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Why Does a Hammer Cost $5000?

5000 Dollar Hammer

We’ve all heard the joke, that the government will pay $5000 for a $5 hammer that you can buy at your local Home Depot. Is it true? Not really, but everyone does know that the government generally pays a lot more for almost everything than if they just went to their local stores and bought what they needed. Why is that? Why would anyone want to pay so much for everything? Especially in these economic times? And even more especially for higher priced products and services where the savings are larger.

The real truth, which most people don’t really want to hear, is that we’re all partially to blame. It’s as much our fault as the governments. And once you start to understand it from their perspective, you start to understand why they do pay too much for things. It doesn’t make it better or right, it just gives you an appreciation for why things are the way they are. And more importantly, why they probably won’t ever change.

So let’s look at the purchasing process, starting from the top, for anything above the $1000-$5000 threshold. The threshold where you need to start getting approvals before you can make any purchases. Where you can’t just buy it on your personal credit card and just it get reimbursed. And before I get going, please remember that this process is the same for purchases of $10,000, $100,000, $1,000,000 or more. The only difference is that they involve more people and layers, hence more bureaucracy and costs. So if you’re going to sell something to the government for more than $1000-$5000, the process quickly becomes complex and expensive and you almost have to increase it by an order of magnitude to cover your costs.

Now I hate this next statement, but it was only after going through it while working for a few government entities in my consulting days that I was fully able to appreciate why the government (and many large companies)have their hands tied. I was always on the side of “this is crazy and bureaucracy is insanely expensive for nothing” but eventually it was explained to me in a way that I got it. So here’s my attempt to help you have pity on the poor people you’re trying to help. Oh, and realize that most of these same people don’t get this, it’s never really explained to them, so please be kind. Many just end up working for the government their whole lives so they assume this is how the world works. You can usually quickly and easily tell those that have worked for the government and very large companies their whole lives. It’s not a bad thing, it’s just a different way of working.

The first thing to remember is that the government is public facing, so they can get in trouble for anything that goes wrong (whether it was a right decision OR a stupid decision). So the general philosophy is CYOA (Cover Your Own A**). To give you an example, if you say need a computer system for your team of 10 people, and you try to do it yourself, if you make any mistake whatsoever you’re personally in trouble. In my case when I worked for a specific government entity and I tried to do this, I was told if even just one computer was infected with a virus, one wasn’t fully patched (or even if it was fully patched), if anything at all happened, I would be personally responsible. Anything at all, data being lost, a power surge, anything, regardless if it’s my fault, someone else’s, or even an act of nature!

Also if I use a vendor and someone somewhere else is cheaper, or has a better deal (regardless of the quality), I could be in trouble if anyone outside finds out. If another vendor gets hold of this info, if a member of the general public sees a better deal anywhere else, etc., they can target me because I didn’t follow the correct process and procedures. And even if I have the best deal in the world, there are still potential issues. Basically I can quickly and easily be in for a world of hurt. I would lose all government protection and could be personally liable.

So what can the government do to alleviate this mess because no one wants to personally take on that kind of risk for the little reward you get. The project is a wild success, you get some taps on your back, you might move up in your career with a small promotion (and that’s a big maybe, many departments have strong tendency towards seniority), and so on. You might get some rewards, but they won’t be anywhere near the same as the risk. What exactly are the risks? You can be fired on the spot. So immediate loss of job. You might not be able to work for any government entity again, depending on your level. You lose all your benefits. If you had a pension, that’s going to be limited from now, or gone in the worse case. You could have legal issues, even criminally charged in some cases. The risks are large, compared to at best a promotion.

Which means that most people aren’t willing to do anything bold or stick out their necks because the risks to reward ratio just doesn’t make sense. So to resolve that, the government force everyone to go through approved vendors. If the vendor is approved, you can’t get in trouble, you can’t be fired, and so on. You’re no longer personally at risk. Ok, that’s easy. And if a vendor is approved it should be because their prices are reasonable and the quality is good. But here’s where it fails and gets all wonky. As soon as you do that, all kinds of people and vendors come out of the woodwork complaining about why it isn’t them and why it’s not fair, regardless of whether or not theey’re right. So now the government has to create further processes by which you can be approved otherwise the public cries foulplay.

