Procurement efficiency: A modern strategy for state and local leaders

Against a backdrop of new federal priorities and global economic uncertainty, state and local leaders face mounting pressure to deliver more with less. Fortunately, bringing together proven best practices with new AI capabilities can help make procurement more efficient, offering these leaders an enormous opportunity to capture savings. Collectively, state and local governments disburse more than $4.5 trillion annually,¹“State and local government finances by level of government,” US Census Bureau, 2023; Russell Pustejovsky and Jeffrey Little, “Annual state and local government finances summary: 2021,” US Census Bureau, August 2023. and procurement efficiency is one of the most powerful levers—if not the most powerful lever²David Pralong, Jennifer Spaulding Schmidt, Teresa George, and Cole Wirpel, “Aim higher and move faster for successful procurement-led transformation,” McKinsey, June 9, 2025.—for significant savings. In fact, according to McKinsey purchasing and supply management data, the savings potential may be higher in state and local government than in any other sector.

On the surface, procurement sounds simple: It’s about getting the right stuff at the right price at the right time in the right way. But in the real world, capturing savings in procurement is anything but simple, and most procurement leaders and government executives would agree that their teams leave value on the table. Government procurement involves technical, policy, and regulatory complexity. Even when governments identify potential savings, these complexities can slow or stymie efforts to capture value.

Navigating procurement requires expertise as well as partnership between agencies and their procurement teams. Senior government leaders often find procurement opaque and even frustrating. Procurement teams often speak their own language and prioritize internal processes and procedures over counseling their customers on how best to achieve their mission outcomes. Working together, senior leaders and procurement teams can seize opportunities to use AI to bypass inherent complexities and transform how procurement gets done.

When implemented properly, new AI tools and approaches can greatly improve procurement performance. They can help capture efficiencies across each element of the process, including the following:

• The right stuff: Better defining requirements, avoiding “gold plating” (adding features or requirements beyond the original scope unnecessarily), and consolidating options to pool purchasing power can lead to significant savings.
• The right price: Consolidating purchases, renegotiating contracts, leveraging economies of scale, and improving invoicing can lead to significant savings.
• The right time: Streamlining procurement processes helps avoid unnecessary delays and ensures that citizens and state employees have what they need when they need it.
• The right way: Modernizing procurement practices can make spending more transparent, reducing waste and fraud and reinforcing public trust—all while complying with public procurement laws, rules, and other regulations.

To be sure, agency leaders and procurement teams alike may be confused or even intimidated by some of the hype surrounding recent AI developments. And caution in adopting new technologies is warranted, especially in the public sector where the expectations for accountability, transparency, and risk differ from the private sector.

This article explores how partnerships between agency leaders and their procurement teams can realize considerable savings via a procurement transformation grounded in mutual understanding and enhanced by the power of new AI approaches. The potential size of the procurement savings prize is illustrated with big transformation wins garnered by some state and local governments. Last, this article details a structured approach to develop and implement a modern procurement strategy that works, even given the complexity facing state and local governments.

Eyes on the prize: Big wins show big potential

As McKinsey has written previously,³David Nuzum, Drew Erdmann, Sarah Tucker-Ray, and Trey Childress, “Capturing performance opportunities in US state and local governments,” McKinsey, April 25, 2025. among major efficiency measures available to state and local governments, procurement offers the greatest opportunity to capture significant cost reductions and savings (Exhibit 1).

Image description: A treemap depicts the distribution of potential annual cost reduction and avoidance in an example state government. There are three drivers of cost reduction and avoidance: 1. sourcing and vendor management, 2. core tech modernization, and 3. asset optimization. These are broken down into further subcategories. Of total cost reduction and avoidance, sourcing and vendor management make up 61%, with the right price and right stuff subcategories contributing 38% and 23% of the savings, respectively. Core tech modernization makes up 32% of potential savings, with the following subcategories: retiring and consolidating applications make up 14% of savings, better pricing and efficiency both make up 7%, and other makes up 4%. Finally, savings from asset optimizations are represented by just one subcategory, fleet and real estate, making up 7% of savings. Source: David Nuzum, Drew Erdmann, Sarah Tucker-Ray, and Trey Childress, “Capturing performance opportunities in US state and local governments,” McKinsey, April 25, 2025 End image description

Capturing procurement savings requires persistence and skill. This is because government procurement does not usually consist of a single “black box” containing a complex, opaque function that can be hard to understand and even harder to optimize. Rather, most local and state procurement consists of hundreds of these black boxes, each with its own idiosyncrasies. Consider the diversity of potential spending categories, such as IT megaprojects, janitorial services, highly specialized lab equipment, fuel, and building materials.

