Description
One of the main goals of public procurement centralization is to generate monetary savings directly impacting the total costs of public institutions. It seems to be a remedy in economic downturn, but the impact of centralization may have both positive and negative financial effects.
104
ISSN 1392-1258. EKONOMIKA 2011 Vol. 90(3)
EVALUATION OF FINANCIAL EFFECTS
OF PUBLIC PROCUREMENT CENTRALISATION
Karolis Šerpytis*, Vytautas Vengrauskas, Zinaida Gineitien?
Vilnius University, Lithuania
Abstract. One of the main goals of public procurement centralization is to generate monetary savings directly
impacting the total costs of public institutions. It seems to be a remedy in economic downturn, but the impact
of centralization may have both positive and negative fnancial efects. A central procurement organisation
constitutes an additional link in the supply chain that makes the distance between the buyer and the supplier
longer. Therefore, the existence of this link should be justifed, and the evaluation of centralisation impact is
one of the key tools in ensuring the procurement centralisation decisions to be benefcial to the state. The aim
of the study was to formulate the model which would serve as a basis for evaluating the fnancial impact of
centralised public procurement.
Key words: public procurement, centralization impact, purchasing procedures
Introduction
Centralisation of public procurement is a trend that is picking up the pace in both Lith- entralisation of public procurement is a trend that is picking up the pace in both Lith-
uania and abroad (Dimitri, Piga, Spagnolo, 2006). In Lithuania, a central contracting
authority at which public procurement is concentrated was established in 2007. Such
authorities exist in the United Kingdom, Germany, Italy, Denmark and Finland. The
growth of trends towards centralised public procurement has been speeded up by the cur-
rent recession. The increasing scope of centralised procurement raises questions about
their fnancial impact. What is the fnancial beneft of public procurement centralisation
for the state and how should it be evaluated?
An appropriate evaluation of the fnancial impact of centralised public procurement is
relevant to various organisations connected with this process. The evaluation could help
contracting authorities to make decisions on participation in the centralisation. It would
enable an authority conducting centralised procurement to timely respond to and duly
adapt the public procurement centralisation strategies. Public procurement policymakers
would adopt well-grounded decisions on the further development of centralisation. It
should be noted that the fnancial impact of the centralisation of public procurement is
not necessarily positive. The central procurement organisation constitutes an additional
* Address for correspondence:
Faculty of Economics, Vilnius University, Saul?tekio Ave. 9, LT-2040 Vilnius, Lithuania; email: kserpytis@
gmail.com
105
link in the supply chain (Young, 1989) that makes the distance between the buyer and the
supplier longer. Therefore, existence of this link should be justifed (Nollet, Beaulieu,
2005), and the evaluation of the effects of centralisation is one of the key tools in achie-
ving that the centralisation decisions are benefcial to the state.
In the scientifc literature, the subject of public procurement centralisation is mainly
examined in the form of arguing for and against its advantages and disadvantages. The
evaluation of the fnancial impact of centralisation, however, is not suffcient. While
such evaluations have been done in Finland, USA, United Kingdom and Chile (Singer et
al., 2009, Karjalainen, 2009; Celec, Nosari, Voich, 2003), an overview of the scientifc
literature has shown that no author has presented a conceptual model allowing to identify
and assess the fnancial benefts of public procurement centralisation.
The purpose of this study was to formulate, through analysis and synthesis of know-
ledge available in the literature, an evaluation model which would form a basis for the
evaluation of the fnancial effects of centralised public procurement. The object of the
study is fnancial savings experienced by contracting authorities conducting public pro-
curement through Lithuania’s central contracting authority. The methods of the study
include the analysis and synthesis of scientifc literature, survey of contracting authori-
ties conducting centralised procurement, and statistical methods of data processing and
analysis.
The structure of the paper: the frst part presents an overview of theoretical literature
and examines the procurement centralisation subject from other authors’ perspective; the
second part presents an analysis of the factors that are relevant in evaluating the fnancial
effects of centralisation on public procurement and development of a methodology; the
third part presents an evaluation of the fnancial effects of centralisation in Lithuania.
Defnition of centralisation in public procurement
Centralisation is the concentration of political or administrative power at a single place
(Ferlie et al., 2005). In a democratic society, political power is always decentralised,
whereas processes of centralisation or decentralisation of administrative power are ta-
king place constantly. From the standpoint of management, centralisation is one of the
dimensions of the organisational structure, which shows the vertical locus of the de-
cision-making authority (Dröge, Germain, 1989). This is particularly relevant to large
organisations with a number of divisions linked by subordination relations.
Centralisation of procurement can be described by identifying three forms of the orga-
nisation of procurement: full centralisation, full decentralisation, and a hybrid structure.
Dimitri et al. (2006) provide the defnitions of these three organisational forms:
full centralisation of procurement. • Procurement is fully centralised when the key
decisions on the purchase of goods and services (what, how and when) are adopted
106
by the central procurement unit formed with the aim of meeting the procurement
needs of an organisation’s divisions;
full decentralisation of procurement. • Procurement is decentralised when divisions
or local offces of an organisation are delegated the power to decide what, how and
when to procure;
a hybrid model of centralisation in procurement. • This is an interim model whereby
a central procurement unit shares the procurement process with the organisation’s
decentralised divisions.
Centralisation of public procurement through a central contracting authority has beco-
me popular in Europe in the last decades (Dimitri et al.,2006). Such centralisation of pu-
blic procurement is consistent with the hybrid model of centralisation. The main feature
of the model is the centralisation of individual parts of the procurement process and not
of the process as a whole. Figure 1 depicts the procurement process from the initiation of
procurement to the fnal payment. In case of decentralised procurement, a full process is
carried out by the contracting authority itself. Where procurement is centralised, part of
the procurement process components such as preparation of public procurement docu-
mentation and execution of procurement procedures as well as potential litigation with
supplier are delegated to the central contracting authority.
Full centralisation of procurement means that all parts of the public procurement
process are concentrated in the central procurement unit (see Fig. 1) in all cases of
purchasing goods or services. In practice, such form of centralisation of procurement is
not found at all levels. A feasibility study on the centralisation of public procurement in
Lithuania identifes the following levels of centralisation (Vengrauskas et al., 2006):
organisational level (procurement is concentrated at procurement division); •
departmental level (procurement of a department is concentrated at its procurement •
division);
national level (procurement concentrated at the central contracting authority). •
FIG. 1. Public procurement process centralisation scheme
Source: Author’s compilation.
Preparation of
public
procurement
documentation
Initiation of
procurement
Execution of
procurement
procedures
Supply of goods
and services
Potential
litigation with
supplier
Final
payment
Central contracting
authority
Delegation of part
of procurement processes
107
The distance between a decentralised division and a division at which procurement
is centralised has a signifcant effect on centralisation in public procurement (Young,
1989). This distance is short at organisational and departmental levels; however, it can
be very long at a national level. The government sector is extremely diverse and exists as
a sophisticated organisational system, with a very wide assortment of goods and services
purchased (from stationery to bridges or military vessels). Therefore, the application of
the full centralisation on national level is very complicated and is rarely found in the
practice of democratic states. Studies of the phenomenon of procurement centralisation
on national level lead to a conclusion that centralisation or decentralisation of public pro-
curement cannot be achieved in full. Therefore, the problem of the research is not limited
to the question as to what fnancial beneft is derived from the decentralised procurement
organisation system versus a centralised one. The research is aimed at determining the
fnancial effect of changing the public procurement centralisation / decentralisation ratio
on a national level within a certain period of time.
Having in mind the fact that the problem of the research is related to public procure-
ment, i.e. an object which is subject to a detailed legal regulation, the scientifc defnition
of public procurement should be harmonised with the legal one. In the public procure-
ment law, centralisation is defned through the notion of a central contracting authority.
“Central contracting authority is a contracting authority which:
acquires goods and / or services intended for contracting authorities, or •
concludes public procurement agreements for a contracting authority, or •
concludes framework agreements on the purchase of works, goods or services.” •
The legal defnition of public procurement provides for three ways in which the cen-
tral contracting authority may centralise public procurement. The frst two ways are not
suitable if the distance between the decentralised division and the central contracting
authority is long. Therefore, centralisation of public procurement on a national scale is
implemented through framework agreements (Dimitri et al., 2006).
Upon summing up the defnitions of centralisation in public procurement, provided in
the scientifc and legal literature, as well as studies of procurement practice, the authors
have formulated the following defnition of centralisation in public procurement on a
national level: “Centralisation of public procurement is a change in the ratio between
centralised and decentralised public procurement on a national level, where the central
contracting authority centralises the procurement through contract agreements“.
