An increasing number of federal agencies are working to reform or standardize their procurement processes. Several also have begun either to investigate outsourcing the procurement function to a third party, or to informally outsource the procurement function through an already-existing client. Groups and agencies such as the Chief Information Officers (CIO) Council, GSA’s Office of Governmentwide Policy, the Department of Commerce, the Army CECOM Acquisition Center Washington, the GSA’s Federal Technology Service and the U.S. Coast Guard have received assistance on acquisition reform. A handful of private firms with core competencies in acquisition and procurement reform have sprung up to meet the growing need for change.

But change in an entrenched procurement landscape can take time. Pivotal Insight’s February 2005 newsletter article DoD and the GSA Schedules: Mixed Messages, No Clear Trend noted DoD’s reluctance to use GSA schedules, and pointed to GSA’s "Get It Right" plan for more efficient, effective and transparent acquisition process. Given the DoD’s slow progress in adopting the GSA schedules, could a government agency handle such a seemingly radical change as completely outsourcing its procurement function?

In reality, a form of this practice is already widely used. Many Contracting Officers’ Technical Representatives (COTRs) informally “outsource” procurement to current vendors who have access to, and deep knowledge about, the qualifications of subcontractors and other vendors. These vendors are able to screen subcontractors and vendors for quality and bring value-added information back to the COTR. This allows the COTR to effectively narrow the field of potential suppliers by using a vendor-partner with core competencies in vendor selection.

So why and when would formalized procurement outsourcing make sense for government, and what could an agency expect once its procurement function was outsourced? How should procurement outsourcing be implemented?

What is Procurement Outsourcing?
By definition, procurement outsourcing is the transfer of specified key activities relating to sourcing and supplier management to a third party, with the goals of reducing overall costs and tightening an organization’s focus on its core competencies. In government, procurement outsourcing occurs when a private organization takes on the full range of duties of the Contracting Officer, with the exception of final contract approval. Procurement outsourcing typically involves:

• A multiyear agreement
• Third party services, but not a complete transfer of control
• Contractual links to cost reduction and service enhancement
• Geared phasing to continuous performance improvement

Procurement outsourcing is one of those business trends that begins in the private sector and slowly migrates into public practice. It is worthwhile to look at the experiences of private companies to get a sense of where the government may be headed.

When to Pursue, What to Expect
For services-focused industries, almost all spend is indirect so procurement is truly a non-core function and procurement expertise may be slim. Pursuing procurement outsourcing makes sense when the company wants best-in-class capabilities and minimal investment in infrastructure. To really weigh the benefits of making this change, a detailed evaluation of the organization’s current circumstances is required. Looking at the direct versus indirect costs and the products versus services mix are not enough. A host of less tangible, more organization-specific issues must be weighed such as: executive team characteristics, the need for systemic change, and the urgency to reduce costs. Several advantages can result:

• Avoiding costly procurement system upgrades
• Channeling more spending through aggregated corporate contracts
• Driving change – new processes and technologies enacted efficiently, with less resistance
• Eliminating ongoing need for personnel management
• Connecting with a better-targeted supplier base, resulting in lower prices and better fit with needs
• Aggregating spending into pooled purchases and contracts
• Accessing higher levels of expertise and niche-focused capabilities
• Tapping more economical labor sources

Once the procurement function is outsourced, a company can expect:

• Increased automation. Staff work in a self-service mode, transmitting orders electronically and using web-based tools to access information about status, suppliers, terms and conditions. Sourcing and quoting tools are prevalent; less phoning, faxing and mailing and more electronic bidding and quoting ensure up-to-the minute information.
• Service center approach. Employees interact with a centralized buying function that reaches out to a larger network of suppliers. Resources can be shared across business units.
• Compliance-intensive environment. Aggregated contracts mean users make fewer tactical decisions, which helps improve order, invoicing, and payment cycles.
• Focus on operating metrics. Contracts and fee structures are tied to cost savings or service improvement metrics. Those metrics become the basis for measuring performance of individual business units.
• Formal governance structures. Formal structures define oversight processes, help evaluate investments, frame risk- and gain-sharing policies, articulate staffing parameters and operating specifics.
• Service-level agreements (SLAs). Agreements delineate operational metrics and help measure success of procurement activities such as compliance. For example, an SLA could define the expected speed at which service center calls are answered, and the way calls are handled and logged.

The question remains whether these advantages and capabilities are wholly transferable to the public sector environment. The answer is—no, not completely. However, many of the benefits that accrue to a company that uses procurement outsourcing also can be available to an agency. These benefits include getting “more bang for the buck,” greater accountability, better throughput, and the opportunity to replace poorly performing vendors with better suppliers. The flip side of these benefits is that placing some control of mission-critical, legislatively mandated and scrutinized functions into the hands of a vendor that does not necessarily share the government procurement community’s ethics and sense of mission may be very risky.

Implementation: A Sliding Scale
Of course, there is not a one-size-fits-all approach for procurement outsourcing. The procurement function can be outsourced on a sliding scale, depending on how much strategic control the agency wishes to maintain.

At its most basic level, procurement outsourcing can simply be (1) the migration of administrative duties—the management of people, technology, systems and suppliers. The agency retains complete control of the processes and procedures of procurement, and simply supplements its workforce with experts from a vendor.

The next step on the sliding scale is (2) when the procurement provider assumes responsibility for one or more procurement-related processes, such as requisitioning and procure-to-pay. This is a limited transfer of responsibility to the vendor with clearly defined operational boundaries and tasks.

At a higher strategic level, the provider (3) takes over value-added functions like strategic outsourcing, which can include identification, selection and shaping supplier relationships. The procurement vendor functions as a trusted agent of the Contracting Officer, and is empowered to make decisions and recommendations as if the vendor were part of the government procurement team.

Finally, an organization may wish to (4) outsource its top-level, broadly strategic responsibilities including forming business rules. Pivotal believes that level 4 outsourcing is highly unlikely within the constraints of the FARs and DFARs. The warrants of the Contracting Officer community do not allow them to fully transfer procurement power to a vendor, and the development of business rules is the purview of senior government executives and Congress, not vendors.

How and When Analysis
More detailed analysis is necessary to answer the “how” and “when” questions that inevitably arise when considering procurement outsourcing. The organization’s willingness to share benefits, current procurement capabilities, need to invest in new procurement technology, number of skilled available resources, magnitude of savings possibilities, and future vision of procurement are all important factors to weigh.

Government often follows business in its processes and innovations, and chances are good that procurement outsourcing will soon be as widespread in the private sector as the outsourcing of payroll or IT, with participating companies enjoying competitive advantages and gains in operating efficiency, revenue generation, and shareholder value. Evidence points to this trend having ripple effects in government and already taking hold informally at many agencies. Procurement executives should explore the options and advisory services available to stay ahead of this trend.