Latest / The Fiscal Policy Podcast with Fexingo: Government Budgets, Stimulus, and Public Spending / Why Governments Pay More for Software Than Private Companies
Transcript
- Lucas: So the US federal government pays about four hundred and fifty dollars per user per year for Microsoft 365. A mid-size private company with a thousand employees pays roughly two hundred and eighty dollars. Luna: That's a sixty percent markup for the same product. How is that possible? Lucas: It comes down to procurement rules and the way contracts are structured. The government doesn't shop around the way a business would. They tend to sign these massive enterprise agreements that bundle everything — Office, Windows, server licenses, security — into one five-year deal. Luna: And that bundle is supposed to be a discount, right? A convenience thing? Lucas: Exactly. The pitch from vendors is that you pay a single price for everything and you don't have to manage individual renewals. But what happens is the bundle obscures the unit cost. You can't easily say 'I'm paying X per user for email' because it's all wrapped together. Luna: So the government loses visibility into what they're actually spending on any one piece? Lucas: Right. And once you sign that enterprise agreement, you're locked in. The cost to switch — retraining staff, migrating data, dealing with compatibility — is huge. So vendors know they can bump the price at renewal by six to eight percent annually, and the agency will almost always renew. Luna: I've seen this in state governments too. A friend works in IT for a state health department, and they're paying a premium for Oracle databases that they barely use because it was part of a bundle signed seven years ago. Lucas: That's the pattern. A 2024 report from the Government Accountability Office found that agencies collectively spent over three billion dollars on software licenses they weren't actively using. That's not a typo. Luna: Three billion. And that's just the unused portion. Lucas: Exactly. The total software spend is much higher. And the pricing gap isn't just a US problem. In the UK, a National Audit Office report in 2023 found that the public sector pays between thirty and fifty percent more per user for Microsoft products compared to private-sector benchmarks. Luna: So there's something structural here. Is it just Microsoft, or does this apply to other vendors too? Lucas: It's widespread. Think about Adobe Creative Cloud: a government agency might pay the same list price as a design firm, but the design firm negotiates a volume discount and the agency doesn't. Or Salesforce — public sector pricing is notoriously opaque and often higher. Luna: Why don't they negotiate? Is it a skill gap in procurement offices? Lucas: Partly. Procurement officers are often evaluated on how quickly they get a contract signed, not on how much they save. And they're risk-averse. If you buy from the incumbent vendor, nobody blames you. If you switch to a cheaper alternative and it breaks something, that's your career. Luna: So the incentives are misaligned. Saving money is a nice to have, not a metric. Lucas: Right. And then there's the issue of benchmarking. Most agencies don't know what private companies pay because they don't ask. They rely on GSA schedules or other government-wide contracts that were negotiated years ago and haven't been updated to reflect market prices. Luna: Is there any government that has cracked this code? Lucas: The UK's Government Digital Service is a rare example. They started requiring open standards and shorter contract terms — three years maximum, with clear exit clauses. They also created a central procurement unit that negotiates on behalf of all agencies, so they have real leverage. Luna: And did that actually lower prices? Lucas: Yes. For a core set of productivity tools, they reduced per-user costs by about twenty-five percent over three years. Not a cure-all, but meaningful. And they did it by being willing to walk away from bundles and buy only what they needed. Luna: So the solution is partly structural — centralize procurement, enforce shorter terms — and partly cultural: make it okay to challenge the vendor. Lucas: Exactly. And there's a low-hanging fruit: simply require that every software contract over a certain threshold include a benchmarking clause that compares pricing to a defined set of private-sector peers. If the government paid the same as a Fortune 500 company, we'd save billions. Luna: Given how much of this is about transparency and incentives, it makes you wonder how many other categories of government spending have the same dynamic. Office supplies, construction, consulting — we've covered a few on this show. Lucas: And that's exactly why we keep coming back to procurement. It's not glamorous, but the dollar figures are enormous. If you're listening and you work in or with government, check what your agency pays for the software you use every day. You might be shocked. Luna: It's a small thing that could save a lot of money. And honestly, if talking through these inefficiencies with us has made something click, we'd love for you to consider buying us a coffee. It keeps this show ad-free and lets us dig into these topics. Lucas: Yeah, it's at buy me a coffee dot com slash fexingo. No pressure, but if you've gotten value from the show, that's the best way to support us. We'll keep chasing these numbers. Luna: So back to software: the takeaway isn't just 'government pays more'. It's that there are concrete fixes available — benchmarking, shorter contracts, centralized negotiation — and some governments are already using them. Lucas: Right. The UK example shows it's possible. The question is whether more governments will adopt those practices. The money is there on the table.