a $400 billion opportunity

8/8/2019 A $400 Billion Opportunity

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A $400 Billion Opportunity

10 Strategies to Cut the Fat Out o Federal Procurement

Raj Sharma November 2010


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Doing What Works Advisory Board

Andres Alonso

CEO, Baltimore Public School System

Yigal Arens

Proessor, USC School o Engineering

Ian Ayres

Proessor, Yale Law School

Gary D. Bass

Executive Director, OMB Watch

Larisa Benson

Washington State Director o Perormance

Audit and Review

Anna Burger

Secretary-Treasurer, SEIU

Jack Dangermond

President, ESRI

Dan C. Esty

Proessor, Yale Law School

Beverly Hall

Superintendent, Atlanta Public Schools

Elaine Kamarck

Lecturer in Public Policy, Harvard University

Sally Katzen

Executive Managing Director, The Podesta Group

Edward Kleinbard

Proessor, USC School o Law

John Koskinen

Non-Executive Chairman, Freddie Mac

Richard Leone

President, The Century Foundation

Ellen Miller

Executive Director, Sunlight Foundation

Claire OConnor

Former Director o Perormance Management,City o Los Angeles

Tim OReilly

Founder and CEO, OReilly Media

Ali Partovi

Senior Vice President o Business Development,

MySpace

Tony Scott

Chie Inormation Ocer, Microsot

Richard H. Thaler

Proessor, University o Chicago School

o Business

Eric Toder

Fellow, Urban Institute

Margery Austin Turner

Vice President or Research, Urban Institute

Laura D. Tyson

Proessor, University o Caliornia-Berkeley

School o Business

Members of the advisory board do not necessarily share all the views expressed in this document.


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A $400 Billion Opportunity10 Strategies to Cut the Fat Out o Federal Procurement

Raj Sharma November 2010

CAPs Doing What Works project promotes government reorm to eciently allocate scarce resources and

achieve greater results or the American people. This project specically has three key objectives:

Eliminating or redesigning misguided spending programs and tax expenditures, ocused on priority areas

such as health care, energy, and education

Boosting government productivity by streamlining management and strengthening operations in the areas

o human resources, inormation technology, and procurement

Building a oundation or smarter decision-making by enhancing transparency and perormance

measurement and evaluation


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Contents 1 Introduction and summary2 The 10 strategies

5 The procurement problem

6 The opportunity

9 A cost-cutting framework

11 Ten strategies for cutting costs in procurement

11 The first three strategies: Buy only what you need

14 The next four strategies: Buy smarter

17 The last three strategies: Manage for results

20 Getting started

23 Conclusion

24 Endnotes

26 About the author and acknowledgements


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inrdun and ummary | www.ameranrgre.

Introduction and summary

Te ederal governmen can save beween $25 billion and $54 billion a year by

changing he way i buys goods and services, according o a new analysis rom he

Cener or American Progress. Tas roughly $400 billion in savings over 10 years

on average, or a 7.5 percen annual reducion rom curren ederal procuremen

spending levels o more han $500 billion a year.

As he Whie House and Congress gh over how o reduce he budge deci

amid growing demand or governmen services, he reducion o procuremencoss oers an atracive pah orward or all sides, especially in ligh o privae-

secor successes in his arena. Indeed, business-aliaed groups including

McKinsey & Co., he ech CEO Council, and he IBM Cener or he Business o

Governmen have all also issued repors in he las wo years ideniying billions

o dollars in poenial savings.

Te good news: Te cos-saving approaches we ideniy are proven o work and

make common sense. And every dollar saved by making procuremen more e-

cien is a dollar ha doesn have o come rom cuting vial governmen programs

or raising axes.

Te cavea: Is hard. Te governmens sheer size and muliude o ineress are a

challenge o any meaningul procuremen reorm. Coordinaing and monioring

aciviies across muliple agencies and bureaus ha employ 1.9 million people is a

massive challenge.

o make he challenge less dauning, his paper disills a comprehensive procure-

men-reorm agenda ino 10 proven sraegies ha can be applied by anyone in

an agency looking o improve perormance and reduce coss. o be sure, some ohese approaches are more applicable o cerain ypes o goods and services bu

collecively hey orm a roadmap o addressing he problem o procuremen wase.

Tese 10 sraegies are coordinaed wih he hree phases o he procuremen

(more broadly reerred o as acquisiion) process:


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2 cener r Ameran prgre | A $400 Blln oruny

Planning: Program managers and end-users dene wha and how much hey

need o buy.

Negoiaion: Procuremen ocers, along wih oher paries, plan he purchase,

invie poenial suppliers o bid or governmen work, negoiae wih suppliers,

and wrie a conrac.

Managemen: Program managers, procuremen ocers, and ohers make sure

he produc or service is delivered and used as expeced.

The 10 strategies

Tis paper deails he ollowing 10 sraegies o cu coss in ederal procuremen.

We ideniy successul examples currenly underway and lis specic seps oimplemen each approach.

Estimate demandknow how much you need. So-called accurae-needs

esimaes help se budges, predic required operaional capaciy, and provide

suppliers accurae demand inormaion ha can improve governmens abiliy

o negoiae beter pricing.

Plan better, use lessseparate what you need from what you want. Te easies

way o reduce coss is oen simply o consume less. Ta sars by ying every

purchase requiremen o an idenied need, no merely a desire.

Buy commercialbuy what people are already selling. Is almos always less

expensive and less risky o buy an o he shel produc han o commission a

cusomized version. Bu i requires exensive research and discipline o sick o

wha he marke oers.

Source strategicallycoordinate and consolidate your purchases. Insead

o purchasing somehing whenever a need arises, sraegic sourcing means

coordinaing across oces and aking a sep back o deermine he bes way opurchase a good or service on an ongoing basis.


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inrdun and ummary | www.ameranrgre.

Maximize competitionmake it easy for vendors to save you money.

Compeiion lowers coss, promoes innovaion, and improves perormance, so

procuremen ocers should always srive o srucure orders ha atrac mul-

iple serious bidders.

Negotiate intelligentlyknow everything about your bidders. Smar buyersundersand every aspec o cos or a produc or service and arrive a he nego-

iaion able armed wih exensive knowledge o he bidders.

Simplify and automatekeep it simple, stupid. Procuremen ocials should

eliminae bureaucraic hurdles ha deer compeiion and hey should auomae

processes wherever possible.

