Strategic Sourcing: Leading Commercial Practices Can Help Federal Agencies Increase Savings When Acquiring Services
Published: 2013-04-15T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In fiscal year 2012, the federal government spent $307 billion to acquire services. The private sector is also reliant on services. Over the last 5-7 years, leading companies have been examining ways to manage their services in order to maximize returns and minimize inefficiencies. Given the amount of federal spending on services, GAO was asked to identify leading practices used by large commercial organizations for purchasing services. GAO identified (1) leading company practices for purchasing services, and (2) potential opportunities for federal agencies to incorporate these practices based on prior work.
To determine leading companies' practices in this area, GAO selected a nongeneralizable sample of companies based upon a literature search and recommendations from Defense and industry organizations that have studied services acquisition. GAO identified and interviewed officials from seven companies, an industry group, and a consulting organization. To identify opportunities for agencies to adopt leading practices, GAO compared the types of services purchased by agencies in fiscal year 2012 with those purchased by companies. GAO also relied on prior, relevant work related to federal procurement of services and OMB initiatives for expanding agencies' use of strategic sourcing.
section_title: What GAO Found
paragraphs: Officials from leading companies GAO spoke with reported saving 4-15 percent over prior year spending through strategically sourcing the full range of services they buy--a process that moves away from numerous individual purchases to an aggregate approach. The federal government and leading companies buy many of the same services, such as facilities management, engineering, and information technology. Companies' keen analysis of spending, coupled with central management and knowledge sharing about the services they buy, is key to their savings. Their analysis of spending patterns can be described as comprising two essential variables: the complexity of the service and the number of suppliers for that service. Knowing these variables for any given service, companies tailor their tactics to fit the situation; they do not treat all services the same. Company tactics fall into four basic categories: (1) Standardize requirements, (2) Understand cost drivers, (3) Leverage scale, and (4) Prequalify suppliers.
To illustrate how buying tactics are tailored, Walmart leverages its scale to compete basic or commodity services that have many suppliers, such as maintenance. When buying sophisticated services with few suppliers, such as consulting, Dell negotiates cost drivers such as labor rates. The framework is dynamic: over the long term, companies seek to reduce complexity and bring in additional suppliers to take advantage of market forces like competition.
Federal agencies have sizable opportunities to leverage leading commercial practices to lower costs and maximize the value of the services they buy. In September 2012, GAO reported that large procurement agencies such as the Department of Defense and Veterans Affairs leveraged only a fraction of their buying power through strategic sourcing and faced challenges analyzing reliable data on spending, securing leadership support, and applying this approach to acquiring services. GAO recommended that these agencies and the Office of Management and Budget (OMB) issue guidance, develop metrics, and take other actions. The agencies and OMB concurred. OMB directed agencies to take actions to overcome these challenges. Potential savings are significant considering a savings rate of 4 percent applied to the $307 billion spent by federal agencies on services in fiscal year 2012 would equate to $12 billion.
section_title: What GAO Recommends
paragraphs: GAO has made recommendations in previous reports to help agencies strengthen strategic sourcing practices, which agencies concurred with and have planned actions under way.

section_title: Letter
paragraphs: In fiscal year 2012, the federal government obligated $307 billion to  acquire services ranging from the management and operation of  government facilities, to information technology services, to research and  development. Spending on services has increased significantly since  fiscal year 2000.
The private sector is also increasingly reliant on services, many of which  are similar to those that the federal government buys, such as information  technology services. Leading companies have been examining ways of  managing their services in order to stay competitive, respond to market  and stockholder pressures, and deal with economic downturns. We have  previously reported that leading companies implemented a strategic  approach to improve service acquisition outcomes and identified  opportunities for federal agencies, specifically the Department of Defense  (DOD), to implement improvements across the range of services they  purchase. Under the strategic sourcing approach, companies took a hard  look at how much they were spending on services and from whom they  were buying these services. This approach included identifying the  number of suppliers, the number of contracts, and prices paid across the  company to identify inefficiencies such as paying different rates for similar  services and suppliers, or not consolidating purchases across the  company to lower prices. Armed with this knowledge, companies were  able to leverage their buying power, reduce costs, and better manage  their suppliers.
Given the trend of increased federal government spending on services  and today’s constrained fiscal environment, there has been a renewed  focus on maximizing return on investment. You requested that we identify  practices used by large commercial organizations in purchasing services.  We briefed your staff on the results of this review. This report presents  those results. Specifically, we (1) identified leading company practices for  acquiring services, and (2) examined potential opportunities for federal  agencies to incorporate these practices.
To determine leading companies’ practices in this area, we selected a  nongeneralizable sample of companies based on (1) a literature search,  including our prior leading practices reports on services acquisition, and  (2) recommendations from the Defense Business Board, Defense  Science Board, and industry experts who have studied the issues. Based  on this approach, we identified and interviewed seven leading companies:  Boeing, Dell, Delphi, Humana, MasterCard, Pfizer, and Walmart; an  industry group: Institute for Supply Management; and a consulting  organization: A.T. Kearney. We identified key practices reported by  companies, including procurement organization structures, services  procurement history and strategies, initiatives and resultant savings, and  contracting methods. We also compared companies’ procurement  practices with those identified in our prior work. To maximize the  applicability of our findings to the federal government, we identified the  top categories of services that the government acquired in fiscal year  2010 from the Federal Procurement Data System-Next Generation  (FPDS-NG)—the government’s system for tracking contracting data—and  interviewed companies about their practices in those categories. We  analyzed company practices to identify common themes. We then  provided this information to the companies and they confirmed our  analysis. To assess the reliability of companies’ data on acquisition  savings, we requested information on data quality control procedures and  system safeguards from company officials. In addition, we provided  relevant sections of a draft of this report to companies for review and  comment. To assess the reliability of FPDS-NG data, we reviewed  documentation and electronically tested data for obvious problems. We  determined that the company and FPDS-NG data were sufficiently  reliable for the purposes of this report. To further identify opportunities for  agencies to adopt leading companies’ practices, we also compared the  types of services purchased by companies and agencies in fiscal year  2012 and relied on our recent, relevant work that examined federal  strategic sourcing efforts. Appendix I provides further details on the scope  and methodology used for this work.
We conducted this performance audit from December 2011 to April 2013  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: As figure 1 shows, services spending for the federal government has  accounted for over half the annual procurement spending since fiscal  year 2008.
In fiscal year 2012, the federal government obligated about $307 billion to  acquire services. Table 1 lists the top services purchased by federal  agencies in fiscal year 2012, which range in complexity from defense  research and development to housekeeping.
We previously reported that agencies have had difficulty managing  services acquisitions and have purchased services inefficiently which  places them at risk of paying more than necessary.can be attributed to several factors. First, agencies have had difficulty  defining requirements for services, such as developing clear statements  of work which can reduce the government’s risk of paying for more  services than needed. Second, agencies have not always leveraged  knowledge of contractor costs when selecting contract types, including  time-and-materials contracts, performance-based contracts, and  undefinitized contracts. Third, agencies have missed opportunities to   These inefficiencies  increase competition for services due to overly restrictive and complex  requirements; a lack of access to proprietary, technical data; and supplier  preferences.
