How Strategic Sourcing Can Save a Bundle

It's a way to do procurement with proven benefits, and it's catching on at all levels of government. But some myths need to be dispelled.
May 8, 2015 AT 9:00 AM
By Krista S. Ferrell  |  Contributor
Krista S. Ferrell is the director of strategic programs for the National Association of State Procurement Officials.

The concept of strategic sourcing can mean different things to different people, but essentially it is a more comprehensive, researched, planned and measured approach to procurement. As governments at all levels begin or expand their involvement with strategic sourcing, they will want to look to the leadership of many states that have been establishing best practices and realizing savings as a result.

In Texas, for example, a strategic-sourcing initiative has delivered savings of more than $163 million across more than a dozen state contracts since the process formally began in 2007, according to the state comptroller's website.

How did Texas do it? A branch of the Texas Procurement and Support Services Division analyzed spending data for commonly purchased goods and services and developed new contracts to secure better prices. Contracts and vendor performance are monitored to ensure compliance. And in Texas as elsewhere, centralization of purchasing maximizes buying power and cost savings for agencies' commonly competitively-purchased goods and services, while real time-data is used to make smart purchasing choices.

Similar savings efforts have been reported in recent years as other states have implemented formal or informal strategic-sourcing programs, according to a recent research paper from the National Association of State Procurement Officials (NASPO). While state initiatives vary, most have a similar focus on creating cost savings and efficiencies through analysis of expenditures, leveraging purchasing-aggregation opportunities and targeting significant spending categories.

Since strategic sourcing is not a simple concept to define, it's not surprising that some myths have developed about it. The NASPO paper describes some of these myths, along with the realities:

Myth #1: Strategic sourcing equals sole sourcing. Reality: Strategic-sourcing initiatives often result in multiple awards.

Myth #2: Strategic sourcing means buying the cheapest product regardless of quality. Reality: Maintaining or enhancing quality is a key component of most strategic-sourcing engagements.

Myth #3: Strategic sourcing is a one-size-fits-all approach to procurement. Reality: Strategic-sourcing methodology anticipates and provides for unique circumstances and challenges.

Myth #4: Strategic sourcing is a one-time project. Reality: Strategic sourcing involves continuous improvement over the lifecycle of many contract iterations.

Myths aside, over time states have learned best practices when it comes to taking on a strategic-sourcing approach:

To begin with, every strategic-sourcing effort should start with an opportunity assessment. The steps include data collection, data cleansing and analysis, a review of statutes, and assessment of the political climate to understand all the factors at play and stakeholders involved and how they can be affected by the initiative.

Once the opportunity assessment is complete and major categories are identified, each category can be assessed on the most important factors in order to prioritize efforts. The process can be viewed as four stages: research and analysis; stakeholder discussions; the procurement event (in which RFPs are issued and contracts are negotiated and awarded); and performance management to track savings and lessons learned.

While more states attempt to use strategic-sourcing methodologies and tools, challenges will always threaten implementation. Restrictive purchasing laws, changes in administration and lack of executive support are just a few of the potential hurdles governments may face. The lack of spending analytics tools and comprehensive spending data can be major showstoppers. But overcoming these obstacles is worth the effort. Savings do come for governments that take a strategic-sourcing approach.