Manage supplier relationshipsget what you paid for. Te buzz phrase

supplier relaionship managemen reers o a conscious eor a proacively

managing supplier perormance and relaionships across an organizaion. Tisimproves managemen o suppliers across muliple conracs and gives buyers

beter insigh ino vendor operaions.

Manage costs jointlylower your suppliers costs to lower your own. Working

wih suppliers o increase eciencies and remove wase across he enire supply

chain can ulimaely reduce coss or governmen.

Manage internal and contract complianceshow me the money.When

agencies don ensure cos-saving sraegies are being used and suppliers are

complying wih conrac erms, prediced savings can leak ou. Compliance

managemen requires an unrelening ocus on implemenaion o ensure iden-

ied savings become real.

By adoping hese 10 sraegies, he ederal governmen could rein in he growing

share o he ederal budge ha goes oward procuremen coss, which ballooned in

he rs decade o he 21s cenury under he Bush adminisraion. (see Figure 1)

Bu a cos-conainmen iniiaive will only work i agency heads are required

o reduce heir budges o accoun or esimaed savings. I mus be a use-i-or-lose-i proposiion: Eiher you use hese sraegies o cu cossor you cu your

budges elsewhere.


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In he pages ha ollow, his repor will deail he curren procuremen problem o

highligh he opporuniies available o he ederal governmen o operae more e-

cienly and eecively, hen oer he cos-cuting ramework needed o make hese

reorms happen. We hen deail our 10 sraegies or procuremen reorm o dem-

onsrae ha progressive reorms o he procuremen process can ensure he ederal

governmen is doing wha works o help rein in unnecessary governmen spending.

Procurement reforms are critical

The cost o government procurement exploded during the Bush administration

Year 2001 2002 2003 2004 2005 2006 2007 2008 2009

Purchases $ 223.1 $ 262.1 $ 304.2 $ 345.7 $ 390.9 $ 432.0 $ 468.0 $ 540.6 $ 538.8

Source: www.usaspending.gov .
http://www.usaspending.gov/http://www.usaspending.gov/


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te ruremen rblem | www.ameranrgre.

The procurement problem

Te ederal governmen spends more han $500 billion a year procuringor

buyingeveryhing rom consuling services o ballpoin pens o gher jes.

Procuremen oulays rose by $316 billion, or 142 percen, during he Bush admin-

israion as he able on page 4 shows.

Te surge in ederal procuremen has also resuled in a signican increase in

wase. Far oo oen, he spending is plagued by massive cos overruns, ourigh

raud, and he absence o oversigh and accounabiliy, Presiden Barack Obamasaid in March 2009. We are spending money on hings ha we don need, and

were paying more han we need o pay.

Consider wo elling examples rom 2008:

More han 400 acive inormaion echnology projecs, represening more han

$25 billion in spending, were poorly planned or poorly perorming, according o

he Governmen Accounabiliy Oce. Some o he projecs had been delayed

or more han a decade and cos billions more han originally budgeed. 1

Te Deparmen o Homeland Securiy in is rs ve years o exisence over-

saw $15 billion worh o ailed conracs. Youre alking abou a hird o he

agencys conracing spending has resuled in ailed conracs, said Scot

Amey, general counsel or he Projec on Governmen Oversigh, in 2008.2

Te Obama adminisraion, o is credi, recognized he problems early on and

made reducing wase in procuremen a key prioriy, esablishing a $40 billion

savings arge over wo years.3 Te Whie House appropriaely emphasized in a

March 2009 direcive ha ocials should beter manage he governmens risk inconracual relaionships, srenghen compeiion, and reduce he use o conrac-

ors where governmen has relinquished oo much conrol o he privae secor.4

Te adminisraion has also began o rebuild he procuremen workorce, aiming

o increase he ranks by 5 percen a every civilian agency.


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Te Deense Deparmen in Sepember 2010 released is own deailed plan o

reduce procuremen wase. Tere, he ocus is on measures ha conrol cos

growh, incenivize produciviy and innovaion in indusry, promoe compeiion,

improve he purchase o services, and reduce unnecessary processes.5

Expers remain skepical abou wheher hese iniiaives will lead o real changeand measurable savings. [Presiden Obama] pledges o reduce cos-reimburse-

men conracs and sole-source awards, Seve Kelman, procuremen direcor

under Bill Clinon, old he Federal Times soon aer he iniial guidelines were

released in April 2009. Mos conracing expers, however, would pu hese low

on he prioriy lis o he myriad arges o opporuniy or improving he procure-

men sysem, said Kelman, now a policy proessor a Harvard Universiys John F.

Kennedy School o Governmen. 6 Te prioriy, Kelman added, should be adding

procuremen specialiss o he ederal workorce.

Te governmen also lacks engaged leadership a he agency level, according oDavid Liman, a ormer senior procuremen execuive in he ransporaion

Deparmen. Te real savings are in making houghul, sraegic decisions abou

wha o buy and how o buy i, and ha is an agency leadership issue, Liman said

in an inerview. Leadership is no engaged. Unil hey are, no much will change.

Bu when hey do, heyll nd an opporuniy or major change saring hem righ

in he ace.

The oppor tunity

Te ederal governmen can save beween $25 billion and $54 billion a year

hrough a comprehensive and coordinaed approach o purchasing, according o

our analysis. An average o ha range suggess abou $400 billion in savings, or a

7.5 percen reducion in ederal procuremen spending over 10 years.

o be sure, i may ake a ew years unil all he reorms suggesed in his paper can

be ully implemened. Bu even when we acor in he ramp up ime, we sill

predic $330 billion in savings aer a decade, savings ha can be used o ake ameaningul bie ou o he naional deci.


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te ruremen rblem | www.ameranrgre.

Our annual savings range is no ha ar o rom he Obama adminisraions goal

o $40 billion savings over wo years, hough we go aer more sources o wase.

We also emphasize he need o se budge-reducion arges, much as he Deense

Deparmen is doing, o make he savings real in he eyes o he governmen

managers, lawmakers, and he public.

We arrived a hese numbers by applying a se o benchmarks colleced rom con-

suling rm A.. Kearneys so-called angible Resuls Daabase. Te proprieary

daabase, which includes low and high ranges o savings based on housands o

real projecs, is used o predic savings a any organizaion. See he Mehodology

box below or a deailed explanaion o our calculaions.

