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. 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. 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.