This research note is restricted to the personal use of mark.robichaux@itc.hctx.

net
This research note is restricted to the personal use of mark.robichaux@itc.hctx.net
G00230856
Public-Sector Entities Can Cut Spending by
Leveraging Sourcing and Procurement Best
Practices
Published: 16 February 2012
Analyst(s): Deborah R Wilson
Few public-sector entities (PSEs) have been left untouched by the
tumultuous economic conditions and calls for budget cuts. CIOs, chief
acquisition officers and elected officials can use this research to build a case
for the changes needed to leverage established sourcing and procurement
best-practice processes, policies and tools from the private sector.
Impacts

Public-sector organizations that eradicate poor buying processes can achieve a reduction of
10% or more in nonpayroll, managed spending.

Public-sector organizations that leverage packaged software solutions that incorporate supplier
and user self-service dramatically improve sourcing and procurement productivity.

PSEs that configure procurement and sourcing solutions to expose the level of local content
and enforce spending distributions can help manage the balance of trade.

PSEs with procurement and sourcing systems that document activities and policies and make
them transparent to auditors and the public can expose and reduce procurement fraud.
Recommendations

Negotiate strategic agreements that span multiple orders and multiple agencies, and feature
fixed pricing.

Leverage packaged procurement suites for governance, productivity improvements and quick
time to value.

Track spending by country of origin.

Configure sourcing and procurement solutions to create a transparent audit trail.

This research note is restricted to the personal use of mark.robichaux@itc.hctx.net
This research note is restricted to the personal use of mark.robichaux@itc.hctx.net
Analysis
Procurement practices have been undergoing a steady but remarkable transformation during the
past decade. Most organizations, even the very largest, were entirely decentralized, with line-of-
business employees placing orders as short-term requirements arose, and often with little
consideration of sources beyond "the reliable suppliers that we've always used."
Trends including global competition, widespread pressure to reduce costs and the growing
availability of cloud-delivered, multienterprise software solutions have triggered the creation and
adoption of a new set of professional sourcing practices and enterprise applications. Consequently,
the vast majority of Global 5000 companies and many smaller organizations have radically changed
their procurement practices by analyzing spending, aggregating demand, negotiating long-term
agreements with a limited number of suppliers (strategic sourcing), extending contracts to
employees and suppliers for self-service, and proactively managing supplier performance. This
transformation is delivering remarkable benefits, including cost savings of 10% to 40% of
strategically sourced spending.
While some PSEs have introduced better procurement practices, evidence shows that they tend to
lag their private-sector counterparts (see "Sir Philip Green says government waste 'shocking'" and
"Bill would require greater use of strategic sourcing"). PSEs are behind because they are bound by
conservative, traditional legal frameworks and the differing forces that shape their acquisition
policies. The private sector is mandated to spend money as efficiently as possible, to be
competitive in the global theater and to maximize shareholder profits. Elected officials, on the other
hand, are tasked with delivering economic opportunity and prosperity. Despite global budget woes,
voters prefer leaders that focus on job creation.
Most PSEs already use competitive procurement processes, such as "three bids and a buy" and e-
notification site RFP postings. Hence, elected officials can truthfully claim that they are trying to be
good stewards of taxpayers' money. The problem is that fully leveraging new private-sector best
practices means supporting significant change in procurement policy, including pushing suppliers
to accept lower prices and to make changes in their own cost structures. At a time when the public
is crying out for economic growth and new opportunities, these outcomes may be seen as
counterproductive and, therefore, unacceptable. What elected official wants to be known for forcing
campaign-contributing constituents to sharpen their pencils? It can be more politically palatable to
eliminate entire agencies or services than to support policies that result in reduced revenue for
specific suppliers. Thus, we observe that many PSEs that have engaged in procurement
transformation have downplayed the cost cutting aspect of their programs to avoid drawing the
wrong kind of attention.
Nevertheless, PSEs everywhere are under extreme pressure to deliver significant cost reductions to
offset high government deficits, and improving procurement practices is an obvious place to start.
This research details procurement and sourcing best practices that have been widely adopted in the
private sector. PSEs should review their current processes against these best practices to identify
areas for improvement.
Page 2 of 10 Gartner, Inc. | G00230856
This research note is restricted to the personal use of mark.robichaux@itc.hctx.net
This research note is restricted to the personal use of mark.robichaux@itc.hctx.net
Figure 1. Impacts and Top Recommendations for Leveraging Sourcing and Procurement Best Practices
Impacts Top Recommendations
Negotiate strategic agreements that span
multiple orders and feature fixed pricing.
Benchmark contract pricing with other
PSEs.
Rightsize the number of buying groups.
Reduce nonpayroll spending by
10% or more.
Leverage commercial procurement suites.
Analyze spending to prioritize
opportunities.
Track transaction cycle times.
Dramatically improve
procurement efficiency.
Track spending by country of origin.
Improve balance-of-trade
management.
Reduce fraud.
Capture prospective bids at the line-item
level.
Post requirements on procurement
networks to maximize supplier
participation.
Source: Gartner (February 2012)
Impact: Public-Sector Organizations That Eradicate Poor Buying Processes Can
Achieve a Reduction of 10% or More in Nonpayroll, Managed Spending
It is well-known and broadly accepted in industry that practices such as aggregating demand,
sourcing strategically and extending contracts to users via self-service tools deliver impressive cost
savings. Price reductions of 20% or more are not unusual when poor buying practices are
eradicated (see the Evidence section). These savings come from economies of scale: limiting the
number of suppliers for a category of spending, and negotiating price for a year or more of forecast
demand, rather than for individual orders. Prices are negotiated directly with suppliers for goods
and services or for important components and pricing algorithms for large projects (e.g., concrete
for dams and labor rates for program development).
Private-sector organizations achieve these savings by centralizing procurement. PSEs cannot "lift
and shift" private-sector best practices because, unlike the private sector, there are typically layers
of government bodies in a region, each with its own sourcing and procurement authority. For
Gartner, Inc. | G00230856 Page 3 of 10
This research note is restricted to the personal use of mark.robichaux@itc.hctx.net
This research note is restricted to the personal use of mark.robichaux@itc.hctx.net
example, hospitals, universities, city government, state or province government, and a water district
may all have acquisition teams, even though they operate in the same state or province. Left to their
own devices, and when given orders to spread business across as many suppliers as possible, this
decentralization can lead to hundreds of contracts for the exact same thing. The challenge is to
rightsize the number of buying centers so that buying power is not diluted. The opportunity is to
enable multiple groups to allow contracts for the same category of spending, to keep competition
alive and spread the business around.
Recommendations:
Chief acquisition officers:

