TO CENTRALIZE OR DECENTRALIZE?

Pilvi Takala*
* Pilvi Takala, LL.M, Chair of the Board is the founding
partner in PTCServices Oy and she is interested in SMEs
and innovation as well as electronic procurement. She has
doubts about centralized procurement.
ABSTRACT. There are benefits in centralizing public
procurement
but
also
drawbacks.
Centralized
procurement requires strategic approach, in order to
avoid narrowing the market and monopolization. As an
answer to the title question, both centralize and
decentralize may be the most effective solution. It is
likely that in the future electronic procurement systems
allow Centralized Purchasing Bodies to promote SME
friendly strategies in an entirely different manner than
before. For example, centralizing the work related to the
procurement process but decentralizing the contract to
several economic operators. It should be noted that each
market will benefit from competition and this is not
different when it comes to CPB. Having at least a few
Centralized Purchasing Bodies in each market area may
lead to better quality framework agreements and
services.
INTRODUCTION
Many authorities are considering the benefits of
centralized purchasing and this study aims to make some
of the right questions. Important questions when
establishing a centralized purchasing body or considering
it are for example:
-

Is there legislation that requires establishment of

Centralized Purchasing Body (CPB) or electronic
procurement?
- What is the most effective way to establish a
Centralized Purchasing Body and what should it do?

- Should it be mandatory to use

agreements concluded by the CPB?

the

framework

- Will centralizing bring such remarkable benefits in

savings and streamlining of the procurement process
that it overrules the drawbacks?
- Could electronic procurement act as a game changer
when considering typical drawbacks of centralizing?
METHODS
Objective is and continues to be, to carry out a
comparative analysis on the ways of organizing a
Centralized Purchasing Body and considering the value of
electronic tools in centralized procurement. The study is
ongoing and this is only a brief overlook of the work. The
questions are relevant in the nations and authorities
where the question of establishing a Centralized
Purchasing Body or e-procurement system is acute or
when considering future strategies or development of
CPBs work.
Compendious use of already existing information is a
primary method, study of the background material,
written
inquiries,
discussions
with
different
administrational organizations and civil servants and
consultants in seminars and in interviews.
There is an overwhelming amount of material in the
internet on the subject matter. The problem is that, in
particular e-procurement methods are in a constant state
of change and therefore a study that is two years old may
be too old. This is the case in ICT-sector in general. For
this reason, discussions and up to date inquiries are the
most reliable sources of what is going on in reality.
Several countries CPBs and electronic tools were
reviewed. Information from eight countries was gathered
concerning their CPB and from four their e-procurement
tools were viewed. In order to get an idea of the size and
volumes of public procurement in the chosen countries,
some statistics and other data was gathered. Similar data
was not available for every country. The reviewed

countries joined to EU between 1973- 2013. Most of them

after 1990.
They present a great variety within EU of ways to
implement centralized purchasing bodies, to organize
public procurement services and to ensure high-level
public
procurement
expertise.
Specific
examples
described in this paper are mainly from the Finnish
experience.
RESULTS
Legislative Background, General Statistics
History of centralized procurement systems in EUs
public procurement directives is not long. For example, in
Finland there was a state procurement center already
prior to EU membership. Similar procurement centers
were common in other countries as well. Due to the EU
rules and restrictions for public sectors operations in the
market, the functions of the former centers are now
limited only to the public sector.
There are no limitations in the EU rules or public
procurement directives with regard to the organizational
model of Centralized Purchasing Body. According to the
new public procurement directive 2014 Article 2
Definitions:1
(16)central purchasing body means a
contracting authority providing centralized purchasing
activities and, possibly, ancillary purchasing activities.
Thus, there are no special requirements with regard to the
legal form of Centralized Purchasing Body.
The only requirement is that the Centralized
Purchasing Body shall be contracting authority and its
liabilities are to provide centralized purchasing activities
for other contracting authorities. The tasks of Centralized
Purchasing Bodies are described in more detail in Article
37 of the new directive.2 In the said article however, the
directive allows the member states to require certain
procurements to made solely from the CPB.
1 Directive 2014/24/EU of the European parliament and of
the council of 26 February 2014 on public procurement
and repealing Directive 2004/18/EC

