How not to do Austerity: Ohio ‘asks’ vendors to volunteer 15% cut
Ohio’s Department of Administrative Services asked vendors to take a voluntary 15% cut effective July 1st. This is a regrettable, shortsighted measure. A better way to do this would be to start by asking vendors how they are doing.
The Columbus Dispatch first reported on a letter sent to 1,400 vendors with live contracts with the state department of administrative services (DAS). The proposed cuts are voluntary, although according to the reporting the letter threatens that conformance “will be taken into consideration as we make decisions whether to renew or rebid contracts approaching their end date. If you are in current negotiations regarding a contract or an extension, please keep this request in mind, as well”. There is a lot wrong with this hasty measure.
To an entrepreneur, a lot hinges on the ambiguously framed appeal/threat that DAS offers. A lot of questions come to mind: Is this a promise about future business if I volunteer cuts? Will I be disadvantaged in future bids if I don’t volunteer now? Is this kind of promise legal or do I risk future challenges by competitors if I offer a cut and get a win a contract extension? As a vendor, I would want to know exactly what I am getting into here.
For Ohio’s government, this ambiguity is not just an ethically problematic threat of their vendors. It may open Ohio to legal challenges for years to come as competitors will question all kinds of awards and renewals in reference to promises made to ‘volunteers’.
Corporations strategize, small businesses struggle
Ohio’s measure is likely to hit the most vulnerable businesses hardest. Small businesses may simply not be able to afford a cancellation or non-renewal of contracts with the state’s biggest customer. If you operate on a modest profit margin, like most small vendors do, you are least likely to have cash reserves to weather Covid and a standoff with your biggest client. Losing this business could tip your business into default.
More generally, small contracts are more vulnerable simply because they are unlikely to be critical in nature, doubling the bias against small vendors. By contrast, corporate vendors may be able to accommodate a 15% cut out of higher margins and cash reserves. Especially if it buys them favor on renewal or future contracts that they know how to milk. Alternatively, corporates may also choose to call the state’s bluff: ignore the ask, knowing that it would be very costly to rebid major contracts.
All this uncertainty and bias suggests to me that take-up will be very uneven as a result. Vendors who do volunteer may end up resenting their decision if others don’t and if the overall savings goal isn’t achieved. In that case, you would not have averted a crisis but made yourself even more vulnerable to the next round of mandatory austerity measures.
Leadership is a service, not an order
All this seems to be one big leadership blunder: It is not just the government that is struggling, but the economy as a whole. Why bully every vendor you have when they may be experiencing their own hardships? Why make them struggle to make sense of a half-baked idea? It looks a lot more like passing the buck than the good contract management we would expect from a well run state.
Ohio is not alone in underestimating the power asymmetry with its vendor base. It is not an inexhaustable resource with which you haggle for terms, but if Covid-19 has shown us one thing, it is that the quality of our partnerships determines our resilience. And the way such partnerships are managed is not by decree in a four paragraph email with dubious promises. Instead, good contract management is a dialogue in which the needs of buyer and vendor are discussed to solve problems. Regrettably, most governments have neglected in investing in contract management excellence which reaps disproportionate rewards in times of crisis.
In leadership terms, writing a four paragraph email to 1,400 vendors demanding ‘voluntary’ cuts is as blunt as breaking up a relationship by SMS. A good leader is mindful of the complexity of the situation. A better opening question might have been “What can we do for you?” or asking “Our needs are changing, how about yours?”.
Here are some ideas as to how Ohio DAS could have done better
Tens of thousands of governments are planning austerity measures as we speak, most of them under great time pressure. Below I am proposing six ways by which Ohio DAS could achieve better outcomes.
- Make a plan. Identify a minimum savings target. Modeled the potential of the program and what it would take to achieve meaningful savings. An operational review can identify which contracts would lend themselves to delays, cuts or termination. A legal evaluation will yield clarity on what threat / promise is being made. Determine who to ask for what and whether you appeal to civic duty or negotiate future business.
- Offer support first. Any conversation should start with listening. Ask vendors what they need, how they are doing. As a major buyer you should care about the health and wellbeing of your suppliers. Maybe there are ways you can help them navigate these difficult times.
- Provide guidance. Tell vendors how you imagine them to determine what voluntary cuts to offer. Should they lay off low-wage workers? Should they reduce service levels by 15%? Can they propose changes to the scope to make things easier? Can they propose cutting red-tape like insurances, payment delays and bonds to release capital?
- Ask for ideas. Vendors will have suggestions on how to make savings. But it is unlikely that cuts will just happen, and the more assistance you can provide the easier it will be to save. At the minimum you can provide a template for proposals and a contract manager to lead the process from your side.
- Help vendors get help. You should not assume that vendors know what to do here or what their rights are. If you do, you risk exploiting the asymmetry of power and resources as a big buyer. Instead, partner with your small business department, economic development, your local Procurement Technical Assistance Centre and Chamber of Commerce.
- Be transparent. Openness pays huge dividends during times of crisis. Avoid ambiguity, provide updates, explain how everything works and what is happening. It cannot be in your government’s interest to spread fear and anxiety caused by misunderstandings or lack of information. In practice this means daily updates, a responsive helpline, having a contract manager call each of your vendors.
