Professor Bornstein Testimony

Professor Bornstein Testimony


Bornstein & Song Research of the California Strategic Sourcing Initiative Programs - June 8, 2011

 
Strategic Sourcing:
Public Sector Savings vs.  Private Sector Savings

Since the 1980s, Strategic Sourcing has been successfully used in the private sector.   In the mid-2000s the public sector tried to duplicate Strategic Sourcing and became enamored with this innovative cost saving initiative.   

The savings from Strategic Sourcing give the impression that this cost saving initiative is the panacea for Federal, State, City, and Municipal governments, especially at this time in this era of budget cuts. 

Strategic Sourcing may work in the private sector where it has been known to save millions, however, Strategic Sourcing in the public sector will precipitate additional social service and other costs related to job loss which may offset more than the savings.   These costs would only apply to the public sector and were never of any concern for the private sector.

In fact, the additional cost due to displaced small businesses and lost jobs may have greater ramifications than the net savings previously estimated for the State.   This is especially significant as the State is in the process of trying to survive in this devastating economic downturn.   Displaced small businesses and the resulting lost jobs and economic loss for the State is not the way out of this quagmire, but in fact it draws us further into its depths.

Strategic Sourcing: Lost State Contracts increase Unemployment and Limit Job Creation

Strategic Sourcing Displaces Small Businesses

  • Strategic Sourcing displaces small businesses by reducing the number of small businesses that participate in State contracts. 
  • The State takes advantage of volume discounts which lowers prices and consolidates state expenditures into fewer contracts. 
  • This results in fewer contracting opportunities for small businesses and displaces many small businesses and their employees.

Strategic Sourcing displaces small businesses by reducing the number of small businesses that participate in State contracts.   It does this by aggregating the volume of all agencies and departments and by driving that volume to a very small number of vendors.   Whereas previously, the State had contracts with multiple vendors, by using Strategic Sourcing the State takes advantage of volume discounts which lowers prices by consolidating state expenditures into fewer contracts.   This results in fewer contracting opportunities for small businesses and displaces many small businesses and their employees.

The Social Service and Other Costs of Job Loss:At What Price to the California Economy

Summary of the Cost of Job Loss:

  • State Unemployment Benefits
  • State Tax Revenue Loss
  • Economic Loss in Consumer Spending & Purchasing Power
  • State Revenue Losses from Individuals and Businesses
  • Social Costs of Worker Displacement & Retraining.
  • Social Safety Net Costs
  • Small Business Owners’ Defaults and Foreclosures Impact the Mortgage & Housing Crisis 


The efficiencies gained by Strategic Sourcing must be offset by the resulting social service and other costs related to the job loss from the shrinking number of small businesses in State contracts.   The social service costs of job loss includes unemployment benefits, the “social safety net” costs, along with the “true” cost of job loss which includes the e
conomic loss from consumer spending & purchasing power and the potentially significant social costs of worker displacement & retraining.   Any savings for California which involves displacement of small business has a cost which should be considered to offset against the Strategic Sourcing savings. 

In California, this shrinking base of small businesses will spike unemployment as 90 percent of the State’s small businesses employ from 1-19 workers.   The impact on small business will also extend to limiting new job creation as firms with fewer than 20 employees create 40 percent of new jobs.