Welcome to the sixth edition of McKinsey’s US State & Local Government newsletter. Building on last edition’s discussion of resident experience, this issue explores how performance-based vendor contracting can be used to improve the user experience.

On average, ~70% of government spend is with third party contractors. Within that contracted spend, technology is creeping into many areas of government procurement (i.e., 95% of all contracts have some form of technology in their delivery scope). If agencies and governments want to improve resident experience, they must get comfortable with performance-based contracting and vendor management.

Building these more innovative payment contract structures may require three important mindset shifts:

• Defining outcomes rather than outputs – During the solicitation process, agencies should consider defining outcomes (e.g., 95% of residents receive customer service support through voice-automated system within 2 minutes of placing their call), rather than outputs (e.g., a new voice automation menu). This will encourage innovations and creativity on the part of vendors instead of supporting one-size-fits all solutions that may not achieve impact.
• Establishing pricing for desired outcomes – Rather than pegging pricing to specific activities, agencies should consider building contracts that peg pricing to specific outcomes. For example, pricing for a digital platform could be based not on the steps required to build the platform but on the utilization of the platform by the target resident audience once the platform is deployed.
• Building staff capabilities to manage performance-based contracts – Staff may not be familiar with contracts that include performance metrics. Agencies should consider providing contracting staff with examples of performance-based contracts and support implementing processes to track vendor performance against contract terms.

While creating innovative contracts requires thoughtful negotiation preparation on the part of the government agency, the inclusion of these structures can set long-term precedents for vendor accountability.

Please contact us with topics you’d like us to cover, other feedback, or questions.

Thank you for your service,

Tim Ward and Jess Kahn from McKinsey’s US State & Local Government Practice

• Discover how transforming state procurement can address challenges like long timelines, poor requirements, and talent shortages, leading to better compliance, speed, cost, and quality. Read the full article for best practices and phased transformation strategies that minimize operational disruptions.
• Explore how public sector agencies can overcome procurement challenges and achieve significant cost savings by asking five strategic questions. Discover proven methods to boost efficiency, encourage innovation, and develop a strong procurement team in this enlightening article.
• Learn how innovative financial tools and best practices from federal agencies can enhance budget transparency and agility, helping maximize value. By sharing these best practices, both federal and state agencies can better navigate the complex financial landscape, ensuring every dollar is optimally utilized.

• Micro, small, and medium-sized enterprises (MSMEs) are the backbone of economies but often face productivity challenges. Enhancing productivity requires creating a mutually beneficial economic environment for all businesses. Discover more in our latest report, “A Microscope on Small Businesses: Spotting Opportunities to Boost Productivity”
• Discover the transformative insights in the McKinsey Technology Trends Outlook 2024, which explores the adoption, development, and industry impacts of advanced technologies like applied AI, sustainability initiatives, and emerging trends such as Web3 and future mobility.
  

Procurement 2024: The next ten CPO actions to meet today’s toughest challenges

McKinsey’s research found that integrating advanced analytics, AI, and digitized processes into procurement can optimize strategic decision-making and value creation while enhancing resilience and sustainability. Emphasizing collaboration with key suppliers, managing macroeconomic volatility, and incorporating ESG factors are key for reducing costs and dependencies on scarce materials. Building new capabilities for future procurement needs will help equip organizations to navigate market dynamics and drive long-term success.

Is this newsletter helpful? Please let us know by clicking the button below and help us forward this to your colleagues so they can subscribe to receive this newsletter