IRS vendor management yields big savings in short time

The Internal Revenue Service looked at its operations from a new angle and found ways to save millions of dollars each year by using a vendor management office.

The VMO improved the agency's ability to monitor and manage its IT purchasing, allowing officials to get rid of redundant IT licenses and overlapping services, to learn the rhythms of the market and to use that new understanding to put themselves in control of pricing.


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The agency launched the VMO in 2008, and by fiscal 2010, the IRS had $61.6 million in savings, and it followed up that year with $58.7 million saved in 2011, according to a Forrester case study on how IRS made its VMO work.

"One of the major functions of a VMO is to maximize IT investments while minimizing risk," said Russell Lewis, executive director of IT vendor and contract management at the IRS.

The key to a successful VMO is for it work for the good of agency and vendor alike, he said. "The result is an organization that is greater than the sum of these individual effects or capabilities," he said.

VMOs may become more popular in the federal government as the President’s Management Council is expected to begin some pilot programs in different agencies to grab savings like the IRS has. The President’s Management Advisory Board, a conglomeration of industry and federal executives, approved a recommendation for the council on VMO pilots on Sept. 23. An Office of Management and Budget official said the council has been working closely with the VMO recommendation.

So, here’s what IRS did with its VMO:

  • Aligned more expensive contracts to the vendors’ fiscal years, instead of the government’s fiscal year. With the change, agency officials weren’t under pressure to sign a bunch of contracts quickly before Oct. 1. Officials can now spend more time evaluating expiring contracts to suit their needs. In addition, it shifted the negotiating leverage from the contractor to the IRS.
  • Worked with various divisions of the IRS to learn what technologies employees were using and how much they used them. The VMO got rid of the unnecessary products.
  • Studied monthly invoices for large labor services, telecommunications and maintenance to find where budgets allocations exceeded what was actually needed. The VMO then reprioritized money at a corporate level to match current needs.
  • Collaborate with IT program managers to better monitor inventory of hardware devices and services to make sure the IRS was not paying maintenance for products it wasn’t using. According to the report, the agency saved $4.7 million in reduced payments to Sun Microsystems and Cisco.
  • Aggregated demand to drive down costs.
  • Simplified the process for making purchase requests with fewer hurdles and a standardized electronic form.

The VMO also looked at its spending on specific products and vendors to find savings and better operations.

As a result, the IRS moved from a desktop software licensing agreement model to a server-based model. For example, it reduced 45,000 Adobe Acrobat desktop licenses to a server-based file generator with the same functionality.

It combined purchases of disk storage on various contracts and narrowed the options to fewer vendors, saving $7.6 million over the two fiscal years.

As the VMO started up, it worked with the centralized procurement office to determine its roles and responsibilities, because it seemed some of the two offices’ work may overlap. Also the report recommended telling the various other offices about the VMO's roles too.

The VMO gained respect in the agency once IRS offices began to see the results of the VMO’s reviews.

“The VMO has found that measuring the success of its efforts and effectively communicating the results generates enthusiasm and greater levels of internal support,” the report states.

About the Author

Matthew Weigelt is a freelance journalist who writes about acquisition and procurement.

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