Advantages and disadvantages of procurement centralisation
The subject of centralisation in public procurement is examined in scientifc literature
by discussing the advantages and disadvantages of public procurement. The following
advantages of public procurement have been identifed in the literature:
economy of scale manifesting itself through higher quantity-based discounts and •
simplifed procurement processes (Munson, 200?);
108
standardisation of goods and services(Munson, Hu, 2009); •
standardisation of processes (Rozemeijer, 2000); •
consistent and integrated character of procurement policy (Trautmann et al., •
2009).
K. Karjalainen sums up that a higher integration of the procurement function has a
number of advantages and can be used for cutting down procurement costs (Karjalainen,
2009). Disadvantages of procurement centralisation are also analysed in the literature:
high expenses for setting up and maintaining the central procurement authority •
(Vagstad, 2000);
part of the goo • ds / services are unique and their standardisation is complicated
(Matthyssens, Faes, 199?);
reasonable specifc needs of contracting authorities can be disregarded in the cen- •
tralisation process (Munson, 2007).
Part of the advantages identifed by the researchers can be directly related to the fnan-
cial impact. The economy of scale manifesting itself through quantity-based discounts
(Munson, 200?) and standardisation of specifcations (Munson, Hu, 2009) affects the
prices of goods and services. Standardisation of the procurement processes (Rozemeijer,
2000) and expenses for setting up and maintaining the central procurement authority
(Vagstad, 2000) infuence the administrative expenses related to the procurement pro-
cesses. Differences in the prices of goods and services as well as changes in administra-
tive expenses are the factors that determine the fnancial effect of centralisation in public
procurement. It should be noted that this effect may manifest itself in the form of savings
or losses for the state.
Savings are defned in the scientifc literature as fnancial savings achieved as a result
of efforts made by a procurement division and directly infuencing an organisation’s ex-
penses (Nollet, Beaulieu, 2005). Furthermore, savings are defned as the added value of
the procurement division for an organisation (Van Weele, 2005). It can be concluded that
in order to answer the question as to the fnancial effect of the change in the ratio between
centralised / decentralised procurement on a national level, an analysis of the savings re-
ceived by contracting authorities due to the operation of the central contracting authority
should be made. This conclusion means that the fnancial effect of centralisation of public
procurement is refected by either savings or losses incurred by contracting authorities
conducting their procurement procedures through the central contracting authority.
Assessment of the fnancial efect of procurement centralization
An analysis of scientifc literature has shown that empirical studies aimed at determining
the fnancial beneft of centralisation in procurement were carried out in Finland, United
Kingdom, and Chile. The authors covered by the analysis (Table 1) identify two main
criteria of fnancial evaluation of the public procurement centralisation:
109
savings due to price differences; •
savings due to changes in administrative expenses. •
TABLE 1. Results of scientifc literature overview
Valuation criteria Enviroment Valuation method Source
Savings due to price
diferences
Electronic procurement
agency (ChileCompra)
Statistical modeling of
price diferential
Singer, Konstantinidis,
Roubik, Befermann
(2009)
Procurement of Central
Contracting Agencyin
United Kingdom (OGC-
buying.solutions)
Survey of sample of price National audit ofce
(2006)
State commodity con-
tracts in United States of
America (CASU program)
Survey of sample of price Celec, Nosari, Voich Jr.
(2003)
Procurement of Central
Contracting Agency in
Finland (Hansel)
Survey of sample of price Karjalainen (2009)
Savings due to
changes in adminis-
trative expenses
Electronic procurement
agency (ChileCompra)
Survey and formula for
the calculation of admi-
nistrational expenses
Singer, Konstantinidis,
Roubik, Befermann
(2009)
Procurement of Central
Contracting Agency in
United Kingdom (OGC-
buying.solutions)
Survey National audit ofce
(2006)
Procurement of Central
Contracting Agency in
Finland (Hansel)
Survey and formula for
the calculation of admi-
nistrational expenses
Karjalainen (2009)
Source: Author’s compilation based on literature review.
According to Celec et al., savings due to price differences is the main factor that can
justify framework agreements (Celec, Nosari, Voich Jr., 2003). Lower prices due to the
economy of scale are an advantage of the procurement centralisation, which is being
mentioned most often. C. L. Munson and K. Karjalainen state that centralisation of pro-
curement lowers the price of goods and services if the merging of several orders into one
major one allows making use of the quantity-based discounts (Munson, 200?; Karjalai-
nen, 2009). Many other authors emphasise that larger procurement volumes increase the
buyer’s negotiating power (Porter, 1998; Faes et al., 2000). H. Schiele has found that
the concentration of knowledge and human resources with high qualifcations lead to a
larger potential of savings due to lower prices (Schiele, 2007).
Savings due to changes in administrative expenses are a consequence of procurement
centralisation that has been identifed in the literature. Avoiding a duplication of pro-
curement procedures and reducing their overall number have a signifcant effect on the
110
general administrative expenses (Karjalainen, 2009; Essig, 2000; Singer et al., 2009). A
public procurement procedure carried out by the central contracting authority by conclu-
ding a framework agreement can replace procurement procedures of many contracting
authorities that centralise their procurement (Vengrauskas et al., 2006).
It should be noted that the results of empirical studies described in the literature show
the unequivocal nature of the fnal effect of decentralisation in public procurement. A
study carried out in Finland established that prices for offce supplies were on average
by 25% and for air travel by 19% lower in centralised procurement as compared with de-
centralised one; in the United Kingdom, prices for computer hardware were on average
by 15% lower in centralised procurement. While these differences are signifcant, they
do not necessarily prove an undisputable beneft of centralised procurement. A study in
Chile has found that the price difference between centralised and decentralized procure-
ment was only 3%. The average prices for part of goods’ and services’ categories were
higher in centralised procurement compared with the decentralized one in the United
Kingdom.
To sum up, one may state that the overall savings arising from centralisation of pu-
blic procurement are determined by two factors: the difference between prices in cen-
tralised and decentralised procurement and the changes in administrative expenses for
conducting public procurement procedures. In the opinion of the author, apart from these
two factors, a third one – the centralised/decentralised procurement ratio – should be
proposed in formulating a model for the evaluation of centralisation in public procure-
ment. This factor has not been suffciently emphasised in the studies referred to in Table
1. The work of K. Karjalainen should be singled out: it states that an insuffcient use
of centralised public procurement can lead to a failure in getting the expected benefts
(Karjalainen, 2009). A certain level of public procurement centralisation is necessary
to recover the expenses for setting up and maintaining the central contracting authority
(Vagstad, 2000).
With regard to the literature overviewed and the conclusions drawn, the main factors
to be considered in the evaluation of the overall fnancial effect of public procurement
centralisation are as follows:
differences in prices in centralised and decentralised procurement; •
administrative expenses for conducting the procurement in both cases (centralised •
and decentralised);
the ratio of centralised and decentralised procurement. •
These factors together form an evaluation model for determining the fnancial effect
of centralisation (see Fig. 2). The indicators refecting the factors of the model are as-
sessed by various methods. S. E. Celec proposes the sample method as the best one for
selecting goods and services that will be an object of a price survey (Celec et al., 2003).
The data of the survey would be used for determining the average prices of goods and
services in centralised and decentralised procurement. Based on a comparison of the
111
prices, the savings indicator S
perc.
is calculated. Statistical modelling of the price diffe-
rential, another method of evaluating this factor (Singer et al., 2009), was not chosen due
to the complexity of its application.
Administrative expenses C
dec
are assessed by analysing the length of working time
and the amounts of pay to the employees carrying out the procurement procedures in
decentralised procurement. Administrative expenses C
cen
are assessed from the fnancial
performance indicators of the central contracting authority. Savings due to changes in
administrative expenses are assessed by calculating the administrative expenses in case
of decentralised procurement C
dec
· n and in case of partial centralisation (C
?cen
+ C
?dec
·
(n – n
?cen
), where n is the number of contracting authorities and n
cen
the number of
organisations centralising procurement. Thus, in case of full decentralisation, adminis-
trative expenses would amount to C
dec
· n, while in case of full centralisation to C
cen
.
The formula for the determination of savings due to changes in administrative expenses
depends on the organisational structure of public procurement at the beginning and at the
end of the period. For example, if the public procurement was fully decentralised at the
FIG. 2. Model for the determination of the fnancial efect of centralisation in public procurement
Source: Author’s compilation.
