The price is not right
By Jim Bard
You’ve heard stories about governments overpaying due to fraud. But did you know that despite the government’s best efforts, federal, state and local agencies overpay for goods and services even when there is no fraud?
So even though the government spends billions on goods and services each year as a large volume purchaser, consumers can get better prices from their online purchases—often with free shipping. And compared with commercial prices, government agencies can pay up to 20 percent more for IT; 30 percent more for maintenance, repair, and operations and janitorial services; and up to 25 percent more for office supplies.
The good news? Government data indicates that saving just 10 percent in procurement spending could produce $50 billion in annual savings for the Federal government alone.
Making progress, but not enough
Strategic sourcing—buying in a more focused way to save money—has changed government procurement in recent years. For example, the General Services Administration’s Federal Strategic Sourcing Initiative (FSSI) is focused on enabling strategic sourcing savings like those in the private sector where companies routinely manage 90 percent of procurements strategically, saving at least 10 percent annually. While there have been significant savings through FSSI contracts—$60 million in fiscal year 2011 alone—just 15 percent of government-wide spending on FSSI-covered products and services went through FSSI contracts that year.
Challenges to real change
Limited use of cooperative contracts is not the only barrier to more competitive pricing. Government procurement is complex and decentralized. This means that governments often operate with blind spots that make it difficult to align purchases across their agencies and departments. Endless data and independent IT systems that do not “talk” to each other further complicate collaboration and analysis. Government sourcing organizations also tend to be more focused on transaction processing versus the total cost of ownership of goods and services. This can result in missed opportunities to work with suppliers to drive down total costs.
Reducing the pricing gap
Despite this, some government agencies have taken steps to get more value from strategic sourcing. More widely adopted, such actions could reduce pricing gaps in government procurement spending. Solving the problem means common sense changes that account for both cost and non-cost considerations:
See the full picture
Agencies must have a complete view of what they are buying, how much they are paying, and which suppliers they are buying from. Such analysis helped one federal agency with an annual spend of $22 million on printers discover that it was using 275 printer suppliers. The price differences among suppliers frequently were more than 10 percent.
Keep it simple
There is room for agencies to eliminate unnecessary or duplicate items, services and suppliers that add costs. One agency discovered that it was purchasing more than 60 different models of desktop computers, more than 130 models of laptops and 255 printer models. By reducing item proliferation by 30 to 70 percent, the agency is in the process of saving more than $4 million annually.
Work with others
Concerns about undue influence notwithstanding, better collaboration with the supplier community can benefit government agencies. Working together, agencies and suppliers can lower the cost-to-serve by sharing insights and exploring opportunities to lower total costs. For example, agencies can collaborate with suppliers around demand plans, which address buying patterns and forecasted behavior, to negotiate better pricing and service levels. One agency used anticipated customer behavior to lock in longer-term supplier pricing while lowering operational costs. This strategy impacted more than $540 million in contracts while helping the agency avoid $120 million in costs.
How can government agencies begin to reduce overpaying for goods and services? Asking these fundamental questions is a good place to start:
Assess. What is the pricing across suppliers for identical items?
Simplify. How many items serve similar purposes?
Collaborate. How much insight into demand do suppliers have?
Jim Bard is a senior principal with Accenture. He can be reached at email@example.com.