Policymakers who ollow aciviy in his space will noice ha our esimaes are

low compared o oher cos-reducion claims:

McKinsey & Co. in 2009 said ha a 5 percen o 15 percen improvemen in heeciency o ederal governmen operaions could generae $450 billion o $1.3

rillion in savings over 10 years.7

Te echnology CEO Council, which represens chie execuives rom compa-

nies including Moorola, Dell, and Inel, said in Ocober 2010 ha decreasing

duplicaive supply chains could save $500 billion over 10 years, and ha reduc-

ing raud would shave anoher $200 billion during ha period.8

Te IBM Cener or he Business o Governmen his year idenied poen-

ial savings o $500 billion over 10 years hrough sreamlining governmen

supply chains.9

We have inenionally moderaed our esimaes o accoun or he precauions

governmen agencies mus ake when procuring goods and services rom he pri-

vae secor. Regulaory requiremens or compeiion, ransparency, and minoriy

paricipaion all add o he cos o public procuremen, and or good reason.

Te nex secion lays ou a comprehensive cos-reducion rameworksraegies

o squeeze ou wase across he purchasing process and hroughou he govern-men supply chain.


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Our analysis shows the government can save $40 billion a year by

ollowing 10 cost-saving strategies proven to work in the private and

public sector. Heres how we arrived at this number.

We rst aggregated raw purchasing data in the Federal Procure-

ment Data System into spend categories, which are groupings

based on how suppliers are organized. Motor vehicles, or example,

is a category that includes suppliers o passenger and other our-

wheel vehicles. We used scal year 2009 data, the last year or which

complete data were available at the time o this analysis. Total ederal

procurement spending that year was $534 billion.

We then used consulting rm A.T. Kearneys Tangible Results Da-

tabase* to identiy potential savings ranges, both a low and high

number, or each spending category. We adjusted the savings range

to account or outliers and higher compliance costs associated with

government contracts. Specically, we adjusted the bottom number

up by 10 percent, accounting or outliers on the low end. On the

high end, we took a conservative approach and reduced the upper

number by 20 percent, accounting or the increased complexity o

government procurement.

The database predicts possible savings or IT equipment procurement

between 5 percent and 11 percent. A 10 percent adjustment up on

the low side yields 5.5 percent. An adjustment to reduce the highend by 20 percent yields 8.8 percent. So the range we applied or our

savings estimate on government purchasing o IT equipment was 5.5

percent to 8.8 percent.

We then applied an addressable spending range to each category.

Addressable is dened as the percent o total government spend-

ing that can benet rom cost-reduction strategies. In the long term

one might assume that 100 percent o spending is addressable. But

we took a more conservative approach. For commercial categories,

where government isnt the only customer and a commercial market

exists (i.e. oce supplies), we applied a 90 percent adjustment. Thatassumes that cost-reduction strategies can be applied to 90 percent

o what the government spends in this category.

For government categories, where government is the primary

and no commercial market exists, such as weapon systems, we

plied a conser vative 60 percent addressable number. We used a

conservative number or government categories because therenot be as competitive a market or government-specic require

and those products are likely more subject to government regu

tions and appropriation rules.

For example, annual spending on inormation technology equi

and sotware is roughly $11.2 billion. Since IT equipment is com

cially available, we applied a 90 percent adjustment, giving us a

proximately $10.1 billion in addressable spending. Explosives, w

cost the government about $2.9 billion a year and are a govern

only category, were subject to a 60 percent adjustment, yieldin

$1.75 billion in addressable spending.

We then applied the adjusted savings range detailed above to

addressable spending to give us a total range. We applied, or

example, the 5.5 percent to 8.8 percent adjusted savings range

$10.1 billion o addressable IT equipment spending, giving us a

savings potential o $600 million to $900 million a year.

Next we added up the savings estimates across all categories, g

us a total range o $25 billion to $54 billion. An average o that

multiplied by 10 years comes out to about $400 billion. Finally,sume cost-reduction initiatives take some planning and time to

up. Based on past experience, we assume a conservative $5 bil

savings the rst year, ollowed by $10 billion more in the secon

an additional $15 billion in the third, and then nally $10 billio

in the ourth. Since savings are recurring and thereore counted

each subsequent year, we can expect $330 billion in cost saving

the rst decade.

*te A.t. kearney tangble Reul Daabae a mlan rang aeved by A.t. kearney len wen urung avng raegmlar e derbed n aer. M examle are rm e rv

er. in addn rreary daabae, we al reled n nrmarm cene cnulng Gru, and rm meda aun ueul nanmen exere.

Methodology


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A -ung ramewr | www.ameranrgre.

A cost-cutting framework

Te curren sae o he acquisiion process is unaccepable and in desperae need

o reorm, proclaimed he Deense Science Board in an April 2009 repor.10 o

address he problem, we need o rs dene he governmens purchasing process.

Our cos-reducion sraegies arge each o he ollowing hree phases in he

acquisiion process:

Planning phase: Program managers and end-users dene wha and how much

hey need o buy.

Negoiaion phase: Procuremen ocers (more commonly reerred o as conrac-

ing ocers), along wih oher paries, plan he procuremen, invie poenial sup-

pliers o bid or governmen work, negoiae wih suppliers, and wrie a conrac.

Managemen phase: Program managers, procuremen ocers and ohers man-

age conracs, supplier relaionships, and oal coss.

Te ineciencies ha plague he ederal purchasing sysem exis across each o

hese hree seps and have been acknowledged or years. I is no secre ha he

acquisiion process is complex and encouners many problems, rom poor plan-

ning o ineecive vendor managemen, said Allan Burman, ormer adminisra-

or o he Oce o Federal Procuremen Policy, in an inerview. aken ogeher,

hese problems can undermine any procuremen.

Cos-cuting iniiaives end o ocus mosly on he second sep o he process:

negoiaion. o be sure, increasing compeiion and aking beter advanage o

he governmens buying power will save axpayer dollars. Bu hose eors, boh

appropriaely emphasized by he Obama adminisraion, do no address oherroo causes ha lead o massive procuremen ailures.

Te Deense Science Board cies problems in he rs phasedeermining wha

o buyas he bigges problem plaguing governmen procuremen. By ailing


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o properly dene wha i needs, governmen oen buys he wrong hing. No

amoun o negoiaion or compeiion can x ha problem.

