- March 13, 2017
- Operational Excellence in Government
This resource is part of the Ash Center's Operational Excellence in Government Project.
Background
Strategic sourcing was recommended in a number of studies, including for drug purchases (Colorado and Florida) and for wireless services (Iowa). Louisiana estimates it could save $46 million by implementing strategic sourcing for select categories and Minnesota estimates that strategic sourcing could save that state $56 million a year.
Strategic sourcing defined
Strategic sourcing is the application of analytics to historical spending data to find areas where cost can be saved. This approach has been in place for nearly two decades in the private sector, with savings achieved varying by region and category of spend and ranging from 5% to 20% of total cost.
Value is created by aggregating a large number of low-dollar value decentralized purchases into a smaller number of higher volume and dollar value central purchases and achieving volume discount pricing. For example, rather than 20–50 state agencies each having their own cellular phone contract, one statewide contract can achieve a volume discount. This is the government equivalent of going to a big box discount store to buy in quantity instead of repeatedly paying a premium for small quantity purchases at a wide variety of local mom-and-pop stores.
Strategic sourcing typically starts with commoditized purchases such as office supplies and technology products, but the same tools and techniques can also be applied to more complex transactions and to services contracting once the initial economies have been achieved.
Strategic sourcing in state government
The National Association of State Procurement Officials (NASPO) identifies strategic sourcing as a growing trend over the last decade and released a report in 2015 with insights from interviews with 15 states that have begun or completed strategic sourcing projects. According to this report, half of the states are engaged in some level of strategic sourcing. Among those interviewed, 80% contracted with an outside consultant to help with spend analysis or other support for the program, with consultant project durations of one to three years.
Many states are now beginning to adopt strategic sourcing but it is far from widespread. In the survey, just over half have a unit or team specifically dedicated to the strategic sourcing program (53%), and staff sizes ranged from one to 16. The survey identified office supplies, print, IT hardware, and fleet as the most successful categories for application of strategic sourcing. NASPO research also identified a number of common myths and misperceptions about strategic sourcing that were impeding the spread of this cost savings measure.
Strategic sourcing in the federal government
In 2005, the Office of Management and Budget established strategic sourcing as a federal priority and now the Federal Strategic Sourcing Initiative, run by the General Services Administration, provides resources so that federal agencies can leverage the purchasing power of the entire federal government and cut their costs for routine purchases. For example, office supplies sourcing efforts produce $90 million in annual savings across 16 federal agencies, while supporting small businesses and honoring sustainability goals in procurement.
Strategic sourcing steps to success
Strategic sourcing is based on data, and the first step is analyzing the data to identify the categories of spend that can be optimized by consolidating purchases into fewer larger volume buys. Often there is a need for data cleaning, which can take time. Phased or incremental implementation involves deciding which categories to take on first. Some factors to consider in choosing priorities include anticipated cost savings, number of available vendors in the marketplace, complexity, level of effort required, political climate, time since the category was last sourced, and total spend.
Strategic sourcing requires large volumes of data and a willingness to question the status quo. Cities and states with existing enterprise-wide financial systems (such as an Enterprise Resource Planning system or ERP) will have a head start in gathering the necessary data. But often even that head start is just the beginning of a rigorous process of cleaning and normalizing data so that it can be analyzed. In a procurement project by one of the authors, a statewide procurement analysis found that 20% of all purchases were categorized as “other,” likely because the enterprise system included 1,600 possible categories and users simply tired of searching for the right one. When California began its strategic sourcing initiative, it found that the necessary spend data was in “hopeless disarray.” The program was eventually quite successful in delivering savings, but the start was delayed considerably by the challenge of finding accurate data.
Strategic sourcing success: California
The California Department of General Services Procurement Division Strategic Sourcing & Acquisitions Branch is responsible for an ambitious strategic sourcing program. In one example of the program’s success, the Statewide Pharmaceutical Program bundles prescription drug purchases across state agencies and local government as well. Using volume pricing, formulary and utilization controls, leveraged pricing agreements, and wholesaler agreements, the goal is to achieve an average savings of 60% on Suggested Wholesale Prices. For some drugs, the savings exceeds that target.
A large number of studies recommended improving the purchasing of pharmaceuticals. Colorado, which has not yet implemented this approach, estimates that nearly $4 million could be saved by using a preferred drug list.
Strategic sourcing success: New York State
New York State has been successful with its strategic sourcing program, saving $780 million over five years through strategic sourcing and other procurement streamlining efforts. In 2010, New York State Governor Cuomo set a goal of reducing spending and increasing efficiencies across government operations. Recognizing the magnitude of the $8 billion annually spent by the state on goods and services, procurement was identified as an opportunity for savings and efficiencies. The state hired a consulting firm to modernize the state’s central procurement function via strategic sourcing and organizational transformation, as follows.
Strategic Sourcing. The consulting firm hired by the state led a comprehensive analysis of historical spend data across 47 categories, including IT Hardware, IT Software, Telecom, Facilities, Fleet, Office Supplies, Advertising, Travel, and Medical. The consulting team worked side by side with state procurement staff so that the data analysis skills of the consulting team could be transferred to the state staff over the course of the project. During the initial wave of the program, only state agencies were included, but over time, non-state agencies (e.g., State University of New York) were included, and this helped gain greater economies, driving further savings. A few examples help illustrate the state’s success with strategic sourcing:
o Hourly IT services. The state generated nearly $33 million in annual savings by using strategic sourcing to provide departments with hourly IT services. Services for programmers, technical architects, and database administrators can be purchased on an hourly basis from statewide contracts of qualified IT vendors. This pool of vendors provides the same services that had previously been purchased at higher prices. The vendors are assessed annually on factors such as their responsiveness, compliance, quality, and participation of minority and women owned businesses (MWBEs), and the reports are shared publicly. In addition to the financial benefit, another positive effect of the new Hourly Based IT Services (HBITS) contract is the increased access it affords MWBEs. As of October 2016, 16 of 25 active vendors on the HBITS contract were MWBE firms, and 81% of awarded work went to these firms.
o Road salt. A new solicitation for road salt reduced the total number of vendors and saved $9.5 million annually on road salt costs, without compromising quality or safety.
Organizational transformation. Once the strategic sourcing effort was well underway, the consultant supported the state in redesigning the entire procurement operation. This involved a new operating model, organizational structure, and technology platform. The consultant studied best practices in the public and private sectors and then helped the state create new job functions for category management, strategic sourcing, contract management, and supplier relationship management. The consultant recommended a central procurement organizational structure to support the delivery of the new operating model. This included developing detailed job descriptions for each new role in the central procurement organization and a procurement competency model that defined the skills and target proficiency levels needed for each role in the new organization. A comprehensive skills assessment survey identified training opportunities to equip the state workforce with the skills they needed to be successful in their new roles. A technology roadmap helped to guide implementation of the appropriate enabling technologies to drive efficiency throughout the state’s procurement function. Key parts of the organizational transformation include:
o Created new procurement organization, with a best practice operating model
o Created new procurement vision, mission statements, and operating principles
o New organizational structure to support the new process and operating model
o New skills model with 45 defined procurement, professional, and technical skills
o Conducted a skills assessment survey and used results to create individual training plans for each central procurement resource
o Change management to communicate to stakeholders consistently throughout the process both inside and outside the organization.
Conclusion
Whether it is office supplies at the federal level or wireless phone service at the local level, using data to understand where volume purchasing can achieve discounts will provide government with more efficient use of resources. Lower unit costs on commodity purchases can translate into dollars saved, and the savings can be applied to the highest priorities of the government.