Agencies purchase services under the Federal Acquisition Regulation,  which places some constraints on how contracts are competed and  awarded. Generally, agencies are statutorily required to award contracts  using full and open competition, unless an exception applies. Additionally,  agencies are subject to certain requirements when awarding contracts,  such as meeting the Small Business Administration’s annual statutory  goals to make awards to various kinds of small businesses.
GAO has been assessing strategic sourcing and the potential value of  applying these techniques to federal acquisitions for more than a decade.  In 2002, GAO reported that leading companies of that time committed to  a strategic approach to acquiring services—a process that moves a  company away from numerous individual procurements to a broader  aggregate approach—including developing knowledge of how much they  were spending on services and taking an enterprise-wide approach to  services acquisition. As a result, companies made structural changes  with top leadership support, such as establishing commodity managers— responsible for purchasing services within a category—and were better  able to leverage their buying power to achieve substantial savings. We  have emphasized the importance of comprehensive spend analysis for  efficient procurement since 2002. Spend analysis provides knowledge  about how much is being spent for goods and services, who the buyers  are, who the suppliers are, and where the opportunities are to save  money and improve performance. In 2005, the Office of Management and  Budget (OMB) defined strategic sourcing as a structured process based  on spend analysis to make business decisions about acquiring  commodities and services more efficiently and effectively.
In 2007, GAO reviewed DOD’s processes for acquiring services and  found that DOD could take further action to improve its strategic sourcing.
GAO reported that the department’s approach had tended to be reactive  and did not fully address key factors for success at either the strategic  (organization-wide) or transactional (individual services transaction) level.  GAO recommended that DOD take a proactive approach to managing  strategic and transactional level service acquisitions elements, including  communicating where individual transactions can then be made to  support strategic goals. Key factors at the transactional level included  clearly defined requirements, appropriate contracting vehicles, and  effective contractor oversight.
section_title: Leading Companies Achieve Significant Savings through a Strategic Approach That Establishes Goals, Builds Market Knowledge, and Tailors Procurement Tactics to Different Services
paragraphs: The leading companies we studied used a strategic sourcing approach to  achieve sustained annual savings, over prior year spending, of 4-15  percent in services over the last 5-7 years. This strategic approach drives  companies to continually strive for savings, partly spurred by annual  goals. To enable this process, companies rely on five foundational  principles to build spending and market knowledge and gain situational  awareness of their procurement environment. In the short term,  companies use this knowledge to adjust their procurement tactics for  different types of services depending on service complexity and number  of available suppliers in order to best achieve savings and efficiencies.  This enables companies to target the full range of services they buy. In  the long term, companies try to address their procurement constraints by  reducing requirements complexity to commoditize services and  developing new suppliers to increase competition. This allows companies  to more aggressively leverage their buying power for all types of services.
subsections: section_title: Companies Foster a Culture of Savings through Setting Goals and Ensuring Accountability
paragraphs: Each of the leading companies we reviewed used annual savings  expectations to drive a corporate culture of savings. For example,  Walmart’s executive leadership sets annual savings goals for their  services procurement division; in 2012, the goal was to save around $100  million, or about 8 percent, of the division’s $1.2 billion budget. A Walmart  official emphasized the importance of savings expectations and  accountability, noting that the very act of establishing goals and metrics  helps enable a culture of savings.  “If you measure it, it will happen.”
Companies further translate savings expectations into individual  performance goals to which executives and employees are held  accountable. Savings expectations are allocated to each procurement  team member and the head of procurement regularly reviews progress.  This metric-based accountability spurs companies’ culture of savings, but  is not necessarily dictated by leadership.
Dell establishes savings expectations and metrics in cooperation with  procurement staff. These metrics are tied to individual performance  contract goals to which staff are held accountable with quarterly  reviews. Top performers are tapped to lead teams and manage critical  procurement projects.
At Delphi, savings targets are initiated by both procurement staff and  leadership. The process continues iteratively until all parties agree to  a final savings target, including after considering areas where costs  are expected to actually rise due to economic conditions.
Additional incentives can drive this culture of savings; for example,  one company allows business units to reinvest savings into their  operations, primarily to fund innovation and strategic initiatives.
Having such a culture is critical to companies’ continual pursuit of savings  and efficiencies. A Pfizer official described this culture as being part of the  company’s DNA.  “Savings is in our DNA.”
Leading companies reported achieving a sustained savings rate of 4-15  percent annually on services procurement by strategically sourcing the  full range of services they buy. Companies achieved these savings after  increasing their focus on services acquisitions over the last 5-7 years.  Companies reported using the same general procurement strategies and  tactics for both goods and services. However, the impetus for an  increased focus on services was leadership recognition that spending had  significantly increased, resulting in additional dedicated resources to  manage this area.
Companies chose different paths to begin the process of improving the  efficiency of services acquisition. For example, Pfizer conducted a spend  analysis in 2007 which revealed increased spending on legal, consulting,  and financial services, as well as opportunities for improving the efficiency  of its processes. Boeing’s Chief Executive Officer made tackling services  spending a priority after noticing how much was being spent in this area  compared to the company’s spending on items directly affecting  customers. This led Boeing to adopt a company-wide procurement model  in 2006. Delphi centralized indirect procurement—products and services  used in support of Delphi’s operations—between 2005 and 2007 in order  to improve efficiency and drive savings. Some companies reported  achieving the greatest amount of savings in the initial years after  prioritizing their procurement of services. For example, Dell reported  achieving 23 percent savings in the first year after increasing its focus on  improving services acquisition, and has been able to sustain 10 percent in  savings thereafter. Another company noted that it is typical to achieve  larger savings at the beginning and that the savings percent goes down  over time, to around 4-7 percent annually. Table 2 below highlights  examples of the annual savings companies reported in 2012, and the  main services they buy.
Leading companies generally agreed that foundational principles— maintaining spend visibility, centralizing procurement, developing  category strategies, focusing on total cost of ownership, and regularly  reviewing strategies and tactics—are all important to achieving successful  services acquisition outcomes. Taken together, these principles enable  companies to better identify and share information on spending and  increase market knowledge about suppliers to gain situational awareness  of their procurement environment. This awareness positions companies  to make more informed contracting decisions.
Each company we spoke with had a history of struggling with fragmented  information on spending, which did not allow them to spot inefficiencies or  opportunities for consolidating purchases. For example, Humana’s Chief  Procurement Officer (CPO) conducted a year-long spend analysis effort  which revealed, among other things, cases where a supplier charged  different rates to different departments for the same service. Dell  emphasized the importance of actively monitoring spending trends in  order to identify opportunities for savings. As one official put it,  unmanaged spend is by definition inefficient.  “Unmanaged spend equals inefficiency.”
To address these issues, companies maintain visibility into spending by  integrating procurement and financial systems across the organization.  For example, in 1999, Boeing upgraded its paper-based manual  processes for procurement to a new, automated system which enabled  more efficient spend analysis. The new system also increased operational  efficiency because it provided a common language and data set for the  procurement staff. To aid efficient spend analysis, Boeing defined a  services taxonomy to allow analysis at the invoice line item level. Invoice  line items are defined beforehand—called billing units—and are built into  contract statements of work. Dell, Delphi, and Humana also reported  using centralized databases that provide transparency into their global  spend. Similarly, in 2012, Walmart started implementing a centralized  database to increase spend visibility.