Nevertheless, the successful outcomes from state and local government procurement transformations noted below show that it can be done:

• Up to $350 million in recurring annual savings: A major municipality identified savings through a rapid assessment of its third-party procurement spend. It analyzed approximately $4 billion in spending data, conducting deep-dive analyses in target categories, including a maturity assessment of construction procurement practices, contract rate analysis for professional services, and rate variation analysis between municipal and state-level facilities management contracts. By benchmarking against comparable peers and engaging with domain experts, the municipality was able to further highlight opportunities among high-impact value levers. And by identifying potential “quick win” initiatives and defining implementation sprints, the municipality can now target prioritized categories based on impact and feasibility.
• Up to $150 million savings in the near term and $230 million in the long term: One state identified these savings through a diagnostic and analysis of one of its single largest contracts governing the state’s employee benefits plan. The state used the analysis to prepare a procurement strategy tied to market benchmarks and user preferences before reprocuring those services.
• More than $25 million in recurring annual savings and upskilling of talent: One regional transportation authority identified sizable savings through its full-scale procurement transformation. An assessment of procurement spending and processes helped the authority identify opportunities to capture financial savings and improve operational efficiency. Building on these insights, it developed and implemented a portfolio of targeted initiatives to realize these opportunities. A transformation office was established to implement the initiatives and track improvements and savings as they were accomplished. The authority ensured that employees had the skills needed by providing more than 200 employees with upskilling sessions and online education resources as well as establishing a new learning steering committee to guide learning and development and succession planning and to implement e-learning.

Another state outlined a path to capture savings and improve services with an enterprise-wide transformation diagnostic (see sidebar “How one state modernized procurement to pursue an ambitious cost savings target”).

How to capture procurement value: The essentials

Behind every procurement success story is a strategy grounded in best practices proven in both the private and public sectors. Every state and local government executive would benefit from understanding the fundamentals (outlined below) of generating efficiencies. Likewise, procurement teams could consider how to clearly explain these fundamentals to other government executives and with a keen understanding of how to support the delivery of mission impact.

• Know the spend. A comprehensive spending analysis is foundational to any successful procurement transformation. After gathering quantitative data (such as annual contract costs) and qualitative data (such as deliverables and statements of work), procurement teams could consider building a baseline of enterprise spend, using analytical AI to identify inefficiencies and opportunities for optimization.
• Select initial categories. To achieve the greatest impact, teams can prioritize categories with significant spending. But nuance matters. Some categories ripe for attention may include potential gold-plated items—think laptops with unnecessary features or capabilities—where demand could be shifted to more basic, lower-cost models without losing functionality. Similarly, in some categories (such as those for certain kinds of equipment), shifting to aftermarket service providers, rather than relying on new purchases, might be beneficial. To ensure competition, potentially high-impact categories can be prioritized, namely those with multiple providers. Such categories typically present the most immediate opportunities to save on costs through competitive bidding and contract renegotiation. Using analytical AI, teams can identify spending patterns and opportunities for consolidation. This data-driven approach helps focus efforts on areas with the highest potential impact.
• Create a shared opportunity map. A comprehensive procurement opportunity map provides a strategic blueprint for action by detailing planned initiatives, estimated cost savings, and implementation timelines. It is important to prioritize quick wins to demonstrate the transformation’s value to the full range of stakeholders and thereby build momentum. Contract timelines can provide horizons for wins: Some will have near-term impact, while others can be deprioritized until the contract is recompeted. Highlighting early wins can also help garner stakeholder buy-in and build support for broader initiatives.
• Benchmark against industry standards. Comparing procurement performance against other public- and private-sector organizations can help identify gaps and set ambitious yet achievable goals. Government leaders often benchmark against past spending internally, but external sources of comparison can reveal real value capture opportunities.
• Implement category management. AI tools can support category management to gain insight into market trends, supplier performance, and cost-saving opportunities. AI-powered tools can also automate routine tasks, freeing up procurement professionals to focus on strategic activities.⁴McKinsey Talks Operations Blog, “The future of category management: The power of AI category agents,” blog entry by Luca D’Avino and Deepanshu Chawla, April 29, 2025. Teams can create tailored strategies for each category, considering factors such as market dynamics, supplier capabilities, and internal demand. These strategies should aim to optimize total cost of ownership, not just purchase price.
• Understand demand and managing for efficiency and value. In some cases, leveraging cooperative purchasing agreements may deliver great value for the state while reducing administrative work for the procurement team. In others, states may prefer to pool demand for better pricing through statewide contracts. Regardless, understanding demand—including opportunities to standardize product and service specifications across agencies and eliminate gold-plating requirements to reduce costs—is an important first step.
• Enhance supplier relationships. Building long-term relationships with key suppliers is vital because such strategic partnerships can help facilitate better pricing, boost service levels, and enable innovation in product and service offerings. Implementing supplier performance management using analytical AI tools can monitor supplier performance continuously and in real time to help identify issues early and ensure suppliers meet contractual obligations.
• Govern for continuous improvement. As the waves or sprints of procurement transformation progress, regular reviews and feedback loops can unlock continuous improvement. Teams can determine a rhythm for how often and in what manner the team reviews progress and outcomes after each sprint. Teams can then take stock of what worked, what didn’t work, and what they’ve learned, and then they can revisit the target categories to determine which to prioritize based on new insights. The cycle helps ensure continuous assessment, learning, and improvement in procurement processes—and it helps embed new capabilities across the procurement organization and other agencies.

