An era of competition

As federal officials kick off an effort to bring together various strategic sourcing efforts in disparate agencies, state government officials are moving ahead with the same approach.

Strategic sourcing aims to lower the cost of goods and services to government customers. That can be done by combining the needs of individual departments or agencies into a single purchase to harness volume-buying power, by using uncommon procurement methods, such as reverse auctions,

or through a combination of the two measures.

In California, General Services Department officials are working alongside consultants from CGI-AMS, an information technology outsourcing company, to improve the state's efficiency. State officials and the contractor have just started their work, said Ron Joseph, director of the department.

"We undertook the strategic sourcing effort with the attitude that there was a lot of opportunity there," he said. "We saw a lot of opportunity for reducing costs of procurement and purchased goods and services based on a more aggressive sourcing effort."

State officials had been looking at new ideas for some time, but Gov. Arnold Schwarzenegger's administration made it a higher priority, Joseph said.

"We're looking at a very short time frame," he said. "We're very much focused on this. We're looking to hopefully have the first sourcing events, and therefore the savings, within the next quarter." State officials project that the effort will save

$96 million during California's current fiscal year, which runs from July 1, 2004, through June 30, 2005.

State and company officials are poring over purchasing data to identify areas ripe for savings, Joseph said. IT goods, IT services, office supplies and similar commodities are likely to be among the first targets.

He said consolidating purchases is one possible strategy. Officials might consider other approaches, such as limiting the suppliers from which state officials can order. Opportunities to renegotiate existing contracts also may be available, he said.

Gary Lambert, a senior executive consultant at CGI-AMS, said the company's sourcing experts expect California officials to save about

$735 million during the five-year term of the contract.

"Just from the data-analysis exercise, we were able to identify state spending that would never have been [combined] without the project," he said. "We came up with a clear picture of 18 different categories."

Private-sector officials have been working on strategic sourcing longer than most government organizations, Lambert said. That experience has allowed companies such as CGI-AMS to develop expertise that can be applied in consulting engagements such as the one with California.

"If there's value in the commercial sector, and it's proven and starting to get publicity, normally about three years after that publicity hits is when the government tries it," Lambert said. "At the state level, there are probably nine states that have some sort of initiative around strategic sourcing."

In the federal government, officials may have hurdles to overcome that state governments don't face, he said.

"In certain areas, they're going to have to find a balance between the [General Services Administration] schedules and strategic sourcing," Lambert said. "They're going to have to find a way to centrally track what's going on against strategic sourcing contracts."

Pennsylvania officials are also working on a sourcing initiative. Like California's situation, a new governor spurred the effort, said Don Cunningham, secretary of Pennsylvania's General Services Department.

"We realized there was a lot of room for improvement," he said. "Pennsylvania has 15 core departments of government. In the past, basically, each department acted as its own entity. It was a very fragmented way of buying goods and services."

State officials hired Accenture, a management consulting company, to help them analyze spending and identify areas in which purchases could be combined. The first wave of purchases started this year, Cunningham said. Pennsylvania officials, like those in California, chose to focus first on commodity items such as IT equipment and maintenance.

Cunningham said the state is on course to save $120 million annually. Strategic sourcing techniques can be applied to only about a third of the $3.1 billion the state spends on goods and services each year, he said.

"It's impossible in one year to apply this methodology to everything that you buy," he said. "We intend to go forward with strategic sourcing where it makes sense."

The areas to attack first are those that yield the quickest and most dramatic results, said Owen Davies, a partner in Accenture's public-sector practice. "We try to do some things that have good savings and are easy to do first to build some momentum," Davies said.

However, he said, officials at all levels of government should not expect too much from strategic sourcing.

"People do this in the private sector and you have more flexibility," he said. "In the public sector, there are more constraints. In the government, you're serving the citizen. In the private sector, you're serving shareholder value."

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Consultants plan strategic exit

Although contractors are serving as consultants to state officials on strategic sourcing initiatives, they said they don't expect to stick around. The objective is to teach state officials to analyze their spending data, identify areas ripe for savings and find the best techniques to get better deals. Once they do that, it will be time for the consultants to fade away.

"The goal is to have them do it on their own," said Gary Lambert, a senior executive consultant at CGI-AMS, the information technology and business process outsourcing company whose consultants are working with California officials. "By the end, we'll be there only as advisers."

The company's contract, a share-in-savings pact, has a three-year base and two one-year options, he said.

The attitude is much the same at Accenture, one of CGI-AMS' main competitors, said Owen Davies, an Accenture partner.

"We're going to teach you how to fish, so that when we're gone you can do this by yourself and do it really well," he said. Davies is guiding Pennsylvania officials on an 18-month contract.