In addition to leveraging knowledge about spending, leading companies  centralize procurement decisions by aligning, prioritizing, and integrating  procurement functions within the organization. The companies we spoke  with overcame the challenge of having a decentralized approach to  purchasing services, which had made it difficult to share knowledge  internally or use consistent procurement tactics. Without a centralized  procurement process, officials told us, companies ran the risk that  different parts of the organization could be unwittingly buying the same  item or service, thereby missing an opportunity to share knowledge of  procurement tactics proven to reduce costs. Company officials noted that  centralizing procurement does not necessarily refer to centralizing  procurement activity, but to centralizing procurement knowledge. For  example, Dell’s procurement organization is centralized, and utilizes a  common tool, enabling cost data to be shared globally. Global Category  Managers are expected to have a good understanding of all aspects of  the services within their category. Clearly defined and communicated  policies ensure users cannot engage with suppliers without procurement  organization involvement. Similarly, Pfizer has “category teams” with a  global reach for broad groupings of services with category managers  assigned to each category. The global category zone leads are managed  by Vice-Presidents who report directly to the head of the procurement  organization and work with internal business partners, who execute  contracts on a company-wide basis or locally as needed. Boeing has a  team of financial analysts that support the procurement function by  conducting “should cost” analyses and providing supplier or service cost  breakdowns to procurement agents.  “Centralize the knowledge, not the activity.”
Company officials told us that the key to an effective centralized process  is ensuring that services spending goes through approved contracts. A  Walmart official referred to non-approved spending as “rogue buying.”  Companies focus on compliance in order to eliminate unapproved  purchases. For example, Delphi aims for 95 percent of its sourcing to  adhere to pre-approved category strategies. The company uses an  internally developed database to manage all sourcing initiatives from  concept to business case to approval by the procurement and financial  organizations. Pfizer has a policy that procurement transactions over  $100,000 must be competitively bid with limited, documented exceptions.    “You must eliminate rogue buying.”
Companies develop category-specific procurement strategies with  stakeholder buy-in in order to use the most effective sourcing strategies  for each category. Category-specific procurement strategies describe the  most cost-effective sourcing vehicles and supplier selection criteria to be  used for each category of service, depending on factors such as current  and projected requirements, volume, cyclicality of demand, risk, the  services that the market is able to provide, supplier base competition  trends, the company’s relative buying power, and market price trends. For  example, Dell’s Global Category Managers oversee teams that develop  detailed sourcing strategies for each commodity. The major components  of the sourcing strategies are (1) internal analyses which include spend  analysis, stakeholder analysis, business requirements, and cost  modeling; and (2) external analyses which include market research and  supply market analysis.
Company officials told us that category strategies help them conduct their  sourcing according to a proactive strategic plan and not just on a reactive,  contract-by-contract basis. One company’s CPO referred to the latter as a  “three bids and a buy” mentality that can be very narrowly focused and  result in missed opportunities such as not leveraging purchases across  the enterprise or making decisions based only on short term  requirements. For this reason, Boeing sometimes chooses to execute a  short-term contract to buy time if market research shows a more  competitive deal can be obtained later.  “You cannot just go with a ‘three bids and a buy’ contracting approach.”
Category strategies also help companies choose sourcing tactics  appropriate to their circumstances. For example, as one company noted,  in one category it may be very beneficial to conduct competitive bidding  via online reverse auctions, while in another category it may be wise to  forego any competitive bidding and extend and lock in pricing based on  market dynamics.strategies for travel and information technology services in order to  leverage purchases globally, but region-based strategies for services  such as facilities management which are used by individual Delphi  facilities. Companies develop strategies that identify the choice of  sourcing vehicles and supplier selection criteria only after extensive  consultation with internal users. This consultation helps procurement staff  better understand user requirements as well as obtain their buy-in.  According to one company CPO, user buy-in is critical; otherwise users  may think that a desire to reduce cost is the only factor driving the choice  of sourcing tactics.
In another instance, Delphi has global, company-wide  Risk is an important consideration when developing category strategies  and setting priorities. Dell considers factors such as data privacy and  security, financial stability, continuity of supply, and geographic economic  conditions to ensure the proper considerations and protections are in  place prior to finalizing supplier selection decisions. Routine services  such as store and parking lot maintenance services are critical to  Walmart’s mission of retail, demanding a high level of attention. Delphi  and Boeing have a policy of minimizing the risk of transitioning to new  suppliers. For this reason, Boeing retains some staff with subject matter  expertise to oversee contracts in each category and know how the  supplier is meeting those requirements. This ensures flexibility for Boeing  in case the company chooses to change suppliers in the future.
Companies focus on total cost of ownership—making a holistic purchase  decision by considering factors other than price. At the strategic—or  higher—level, managing internal demand is an important element of  reducing total cost of ownership. For example, Humana closely examines  services requirements in order to prevent unnecessary spending on  services the company does not absolutely need. Boeing considers  internal costs, such as the administrative cost per transaction or purchase  order to determine price and efficiency trade-offs. Dell considers factors  such as risk to the company’s mission, innovation, operational  performance, and demand management. Dell and Delphi examine  suppliers’ management models for maturity, including how well they  manage and train staff and use appropriate cost management tools. In  fact, a Dell official said that the quality of a service is largely determined  by the quality of the supplier’s management structure.  “When purchasing a service, you are essentially paying for the quality of  suppliers’ management processes.”
At the transactional—or lower—level, incorporating non-price factors can  be important inputs into decision making. For example, while Walmart  may often award a contract to the lowest bidder, it takes other  considerations into account—such as average invoice price, time spent  on location, average time to complete a task, supplier diversity, and  sustainability—when awarding contracts. Humana is developing internal  rate cards for consulting services that would help the company evaluate  contractors’ labor rates based on their skill level. Pfizer’s procurement  organization monitors compliance with company processes and billing  guidelines. The company considers its procurement professionals as  essentially risk managers rather than contract managers because they  need to consider what’s best for the company and how to minimize total  cost of ownership while maintaining flexibility.
Companies regularly review strategies and tactics to adapt to market  trends. This provides room for flexibility in managing suppliers— something companies we spoke with valued. Walmart officials  emphasized the importance of frequently reviewing tactics in order to  identify new opportunities for savings. For this reason, Walmart constantly  evaluates new ways to invite bids and new types of pricing tiers by which  to lower prices, such as by state or region or volume. Delphi’s strategies  are formally reviewed and documented annually by Delphi’s strategic  council comprised of senior company executives. These reviews may  result in changing tactics or suppliers according to predetermined goals.  For example, for a particular category, Delphi may not want to represent  more than a certain percentage of any supplier’s revenue in order to  minimize risk that the supplier may be overly dependent on Delphi for  long-term viability. If the reviews highlight cases where the limit is  exceeded, Delphi examines ways to bring in an additional supplier.  “You must continually stay ahead of suppliers or they will figure you out.”