Average price of goods and
services in decentralized
procurement
Average price of goods and
services in centralized
procurement
Administrative expenses of
centralized purchase
Administrative expenses of
decentralized purchase
Number of contracting
authorities which decentralize
procurement
Number of contracting
authorities which centralize
procurement
Revenue of centralized
procurement
Savings
indicator
Savings due to price
differences
Savings due to changes in
administrative expenses
Total savings of
centralization
Evaluation of price
difference
Ratio between
centralised and
decentralised
procurement
Size of
administrative
expenses for
conducting the
procurement
112
beginning of the period but partially centralised at the end of it, savings due to changes in
administrative expenses are determined as the difference between the above-mentioned
expressions from the formula:
DC
administrative expenses
= C
dec
· n – (C
cen
+ C
dec
· (n – n
cen
))
1
.
This change in administrative expenses depends on the change in the ratio between
centralised and decentralised procurement, which is measured as the difference between
n, the total number of contracting authorities, and n
cen
, the number of authorities centra-
lising procurement.
Financial savings due to price differences depend on changes in the volume of cen-
tralised procurement during the given period. Savings due to this factor are determined
from two indicators: the determined savings percentage S
perc
and the calculated indicator
of the value of centralised procurement during the period R
cen
. The total fnancial effect
of the centralisation of public procurement is determined by summing up the amounts of
savings due to price differences (S
perc
· R
cen
) and savings due to changes in administrati-
ve expenses DC
administrative expenses
.
Methods
In Lithuania, public procurement has been centralised through the Central Contracting
Authority since 200?; however, its fnancial effect has not been studied. Studies were
carried out (see Table 2) based on the fndings of analysis of the literature and the eva-
luation model developed. The purpose of the studies was to assess the fnancial effect of
public procurement centralisation in Lithuania in 2007–2010.
TABLE 2. List of research projects
Research project Research object Method Date of research
Evaluation of administrative
expenses of decentralised pur-
chase
Length of working time and the
amounts of pay to the employ-
ees carrying out the procure-
ment procedures in a decentra-
lised procurement
Survey March–May 2006
Evaluation of price diferences
in centralised and decentralised
public procurement
Sample of prices of goods and
services
Survey April–June 2010
Evaluation of centralized pro-
curement volume
Statistics of central contracting
authority procurement volumes
in 2007–2010
Statistical
data analysis
2010
Evaluation of of decentralized
procurement volume
Statistics of decentralised public
procurement in 2007–2010
Statistical
data analysis
2010
Source: Author’s compilation
1
Source: Karjalainen, K. (2009). Challenges of purchasing centralization – Empirical evidence from public
procurement. Helsinki School of Economics.
113
The research object consists of two parts: prices of goods and services acquired
through the public procurement procedure and of administrative expenses for conduc-
ting these procedures in the environment of 1) decentralised public procurement and
2) centralised public procurement. The results of the analysis are compared using the
developed theoretical evaluation model which enables determining the fnancial effect
of public procurement centralisation.
Evaluation of price diferences due to public procurement centralization
To determine the differences in prices in decentralised and centralised procurement, a
survey of all contracting authorities that centralised their procurement procedures through
the central contracting authority was conducted. Questionnaires were sent via electronic
mail to 274 organisations, and 154 questionnaires (56.2%) were properly completed.
The results of the survey were recognised as representative ones based on the conclusion
that when the general population is small, all its members or half of them should be sur-
veyed where possible (Kardelis, 2005).
In this survey, the contracting authorities that had a centralised procurement of mobile
communication services were asked to provide the amount of the bill for the past full ca-
lendar month prior to the procurement through the central contracting authority and the
amount of the bill for the frst calendar month after such procurement. A comparison of
the bills was selected as the one refecting the changes better than a comparison of minu-
te rates. The contracting authorities that centralised the procurement of fuel were asked
to provide information on the discount received on one of the fuel types. A discount per
litre of fuel is expressed in cents, which is a usual way to agree on rates in fuel purchases.
The contracting authorities that had centralised procurement of other goods were asked
to provide prices at which goods were purchased prior to starting procurement through
the central contracting authority.
In order to calculate the results as accurately as possible, savings (S
savings
) were de-
termined for each contracting authority separately, followed by the calculation of the
savings percentage S
perc
for each procurement category from the formula:
?
?
=
t procuremen d centralise of revenue
savings
perc
R
S
S .
Table 3 presents the values of saving percentages for each category of centralised
public procurement. It should be noted that, in the calculation of this indicator, negative
savings (with the prices in centralised procurement higher than those in decentralised
procurement) were also taken into account. A small part of the respondents have incur-
red a loss due to centralisation of procurement. In the procurement of mobile communi-
cation services, higher costs after centralisation were incurred by 3 organizations out of
35 (8.5%) and in fuel procurement by 14 out of 54 (26%). Nevertheless, centralisation of
114
public procurement enabled the majority of the or-
ganisations to save money. The saving percentages
were highly signifcant in the mobile communicati-
on and offce supply categories (40% and 45.32%,
respectively). The lowest savings were observed in
the procurement of fuel: savings due to price chan-
ges in this category amounted to just 1.2%. To sum
up, overall savings were positive in all categories
of centralised procurement, and price changes due
to centralisation were signifcant.
Evaluation of the price-to-quality ratio
The survey was aimed also at verifying whether
the price change was not achieved by compromising the quality of the goods and servi-
ces. The surveyed contracting authorities were asked to assess the price-to-quality ratio
according to the Likert scale. A point was assigned if the ratio between the price and
quality of the purchased goods / services had deteriorated considerably in centralised
procurement as compared with decentralised procurement. Three points were assigned if
the price-to-quality ratio remained unchanged, and fve points were assigned in case of
considerable improvement.
Table 4 presents the results of the contracting authorities’ survey refecting the eva-
luation of the price and quality ratio. Changes in the price-to-quality ratio received most
favourable evaluations in mobile communication service procurements (score 4.43).
Procurement of computer equipment was the category that received worst evaluations
(score 3.45).
TABLE 3. Savings in the centralised pro-
curement categories, %
Procurement category Savings
Computer hardware 7%
Printers 24%
Mobile services 40%
Fuel 1.20%
Stationary goods 45.32%
Printing paper 15.35%
Toners 4.50%
Source: Author’s compilation.
TABLE 4. Average and standard deviations of the price-to-quality ratio
Price and quality ratio N – number of respondents Average Deviation
Mobile services 35 4.43 0.9292
Fuel 54 4.05 0.8111
Stationary goods 74 3.51 1.0760
Computer hardware 58 3.45 1.0117
Source: Author’s calculation.
In all categories of goods and services, the evaluation given to the price-to-quality
ratio was higher than 3, which means that centralisation of procurement led to an impro-
vement of this ratio in all procurement categories.
115
Evaluation of changes in administrative expenses
of conducting procurement through centralisation
In the procurement centralisation process, contracting authorities transfer part of the
procurement procedures to the central contracting authority. In this way, the contracting
authorities avoid such processes as:
drawing up public procurement documentation; •
carrying out public procurement procedures; •
potential disputes with suppliers. •
Avoiding these processes means that the contracting authorities cut their administra-
tive expenses for the processes. According to contracting authorities that conduct public
procurement by the decentralised methods, a public procurement procedure ending in
concluding a sale-purchase contract costs LTL 2,805 on average. Thus, through centra-
lisation, contracting authorities avoid paying LTL 2,805 as administrative expenses. It
should be noted that depending on the procurement method, a public procurement takes
83 days on average in case of an open tender procedure, 4? days in a simplifed tender
procedure, 46 days in a restricted tender procedure, 30 days in a negotiated procedure
with a publication of a contract notice, and 24 days in a negotiated procedure without a
publication of a contract notice.
By assuming the conduct of the public procurement procedure, the central contracting
authority incurs high fxed costs related to the conclusion and management of contract
agreements. The central contracting authority pays the expenses for activities such as:
studies of contracting authorities’ requirements and market research; •
drafting of public procurement documentation; •
potential disputes with suppliers; •
management of orders received from contracting authorities and of renewed com- •
petition processes by electronic means.
As procurement processes are more complicated in case of centralisation as compa-
red with decentralised processes, administrative expenses for a centralised procurement
procedure are much higher. The administrative expenses on concluding a contract agre-
ement amounted to LTL 181,000 on average (data provided by the Central Contracting
Authority).
The overall scope of change in administrative expenses depends on the number (n
cen
)
of contracting authorities starting centralisation of public procurement in each procu-
rement category (n – the total number of contracting authorities). The change in these
expenses DC
administrative expenses
is calculated for each procurement category by the for-
mula:
DC
administrative expenses
= C
dec
· n – (C
cen
+ C
dec
· (n – n
cen
)).
116
The above formula compares the size of administrative expenses in a certain procure-
ment category in cases of decentralised procurement C
dec
· n and of partial centralisation
(C
cen
+ C
dec
· (n – n
cen
)). Given that the costs of conducting a centralised public procure-
ment procedure and of further contract administration are very high, savings are essenti-
ally determined by the number of contracting authorities centralising procurement.
