Strategic Sourcing: Improved and Expanded Use Could Provide Significant Procurement Savings
Released: 2013-07-15T00:00:00


Highlights: section_title: Why GAO Did This Study
paragraphs: GAO has reported that the government is not fully leveraging its aggregate buying power. Strategic sourcing, a process that moves an organization away from numerous individual procurements to a broader aggregate approach, has allowed leading companies to achieve savings of 10 percent or more. A savings rate of 10 percent of total federal procurement spending would represent more than $50 billion annually. While strategic sourcing makes good sense and holds the potential to achieve significant savings, federal agencies have been slow to embrace it, even in a time of great fiscal pressure.

This statement highlights GAO's recent findings related to the use of strategic sourcing across government, best practices leading companies are adopting to increase savings when acquiring services, and recent actions that could facilitate greater use of strategic sourcing. GAO's testimony is based largely on GAO's September 2012 report on strategic sourcing and GAO's April 2013 report on leading practices for acquiring services, as well as other GAO reports on contracting and acquisition.

section_title: What GAO Found
paragraphs: Most of the agencies GAO reviewed for its September 2012 report leveraged a fraction of their buying power. More specifically, in fiscal year 2011, the Departments of Defense (DOD), Homeland Security, Energy, and Veterans Affairs (VA) accounted for 80 percent of the $537 billion in federal procurement spending, but reported managing about 5 percent of that spending, or $25.8 billion, through strategic sourcing efforts. Similarly, GAO found that the Federal Strategic Sourcing Initiative had only managed a small amount of spending through its four government-wide strategic sourcing initiatives in fiscal year 2011, although it reported achieving significant savings on those efforts. Further, we found that most selected agencies' efforts did not address their highest spending areas, such as services, which may provide opportunities for significant savings.

Companies' keen analysis of spending is key to their savings, coupled with central management and knowledge sharing about the services they buy. Their analysis of spending patterns comprises 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, and do not treat all services the same. 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 and make more informed contracting decisions. Like the federal government, leading companies have experienced growth in spending on services, and over the last 5 to 7 years have been examining ways to better manage spending. Officials from seven leading companies GAO spoke with reported saving 4 to 15 percent over prior year spending through strategically sourcing the full range of services they buy, including those very similar to what the federal government buys--for example, facilities management, engineering, and information technology.

Agencies have not fully adopted a strategic sourcing approach but some have actions under way. For example, in April 2013, DOD was assessing the need for additional resources to support strategic sourcing efforts, and noted a more focused targeting of top procurement spending categories for supplies, equipment, and services. VA reported that it had taken steps to better measure spending through strategic sourcing contracts and was in the process of reviewing business cases for new strategic sourcing initiatives. In 2012, the Office of Management and Budget (OMB) released a Cross-Agency Priority Goal Statement, which 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 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 directed these agencies to promote strategic sourcing practices inside their agencies by taking actions including collecting data on procurement spending.

section_title: What GAO Recommends
paragraphs: GAO is not making any new recommendations in this testimony. GAO has made recommendations to OMB, DOD, VA, and other agencies on key aspects of strategic sourcing and acquisition of products and services in the past. These recommendations addressed such matters as setting goals and establishing metrics. OMB and the agencies concurred with the recommendations, and are in the process of implementing them.

section_title: Letter
paragraphs: I am pleased to be here today to testify on the value of strategic sourcing  as an important tool to achieve greater savings and efficiencies in  government procurements of products and services. Generally speaking,  strategic sourcing is a procurement process that seeks to move an  organization away from numerous individual procurements to a broader  aggregate approach. The tools and techniques that come with strategic  sourcing enable organizations to develop a better picture of what they are spending on goods and better understand cost drivers, prioritize their requirements, better manage suppliers,  take advantage of market trends, and target savings.

Leading companies strategically manage 90 percent of their procurement  spending, and report savings of 10 percent or more of total procurement  costs. We have previously reported that leaders across the government  need to embrace a strategic sourcing approach, and that saving 10  percent of the total federal procurement spending would produce more  than $50 billion in savings annually.

