Can federal agencies manage their "spend"?

Private-sector thought leaders and innovators are engaged in reinventing acquisition in corporate America. They are transforming by "flipping" the traditional procurement approach from bottom-up, requisition-based, and order-based processes to a top-down, strategic management of corporate "spend."

They examine--at the enterprise level--what they are buying, who is buying, who the suppliers are, how much they are spending, and how they are buying. Then they transform their acquisition process guided by corporate objectives, such as cost savings, supplier management, supplier diversity, and just-in-time product and service delivery.

In the course of implementing enterprise spend management, private-sector firms are saving millions of dollars. Extrapolated to government spend, the savings would be huge--savings that can go directly to furthering agency mission requirements and other high-priority initiatives.

Industry Experience

Companies such as Federal Express (FedEx), Motorola, Hasbro--and a host of other leading firms--have adopted enterprise spend management and strategic sourcing among their highest-priority, bottom-line-enhancing initiatives. They have implemented defined processes and supporting technology to control spending and, as a result, are reaping significant savings.

FedEx adopted a spend management solution throughout the FedEx Global Supply Chain, encompassing about $95 million in annual spending and about 137,000 annual transactions. FedEx reported a 100 percent return on investment within six months of launch and an estimated savings from 1999 to 2001 of $32 million. (1)

Using spend management, Motorola "realized a $126 million hard-dollar price reduction savings" in 2001. (2)

Hasbro's spend analysis revealed that it had 17 providers of temporary administrative, clerical, and light industrial personnel for seven locations. Leveraging its buying power, Hasbro renegotiated and reduced its total spending on temporary labor from $5 million to $4.3 million. A Hasbro official told the General Accounting Office that the firm's efforts often resulted in savings ranging from 15 percent to 45 percent and improved service levels. (3)

Through the adoption of spend management technology, a large global financial services institution (with spend exceeding $5 billion per year) reduced its competitive process from 140 to 67 days and generated more than $9 million in savings in 2002. (4)

Since deploying the expense management automation solution from Ariba, Bell Canada has cut its overall expense report process cycle by 91 percent (eleven days to one day) and saved 73 percent in process costs ($31.50 CAD to $8.50). Furthermore, the company has been able to recoup $400,000 in corporate card late fees.

And finally, "American Express is in the third year of an ESM [Enterprise Spend Management] project that has resulted in hundreds of millions of dollars in savings," says Gary Crittendon, executive vice president and chief financial officer. (5)

In addition to "hard" dollar savings, there frequently are "soft" dollar savings that can be garnered by implementing spend management processes:

* Improved contract prices and terms

* Lowered procurement administrative costs 

* Improved data gathering and reporting

* Improved compliance with company contracts and less "maverick spend" (spending occurring outside of authorized contracts or sources)

* Significantly shortened requisition and order fulfillment cycles

* Enhanced negotiation leverage with suppliers

* Improved supplier performance

* Better, more strategic use of the dwindling pool of acquisition professionals

Federal Government Experience

Strategic sourcing in the federal government is just starting to catch on. One example is found in the Department of Defense (DoD).

The Department set out a few years ago to leverage its buying power to acquire and manage commercially available software at a dramatically reduced cost. Thus was born the Enterprise Software Initiative (ESI) to emplace DoD-wide software agreements.

Acquisition Solutions staff interviewed Jim Clausen and Floyd Groce, co-chairs of the ESI Working Group, to learn what DoD's ESI has done to further the Department's objectives. At that time, we discovered that over 3 1/2 years (from 1998 to 2002)--and 24 agreements and 9,000 software orders later--DoD had documented over $1 billion in cost avoidance.

More recently, DoD has embarked on pilot spend analysis efforts. Kicking off the effort, a DoD Integrated Process Team was established to help guide the spend analysis efforts. Initial results are in, and service commodity groups have been identified to conduct further analysis.

In October 2003, the DoD's Director for Procurement and Acquisition Policy's Enterprise Spend Analysis Pilot was one of 12 proposals selected by the Department's chief information officer to receive funds from his Rapid Acquisition Incentive--Net Centricity program. This program promotes business-case-driven projects that cost $1 million or less, that will be completed within one year, and that can produce results that can be applied across DoD. The Enterprise Spend Analysis Pilot aims to give the DoD Components an enterprise-level spend analysis capability for identifying purchasing patterns, procurement trends, and strategic sourcing opportunities. (6)

More Opportunity

Federal procurement is big business. The fiscal year (FY) 2005 federal budget includes more than $914 billion in discretionary spending. Over $200 billion will go to contracts for goods and services. (To put that in perspective, in 2001 only one of the 176 nations listed by the World Bank had a gross domestic product larger than this year's federal acquisition expenditures.)

A quick examination of the government's buying patterns for FY 2002 (the latest year for which complete data are available) reveals that the vast majority of the government's transactions were small-dollar transactions (Figure 1). In fact, a full 92 percent of FY 2002 executive agency transactions were under $25,000 each, a staggering 8.0 million out of 8.7 million procurement actions within the executive branch alone. (7) This figure does not include an additional 25.5 million transactions processed via purchase cards, most of which carry a maximum threshold of $25,000 per transaction.

