Tuesday, April 7, 2009

A better explanation of the Xerox - NYC Dept of Ed kerfuffle

So I think I figured why I was wrong about the press jumping on this story. It turns out that it's a "gotcha" story for politicians. It may still come up in the primary campaign, but the story is too complicated for the sound bites. It's a story about a broken, outmoded purchasing system.

It turns out that a "contract" with the NYC Dept of Ed is more like a hunting license. It's a lot like the way textbooks work. So a "contract" for $38 million can turn into a $68 million spend.

When central purchasing gives a vendor am exclusive hunting license, it's a bit like the King creating the Stationer's Guild. Like textbooks, it keeps the competition out. The danger for Xerox and the textbook companies is that this way of doing business might disappear as the world of asymmetric information disolves.

The difference between $38 million and $67 million is still real money for an education system that only graduates 50% of it's students. School systems can no longer afford the investment unless they have the metrics to prove it was worth it.

It never was about bad people. That's the story politicians like to use. It's about good, smart people playing by the rules, with unintended consequences that can be very, very expensive.

Here's what Joel Klein said,
In general, your analysis mischaracterizes the Department’s requirements contracting process. Requirements contracts are structured on a per unit price basis, meaning that schools and departments only pay for the units they purchase at the unit price fixed in the contract. In some of the examples your office listed, schools decided they wanted to purchase more services and goods than we originally estimated. These expenditures are not examples of cost overruns and do not add costs to taxpayers; they simply reflect increased demand, which the schools pay for out of their budgets.

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