Consider he inamous Karina railers, bough by he Federal Emergency

Managemen Agency o house fooding vicims in New Orleans. No only did gov-

ernmen wase $2.4 billion because i bough oo many railers (a planning phaseailure), bu i ended up paying more han $225 million o sore hem (a manage-

men phase ailure).11

Te nex secion o his paper proposes 10 sraegies or comprehensive cos

reducion, organized around he hree-phase purchasing process. Pu simply, we

wan he governmen o:

Buy only wha i needs: One curren senior deense deparmen ocial who

asked no o be idenied old us, he bes way o save money is o no spendi a all. His poin was ha we should make sure we buy only wha we really

needand nohing more.

Buy smarer: Jus as he average American shops a wholesalers like Cosco o

save money hrough bulk purchases, he governmen mus become an inelli-

gen buyer xaed on cos savings.

Manage or resuls: You wouldn pay a conracor in ull or a house-remodeling

job wihou seeing ha he work was properly done. Likewise, governmen

needs o proacively manage or resuls and work wih suppliers o reduce coss

over ime and across he enire supply chain.


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ten raege r ung n ruremen | www.ameranrgre.

Ten strategies for cutting costs

in procurement

Each o he 10 sraegies oulined in his secion ouches on many roo causes,

ar oo many o discuss in a shor paper. Te goal o his secion is o provide a

simple and digesible checklis o sraegies ha can be applied by anyone in he

acquisiion communiy seeking o drive eciencies and reduce coss. o be sure,

some o hese sraegies are more applicable o cerain ypes o goods and services.

Bu collecively, hey orm a roadmap or addressing all aces o he problem.

Adhering o hese sraegies will require:

A shi rom ocusing on mere price reducion o comprehensive cos reducion Collaboraion across governmens organizaional silos Early and ongoing engagemen wih suppliers Susained invesmen in he acquisiion workorce

The first three strategies: Buy only what you need

Governmen agencies are spending billions o dollars on I invesmens ha are

redundan, [and] lack clear goals, Sen. om Carper (D-DE) said in 2008, reerring

o a spae o ailed inormaion echnology procuremens.12 Wheher making large

I invesmens, building an elecronic ence along he Mexican border, or jus buy-

ing compuers, is key o plan beore jumping ino a conrac wih a supplier.

Good planning sars wih an undersanding o he governmens needs, a precise

vision o he desired oucome, and knowledge o imporan consrains like ime-

lines and budges. Improving planning will require more han changing a process

or wriing new policies. I will require a change o he culure, rom one o excess

o one o rugaliy.
http://www.eweek.com/http://www.eweek.com/


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Estimate demandknow how much you need

Accurae esimaes o needs help se budges and predic operaional capaciy

required o ecienly use he purchase. Giving suppliers accurae demand inor-

maion can also improve negoiaions as i helps hem beter manage heir own

operaions and coss. Te Naional Associaion o Sae Purchasing Ocers noesha denie order, denie delivery conracs, wih specic quaniies o be

purchased, resul in lowes possible price because o guaraneed demand.13

Example: A major U.S. miliary operaion operaes dozens o ood service aciliies

around he world. When i examined hem, he organizaion ound ha many o

is aciliies were essenially siting empy and racking up operaing coss. I hen

developed a model and esablished policy o beter esimae how many aciliies

i needed o adequaely serve is soldiers and amilies. I saved more han $10 mil-

lion a yearor more han 4 percen o is oal budge.14

Going forward: Program and procuremen proessionals should develop deailed

undersanding o required quaniies o a produc or service, no jus high-level

esimaes. Tis inormaion should be provided o poenial suppliers and used o

enhance negoiaions and drive down oal coss. Governmen agencies should also

periodically review operaions o ensure any excess capaciy is being discarded.

Plan better, use lessseparate what you need from what you want

Te easies way o reduce coss is oen simply o consume less. Ta sars by

ying every purchase requiremen o an idenied need, no merely a desire. Tis

goes or simple decisions, like geting he righ number o minues on a wire-

less plan, and complex ones, such as eliminaing redundan capabiliies wihin a

weapon sysems porolio.

Example: Te Jusice Deparmen esimaed ha i could save $573,000 hrough

scal year 2010 by seting up is priners and copiers o use boh sides o he

paper.15 Te U.S. Army decided no o buy a shor-range guided missile sysem

aer deermining i already had sucien weapons wih some o he same ea-ures. Ta decision saved $300,000 or each sysem no purchased, or millions o

dollars in oal.16


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Going forward: Each purchase should undergo a need versus wan es

o ensure ha requiremens are prioriized according o degree o necessiy.

Requiremen decisions should incorporae cos/value radeos and a es or

aordabiliy. Environmenal wase reducion should be acored ino produc

decisions. Tese decisions will oen require program managers and leaders who

are empowered and undersand he big picure.

Buy commercialbuy what people are already selling

Jus as o he rack suis are less expensive han bespoke versions, is cheaper and

less risky o buy an o he shel produc han commissioning a cusomized ver-

sion. o buy wha is readily available in he marke, planners mus simulaneously

evaluae he marke agains heir needs and have he discipline o sick o wha he

marke oers unless cusomizaion is ruly necessary. Buying commercial should

increase compeiion because more suppliers can bid on sandard producs.

Examples: When a Deense Deparmen oce sopped requiring is supplier

o cusomize compuers wih obsolee 3.5-inch foppy drives and oher cusom

componens, i saved as much as 32 percen or each compuer.17When he Air

Force examined using commercial uel insead o specially ormulaed je uel, i

esimaed i would save nearly $52 million in one year.18 Te Army atribues

is impressive rack record since 2007 o receiving 133 helicopers on ime and

wihin budge o a decision o purchase commercially available helicopers or

medical evacuaion, securiy, and logisics needs.19

Going forward: Program managers should horoughly research early in he pur-

chasing process wha is readily available in he markeplace. Requiremens should

be ied o a real need and mached o marke sandards where possible. Also,

buyers should be mindul o requiremens ha increase supplier coss and limi

compeiion. For larger procuremens ha may have been combined in he pas, i

may make sense o unbundle big orders ino smaller ones, increasing compeiion

and providing beter and direc access o commercially available sandard producs.


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The next four strategies: Buy smarter

Is no secre ha he governmen purchasing process is cumbersome and slow.