Negotiate strategic agreements that span multiple orders and that feature fixed pricing. Identify
opportunities based on projected total spending for a category of items or services for a year,
not on unit cost or projected requisition value. For example, it may seem silly to negotiate
pricing for printer cartridges that cost only $29.99 each, but if an organization buys 10,000 of
the same cartridge each year, then the value of the spending totals more than a quarter of a
million dollars and contract pricing should be negotiated.

Limit PSE awards for a particular good, service or material to one or two suppliers at most, to
build economies of scale and maximize price reduction.

Benchmark contract pricing with other PSEs. For example, a university, city and water company
in the same province could share pricing or could all post their contracts in a shared e-
procurement solution for transparency. Also, consider benchmarking with local businesses that
employ best procurement and sourcing practices.

Leverage consultants and business process outsourcers (BPOs) to demonstrate best practices
and aid in employee training.
Elected officials:

Identify regulations that stand in the way of sourcing and procurement best practices, and
submit or support legislation for change. For example, eliminate laws that require bid solicitation
based on the value of the requisition; instead, base competitive bidding laws on total spending
for related items for the year.

Rightsize the number of buying organizations in a given region. One is too few, and 10 or more
is too many.

Remove cost savings from budgets. Take down budget line items by the amount saved;
otherwise, stakeholders will shift the savings into other line items and spend the money anyway.

Realign employee compensation to acknowledge and reward cost savings.

Page 4 of 10 Gartner, Inc. | G00230856
This research note is restricted to the personal use of mark.robichaux@itc.hctx.net
This research note is restricted to the personal use of mark.robichaux@itc.hctx.net
Impact: Public-Sector Organizations That Leverage Packaged Software Solutions
That Incorporate Supplier and User Self-Service Dramatically Improve Sourcing and
Procurement Productivity
Progressive private-sector organizations leverage user self-service and packaged software
solutions to dramatically improve sourcing and procurement productivity. Packaged solutions are
often purpose-built to speed up process cycle times and reduce unnecessary work, such as
requiring the purchasing department to touch every requisition or rekey supplier bids for analysis.
This is an important impact because most PSEs must do more with fewer resources. Gartner has
heard from many PSE clients that packaged procurement and sourcing solutions can improve
productivity by double or more.
Furthermore, moving from manual methods and aging software solutions to newer, workflow-based
enterprise applications can dramatically improve governance and process consistency. For
example, a contract life cycle management (CLM) solution can be configured to mandate IT review
for all contracts before they are signed. Workflow-based solutions enable organizations to ensure
that the right individuals review a decision at the right time, every time.
Recommendations:
CIOs:

Educate yourself on private-sector best practices in procurement and sourcing so that you can
take a proactive role in cost cutting (see "Understanding Your Top Procurement Processes").