Assessment of fnancial savings due to centralisation
of public procurement in Lithuania in 2007–2010
In Lithuania, centralisation of public procurement on the national scale was started in
2007. Since then, the scope of centralisation has been increasing according to the follo-
wing criteria:
the value of centralised public procurement; •
the number of contracting authorities centralising procurement; and •
the number of categories of goods and services purchased through centralised pro- •
curement.
The year 2010 is exceptional in terms of the scope of centralised public procurement.
In that year, the value of centralised public procurement increased by 214% (see Fig. 3).
The number of contracting authorities conducting public procurement through the Cen-
tral Contracting Authority also increased considerably.
The trend toward an increase in the volumes of centralised public procurement has a
positive effect on the dynamics of fnancial savings. The fndings of the above-mentio-
ned survey show that the average prices in centralised public procurement procedures
are lower as compared with decentralised procurement. Therefore, fnancial savings due
to differences in prices of goods and services increase along with the rising value of
centralised public procurement.
Savings due to changes in administrative expenses depend on the number of contrac-
ting authorities switching to centralisation of the procurement. It should be noted that,
FIG 3. Scope of centralised public contracting authorities centralising procurement
Source: Author’s calculation.
Revenue
117
based on results of this study, fxed administrative expenses for centralised public pro-
curement are very high as compared with those incurred in decentralised procurement.
As a result, when the degree of centralisation is insuffcient, the overall administrative
expenses are even higher in comparison with decentralised procurement.
In 2007–2010, the overall dynamics of the savings value has been positive, inclu-
ding savings due to both price differences and changes in administrative expenses. High
administrative expenses of the Central Contracting Authority and an insuffcient degree
of centralisation of public procurement resulted in negative or insignifcant savings in
the frst three years of the period. However, the scope of centralisation increased signif-
cantly in 2010, followed by a rapid growth of fnancial savings. Financial savings due to
centralisation of public procurement amounted to LTL 3.3 million in 2010 (see Fig. 4).
To sum up the results of savings in centralised public procurement, the following key
factors of success in centralisation can be identifed:
signifcant price differences in favour of centralised procurement; •
large volumes of public procurement centralisation. •
Signifcant price differences in favour of centralised procurement are achieved by
using the advantages of this procurement method. The Central Contracting Authority
employs the best procurement experts, the best procurement practice is applied, inno-
vations are introduced, and the advantages of the economy of scale are made use of. Si-
gnifcant differences in prices, however, are achieved with relatively high administrative
expenses.
A suffcient degree of centralisation in public procurement is required to convert these
price differences in favour of centralised procurement into fnancial savings. While the
increase in this degree is accompanied by the growing savings due to price differences,
savings due to changes in administrative expenses start increasing after these expenses
reach a certain break-even point.
FIG. 4. Dynamics of fnancial savings due to procurement through CCAin 2007–2010
Source: Author’s calculation.
Total fnancial savings
118
Conclusions
1. Upon summing up the defnitions of centralisation in public procurement provided
in the scientifc and legal literature as well as studies of procurement practice, the
authors have formulated the following defnition of centralisation in public procu-
rement on a national level: Centralisation of public procurement is a change in the
ratio between centralised and decentralised public procurement on a national level,
when the central contracting authority centralises the procurement through contract
agreements.
2. The main factors to be considered while evaluating the overall fnancial effect of
centralised public procurement are as follows: differences in prices in centralised
and decentralised procurement; size of administrative expenses for conducting the
procurement in both cases – centralised and decentralised; the ratio of centralised
and decentralised procurement.
3. In 2007–2010, the overall dynamics of the savings has been positive, including
savings due to both price differences and changes in administrative expenses. High
administrative expenses of the Central Contracting Authority and the insuffcient
degree of centralisation of public procurement resulted in negative or insignifcant
savings in the frst three years of the period. However, the scope of centralisation
increased signifcantly in 2010, followed by a rapid growth of fnancial savings. Fi-
nancial savings due to public procurement centralisation amounted to LTL 3.3 mil-
lion in 2010.
4. To sum up the results of saving in centralised public procurement, the following
key factors of success in centralisation can be identifed: signifcant price diffe-
rences in favour of centralised procurement and large volumes of centralisation in
public procurement.
REFERENCES
1. Dimitri, N, Piga, G., Spagnolo G. (2006). Handbook of Procurement. Cambridge University
Press.
2. Dröge, C.; Germain, R. (1989). The Impact of the Centralized Structuring of logistics activities
on span of control, formalization and performance. Journal of the Academy of Marketing Science, pp.
83–89.
3. Faes, W., Matthyssens, P., Vandenbempt, K. (2000). The pursuite of global purchasing synergy.
Industrial Marketing Management, Vol. 29, issue 6, pp. 539–553.
4. Ferlie, E., Lynn, Jr. L. E., Pollitt, C. (2005). The Oxford handbook of Public Management. New
York: Oxford University Press.
5. Hartmann, E., Trautmann, G., Jahns, C. (2008). Organisational design implications of global
sourcing: A multiple case study analysis on the application of control mechanisms. Journal of Purchas-
ing & Supply Management, Vol. 14, pp. 28–42.
6. Young S.C. (1989). Prime vendor/hospital purchasing relationship. International Journal of
Physical Distribution and Logistics Management, Vol. 19, No. 9, pp. 27–30.
119
7. Kamann, D. F. (2007). Organizational design in public procurement: A stakeholder approach.
Journal of Purchasing & Supply Management, pp. 127–136.
8. Kardelis, K. (2005). Mokslini? tyrim? metodologija ir metodai. Šiauliai: 398.
9. Karjalainen, K. (2009). Challenges of purchasing centralization – Empirical evidence from
public procurement. Helsinki School of Economics.
10. Leenders, M. (1998). The problem with purchasing savings. Proceedings of 2nd Worldwide
Symposium. London, pp.343.
11. Munson, C.L., Hu, J. (2009). Incorporating quantity discounts and their inventory impacts into
the centralized purchasing decision. European Journal of Operational Research, pp. 581–592.
12. Munson, C. L. (2007). The appeal of partially centralised purchasing policies. International
Journal of Procurement Management, Vol. 1, Nos. 1/2, pp. 117–142.
13. Nollet, J., Beaulieu, M. (2005). Should an organisation join a purchasing group? Supply Chain
Management: An International Journal, pp. 11–17.
14. Pooler, V. H., Pooler, D. J., Farney, S. D. (2004). Global Purchasing and Supply Management
Fullfl the Vision. Second edition. Kluwer Academic Publishers.
15. Porter, M. E. (1998). Competitive Advantage: Creating and Sustaining Superior Performance.
New York: Free Press.
16. Rozemeijer, F. (2000). How to manage corporate purchasing synergy in a decentralised compa-
ny? Towards design rules for managing and organising purchasing synergy in decentralised companies.
European Journal of Purchasing & Supply Management, Vol. 6, issue 1, pp. 5–12.
1?. Sanchez-Rodr?guez, C., Hemsworth, D., Mart?nez-Lorente, A. R. (2005). The effect of supplier
development initiatives on purchasing performance: a structural model. Supply Chain Management: An
International Journal, Vol. 10, No. 4, pp. 289–301.
18. Schiele, H. (2007). Supply-management maturity, cost savings and purchasing absorptive ca-
pacity: Testing the procurement–performance link. Journal of Purchasing & Supply Management, pp.
274–293.
19. Singer, M., Konstantinidis, G., Roubik, E., Beffermann, E. (2009). Does e-procurement save
state money? journal of public procurement, Vol. 9 issue 1, pp. 58–78.
20. Tchokogue, A., Nollet, J., Gobeil, K. (2010). Supply structure: the pendulum in action. Pro-
ceedings of the 19th IPSERA Conference, pp. 351–364.
21. Trautmann, G., Bals, L., Hartmann, E. (2009). Global sourcing in integrated network struc-
tures: The case of hybrid purchasing organizations. Journal of International Management, Vol. 15, pp.
194–208.
22. Vagstad, S. (2000). Centralized vs. decentralized procurement: Does dispersed information
call for decentralized decision-making? International Journal of Industrial Organization, No. 18, pp.
949–963.
23. Van Weele, A. (2005). Purchasing and Supply Chain Management: Analysis, Strategy, Plan-
ning and Practice, 4th edition. London: Thomson Learning.
24. Vengrauskas, V., Gineitien?, Z., Zaleskyt?, J., Šerpytis, K. (2006). Vieš?j? pirkim? centraliza-
vimo galimybi? studija. Mokslinis tiriamasis darbas.
doc_441853779.pdf
One of the main goals of public procurement centralization is to generate monetary savings directly impacting the total costs of public institutions. It seems to be a remedy in economic downturn, but the impact of centralization may have both positive and negative financial effects.
