A few good partners

Air Force AFWay procurement/purchasing Web site

The Office of Management and Budget issued a policy memo in May 2005 that requires all federal agencies to implement strategic sourcing, a procurement strategy based on closely knit relationships between an agency and a few major suppliers of commodities that it buys in large quantities, such as desktop PCs.

Strategic sourcing is a controversial strategy because it tends to reduce competition and squeeze out small businesses. But the Air Force, which has been using strategic sourcing since at least 2003, offers a model of how that policy can work with minimal friction while producing results that make it worthwhile.

The OMB memo directed agencies to identify commodities suitable for strategic sourcing, develop implementation plans and set up mechanisms to report savings and cost data. OMB envisions a future in which it will coordinate commodity buys governmentwide. So strategic sourcing is not going away.

The founders and members of the Air Force Information Technology Commodity Council understand that policy perhaps better than anyone else because they have practiced strategic sourcing for three years. The council, which manages all IT commodity buys for the Air Force, has 10 members and 16 representatives from each of the service’s major commands. Based at the Maxwell Air Force Base at Gunter Annex in Montgomery, Ala., the council shares its home with the Headquarters Standard Systems Group and the 754th Electronic Systems Group.

The council’s primary aim is to maximize the value of Air Force purchases of commercial IT products. In calculating greatest value, the council includes factors such as life cycle management costs, the cost of support services and procurement complexities.

“It’s not only about purchase price,” said Ken Heitkamp, director of the council since its formation. “It’s about the total cost of ownership.”

In addition to planning what the Air Force will buy, the council also selects suppliers. The council’s philosophy of treating suppliers as partners rather than adversaries is a primary reason why it has been successful, Heitkamp said. The council cultivates relationships with principal suppliers and includes them in its procurement planning activities.

The council follows an eight-step process for strategic sourcing. Step 6, issuing requests for proposals, occurs after the council has analyzed the Air Force’s IT needs, suppliers’ wishes, anticipated spending trends and other concerns, said Matthew Benavides, director of the 754th Electronic Systems Group’s Acquisition and Commodities Division. He is the acquisitions official responsible for all IT contracts that the council awards.

The council invites its industry partners to help in all stages of planning, Benavides said. In the planning stages, council members and industry partners try to identify factors that will influence IT commodity costs, establish appropriate buying standards and anticipate future technology developments.

Every 18 months, the council meets with its partners and analysts from industry to create a comprehensive plan for IT systems evolution, which all Air Force major commands must approve before the council proceeds with implementation.

Industry groups that had been concerned that the council’s strategic sourcing strategy would hurt competition and destroy innovation have set aside those concerns for the most part, said Larry Allen, executive vice president of the Coalition for Government Procurement. The coalition represents the interests of companies that sell commercial services and products to the federal government primarily through multiple-award schedule contracts.

“Anytime you’ve got a program like this, there’s a potential for contractor unrest,” Allen said. “This program is notable for a lack of that,” which means the Air Force has learned how to collaborate with industry, he added.

Even if some companies do not entirely support strategic sourcing, they recognize it as a governmentwide trend and an OMB mandate, Allen said. “Industry understands that this is something their customer is going to do, so they try and work with that customer to the maximum extent they can.”

Although large companies often benefit, many small businesses find it hard to accept strategic sourcing. By encouraging agencies to narrow their field of suppliers, strategic sourcing has reduced competition and hurt small businesses, critics say.

In a 2002 policy memo, OMB seemed to acknowledge that result. “The significant reductions in new contract awards and the number of small-business contractors receiving contract awards signal an increase in contract bundling and a decline in small-business opportunities,” OMB wrote.

Agencies often will include small businesses on their lists of approved suppliers, said Jere Glover, executive director of the Small Business Technology Council. “Unfortunately, the small businesses don’t end up getting any of the contracts,” he said.

The Federal Acquisition Regulation requires agencies to guarantee specific percentages of small-business participation in all federal contracting activities. The Air Force typically exceeds those percentages, Benavides said. But the issue deserves continuous monitoring, he added.

Apart from government policies aimed at protecting small businesses, major trends in the computer marketplace are not favorable for small businesses, Benavides said. Large suppliers increasingly ship their products directly to customers, eroding the need for resellers, especially in the desktop and laptop computer market.

“You can see the shakeout,” he said. “We look at what alternatives are out there to try to mitigate the use of consolidation.”

