Analysis: Seizing a $400 billion opportunity

The federal government can save between $25 billion and $54 billion a year by changing the way it buys goods and services, according to a new report from the Center for American Progress. That's roughly $400 billion in savings over 10 years, or a 7.5 percent annual reduction from current procurement spending levels of more than $500 billion a year.

As the White House and Congress fight over how to reduce the budget deficit amid growing demand for government services, the reduction of procurement costs offers an attractive path forward for all sides, especially in light of private sector successes in this arena. Indeed, industry groups including McKinsey & Co., the Technology CEO Council, and the IBM Center for the Business of Government also have issued reports in the past two years identifying billions of dollars in potential savings.

The Center for American Progress will release its analysis on Tuesday at a public event in Washington featuring Ashton Carter, the Defense Department's undersecretary for acquisition, technology and logistics. A copy of the report and live streaming video will be available at the center's website.

The good news: The cost-saving approaches in the report are proven to work and make common sense. Every dollar saved by making procurement more efficient is a dollar that doesn't have to come from cutting vital government programs or raising taxes.

The caveat: It's hard. The government's sheer size and multitude of interests can be obstacles to meaningful procurement reform. Coordinating and monitoring activities across multiple agencies and bureaus that employ 1.9 million people is a massive challenge.

To make the effort less daunting, the report distills a comprehensive procurement reform agenda into 10 proven strategies that anyone in an agency can apply to improve performance and reduce costs. Some of these approaches are more applicable to certain types of goods and services, but collectively they form a roadmap to addressing the problem of procurement waste:

• Estimate demand. Know how much you need. So-called accurate-needs estimates help set budgets, predict required operational capacity, and provide suppliers precise information about demand that can improve government's ability to negotiate better pricing.
• Plan better, use less. Separate what you need from what you want. The easiest way to reduce costs is often simply to consume less. That starts by tying every purchase requirement to an identified need, not merely a desire.
• Buy commercial. Buy what people already are selling. It's almost always less expensive and less risky to buy an off-the-shelf product than to commission a customized version. "But it requires extensive research and discipline to stick to what the market offers, a discipline that has too often been lacking in the government," according to the report.
• Source strategically. Coordinate and consolidate your purchases. Instead of purchasing something whenever a need arises, strategic sourcing means coordinating across offices and taking a step back to determine the best way to purchase a product or service on an ongoing basis.
• Maximize competition. Make it easy for vendors to save you money. Competition lowers costs, promotes innovation and improves performance, so procurement officers always should strive to structure orders that attract multiple serious bidders.
• Negotiate intelligently. Know everything about your bidders. Smart buyers understand every aspect of cost for a product or service and arrive at the negotiation table armed with extensive knowledge of the bidders.
• Simplify and automate. Keep it simple. Procurement officials should eliminate bureaucratic hurdles that deter competition, and they should automate processes whenever possible.
• Guide supplier relationships. Get what you paid for. The buzz phrase "supplier relationship management" refers to a conscious effort to proactively manage supplier performance and relationships across an organization. This improves management of suppliers across multiple contracts and gives buyers better insight into vendor operations.
• Manage costs jointly. Lower your supplier's costs to lower your own. Working with suppliers to increase efficiencies and remove waste across the entire supply chain ultimately can reduce costs for government.
• Monitor internal and contract compliance. Show them the money. When agencies don't ensure cost-saving strategies are being used and suppliers are complying with contract terms, projected savings can be lost. Compliance management requires an unrelenting focus on implementation to ensure identified savings become real.

By adopting these 10 strategies, the government could rein in the growing share of the federal budget that goes toward procurement costs, which ballooned under the Bush administration. The report contains agency success stories for each of the above strategies and specific actions officials can take to implement them.

But cost containment initiatives will work only if agency heads are required to reduce their budgets to account for estimated savings. It must be a use-it-or-lose-it proposition: either you implement these strategies to cut costs or you cut your budget elsewhere.

Raj Sharma is a visiting fellow at the Center for American Progress who focuses on improving government procurement and supply chain management practices.