Similarly, Dell regularly assesses whether to “make or buy” services,  conducting objective evaluations of internal capability versus that of  external providers. In some instances, although Dell may have the  capability in-house, they may not have available resources at that point in  time, and may therefore elect to purchase that particular service. In order  to retain flexibility to adapt to market trends, companies view long-term  contracts (generally over 3 years) as risky. For example, Pfizer will  examine market conditions and unbundle contracts—use separate  contracts for multiple services—for greater transparency and to bring  more suppliers into the mix; later on Pfizer might bundle contracts to gain  leverage as part of the strategy. Similarly, Delphi prefers contract lengths  of under 3 to 4 years because of the difficulty of predicting the future price  trends of key cost components—for example, fuel, which is a significant  cost component of services involving travel.
section_title: Companies Tailor Their Procurement Tactics to Each Type of Service Depending on Complexity and Availability of Suppliers
paragraphs: By following the foundational principles to improve knowledge about their  procurement environment, companies are well positioned to choose  procurement tactics tailored to each service. While companies emphasize  the importance of observing the principles, including category strategies,  they do not take a one-size-fits-all approach to individual service  purchase decisions. Two factors—the degree of complexity of the service  and the number of available suppliers—determine the choice of one of  four general categories of procurement tactics appropriate for that  service: leveraging scale, standardizing requirements, prequalifying  suppliers, and understanding cost drivers. Figure 2 below shows how the  two factors help companies categorize different services and select  appropriate tactics.
Complexity is defined as the relative difficulty of defining performance  requirements, and varies for different types of services. Less complex  services—referred to as commodity services—are those where  requirements are relatively easy to define and performance more clearly  measured; for example, housekeeping, telecommunications, and  maintenance services. More complex services—referred to as  knowledge-based services—are those where requirements are more  complex, performance more difficult to measure, and where service  provider staff skill levels are paramount; for example, research and  development, engineering and management support, and legal services.
The number of suppliers that can fulfill a service varies depending on  market conditions and whether specialized skills and knowledge are  required. Based on our discussions with companies, table 3 shows how  different services may be categorized according to these two factors. For  illustration purposes, the table shows the two factors at the extremes of  their range of possibilities.
Companies we reviewed are not content to remain limited by their  environment; over the long term, they generally seek to reduce the  complexity of requirements and bring additional suppliers into the mix in  order to commoditize services and leverage competition. This dynamic,  strategic approach has helped companies demonstrate annual, sustained  savings. Companies generally aim to commoditize services over the long  term as much as possible because, according to them, the level of  complexity directly correlates with cost. Companies also aim to increase  competition, whether by developing new suppliers or reducing  requirements complexity, which could allow more suppliers to compete. In  doing so, companies can leverage scale and competition to lower costs.  “Complexity drives cost.”
Figure 3 below depicts most companies’ overall goal of commoditizing  services over the long term, as depicted by the goal of moving services to  the lower-left quadrant of companies’ transactional framework shown  earlier.
The two factors—complexity and supplier availability—influence what  tactics are best suited to each quadrant of services as shown in table 4  below.
For commodity services with many suppliers, such as administrative  support, facilities maintenance, and housekeeping, companies generally  focus on leveraging scale and competition to lower cost. The figure on the  left shows the companies’ transactional framework discussed earlier and  highlights the quadrant represented by commodity services that are  served by many suppliers. Typical tactics applicable to this quadrant of  services include consolidating purchases across the organization; using  fixed price contracts; developing procurement catalogs with pre- negotiated prices for some services; and varying bidding parameters such  as volume and scale in order to find new ways to reduce costs. For  example, Walmart continually lowers costs on store maintenance services  such as parking lot maintenance by inviting bids on a regional or national  basis. Bidders are required to submit quotes based on a variety of options  that are thoroughly discussed ahead of time, such as the number of  stores or regions and contract length. This helps Walmart identify new  contract parameters by which to reduce costs. Boeing has begun  developing procurement catalogs for commonly acquired routine and low- dollar services. The catalogs list approved suppliers and negotiated  prices to allow users to directly execute contracts up to a certain amount.
For commodity services with few suppliers, such as specialized logistics  and utilities, companies focus on standardizing requirements. Typical  tactics applicable to this quadrant of services include paring back  requirements in order to bring them more in line with standard industry  offerings, and developing new suppliers to maintain a competitive  industrial base. For example, Walmart holds pre-bid conferences with  suppliers such as those supplying store security for “Black Friday”—the  major shopping event on the day after Thanksgiving—to discuss  requirements and what suppliers can provide. Delphi makes an effort to  maintain a competitive industrial base by dual-sourcing certain services in  order to minimize future risk—a cost trade-off.
For knowledge-based services with many suppliers, such as information  technology, legal, and financial services, companies prequalify and  prioritize suppliers to highlight the most competent and reasonable  suppliers. Typical tactics applicable to this quadrant of services include  prequalifying suppliers by skill level and labor hour rates; and tracking  supplier performance over time in order to inform companies’ prioritization  of suppliers based on efficiency. For example, Pfizer Legal Alliance was  created to channel the majority of legal services to pre-selected firms.  Delphi only awards contracts to companies on their Category Approved  Supplier List. The list is approved by Delphi leadership and is reviewed  annually.
For knowledge-based services with few suppliers, such as engineering  and management support and research and development services,  companies aim to maximize value by better understanding and  negotiating individual components that drive cost. Typical tactics  applicable to this quadrant of services include negotiating better rates on  the cost drivers for a given service; closely monitoring supplier  performance against pre-defined standards; benchmarking supplier rates  against industry averages in order to identify excess costs; and improving  collaboration with suppliers. Some companies leverage their knowledge  of cost drivers in order to use time and materials contracts—a contract  type that we have reported as high-risk, mainly because of inadequate  oversight—because that allows them to negotiate individual rates. For  example, Dell’s forensic costing process breaks down service costs to the  smallest component—for example, labor rates and even raw materials  such as fuel. Cost knowledge is shared throughout Dell’s procurement  organization, providing an advantage in negotiating contracts. Boeing  uses benchmark clauses in some contracts, requiring that supplier rates  be within a specified percentage of the benchmarked average as  determined by third-party research firms such as Gartner Group. To  improve collaboration with suppliers, Pfizer aims to build a single global  account management team in order to have one point of contact globally  that can solve issues and manage the Pfizer relationship holistically.
section_title: Opportunities Exist for Federal Agencies to Adopt Commercial Practices
paragraphs: Federal agencies have opportunities to leverage leading companies’  practices for purchasing services in order to lower costs and maximize  the value of the services they buy. In our September 2012 report on  strategic sourcing, we found that most of the agencies we reviewed  leveraged only a fraction of their buying power. Specifically, we found that  four agencies—DOD, Department of Homeland Security (DHS),  Department of Energy (Energy), and Department of Veterans Affairs  (VA)—accounted for 80 percent of federal procurement spending in fiscal  year 2011, but managed only 5 percent, or $25.8 billion, of the $537  billion spent on federal procurement through strategic sourcing contracts.  Their strategic sourcing efforts resulted in $1.8 billion in savings. When  strategic sourcing contracts were used, selected federal agencies  generally reported achieving savings between 5 and 20 percent.  However, we reported that many agencies did not address the categories  that represented their highest spending, the majority of which exceeded  $1 billion and most of which were services. Agencies also continued to  face challenges in obtaining and analyzing reliable and detailed data on  spending, securing leadership support, and acquiring services through  strategic sourcing. Adoption of leading companies’ practices could help  agencies increase the portion of and types of services they strategically  source. For example, leading company practices show how agencies  could adopt tailored tactics to better target services that have been  considered too difficult to strategically source, such as professional  services. Moreover, leading companies have saved between 4 and 15  percent annually—over prior year spending—on services using these  practices. A savings rate of 4 percent applied to the $307 billion spent by  federal agencies on services in fiscal year 2012 would equate to $12  billion in savings. In December 2012, OMB directed agencies to take  actions to better coordinate and gain more visibility into spending to  overcome these challenges.
