Good directions for strategic sourcing

FCW’s Matthew Weigelt “obtained” (i.e. somebody leaked to him) a copy of a draft report from the Government Accountability Office about strategic sourcing, which he wrote about on FCW.com, with a follow-up here.

Strategic sourcing – taking advantage of an organization’s combined buying power to get better prices and service from vendors than would be obtainable by each part of the organization buying on its own – is sort of Procurement 101, certainly in the private sector, where it is a major way that purchasing organizations justify their existence in corporate America. The basic idea is no more complicated than the observation that you pay a lower price per unit when you buy the giant economy size than when you buy single-serving containers. I preached this as far back as when I was the Office of Federal Procurement Policy Administrator 15 years ago.

Looking at progress made on strategic sourcing at the Defense Department, Veterans Affairs, Homeland Security and Energy, the GAO report concludes that the government hasn’t moved fast enough, especially compared with big private companies, which, GAO states, buy 90 percent of what they purchase using strategic sourcing, saving a whopping 10 percent to 20 percent of their total purchasing bill (which, if it could be duplicated in the federal government, would imply up to $100 billion a year of savings, a huge number).

I like the idea of comparing what big companies are doing here to what the government is doing, because procurement is a business function, and if the government isn’t doing it as well as big companies, that’s a problem. At the same time, the GAO conclusion is a little unfair, for two different reasons. First, much of what big companies buy is commodities (such as steel or component parts) that are used in the firm’s production, while a larger percentage of what the government buys is services and unique items such as weapons system. Second, strategic sourcing in the government has been politically controversial, with the very concept denounced by small business lobbyists as “bundling.” My own efforts in the government in support of strategic sourcing earned me the frenzied enmity of these lobbyists, who defended the government paying retail rather than wholesale prices.

I like two of the directions the GAO report takes in its recommendations. First, they argue more use should be made of existing strategic sourcing contracts. I agree. Although use of the General Services Administration’s office supplies strategic sourcing contract has been greater than any of the previous similar contracts – and by the way GSA has been able to include some small business suppliers on this contract – it still accounts for less than half of office supply sales to the government. In these tough budget times, why doesn’t somebody (the Office of Management and Budget perhaps?) just bite the bullet and say use of this contract should be mandatory unless there is a good reason – hopefully filled with a lot of stupid paperwork to discourage applications -- for an exemption. This is exactly what many big companies do. (There is a fair worry about prices on these big contracts deteriorating over time and not responding to spot market changes, as well as a worry about GSA gaining a procurement monopoly that will make them lazy. Partly, the multiple-award nature of these contracts counteracts that, but agencies can also do second-stage reverse auctions for larger buys under the contracts that would help keep prices low and deal with spot-market bargains or temporary discounts.)

The GAO’s other recommendation involves applying strategic sourcing more to services. As the report notes, many agencies push back that these are much harder to standardize than the commodities on strategic sourcing contracts. However, I would love to see GSA re-establish some of the earlier service-specific governmentwide contracts they once had (such as for data centers or IT recovery services) that are easier to standardize. And, as a first step, agencies should look at who their two or three biggest service contractors are, and try to manage the relationship more strategically, including obtaining quantity discounts or other favorable treatment.