While strategic sourcing inherently makes good sense and holds the  potential to achieve significant savings, federal agencies have been slow  to embrace it, even in a time of great fiscal pressure. Reasons for this  include a lack of leadership commitment within agencies, a desire on the  part of agency officials to maintain control over their contracting, a lack of  strategic sourcing expertise, data barriers, and perceptions about  strategic sourcing that increase the hesitancy to use it, such as a fear that  reporting savings will lead to budget cuts. My testimony today will  highlight GAO’s recent findings related to the use of strategic sourcing  across government, best practices leading companies have been  adopting to increase savings when acquiring services, and recent actions  that could facilitate greater use of strategic sourcing.

This testimony is based largely on GAO’s September 2012 report on  strategic sourcing and GAO’s April 2013 report on leading practices for  acquiring services, as well as other GAO reports on contracting and  acquisition. In conducting work on the government side, we spoke with  four agencies and analyzed relevant data. On the company side, we  visited seven companies and identified key practices. Details of the scope  and methodology are available in the September 2012 and April 2013  reports. All work on which this testimony is based was performed in  accordance with generally accepted government auditing standards.
subsections: section_title: Background
paragraphs: 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   As a result, companies made structural changes  services acquisition.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.

Strategic sourcing can encompass a range of tactics for acquiring  products and services more effectively and efficiently. In addition to  leveraged buying, tactics include managing demand by changing  behavior, achieving efficiencies through standardization of the acquisition  process, evaluating total cost of ownership, and better managing supplier  relationships. We have particularly 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.  Private sector companies are using spend analysis as a foundation for  employing a strategic approach to procurement.

We have previously reported that because procurement at federal  departments and agencies is generally decentralized, the federal  government is not fully leveraging its aggregate buying power to obtain  the most advantageous terms and conditions for its procurements.  Agencies act more like many unrelated, medium-sized businesses and  often rely on hundreds of separate contracts for many commonly used  items, with prices that vary widely. Recognizing the benefits of strategic  sourcing, the Office of Management and Budget (OMB) issued a  memorandum in 2005 that implemented strategic sourcing practices.  Agencies were directed to develop and implement strategic sourcing  efforts based on the results of spend analyses.

In addition to individual agency efforts, a government-wide strategic  sourcing program—known as the Federal Strategic Sourcing Initiative  (FSSI)—was established in 2005. FSSI was created to address  government-wide opportunities to strategically source commonly  purchased products and services and eliminate duplication of efforts  across agencies. The FSSI mission is to encourage agencies to  aggregate requirements, streamline processes, and coordinate purchases  of like products and services to leverage spending to the maximum extent  possible. At the time of our 2012 report, four FSSI efforts were ongoing— focused on office supplies, domestic delivery of packages,  telecommunications, and print management—and three were planned  related to SmartBUY, Wireless plans and devices, and publication  licenses.

section_title: Expanded Use of Strategic Sourcing Could Save Billions in Federal Procurement Costs
paragraphs: In our September 2012 report, we found that most of the agencies we  reviewed leveraged a fraction of their buying power through strategic  sourcing. More specifically, in fiscal year 2011, the Department of  Defense (DOD), Department of Homeland Security (DHS), Department of  Energy, and Department of Veterans Affairs (VA) accounted for 80  percent of the $537 billion in federal procurement spending, but reported  managing about 5 percent of that spending, or $25.8 billion, through  strategic sourcing efforts. Similarly, we found that the FSSI program had  only managed a small amount of spending through its four government- wide strategic sourcing initiatives in fiscal year 2011, although it reported  achieving significant savings on those efforts. Further, we found that most  selected agencies’ efforts did not address their highest spending areas,  such as services, which provides opportunities for significant savings.

We found that when strategically sourced contracts were used, agencies  generally reported achieving savings. For example, selected agencies  generally reported savings ranging from 5 percent to over 20 percent of  spending through strategically sourced contracts. In fiscal year 2011,  DHS reported managing 20 percent of its spending and achieving savings  of $324 million. At the government-wide level, the FSSI program reported  managing $339 million through several government-wide initiatives in  fiscal year 2011 and achieving $60 million in savings, or almost 18  percent of the procurement spending it managed through these initiatives.  After strategic sourcing contracts are awarded, realizing cost savings and  other benefits depends on utilization of these contracts. We found that  only 15 percent of government-wide spending for the products and  services covered by the FSSI program went through FSSI contracts in  fiscal year 2011. Agencies cited a variety of reasons for not participating,  such as wanting to maintain control over their contracting activities, or  because the agency had unique requirements. FSSI use is not mandatory  and agencies face no consequences for not using FSSI contract vehicles.
subsections: section_title: Barriers to Strategic Sourcing
paragraphs: There are a variety of impediments to strategic sourcing in the federal  setting but several stood out prominently in our 2012 review.agencies faced challenges in obtaining and analyzing reliable and  detailed data on spending as well as securing expertise, leadership  support, and developing metrics.

