The Billions That Modernized Procurement Could Unlock

Across the United States, state and local governments spend over $4.5 trillion each year. But against a backdrop of new federal priorities and global economic uncertainty, budgets are stretched tighter than they have been in recent years. Government leaders are looking for new ways to unlock value, as even a small reduction in total spending on goods and services could free up billions of dollars for priority areas such as education and infrastructure.

Procurement efficiency is one of the most powerful tools for savings, but it’s underused. McKinsey analysis shows that among major efficiency measures available to state and local governments, procurement could lead to the greatest cost reductions. By improving procurement strategies, public leaders can capture significant value while still delivering on their mission.

Put simply, procurement is about getting the right stuff, at the right price, at the right time, and in the right way. But the process is often slowed by rule-bound complexity, with most procurement leaders and government executives agreeing that their teams leave value on the table. That’s changing quickly, though: Artificial intelligence-enabled procurement has entered the market, and coupling the new technology with proven best practices offers an unprecedented opportunity for leaders to transform the process.

AI could enhance the work of procurement teams, making it smarter, faster and better across every stage of the process:

The right stuff: Better define requirements, avoid “gold plating” (adding features or requirements beyond the original scope unnecessarily) and consolidate options to pool purchasing power.

The right price: Consolidate purchases, renegotiate contracts, leverage economies of scale and improve invoicing.

The right time: Streamline procurement processes to reduce delays and ensure that citizens and government employees have what they need when they need it.

The right way: Increase transparency, reduce waste and fraud, and reinforce public trust, while complying with procurement laws and regulations.

Here’s a graphical view of how these concepts relate in terms of opportunities for savings:
These opportunities are already being put to the test. The state of Oklahoma, for example, used an AI-powered platform to flag $6.8 billion in purchasing inefficiencies; its vendor identified at least $174 million in potential savings by using process mining tools to monitor procurement operations in real time. Similarly, a major U.S. city recently identified $350 million in recurring annual savings by conducting a rapid assessment of its spending with suppliers, benchmarking against peers and engaging with experts in its spending categories. By identifying “quick win” initiatives and defining implementation sprints, the municipality can now target prioritized categories based on impact and feasibility.

Behind every procurement success story is a strategy grounded in best practices proven in both the private and public sectors. Seven core practices, enhanced by AI, could help state and local government leaders strengthen their purchasing operations:

Know the spend: Use data and AI to build a granular view of what’s being bought, from whom, for how much and why. This will allow procurement teams to create a spending baseline and find inefficiencies along the way.

Prioritize categories: Identify spending patterns and opportunities for consolidation to help focus efforts on areas with the highest potential impact. These include so-called “gold-plated” items, such as when agencies purchase high-cost laptops with capabilities that are not needed.

Create a shared opportunity map: Lay out key initiatives, expected savings and timelines to serve as a strategic blueprint for action, to both build momentum and gain stakeholder support.

Implement category management: Analyze market trends, supplier performance and cost-saving opportunities, and automate routine tasks to allow for more time to be spent on strategy. This data can be used to build category plans to optimize total cost rather than just the purchase price.

Understand demand and manage for efficiency and value: Leverage cooperative purchasing agreements to deliver greater value and reduce administrative work, or pool demand for better pricing through statewide contracts.

Strengthen supplier relationships: Build lasting supplier partnerships to deliver better pricing, service quality and innovation.

Commit to continuous improvement: Build feedback loops to drive ongoing improvement with the procurement team’s agency or business stakeholders.

True transformation doesn’t start in the procurement office — it starts in the governor’s office, the mayor’s office and the agency head’s office. Procurement excellence requires teamwork, talent investment and continuous learning. With many seasoned professionals retiring, rebuilding expertise and attracting new talent is critical. While AI is a helpful tool, the best talent needs to be employed to design these new AI-enabled processes.

Leaders who seize this procurement opportunity could help stretch public dollars considerably further. Those that make procurement a strategic priority could ensure a more efficient future, better meeting the demands and expectations of the communities they serve.

Drew Erdmann, a former chief operating officer of the state of Missouri, is a partner in McKinsey & Company’s St. Louis office, where he helps lead operational and organizational effectiveness work. Elizabeth Murthy is a partner in McKinsey’s Atlanta office and leads the company’s procurement service line for state and local governments.

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