Buying Local on a Large Scale

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"This isn't a charity program, and I think if it was, it wouldn't be sustainable," says Steven Standley, chief administrative officer for University Hospitals.

Standley says the hospital group tries to use local vendors whenever possible. In a $1.2 billion construction project that began in 2005, 90% of the funds have been spent in northeast Ohio. University Hospitals uses competitive bidding to award contracts, but Standley says factors like a higher level of service, the location of a supplier, or a commitment to diversity can sway a contract toward a vendor that doesn't have the absolute lowest price.

That consideration is growing at other institutions as well. "Where one provider may be very close in price to another, then we might look to our broader interests," says Oliver Henkel, the Cleveland Clinic's chief government relations officer. "There are residual benefits to us that can't necessarily be quantified."

Officials at all three institutions involved in the Cleveland project point out that it's in their interest to foster new businesses, jobs, and wealth in their communities. Economic development can make the neighborhoods more attractive places for staff to live, and, in the case of hospitals, improve the health and security of the people they serve.

Local Office Supplies

It's not just nonprofits embracing the idea, either. Last year, Arizona's largest electrical company, APS, sought a new office-supply provider in an effort to lower costs. The $1.5 million contract went to Wist Office Products, a family-owned Tempe firm with 60 employees and $15 million in revenue. Wist outbid national competitors like OfficeMax (OMX), Office Depot (ODP), and APS's previous vendor, Corporate Express, which is now part of Staples (SPLS).

APS, the main subsidiary of publicly traded Pinnacle West Capital Corp. (PNW), spends $1.5 billion annually on outside purchases, and one-third of that goes to 1,500 vendors in Arizona, says Tammy McLeod, vice-president and chief customer officer at APS. "The tangible benefit of making a local business more successful is they probably become a better customer of ours," McLeod says.

In addition to the APS contract, Wist is doing brisk business with dozens of school districts and municipalities that want to buy from local firms rather than the single supplier available through Arizona's statewide contract. "We have to be lowest or most cost-effective, so there's no favors given, but in the grand scheme I believe they … say this is a good thing for our community," says Ian Wist, the company's general manager.

Such principles support the long-standing practice of giving public contracting preferences to businesses owned by women, minorities, veterans, or other disadvantaged groups. Some 27 states also have preferences for using local vendors, according to a 2009 survey by the National Association of State Procurement Officials. More states and local governments have adopted such policies during the downturn in efforts to bolster their economies, says Jack Gallt, NASPO association director. Local purchasing preferences can backfire, however, when companies try to land out-of-state contracts. "They're penalized for not being an in-state company somewhere else," Gallt says.

Indeed, contracts going to the Evergreen businesses in Cleveland have to come from somewhere else. But as long as the businesses offer competitive value vs. their existing suppliers, the Greater University Circle institutions would just as soon spend their money in their own backyard. John Wheeler, a former corporate lawyer who is now vice-president for administration at Case Western, says he fully supports the plan but was skeptical of the idea at first. "Do you think a bunch of do-gooders can create entrepreneurs in these neighborhoods? I've got to see it to believe it," he says. "To the extent it can be a success, it is truly a formula for providing a dramatic amount of economic development. … The capacity here for a market is huge, absolutely huge."

Tozzi covers small business for BusinessWeek.com.

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