So the directive allows to use the CPB as a tool for

aggregated procurement, but the decision remains with
the member state. Consequently, it is up to a member
state to choose, the operational form, or, whether there is
a need to have a Centralized Purchasing Body at all. Not
all member states have Centralized Purchasing Bodies.
As Dimitri et al (2006) have defined, there are several
options to decide on the aggregation strategies. The
centralization doesnt have to be full scale. More so, it is
very typical to have decentralized or so called hybirid
models where there is still an overall strategy of how the
entire procurement organization functions. In full
centralization the procurement decisions are entirely in
the hands of the central authority. In decentralized model
local administrations are delegated the power to decide
how, what and when to procure. In hybrid models central
and local purchasing units both have authority over some
decisions and there is co-operation in different levels of
planning, management and for example training. Dimitri
et al (2006) states that the hybrid model may be the most
common model (Dimitri et al., 2006).
Electronic means are used quite widely in public
procurement within the EU. As illustrated in a report
about uptake in eProcurement (Prepared for DG GROW
2015) in particular, the uptake in publishing notices
electronically, is close to 100%. 3
According to the 2014 EU Directive, article 22,
contracting authorities should use electronic means of
communication in procurement procedures.
2 Member States are allowed to provide that certain
procurements are to be made by having recourse to
central purchasing bodies or to one or more specific
central purchasing bodies.
3 Prepared for DG GROW (2015) eProcurement Uptake
Final Report [On-line]. Available at
http://ec.europa.eu/growth/single-market/publicprocurement/studies-networks/index_en.htm (47-48)

After 18th of April 2016 all transmission of notices

covered by the Directive 2014 must be conducted
electronically. On the same date electronic availability of
procurement documents must be ensured. In case
contracting authority uses Dynamic purchasing systems,
Electronic auctions and Electronic catalogues, then the
means shall be electronic starting from the said date.
By 18th of October 2018 electronic transmission of
requests for participation and electronic submission of
tenders will become mandatory. For central purchasing
bodies the deadline is already 18th of April 2017 after
which all procurement procedures should be conducted by
electronic means. This means in particular electronic
submission of tenders.
Even if the end to end e-procurement is the goal of the
directive, it obliges only to use electronic tools in the
above mentioned phases. It does not oblige Centralized
Purchasing Body for example to carry out e- processing of
tenders, e-evaluation or automatic processing or internal
e-communication.
However, there is a lot to gain, so most of the CPBs
are already either professional users of e-procurement
systems or pilot users.
As concluded in the EU Commissions strategy for eprocurement (2012) the e-procurement savings generate,
first of all, more efficient way of work. Electronic tools can
also significantly help improve the transparency of the
entire procurement process and this way help reduce
corruption and other illegal of unwanted ways of spending
public money. 4
e-tools
allow
better
access
to
procurement
opportunities, especially for small and medium sized
companies (SMEs).
This should have an effect of
4 Communication From The Commission To The European
Parliament, The Council, The European Economic And
Social Committee And The Committee Of The Regions A
strategy for e-procurement /* COM/2012/0179 final */ (1.
Introduction)