You don’t see this in a private or public companies, but with the government it’s different because of who they are. It’s insane how many people complain about everything! And if anything isn’t “fair” (which most things aren’t, that why there’s competition and a free market), it will generally make the papers. So this creates a lot of process and work for everyone. It’s a mess. With companies you can just ignore the public because you’re a company, but with a government entity you don’t have that luxury. You are accountable to the people.

So now a process gets put in place for selecting vendors. Of course some people still complain some more. So tighter measures get added to the process. Suddenly the only vendors willing to do all the paperwork charge crazy expensive prices for everything because it costs them an arm and a leg just to get in. And this is with no promises of any sales, that must be done after you’re approved (and costs further money). You want a $800 computer, that’s $5000. $800 for the computer, and $4200 for all the costs to get in the system and the risks of not getting a sale in the first place.

And so here we are. The poor government worker is screwed into going through all these crazy and expensive processes because they have to for their own personal safety. The very people who scream loudly that this is insane and stupidly expensive are often the same people who created this mess in the first place. If at every corner every single one of my purchases are being scrutinized and I can be fired for anything (nevermind the potential legal issues), I won’t do anything. It doesn’t make sense for me to buy anything, even if the consequences are potentially terrible. Which then forces all the crazy processes and brings us to where we are today.

I’m personally not fond of how that world works but unfortunately I do understand it and was able to navigate through it when I was a consultant (it helps to understand it). That’s also why I will never sell software to that world. The risks for a vendor are just too high. As a company you have to invest a lot of money for the chance to sell to the government at inflated prices. Sure you will make a profit, but it’s not nearly as big as most people think because of all the costs associated in selling to the government in the first place. That $5000 hammer might only result in a profit of $500, but that’s only a 10% margin with a lot of risk.

The main draw for companies is that once you’re in, it’s relatively easy to stay in. Most companies aren’t willing to go through all the effort and cost. That and the government doesn’t like to change, even if there are better and more affordable solutions, because there is a lot of internal costs and efforts in changing anything. Change is not fluid, it’s hard and has a lot of inertia. And it can be vetoed at almost any step. So if you are fortunate to get in, you can be locked in for quite some time, which is where the real benefits and profits to vendors come in. That’s the gravy boat. Not the prices you charge, but the consistent and long term almost guaranteed revenues and profits for those lucky few.

So even if you do get into the system, good luck trying to find any real decision maker willing to make an actual decision on your product or service within a reasonable timeframe! That’s the hardest thing possible, at least from my personal experience for anything more than $1000. From the government employee side, it’s much much easier to ride on a big decision for months, even years, before ever considering making the actual decision because you can’t get in trouble for finding more information and doing more research. That and being undecided generally won’t get you in trouble compared to what making a wrong decision can cost you. So what happens is that it takes a while for anyone and everyone to get into some kind of consensus and make a final decision. Eventually someone or some department has a strong enough need to push a decision, enough to champion and push it through. But until then, the sales cycle will generally be months to years. At least once a decision has been made things usually move relatively fast. That’s relatively fast, and not private world fast.

To give you a further example to contemplate about, if I’m the person in charge of a project and I decide to take a risk and do something, even if it’s only a 10% chance it can fail, an 80% we collapse if I do nothing, and a 90% chance of success (so massive chances of winning and almost no downside, and if I do nothing we fail), if it does end up failing, my career is most likely over. Not only can I get fired, I could be in the news and so on. If I do nothing and it fails because of inaction, I’m not personally to blame and still get my pension and everything else. The motivation for me to do move forward and do the correct thing is badly aligned with my personal motivations and success. In the private world, if you don’t move ahead and get some successes, you’re not gonna be around long, so the motivations are better aligned. They’re not perfect, we obviously have some issues as the Occupy Wall Street Protests have shown, but at least it’s closer.

In other words there is little incentive to take any kind of risk, even when the odds are incredibly stacked in your favor and the downside is minimal. As long as there’s any potential downsides, which there always are, then it’s against my motivation to act. Unless I’m a go-getter willing to take the risks, don’t know any better, I’m naive, or I just don’t care, the only time I’ll make any decision is when I can no longer push it off. The culture is amazingly strong to avoid making any real decisions. And you can’t blame them. What would you do if you were in that situation? And remember that most decision makers are at higher levels, so they generally have quite a number of years invested in their careers, not to mention their pension plans, and everything else that comes with being a government worker.

