Autonomy in Procurement
A field experiment in organizational design
Editorial note: This week, I plan to write three articles about recent research from the National Bureau of Economic Research. This is the second.
In every procurement organization in the government, there is an authority matrix that defines when a contracting officer must obtain approval from “up the chain” before purchasing. These internal review and approval processes are intended to ensure alignment with organizational policies and, ostensibly, to reduce corruption through a sort of organizational Hawthorne effect. On the other side of these approval processes, most contracting officers quietly bemoan the fact that these approval processes add delay and do not substantively affect the actual purchasing decisions.
Given this backdrop, I was captivated by a recent working paper entitled The Allocation of Authority in Organizations: A Field Experiment with Bureaucrats, which tested changes to an approval matrix, created a “financial incentive” system, and examined the results. Here’s the abstract in full:
We design a field experiment to study how the allocation of authority between frontline procurement officers and their monitors affects performance both directly and through the response to incentives. In collaboration with the government of Punjab, Pakistan, we shift authority from monitors to procurement officers and introduce financial incentives to a sample of 600 procurement officers in 26 districts. We find that autonomy alone reduces prices by 9% without reducing quality and that the effect is stronger when the monitor tends to delay approvals for purchases until the end of the fiscal year. In contrast, the effect of performance pay is muted, except when agents face a monitor who does not delay approvals. The results illustrate that organizational design and anti-corruption policies must balance agency issues at different levels of the hierarchy.
In other words, providing greater autonomy to contracting officers led to cost savings and reduced procurement lead times. By contrast, the financial incentives had no meaningful effect. Now, there are important caveats to this research perhaps most significantly the facts that it was a relatively small-scale experiment with low price thresholds.
But the findings are notable. The reduction delays were sizeable: autonomy led to a 25% drop in delays longer than eight months. Similarly, although the sample size was small, the impact of 9% savings had a meaningful effect:
Our point estimates suggest that the savings from the autonomy treatment from the relatively small group of offices in our experiment are sufficient to fund the operation five schools or to add 75 hospital beds.
This research speaks to some of the larger tradeoffs in organizational design. Management often exists to ensure that lower-level operators comply with policy and organizational goals. But, often, limiting autonomy for those operators can lead to negative outcomes. Why do these patterns persist? The authors offer a compelling hypothesis: that, from management’s perspective, “corruption ‘scandals’ are much more damaging to the organization than the, potentially much larger, sum of small markups on a large volume of transactions.”
Ultimately, the research is another helpful contribution to the literature on organizational design. But it also might serve as a prompt to leaders to reconsider their own organization’s processes and decide whether “getting out of the way” might be the best path toward improving organizational outcomes.