How to be a more effective IT buyer
- By David Shields
- Jul 25, 2016
The federal government spent approximately $50 billion on IT in each of the past three fiscal years, according to Federal Procurement Data System totals for the Federal Acquisition Regulation Part 2 definition of IT. That makes IT one of the largest of the 10 categories of common goods and services spending governmentwide.
In fiscal 2015, that $50 billion in obligations broke out this way in six IT subcategories: Outsourcing $29.4 billion, hardware $11.5 billion, software $6 billion, telecommunications $1.8 billion, consulting $1.2 billion and IT security $1.2 billion.
Knowing how much government spends in categories and subcategories is, of course, only the first step to getting more value for the procurement dollar. Next comes using the data to shape buyer and supplier behavior. That is what will make for better buying.
The size and importance of the federal government's demand for IT should make it a significant and even favored customer of its biggest suppliers. But that requires getting federal spending and demand under management -- two key category management levers.
First, it's useful to know general trends in government IT purchasing. For example, the number of transactions is down 44 percent between fiscal 2011 and 2015, the number of contracts is down 83 percent, and the number of suppliers has fallen 24 percent. At the same time, spending per transaction and per contract are up substantially, as is small-business spending.
What does all that tell us? For one thing, government is using fewer contracts, using them more often and buying from fewer companies. That means fewer federal resources are being expended in creating suboptimal contracts, which saves money for vendors that don't have to commit resources and time to win contracts that don't deliver the estimated revenue.
What's more, the data reveals that consolidation has not hurt small businesses.
Re-examine the status quo
It's also useful to know the degree of crossover between government's largest suppliers and the biggest players in the global IT market. In software, for example, Microsoft and IBM are on both lists. But they diverge after that, with resellers and systems integrators providing the majority of applications and services, including Microsoft's, to the U.S. federal government.
That difference is evidence of several trends in the federal market:
1. Many major global software suppliers do not sell directly to the federal government.
2. As a result, agencies buy software primarily through resellers or systems integrators rather than contracting directly.
3. Agencies also tend to acquire hardware and peripherals through resellers and systems integrators rather than original equipment manufacturers (OEMs).
As I have written elsewhere, resellers can add cost to IT hardware, services and software. So in managing the IT category, teams should closely examine widespread use of resellers to ensure that government receives demonstrable value for additional costs incurred. The agency software license inventories required under the category management policy for software licensing will help provide data for that exploration and many others.
Those inventories also should help reveal the degree to which agencies acquire software through IT services contracts with systems integrators, another indirect route where money might be saved.
Close the knowledge gap
Managing categories of spending will supply the government with intelligence about everything from price differentials and profit margins to supply chains and logistics in IT goods and services markets. Marshaling governmentwide spending data will allow government to meet with its largest suppliers on more equal ground. In today's fragmented and decentralized federal market, contractors often know more about their government customers than do the agencies themselves.
For example, at $6 billion in obligations in fiscal 2015, software is the third largest governmentwide IT subcategory, and it's growing about 17 percent a year -- compared to 7 percent in the overall U.S. market. But because government software purchases are not centralized, agencies' use of suppliers, types of licenses and prices paid for similar products vary widely. Requirements aren't standardized or optimized across government, and best practices for managing licenses are sporadically implemented.
Managing software as a category will reduce total cost of ownership, improve license management and generate significant savings and acquisition efficiencies.
For example, the Navy faces a $600 million claim in the U.S. Court of Federal Claims for allegedly copying and installing collaboration software on 558,466 computers when it had paid for only 38 licenses of the application. With a best-practice software asset and license management program, an agency could quickly dispense with such claims, if they even arose. When buyers can negotiate based on precise usage data, IT companies are less likely to have the need or the grounds to sue or initiate expensive audits.
Using license inventories to chart the buying behavior, top suppliers, usage patterns and contracts of the largest federal software buyers will help the Enterprise Software Category Team improve transparency, flexibility, and terms and conditions; manage demand; and negotiate pricing governmentwide.
Capitalize on trends
Market and supplier analysis also will help government manage risks, understand how prices are set and take advantage of trends in the global and U.S. IT markets. For example, the trend across all markets is increasingly for suppliers to license software as a service (SaaS) online versus on premises, so agencies will need ways to keep track of licenses for software provided via the internet.
Licenses generally are either subscriptions for a set period, which enables buyers to pay fees in installments, or perpetual, for which buyers pay annual maintenance and support fees and automatically are notified of and can download updates for free. The market is shifting from on-premises perpetual licenses to the SaaS subscription model, and agencies must shift their buying practices accordingly.
Better supplier relationships will help government discover other ways to change how it buys and manages IT to better match industry practices and thereby create seller efficiencies that result in cost and price reductions. Wherever possible, government should streamline procurement practices to cut vendors' costs in responding to bid solicitations.
Whatever benefits suppliers gain from selling to many agencies at different prices could be overshadowed by the efficiency of responding to the consolidated demand of the entire federal enterprise -- or at least larger swaths of it.
Redeploy savings to the mission
By understanding what incentivizes suppliers, agencies can take advantage of IT supply chains to negotiate better pricing. For example, knowing the true volume of government purchases, buyers can get better OEM pricing and have resellers agree to charge accordingly. And buyers who know the optimal OEM supply routes for IT products can whittle down costs by getting resellers to piggyback on OEMs' distribution deals.
Category management of IT expenditures lets government buyers build deep knowledge, business acumen and understanding of their own spending, plus the workings of the companies and markets they buy from. The category management approach also supplies a range of buying tools based on that extensive knowledge base -- from demand and total cost management to strategic sourcing and supplier relationship management.
Best of all, large companies that use the approach generally reap 10 percent savings on their annual procurement spending for years.
If government can duplicate industry's success, the next president and Congress could have as much as $5 billion a year in savings from the $50 billion annual IT procurement bill to invest in new projects or technology and to apply directly to achieving policy goals. That's effective buying in anybody's book.