All regular reviews of procurement processes and performance should involve the procurement team’s agency or business stakeholders and focus on identifying areas for improvement. Further, establishing continuous feedback loops with suppliers and internal stakeholders helps identify issues early, foster a culture of collaboration, and provide incentives for improvement.

How to preserve procurement value: Harnessing technology and AI today

The essentials of procurement transformation may appear familiar, but capturing value consistently is an enduring implementation challenge. But analytical AI and other digital tools can be game changers in procurement, enabling smarter decision-making, faster processes, and better overall outcomes. Predictive analytics, for example, can forecast demand for more accurate and efficient purchasing, and automation can reduce time spent on manual tasks (such as extracting data from PDF deliverables) while enabling at-scale analysis (see sidebar “Leveraging contract AI to reduce costs and boost compliance”).

All too often, value “leaks” from procurement processes or transformations become “one and done” initiatives rather than enabling ongoing continuous improvement. Across a range of state and local governments, for example, we have seen how a potential stream of procurement savings can be reduced to a trickle by a series of seemingly minor leaks in compliance, control, and visibility (Exhibit 2).

Image description: A diagram illustrates the typical sources of value leakage and their respective opportunities to preserve value. The first source of leakage is the use of nonpreferred supplies (or maverick spend), but compliance with strategic supplier contracts with improved prices and service levels can save 10 to 50% in value. The next source of leakage is purchasing orders not matching preferred supplier contract s(for example, in price payment terms). To combat this, a catalog of preapproved items at negotiated prices can save 5 to 15%. The third source of leakage is no preauthorization involved (as in no purchasing orders) or slow payment for a majority of invoices, but proper channel management and price performance benchmarking can save 5 to 10%. The last source of leakage in this exhibit is limited spend visibility and limited potential for renegotiation and leverage, which can be combatted by the use of purchasing orders through defined procurement channels and proper procurement engagement and more automated matching, saving 5 to 10% in value. End image description

Analytical AI tools and techniques are now offering new ways to seal the pipes of procurement, so to speak.⁵“Mitigating procurement value leakage with generative AI,” McKinsey, April 9, 2025. In the private sector, such benefits are now being captured by category managers at companies that have prioritized strategic AI development and adoption. One chemical company, for example, has built and deployed an AI tool to conduct autonomous sourcing with a successful pilot in the consumables category. With an agent preparing and executing tenders, requiring minimal human intervention, the company was able to realize significant value: a 20 to 30 percent increase in full-time equivalent efficiency, increased visibility and control, and additional value capture of 1 to 3 percent.

While AI is evolving rapidly, some government organizations have already proven AI’s potential to equip business leaders and procurement teams with advanced capabilities to capture the full potential for procurement savings.⁶According to their survey on state procurement practices, the National Association of State Procurement Officers (NASPO) found that seven states had incorporated AI into their procurement or contract management practices: 2024 Survey of State Procurement Practices report, NASPO, 2024. Contract noncompliance and “maverick spending” (unauthorized purchases not aligned with overall procurement strategy that can cumulatively erode savings) are two common sources of value leakage. Supplementing traditional procurement management with analytical AI can improve the speed and insights from regular audits and performance reviews to identify and address noncompliance issues and ensure that suppliers adhere to contract terms and conditions. According to McKinsey analysis, organizations have saved an additional 1 percent in total procurement spending by not paying incorrect invoices. Likewise, analytical AI can improve a procurement team’s abilities to monitor spending patterns at a granular level and thus identify and stop maverick spending.