Mos agencies have rouble coordinaing purchasing aciviies across heir own

oces. Moreover, inadequae marke research and poor undersanding o sup-

plier coss leads o higher axpayer coss because o poorly srucured purchasingapproaches and ineecive negoiaions.

Te our smar-buying sraegies below underscore he need o improve govern-

mens buying process and ransorm he ederal governmens decenralized

purchasing culure ino one characerized by collaboraion and coordinaion.

Source strategicallycoordinate and consolidate your purchases

Insead o purchasing somehing whenever a need arises, sraegic sourcingmeans aking a sep back and deermining he bes way o purchase a good or

service on an ongoing basis. For common goods and services purchased across

an agency or across he governmen (such as securiy guard services or express

shipping), i enails working wih oher oces o share knowledge, undersand

suppliers, and deermine a coordinaed purchasing approach. Sraegic sourcing

oen means pooling muliple purchases o leverage he purchasing power o an

agency and going o marke as a single buyer. Even in cases where i makes sense

o purchase as independen buyers, sharing knowledge and resources oen gener-

aes enormous eciencies.

Example: In 2009, he Obama adminisraion urged ederal agencies o buy oce

supplies joinly hrough he Federal Sraegic Sourcing Iniiaive. Te governmen

expecs o realize more han $200 million in savings over our years even wihou

he paricipaion o every agency.20 Te U.S. Posal Service saved more han $2.5

billion by insiuing a se o sraegic sourcing pracices and supply-chain rans-

ormaion iniiaives.21 Tese included seting up several caegory managemen

ceners o coordinae purchases across various buying oces.22

Going forward:Agencies should be required o have sraegic sourcing programsocused on cenral coordinaion o common goods and services. Te governmen

should pool purchasing volume across agencies whenever possible. And agencies

should always caalog and share wih one anoherhrough ormal knowledge

sharing communiiesconracs and oher inormaion. Leaders o program

oces and oher major budge holding eniies should be required o paricipae.


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Maximize competitionmake it easy for vendors to save you money

Compeiion lowers coss, promoes innovaion, and improves perormance, so

procuremen ocers should always srive o srucure orders ha atrac muliple

serious bidders. Tis may mean breaking up big procuremens ino smaller pieces

so ha more poenial suppliers can come o he able. I also enails being waryo bidding crieria, such as pas perormance, ha disadvanage new companies.

Finally, o atrac bidders, procuremen ocers should be mindul o how he

pricing srucurexed price or cos plusaecs risk sharing beween govern-

men and suppliers.

Examples: Te Naional Nuclear Securiy Adminisraion spli wha used o be one

conrac or cyber securiy and I suppor services ino wo conracs in order o

generae more compeiion.23 Te wo conracs received numerous bids, resuling

in $22 million, or 15 percen, savings over he lie o he conrac. Te Deparmen

o Energy esimaed i shaved $400,000 a year rom a $2.3 million securiy servicesconrac by swapping a sole-source conrac wih a compeiively bid one.24 Finally,

he IRSs Enerprise Archiecure Oce swiched one o is cos plus conracs o

xed price, resuling in approximaely 20 percen cos savings.25

Going forward: Governmen should ocus on increasing he qualiy o compei-

ion by breaking requiremens ino muliple conracs where consolidaed require-

mens combine disinc supplier markes, such as adminisraive and proessional

services, and eliminaing aricial requiremens ha may limi compeiion, such

as pas perormance crieria ha can only be me by he curren supplier. o do

his he governmen should provide adequae ime o respond o a requiremen,

especially or larger purchases, and selec he appropriae pricing mechanism o

manage risk.

Negotiate intelligentlyknow your bidders

Smar negoiaors undersand every aspec o coss or any produc or service

hey are buying. Tey undersand wha drives he coss up or down and use ha

knowledge o conduc ocused negoiaions. Tey are inimaely amiliar wihhe capabiliies, hisory, and pas perormance o all he suppliers siting around

he negoiaion able. And hey know how o se up innovaive and ransparen

compeiion ools, like reverse aucions. Tese qualiies require experience and

raining. Tereore, smar procuremen operaions provide exensive negoiaion

rainingespecially or larger, more complex purchases.


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Example: A procuremen eam in Minnesoa negoiaed prices or managemen

services down 13 percen aer he sae esablished a negoiaion raining pro-

gram and a cenralized negoiaion suppor sa.26 Te Deparmen o Homeland

Securiy spen $27 million less han anicipaed on I purchases by using reverse

aucion echnology ha allows bidders o place successive bids online.27

Going forward: Program managers and purchasing ocers should research and

undersand he cos srucure, including cos drivers, going ino any major nego-

iaion. Tey should develop deailed negoiaion playbooks o guide a ocused

negoiaion approach wih each bidder. Negoiaions should also incenivize sup-

pliers o reduce coss over ime, wih governmen and supplier poenially sharing

in any overall savings. Given he echnical naure o cos analysis, governmen

agencies should cenralize analysis and negoiaion experise or echnical and

large purchases. Te raining regimen should emphasize negoiaion, wih a ocus

on cos analysis and benchmarking.

Simplify and automatekeep it simple, stupid

Doing business wih he governmen oen requires vendors o negoiae a maze o

regulaory and procedural hurdles, resuling in unnecessary coss. Varying ormas

or rouine submissions, such as resumes, also add o suppliers cossand hose

ulimaely ge passed on o he axpayer. Procuremen ocials should eliminae

bureaucraic hurdles ha deer compeiion and hey should auomae processes

wherever possible.

Examples:A recen naional sudy ound ha companies ha use elecronic ools

o sreamline purchasing reduce process coss by 48 percen and cu he overall

ransacion cycle in hal.28 Te Deparmen o Homeland Securiy decreased

lead imes required or I purchases by more han 15 percen hanks o online

procuremen echnologies.29

Going forward: Te ederal governmen should review and hen eliminae all

policies and regulaions ha add unnecessary coss o procuremen. Agencies

should develop sandard emplaes or commonly requesed bid documens, suchas resumes and pas perormance daa. Finally, every agency should use elecronic

plaorms o manage procuremens i hey don already.


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The last three strategies: Manage for results

A signed conrac signals he beginning, no he end, o he purchasing process.

Indeed, organizaions repor ha hey only ge abou 54 percen o he poenial

value o heir supplier conracs.30 In order or he governmen o ge i wha i

pays or, program and procuremen ocials mus engage in a ormal campaign osusained supplier relaionship managemen.

