How procurement can help tackle the federal deficit

Steve Kelman is professor of public management at Harvard University’s Kennedy School of Government and former administrator of the Office of Federal Procurement Policy.

At the risk of making a partisan statement (something I try hard to avoid in my columns), I will say that in my judgment — and more importantly, that of most professional economists — the Obama administration’s economic stimulus package, along with the equally unpopular bank rescue, saved our economy from a frightening descent into depression.

However, we all should know that the federal deficit is unsustainable. In the medium term, we will need to find ways to save money.

We will never reduce the deficit significantly through contracting savings — or, frankly, even make a major dent — unless significant programs funded through contracts are cancelled. Contracting folks in government, like other civil servants, have a responsibility to do their part to deal with this national problem. Luckily, the call for contracting to get better deals also resonates with the frugal culture of the profession. While in government, I often took surveys of contracting folks to ask how many of them used cents-off coupons when they shopped. Typically, 90 percent did.

I recently attended the World Congress of the National Contract Management Association, the professional association for contracting. I was chairman of two breakout groups on procurement savings issues: one on agency contracting savings plans submitted to the Office of Management and Budget and the other on strategic sourcing.

Four panelists discussed their agencies' savings plans, and there were some common features in the techniques that different agencies were using. One was greater use of reverse auctions. Participants were trying to expand the use of reverse auctions beyond commodities to include some services, such as janitorial services or conference planning and management.

Another common approach was contract consolidation. After a period when the idea of saving money by combining service contracting requirements was denounced as bundling, cost-saving consolidation seems to be back on the upswing. A State Department representative said the department now groups embassy visa-issuance support contracts by regions, rather than asking each embassy to oversee the contracts, and consolidated its help-desk contracts. In both cases, the department saw significant savings on staffing costs because a centralized staff can more efficiently meet demand than small numbers of not fully occupied bodies in many locations can.

Insourcing also was a topic of discussion. The panelists thought that, in some cases, using government employees rather than contractors could save money, counting net costs including benefits. There are easy ways to make it appear as if insourcing is saving money, such as not counting benefits for civil servants. And there are also legitimate topics for debate, such as how or whether to count a share of agency overhead costs. Panelists felt savings are especially likely when contractors augment a staff for ongoing requirements rather than merely provide surge capacity for temporary use.

The strategic sourcing discussion also was interesting. I was disappointed to hear that contracting representatives from the Homeland Security Department and National Institutes of Health do not believe the base prices on their IT hardware and services vehicles are better than General Services Administration schedule prices. To me, that suggests that these organizations haven’t been sufficiently aggressive in price negotiations because those vehicles, particularly the DHS contract, carry an implicit commitment of significant sales, while GSA prices are based on the best price for a quantity of one. It also underlines the need to do second-stage reverse auctions for individual orders, as DHS is doing on its First Source IT hardware contract.

Participants also reported that many front-line buyers do not negotiate discounts off GSA schedule prices. That is partially because of the misperception that schedule prices are the lowest available, while in fact — as mentioned above — they are only said to be the lowest for a quantity of one. Agencies need to do a better job educating buyers about this issue.

Check out my blog for results of some audience polls that I took on these topics at the two panels.