[FIGURE 1 OMITTED]

Although the vast majority of federal transactions in FY 2002 each were under $25,000, they add up to a hefty sum: over $15 billion. Even more compelling in the case for transformation is the fact that such transactions are likely "onesie, twosie" buys at retail or near-retail rates. Such buying patterns, if aggregated, would--by their nature--guarantee substantial savings. The potential for cost effectiveness and efficiency is staggering.

Who's In Charge?

Generally speaking--as with many transformational cross-cutting initiatives--no single "chief" in an agency has clear responsibility. This may explain why advances are not more quickly being made. Consider the following players:

The agency's chief financial officer knows (or should know) where the money is being spent and is likely to have analytical capability to "crunch the numbers." Enterprise-wide spend management can reduce the costs of supplies and services, thereby enabling (with appropriate accounting procedures and flexibilities) the direction of a greater percentage of funds to direct mission support.

The agency's chief acquisition officer is the person who can translate spend analysis results into effective acquisition strategies that provide best value to the agency in meeting its goals and objectives. He or she also puts in place the business rules that produce efficiencies in the agency's e-commerce systems that process orders. Enterprise-wide spend management enables the agency to do more with less.

The agency's chief information officer is the person responsible for assisting others in successfully implementing technologies that will improve the operations of the agency. Enterprise-wide spend management enables highly capable, interoperable, standardized state-of-the-art technologies that support the mission.

Clearly, the agency head (chief executive officer) or the principal deputy (chief operating officer) must be involved to ensure that the management ("C-Suite"--the firm's highest levels of leadership) team works the issues with common vision and methodology.

The "Business Case" for Strategic Sourcing and Spend Management

The benefits of strategic sourcing and spend management are widespread and many. They include the following:

* Cost savings. If we quantify the cost savings that the private sector is achieving through these techniques, then we can extrapolate that there will be dollars available within a transformed agency for allocation to other programs that help the agency more fully to fulfill its strategic plan and mission.

* Reduced cycle time. If agencies enjoy the efficiencies that industry is achieving through these techniques, then those agencies could expect that products or services will be delivered at least 50 percent faster when compared with traditional acquisition cycles.

* Better use of human capital. If agencies reduce the human resources needed to define requirements and complete recurring ordering requirements, then those agencies will save money and reduce the workload of a burdened workforce. (8)

* Empowerment. If agencies implement current technologies by building business rules in Web-enabled capabilities, they then achieve a global reach--and empowerment occurs at the lowest opportunity cost. With these technologies, the responsible agency officials can guide ordering activities to the right people, delegate the approval of ordering, manage the use of catalog pricing, and optimize supplier invoicing. Through these changed processes, forward-thinking agencies can unleash the flexibility to redistribute funds through a streamlined and more responsive process.

* Inventory reductions. If agencies attain the dramatic inventory reductions that the private sector is achieving through these techniques, they then can expect the level of their inventories to drop as much as 20 to 35 percent. (9)

The bottom line: Operational people get more efficient organizations; acquisition people are better able to support agency mission requirements; financial people have more dollars to get more done; information technology people get to implement current technologies that optimize support of the agency's mission; and the agency's senior leadership realizes reduced costs and improved efficiencies in support of the mission.

Conclusion

Like their private-sector counterparts, thought leaders operating in the federal space can implement enterprise spend analysis and management and save tens of millions to hundreds of millions of dollars. Will this concept gain real traction in the federal government?

It's up to you!

Endnotes

(1) "Live 2001 B2B World Tour" presentation by Edith Kelly-Green, vice president and chief sourcing officer, FedEx, September 10, 2001.

(2) "E-procurement: The link to the c-commerce value chain," Franky McCoy, Tech Republic, March 6, 2002, http://techrepublic.com.com/5102-6296-1054271.html.

(3) Example from "Best Practices: Taking a Strategic Approach Could Improve DOD's Acquisition of Services," General Accounting Office, GAO-02-230, September 2002.

(4) "Spend Visibility Drives Sourcing and Procurement Efficiency," The Yankee Group, May 2003.

(5) www.cfo.com.

(6) DoD Chief Information Officer memorandum, Rapid Acquisition Incentive--Net Centricity (RAI-NC) FY04 Pilot Selection, October 7, 2003.

(7) Federal Procurement Data System, viewable at http://www.fpdc.gov/fpde/ fpr2002.htm.

(8) Office of Management and Budget, President's Management Agenda, Fiscal Year 2002.

(9) I2 Technologies White Paper, Supply Change Managemen--The Heart of B2B e-Business, January 2001, viewable at http://www.i2.com/assets/pdf/00916668-0E9B-11D5-9EE6-0008C7FA726A.pdf (see page 7).

Prior to his retirement from federal service, Bob Welch was the senior procurement executive at the Department of Commerce and the Department of the Treasury. He now is a partner with Acquisition Solutions, Inc. This article is based in part on the publications of Acquisition Solutions and its strategic partner, Ariba, which have teamed to bring spend management solutions to the federal government.