In fiscal year 2012, the federal government obligated about $307 billion to  acquire services. In 2002, GAO reported that leading companies of that time committed to  a strategic approach to acquiring services—a process that moves a  company away from numerous individual procurements to a broader  aggregate approach—including developing knowledge of how much they  were spending on services and taking an enterprise-wide approach to  services acquisition. This enables companies to target the full range of services they buy. Two factors—the degree of complexity of the service  and the number of available suppliers—determine the choice of one of  four general categories of procurement tactics appropriate for that  service: leveraging scale, standardizing requirements, prequalifying  suppliers, and understanding cost drivers. Companies we reviewed are not content to remain limited by their  environment; over the long term, they generally seek to reduce the  complexity of requirements and bring additional suppliers into the mix in  order to commoditize services and leverage competition. For commodity services with many suppliers, such as administrative  support, facilities maintenance, and housekeeping, companies generally  focus on leveraging scale and competition to lower cost. For knowledge-based services with few suppliers, such as engineering  and management support and research and development services,  companies aim to maximize value by better understanding and  negotiating individual components that drive cost. Opportunities Exist for Federal Agencies to Adopt Commercial Practices

Federal agencies have opportunities to leverage leading companies’  practices for purchasing services in order to lower costs and maximize  the value of the services they buy. In our September 2012 report on  strategic sourcing, we found that most of the agencies we reviewed  leveraged only a fraction of their buying power. Moreover, leading companies have saved between 4 and 15  percent annually—over prior year spending—on services using these  practices. A savings rate of 4 percent applied to the $307 billion spent by  federal agencies on services in fiscal year 2012 would equate to $12  billion in savings. through these initiatives. Agencies Need to Overcome Key Challenges to Improve Strategic Sourcing Efforts

Agencies also continued to face challenges in obtaining and analyzing  reliable and detailed data on spending, securing leadership support for  strategic sourcing, and applying this approach to acquiring services. Agency officials also stated several  disincentives that can discourage strategic sourcing efforts, such as a  perception that reporting savings due to strategic sourcing could lead to  program budgets being cut in subsequent years.leading companies stated they have focused their efforts on services,  such as telecommunications and information technology services, over  the past 5-7 years because of the growth in spending in that area, and  have achieved significant savings. Recent Agency and OMB Actions Could Improve and Expand Strategic Sourcing of Services

We have recommended that selected agencies and OMB take actions to  increase the use of strategic sourcing. have devised strategies and tactics to manage sophisticated services. The simple dynamic is that adopting leading  commercial practices can enable agencies to provide more service for the  same budget or the same service with a smaller budget. Accordingly, we (1) assessed key  practices used by leading companies in purchasing services, and (2)  examined potential opportunities for federal agencies to incorporate these  practices. To determine leading companies’ practices for acquiring services, we  selected a nongeneralizable sample of companies based on a literature  search and recommendations from experts. An industry group: Institute for Supply Management. A consulting organization: A.T. Kearney. We compared companies’ procurement  practices with those identified in our prior work. Specifically, to compare  purchased services, we identified the top services leading companies  purchase through interviews and reviewed FPDS-NG data from fiscal  years 2010 and 2012 to identify the top ten services purchased by the  federal government.
Why GAO Did This Study

In fiscal year 2012, the federal government spent $307 billion to acquire services. The private sector is also reliant on services. Over the last 5-7 years, leading companies have been examining ways to manage their services in order to maximize returns and minimize inefficiencies. Given the amount of federal spending on services, GAO was asked to identify leading practices used by large commercial organizations for purchasing services. GAO identified (1) leading company practices for purchasing services, and (2) potential opportunities for federal agencies to incorporate these practices based on prior work.
To determine leading companies' practices in this area, GAO selected a nongeneralizable sample of companies based upon a literature search and recommendations from Defense and industry organizations that have studied services acquisition. GAO identified and interviewed officials from seven companies, an industry group, and a consulting organization. To identify opportunities for agencies to adopt leading practices, GAO compared the types of services purchased by agencies in fiscal year 2012 with those purchased by companies. GAO also relied on prior, relevant work related to federal procurement of services and OMB initiatives for expanding agencies' use of strategic sourcing.

What GAO Found

Officials from leading companies GAO spoke with reported saving 4-15 percent over prior year spending through strategically sourcing the full range of services they buy--a process that moves away from numerous individual purchases to an aggregate approach. The federal government and leading companies buy many of the same services, such as facilities management, engineering, and information technology. Companies' keen analysis of spending, coupled with central management and knowledge sharing about the services they buy, is key to their savings. Their analysis of spending patterns can be described as comprising two essential variables: the complexity of the service and the number of suppliers for that service. Knowing these variables for any given service, companies tailor their tactics to fit the situation; they do not treat all services the same. Company tactics fall into four basic categories: (1) Standardize requirements, (2) Understand cost drivers, (3) Leverage scale, and (4) Prequalify suppliers.
To illustrate how buying tactics are tailored, Walmart leverages its scale to compete basic or commodity services that have many suppliers, such as maintenance. When buying sophisticated services with few suppliers, such as consulting, Dell negotiates cost drivers such as labor rates. The framework is dynamic: over the long term, companies seek to reduce complexity and bring in additional suppliers to take advantage of market forces like competition.
Federal agencies have sizable opportunities to leverage leading commercial practices to lower costs and maximize the value of the services they buy. In September 2012, GAO reported that large procurement agencies such as the Department of Defense and Veterans Affairs leveraged only a fraction of their buying power through strategic sourcing and faced challenges analyzing reliable data on spending, securing leadership support, and applying this approach to acquiring services. GAO recommended that these agencies and the Office of Management and Budget (OMB) issue guidance, develop metrics, and take other actions. The agencies and OMB concurred. OMB directed agencies to take actions to overcome these challenges. Potential savings are significant considering a savings rate of 4 percent applied to the $307 billion spent by federal agencies on services in fiscal year 2012 would equate to $12 billion.

What GAO Recommends

GAO has made recommendations in previous reports to help agencies strengthen strategic sourcing practices, which agencies concurred with and have planned actions under way.