stimulating innovation as well as cross-border competition

in the EU.
There should also be visible reduction of transaction
costs for both public sector and for economic operators.
The systems can also reduce errors, for example, by
avoiding the need to repeatedly rewrite information from
paper to paper during different phases of the procurement
process.
The environmental aspects have an effect also to
savings calculation and there are several CPBs whose
strategy is to promote green procurement. e-procurement
reduces waste, with less paper consumption and there is
less transport of the paper.
Techniques and Instruments for Electronic and
Aggregated Procurement
Both electronic and aggregated procurement are
gathered in the same Chapter III of the Directive 2014.
CPBs, framework agreements, dynamic purchasing
systems, electronic catalogues etc. have all the same
goal: to help the operators in the public procurement field
to achieve better and more effective outcomes from
public contracts.
Unfortunately, very often optimal and full usage of
these tools described in chapter III have required
substantial recourses, time for planning and professional
procurement authorities who have the possibility to
concentrate solely on procurement related issues. To
achieve this kind of professionalism and to have the
resources to procure state of the art e-procurement tools,
has been generally necessary to establish a centralized
procurement body such as a CPB.
However, there may be a change in this state of play
on its way: a single, small municipality may be able to use
all the tools and methods in Chapter III without any
problems in case there is a high quality but inexpensive
e-procurement system available. This is reality in some
cases already.

Centralized Purchasing Body as a Limited Company

or as a Part of the State
Many of the studied countries have CPBs organized as
limited companies. All of them are of non-profit nature. In
addition, many other European countries have chosen
limited company model as the form for their Centralized
Purchasing Body. It has been said, that this organizational
form provides Centralized Purchasing Body flexibility and
freedom compared to being part of government
administration, within a ministry or as an independent
agency.
According to the Sigmas study from the year 2011,5 it
has been argued that being a corporation makes it easier
to attract competent staff and that this organizational
form enables the Centralized Purchasing Body to focus
entirely on creating value for their customers, without
taking unnecessary political considerations into account.
All the limited company Centralized Purchasing Bodies in
this study have confirmed this viewpoint and been very
satisfied about their form to operate.
Critics towards limited company model argue that the
limited company form is not ideal for Centralized
Purchasing Body because the form in question is
ultimately designed for profit-seeking companies. Critics
argue that Centralized Purchasing Bodies do not pursue
the objective of maximizing profits since their aim is to
create savings for the public sector. Instead, they argue, a
Centralized Purchasing Body is best organized as a
government agency or a division within a ministry.
Serious criticism has been expressed concerning the
openness and transparency of the limited companies.
From a transparency perspective a government-controlled
or regional controlled organization would perhaps be more
beneficial in terms of openness. Openness of public
5 OECD (2011), Centralised Purchasing Systems in the
European Union, SIGMA Papers, No. 47, OECD Publishing.
[On-line]. Available at
http://dx.doi.org/10.1787/5kgkgqv703xw-en (59-61)

documents does not in general apply

companies as it does to civil servants.

to

limited

Half of the Centralized Purchasing Bodies of the review

were organized as departments of the state. In addition,
many other countries in EU operate centralized
purchasing systems by state organization with success.
According to the Sigmas report, this solution is said to
bear more of problems than the limited company form
has.
Obviously, this is a more formal way to operate.
Usually there are more administrative rules and the staff
usually consists of civil servants. Their salaries are often
lower than in the private companies. However, there are
also several other motives to stay in the public sector, like
interesting duties and possibilities to develop career.
Organization model
Limited company
Department of the state

Centralized
Purchasing Bodys
4
4

Organization models for Centralized Purchasing Bodies

reviewed
Tasks of the Centralized Purchasing Body
The main target of all the reviewed Centralized
Purchasing Bodies is to run effective system of central
public procurement in order to use public funds in
economically advantageous way. One, and the most
important, way to achieve the target is to establish and
manage framework agreements intended to Centralized
Purchasing Bodies customers. The categories of the
products vary depending on the Centralized Purchasing
Body.
Some of the Centralized Purchasing Bodies operate
also public procurement portals and electronic tools.
Overall, the public procurement portals offer general
information and the latest news in public procurement,

