understandable information on expectations and requirements.

Who uses it: Most purchasers that commit to a buy-local policy try to do this to some extent.

Advantages: Though it entails some upfront cost in staff time, better accessibility and outreach does not increase the cost of contracts and should lead to more bidders and increased competition. This approach is essential if local preferences are to effectively increase local contracting. Relationship-building also generates higher quality bids from local vendors as they better understand what is expected of them.

Disadvantages: If starting from scratch or in an environment of mistrust between institutional purchasers and local businesses, this can take a lot of work before it bears fruit, and may involve a considerable investment in time with vendors who do not end up qualified.

Examples: To offset the advantage of national chains that have dedicated staff to respond to RFPs and bids, Penn’s Supplier Mentoring Program meets with prospective local bidders to walk through the process before they submit a bid. The program helps local businesses understand the requirements and identify creative ways to meet them cost effectively. Often this is enough to make a local business competitive.

Address challenges of bonding to diversify the pool of local contractors

Small businesses often face a “you-need-experience-to-get-experience” dilemma when it comes to securing bonding, which is usually required for large institutional contracts. These surety bonds are like insurance, in that they are a source of funding should the contractor not perform the services or provide the goods agreed to in the contract. Many purchasers require businesses to be bonded in order to submit a bid. This proof of credibility is often a large barrier for small businesses because the larger the contract, the larger the required bonding amount. The decision to offer bonding to a company that has never been bonded before often relies on personal credit scores, cash flow, and even personal contacts, erecting barriers for many small entrepreneurs.

Some institutions have taken innovative steps to get around these problems and diversify their pool of local contractors.

How it works: All purchasers can offer mentoring to help potential vendors through the bonding process. Private purchasers, such as corporations, have the flexibility to raise their bonding threshold, or, less frequently, purchase materials directly to lower a contract amount and therefore lower the amount of the bonding necessary.

Public purchasers can create bonding pools—often lines of credit—to offer a partial guarantee to the surety companies for eligible firms (small, local, minority- or woman-owned, etc.).

Who uses it: Any large firm or institution can share information and start a mentoring program. Private firms have more leeway to raise their bonding threshold; governments are often bound by law to require a certain amount of bonding. Public purchasers can instead explore bonding pools or guarantees.

Advantages: Raising the bonding threshold—the contract amount for which a bond is required—is a simple one-time step that can produce big results quickly. A higher bonding threshold or offering bonding guarantees can reduce construction costs by increasing the pool of competitors.

Disadvantages: Raising the bonding threshold entails some additional risk, in theory. Creating a bonding pool may require upfront fundraising and significant administrative work to organize.

Examples: In 2002, Case Western University raised its bonding threshold from $25,000 to $500,000, meaning that projects under $500,000 do not require a bond. This by itself dramatically increased the university’s ability to hire small, local, and minority-owned firms. The university has not incurred any greater losses as a result. “Have we exposed ourselves to greater risk? Yes,” says Heidi Holman, director of construction. “Is it worth it? Yes.”

Merriwether & Williams Insurance Services works with 12 public agencies in California, including local governments, airports, and school districts, to implement bonding assistance programs. In each case, the agency first sets aside a pool of funds (often just a line of credit) as collateral for the bonding companies. Usually, the maximum percentage guaranteed is 40 percent, and often 10 percent is enough. There is also a dollar cap, which ranges from $250,000 to $750,000. Once a contract is completed, the letter of credit is retired and those funds are free for another company. After several rounds of contracts, companies establish enough of a track record and capacity that they can qualify for bonding without the guarantee.

Since 1995, Merriwether & Williams has enabled contractors to bid on $300 million in contracts that were previously out of reach because of bonding problems. Those bidders won contracts worth $100 million. Over the years, the guarantee has been invoked only once, a program loss ratio of two-tenths of 1 percent; the average for the industry is 35 percent. “Our contractors have generated $9 million in savings because we’ve increased the pool of competitors,” says Merriwether. “In essence, programs like this can pay for themselves.”

Redesign contracts to capture the strengths and capabilities of local suppliers

Instead of wondering how to find a local vendor that can meet the current specifications of a contract, purchasers can take a fresh look at the contract itself, with an eye toward buying local. What goals does the contract seek to achieve? How can the terms be adjusted to be more inviting to local businesses, without sacrificing the needs of the purchaser?

We tend to think that contract specifications are set in stone, but they’re not. With flexibility and creativity, purchasers can revise contracts to play to the strengths of local firms. If clear criteria such as nutritional quality, freshness, and frequency of delivery are included in contracts, it is often the smaller or local suppliers that have the advantage.

How it works: This will work differently every time, as the point is to match local business strengths with re-envisioned contracts. For example, a university might change catering requirements to encourage seasonal variations in offerings or ethnic foods, or it might raise standards for freshness or customizability. Any of these shifts would give local purveyors an advantage. In the same vein, a purchaser might require a locally available service representative or prioritize the reduction of downtime and repair costs by buying equipment from a business that can make local rush service calls.

Who uses it: Governments in Europe subject to strict free trade, lowest-bidder regulations have pioneered this way of thinking as a way to increase local spending when official local preferences are not available or desirable. But anyone can try this.

Advantages: It spurs a creative rethinking of a purchaser’s goals and how to achieve them. The purchaser may end up with higher quality commodities and services and even some that are carefully tailored to address multiple needs at once. This approach does not require legislative changes or provoke legal or philosophical challenges about quotas, yet it is likely to generate contracts with local businesses.

Disadvantages: Because it requires individual attention to each contract, relationships to know what’s available locally, and creativity to blend the two, this approach cannot be codified into a set of rules that become automatic. It requires a high level of understanding, commitment, and attention from all decision makers.

Example: Cornwall Food Programme (CFP) was created by a consortium of three National Health Service (NHS) locations in Cornwall, a disadvantaged area in the southwest of the United Kingdom. NHS wanted to improve its food quality and direct some economic benefit to this region. Due to strict European Union free trade rules, NHS could not deploy a simple local bid preference.

One of CFP’s early actions was to change ice cream suppliers. Hospital staff noticed that the mediocre ice cream they were serving for dessert was often left, melted, on patients’ plates. Clearly, this was a waste of money and food.

CFP identified a local dairy, Callestick, that made high-quality ice cream. CFP and the dairy identified ways to reduce costs, for example by reducing portion sizes and simplifying packaging, but the local dairy’s resulting offer was still not competitive with the previous supplier based strictly on price. However, it had 50 percent more protein than the previous supplier’s.

So CFP included in the contract specifications minimum nutrition requirements. On the basis of the revised specifications, the national contractors declined to even submit bids, and Callestick won the contract on both price and quality.

The new ice cream has been good for patients and the bottom line. Because the ice cream tastes better and delivers more nutrition, the hospitals have saved money despite the slightly higher direct costs because they have been able to decrease their use of expensive powdered drink supplements given to elderly patients to maintain their calorie intake.

Taking this approach into other contracts, CFP has been able to spend 83 percent of its budget with local companies and 41 percent on local produce without increasing its costs.

This article is excerpted from the PolicyLink report Buy Newark, by Solana Rice, research by Miriam Axel-Lute

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