Leverage packaged procurement applications to make dramatic improvements in productivity

and performance (see "Hype Cycle for Procurement, 2011"). The software market is awash with
dozens of viable, off-the-shelf solutions; commissioning a proprietary solution is an
unnecessary and costly alternative.

Build a portfolio of solutions with appropriate service life cycle expectations and platform
characteristics using Gartner's Pace-Layered Application Strategy (see "Use Gartner's Pace-
Layered Application Strategy to Structure Your Procurement Application Portfolio").

Increase productivity by enabling self-service in solutions whenever possible. Allow suppliers to

upload proposed catalog content updates, and allow employees to create their own requisitions
and set up e-forms for requesting sourcing or a contract. However, ensure that the self-service
solutions you deploy are intuitive and easy to use, so that the burden of buying isn't simply
shifted from the purchasing department to others.

Shortlist solutions that incorporate private-sector best practices can help you deploy modern
techniques. Insist that solution vendors demonstrate the ability to do more than slavishly adhere
to long-standing procurement regulations.
Chief acquisition officers:

Analyze spending using software or services to identify and prioritize opportunities for supply
base rightsizing and cost reduction (see "Spend Analysis Best Practices").
Gartner, Inc. | G00230856 Page 5 of 10
This research note is restricted to the personal use of mark.robichaux@itc.hctx.net
This research note is restricted to the personal use of mark.robichaux@itc.hctx.net

Track transaction cycle times for requisitions and contracts. Consider process changes that
shorten cycle times (see "Understanding Your Top Procurement Processes").
Impact: PSEs That Configure Procurement and Sourcing Solutions to Expose the
Level of Local Content and Enforce Spending Distributions Can Help Manage the
Balance of Trade
Procurement and sourcing policies can impact the balance of trade between nations and regions by
exposing the level of local content in contracts and for suppliers, and by enforcing policies to
distribute spending in a particular way. These policies help PSEs decrease local content to improve
ties with neighboring nations, as well as aid those that desire to spend more locally to improve
independence and economic stability. For example, several EU nations are experimenting with local
content tagging to increase member trade to support initiatives such as the EU Single Market for
Goods New Legislative Framework. Other nations that Gartner has worked with are trying to
increase the amount of goods and services bought locally to strengthen their local economies.
Recommendations:
CIOs:

Configure procurement solution data models so that the location of value-adds can be
captured. Set up fields for location in supplier master files, item part master files, contract life
cycle management solutions and/or e-sourcing tools.

Create analytics/reports that capture totals and trends for spending by location of manufacturer
and/or value-added services.
Chief acquisition officers:

Track spending by country of origin. Accomplish this by tying country-of-origin percentage

content to supplier records, contracts and/or purchase orders. Leverage business intelligence
tools and analytics to capture and share trend data.
Elected officials:

Use the resulting data as input for awarding business for new contracts and renewals, and for
deciding where and when to make investments in trade agreements and local economic
development.
Impact: PSEs With Procurement and Sourcing Systems That Document Activities
and Policies and Make Them Transparent to Auditors and the Public Can Expose
and Reduce Procurement Fraud
Well-documented transactions and processes discourage procurement fraud. For example, a hotel
chain was able to allege procurement fraud because its e-procurement solution was found to be
reconfigured to block preferred suppliers, so orders could be redirected to high-priced suppliers
that, in turn, paid kickbacks to hotel employees. The best procurement policy for the public sector
is to capture as much data as possible in solutions, and to enforce restrictions such as disallowing
Page 6 of 10 Gartner, Inc. | G00230856
This research note is restricted to the personal use of mark.robichaux@itc.hctx.net
This research note is restricted to the personal use of mark.robichaux@itc.hctx.net
prospective suppliers that have not paid their taxes or that are accused of inappropriate behavior
through procurement and sourcing solution configurations.
Recommendations:
CIOs:

Choose procurement and sourcing solutions that capture prospective supplier bids at the line-
item level so that proposals are fully transparent and auditable. Do not configure e-sourcing
solutions to allow bid submissions as attachments.

Shortlist procurement and sourcing solutions that are configured for control. For example, e-
procurement solutions can limit requisitioners to preferred suppliers.
Elected officials:

Adopt legislation that requires periodical audits of procurement records to identify out-of-
compliance sourcing behavior.

Require procurement to periodically benchmark pricing and explain significant discrepancies.

