With state and local jurisdictions everywhere facing continued budget difficulties, strategic sourcing could play a pivotal role in government purchasing practices. State officials already involved in strategic sourcing initiatives talk with excitement about the innovation -- and for good reason.
Pennsylvania expects to save $100 million in the next year -- not by cutting purchases, but by buying smarter.
"There isn't a Fortune 100 company in business today that hasn't done some kind of strategic sourcing in the last five years," said David Yarkin, deputy secretary for procurement of Pennsylvania's Department of General Services. "It's only recently that governments are looking to strategic sourcing to really leverage their buying power and harness a tool that has been very successful in the private sector. My guess is there are eight or nine states currently engaged in sourcing, as well as a number of branches of the federal government."
For an entity as big as Pennsylvania government, turning to strategic sourcing is a no-brainer. Yarkin said the state spends in the neighborhood of $3.1 billion annually on goods and services, and about one-quarter to one-third of that is in the IT realm.
"If the state were a private enterprise, that $3.1 billion annual spend would put us up with Fortune 50 companies," he said.
To implement a comprehensive strategic sourcing initiative, Pennsylvania not only contracted the consulting services of Accenture for 15 months, but also hired two sourcing experts from the private sector to fill permanent staff positions.
"We recognized that government is not a leader in the procurement area," said Yarkin. "Most of the innovation in purchasing has been done in the private sector, so we went out and hired some real professionals from that sector."
Pennsylvania Gov. Edward Rendell wanted to ensure that strategic sourcing was institutionalized within the state administration and the $100 million savings could be delivered year after year. Special emphasis was placed on knowledge transfer from Accenture to all purchasing officers in the state agencies.
At conferences, Yarkin already advises other states to take the same approach. "Don't just make an investment in a consulting firm," he urges. "That's only going to get you short-term savings. Make an investment in people."
Already this comprehensive strategy is paying off for the state. Last year, Pennsylvania spent $22.5 million on office supplies for state workers. After a reverse auction, the state expects to save $9.5 million this year buying the same supplies from the lowest bidders. Thus far, the state has also reduced the price of software purchases by $3.5 million, 2004 model vehicles by $1.1 million and personal computers by $1.3 million. After contracts are finalized, it also expects to have reduced the price of road asphalt by $2.4 million.
Nuts and Bolts
As the term is now used, strategic sourcing isn't simply one approach to procurement, but rather a label to describe a series of procurement best practices that enable organizations to buy more effectively and efficiently.
When Accenture implements a strategic sourcing initiative with a client, the effort usually begins with an in-depth assessment.
"We look at what the client spends, where they spend it, and their buying patterns," explained Owen Davies, a partner in Accenture's government practice in Pennsylvania. "We look at the quality of the data they captured on their prior spends. We look at what they want to spend in the future. Then we break all that down into different commodities or service categories. For each of these, we come up with a strategy that best matches what they are trying to do [but] won't reduce the quality of the product or service they are buying."
In some cases, this might be a reverse auction as Pennsylvania recently held. Other times, it involves fact-based negotiation to reduce margins. Frequently separate purchasing contracts are aggregated to increase