subsections: section_title: Federal Strategic Sourcing Efforts for Services Have Been Limited, but Results Show Potential for Additional Savings
paragraphs: In September 2012, GAO reported that many large procurement agencies  were in the early stages of implementing strategic sourcing and had  achieved limited results. For example, in fiscal year 2011, DOD, DHS,  Energy, and VA accounted for 80 percent of the $537 billion in federal  procurement spending, but reported managing only about 5 percent of  that spending, or $25.8 billion, through strategic sourcing efforts. These  agencies reported savings of $1.8 billion—less than one-half of 1 percent  of federal procurement spending.
Further, most of these agencies’ strategic sourcing efforts did not address  their highest spending areas—including services—which may have  provided opportunities for additional savings. For example, we reported  that VA had efforts underway to address only 3 of its top 10 spending  categories as of September 2012. As discussed later in this report, we  recommended that selected agencies identify strategic sourcing  opportunities for their highest spending categories, and agencies  concurred. By contrast, DHS reported that nearly 20 percent of its fiscal  year 2011 procurement spending was directed through strategically  sourced contracts which included the majority of its top ten products and  services. While strategic sourcing may not be suitable for all  procurements, industry groups have reported that leading companies they  surveyed strategically manage about 90 percent of their procurements. Moreover, officials from leading companies we spoke with reported that  their annual savings for services are between 4 and 15 percent.
GAO-12-919. through these initiatives. The FSSI mission is to encourage agencies to  aggregate requirements, streamline processes, and coordinate purchases  of like products and services in order to leverage spending to the  maximum extent possible. Additionally, the Navy reported spending $145  million and achieving savings of $30 million through its strategic sourcing  efforts in fiscal year 2011; the reported savings was almost 21 percent of  the spending that went through strategic sourcing vehicles.
section_title: Agencies Need to Overcome Key Challenges to Improve Strategic Sourcing Efforts
paragraphs: Agencies also continued to face challenges in obtaining and analyzing  reliable and detailed data on spending, securing leadership support for  strategic sourcing, and applying this approach to acquiring services. In  2012, we reviewed the use of strategic sourcing across agencies with the  largest procurement budgets in fiscal year 2011 and found that they were  reluctant to apply strategic sourcing techniques to services, especially  more complex ones. Additionally, these agencies did not sufficiently  support strategic sourcing efforts with staff and other resources. These  challenges make it difficult for agencies to identify opportunities for  strategic sourcing or measure the success of ongoing initiatives.
In our strategic sourcing report, we found that agencies and federal  strategic sourcing programs generally continued to rely on the  government’s current system for tracking contracting information data,  and noted numerous deficiencies with this data for the purposes of  conducting strategic sourcing research.obtain knowledge of procurement spending is a foundational component  of an effective strategic approach. The analysis reveals how much is  spent each year, what was bought, from whom it was bought, and who  was purchasing it. The analysis also identifies where numerous suppliers  are providing similar goods and services—often at varying prices—and  where purchasing costs can be reduced and performance improved by  better leveraging buying power and streamlining the number of suppliers  to meet needs. For example, in a report on the use of strategic sourcing  for office supplies, we reported that the General Services Administration  (GSA) estimated federal agencies spent about $1.6 billion during fiscal  year 2009 purchasing office supplies from more than 239,000 vendors.  GSA used available data on spending to support development of the  Office Supplies Second Generation FSSI, which focuses office supply   Conducting spend analysis to  spending to 15 strategically sourced contracts. Agencies and the federal  strategic sourcing program generally continued to rely on the  government’s current system for tracking contracting information data,  FPDS-NG, and noted numerous deficiencies with this data for the  purposes of conducting strategic sourcing research. Although we noted  that some agencies had been able to identify some strategic sourcing  opportunities despite flaws in the available data, the difficulty of obtaining  reliable and detailed data on spending hindered their ability to assess  which strategic sourcing opportunities offered the most potential  benefits. Additionally, we have made recommendations in the past to  improve government-wide contracting data systems, such as electronic  submission of data and greater controls to help improve the accuracy and  completeness of FPDS-NG. Agencies generally concurred with these  recommendations and have taken actions to improve the system.
We reported in our strategic sourcing report that most of the agencies we  reviewed were challenged by a lack of leadership commitment to strategic  sourcing, though improvements were under way. Leading companies we  previously spoke with stated that the support and commitment of senior  management is essential to facilitating companies’ efforts to re-engineer  their approaches to acquisitions as well as to ensuring follow through with  the strategic sourcing approach. However, we have found that leaders at  some agencies were not dedicating the resources and providing the  incentives that were necessary to build a strong foundation for strategic  sourcing. In addition, a lack of clear guidance on metrics for measuring  success had also impacted the management of ongoing FSSI efforts as  well as most selected agencies’ efforts. For example, we found that  agencies were challenged to produce utilization rates and other metrics— such as spending through strategic sourcing contracts and savings  achieved—that could be used to monitor progress. Several agencies also  mentioned a need for sustained leadership support and additional  resources in order to more effectively monitor their ongoing initiatives. We  recommended that the Secretaries of Defense and VA evaluate whether  there are sufficient resources to fulfill strategic sourcing missions and  develop metrics; the agencies concurred.
Additionally, as we previously reported, agency officials noted that they  have been reluctant to strategically source services (as opposed to  goods) for a variety of reasons, such as difficulty in standardizing  requirements or a decision to focus on less complex commodities that  can demonstrate success. Agency officials also stated several  disincentives that can discourage strategic sourcing efforts, such as a  perception that reporting savings due to strategic sourcing could lead to  program budgets being cut in subsequent years.leading companies stated they have focused their efforts on services,  such as telecommunications and information technology services, over  the past 5-7 years because of the growth in spending in that area, and  have achieved significant savings. Leading companies employ more  sophisticated strategic sourcing techniques, using spend analyses and in- depth market research to tailor their acquisition approaches to the  complexity and availability of the particular good or service they are  acquiring.
An industry group surveyed companies and reported that companies are  able to strategically buy the majority of their procurements, including  services, in part because they targeted services that have been off-limits  or controversial for most organizations, such as professional services.  Professional services represented the federal government’s highest- spend service category and accounted for almost $50 billion of the federal  procurement obligations in fiscal year 2012. For complex services, such  as professional services, engineering, and research and development,  agencies could apply company tactics to understand cost drivers and  prequalify suppliers. Specifically, agencies could address knowledge- based services by using third-parties to benchmark supplier rates against  comparable suppliers to ensure best price, develop new suppliers, and  prioritize suppliers based on effectiveness and efficiency in order to  ensure they are getting the best value. For less complex services, such  as housekeeping and telecommunications, agencies could consolidate  purchases to leverage buying power. Standardizing requirements could  also help drive down costs. Leading companies reported that they applied  this type of tactic for specialized maintenance and repair, specialized  logistics, utilities, and certain types of security.