And that is why a hammer will cost a government entity many times more than it costs in real life. It’s a vicious cycle where you can’t blame the person who has to make the decision. Pay a realistic amount and PERSONALLY take on any and all of the risks and liabilities yourself OR follow a process which significantly increases the cost of everything and protects you in the process. A process that was created to protect the government from overpaying is the very one that causes them to pay so much! It’s a real bad lose-lose situation. And as far as I can tell, there’s no real way, and definitely no easy way, to resolve this problem. Which is why I predict the government will continue to overpay for just about everything for the coming future. Hopefully some day we can find a solution.



 
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Comments:

  •     Scott
    · November 26th, 2011  · 3:06 am  · Permalink

    I have always believed I could never work in the government sector for many reasons (inefficiency, lack of creativity, seniority over meritocracy etc etc) but this has summed up the financial side of things nicely … albeit painfully.

    I think that perhaps the only way to unravel this mess is to loosen to reins of government a little and let people fail without the prospect of immediate dismissal. Rather than approved vendors, have a minimal set of requirements that must be met and a standard format feasibility study on the vendor offerings that reasons why a particular vendor was chosen, because it certainly isn’t all about price.

  •     Steph
    · November 26th, 2011  · 1:03 pm  · Permalink

    I understand and appreciate what you’re saying Scott, but that’s exactly the issue: “have a minimal set of requirements that must be met and a standard format feasibility study on the vendor offerings that reasons why a particular vendor was chosen”

    What is the minimum? It keeps increasing each year because people continue to be vocal about the current systems in place, and the reality is that it will never be 100% fair because that’s unrealistic. I don’t have infinite time to find the best product, best vendor, and/or best price.

    And how do you that and keep the products and services affordable? It’s ok if it’s something large, which is where approved vendors come in. But anything that’s one off, forget about it. A $1000 computer now becomes a $2000, $5000, or maybe even $10,000 computer by the time you calculate everyone’s time and effort. First you have to do the study/requirements documentation. Then you have to make sure the vendor is approved, because someone has to say yes, most likely more than one person. Which also probably means meetings. And how long does filling in all the documentation and doing the research take? Most likely a day, probably more. You have to find the proper forms, know what to write, do the research, fill in the blanks, etc. Then you have to know who to submit it to, follow-up, keep it on file, etc.

    And what happens if something goes wrong. The risks should definitely be smaller, but how? For example, if I buy 1000 computers at $1200 and the newspapers find a vendor willing to sell the same computers at $1000, or a better computer for the same price, what happens? Who takes the blame? A private company can just ignore the complaints, but you don’t have that luxury with the government. Unless you have strict guidelines and approved vendors, what happens? And we all know the direction s**t travels 😉

    My apologies if this comes across as negative, that’s not at all my goal. I just wanted to point out that this is exactly the issue. Unless you can treat it like a private business, anything that requires requirements, feasibility studies, etc. (ie. paperwork and any kind of approval), you will never be able to purchase anything for a reasonable price. And that’s why most governments go with approved vendors.

  •     Scott Kane
    · April 2nd, 2012  · 7:09 am  · Permalink

    Well written and explained, Steph.

    It can be difficult for folks to understand how a bureaucracy works until one actually has to run one. It’s easy to see some things as largesse when sheer scale is the issue. Quite opposite to instances where largesse is based upon wanton indulgence. From the outside looking in it can be hard to tell the two apart – even for politicians in government and in opposition.

  •     Rick (Realtor)
    · October 2nd, 2013  · 3:22 am  · Permalink

    This is extremely insightful, Steph. We all think that government works properly in a democracy because it is so easy to blame the government for everything that goes wrong. It is very interesting to see this new angle which points out that in many ways this “easy to blame” factor is the very reason that many things go wrong. I really don’t think that this topic could have been explained with any more clarity than this. It made me see the inner mechanisms of the government and I was even able to put myself in place of those people and understand what it feels like to be the one making that decision. Sadly, I see myself doing the same things and I would buy things for much more too If I were the one making that decision. I wish there was some feasible solution to tackle this problem but even after exerting my mind in all kinds of directions, I wasn’t able to find one. So, I guess I’ll have to agree with you on things staying the same in future too.

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