guidelines, blogs and court cases of public procurement

issues. None of the selected Centralized Purchasing
Bodies acts as a wholesaler or keeps their own
warehouse.
Some Centralized Purchasing Bodies offer also
consultancy services for procurement procedures and
legislation to its customers. Consultancy services are
generally very limited and depend on the resources of the
Centralized Purchasing Body in question. For example,
consultancy and advice services are requested only every
now and then but in practice, the Centralized Purchasing
Bodies do not have either resources or capacity to offer
such services. Advice has been mainly given concerning
Framework Agreements and common legal issues, but not
for concrete procurement procedures.
In Finland, Hansel Oy (CPB for state) offers consultancy
services also with regard to public procurement
procedures besides their own, exclusively for state
authorities, not for all contracting authorities. Initially,
pressure to provide such services came from the Ministry
of Finance. Consultancy service for Contracting Authorities
is not free of charge. So far there has been only very
limited consultancy available.
KL-Kuntahankinnat (CPB for municipalities) does not
provide consultancy services at all, and counselling is only
very limited. Counselling is limited mainly to KLs own
contracts and common legal interpretation, not concrete
procurement cases. Service, as it is, is free of charge.
Hansel and KL-Kuntahankinnat have also been very
active on promoting electronic procurement methods and
they both provide a framework agreement to use a
commercial platform in Finland.
Depending on the resources of the Centralized
Purchasing Body in question, it can also draft guidelines
for public procurement, organize seminars and give public
procurement training. In practice, these kinds of activities
are limited.
The staff of each Centralized Purchasing Body varies
from 11 to 795. It is understandable that more tasks and

duties need considerably more staff (e.g. legislative

work).
Categories and Strategy
The categories suitable for centralized procurement
vary slightly depending on the contracting authority.
There are however many similarities in the category
strategies. Some of the goods and services are common
to most Contracting Authorities, such as office supplies
and ICT products. For this kind of volume products, there
are obvious benefits in running a centralized purchasing
process. This is the way to achieve lower prices and
transaction costs.
Nevertheless, not everything procured is suitable for
centralized purchasing. Contracting Authorities also have
very specific needs and need tailored products or services
in order to provide the services they are bound by law to
provide to the citizens. In such cases, centralized
purchasing is not necessarily useful, but may lead to
major problems.
Interestingly enough, none of the reviewed Centralized
Purchasing Bodies organized public tenders on building
and construction services. Most of the interviewed
considered them too specific and not standardized
enough for the categories of Centralized Purchasing Body.
Special expertise would be needed also in order to buy
works. One of the interviewed did not completely exclude
this possibility in the future.
When deciding suitable products for centralized
purchase, product classification will help to define the
right categories. For example, In Finland in the initial,
State public procurement strategy, from year 2004,
product classification was made by using Peter Kraljics
portfolio purchasing analysis. This work has been
continued and the latest version of the strategy work is
available from last year. As Liisa Lehtomki (2015)

10

illustrates, the portfolio is a valuable a simple tool to

manage procurements. 6
The analysis was then utilized to define the product
categories to be purchased by the Centralized Purchasing
Body, Hansel (Finland). And finally, some of these
products and services were listed in a regulation of the
Ministry of Finance. Hansel is bound to provide framework
contracts at least for all items stated in the regulation.
State authorities are then obliged to use Hansels
Framework Agreements on those items. In addition, there
are plenty of contracts, Hansel procures on voluntary
basis and on demand of its customers.
KL-Kuntahankinnat (Finland) chooses products and
services for the centralized competitions together with
their customers, i.e. mainly municipalities, by making
inquiries about their needs. Sometimes proposals rise
from the municipalities themselves, too. There must
always exist sufficient volume and/or a sufficient number
of committed customers in order to launch a new
competition. With regard to KL-Kuntahankinnat, there is
no regulation or mandatory requirements to use the
concluded framework agreements.
From the study of the several nations, it was gathered,
that regulation for the products in the portfolios of
Centralized
Purchasing
Bodies
exists
especially
concerning products targeted for the state authorities.
The Centralized Purchasing Bodies for municipalities
and other local and regional authorities do not have
similar product regulations as the state Centralized
Purchasing Bodies. Successful co-operation is possible,
though, and mandatory obligations are not always
needed. If the Framework Agreements of Centralized
Purchasing Bodies are desirable enough and voluntary
users can recognize the benefits of the services, the
6 Liisa Lehtomki (2015) Valtion hankintatoimen
kehittmishankkeen osa-alueiden 1 ja 2 vliraportti [Online]. Available at http://vm.fi/hallintopolitiikka/valtionhankinnat (30-31)