Data: Our reports have consistently found that the starting point for  strategic sourcing efforts is having good data on current spending and  yet this is the biggest stumbling block for agencies. A spending  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 reducing the number of suppliers to meet needs. The FSSI  program and selected agencies generally cited the Federal  Procurement Data System-Next Generation (FPDS-NG)—the federal  government’s current system for tracking information on contracting  actions—as their primary source of data, and noted numerous  deficiencies with these data for the purposes of conducting strategic  sourcing research. Agencies reported that when additional data  sources are added, incompatible data and separate systems often  presented problems. We have previously reported extensively on  issues agencies faced in gathering data to form the basis for their  spend analysis. However, some agencies have been able to make progress on conducting enterprise-wide opportunity analyses despite  flaws in the available data. For example, both the FSSI Program  Management Office and DHS told us that current data, although  imperfect, provide sufficient information for them to begin to identify  high spend opportunities. DHS has in fact evaluated the majority of its  10 highest-spend commodities and developed sourcing strategies for  seven of those based on its analysis of primarily FPDS-NG data.  Further, we have previously reported that the General Services  Administration estimated federal agencies spent about $1.6 billion  during fiscal year 2009 purchasing office supplies from more than   GSA used available data on spending to support  239,000 vendors.development of the Office Supplies Second Generation FSSI, which  focuses office supply spending to 15 strategically sourced contracts.

Expertise: Officials at several agencies also noted that the lack of  trained acquisition personnel made it difficult to conduct an  opportunity analysis and develop an informed sourcing strategy. For  example, Army officials cited a need for expertise in strategic sourcing  and spend analysis data, and OMB officials echoed that a key  challenge is the dearth of strategic sourcing expertise in government.  VA and Energy also reported this challenge. A few agencies have  responded to this challenge by developing training on strategic  sourcing for acquisition personnel. For example, the Air Force noted  that it instituted training related to strategic sourcing because it is  necessary to have people who are very strong analytically to do the  front-end work for strategic sourcing, and these are the hardest to  find. The training course facilitates acquisition personnel in obtaining  the strong analytical skills to perform steps like market evaluation. VA  has also begun to develop training to address this challenge.

Leadership commitment: We also found in 2012 that most of the  agencies we reviewed were challenged by a lack of leadership  commitment to strategic sourcing, although improvements were under  way. We have reported that in the private sector, the support and  commitment of senior management is viewed as essential to  facilitating companies’ efforts to re-engineer their approaches to  acquisition as well as to ensuring follow through with the strategic  sourcing approach. However, we found in 2012 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.

Metrics: A lack of clear guidance on metrics for measuring success  has also impacted the management of ongoing FSSI efforts as well as  most selected agencies’ efforts. 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.

Agency officials also mentioned several disincentives that can discourage  procurement and program officials from proactively participating in  strategic sourcing, and at many agencies, these disincentives have not  been fully addressed by leadership. Key disincentives identified by  agency officials include the following:

A perception that reporting savings due to strategic sourcing could  lead to program budgets being cut in subsequent years,

Difficulty identifying existing strategic sourcing contracts that are  available for use as there is no centralized source for this information,

A perception that strategically sourced contract vehicles may limit the  ability to customize requirements,

A desire on the part of agency officials to maintain control of their

Program officials’ and contracting officers’ relationships with existing

The opportunity to get lower prices by going outside of strategically  sourced contracts.