104
ISSN 1392-1258. EKONOMIKA 2011 Vol. 90(3)
EVALUATION OF FINANCIAL EFFECTS
OF PUBLIC PROCUREMENT CENTRALISATION
Karolis Šerpytis*, Vytautas Vengrauskas, Zinaida Gineitien?
Vilnius University, Lithuania
Abstract. One of the main goals of public procurement centralization is to generate monetary savings directly
impacting the total costs of public institutions. It seems to be a remedy in economic downturn, but the impact
of centralization may have both positive and negative fnancial efects. A central procurement organisation
constitutes an additional link in the supply chain that makes the distance between the buyer and the supplier
longer. Therefore, the existence of this link should be justifed, and the evaluation of centralisation impact is
one of the key tools in ensuring the procurement centralisation decisions to be benefcial to the state. The aim
of the study was to formulate the model which would serve as a basis for evaluating the fnancial impact of
centralised public procurement.
Key words: public procurement, centralization impact, purchasing procedures
Introduction
Centralisation of public procurement is a trend that is picking up the pace in both Lith- entralisation of public procurement is a trend that is picking up the pace in both Lith-
uania and abroad (Dimitri, Piga, Spagnolo, 2006). In Lithuania, a central contracting
authority at which public procurement is concentrated was established in 2007. Such
authorities exist in the United Kingdom, Germany, Italy, Denmark and Finland. The
growth of trends towards centralised public procurement has been speeded up by the cur-
rent recession. The increasing scope of centralised procurement raises questions about
their fnancial impact. What is the fnancial beneft of public procurement centralisation
for the state and how should it be evaluated?
An appropriate evaluation of the fnancial impact of centralised public procurement is
relevant to various organisations connected with this process. The evaluation could help
contracting authorities to make decisions on participation in the centralisation. It would
enable an authority conducting centralised procurement to timely respond to and duly
adapt the public procurement centralisation strategies. Public procurement policymakers
would adopt well-grounded decisions on the further development of centralisation. It
should be noted that the fnancial impact of the centralisation of public procurement is
not necessarily positive. The central procurement organisation constitutes an additional
* Address for correspondence:
Faculty of Economics, Vilnius University, Saul?tekio Ave. 9, LT-2040 Vilnius, Lithuania; email: kserpytis@
gmail.com
105
link in the supply chain (Young, 1989) that makes the distance between the buyer and the
supplier longer. Therefore, existence of this link should be justifed (Nollet, Beaulieu,
2005), and the evaluation of the effects of centralisation is one of the key tools in achie-
ving that the centralisation decisions are benefcial to the state.
In the scientifc literature, the subject of public procurement centralisation is mainly
examined in the form of arguing for and against its advantages and disadvantages. The
evaluation of the fnancial impact of centralisation, however, is not suffcient. While
such evaluations have been done in Finland, USA, United Kingdom and Chile (Singer et
al., 2009, Karjalainen, 2009; Celec, Nosari, Voich, 2003), an overview of the scientifc
literature has shown that no author has presented a conceptual model allowing to identify
and assess the fnancial benefts of public procurement centralisation.
The purpose of this study was to formulate, through analysis and synthesis of know-
ledge available in the literature, an evaluation model which would form a basis for the
evaluation of the fnancial effects of centralised public procurement. The object of the
study is fnancial savings experienced by contracting authorities conducting public pro-
curement through Lithuania’s central contracting authority. The methods of the study
include the analysis and synthesis of scientifc literature, survey of contracting authori-
ties conducting centralised procurement, and statistical methods of data processing and
analysis.
The structure of the paper: the frst part presents an overview of theoretical literature
and examines the procurement centralisation subject from other authors’ perspective; the
second part presents an analysis of the factors that are relevant in evaluating the fnancial
effects of centralisation on public procurement and development of a methodology; the
third part presents an evaluation of the fnancial effects of centralisation in Lithuania.
Defnition of centralisation in public procurement
Centralisation is the concentration of political or administrative power at a single place
(Ferlie et al., 2005). In a democratic society, political power is always decentralised,
whereas processes of centralisation or decentralisation of administrative power are ta-
king place constantly. From the standpoint of management, centralisation is one of the
dimensions of the organisational structure, which shows the vertical locus of the de-
cision-making authority (Dröge, Germain, 1989). This is particularly relevant to large
organisations with a number of divisions linked by subordination relations.
Centralisation of procurement can be described by identifying three forms of the orga-
nisation of procurement: full centralisation, full decentralisation, and a hybrid structure.
Dimitri et al. (2006) provide the defnitions of these three organisational forms:
full centralisation of procurement. • Procurement is fully centralised when the key
decisions on the purchase of goods and services (what, how and when) are adopted
106
by the central procurement unit formed with the aim of meeting the procurement
needs of an organisation’s divisions;
full decentralisation of procurement. • Procurement is decentralised when divisions
or local offces of an organisation are delegated the power to decide what, how and
when to procure;
a hybrid model of centralisation in procurement. • This is an interim model whereby
a central procurement unit shares the procurement process with the organisation’s
decentralised divisions.
Centralisation of public procurement through a central contracting authority has beco-
me popular in Europe in the last decades (Dimitri et al.,2006). Such centralisation of pu-
blic procurement is consistent with the hybrid model of centralisation. The main feature
of the model is the centralisation of individual parts of the procurement process and not
of the process as a whole. Figure 1 depicts the procurement process from the initiation of
procurement to the fnal payment. In case of decentralised procurement, a full process is
carried out by the contracting authority itself. Where procurement is centralised, part of
the procurement process components such as preparation of public procurement docu-
mentation and execution of procurement procedures as well as potential litigation with
supplier are delegated to the central contracting authority.
Full centralisation of procurement means that all parts of the public procurement
process are concentrated in the central procurement unit (see Fig. 1) in all cases of
purchasing goods or services. In practice, such form of centralisation of procurement is
not found at all levels. A feasibility study on the centralisation of public procurement in
Lithuania identifes the following levels of centralisation (Vengrauskas et al., 2006):
organisational level (procurement is concentrated at procurement division); •
departmental level (procurement of a department is concentrated at its procurement •
division);
national level (procurement concentrated at the central contracting authority). •
FIG. 1. Public procurement process centralisation scheme
Source: Author’s compilation.
Preparation of
public
procurement
documentation
Initiation of
procurement
Execution of
procurement
procedures
Supply of goods
and services
Potential
litigation with
supplier
Final
payment
Central contracting
authority
Delegation of part
of procurement processes
107
The distance between a decentralised division and a division at which procurement
is centralised has a signifcant effect on centralisation in public procurement (Young,
1989). This distance is short at organisational and departmental levels; however, it can
be very long at a national level. The government sector is extremely diverse and exists as
a sophisticated organisational system, with a very wide assortment of goods and services
purchased (from stationery to bridges or military vessels). Therefore, the application of
the full centralisation on national level is very complicated and is rarely found in the
practice of democratic states. Studies of the phenomenon of procurement centralisation
on national level lead to a conclusion that centralisation or decentralisation of public pro-
curement cannot be achieved in full. Therefore, the problem of the research is not limited
to the question as to what fnancial beneft is derived from the decentralised procurement
organisation system versus a centralised one. The research is aimed at determining the
fnancial effect of changing the public procurement centralisation / decentralisation ratio
on a national level within a certain period of time.
Having in mind the fact that the problem of the research is related to public procure-
ment, i.e. an object which is subject to a detailed legal regulation, the scientifc defnition
of public procurement should be harmonised with the legal one. In the public procure-
ment law, centralisation is defned through the notion of a central contracting authority.
“Central contracting authority is a contracting authority which:
acquires goods and / or services intended for contracting authorities, or •
concludes public procurement agreements for a contracting authority, or •
concludes framework agreements on the purchase of works, goods or services.” •
The legal defnition of public procurement provides for three ways in which the cen-
tral contracting authority may centralise public procurement. The frst two ways are not
suitable if the distance between the decentralised division and the central contracting
authority is long. Therefore, centralisation of public procurement on a national scale is
implemented through framework agreements (Dimitri et al., 2006).
Upon summing up the defnitions of centralisation in public procurement, provided in
the scientifc and legal literature, as well as studies of procurement practice, the authors
have formulated the following defnition of centralisation in public procurement on a
national level: “Centralisation of public procurement is a change in the ratio between
centralised and decentralised public procurement on a national level, where the central
contracting authority centralises the procurement through contract agreements“.
