'Strategic sourcing' pays off

What is strategic sourcing

Strategic sourcing is a commercial best practice that's gaining strength among state and local governments facing budget shortfalls or looking for savings to fund other programs. In essence, strategic sourcing generates savings by improving an organization's procurement practices.

A strategic sourcing program consists of two phases: assessment and implementation. During assessment, which takes six to eight weeks, the contractor examines the government customer's procurement processes and expenditures. The contractor might examine what products and services the customer purchased, how they were purchased, and the procurement laws and regulations governing those purchases.

After it has the information, the contractor helps the government agency assess savings opportunities and the appropriate sourcing tool for achieving them. The contractor might recommend that the agency consolidate several small contracts into a single, large contract, and then renegotiate the contract terms. Or it might suggest buying certain commodities through reverse auctions.

During implementation, the agency puts the reforms into place. Strategic sourcing is a good candidate for share-in-savings contracting, in which contractors are paid a portion of the savings generated by their work.

In the public sector, strategic sourcing targets spending in four areas: construction, services for health and human services programs, procurement for unique and ad hoc projects, and acquisition of routine and recurring commodity goods and services.

Procurement in the last category, which often accounts for about 5 percent of government expenditures, offers the highest potential for savings.

CGI-AMS' Gary Lambert said strategic sourcing "requires a deep understanding of contract and supplier management and an ongoing vendor management program."

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Accenture came in "with this small army of MBAs and set up shop with our purchasing people. [It] was the equivalent of 21st-century coal mining."? Donald Cunningham, secretary of the Pennsylvania Department of General Services

"Generally, across the states, there is no consistency with strategic sourcing, and even within an individual state, there is no consistency," said Thom Rubel of Meta Group Inc.

J. Adam Fenster

Opportunities grow as states embrace procurement method

One of the first things Pennsylvania Gov. Ed Rendell (D) did when he took office last year was look for ways to whittle down the state's $2 billion budget shortfall. But rather than pursuing quick fixes, such as workforce layoffs, he embraced a commercial cost-cutting approach known as strategic sourcing.

The Rendell administration tapped Accenture Ltd. for the strategic sourcing initiative, which generates savings by streamlining an organization's procurement activities. The company immediately began a rigorous assessment of the state's spending habits.

Working alongside state purchasing officials, Accenture sifted through purchase orders, requisition forms, and even notes written on the back of envelopes to determine precisely what the state bought and how those purchases were made, said Donald Cunningham, secretary of the Pennsylvania Department of General Services.

The two groups also extracted data from as many as a half dozen financial systems used by the state at that time.

Accenture came in "with this small army of MBAs and set up shop with our purchasing people," Cunningham said. The scene that unfolded "was the equivalent of 21st-century coal mining," he said.

With the data it collected, Pennsylvania was able to consolidate contracts and adopt innovative purchasing methods. These changes, Cunningham said, are expected to save $200 million over two years.

Pennsylvania is not the only state turning to strategic sourcing to reduce the costs of running government.

A handful of other large states, including California, Florida, Illinois, Ohio and Texas, are using strategic sourcing, according to government and industry officials. Large counties and cities also want in on the action, they said.

As a result, companies such as Accenture of Hamilton, Bermuda, and CGI-AMS Inc. of Fairfax, Va., see strategic sourcing as a growing opportunity and a valuable entree to new customers.

Strategic sourcing "requires a deep understanding of contract and supplier management and an ongoing vendor management program," said Gary Lambert, a senior consultant with CGI-AMS.

[IMGCAP(2)]In Pennsylvania, the effort derived savings from more efficient procurement of commodities such as office supplies, computer hardware and road construction materials, which account for a sizeable portion of the $3.1 billion the state spends annually on goods and services.

The state often uses reverse auctions in these procurements, state and company officials said.

Pennsylvania used this approach on a contract with Dell Inc. of Round Rock, Texas, to buy 70,000 personal computers over four years for less than $80 million.

Using strategic sourcing, the state cut the cost of a single personal computer from $1,277 to $714, a 44 percent savings, Cunningham said.

"You can have a fairly positive effect by sourcing a few commodities," said Owen Davies, Accenture's lead government partner in Pennsylvania.

Accenture's strategic sourcing contract with Pennsylvania has elements of both fixed-price and share-in-savings contracts, Davies said.

The company will receive $6 million for the 15-month contract as well as additional financial incentives for helping the state reach certain goals, he said. The incentives may raise the total value of the contract to between $8 million and $10 million, Cunningham said.

[IMGCAP(3)]After the state realizes $150 million in savings, Accenture will no longer receive financial incentives, Cunningham said. The cap was put in to keep the company from pursuing savings just for the sake of it, he said.

"We didn't want this to become a reckless exercise in just taking out cost," he said.

California wants similar savings. CGI-AMS, part of CGI Group Inc. of Montreal, signed a contract in June to provide strategic sourcing analysis to the state. The three-year contract has two one-year options.

With its partner, management-consulting firm A.T. Kearney of Plano, Texas, CGI-AMS will provide program management, assess savings opportunities and review procurement laws and regulations affecting the state's $4.9 billion annual purchase of goods and services.

Kearney, a part of EDS Corp. of Plano, will develop and recommend strategic techniques that California can use in procurements to reduce costs and increase the quality of goods and services it will receive.

The state expects to save up to $100 million through strategic sourcing in fiscal 2005, Lambert said.

The California contract has two phases. The company will be reimbursed $2 million for phase one, and an unspecified amount for phase two, Lambert said.

The company won't know how much it will recover in phase two until the state decides the commodities or categories to which strategic sourcing will apply. The state hopes to start using strategic sourcing by December, he said.

Even though strategic sourcing is gaining popularity in the state and local market, it is still primarily done on an ad hoc basis, said Thom Rubel, vice president of government strategies for the market research firm Meta Group Inc., Stamford, Conn.

"Generally, across the states, there is no consistency with strategic sourcing, and even within an individual state, there is no consistency," he said.

For this to change, states need to develop a technical architecture for strategic sourcing that they can use as a road map, he said. As they embrace the approach, states must ensure they have proficient contract administration as well as project management to be successful.

Although the dollar value of strategic sourcing deals has not been very large, companies that land them are well positioned for future business with those customers, analysts and industry officials said.

CGI-AMS hopes the California government will realize the value of strategic sourcing and make it available to other organizations in the state, such as local governments and higher education, Lambert said.

The company hopes that, beyond California, future clients will embark on strategic sourcing as part of broader e-procurement or enterprise resource planning projects or initiatives, he said.

As savings are realized from strategic sourcing, "we hope that the client would pour that back into completing a broader project with us," Lambert said.

Staff writer William Welsh can be reached at wwelsh@postnewsweektech.com.

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