11

usage of the Framework Agreements should become as a

mere result of the good service.
Mandatory versus Voluntary
As defined earlier, procurement directives do not
implicate mandatory or voluntary use of Centralized
Purchasing Body.
In six of the studied countries, there are defined
framework agreements, which are mandatory for the
state central administration. These countries have
regulated exclusively their state authorities.
Municipalities and other public sector Contracting
Authorities have freedom to decide how they buy needed
goods and services.
If the use of the Centralized Purchasing Body is
mandatory, it is for example easier to calculate the
volumes of the Framework Agreements. Moreover at
least first years of the Centralized Purchasing Body the
bigger volumes, the bigger savings.
If the use of the Framework Agreements is obligatory
for the Contracting Authorities, it may result to a situation
where the Centralized Purchasing Bodies do not need to
innovate enough to get best value for money and high
quality contracts. They could make poor contracts and the
Contracting Authorities would still be obliged to use them.
This would not be economically the most advantageous
way to work and not admissible way to use public funds.
One suggestion could be to state the usage of certain
products/contracts/categories mandatory in the beginning
stage. With regard to municipalities, regional and local
authorities, one should carefully scrutinize if the
mandatory usage could be possible. If the municipalities
and communes are independent legal entities with
possible right to collect taxes, mandatory use might
infringe the constitutional rights of municipalities.
The Pros and Cons
Benefits of using Centralized Purchasing Body

12

Several benefits in favor of using Centralized

Purchasing Bodies services can be demonstrated.
Karjalainen (2009) for example lists numerous pros of
pooling, points out clear evidence of its usefulness. She
also then points out, that even though it is obvious that
savings are available, it is still important to argue on their
behalf: centralization, even how effective, will always
encounter resistance. The benefits are in future and it
may be difficult for any procurement official to see how to
achieve them in reality. If benefits are not thoroughly
discussed, and statistics gathered, any centralization
project may face lack of commitment and hesitation to
join the operating.
At least following benefits have been pointed out:
direct savings in form of lower prices
indirect savings, when multiple transactions costs for
organizing public procurement procedure in each
Contracting Authority separately become redundant
better quality in procurement processes due to the
expertise of Centralized Purchasing Body, including
effective usage of electronic tool
increasing professionalism, when public procurement
experts are concentrated in one organization
standardization and better quality of products due to
better technical specifications
allows the customers (Contracting Authorities) to
concentrate on their core tasks
reduced legal risks for Contracting Authorities
transfer of legal liability from Contracting Authority to
Centralized Purchasing Body (ease the life of
Contracting Authority)
Drawbacks of using Centralized Purchasing Body
Too much centralization on products and markets: The
problem is not always the organizational form of
Centralized
Purchasing
Body.
A
tendency
to
overcentralize public procurement contracts may be the
real problem.