Advantages and disadvantages of procurement centralisation
The subject of centralisation in public procurement is examined in scientifc literature
by discussing the advantages and disadvantages of public procurement. The following
advantages of public procurement have been identifed in the literature:
economy of scale manifesting itself through higher quantity-based discounts and •
simplifed procurement processes (Munson, 200?);
108
standardisation of goods and services(Munson, Hu, 2009); •
standardisation of processes (Rozemeijer, 2000); •
consistent and integrated character of procurement policy (Trautmann et al., •
2009).
K. Karjalainen sums up that a higher integration of the procurement function has a
number of advantages and can be used for cutting down procurement costs (Karjalainen,
2009). Disadvantages of procurement centralisation are also analysed in the literature:
high expenses for setting up and maintaining the central procurement authority •
(Vagstad, 2000);
part of the goo • ds / services are unique and their standardisation is complicated
(Matthyssens, Faes, 199?);
reasonable specifc needs of contracting authorities can be disregarded in the cen- •
tralisation process (Munson, 2007).
Part of the advantages identifed by the researchers can be directly related to the fnan-
cial impact. The economy of scale manifesting itself through quantity-based discounts
(Munson, 200?) and standardisation of specifcations (Munson, Hu, 2009) affects the
prices of goods and services. Standardisation of the procurement processes (Rozemeijer,
2000) and expenses for setting up and maintaining the central procurement authority
(Vagstad, 2000) infuence the administrative expenses related to the procurement pro-
cesses. Differences in the prices of goods and services as well as changes in administra-
tive expenses are the factors that determine the fnancial effect of centralisation in public
procurement. It should be noted that this effect may manifest itself in the form of savings
or losses for the state.
Savings are defned in the scientifc literature as fnancial savings achieved as a result
of efforts made by a procurement division and directly infuencing an organisation’s ex-
penses (Nollet, Beaulieu, 2005). Furthermore, savings are defned as the added value of
the procurement division for an organisation (Van Weele, 2005). It can be concluded that
in order to answer the question as to the fnancial effect of the change in the ratio between
centralised / decentralised procurement on a national level, an analysis of the savings re-
ceived by contracting authorities due to the operation of the central contracting authority
should be made. This conclusion means that the fnancial effect of centralisation of public
procurement is refected by either savings or losses incurred by contracting authorities
conducting their procurement procedures through the central contracting authority.
Assessment of the fnancial efect of procurement centralization
An analysis of scientifc literature has shown that empirical studies aimed at determining
the fnancial beneft of centralisation in procurement were carried out in Finland, United
Kingdom, and Chile. The authors covered by the analysis (Table 1) identify two main
criteria of fnancial evaluation of the public procurement centralisation:
109
savings due to price differences; •
savings due to changes in administrative expenses. •
TABLE 1. Results of scientifc literature overview
Valuation criteria Enviroment Valuation method Source
Savings due to price
diferences
Electronic procurement
agency (ChileCompra)
Statistical modeling of
price diferential
Singer, Konstantinidis,
Roubik, Befermann
(2009)
Procurement of Central
Contracting Agencyin
United Kingdom (OGC-
buying.solutions)
Survey of sample of price National audit ofce
(2006)
State commodity con-
tracts in United States of
America (CASU program)
Survey of sample of price Celec, Nosari, Voich Jr.
(2003)
Procurement of Central
Contracting Agency in
Finland (Hansel)
Survey of sample of price Karjalainen (2009)
Savings due to
changes in adminis-
trative expenses
Electronic procurement
agency (ChileCompra)
Survey and formula for
the calculation of admi-
nistrational expenses
Singer, Konstantinidis,
Roubik, Befermann
(2009)
Procurement of Central
Contracting Agency in
United Kingdom (OGC-
buying.solutions)
Survey National audit ofce
(2006)
Procurement of Central
Contracting Agency in
Finland (Hansel)
Survey and formula for
the calculation of admi-
nistrational expenses
Karjalainen (2009)
Source: Author’s compilation based on literature review.
According to Celec et al., savings due to price differences is the main factor that can
justify framework agreements (Celec, Nosari, Voich Jr., 2003). Lower prices due to the
economy of scale are an advantage of the procurement centralisation, which is being
mentioned most often. C. L. Munson and K. Karjalainen state that centralisation of pro-
curement lowers the price of goods and services if the merging of several orders into one
major one allows making use of the quantity-based discounts (Munson, 200?; Karjalai-
nen, 2009). Many other authors emphasise that larger procurement volumes increase the
buyer’s negotiating power (Porter, 1998; Faes et al., 2000). H. Schiele has found that
the concentration of knowledge and human resources with high qualifcations lead to a
larger potential of savings due to lower prices (Schiele, 2007).
Savings due to changes in administrative expenses are a consequence of procurement
centralisation that has been identifed in the literature. Avoiding a duplication of pro-
curement procedures and reducing their overall number have a signifcant effect on the
110
general administrative expenses (Karjalainen, 2009; Essig, 2000; Singer et al., 2009). A
public procurement procedure carried out by the central contracting authority by conclu-
ding a framework agreement can replace procurement procedures of many contracting
authorities that centralise their procurement (Vengrauskas et al., 2006).
It should be noted that the results of empirical studies described in the literature show
the unequivocal nature of the fnal effect of decentralisation in public procurement. A
study carried out in Finland established that prices for offce supplies were on average
by 25% and for air travel by 19% lower in centralised procurement as compared with de-
centralised one; in the United Kingdom, prices for computer hardware were on average
by 15% lower in centralised procurement. While these differences are signifcant, they
do not necessarily prove an undisputable beneft of centralised procurement. A study in
Chile has found that the price difference between centralised and decentralized procure-
ment was only 3%. The average prices for part of goods’ and services’ categories were
higher in centralised procurement compared with the decentralized one in the United
Kingdom.
To sum up, one may state that the overall savings arising from centralisation of pu-
blic procurement are determined by two factors: the difference between prices in cen-
tralised and decentralised procurement and the changes in administrative expenses for
conducting public procurement procedures. In the opinion of the author, apart from these
two factors, a third one – the centralised/decentralised procurement ratio – should be
proposed in formulating a model for the evaluation of centralisation in public procure-
ment. This factor has not been suffciently emphasised in the studies referred to in Table
1. The work of K. Karjalainen should be singled out: it states that an insuffcient use
of centralised public procurement can lead to a failure in getting the expected benefts
(Karjalainen, 2009). A certain level of public procurement centralisation is necessary
to recover the expenses for setting up and maintaining the central contracting authority
(Vagstad, 2000).
With regard to the literature overviewed and the conclusions drawn, the main factors
to be considered in the evaluation of the overall fnancial effect of public procurement
centralisation are as follows:
differences in prices in centralised and decentralised procurement; •
administrative expenses for conducting the procurement in both cases (centralised •
and decentralised);
the ratio of centralised and decentralised procurement. •
These factors together form an evaluation model for determining the fnancial effect
of centralisation (see Fig. 2). The indicators refecting the factors of the model are as-
sessed by various methods. S. E. Celec proposes the sample method as the best one for
selecting goods and services that will be an object of a price survey (Celec et al., 2003).
The data of the survey would be used for determining the average prices of goods and
services in centralised and decentralised procurement. Based on a comparison of the
111
prices, the savings indicator S
perc.
is calculated. Statistical modelling of the price diffe-
rential, another method of evaluating this factor (Singer et al., 2009), was not chosen due
to the complexity of its application.
Administrative expenses C
dec
are assessed by analysing the length of working time
and the amounts of pay to the employees carrying out the procurement procedures in
decentralised procurement. Administrative expenses C
cen
are assessed from the fnancial
performance indicators of the central contracting authority. Savings due to changes in
administrative expenses are assessed by calculating the administrative expenses in case
of decentralised procurement C
dec
· n and in case of partial centralisation (C
?cen
+ C
?dec
·
(n – n
?cen
), where n is the number of contracting authorities and n
cen
the number of
organisations centralising procurement. Thus, in case of full decentralisation, adminis-
trative expenses would amount to C
dec
· n, while in case of full centralisation to C
cen
.
The formula for the determination of savings due to changes in administrative expenses
depends on the organisational structure of public procurement at the beginning and at the
end of the period. For example, if the public procurement was fully decentralised at the
FIG. 2. Model for the determination of the fnancial efect of centralisation in public procurement
Source: Author’s compilation.
