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A Conversation on Strategic Sourcing 101

Integrity Fellow Tom Kuhn
Integrity Fellow
Tom Kuhn

You’ve heard of strategic sourcing.  You’re being advised to use it.  But when does it work best and what’s the key to getting started?  Integrity Fellow Tom Kuhn sits down with Chris Dorobek of the Dorobek Insider program for a wide-ranging discussion about how to make strategic sourcing work in federal agencies.

Read the transcript, listen to the interview and learn a new approach to managing austerity in 2013

Tom Kuhn’s article “Program Management in an Era of Tight Budgets – How Strategic Sourcing Could Loosen the Squeeze,” inspired an interview to delve deeper into strategic sourcing.  Here is Tom’s discussion with Chris Dorobek of the Dorobek Insider.

CHRIS DOROBEK:  What is strategic sourcing?

TOM KUHN:  In previous acquisitions, you would look at buying tactically.  You would focus on a specific item, goods, or services.  That was done on an as-needed basis.  Now, you can look at buying collaboratively in a strategic sourcing environment to where you can make better use of economy of scale, more efficiencies across your portfolio.  In particular, DoD – if there are two separate agencies buying the same kind of weapons system or ammo, or something to that effect, you can make some combined strategic contracting there to get a better economy of scale and also share both the workload to let the contract, and also in executing it.

Chris Dorobek
Chris Dorobek
Dorobek Insider

CHRIS DOROBEK:  Now, this sounds a little bit like something we should be doing anyway, regardless of whether budgets are tight or not.

TOM KUHN:  Yes, well economy of scale has been a concept for a while, and not everybody does it.  It’s more difficult with services contracts, where you’re buying a service.  But, particularly with service contracts, if you have multiples across a portfolio within a program office, you can look at elements in each of those service contracts and perhaps combine those, rather than have each individual one.  So if you think about it, across the aggregate, you’re now only paying into one service, whereas you were paying into multiple, which would be perhaps two, three, four times as much.

CHRIS DOROBEK:  You highlight the recent GAO Report, which found that folks are thinking about strategic sourcing, but not really doing it all that much.  That is essentially my read of the GAO Report.

TOM KUHN:  Yes, and I would agree.  I don’t know if you’ve had a chance to read the new Better Buying Power 2.0.  There are some guidelines in there that, if you read them, they tend to imply that some of the elements of this concept would certainly be beneficial.  So yes, people are not doing it.  Part of it is in the last recommendation in Better Buying Power 2.0 – that we need to change the acquisition workforce culture.  As you saw in my article, we’ve been living rather large for the past several years, and I think people need to start changing their mindset.  You can talk about the recommendations I make, but really, you need to change your mindset, because going forward, we’re not going to have the luxury of just unlimited budgets, as we’ve been experiencing in the past 10 or so years.

CHRIS DOROBEK:  Well, first start off with this mindset.  What is the mindset that one should have if you’re going to get strategic sourcing and do it in any way, shape, or form?

TOM KUHN:  Well, the mindset upfront is: you’re going to save the taxpayer money and, of course, you want to keep in mind small business and take care of them.  But you’re also going to inherit the cost of the product you buy over its entire lifecycle.  So upfront you need to do the proper market research across your portfolio and contracts.  Let’s say you’re comparing two different things.  You’ve got to look at also the out years, and that’s where most of your cost is, and those budgets are years down the way.  So I think people have been doing it the old way, and strategic sourcing looks to them on the surface like it’s quite a bit of work upfront.  But I think if you really look at it, it’s not much more work than what you have to do anyway to put a big contract together.

CHRIS DOROBEK:  And you highlight that, if you want to get the most gains out of this, it’s doing market research; it’s doing spend analysis; it’s actually thinking, “Am I doing this strategically,” and then having some measure to make sure that this is working.  Again, those things seem like good acquisition, regardless of whether you’re doing strategic sourcing or not.

TOM KUHN:  You’re exactly right, and oftentimes, you’ve got different methods for doing market research.  And it depends on what you’re buying.  There are some basic things that are required by the Federal Acquisition Regulations (FAR), of course, but I just think the more effort that you put in upfront, you’re going to inherit the budget for your program, and then you’re going to turn some of that cost over to the customer.  So, the deeper analysis you do upfront is certainly going to make it better in the out years.  And I think people just get intimidated right up front that that’s a big task to take on.

CHRIS DOROBEK:  You have a number of recommendations in here, and they’re all things that I think we should be doing anyway.  But, one of them is to think about pulling services together—pulling things together.  And, as I was reading, I was thinking—you know, having been through the bundling era, we were all so concerned about bundling, and the implications for small business.  There are these things that I know a lot of acquisition folks think about and are concerned about.