13

Mandatory use and the needs of customers: In some

cases, mandatory use can make the contracting
authorities to buy unsuitable products, which does not
meet the needs of the Contracting Authority. This is
neither economical nor does it attract Contracting
Authorities to further use Framework Agreements of
Centralized Purchasing Body.
Expertize is also sometimes difficult to secure.
SMEs possibilities: Centralized Purchasing Bodies are
often criticized for limiting SMEs possibilities to reach
public market. The volumes in the contracts are very high.
Only big contractors have chances to succeed in the large
scale competitions.
Prices: Sometimes customers are criticizing prices of
the contracts: if you only compare market prices without
thinking of the related services of the products, which are
not included in the market price.
The possible conflicts between CPBs and its customers
as Karjalainen (2006) refers. These organizational
challenges should be taken seriously into consideration
when defining the strategy for the CPB. The same goes for
the e-procurement. There may be resistance against the
entirely new way of doing things. The reasons for
resistance should be considered and resolved before
entering any project where the organization is starting
usage of new e-tools.
The lists could go on, but generally it is arguable, that
the drawbacks could be lifted with careful planning and
application of a suitable strategy and possibly with a
hybrid model, rather than full scale centralizing.
DISCUSSION AND CONCLUSIONS
It is advisable to centralize procurements in a form
or another. In case a CPB is established, it is important to
have a solid procurement strategy to avoid the known
drawbacks. The strategy should include category
management plan for the functions of the CPB. A
professionally run Centralized Purchasing Body generally
increases the efficiency of public procurement of the

14

nation or area and reduces public expenditure. In

addition, the Contracting Authorities with less experience
in the process have an opportunity to reduce their legal
risks.
One of the most effective forms for the Centralized
Purchasing Body is a limited company.
Limited
company was estimated to be a flexible form to manage
the organization and to attract public procurement
professionals in the means of better private-sector
salaries.
According to the review, if the use of the Centralized
Purchasing Body is mandatory, it should be mandatory
only for state-run Contracting Authorities. Among
the reviewed countries, the use of Centralized Purchasing
Body was not mandatory for municipalities anywhere,
since the local authorities should be encouraged to
establish their own Centralized Purchasing Bodies.
Between different Centralized Purchasing Bodies, the
tasks were quite similar. The most important task for the
Centralized Purchasing Body is establishing and
managing framework agreements.
Many Centralized Purchasing Bodies, are already using
electronic tools and it will become gradually mandatory
to all procurement authorities within the EU. Electronic
tools lessen administrative burden and allow promotion of
innovative strategies. If a CPB is established, eprocurement should be one of the first thigs to be
considered in the founding strategy.
Finally, when in the founding stage, a new Centralized
Purchasing Body should not be burdened with tasks
too heavily. New tasks should be included with
moderation and only after the results i.e. already carried
out framework agreements and procurement results are
present.
ACKNOWLEDGMENTS
The author would thank experts of Centralized
Purchasing Body/ eProcurement in Austria, Croatia,
Cyprus, Denmark, EBRD, Estonia, Finland, Hungary,

15

Moldavia, Poland, Portugal, Sweden UK, Ukraine, World

Bank etc. for granting interviews and discussions; and
PTCServices Oy team of experts involved in the project
were: Tarja Krakau, Jouni Jskinen, Eeva Kiviniemi, Laura
Mki, Pilvi Takala and Irene Usano
REFERENCES
DG GROW (2015) eProcurement Uptake Final Report [Online]. Available at http://ec.europa.eu/growth/singlemarket/public-procurement/studiesnetworks/index_en.htm (1. Introduction)
OECD (2011), Centralised Purchasing Systems in the
European Union, SIGMA Papers, No. 47, OECD
Publishing.

[On-line].
Available
at
http://dx.doi.org/10.1787/5kgkgqv703xw-en (59-61)
Dimitri et al (2006) Handbook of Procurement (48)
Liisa
Lehtomki
(2015)
Valtion
hankintatoimen
kehittmishankkeen osa-alueiden 1 ja 2 vliraportti
[On-line].
Available
at
http://vm.fi/hallintopolitiikka/valtion-hankinnat (30-31)
Katri Karjalainen (2009) Challenges of purchasing
centralizationempirical
evidence
of
public
procurement
[On-line].
Available
at
http://epub.lib.aalto.fi/pdf/diss/a344.pdf (4-5)

16