Leaders at some agencies have proactively introduced practices that  address these disincentives to strategically source. For example, DHS  and VA reported increasing personal incentives for key managers by  adding strategic sourcing performance measures to certain executives’  performance evaluations. In addition, several agencies including DOD,  DHS, and VA have instituted policies making use of some strategic  sourcing contracts mandatory or mandatory “with exception,” although the  extent to which these policies have increased use of strategic sourcing  vehicles is not yet clear. Some agencies have made use of automated  systems to direct spending through strategic sourcing contracts. For  example, FSSI issued a blanket purchase agreement through its office  supplies initiative that included provisions requiring FSSI prices to be  automatically applied to purchases made with government purchase  cards. VA reported that its utilization rate for the office supplies FSSI  contracts increased from 12 percent to 90 percent after these measures  took effect.

section_title: Agencies Are Reluctant to Apply Strategic Sourcing to Purchase of Services
paragraphs: In fiscal year 2012, the federal government obligated $307 billion to  acquire services ranging from the management and operations of  government facilities, to information technology services, to research and  development. This represents over half of all government procurements.  Making services procurement more efficient is particularly relevant given  the current fiscal environment, as any savings from this area can help  agencies mitigate the adverse effects of potential budget reductions on  their mission. Moreover, our reports have shown that agencies have  difficulty managing services acquisition and have purchased services  inefficiently, which places them at risk of paying more than necessary.  These inefficiencies 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.   Third, agencies have missed opportunities to increase competition for  services due to overly restrictive and complex requirements; a lack of  access to proprietary, technical data; and supplier preferences.

We found that strategic sourcing efforts addressed products significantly  more often than services and that agencies were particularly reluctant to  apply strategic sourcing to the purchases of services. For example, of the top spending categories that DOD components reported targeting  through implemented strategic sourcing initiatives, only two are services.  Officials reported that they have been reluctant to strategically source  services for a variety of reasons, such as difficulty in standardizing  requirements or a decision to focus on less complex commodities that  can demonstrate success. Yet, like the commercial sector, federal  agencies can be strategic about buying services. For example, DHS has  implemented a strategic sourcing initiative for engineering and technical  services, which is also in the top 10 spending categories for the Army, Air  Force, and Navy.

The reluctance of federal agencies to apply strategic sourcing to services  stands in sharp contrast to leading companies. As described below,  leading companies perceive services as prime candidates for strategic  sourcing, though they tailor how they acquire these services based on  complexity and availability.

section_title: Leading Company Practices Generate Significant Savings by Strategically Sourcing Services
paragraphs: Given the trend of increased federal government spending on services  and today’s constrained fiscal environment, this Committee asked that we  identify practices used by large commercial organizations in purchasing  services. We reported on the results of this review in April 2013. Like  the federal government, leading companies have experienced growth in  spending on services, and over the last 5 to 7 years, have been  examining ways to better manage them. Officials from seven leading  companies GAO spoke with reported saving 4 to15 percent over prior  year spending through strategically sourcing the full range of services  they buy, including services very similar to what the federal government  buys: facilities management, engineering, and information technology, for  example. Leading company practices suggest that it is critical to analyze  all procurement spending with equal rigor and with no categories that are  off limits. Achieving savings can require a departure from the status quo.  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. In our 2013 report, we highlighted quotes from  company officials that illuminate what their approach to increasing  procurement efficiency means to them (see table 1).

Leading companies generally agreed that the following foundational  principles are all important to achieving successful services acquisition  outcomes: maintaining spend visibility, developing category strategies,  focusing on total cost of ownership, and  regularly reviewing strategies and tactics.

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.

For example, 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. This is  important because there is a perception in the federal community that  strategic sourcing requires the creation of a large, monolithic buying  organization.

Companies also 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.  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 Chief Procurement Officer  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. Similarly, Boeing says it sometimes  chooses to execute a short-term contract to buy time if market research  shows a more competitive deal can be obtained later.

In addition, companies focus on total cost of ownership—making a holistic  purchase decision by considering factors other than price. This is also  contrary to a perception that strategic sourcing can lose a focus on best  value. 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 is best for the  company and how to minimize total cost of ownership while maintaining  flexibility.
subsections: 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 1 below shows how the  two factors help companies categorize different services and select  appropriate tactics.

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. 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 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 (see table 2).