Officials from leading companies also stated that there is not one right  path for developing a strategic approach. However, as we previously  discussed, leading companies’ foundational principles show that  leveraging knowledge, developing services category strategies, and  measuring success based on reducing costs and maximizing value are  necessary steps. For example, leading companies reported beginning  with different principles as they adopted a more strategic approach for  purchasing services. Some began by conducting a spend analysis, while  others began by implementing an enterprise-wide centralized  procurement approach and setting savings goals. While their first steps  may vary, agencies could gather enough knowledge to allow them to  tailor their tactics to different types of services in order to achieve savings  and maximize value.
section_title: Recent Agency and OMB Actions Could Improve and Expand Strategic Sourcing of Services
paragraphs: We have recommended that selected agencies and OMB take actions to  increase the use of strategic sourcing. For example, in our 2012 strategic  sourcing report, we recommended that the Secretaries of Defense and  VA, and the Director of OMB take a series of detailed steps to improve  strategic sourcing efforts. More specifically, we recommended that:  the Secretary of Defense evaluate the need for additional  guidance, resources, and strategies, and focus on DOD’s highest  spending categories;  the Secretary of VA evaluate strategic sourcing opportunities,  including opportunities for VA’s highest spending categories, set  goals, and establish metrics; and  the Director of OMB issue updated government-wide guidance on  calculating savings, establish metrics to measure progress  towards goals, and identify spending categories most suitable for  strategic sourcing.
In commenting on the 2012 strategic sourcing report, DOD, VA, and OMB  concurred with the recommendations and stated that they would take  action to adopt them.
In 2012, as part of establishing crosscutting goals to improve  management across the federal government, OMB called for agencies to  strategically source at least two new products or services in both 2013  and 2014 that yield at least 10 percent savings. In December 2012, OMB  further directed certain agencies to reinforce senior leadership  commitment by designating an official responsible for coordinating the  agency’s strategic sourcing activities. In addition, OMB identified  agencies that should take a leadership role on strategic sourcing. OMB  called upon these agencies to lead government-wide strategic sourcing  efforts by taking steps such as recommending management strategies for  specific goods and services to ensure that the federal government  receives the most favorable offer possible. Additionally, OMB directed  these agencies to promote strategic sourcing practices inside their  agencies by taking actions including collecting data on procurement  spending. The memo also asks GSA to increase the transparency of  prices paid for services that other agencies buy in order to inform market  research and contract negotiations. improve the federal government’s access to detailed pricing information  and visibility into spending. Improved visibility may also help the federal  government better measure the success of its strategic sourcing  initiatives. While it is too early to tell whether OMB’s actions will result in  future savings, this initiative is a step in the right direction.
section_title: Concluding Observations
paragraphs: OMB, Memorandum M-13-02, Improving Acquisition through Strategic Sourcing,  (Washington, D.C.: Dec. 5, 2012). have devised strategies and tactics to manage sophisticated services. In  addressing these categories, companies have shown that savings in  service procurements come over a wide base. Also, such results need not  require the creation of monolithic procurement organizations—these  results can be achieved with leadership, shared data, and a focus on  strategic categories that is dynamic rather than static.
Clearly, the cost culture endemic to leading commercial practices is tied  to the private sector’s focus on profits. In federal agencies, profit is not a  motivator. And there are disincentives to identifying and pursuing new  strategic sourcing opportunities, such as the perception that doing so  could lead to unanticipated budget cuts. This could contribute to why  federal agency efforts to manage the purchase of services strategically  are limited to small, commodity-like segments of spending. Similarly,  agency tactics tend to be slow-moving and static once put in place. As  budgets decline, however, it is important that the cost culture in federal  agencies change. The simple dynamic is that adopting leading  commercial practices can enable agencies to provide more service for the  same budget or the same service with a smaller budget.
section_title: Third-Party Comments
paragraphs: Because this report focuses on leading company practices rather than  agency operations, we provided relevant sections of a draft of this report  to the leading companies we interviewed. They generally agreed with our  findings and provided technical comments, which were incorporated as  appropriate.
As agreed with your offices, unless you publically announce the contents  of this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to appropriate congressional  committees, the Secretary of Defense; the Administrator for GSA; the  Administrator for the Office of Federal Procurement Policy; and other  interested parties.
This report will also be available at no charge on GAO’s website at  http://www.gao.gov. If you or your staff have any questions about this  report or need additional information, please contact me at (202) 512- 4841 or chaplainc@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. Staff acknowledgments are provided in appendix III.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: We were asked to identify practices used by large commercial  organizations for purchasing services. Accordingly, we (1) assessed key  practices used by leading companies in purchasing services, and (2)  examined potential opportunities for federal agencies to incorporate these  practices.
To determine leading companies’ practices for acquiring services, we  selected a nongeneralizable sample of companies based on a literature  search and recommendations from experts. We conducted a literature  search of industry-recognized companies that have had success with  services acquisition practices, including reviewing our prior leading  practices reports on services acquisition. We also met with the Defense  Business Board, Defense Science Board, and industry experts to discuss  their recent studies on services acquisition and to obtain  recommendations on which leading companies to contact. Based on this  approach, we identified and interviewed the following organizations:
Seven companies: Boeing, Dell, Delphi, Humana, MasterCard, Pfizer,  and Walmart.
An industry group: Institute for Supply Management.
A consulting organization: A.T. Kearney.
Based on interviews with these organizations, we identified key practices  reported by each company, including procurement organization  structures, services procurement history and strategies, initiatives and  resultant savings, and contracting methods. To maximize the applicability  of our findings to the federal government, we identified top categories of  services that the government acquires from the Federal Procurement  Data System–Next Generation (FPDS-NG)—the government’s system for  tracking contracting information—and interviewed companies about their  practices in those categories. We compared companies’ procurement  practices with those identified in our prior work. We identified common  themes, including developing a transactional framework depicting our  analysis of how companies tailor their procurement tactics, and confirmed  with the companies. To assess the reliability of companies’ data on  acquisition savings, we requested information on data quality control  procedures and system safeguards from company officials. In addition we  provided relevant sections of a draft of this report to companies for review  and comment. We determined that the data were sufficiently reliable for  the purposes of this report.
To identify opportunities for federal agencies to adopt leading company  practices, we determined that agencies purchase services similar to those  that the selected leading companies purchase. Specifically, to compare  purchased services, we identified the top services leading companies  purchase through interviews and reviewed FPDS-NG data from fiscal  years 2010 and 2012 to identify the top ten services purchased by the  federal government. To assess the reliability of FPDS-NG, we reviewed  existing documentation and electronically tested the data to identify  obvious problems with completeness or accuracy. We determined that  these data were sufficiently reliable for the purpose of reporting  government-wide and agency spending on products and services.  Additionally, to determine the federal government’s spending trend on  services since fiscal year 2000, we relied on information we previously  reported as well as FPDS-NG data between fiscal years 2008 and 2012.  We reported then-year dollars for this analysis.
