Since 2002, spending on federal contracts has more than doubled to about $540 billion in 2009, consuming a significant share of agencies' discretionary budgets. Because procurement at federal departments and agencies generally is decentralized, the federal government is not fully leveraging its aggregate buying power to obtain the most advantageous terms and conditions for its procurements.
In the private sector, however, an approach called strategic sourcing has been used since the 1980s to reduce procurement costs at companies with large supplier bases and high procurement costs. Strategic sourcing is a process sometimes led by a central procurement organization that improves purchasing activities by moving a company away from numerous individual procurements to a broader aggregate approach. Leading companies GAO reviewed in 2002 found they could save billions of dollars and improve the quality of the products and services received by using strategic sourcing.
Bringing about such changes was not easy, but the strategic sourcing best practices of leading companies GAO studied can serve as a framework to guide federal strategic sourcing efforts.
The federal government could save billions of dollars annually by leveraging its enormous buying power. Like the federal government, major companies in the private sector rely on products and services from numerous suppliers, and many have struggled with methods to better manage their purchasing. GAO has reported that to reduce costs, improve productivity, and more effectively procure products and services, many companies have adopted a strategic sourcing approachcentralizing and reorganizing their procurement operations to get the best value for the company as a whole. The federal government could do the same and realize significant savings as a result.
The leading companies GAO studied in 2002 made a number of dramatic changes to the way they managed procurement and found that these changes, in turn, resulted in significant cost savings and other improvements. These changes generally began with a corporate decision by top leaders to pursue a strategic procurement approach. This approach involved a range of activitiesfrom developing a better picture of what the company was spending on various types of supplies and services, to taking an enterprisewide approach to procurement, to developing new ways of doing business. Specifically, once top leaders committed to taking a strategic approach, the companies took a hard look at how much they were spending on products and services and from whom. By using this "spend analysis" to arm themselves with knowledge, the companies identified opportunities to leverage their buying power, reduce costs, and better manage their suppliers. The companies also instituted a series of structural, process, and role changes aimed at moving away from a fragmented procurement process to a more efficient and effective enterprisewide process.
Applying a strategic sourcing approach in the private sector clearly has paid dividends. Studies have reported significant cost savings for some companies of 10 percent to 20 percent of their total procurement costs. For example, GAO identified one 2002 survey of 147 companies in 22 industries that indicated a strategic sourcing approach produced savings of more than $13 billion in the year 2000 alone. Saving even 10 percent of total federal procurement spending would produce more than $50 billion in savings annually.
Since 2005, the Office of Management and Budget (OMB) has encouraged agencies to coordinate their buys through Federal Strategic Sourcing Initiative (FSSI) interagency procurement vehicles awarded by the General Services Administration. In addition, some agencies have awarded agencywide (also referred to as enterprisewide) contracts awarded under strategic sourcing programs within an individual federal department or agency. In July 2010, OMB's congressional testimony on the status of improvements to federal acquisition cited examples of what progress is being achieved under agency strategic sourcing efforts. Under the FSSI effort for example, a team of agencies selected office products in late 2009 as a promising strategic sourcing opportunity to combine buying power for about $250 million in requirements. This office products initiative is expected to reduce costs at these agencies by as much as 20 percent, for a total savings of almost $200 million over the next 4 years. Further, an agencywide initiative at the Department of Homeland Security-which accounted for $14.3 billion in contract spending in 2009-is expected to save $87 million during the next 6 years for a standardized suite of discounted desktop operating systems, e-mail, and office automation products.
These results demonstrate the potential to achieve significant savings through the use of strategic sourcing approaches. The starting point for such efforts, however, is having good data on current spending. But according to an April 2010 GAO report, OMB and agencies cannot be sure the government is fully leveraging its buying power because of the lack of comprehensive, reliable data to effectively manage and oversee an important segment of total procurement spending: interagency and agencywide contracts. That is, the total number of and sales volume of these contracts are unknown because the federal government's official procurement database does not fully capture this information. To provide better transparency and a coordinated approach, GAO has recommended that OMB ensure that departments and agencies accurately record these contracts in the procurement data system. The President has called on OMB to issue governmentwide guidance on improving the effectiveness of government acquisition. In response, OMB's 2009 guidance calls on agencies to increase their participation in strategic sourcing initiatives that will leverage federal buying power. Because these types of contracts are now being used as part of the governmentwide strategic sourcing initiative, improved knowledge will help identify additional opportunities for savings and ensure that these contracts are being used in an efficient and effective manner.
The FSSI was launched in 2005 to strategically source across federal agencies and create a strategic sourcing community of practice. The FSSI is led by the General Services Administration, in partnership with the Department of Treasury, with active participation by more than 20 federal agencies. FSSI contracts have been made for office products, domestic delivery services, and wireless device ordering and expense management services.
Acquisition leaders across the government need to more fully embrace the strategic sourcing initiative beginning with collecting, maintaining, and analyzing data on current procurement spending. Then, agencies have to conduct assessments of acquisition and supply chain functions to initiate enterprisewide transformations. Only then will they be able to fully implement strategic sourcing programs that drive immediate and long-term efficiencies.
The information contained in this analysis is based on the related products listed under the "Related GAO Products" tab with updates provided by more recent OMB testimony. GAO determined that the data it used were sufficiently reliable for its purposes.
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