Buy Lines: What a difference a word makes

Steve Charles

I was briefing a management team on the Office of Management and Budget's strategic sourcing memo that asks agencies to define three commodity areas ripe for this methodology. I explained how enterprise license agreements with software publishers can be structured to lower administration costs, but still allow many resellers, integrators and small businesses to participate in the business.

This achieves the objectives of both the government and the software publisher and serves as an example of how strategic sourcing can streamline procurement and lower costs. Then, someone asked what this had to do with A-76.

Ah, what a difference one word can make.

Competitive sourcing is the Bush administration's term for letting the private sector compete for government jobs not considered inherently governmental. Agency guidelines for these public-private competitions are defined in the A-76 circular published by OMB.

Competitive sourcing is a priority of the Bush administration, which said the annualized savings per job competed in 2004 was $22,000. Labor unions, which represent government employees and form the primary opposing force to competitive sourcing, claim that defending each job costs $40,000.

But strategic sourcing is a supply-chain management methodology whereby enterprises rationalize their spending across disparate business units to leverage their buying power, to get lower prices while adding automation, and drive down procurement costs.

The guidance from OMB on strategic sourcing was published May 20. It asked agencies to identify three commodity categories and set up commodity councils to start this process. The primary policy hurdle is how to find a truly innovative role for small business in strategic sourcing initiatives, lest they go the way of the threatened eTravel initiative.

We see that competitive sourcing and strategic sourcing both involve sourcing and are strategic -- just in different ways.

Competitive sourcing is about keeping the government workforce on its toes by offering contractors the chance to perform the same activities if they can save the government at least 10 percent. Industry's rate for winning these public-private competitions is 10 percent.

Strategic sourcing is exemplified by the Enterprise Software License Agreements of the Defense Department's Enterprise Software Initiative. The agreements lower costs by eliminating further licensing negotiations, contracting and subcontracting activity and price list and catalog maintenance with a publisher.

These license agreements can be referenced regardless of which program manager, prime contractor, reseller or systems integrator might be involved in a transaction. This effectively eliminates all the costs associated with contracting, and lets each vendor partner focus on providing value-added activities rather than redundant contracting activities. The Defense Department's Enterprise Software Initiative has realized more than $2 billion in cost avoidance.

At OMB's urging, strategic sourcing is now being discussed for commodity categories such as copiers, printers, PCs and cell phones. But it also has been used for one of the most complex services in the world of IT: enterprise resource planning implementations.

Each product or service type requires in-depth industry analysis from both the buy side and the sell side to figure out where the value for buyers and sellers can be found. It will be interesting to see how these programs evolve to address the differences from one commodity category to another.

This is the reason I urge manufacturers to develop a federal channel strategy that contemplates the government's objectives of strategic sourcing; recognizing, of course, that these kinds of initiatives typically take years to unfold.

Steve Charles is cofounder of immixGroup, a government business-consulting firm in McLean, Va. Steve welcomes your comments at Steve_Charles@immixgroup.com.

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