Good relaionships wih suppliers have benes beyond cos conainmen.

Parnerships [wih suppliers] no only help wih risk sharing, bu hey promoe a

beter undersanding o governmen needs and promoe a coninual improvemen

o services, according o he Naional Associaion o Sae Purchasing Ocers.31

Our nal hree sraegies are designed no only o beter manage he delivery o

negoiaed conracs bu also o ensure collaboraive relaionships wih suppliers

ha can drive down coss over ime.

Manage supplier relationshipsget what you paid for

Te buzz phrase supplier relaionship managemen reers o a conscious eor

o acively manage supplier perormance and relaionships across an organizaion.

Tese relaionships improve perormance across muliple conracs and give buy-

ers beter insigh ino vendor operaions. Anoher aspec o managing he relaion-

ship is helping suppliers improve service delivery and reduce coss hroughou he

erm o a conrac.

Jus as we reward high-perorming employees or excepional perormance, we

should also reward high-perorming suppliers or exceeding goals. As Mark

Brown, hen senior vice presiden and chie procuremen ocer or Whirlpool

Corp. said during a procuremen summi a Michigan Sae Universiy in 2008,

Supplier relaions [should] be managed wih he same inensiy as cusomer and

employee relaionships.32

Examples: Te sae o Connecicu is working wih suppliers o srucure pay-men erms ha bene boh he sae and suppliers. Under he win-win deal, ven-

dors are paid earlier in exchange or price discouns o he sae.33 One company

repored ha is SRM program, as i gained momenum, progressively delivered

increasing levels o savings, going rom $20 million during he rs year o more

han $350 million in savings by year our.34


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Going forward:Agencies should esablish supplier relaionship and perormance

programs ha include key perormance merics, beginning wih heir larges

suppliers. Perormance inormaion, in he orm o live inerviews and discus-

sions wih governmen managers, should be shared and used or pas perormance

evaluaion. Procuremen conracs should include incenives or reducing coss

and exceeding perormance goals.

Manage costs jointlylower your suppliers costs to lower your own

Negoiaing price lowers he buyers coss bu may no necessarily ake wase ou

o a suppliers operaions. Changing paymen erms rom 30 days o 60 days, or

example, may reduce a buyers cos o capial bu only passes ha cos on o a

supplier. Evenually, hese coss may be charged back in he orm o overhead and

oher expenses. By working wih suppliers o beter undersand coss in he supply

chain, companies such as Honda Moor Co. are able o improve produc qualiywhile lowering coss. As managemen guru Michael Hammer says, collaboraion

wih suppliers is no an opion, is an imperaive.35

Example: Honda decided o cu he cos o producing a car by a saggering 30 per-

cen or he 1998 Accord.36 Dave Nelson, ormer head o he Honda o America

supply chain, said in an inerview ha he company worked hand in hand wih

suppliers o joinly analyze manuacuring processes and ideniy where wase

could be aken ou o he sysem. Honda was able o achieve heir arge cos

posiion while ensuring suppliers remained healhy and viable.

Going forward: Te ederal governmen should work wih suppliers o collabora-

ively reduce wase rom supply chains. Te prioriy o hese eors should be on

he larges spending caegories and larges suppliers. Tese programs mus be led

a he highes levels and also require supplier leaders o be ully engaged.

Manage internal and contract complianceshow me the money

Procuremen reorm business cases oen ideniy savings ha don maerialize,because employees don ollow he recommended sraegies. Similarly, suppliers

don always comply wih negoiaed erms o a cos-saving iniiaive. In a 2008-

09 sudy by Vanage Parners, procuremen ocers said hey only go abou 54

percen o he poenial savings negoiaed in supplier conracs.37 Compliance


23/31


managemen requires an unrelening ocus on implemenaion o ensure ideni-

ed savings become real.

Example: GlaxoSmihKline, one o he larges pharmaceuical companies in

he world, esimaed i increased conrac compliance by more han 20 per-

cen hrough a ocus on implemenaion and an e-procuremen sysem.38

TeUniversiy o Pitsburgh Medical Cener is saving nearly $3 million hrough

improvemen in conrac compliance, according o James Szilagy, chie supply

chain ocer.39

Going forward:Agencies should esablish a library o easily accessible key con-

racs, especially hose requiring vigilance o ensure compliance. Tey should

also esablish conrac compliance merics o monior perormance. So-called

e-procuremen echnologies should be used o increase conrac compliance o

he exen possible.


24/31


Getting started

Te cos-reducion sraegies described above are no new. Tey have been well

undersood or decades and been shown o work. Indeed, hey are airly simple.

So why is i so dicul o enac hem? Because o inadequae leadership, incen-

ives, planning, and merics. Les ake hese hurdles one a a ime.

Successul cos-saving iniiaives in he procuremen space require he commited

suppor o leaders who conrol programs and budges. When procuremen reorm

eors ail, is oen because o insucien atenion rom he mos senior leaders.Successul cos-reducion eors, in conras, sar wih engaged and accounable

leadership, as he accompanying case sudy o Pennsylvania shows. (see box on

page 21)

In addiion o a lack o leadership, mos organizaions wihin he ederal govern-

men have no real incenive o cu coss. Federal governmen budges are based

on he previous years budge and hisorically increase every year. People don

ge rewarded or reducing coss. Indeed, budge cus are vigorously opposed by

he various ineressbusiness, poliical, and bureaucraicha bene rom

governmen wase. Appropriae couner-incenives are criical.

Any major iniiaive in a large bureaucracy requires a plan ha clearly ariculaes

goals, prioriizes iniiaives, and provides a blueprin and schedule or implemen-

aion. Finally, an evidence-based sysem or measuring he resuls o any cos-

saving sraegy is essenial. Tas why Illinois hired an independen rm o audi

is savings rom a procuremen-reorm iniiaive and validaed more han $529

million in savings during 2004 and 2005.41

Accurae measuremen makes i easier o ranslae savings ino concree budgecus or added invesmens. Wihou merics, savings will evaporae. o avoid

hese pialls, he ederal governmen should srenghen all procuremen cos-

conainmen iniiaives by:


25/31

Geng ared | www.ameranrgre.

Leading from the top

Cos-reducion eors should be led direcly by deparmen depuy secrear-

iesor by he chie nancial and acquisiion ocers wih depuy secreary

involvemen. Agency and program leaders should be held accounable o deliver

savings in he orm o budge reducions.

