Strategic sourcing: A good idea but...

Despite some success, the ultimate goal of strategic sourcing seems to have gotten lost

Bill Gormley is president and chief executive officer of the Washington Management Group and former assistant acquisition commissioner at the General Services Administration.

Sometimes a good idea is just that — a good idea. Because it doesn't always work when put into practice.

Strategic sourcing is a great idea. If an organization is pursuing strategic sourcing, it means that it is looking to improve its buying process. It is analyzing where money is being spent and with whom, and it is maximizing its resources.

The General Services Administration was founded in 1949 under the premise of strategic sourcing — to help government improve its buying processes and get more value from suppliers.

In 2005, GSA and the Treasury Department launched the Federal Strategic Sourcing Initiative in response to a memo from the Office of Management and Budget that requires all agencies to identify commodities that could be "purchased more effectively and efficiently through the application of strategic sourcing."

Those are all great ideas. And agencies have been quick to comply. Most have assigned workers to oversee the initiatives, identified purchases that would fit the strategic sourcing model, and begun implementing and executing strategic sourcing relationships and purchases.

However, in the rush to comply, the ultimate goal of strategic sourcing — to analyze the process to get more value from suppliers — seems to have gotten lost. Instead, the effort seems to have become focused on getting the lowest price, regardless of value. A low price does not always mean good value. In fact, a short-term focus on price often precludes a longer-term opportunity for value.

Example: Let's say Agency X bought 700 copiers. In its price negotiations, the agency discovered that a particular model was about to be discontinued and could be bought at a very low price. Because it was in a position to resell those copiers to other agencies, Agency X got a bulk discount and a phenomenal price.

Agency X stored the copiers in its warehouse in preparation for selling them to other agencies. But technology ages quickly, and Agency X found it could not resell the copiers. The warranty had expired while they were sitting in the warehouse. Agency X never sold the copiers and instead gave them away to customers, who traded them in for a discount on newer machines.

In the commercial world, businesses don't talk about strategic sourcing. They talk about strategic supplier management, which combines the idea behind strategic sourcing with an understanding that every organization has a network of suppliers. Through strategic supplier management, an organization analyzes its buying processes from a much broader perspective to get more value from its entire network of suppliers.

That is a much more valuable concept. In part, it forces the organization to look at the buying process as a whole and discourages too much focus on the price of individual products.

What will it take for strategic sourcing to be successful in government? First, the government must be able to describe its objectives and requirements, and it must be able to define value as more than simply the best price. Agency X got the best price on the copiers in our example, but the objective is obviously more complex than that.

Step 2 is flexibility. Things change. The government must be able to tweak its strategic sourcing relationships to marry its changing needs with industry's changing services and products. If the objective of strategic sourcing is value, then the process must be fluid enough to adapt to changing priorities and market dynamics.

As I said at the start, strategic sourcing is a great idea. It should be the government's responsibility to make strategic sourcing work as a way to manage the public's money. A more strategic, comprehensive approach to buying that focuses on value could lower the overall cost of acquisition for government and industry.

2014 Rising Star Awards

Help us find the next generation of leaders in federal IT.

Reader comments

Fri, Mar 15, 2013 An Fhirinne

By definition, isn't the GSA Schedule itself supposed to be a "strategic sourcing" of product and pricing? If so, and it is not working, why are we trusting that the same people (GSA) are going to get it right this time....more wasted taxpayer money. Why not spend the effort to clean-up the Schedules and holders, and let agencies negotiate BPA's that fit their business models and needs?!

Sun, Apr 8, 2012 Rick Vogel Simi Valley, Ca

Strategic sourcing has numerous unintended consequences, when implemented in public sector, that are not apparent, and that do not exist in private sector initiatives of this nature. This is especially true for federal public sector, and is a fact that has been overlooked in every article that I have read thus far on the subject. Unlike private sector businesses, the fed is reliant upon a thriving and growing tax basis for their revenue stream. As the largest single spender in the US marketplace, the fed spend through over 16000 companies, the majority of which are small and/or socio economically disadvantaged, represents a significant portion of their revenues through taxes attributable to income, social security, Medicare, Medicaid, veterans support programs, etc... strategic sourcing will result in a drastic reduction of the number of contractors utilized, as well as a shrinkage to the incomes of the remaining chosen few. Hence, it will result in a drastic, and unaccounted for, reduction to the tax basis. This is a two edged sword that everyone is looking at like a steak knife, and these offsetting effects need to be calculated before we find ourselves too far down the rabbit hole, and realize it's a rattlesnake den. If I were a betting man, I would wager that federal strategic sourcing will end up costing the American taxpayer far more than it saves. These programs look good on paper, but are penny wise and pound foolish if you take a look at the broader picture.

Thu, Apr 22, 2010 Debbie Wilson New Hampshire

Bill, your article certainly caught my attention as we find so many of our clients, both public and private sector, have done so well with strategic sourcing. Your title is at odds with our findings. I notice however that our working definition is somewhat different from yours. We view strategic sourcing as a total-cost evaluation of the options - and a goal of negotiating agreements that, where appropriate, span multiple purchases. For example, tactical sourcing (the opposite) would be buying copiers one at a time, because that's the way the requisitions flow. Negotiating an annual agreement, based on forecasted volume, with one more suppliers, and basing that decision on mulitple variables including potential inventory obsolence - is strategic sourcing. I know words sometimes get in the way of concepts but I think its important to point out that other interpretations of the concept can yield much better results. Debbie Wilson - Gartner

Thu, Apr 22, 2010 Brandon Washington, DC

One major component of almost every strategic supplier management program is supplybase optimization: creating long-term, value-based, strategic relationships with a managable set of suppliers. This one factor alone drives huge efficiency gains for both the customer and the supplier. Unfortunately, Federal agencies are generally discouraged from optimizing the supplybase. Instead, we are pushed to "spread the wealth" to as many companies as we can, with a focus on small and disadvantaged businesses. Most of the budget-killing inefficiencies I see are tied to this issue in one way or another. No one wants to address that though, so "value" ends up being defined as "price", which is really only one part of the equation (as you've pointed out). Bottom Line: Don't expect Federal agencies to effectively implement industry best practices when the FAR guts the key components that would bring the most overall value for the taxpayers' money.

Please post your comments here. Comments are moderated, so they may not appear immediately after submitting. We will not post comments that we consider abusive or off-topic.

Please type the letters/numbers you see above