Overview of Selling to State Governments

The federal government may be the world's biggest buyer, but the 50 state governments and the District of Columbia, too, represent an enormous market. With combined budgets in excess of $1.4 trillion (2004), the 50 state governments and the District of Columbia are major buyers of all types of equipment, supplies, services, and construction.

Despite the tantalizing size of this combined market, it is important to understand that it is comprised of 51 individual customers, each with its own procurement rules and procedures. While the federal government can be viewed as a single market subject to the Federal Acquisition Regulation, there is no single counterpart regulating transactions with all state governments.

The size of state budgets grew dramatically in the 1990s, driven by strong tax revenues and transfers of responsibility for many programs from the federal government to the states. Growth in state tax revenues faltered around 2001, but has since picked up. This variability reveals a major challenge for businesses hoping to sell to state governments: Most state governments are constitutionally required to have a balanced budget. If tax revenues do not materialize, the state cannot spend the money, no matter how dire the need.

During downturns, states struggle to prioritize their expenditures, relying on reductions, program cancellations, and delayed purchases to keep their budgets in balance. This means that the pool of discretionary dollars - especially budgets that can be spent on new equipment, systems, and services - though still large in the aggregate, is subject to considerable year-to-year fluctuation.

Given the budgetary pressures periodically faced by many state governments, it is very important to focus on some basics of marketing:

• Precisely target your best prospects by researching the market. Knowing who has budgets to spend and when they need to spend them is priceless information.
• Allow for realistic lead times. Enter the market with a long-term perspective so you will be in position to take opportunities as they arise.
• Be prepared to deliver value. When budgets are tight, the customer is more cost-conscious than ever.

Compared to the federal government, which must adhere to the FAR, state government purchasing regulations are typically less restrictive. Sealed, competitive bidding is the norm on larger contracts, especially for construction and commodities, but in some states many contracts and purchase orders up to $30,000 or even $50,000 are awarded simply by negotiating with known vendors in compliance with existing state regulations. State contracts that involve the use of federal funds may be subject to federal procurement regulations.

In some instances, politics plays a crucial role in determining who gets the contract, with key government managers or department heads working behind the scenes to help a preferred vendor get the award. While this may sound like a vestige of the "good old boy" network, in practice it works more like purchasing decisions in a large private-sector corporation would. A personal friendship does not automatically mean you will get the contract, but it can help ensure that your offer receives more than a cursory look.

With 50 potential state government buyers, how do you decide which to target for your product or service? The obvious first choice is your own state government, for a variety of reasons.

• As a resident of your state, you are likely to be more familiar with your state's operations, locations, and needs than for other states.
• It's easier to network with people that are geographically close. Personally knowing the individuals who buy, or having common interests and acquaintances, will help you get on the "inside," with firsthand knowledge of your customer's needs, buying timelines, and budget projections.
• Many purchases of services and equipment, including construction, require the ongoing presence of the contractor. Geographic proximity may, in fact, be a requirement of the contract.

What about preferences for in-state vendors? Most states have no or few codified preferences where being in-state is the only qualification. For those states that do have some preferences, they usually apply only to specific products (such as agricultural/forestry products and printing), apply only to contracts below a set dollar amount, or apply only in cases of a tie bid. More common are preferences for small businesses and businesses that are owned by minorities or women. Preferences such as these often apply only to in-state vendors.

Next: Who Makes Purchasing Decisions in State Governments?

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