AI technology can also support real-time monitoring and predictive analytics, which are essential to proactive planning and informed decision-making. By allowing organizations to monitor procurement activities continuously and in real time, AI helps organizations identify potential issues before they escalate and increase visibility into spending, contract compliance, and supplier performance. And predictive analytics enables and enriches forecasting of future procurement needs and market trends (see sidebar “Process mining leads to big wins in Oklahoma”).

These AI-enabled approaches to capture and preserve savings go hand in hand with modernizing and streamlining government procurement overall. In practice, this means government procurement teams can also develop requests for proposal much more rapidly by using agentic AI and copilots, expedite proposal review and assessment, engage with suppliers more strategically, and provide overall better-quality service to their customers. Thus, such AI-enabled transformation of procurement practices helps deliver not only the right cost but also the right stuff at the right time in the right way.⁷Aasheesh Mittal, Charles Cocoual, Mauro Erriquez, and Theano Liakopoulou, “Revolutionizing procurement: Leveraging data and AI for strategic advantage,” McKinsey, June 13, 2024.

How to enable sustained success

Treating the steps above as a stand-alone checklist will not deliver an enduring change in how a state or local government procures goods and services. Instead, successful government leaders focus equally on how the work gets done, not just what is required to capture near-term savings. Government executives, therefore, can work with their procurement leaders to build healthy organizations that are aligned, can execute, and can renew their ways of working as their operating context evolves.⁸Scott Blackburn, Georgios Athanasakopoulos, James Rappaport, and Nicolette Rainone, “A fitness agenda for government: Cultivating organizational health in the US public sector,” McKinsey, January 14, 2025.

• Invest in procurement talent. Procurement expertise provides the foundation for success. In many state and local governments, however, such expertise has eroded over the past decade. Seasoned experts are retiring, and cities and states often have not backfilled their ranks as part of overall administrative staff reductions. Such trends may appear “penny wise” in the near term but are ultimately “pound foolish.” Governments need to seek new talent as well as deploy the best talent available in designing new processes, including those relying on technologies such as automation and gen AI, to improve productivity.

• Assemble a cohesive enterprise team. Procurement transformation cannot be left to procurement teams alone. Ideally, end-user agencies and departments partner closely to establish priorities and problem-solve with their procurement colleagues to promote shared accountability and transparency. Lasting change involves engaging stakeholders across agencies, including procurement officers, department heads, and finance leaders. The team approach not only helps ground the opportunity map in the realities of day-to-day operations but also helps align decision-makers.

• Build a learning engine. Training and development are integral to sustained procurement excellence, especially given technological advances in AI. For example, ongoing upskilling, training, and development opportunities for procurement professionals ensure that team members apply leading-edge skills and knowledge to daily activities, planning, and special projects. And sharing best practices across agencies and departments helps cultivate a culture of knowledge sharing and collaboration, which enhances overall procurement performance.

Compass bearings for government ‘business’ leaders

Procurement is critical to government performance and should not be left to procurement experts alone. The “business” leaders in a state or local government, whether in a governor’s or mayor’s office or leading an agency, have special roles and responsibilities in accelerating a procurement transformation. Procurement experts can guide and coach such leaders to help forge impactful partnerships. Success requires these government leaders to embody certain characteristics:

• Savvy. Government leaders need to know the fundamentals of procurement. This takes some effort; internalizing this article’s main points is a good first step.
• Bold. While quick wins are important, enduring procurement impact at scale starts with an ambitious long-term vision that supports an administration’s strategic agenda. Done right, procurement reform can provide the right stuff at the right time and the right price, and its savings can be redirected into sustaining mission priorities.
• Clear. As the saying goes, “Vision without execution is a daydream.” Bold aspirations need to be translated into clear targets for procurement performance, whether typical cycle times, savings targets across a spending category, or performance KPIs for suppliers. Such clear expectations help drive innovation and continuous improvement as well as transparency and accountability.

Now more than ever, state and local governments need to steward every dollar. Procurement is complex. Transforming it requires technical, analytic, and interpersonal acumen. Instead of shying away from the complexities of procurement, government executives should lean into procurement transformation. This means giving it their time and attention, first by learning procurement essentials and the potential for new technologies. Then government executives and their procurement team partners can chart a course to achieve bold but practical savings ambitions across their government, thereby better meeting the demands and expectations of the communities they serve.