OMB announces 'strategic sourcing' requirement

The Office of Management and Budget will require agencies to start analyzing their buying habits and using the data to cut better deals with vendors by Oct. 1.

In a May 20 letter to top federal executives, Clay Johnson, OMB's deputy director for management, said chief acquisition officers will work with chief financial and information officers to implement "strategic sourcing" plans.

Johnson defined strategic sourcing as "the collaborative and structured process of critically analyzing spending and using this information to make business decisions about acquiring commodities and services more effectively and efficiently." The process often involves using agencies' buying power to negotiate bulk discounts.

Agencies must identify three commodities that can be acquired more efficiently through strategic sourcing. By January 2006, chief acquisition officers must submit reports to OMB on savings generated as a result of strategic sourcing.

Some agencies already have started using strategic sourcing, which until now was voluntary, to buy goods and services. The Agriculture Department saves $2.5 million a year on office supplies through a negotiated agreement with its office supply provider. Similarly, the Internal Revenue Service estimates that it saves $4 million annually on photocopiers through strategic procurement efforts.

"Strategic sourcing is just another example of our efforts to best leverage the government's buying power and to realize the most savings for taxpayers," said David Safavian, head of OMB's Office of Federal Procurement Policy.

In February, Safavian told Government Executive that OMB was considering adding strategic sourcing to the President's Management Agenda, largely because private sector companies showed that they could save up to 30 percent by doing so.

In the past, the Government Accountability Office has said savings from strategic sourcing were difficult to calculate due to a lack of strong baseline data. Johnson's memo instructed agencies to develop consistent methods for collecting that data.

Strategic sourcing also requires agencies to know what they are buying and to use that information to negotiate with their suppliers. But that knowledge has been hard to come by.

"They don't have good usage information on what their internal customers are buying, and they're struggling to get that data together," said Jeffrey Hawting, director of federal government services for Office Depot, which works with agencies on strategic sourcing agreements for office supplies.

Consultants who work with agencies on strategic sourcing greeted OMB's announcement with enthusiasm. "It's essential that every agency start to look at where value from procurement can be extracted, and where extra value is left on the table, and strategic sourcing is a way to look at ineffiencies," said Rajesh Sharma, founder of the Washington-based Censeo Consulting Group.

"It should have come a long time ago," he added.

Bob Welch, a partner at Acquisition Solutions, which consults with agencies on strategic sourcing, said he was pleased to see that OMB was involving chief financial, information and acquisition officers. "OMB got it right and recognized that this best practice is bigger than procurement. Like in industry, success requires involvement of all stakeholders," he said.