To determine the extent to which the government plans to target its  highest spend service categories, we reviewed Office of Management  and Budget strategic sourcing initiatives, but did not assess the results of  these initiatives.
We also reviewed our previous reports related to federal strategic  sourcing, acquisition, contract management, government streamlining,  and duplication, overlap and fragmentation to identify (1) agency efforts to  establish a strategic approach that reflected leading companies’  foundational principles; (2) procurement tactics that agencies have used  to purchase a variety of services; and (3) challenges that agencies face  when establishing a strategic approach. We also reviewed the Defense  Business Board 2011 Report to the Secretary of Defense on Strategic  Sourcing, as well as literature from industry sources on successful  strategic sourcing efforts.
We conducted this performance audit from December 2011 to April 2013  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
section_title: Appendix II: Profiles of Leading Companies
subsections: section_title: Boeing
paragraphs: Procurement Organization (Shared Services Group)  Boeing’s centralized Shared Services Group is responsible for the global  purchase of non-production goods and services. It is organized into  Strategic Contracting and Category Management, Procurement  Operations, and Procurement Support and Integration components.
Beginning of Focus on Improvement to Services Procurement  Boeing began implementing its current enterprise procurement model in  2006, with its Chief Executive Officer (CEO) subsequently making non- production procurement efficiency a priority.
Visibility into Services Spend  The company has one system that provides visibility into its services  spend, called the Shared Service Procurement/Payables Network. The  quality and quantity of data provided by this system allows for improved  spend analysis.
Overall Procurement Strategy  Boeing’s enterprise procurement model aggregates demand by  standardizing requirements in order to obtain pricing power. The company  is currently implementing a Strategic Contracting and Category  Management strategy with a focus on reducing total cost of ownership.  This strategy involves category planning, strategic sourcing, contract  management, and supplier relationship management.
Examples of Procurement Tactics  Boeing uses a four step process to ensure it is achieving the best value  for each service: (1) define requirements; (2) define performance  parameters; (3) define minimum acceptable performance standards; and  (4) define service level agreements to measure success. Other tactics  include standardizing requirements to reduce complexity, including  benchmarking clauses in contracts to ensure competitive rates, and  conducting business and market intelligence to help formulate future  procurement strategies.
Metrics Used to Manage Services  Boeing manages supplier performance by establishing rating criteria with  both the business partner and the supplier. An example of an internal  metric is percentage goals for unit price reduction.
section_title: Dell
paragraphs: Procurement Organization (Worldwide Procurement)  Dell’s procurement operation is structured as a centralized model. They  have a Chief Procurement Officer (CPO). Cost knowledge is shared  throughout Dell with everyone having access to the same data source.  Dell uses Global Category Managers (GCMs), who are responsible for  knowing all the requirements, delivery needs, and contracting  requirements for each service (or good). Under the GCM are Regional  GCMs, responsible for knowing local markets.
Visibility into Services Spend  Dell has a centralized database and reporting process.
Overall Procurement Strategy  Each commodity (good or service) is managed by a unique commodity  team that is tasked with developing detailed sourcing strategies. The  commodity team conducts research in both the marketplace and the  supplier base for a given commodity. Technological issues are  considered in order to understand any risks and deficiencies in regards to  how the commodity can best be utilized for programs and projects.  Procurement scenarios are analyzed so that teams can evaluate how  suppliers react to Dell’s purchasing needs.
Examples of Procurement Tactics  The ability and will to invest time and effort in capability management— highly trained employees, value creation process, and supplier  relationship management—are the primary keys to procurement success.  Teams continually aim to reduce costs by reducing complexity through  reusing commodities for new products, bringing in outside expertise, and  trusting commodity teams.
Metrics Used to Manage Services  Savings goals and metrics for success are determined from the bottom up  and evaluated on a quarterly basis. Financial, operational, and  organizational aspects of each commodity have their own set of  performance metrics and means to measure improvement and success.  This allows procurement officials to understand the “what” aspect that  drives success.
section_title: Delphi
paragraphs: Procurement Organization (Global Supply Management)  Delphi’s procurement organization is centralized, with a Senior Vice  President of Global Supply Management as the equivalent of a CPO. For  indirect spend, each of Delphi’s four global regions has a director with  category managers for its major spend areas: Corporate Services,  Facilities Management, Information Technology, Industrial Supplies,  Materials Management, and Machinery and Equipment.
Beginning of Focus on Improvement to Services Procurement  Delphi centralized indirect procurement between 2005 and 2007 in order  to improve efficiency and drive savings.
Visibility into Services Spend  Company tracks spending through a central database integrated with its  financial systems, and monitors its savings through a separate, self- developed information technology tool, Indirect Material Cost  Improvement Process.
Overall Procurement Strategy  Service categories are overseen by category team managers who utilize  a three-level strategy for procurement: industry knowledge strategy,  internal corporate strategy, and supply base strategy. These strategies  are formally reviewed and documented annually. Decision criteria for  determining service providers include price, total cost of ownership,  company viability, company maturity, and management structure.
Examples of Procurement Tactics  Delphi maintains a Category Approved Supplier List for primary service  suppliers, which is reviewed annually. Companies on this list provide  goods and services in accordance with Delphi’s respective category  strategies. The companies are approved by the Category Managers and  Strategy Council of Delphi’s Supply Management Leadership. Delphi will  also dual source certain services in order to minimize future risk.
Metrics Used to Manage Services  Cost, delivery, technology, quality, optimization of supply base, and  localization to the region are the primary metrics used to measure  services. Other performance indicators can include on-time delivery,  interruptions, and safety. Suppliers are measured weekly or monthly,  depending on the service, and review meetings are held at least  quarterly. Savings are centrally tracked and only counted after validation  by the financial department.
section_title: Humana
paragraphs: Procurement Organization (Corporate Procurement)  Humana‘s Corporate Procurement department is centralized with a CPO.  Within Corporate Procurement category managers coordinate with  internal customers to clarify business requirements, engage with  suppliers to satisfy business needs, and develop strategic plans across its  six procurement categories. While all purchases associated with  government-related contracts are managed through Corporate  Procurement, there are two additional procurement teams managing  certain non-government-related supplier purchases within Humana:  Global Sourcing, focused on business process outsourcing; and  Information Technology Strategic Vendor Management, dedicated to  software, non-commodity hardware, and technical consulting.
Beginning of Focus on Improvement to Services Procurement  In 2004, Humana hired a new CPO tasked with centralizing the overall  Corporate Procurement process. The CPO has since developed spend  analytics, results and process measures, and worked to value-driven  annual goals and objectives. Category teams were introduced in 2004 yet  did not mature to the full team structure, as it exists today, until 2007.
Visibility into Services Spend  Humana has an established centralized enterprise business suite, a fully  integrated, comprehensive suite of business applications for the  enterprise. These tools cover the procure-to-pay activity for supplier- related spend. Additionally, the team has an established centralized data  source to capture key results and process measures.
Overall Procurement Strategy  Humana’s six-step procurement process is applied to the purchase of  both goods and services. The procurement process is focused on  obtaining best value for the enterprise through coordinated category  planning and supplier relationship management. The six category teams  formally review and refresh their category strategic plans annually, at a  minimum, with updates through the course of the year in response to  material business change.