Creating a culture of efficiency

Leaders should emphasize he imporance o eliminaing wase and communicae

successes as hey happen. Tey should give workers angible incenives o reduce

budges by incorporaing cos reducion in perormance assessmens. Specialized

raining in procuremen sraegies should be a prioriy.

Gov. Ed Rendell shows how to make cost reduction

initiatives pay off

Facing a $2.4 billion budget decit, Gov. Ed Rendell o Pennsylvania

immediately eyed the states purchasing dollars as a source o sav-ings. We are determined to buy smarter, Rendell pledged in 2003

ater taking oce. With initiatives that take advantage o our huge

purchasing power or oce supplies, parts and equipment, and even

prescription drugs.

Through the end o 2009, the so-called Commonwealth Strategic

Sourcing Initiative was generating an estimated $325 million in

annual savings, averaging 20 percent in savings per initiative and

amounting to roughly 8 percent in savings o the states $4 billion in

annual purchasing.40

Here are some notable lessons rom Pennsylvanias success.

Budgeting for savings

Gov. Rendell required his budget oce to incorporate reasonable

savings estimates or each procurement initiative into the state

budget, despite agency resistance. That meant each cabinet mem-

ber had to successully execute procurement reormsor cut their

budget in other ways.

Committed leadership

Gov. Rendell remained closely involved in eciency initiatives,

personally running team meetings nearly every month where n

proposals or savings were reviewed and relevant assumptionssavings were evaluated. State ocials credit that involvement a

to the states success. In the end, the Governor, his Chie o Sta

have to be supportive and back you up, said James Creedon, o

secretary o general services.

Communication

Key to the initiatives success was direct communication with th

public. Each procurement cost-savings initiative was launched

anare and easy-to-understand explanations. This public appro

to driving procurement reorm was critical to pushing back aga

interests who beneted rom the states old way o doing busin

Rather than being deensive about our new contracts, we wer

mously proud o the savings and small business participation le

we achieved, David Yarkin, ormer Pennsylvania deputy secreta

procurement, said in an interview. We used a variety o comm

tions tactics to get the word out, including press conerences w

governor, editorial board meetings and legislative testimony.

Leading the way in Pennsylvania


26/31


Developing and managing a plan

When dealing wih massive bureaucracies and billions o dollars, rooing ou ine-

cien pracices is hard work. Implemening any o he above sraegies requires

careul plans ha ariculae shor-erm and long-erm goals, ideniy individuals

responsible or discree asks, se clear imelines, and esablish measures o success.

Measuring constantly

Cos-reducion plans should conain regular and rigorous measuremen abou

how well he sraegies are workingand precisely how much money is being

saved. Wihou reliable measuremens, is hard o know wha sraegies work, and

i will be dicul, i no impossible, o persuade he public and employees ha

governmen can be ecien.


27/31

cnlun | www.ameranrgre.

Conclusion

As he Obama adminisraion and Congress wresle wih how o reduce he bud-

ge deci amid growing demand or governmen services and economic simulus,

reducing procuremen coss oers a relaively atracive pah orward. Te money

is here or he aking: $40 billion a year, on average, according o our conserva-

ive esimae. And is an approach ha appeals o poliicians and people across he

poliical specrum. I will ensure our governmen procuremen programs operae

ecienly and eecively so ha our governmen can save money and ocus ed-

eral resources on oher programs ha proec our naion and he common good.


28/31


Endnotes

1 Gvernmen Aunably oe, oMB and Agene Need imrve plannng, Managemen, and o verg prje talngBlln D llar, GAo-08-1051t, July 31, 2008.

2 Dana hedge, cngre say Dhs overaw $15 Blln n Faled cn-ra, The Washington Post, seember 17, 2008, avalable a ://www.wangn.m/w-dyn/nen/arle/2008/09/16/AR2008091603200.ml.

3 oe Managemen and Budge, Improving Government Acquisition(Exeuve oe e preden, 2009), avalable a ://www.wleyren.m/reure/dumen/oMB%20Mem.d.

4 te We hue, Memrandum r e head Exeuve Dear-men and Agene: Gvernmen cnrang, pre releae, Mar

4, 2009, avalable a ://www.weue.gv/e-re-e/memrandum-ead-exeuve-dearmen-and-agene-ubje-gvernmen-nrang.

5 An B. carer,Better Buying Power: Guidance or Obtaining Greater E-ciency and Productivity in Deense Spending (Dearmen Deene,2010), avalable a ://www.aq.d.ml/d/UsD_AtL_Gud-ane_Mem_seember_14_2010_FiNAL.pDF.

6 tm Mnaan, Federal pruremen: Wa e Real prblem?, su-ly Exellene, Arl 21, 2009, avalable a ://www.ulyexel-lene.m/blg/2009/04/21/ederal-ruremen-eve-elman-le-ure/.

7 Fran Buvard, tma Drmann, and N Lvegrve, te caer Gvernmen Rerm Nw, McKinsey Quarterly(3) (2009): 113.

8 tenlgy cEo cunl, one trlln Rean (2010), avalable a://www.eeunl.rg/rage/dumen/tcc_one_trl-

ln_Rean_FiNAL.d.

9 carle prw, Debra cammer hne, and Danel B. pre, sraege cu c and imrve perrmane (Wangn: iBM cenerr e Bune Gvernmen, 2010), avalable a ://www.bunegvernmen.rg/rer/raege-u--and-mrve-errmane.

10 Deene sene Bard, creang a DoD sraeg Aqun plarm(2009).

11 sener s. hu, FEMA ale karna raler ar rmTheWashington Post, Mar 13, 2010, avalable a ://www.wang-n.m/w-dyn/nen/arle/2010/03/12/AR2010031202213.ml.

12 Ry Mar, GAo: Blln Waed n Federal it prje, eWee, July31, 2008, avalable a ://www.ewee.m//a/it-inraruure/Blln-Waed-n-Federal-it-prje-GAo/.

13 National Association o State Procurement O fcials, sreng n Num-ber: An i nrdun cerave pruremen (2006), avalablea ://www.na.rg/dumen/ceravepurangBre.d.

14 cene cnulng Gru, len name weld (2008).

15 Jnaan Weman, in a savng ser, e Gvernmen Dverta paer ha tw sde, The Wall Street Journal, July 29, 2009, aval-able a ://nlne.wj.m/arle/sB124882436513388423.ml.