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.

section_title: Recent Actions May Facilitate Agencies’ Greater Use of Strategic Sourcing
paragraphs: OMB and other agencies have recently taken actions to expand the use  of strategic sourcing. In September 2012, GAO recommended that the  Secretary of Defense, the Secretary of Veterans Affairs, and the Director  of OMB take a series of detailed steps to improve strategic sourcing  efforts. More specifically, we recommended that

DOD evaluate the need for additional guidance, resources, and  strategies, and focus on DOD’s highest spending categories;

VA evaluate strategic sourcing opportunities, set goals, and establish

OMB issue updated government-wide guidance on calculating  savings, establish metrics to measure progress toward goals, and  identify spending categories most suitable for strategic sourcing.

In commenting on the September 2012 report, DOD, VA, and OMB  concurred with the recommendations and stated they would take action to  adopt them. We reported in April 2013 that DOD and VA had not fully  adopted a strategic sourcing approach but had actions under way. For  example, at that time, DOD had developed a more comprehensive list of  the department’s strategic sourcing efforts, was creating additional  guidance that includes a process for regular review of proposed strategic  sourcing initiatives, noted a more focused targeting of top procurement  spending categories for supplies, equipment, and services, and was  assessing the need for additional resources to support strategic sourcing  efforts. VA reported that it had taken steps to better measure spending  through strategic sourcing contracts and was in the process of reviewing  business cases for new strategic sourcing initiatives, and adding  resources to increase strategic sourcing efforts.

In 2012, OMB released a Cross-Agency Priority Goal Statement, which  called for agencies to strategically source at least two new products or  services in both 2013 and 2014 that yielded at least 10 percent savings.  At least one of these new initiatives is to target information technology  commodities or services. 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. OMB directed these agencies to promote strategic sourcing  practices inside their agencies by taking actions including collecting data  on procurement spending.

In closing, current fiscal pressures and budgetary constraints have  heightened the need for agencies to take full advantage of strategic  sourcing. These practices drive efficiencies and yield benefits beyond  savings, such as increased business knowledge and better supplier  management. Government-wide strategic sourcing efforts have been  initiated, and federal agencies have improved and expanded upon their  use of strategic sourcing to achieve cost savings and other benefits.  However, little progress has been made over the past decade and much  more needs to be done to better incorporate strategic sourcing leading  practices, increase the amount of spending through strategic sourcing,  and direct more efforts at high spend categories, such as services.  Companies have shown that it is possible to save money by strategically  managing services. They have done so not just by consolidating  purchases of simple, commodity-like services; they have devised  strategies and tactics to manage sophisticated services. Companies have  also shown that savings come over a wide base and that results can be  achieved with leadership, shared data, and a focus on strategic  categories that is dynamic rather than static. Strategic sourcing efforts to  date have targeted a small fraction of federal procurement spending. As  budgets decline, however, it is important that the cost culture in federal  agencies change. Adopting leading practices can enable agencies to  provide more for the same budget.

Chairman Carper, Ranking Member Coburn, and Members of the  Committee, this concludes my statement. I would be pleased to answer  any questions at this time.

section_title: GAO Contact and Staff Acknowledgments
paragraphs: For future questions about this statement, 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 statement. Individuals making key contributions to this statement  include W. William Russell, Assistant Director; Peter Anderson; Leigh Ann  Haydon; John Krump; Roxanna Sun; Molly Traci; Ann Marie Udale;  Alyssa Weir; and Rebecca Wilson.

This is a work of the U.S. government and is not subject to copyright protection in the  United States. The published product may be reproduced and distributed in its entirety  without further permission from GAO. However, because this work may contain  copyrighted images or other material, permission from the copyright holder may be  necessary if you wish to reproduce this material separately.


