Smart Buys

Agencies are starting to fill their shopping carts with savings from new spending strategies.

Pat McConnel, a program manager for acquisition strategies at the Internal Revenue Service, was having a photocopier meltdown. The IRS had 4,000 copy machines, provided by 43 different suppliers, spread throughout its 772 locations. The agency was violating multiple best business practices: It owned the copiers instead of leasing them, and the machines weren't identical, which led to maintenance holdups and employee frustration.

In an effort to save money and time, McConnel got rid of all but three suppliers last fall. "It's a real headache if you have five different copiers in your building and five different types of toner cartridges," he says. The IRS also signed operating leases instead of buying the machines, in an effort to save on storage costs down the road.

McConnel estimates the IRS now saves $4 million annually, more than 20 percent of what it was spending on copiers, under a buying approach known as strategic sourcing. It involves analyzing purchases and using that information to negotiate better deals. The Office of Management and Budget, which might make strategic sourcing a governmentwide initiative, says the technique can save as much as 30 percent on equipment costs. And because strategic sourcing can be applied to almost anything the government buys, including computers, firearms and even services, the potential for savings is enormous.

While the private sector has long leveraged its buying power with suppliers, the government has been slower to catch on. Daunting databases, concerns about leaving small businesses out of streamlined contracts and a natural tendency to use the traditional method of purchasing items separately get in the way.

But now, under pressure from OMB and momentum from a handful of success stories, federal procurement officers are about to become savvy bargain hunters. As in the private sector, tighter budgets and the need to cut costs are key motivating factors. "It's not an issue that people can ignore anymore," says Reid Jackson, a senior associate at the consulting firm Booz Allen Hamilton. He has worked on strategic sourcing initiatives with the Commerce, Defense and Agriculture departments. OMB has convened a working group to examine strategic sourcing, but has not yet issued guidelines.

Jackson recommends that executives pursuing strategic sourcing involve senior agency officials early and discuss results with the agency head regularly. He also says it's important to get input from employees because they are most familiar with the products they need. And before making any decisions, agencies must study how they are currently buying goods and services, Jackson says.

The Postal Service did just that. Faced with the goal of lopping $1 billion off the agency's $12.4 billion in annual supply costs, Keith Strange, vice president of supply management, started organizing accounts payable and purchasing data. Today, an enormous data warehouse acts like a vacuum, sucking up numbers agencywide. His team then uses that information to negotiate more attractive deals on purchases such as truck deliveries and office supplies. After surpassing the $1 billion savings goal in 2004, Strange is now working to double that amount.

USPS was not always so efficient. Before strategic sourcing, Strange says, post office employees would buy products locally. If an office was out of tape, for example, an employee would leave the office to drive to a store. That tape would cost USPS not only its price tag, but also gasoline and work time. When employees purchase products through a centralized system, those transaction costs are eliminated.

The savings have not come without criticism, however. While the Government Accountability Office has encouraged agencies to put more emphasis on strategic sourcing, last year it said the centralization of certain USPS contracts caused small business participation to plummet. Strange says the information in that report is outdated; 51 percent of USPS contracts go to small businesses, in addition to 5 percent to minority-owned firms and 9 percent to women-owned enterprises. Agencies can include small businesses in centralized contracts by requiring large suppliers to subcontract with them or by contracting with them directly.

Bob Welch, a partner at Acquisition Solutions Inc., which works with federal agencies on strategic sourcing, says he sees no reason strategic sourcing couldn't be applied to most government purchases. He envisions government employees buying supplies on an Amazon.com-type Web site, where prices have been negotiated ahead of time. Given the momentum of strategic sourcing, that day might be just a few clicks away.

Steps to Strategic Sourcing

1. Gather data. Agencies' first step is to figure out how they are buying supplies and services, and from which companies, and to organize the data in a way that's easy to analyze.
2. Involve employees. The Air Force and Internal Revenue Service have set up commodity councils, groups of employees who influence buying decisions.
3. Determine industry best practices. Leasing instead of buying, for example, could save money on storage and maintenance costs.
4. Streamline suppliers. The Food and Drug Administration saved $322,000, or 5 percent of the old contract costs, when it reduced the number of suppliers that manage its documents.
5. Think about more than just price. The Agriculture Department considered a range of factors, including delivery time, and estimates savings of $5 million on its office supply and domestic express delivery purchases in fiscal 2005.