Require competitive bid solicitation for significant spending (as measured by projected
spending for a given good/service for the year).
Chief acquisition officers:

Post requirements to as broad an audience as possible to maximize supplier participation. The

more suppliers that submit a bid for an opportunity, the less likely there will be a fraudulent
award. There is also some evidence that higher numbers of proposals result in greater cost
savings.
Recommended Reading
Some documents may not be available as part of your current Gartner subscription.
"The Impact of Cloud Computing on Procurement Applications"
"Strategies for Public-Sector Investment in Procurement Applications"
"Understanding Your Top Procurement Processes"
"Use Gartner's Pace-Layered Application Strategy to Structure Your Procurement Application
Portfolio"
"E-Procurement Market and Vendor Landscape"
"Hype Cycle for Procurement, 2011"
Gartner, Inc. | G00230856 Page 7 of 10
This research note is restricted to the personal use of mark.robichaux@itc.hctx.net
This research note is restricted to the personal use of mark.robichaux@itc.hctx.net
"Best Practices for Choosing, Implementing and Using E-Sourcing Solutions"
"Magic Quadrant for Strategic Sourcing Application Suites"
"The Benefits and Drawbacks to Group Purchasing Organizations and Collaborative Sourcing"
Evidence
For an independent validation of the benefits and adoption rate of strategic sourcing, see:

Wikipedia entry on strategic sourcing

"Procurement: The Last Best Place for Results Improvement," A.T. Kearney

"Driving high-performance procurement initiatives," Zycus

European Union public-sector procurement policymaking, which estimates new policies could
drive 4% to 5% savings per year on spending (see "Commission proposals to modernise the
European public procurement market Frequently Asked Questions," question no. 14).

The U.S. General Services Administration (GSA) piloted strategic sourcing practices for buying
office suppliers. While there is argument over the large amount of savings the GSA reported that
agencies could achieve, the study confirms that buying from negotiated agreements, instead of
making one-off purchases, delivers double-digit savings (see "Strategic Sourcing: Office
Supplies Pricing Study Had Limitations, but New Initiative Shows Potential for Savings").

Research by Luis Valadares Tavares, Professor at the Operational Research of the Instituto
Superior Tecnico (Technical University of Lisbon), presented to the EU, estimates public
expenditure savings of 6% to 12% with expanded visibility of opportunities to prospective
suppliers through e-tendering.

"Reverse Auctions Generate Big Savings for Municipalities," K2 Sourcing

"Public eTendering in the European Union: Trust in eVolution," L. Valadares Tavares

Industry press routinely credits strategic sourcing and best procurement practices as drivers of cost
savings and productivity. For examples, see:

"Miami University Plans Procurement Modernization with Accenture's Support," MarketWatch

"Strategic sourcing of IT Demand," InformationWeek

"John Hopkins Medicine Reduces Contract Costs by $41 million with MedPricer's E-Sourcing
System," MarketWatch

"Global Procurement Transformation: New Frontiers for Global Innovation" details LG

Electronics' expectation that procurement will deliver $30 billion to the bottom line.

Unilever delivered 1.4 billion in savings in 2009 and 2010, in part due to a single, global
procurement strategy.
Page 8 of 10 Gartner, Inc. | G00230856
This research note is restricted to the personal use of mark.robichaux@itc.hctx.net
This research note is restricted to the personal use of mark.robichaux@itc.hctx.net

Keepmoat, a 570 million provider of community regeneration services to the U.K. public
sector, is saving 15%, on average, on strategically sourced spending (see page 4).
This is part of a set of related research. See the following for an overview:

DoD Must Do Better in Sourcing and Still Meet Warfighter Needs

Gartner, Inc. | G00230856 Page 9 of 10
This research note is restricted to the personal use of mark.robichaux@itc.hctx.net
This research note is restricted to the personal use of mark.robichaux@itc.hctx.net
GARTNER HEADQUARTERS
Corporate Headquarters
56 Top Gallant Road
Stamford, CT 06902-7700
USA
+1 203 964 0096
Regional Headquarters
AUSTRALIA
BRAZIL
JAPAN
UNITED KINGDOM
For a complete list of worldwide locations,
visit http://www.gartner.com/technology/about.jsp
2012 Gartner, Inc. and/or its affiliates. All rights reserved. Gartner is a registered trademark of Gartner, Inc. or its affiliates. This
publication may not be reproduced or distributed in any form without Gartners prior written permission. The information contained in this
publication has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or
adequacy of such information and shall have no liability for errors, omissions or inadequacies in such information. This publication
consists of the opinions of Gartners research organization and should not be construed as statements of fact. The opinions expressed
herein are subject to change without notice. Although Gartner research may include a discussion of related legal issues, Gartner does not
provide legal advice or services and its research should not be construed or used as such. Gartner is a public company, and its
shareholders may include firms and funds that have financial interests in entities covered in Gartner research. Gartners Board of
Directors may include senior managers of these firms or funds. Gartner research is produced independently by its research organization
without input or influence from these firms, funds or their managers. For further information on the independence and integrity of Gartner
research, see Guiding Principles on Independence and Objectivity on its website, http://www.gartner.com/technology/about/
ombudsman/omb_guide2.jsp.
Page 10 of 10 Gartner, Inc. | G00230856