Question-summary annotations: questions: question: What did most of the agencies GAO reviewed leverage for their September 2012 report?
answer: Most of the agencies GAO reviewed for its September 2012 report leveraged a fraction of their buying power.
child_questions: question: How did the Departments of Defense (DOD), Homeland Security, Energy, and Veterans Affairs (VA) leverage a fraction of their buying power?
answer: More specifically, in fiscal year 2011, the Departments of Defense (DOD), Homeland Security, Energy, and Veterans Affairs (VA) accounted for 80 percent of the $537 billion in federal procurement spending, but reported managing about 5 percent of that spending, or $25.8 billion, through strategic sourcing efforts.

question: How did the Federal Strategic Sourcing Initiative leverage a fraction of their buying power?
answer: Similarly, GAO found that the Federal Strategic Sourcing Initiative had only managed a small amount of spending through its four government-wide strategic sourcing initiatives in fiscal year 2011, although it reported achieving significant savings on those efforts.

question: What problem has been found about most selected agencies' efforts?
answer: Further, we found that most selected agencies' efforts did not address their highest spending areas, such as services, which may provide opportunities for significant savings.

questions: question: What is the key to companies' savings?
answer: Companies' keen analysis of spending is key to their savings, coupled with central management and knowledge sharing about the services they buy.
child_questions: question: What are the two essential variables that comprises their analysis of spending patterns?
answer: Their analysis of spending patterns comprises two essential variables: the complexity of the service and the number of suppliers for that service.
child_questions: question: What are the advantages of knowing these variables for any given service?
answer: Knowing these variables for any given service, companies tailor their tactics to fit the situation, and do not treat all services the same.

question: What are the foundational principles generally agreed by leading companies?
answer: 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.
child_questions: question: How do these principles help companies with their spendings?
answer: 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 and make more informed contracting decisions.
child_questions: question: How do these companies’ change in spending on services compare to the federal government’s change?
answer: Like the federal government, leading companies have experienced growth in spending on services, and over the last 5 to 7 years have been examining ways to better manage spending.

question: What did officials from seven leading companies report?
answer: Officials from seven leading companies GAO spoke with reported saving 4 to 15 percent over prior year spending through strategically sourcing the full range of services they buy, including those very similar to what the federal government buys--for example, facilities management, engineering, and information technology.

questions: question: What are the progress of agencies on the adoption of a strategic sourcing approach?
answer: Agencies have not fully adopted a strategic sourcing approach but some have actions under way.  For example, in April 2013, DOD was assessing the need for additional resources to support strategic sourcing efforts, and noted a more focused targeting of top procurement spending categories for supplies, equipment, and services. VA reported that it had taken steps to better measure spending through strategic sourcing contracts and was in the process of reviewing business cases for new strategic sourcing initiatives.

question: What efforts have the Office of Management and Budget (OMB) made to help agencies with strategic sourcing?
answer: In 2012, the Office of Management and Budget (OMB) released a Cross-Agency Priority Goal Statement, which 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.
child_questions: question: How did OMB direct agencies to reinforce senior leadership commitment?
answer: In December 2012, OMB further directed agencies to reinforce senior leadership commitment by designating an official responsible for coordinating the agency's strategic sourcing activities.

question: What did OMB identify regarding strategic sourcing?
answer: In addition, OMB identified agencies that should take a leadership role on strategic sourcing.
child_questions: question: How did OMB direct agencies to promote strategic sourcing practices inside their agencies?
answer: OMB directed these agencies to promote strategic sourcing practices inside their agencies by taking actions including collecting data on procurement spending.

questions: question: What did GAO report about the government?
answer: GAO has reported that the government is not fully leveraging its aggregate buying power.

question: How effective is strategic sourcing?
answer: Strategic sourcing, a process that moves an organization away from numerous individual procurements to a broader aggregate approach, has allowed leading companies to achieve savings of 10 percent or more.
child_questions: question: How could strategic sourcing help the government?
answer: A savings rate of 10 percent of total federal procurement spending would represent more than $50 billion annually.

question: How did federal agencies deal with strategic sourcing?
answer: While strategic sourcing makes good sense and holds the potential to achieve significant savings, federal agencies have been slow to embrace it, even in a time of great fiscal pressure.

questions: question: What new recommendations is GAO making in this testimony?
answer: GAO is not making any new recommendations in this testimony.

question: What type of recommendations has GAO made to OMB, DOD, VA, and other agencies in the past?
answer: GAO has made recommendations to OMB, DOD, VA, and other agencies on key aspects of strategic sourcing and acquisition of products and services in the past.
child_questions: question: What matters did these recommendations address?
answer: These recommendations addressed such matters as setting goals and establishing metrics.

question: How did OMB and the agencies respond to the recommendations?
answer: OMB and the agencies concurred with the recommendations, and are in the process of implementing them.