Examples of Procurement Tactics  Humana conducts make-versus-buy analysis when determining the ideal  source for services. If requirements cannot be met in-house, the company  leverages purchases across the organization to create a fully informed  view of requirements and a competitive, best value award. Humana relies  on bench marking studies, past performance data, and prior customer  references. Based on this information and approach, Humana is  progressing toward establishing internal rate cards for consulting services  to assess the value of proposed hourly rates based on contractor skill  level. Humana adjusts the number of suppliers as needed. Humana  steadily brought down the number of suppliers between 2004 and 2012.  Currently, 4 percent of the supply base claims 80 percent of Humana’s  spend. Humana is now engaging small, diverse, and emerging suppliers  in order to achieve the right balance of supplier to spend.
Metrics Used to Manage Services  Humana is in the process of scoping out requirements to build a  scorecard process to standardize the scoring of vendors’ performance,  including keeping track of past performance. Inflation and deflation are  measured based on year-over-year change in price on a per unit basis.  Humana currently tracks cost avoidance and productivity—price and  usage. Productivity is a key measure for executives and is incorporated  into established performance measures.
Procurement Organization (Global Supply Chain)  The CPO has worked since 2009 to reduce silos within MasterCard’s  business units, and established a centralized model with a category  focus.
Beginning of Focus on Improvement to Services Procurement  Prior to the CPO’s arrival in 2009, MasterCard’s sourcing organization  focused primarily on traditional procurement and tactical sourcing. The  company recognized the value of advancing from a tactical procurement  approach to a strategic one.
Visibility into Services Spend  MasterCard uses a centralized database for procurement operations,  which provides transparency into their global spend. They may use other  tools to track supplier performance, risk management, and to conduct e- sourcing.
Overall Procurement Strategy  MasterCard employs a category management strategy that is comprised  of a six-step model: (1) analyze internal and external spend; (2) define  requirements and develop strategy; (3) execute strategy; (4) negotiate  and award contracts; (5) implement and manage contracts; and (6)  manage supplier performance.
Examples of Procurement Tactics  MasterCard emphasizes the importance of understanding the nature of  requirements. Some categories are more complex than others and the  approach for each category differs. Procuring services in the  contingent/temporary labor space is driven by competition and achieving  process efficiencies; procuring services in the legal services space is  driven by custom requirements and increased complexity.
Metrics Used to Manage Services  Cost savings are always important and MasterCard uses standard  definitions to measure those savings, such as year-over-year change.  Other metrics such as productivity savings and budget savings allow for  innovation and investment.
section_title: Pfizer
paragraphs: Procurement Organization (Global Procurement)  Pfizer has “category teams” with a global reach for broad groupings of  services with category managers assigned to each category. The global  category zone leads are managed by Vice-Presidents who report directly  to the head of the procurement organization and work with internal  business partners, who execute contracts on a company-wide basis or  locally as needed.
Beginning of Focus on Improvement to Services Procurement  Pfizer undertook a spend analysis effort in 2007, which revealed  increased spending on legal, consulting, and financial services, as well as  opportunities for improving the efficiency of their processes.
Example of a Procurement Tactic  Pfizer will examine market conditions and unbundle contracts for greater  transparency and to bring more suppliers into the mix; later on Pfizer  might bundle contracts to gain leverage as part of the strategy.
Compliance  Pfizer has a policy that procurement transactions over $100,000 must be  competitively bid with limited, documented exceptions. Pfizer  Procurement monitors compliance with company processes and billing  guidelines. The company considers its procurement professionals as  essentially risk managers rather than contract managers because they  need to consider what is best for the company and how to minimize total  cost of ownership while maintaining flexibility.
section_title: Walmart
paragraphs: Procurement Organization (Realty Procurement Services)  Walmart’s procurement function is decentralized. Realty Procurement  Services, led by a Realty Vice President, provides sourcing support for  facilities maintenance which includes outside services such as snow  removal, roofing, and parking lot maintenance. Realty Procurement  Services provides complete procurement, project management, and  sourcing support for Walmart capital projects.
Beginning of Focus on Improvement to Services Procurement  Focus on procurement improvement began in approximately 2008.  However, the services spend is not fully leveraged as different divisions  within Walmart procure services such as human resources, information  technology, legal, and marketing separately.
Visibility into Services Spend  Walmart does not have one system that provides visibility into the  services procurement spend. It utilizes one system as a contract bidding  tool and is currently implementing another to provide increased spend  visibility into maintenance services.
Overall Procurement Strategy  Walmart’s procurement strategy is focused on the reduction of total cost  of ownership. While the lowest bidder may often be awarded a contract, it  is important to take into account other considerations such as diversity  and sustainability.
Examples of Procurement Tactics  Walmart employs craft managers for the major categories of services they  acquire. These managers provide expert advice to the procurement  organization. Walmart uses a performance management system that  includes “score-carding” to rank suppliers based on various criteria. The  company also applies a tiered pricing strategy, where a supplier offers  different rates depending on the size of the contract.
Metrics Used to Manage Services  Average invoice price, hourly rate, time spent on location, and average  time to complete a task are examples of the metrics Walmart uses to  evaluate performance.
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, W. William Russell, Assistant  Director; Peter Anderson; Raj Chitikila; Laura Greifner; Julia Kennon;  Amber N. Keyser; Stephen V. Marchesani; Jean McSween; Brian Mullins;  Michael Palinkas; Sylvia Schatz; Roxanna Sun; Ann Marie Udale; Alyssa  Weir; Sally Williamson; and Rebecca A. Wilson made key contributions to  this report.
section_title: Related GAO Products
paragraphs: Federal Contracting: Slow Start to Implementation of Justifications for  8(a) Sole-Source Contracts, GAO-13-118. Washington, D.C.: Dec. 12,  2012.
Strategic Sourcing: Improved and Expanded Use Could Save Billions in  Annual Procurement Costs, GAO-12-919. Washington, D.C.: Sep. 20,  2012.
Defense Contracting: Competition for Services and Recent Initiatives to  Increase Competitive Procurements, GAO-12-384. Washington, D.C.:  Mar. 15, 2012.
Strategic Sourcing: Office Supplies Pricing Study Had Limitations, but  New Initiative Shows Potential for Savings, GAO-12-178. Washington,  D.C.: Dec. 20, 2011.
Federal Contracting: Observations on the Government’s Contracting Data  Systems, GAO-09-1032T. Washington, D.C. Sept. 29, 2009.
Defense Acquisition: Actions Needed to Ensure Value for Service  Contracts, GAO-09-643T. Washington, D.C.: Apr. 23, 2009.
Defense Acquisitions: Tailored Approach Needed to Improve Service  Acquisition Outcomes, GAO-07-20. Washington, D.C: Nov. 9, 2006.
Best Practices: Improved Knowledge of DOD Service Contracts Could  Reveal Significant Savings, GAO-03-661. Washington, D.C.: Jun. 9.  2003.
Best Practices: Taking a Strategic Approach Could Improve DOD’s  Acquisition of Services, GAO-02-230. Washington, D.C: Jan. 18, 2002.