Average price of goods and
services in decentralized
procurement
Average price of goods and
services in centralized
procurement
Administrative expenses of
centralized purchase
Administrative expenses of
decentralized purchase
Number of contracting
authorities which decentralize
procurement
Number of contracting
authorities which centralize
procurement
Revenue of centralized
procurement
Savings
indicator
Savings due to price
differences
Savings due to changes in
administrative expenses
Total savings of
centralization
Evaluation of price
difference
Ratio between
centralised and
decentralised
procurement
Size of
administrative
expenses for
conducting the
procurement
112
beginning of the period but partially centralised at the end of it, savings due to changes in
administrative expenses are determined as the difference between the above-mentioned
expressions from the formula:
DC
administrative expenses
= C
dec
· n – (C
cen
+ C
dec
· (n – n
cen
))
1
.
This change in administrative expenses depends on the change in the ratio between
centralised and decentralised procurement, which is measured as the difference between
n, the total number of contracting authorities, and n
cen
, the number of authorities centra-
lising procurement.
Financial savings due to price differences depend on changes in the volume of cen-
tralised procurement during the given period. Savings due to this factor are determined
from two indicators: the determined savings percentage S
perc
and the calculated indicator
of the value of centralised procurement during the period R
cen
. The total fnancial effect
of the centralisation of public procurement is determined by summing up the amounts of
savings due to price differences (S
perc
· R
cen
) and savings due to changes in administrati-
ve expenses DC
administrative expenses
.
Methods
In Lithuania, public procurement has been centralised through the Central Contracting
Authority since 200?; however, its fnancial effect has not been studied. Studies were
carried out (see Table 2) based on the fndings of analysis of the literature and the eva-
luation model developed. The purpose of the studies was to assess the fnancial effect of
public procurement centralisation in Lithuania in 2007–2010.
TABLE 2. List of research projects
Research project Research object Method Date of research
Evaluation of administrative
expenses of decentralised pur-
chase
Length of working time and the
amounts of pay to the employ-
ees carrying out the procure-
ment procedures in a decentra-
lised procurement
Survey March–May 2006
Evaluation of price diferences
in centralised and decentralised
public procurement
Sample of prices of goods and
services
Survey April–June 2010
Evaluation of centralized pro-
curement volume
Statistics of central contracting
authority procurement volumes
in 2007–2010
Statistical
data analysis
2010
Evaluation of of decentralized
procurement volume
Statistics of decentralised public
procurement in 2007–2010
Statistical
data analysis
2010
Source: Author’s compilation
1
Source: Karjalainen, K. (2009). Challenges of purchasing centralization – Empirical evidence from public
procurement. Helsinki School of Economics.
113
The research object consists of two parts: prices of goods and services acquired
through the public procurement procedure and of administrative expenses for conduc-
ting these procedures in the environment of 1) decentralised public procurement and
2) centralised public procurement. The results of the analysis are compared using the
developed theoretical evaluation model which enables determining the fnancial effect
of public procurement centralisation.
Evaluation of price diferences due to public procurement centralization
To determine the differences in prices in decentralised and centralised procurement, a
survey of all contracting authorities that centralised their procurement procedures through
the central contracting authority was conducted. Questionnaires were sent via electronic
mail to 274 organisations, and 154 questionnaires (56.2%) were properly completed.
The results of the survey were recognised as representative ones based on the conclusion
that when the general population is small, all its members or half of them should be sur-
veyed where possible (Kardelis, 2005).
In this survey, the contracting authorities that had a centralised procurement of mobile
communication services were asked to provide the amount of the bill for the past full ca-
lendar month prior to the procurement through the central contracting authority and the
amount of the bill for the frst calendar month after such procurement. A comparison of
the bills was selected as the one refecting the changes better than a comparison of minu-
te rates. The contracting authorities that centralised the procurement of fuel were asked
to provide information on the discount received on one of the fuel types. A discount per
litre of fuel is expressed in cents, which is a usual way to agree on rates in fuel purchases.
The contracting authorities that had centralised procurement of other goods were asked
to provide prices at which goods were purchased prior to starting procurement through
the central contracting authority.
In order to calculate the results as accurately as possible, savings (S
savings
) were de-
termined for each contracting authority separately, followed by the calculation of the
savings percentage S
perc
for each procurement category from the formula:
?
?
=
t procuremen d centralise of revenue
savings
perc
R
S
S .
Table 3 presents the values of saving percentages for each category of centralised
public procurement. It should be noted that, in the calculation of this indicator, negative
savings (with the prices in centralised procurement higher than those in decentralised
procurement) were also taken into account. A small part of the respondents have incur-
red a loss due to centralisation of procurement. In the procurement of mobile communi-
cation services, higher costs after centralisation were incurred by 3 organizations out of
35 (8.5%) and in fuel procurement by 14 out of 54 (26%). Nevertheless, centralisation of
114
public procurement enabled the majority of the or-
ganisations to save money. The saving percentages
were highly signifcant in the mobile communicati-
on and offce supply categories (40% and 45.32%,
respectively). The lowest savings were observed in
the procurement of fuel: savings due to price chan-
ges in this category amounted to just 1.2%. To sum
up, overall savings were positive in all categories
of centralised procurement, and price changes due
to centralisation were signifcant.
Evaluation of the price-to-quality ratio
The survey was aimed also at verifying whether
the price change was not achieved by compromising the quality of the goods and servi-
ces. The surveyed contracting authorities were asked to assess the price-to-quality ratio
according to the Likert scale. A point was assigned if the ratio between the price and
quality of the purchased goods / services had deteriorated considerably in centralised
procurement as compared with decentralised procurement. Three points were assigned if
the price-to-quality ratio remained unchanged, and fve points were assigned in case of
considerable improvement.
Table 4 presents the results of the contracting authorities’ survey refecting the eva-
luation of the price and quality ratio. Changes in the price-to-quality ratio received most
favourable evaluations in mobile communication service procurements (score 4.43).
Procurement of computer equipment was the category that received worst evaluations
(score 3.45).
TABLE 3. Savings in the centralised pro-
curement categories, %
Procurement category Savings
Computer hardware 7%
Printers 24%
Mobile services 40%
Fuel 1.20%
Stationary goods 45.32%
Printing paper 15.35%
Toners 4.50%
Source: Author’s compilation.
TABLE 4. Average and standard deviations of the price-to-quality ratio
Price and quality ratio N – number of respondents Average Deviation
Mobile services 35 4.43 0.9292
Fuel 54 4.05 0.8111
Stationary goods 74 3.51 1.0760
Computer hardware 58 3.45 1.0117
Source: Author’s calculation.
In all categories of goods and services, the evaluation given to the price-to-quality
ratio was higher than 3, which means that centralisation of procurement led to an impro-
vement of this ratio in all procurement categories.
115
Evaluation of changes in administrative expenses
of conducting procurement through centralisation
In the procurement centralisation process, contracting authorities transfer part of the
procurement procedures to the central contracting authority. In this way, the contracting
authorities avoid such processes as:
drawing up public procurement documentation; •
carrying out public procurement procedures; •
potential disputes with suppliers. •
Avoiding these processes means that the contracting authorities cut their administra-
tive expenses for the processes. According to contracting authorities that conduct public
procurement by the decentralised methods, a public procurement procedure ending in
concluding a sale-purchase contract costs LTL 2,805 on average. Thus, through centra-
lisation, contracting authorities avoid paying LTL 2,805 as administrative expenses. It
should be noted that depending on the procurement method, a public procurement takes
83 days on average in case of an open tender procedure, 4? days in a simplifed tender
procedure, 46 days in a restricted tender procedure, 30 days in a negotiated procedure
with a publication of a contract notice, and 24 days in a negotiated procedure without a
publication of a contract notice.
By assuming the conduct of the public procurement procedure, the central contracting
authority incurs high fxed costs related to the conclusion and management of contract
agreements. The central contracting authority pays the expenses for activities such as:
studies of contracting authorities’ requirements and market research; •
drafting of public procurement documentation; •
potential disputes with suppliers; •
management of orders received from contracting authorities and of renewed com- •
petition processes by electronic means.
As procurement processes are more complicated in case of centralisation as compa-
red with decentralised processes, administrative expenses for a centralised procurement
procedure are much higher. The administrative expenses on concluding a contract agre-
ement amounted to LTL 181,000 on average (data provided by the Central Contracting
Authority).
The overall scope of change in administrative expenses depends on the number (n
cen
)
of contracting authorities starting centralisation of public procurement in each procu-
rement category (n – the total number of contracting authorities). The change in these
expenses DC
administrative expenses
is calculated for each procurement category by the for-
mula:
DC
administrative expenses
= C
dec
· n – (C
cen
+ C
dec
· (n – n
cen
)).
116
The above formula compares the size of administrative expenses in a certain procure-
ment category in cases of decentralised procurement C
dec
· n and of partial centralisation
(C
cen
+ C
dec
· (n – n
cen
)). Given that the costs of conducting a centralised public procure-
ment procedure and of further contract administration are very high, savings are essenti-
ally determined by the number of contracting authorities centralising procurement.