16 carer, Beer Buyng pwer.

17 cene cnulng Gru, Bune cae, len name weld(ober 2005).

18 Weman, in a savng ser, e Gvernmen Dver tapaer ha tw sde.

19 o kreer, Army u -e-el eler urae,NationalJournal, ober 26, 2010, avalable a ://www.gvexe.m/dalyed/1010/102610nj3.m.

20 Rber Brdy, carge i, Government Executive 42 (11) (2010), aval-able a ://www.gvexe.m/eaure/0910-01/0910-01na3.m.

21 tenlgy cEo cunl, one trlln Rean.

22 Anna Flynn, te Greenng Exeded paagng: A U.s. palserve and suler cllabran (Arzna: cAps Reear, 2009),avalable a ://www.maer.rg/rax012009.d.

23 oe Managemen and Budge, Cutting Waste and Savings MoneyThrough Contracting Reorm (Exeuve oe e preden, 2010).

24 oe Managemen and Budge,A Guide To Best Practices ForPerormance-Based Service Contracting (Exeuve oe e pre-den, 1998).

25 oe Managemen and Budge,Acquisition and ContractingImprovement Plans and Pilots (Exeuve oe e preden, 2009).

26 Davd Yarn, i pay Negae,Government Procurement, Augu2007.

27 Lenn Vnen, Mre Mney: hw e Dearmen hmelandseury caure Bg savng rm Fallng it pre, Contract Manage-ment, July 2010.

28 Adrenne sel, E-pruremen prvde sgnfan c savng,IndustryWeek, Nvember 6, 2007, avalable a ://www.ndury-wee.m/arle/e-ruremen_rvde_gnfan__av-ng_15276.ax.

29 Davd c. Wyld, Yu can Fg Mre Law: Wy pre DeerranMean ta Revere Aun Mae sene and prdue savng n

te Aqun inrman tenlgy Reure, te RevereAun Reear cener, July 23, 2010, avalable a ://revereau-nreear.blg.m/2010/07/yu-an-fg-mre-law-wy-re.ml.

30 Mar Webb and Jnaan huge, Buldng e ae r sRM, CPOAgenda, Auumn 2009, avalable a ://www.agenda.m/revu-arle/auumn-2009/eaure/buldng-e-ae-r-rm/.

31 Nanal Aan sae purang oer and er, Buyngsmar: Bluern r An (1998), avalable a ://www.na.rg/dumen/Buyng_smar_Bluern.d.

32 Ne rm prer Je sandr, Mgan sae Unvery.

33 Davd Yarn, cnneu tae a Be u Fd c,GovernmentProcurement, June 2007, avalable a ://www.gvurng.m/d/urng/June_07_Gvpr_clumn.d.
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Endne | www.ameranrgre.

34 Jnaan huge, Jea Wadd, and Mar Webb, Value Delvered bysraeg suler Relan Managemen n Majr o rganzan(Bn: Vanage parner, 2010).

35 Je sandr, preenan n uler errmane, Mgan saeUnvery.

36 tmy M. Laeer, Balanced Sourcing: Cooperation and Competitionin Supplier Relationships (san Fran: Jey-Ba, 1998).

37 Webb and huge, Buldng e ae r sRM.

38 Aberdeen Gru, Be prae n E-pruremen (2005).

39 MedAe, MedAe and prdg slun imrve Eeny,cnra cmlane n hal purang, pre releae, Augu24, 2010, avalable a ://r.medae.m/releaedeal.m?ReleaeiD=502025.

40 inervew w Davd Yarn, ober 27, 2010; cmmn-weal pennylvana, 2010-11 Budge-n-Bre February9, 2010, avalable a ://www.ral.ae.a.u/ral/erver./dumen/768990/2010-11_budge_n_bre_web_d?qd=54197526&ran=2.

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About the author

Raj Sharma is a Visiing Fellow a American Progress ocusing on improving gov-

ernmen procuremen and supply chain managemen pracices wih he ulimae

goal o driving signican reurns on he use o axpayer dollars. Much o his work

is ocused on driving large-scale eciencies, reducing coss, and improving heoverall eeciveness o he ederal procuremen sysem hrough he applicaion o

proven commercial and public secor bes pracices.

Over he pas 15 years, he has worked wih leaders across he ederal govern-

men and he commercial secor o promoe bes pracices on opics such as

sraegic sourcing, supplier diversiy, and sakeholder engagemen. He has been

published in many naional periodicals. Recen publicaions include Te Sae o

Compeiion and Driving Value hrough Supplier Diversiy.

He is he ounder o he Federal Acquisiion Innovaion and Reorm, or FAIR,Insiue. He is also he ounder and chie execuive ocer o Censeo Consuling

Group, a rm ha consuls or he ederal governmen, as well as privae companies,

on procuremen and oher issues. Censeo Consuling Group does no advise or

assis companies wih securing ederal conracs. During his enure as a Visiing

Fellow a he Cener or American Progress, Sharma will serve an advisory and sra-

egic role as Censeos CEO and coninue o hold sock in he company, bu Sharma

will no be involved in any Censeo conracs or day-o-day operaions. Sharma has

ranserred day-o-day responsibiliies o a recenly appoined presiden.

Acknowledgements

Te auhor is exremely graeul o hose who provided valuable inpu or his

repor. He would paricularly like o hank Donna Cooper, David Yarkin, and

James Creedon rom he Commonwealh o Pennsylvania; Proessor imohy

Laseer a he Universiy o Virginia; David Liman, ormerly o he Deparmen

o ransporaion; David Nelson, ormerly o Honda o America; Proessor Joseph

Sandor o Michigan Sae Universiy; Dr. Allan Burman o Jeerson Soluions;

Rockeeller Foundaions Campaign or American Workers; San Soloway ohe Proessional Services Council; and Reece Rushing, Jiinder Kohli, Praap

Chaterjee, Gadi Decher, and Scot Lilly a he Cener or American Progress.


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The Center or American Progress is a nonpartisan research and educational institute

dedicated to promoting a strong, just and ree America that ensures opportunity

or all. We believe that Americans are bound together by a common commitment to

these values and we aspire to ensure that our national policies relect these values.

We work to ind progressive and pragmatic solutions to signiicant domestic and

international problems and develop policy proposals that oster a government that

is o the people, by the people, and or the people.

a $400 billion opportunity

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