MPC, formerly MicronPC, is one of three small businesses eligible to bid on PC buys under the council’s strategic sourcing program. MPC has experienced a significant decrease in PC orders from the Air Force, said Ross Ely, the company’s vice president of corporate marketing. He said MPC bids at every opportunity but rarely wins an order.

“There seems to be a heavy focus on acquisition price,” Ely said. He added that a best-value approach, which is the council’s stated goal for the strategic sourcing strategy, would show that the company can compete with larger suppliers.

Procurement experts aren’t convinced. Small businesses typically can’t match the delivery, manufacturing and quality-control capabilities of large suppliers, said Chip Mather, a partner at Acquisition Solutions, a company that advises federal agencies on procurement issues. Mather said he is hopeful that IT services contracts, which the council expects to add to its procurement plate, will help small businesses regain lost ground.

“Services are certainly an area where small-business and socioeconomic programs can be fostered,” Mather said. In a procurement environment in which consolidation and large orders prevail, the Air Force and other federal agencies must also pay attention to small businesses and programs that fulfill requirements to incorporate companies owned by women, minorities and disabled veterans, he said.

Considerations of small-business concerns are part of the discussions within the council. But after it lays the procurement groundwork, it relies on the 754th Electronic Systems Group to aggregate requirements, establish commodity standards and develop procedures for implementing and enforcing the council’s procurement policy.

“The contracting part is the easy part,” Mather said. “It’s the management, oversight and control part that’s difficult.” Agencies that lack the management capacity for aggregating user requirements and setting commodity standards will not generate the savings the Air Force has achieved from strategic sourcing, he said.

The council says it achieves dramatic savings when it conducts quarterly procurements for desktop and laptop PCs. Since 2004, the council has bought 216,000 PCs at a reported savings of $61 million.

The council continually updates its buying standards as part of an 18-month planning cycle. Those buying standards include Trusted Platform Module Version 1.2 as a requirement on all Air Force computer purchases beginning Oct. 1. The chief benefits of TPM include strong data protection and authentication for accessing networks.

One way to measure the council’s strategic sourcing success is by the number of contracts it generates and suppliers it works with, which are far fewer than those for most organizations of its size. The council has five-year blanket purchase agreements with seven suppliers. Every three months, those suppliers bid for task orders as part of those BPAs, and the council chooses one supplier for each product group.

Another measure of the council’s success is its standard desktop PC configurations. They allow the Air Force to seek the best volume discounts, establish servicewide software security controls and centrally manage PC assets. The Air Force expects to have standard desktop configurations on all unclassified systems by the end of the year.

Standardization has many benefits, Heitkamp said. Standardized systems are more stable and require less management and maintenance. They also make installing new applications and software security patches much easier, he said.

As of July 21, the Air Force had deemed that 56 percent of its approximately 2,000 systems are compatible, and only 8 percent are incompatible. The remaining 36 percent are currently in testing or awaiting testing.

The 754th Electronic Systems Group is the test bed, Benavides said.

The council has selected wireless handheld devices and services as its next IT commodity to procure through strategic sourcing. For that project, the council has teamed with the Army, whose IT, E-Commerce and Commercial Contracting Center already has contracts for wireless capabilities.

The council also plans to develop a strategic sourcing strategy for digital printers and imaging devices. The newest printers are computers, and agencies should manage them as such, Heitkamp said. The council’s strategy for buying digital printers will include semiannual buys in March and August, servicewide contracts with strategic sources and regularly updated buying standards, he said.

Looking ahead, the council plans to implement servicewide configuration management processes in 2007. After that, its next priority will be to devise policy and processes for enforcing compliance, Heitkamp said.

In assessing the council’s work, he said the greatest challenges have been internal. He partly blamed “the culture that we have allowed to evolve over the past 25-year history of the PC.” Air Force users must change their thinking about their right to make changes to their desktop PCs, which people still consider to be personal computers, he said.

Mather said he thinks such change is possible. But Air Force users who are unhappy with the council’s procurement strategy always have an option to petition a review board for authorization to buy outside the program, he said. That provides valuable feedback for the council, he added.

Other parts of the Air Force must also adapt to the new procurement strategy, Mather said. Program officers, for example, no longer have the authority to buy PCs. Contracting officials’ roles have changed, too.

But the council thinks the cost savings and enhanced computer security that strategic sourcing facilitates should alleviate those concerns.