Assessment of fnancial savings due to centralisation
of public procurement in Lithuania in 2007–2010
In Lithuania, centralisation of public procurement on the national scale was started in
2007. Since then, the scope of centralisation has been increasing according to the follo-
wing criteria:
the value of centralised public procurement; •
the number of contracting authorities centralising procurement; and •
the number of categories of goods and services purchased through centralised pro- •
curement.
The year 2010 is exceptional in terms of the scope of centralised public procurement.
In that year, the value of centralised public procurement increased by 214% (see Fig. 3).
The number of contracting authorities conducting public procurement through the Cen-
tral Contracting Authority also increased considerably.
The trend toward an increase in the volumes of centralised public procurement has a
positive effect on the dynamics of fnancial savings. The fndings of the above-mentio-
ned survey show that the average prices in centralised public procurement procedures
are lower as compared with decentralised procurement. Therefore, fnancial savings due
to differences in prices of goods and services increase along with the rising value of
centralised public procurement.
Savings due to changes in administrative expenses depend on the number of contrac-
ting authorities switching to centralisation of the procurement. It should be noted that,
FIG 3. Scope of centralised public contracting authorities centralising procurement
Source: Author’s calculation.
Revenue
117
based on results of this study, fxed administrative expenses for centralised public pro-
curement are very high as compared with those incurred in decentralised procurement.
As a result, when the degree of centralisation is insuffcient, the overall administrative
expenses are even higher in comparison with decentralised procurement.
In 2007–2010, the overall dynamics of the savings value has been positive, inclu-
ding savings due to both price differences and changes in administrative expenses. High
administrative expenses of the Central Contracting Authority and an insuffcient degree
of centralisation of public procurement resulted in negative or insignifcant savings in
the frst three years of the period. However, the scope of centralisation increased signif-
cantly in 2010, followed by a rapid growth of fnancial savings. Financial savings due to
centralisation of public procurement amounted to LTL 3.3 million in 2010 (see Fig. 4).
To sum up the results of savings in centralised public procurement, the following key
factors of success in centralisation can be identifed:
signifcant price differences in favour of centralised procurement; •
large volumes of public procurement centralisation. •
Signifcant price differences in favour of centralised procurement are achieved by
using the advantages of this procurement method. The Central Contracting Authority
employs the best procurement experts, the best procurement practice is applied, inno-
vations are introduced, and the advantages of the economy of scale are made use of. Si-
gnifcant differences in prices, however, are achieved with relatively high administrative
expenses.
A suffcient degree of centralisation in public procurement is required to convert these
price differences in favour of centralised procurement into fnancial savings. While the
increase in this degree is accompanied by the growing savings due to price differences,
savings due to changes in administrative expenses start increasing after these expenses
reach a certain break-even point.
FIG. 4. Dynamics of fnancial savings due to procurement through CCAin 2007–2010
Source: Author’s calculation.
Total fnancial savings
118
Conclusions
1. Upon summing up the defnitions of centralisation in public procurement provided
in the scientifc and legal literature as well as studies of procurement practice, the
authors have formulated the following defnition of centralisation in public procu-
rement on a national level: Centralisation of public procurement is a change in the
ratio between centralised and decentralised public procurement on a national level,
when the central contracting authority centralises the procurement through contract
agreements.
2. The main factors to be considered while evaluating the overall fnancial effect of
centralised public procurement are as follows: differences in prices in centralised
and decentralised procurement; size of administrative expenses for conducting the
procurement in both cases – centralised and decentralised; the ratio of centralised
and decentralised procurement.
3. In 2007–2010, the overall dynamics of the savings has been positive, including
savings due to both price differences and changes in administrative expenses. High
administrative expenses of the Central Contracting Authority and the insuffcient
degree of centralisation of public procurement resulted in negative or insignifcant
savings in the frst three years of the period. However, the scope of centralisation
increased signifcantly in 2010, followed by a rapid growth of fnancial savings. Fi-
nancial savings due to public procurement centralisation amounted to LTL 3.3 mil-
lion in 2010.
4. To sum up the results of saving in centralised public procurement, the following
key factors of success in centralisation can be identifed: signifcant price diffe-
rences in favour of centralised procurement and large volumes of centralisation in
public procurement.
REFERENCES
1. Dimitri, N, Piga, G., Spagnolo G. (2006). Handbook of Procurement. Cambridge University
Press.
2. Dröge, C.; Germain, R. (1989). The Impact of the Centralized Structuring of logistics activities
on span of control, formalization and performance. Journal of the Academy of Marketing Science, pp.
83–89.
3. Faes, W., Matthyssens, P., Vandenbempt, K. (2000). The pursuite of global purchasing synergy.
Industrial Marketing Management, Vol. 29, issue 6, pp. 539–553.
4. Ferlie, E., Lynn, Jr. L. E., Pollitt, C. (2005). The Oxford handbook of Public Management. New
York: Oxford University Press.
5. Hartmann, E., Trautmann, G., Jahns, C. (2008). Organisational design implications of global
sourcing: A multiple case study analysis on the application of control mechanisms. Journal of Purchas-
ing & Supply Management, Vol. 14, pp. 28–42.
6. Young S.C. (1989). Prime vendor/hospital purchasing relationship. International Journal of
Physical Distribution and Logistics Management, Vol. 19, No. 9, pp. 27–30.
119
7. Kamann, D. F. (2007). Organizational design in public procurement: A stakeholder approach.
Journal of Purchasing & Supply Management, pp. 127–136.
8. Kardelis, K. (2005). Mokslini? tyrim? metodologija ir metodai. Šiauliai: 398.
9. Karjalainen, K. (2009). Challenges of purchasing centralization – Empirical evidence from
public procurement. Helsinki School of Economics.
10. Leenders, M. (1998). The problem with purchasing savings. Proceedings of 2nd Worldwide
Symposium. London, pp.343.
11. Munson, C.L., Hu, J. (2009). Incorporating quantity discounts and their inventory impacts into
the centralized purchasing decision. European Journal of Operational Research, pp. 581–592.
12. Munson, C. L. (2007). The appeal of partially centralised purchasing policies. International
Journal of Procurement Management, Vol. 1, Nos. 1/2, pp. 117–142.
13. Nollet, J., Beaulieu, M. (2005). Should an organisation join a purchasing group? Supply Chain
Management: An International Journal, pp. 11–17.
14. Pooler, V. H., Pooler, D. J., Farney, S. D. (2004). Global Purchasing and Supply Management
Fullfl the Vision. Second edition. Kluwer Academic Publishers.
15. Porter, M. E. (1998). Competitive Advantage: Creating and Sustaining Superior Performance.
New York: Free Press.
16. Rozemeijer, F. (2000). How to manage corporate purchasing synergy in a decentralised compa-
ny? Towards design rules for managing and organising purchasing synergy in decentralised companies.
European Journal of Purchasing & Supply Management, Vol. 6, issue 1, pp. 5–12.
1?. Sanchez-Rodr?guez, C., Hemsworth, D., Mart?nez-Lorente, A. R. (2005). The effect of supplier
development initiatives on purchasing performance: a structural model. Supply Chain Management: An
International Journal, Vol. 10, No. 4, pp. 289–301.
18. Schiele, H. (2007). Supply-management maturity, cost savings and purchasing absorptive ca-
pacity: Testing the procurement–performance link. Journal of Purchasing & Supply Management, pp.
274–293.
19. Singer, M., Konstantinidis, G., Roubik, E., Beffermann, E. (2009). Does e-procurement save
state money? journal of public procurement, Vol. 9 issue 1, pp. 58–78.
20. Tchokogue, A., Nollet, J., Gobeil, K. (2010). Supply structure: the pendulum in action. Pro-
ceedings of the 19th IPSERA Conference, pp. 351–364.
21. Trautmann, G., Bals, L., Hartmann, E. (2009). Global sourcing in integrated network struc-
tures: The case of hybrid purchasing organizations. Journal of International Management, Vol. 15, pp.
194–208.
22. Vagstad, S. (2000). Centralized vs. decentralized procurement: Does dispersed information
call for decentralized decision-making? International Journal of Industrial Organization, No. 18, pp.
949–963.
23. Van Weele, A. (2005). Purchasing and Supply Chain Management: Analysis, Strategy, Plan-
ning and Practice, 4th edition. London: Thomson Learning.
24. Vengrauskas, V., Gineitien?, Z., Zaleskyt?, J., Šerpytis, K. (2006). Vieš?j? pirkim? centraliza-
vimo galimybi? studija. Mokslinis tiriamasis darbas.
doc_441853779.pdf