TOM KUHN:  That’s exactly right.  So, let’s just take the multiple services.  I have a client that I represent and consult, and we’ve taken an approach that, if you look at seven different service contracts and you have the same language in a certain area in each of those, you’re paying for that seven different times.  So, you know, when you’ve got a big organization, and you’ve got that many contracts, that can easily happen.  So, one way to do it upfront is ask, “How do I combine some of these tasks into one, so I’m only paying for it once?”  And if you look at some of the definitions of strategic sourcing and recommendations, it specifically talks about that.  You know, looking at multiple, repetitive purchases of the same thing across the one organization, whereas you can combine it into one in certain areas.

CHRIS DOROBEK:   You also mention using an Agile approach.  Talk about the link between Agile and strategic sourcing.

TOM KUHN:  Okay, so with an Agile approach you can take it as incremental, in smaller bites.  For example what we do with the client I work with is “two-week sprints”.  And Agile was originated with IT development, so how do you apply it to, perhaps, purchasing a product or service in terms of strategic sourcing?  As you saw earlier, I said we used to think buying tactically.  Well, now you want to do a well-planned-out approach.  So, you could, perhaps, do an incremental sourcing, or incremental contracting, on whatever it is you’re purchasing, and we would apply the Agile approach so you have a much more efficient roll-out of your buy.  So let’s say in increment one you would just buy a portion of the requirement for the warfighter or the customer.  And they’re happy with that for a couple of years, and you can manage, in smaller bites than the “one big-bang” series we used to do.  So, that’s one way to apply it to strategic sourcing.

CHRIS DOROBEK:  Does buying it in increments end up saving you money?  Or is this just making sure that the program works and the acquisition works?

TOM KUHN:  Well, it’s easier to manage in smaller bites.

CHRIS DOROBEK:  It doesn’t get so unwieldy and complex.

TOM KUHN:  Right.  And also, let’s say, for some reason, you needed to cancel that portion of the incremental buy, you’ve got less cost that you’re going to lose.  Whereas if it’s a large contract, and you get to a point where you’ve taken on too much and if you have to do the ultimate – terminate, or perhaps not purchase, or not exercise an option – there may be some more costs at that level of effort.  Whereas, if you took it in smaller bites and combined things through techniques of strategic sourcing, there’s less penalty.

CHRIS DOROBEK:  The other thing you mentioned, and it’s mentioned in the GAO Report as well, I believe, is making sure that you use the right type of service or procurement (i.e., firm fixed-price versus cost reimbursable).  This seems like often a challenge for a lot of folks.

TOM KUHN:  Well, it is.  Because there was that mandate several years ago, and I think in some respects, it was applied across the board that we need to go to firm fixed-price contracts.  You saw what happened with the Joint Strikes Fighter, with the award fee that Mr. Gates withheld.  I’m seeing with clients, they tend to go firm-fixed initially, and then I think what they find out sometimes is, maybe I should have done some sort of cost reimbursable.  I am seeing that applied with a current contract that there were immature requirements, which is one of the appropriate times to use cost reimbursable.  So, I am seeing some success in that area, but I do see—particularly with service contracts—they tend to go firm-fixed, whereas they maybe should have gone cost reimbursable, because they find out later on the level of effort was more than what I think they planned for.  So, it’s just that upfront market research, that upfront requirements process, is really where you need to put the work in to determine the proper type of contract.

CHRIS DOROBEK:  So, overall, if folks are thinking, “Yeah, I’ve heard about strategic sourcing.  I know I need to do it, but I don’t really know how to get from here to there,” what should be their mindset?  What should they be doing?  What should be those first steps?

TOM KUHN:  Well, certainly the research.  I tend to go to the DAU website quite a bit.  But also, there is some literature out there right now on strategic sourcing.  You know, see how this Better Buying Power 2.0 rolls out during the initial sourcing of input from industry and government.  I highlighted six or seven things in my article that really play into any kind of strategic sourcing-type contracting.  Look at how you’re contracting now, and just go back and do some analysis within your portfolio, and see if strategic sourcing would work for you.

CHRIS DOROBEK:  And the overall assessment about how it would work…Have you found certain ways that just don’t lend themselves to strategic sourcing?

TOM KUHN:  Well, services definitely are difficult because you’re buying people to perform a task.  If I’m going to go buy 20 licenses for software or 20 weapons systems, that’s an area where you can attack it through strategic sourcing, whereas, when you’re buying just services, sometimes you can’t pinpoint exactly a best way to do a strategic source buy.

To hear Chris Dorobek’s interview with Integrity Fellow Tom Kuhn click here.