In our current era of shrinking budgets, the Federal government often touts the effectiveness of its procurement processes by looking at the savings that its programs have delivered to the taxpayer. For instance, the Office of Federal Procurement Policy (OFPP) announced earlier this year that Category Management has saved the government more than $2 billion. GSA also has claimed that, over the last five years, its Federal Strategic Sourcing Initiative (FSSI) has saved more than $500 million. This article examines how savings rates are calculated, how this impacts Federal procurement, and how the government should be measuring the success of its programs.
Based on publicly available information, in both FSSI and Category Management, savings are calculated by comparing the Schedule prices and prices paid, which raises several questions. First, the estimates do not account for the total acquisition costs of implementing these programs (whether it is FSSI or Category Management). Second, the methodologies measure savings by looking at the difference between a Schedule price and a new contract price. Using this methodology to measure savings is misleading, and it ignores one of the fundamental principles of the Schedules program, which is that competition under the Schedules program occurs at the order level. Using Schedule prices to account for savings ignores the fact that the Schedule price is not always the price paid by the customer, and that there are different terms and conditions at the order level. Finally, many of the savings rates do not account for the long-term effects of programs that focus on getting the lowest price instead of best value.
Measuring Savings
There are many ways to measure savings. One effective method for calculating savings is through the following equation:
This equation (also known as a cost-benefit ratio) shows how much benefit is received for every $1 spent. When the outcome is greater than 1, benefits outweigh the costs of the project. Notably, any increases in savings could result from either an increase in benefits or a decrease in costs.
This analysis should not be surprising; consumers make decisions like this every day. For example, a consumer may ask if another helping of ice cream is worth the extra cost and the extra calories, or if the more expensive car is justified because it has a more powerful engine. When looking at the Federal market, however, which accounts for more than $400 billion in spending and around 2% of the entire American economy, measuring costs and benefits is not nearly as simple as it is for an individual consumer. Still, the government has a duty to collect, asses, and publish data on the overall costs and benefits of implementing major acquisition programs, such as FSSI and Category Management.
Federal Strategic Sourcing Initiative
According to GSA, FSSI is a program which seeks to leverage agency purchasing power to reduce contracting costs. The overarching goal of FSSI is to achieve lower prices. FSSI is comprised of a series of Federal contracts and blanket purchase agreements (BPAs) managed by GSA.
FSSI vehicles include, but are not limited to, Office Supplies (OS3); Maintenance, Repair and Operations (MRO); Janitorial and Sanitation Supplies (JanSan); Managed Print Services; and Building Maintenance and Operations (BMO). BMO was only awarded in March 2016; print management FSSI expired at the end FY2016 and was not renewed. The remaining three vehicles (OS3, MRO, and JanSan) will be the focus of this analysis.
GSA has stated that, in FY15, the JanSan saved $3.4 million, MRO saved $11.2 million, and OS3 saved $37.5 million. In addition, GSA claimed that, overall, the FSSI vehicles resulted in savings of $128 million in FY15. GSA provided the following savings methodology for JanSan and MRO FSSIs:
In this case, the baseline unit price is the “current MAS lowest quartile price,” which means it is the MAS price halfway between the lowest MAS price and the median MAS price. The FSSI unit price is the “price available to agencies under the FSSI solution.” The tier unit discount is “further price reductions obtained from tiered pricing or other discounts in the FSSI solution.” GSA noted in its analysis that this final element may not be included when calculating savings in order to avoid complicated volume assumptions.
These savings calculations raise several questions. The first, which the Coalition has raised before, is that the methodology compares Schedule prices and prices paid. Measuring savings based on discounts off a Schedule price is unremarkable. Comparing a Schedule price with an order price is not an “apples-to-apples” comparison, as the terms and conditions of a contract will drive pricing, and a Schedule contract with guaranteed minimum of only $2,500 is not the same business commitment as an agency-specific blanket purchase agreement or order with volume tier discounts. Fundamentally, the Schedules program encourages competition at the task order level. This competition leverages agency-specific requirements and leads to instantaneous market-based price reductions. As such, comparing FSSI and Schedule prices is not a valuable metric of savings, particularly when agencies buyers are already capturing discounts at the order level.
Second, this metric also does not account for the total acquisition costs involved with establishing these FSSI vehicles. The costs of creating the new vehicles, evaluating proposals, awarding the vehicles, and managing these FSSI programs for the contract term are not accounted for in the methodology.
Third, the savings methodology does not account for the small business impacts of FSSI. Even though the FSSI vehicles have higher small business participation rates than Schedule contracts, there are significantly fewer small businesses on FSSI than on Schedules. For example, in FY2015, there were 432 contract holders on Schedule 75 for Office Supplies. 404 of those contractors were small businesses. On Schedule 75, $300 million of sales went to these small businesses. In contrast, OS3 only has 23 small business vendors. If all office supply sales were shifted to OS3, then almost 400 small businesses would lose $300 million in sales.
Finally, the savings methodology has no measure for the value of the good or service provided. Over time, driving towards the lowest price will encourage contractors providing higher quality goods and services or favorable terms and conditions to leave the market as their margins fall. This drive to the lowest price will have serious implications for the Government’s supply chain if programs that encourage these methodologies are institutionalized.
So, even though most of the products on FSSI vehicles had lower prices than the Schedule contracts, there are serious questions about (1) how much actually was saved because of FSSI pricing, (2) how much it cost to achieve those savings, (3) what was the impact of FSSI on small businesses, (4) how would an agency-specific BPA compare to the FSSI BPA’s, and (5) what is the impact on the supply chain if vendors choose to leave the market.
These discussions about the pricing and saving methodologies for office supplies can seem very esoteric. Recent events surrounding the expansion of Category Management, however, give new life to these discussions.
Category Management Savings
On October 7, 2016, OFPP released a draft Category Management Circular, a document that seeks to institutionalize the principles of Category Management. The Coalition raised concerns with the draft circular and submitted comments on the circular in early November.
The draft circular provides guidance on how the savings from Category Management will be measured. It defines savings as “reductions in cost that allow the Federal Government to make better use of resources.” The draft circular also specifies the principles that will lead to savings, which includes, “reduced unit price based on increased volume or other strategy.”
The draft circular should be read in conjunction with the Government-wide Category Management Guidance, which was approved by the Category Management Leadership Council on May 21, 2015. There is significant overlap between the two documents, and the guidance contains additional information on the savings methodologies used under Category Management. The methodology to determine savings for Category Management should look familiar because it is very similar to the methodology used to determine FSSI savings. In this case, the baseline unit price could be the Schedule price, lowest price on a contract, or lower price from an existing vehicles identified by the Category Management Leadership Council.
As with the FSSI methodology, the Category Management methodology fails to consider the “full view” of total acquisition costs and faces the same shortcomings, specifically, it compares prices paid to a Schedule price and fails to account for the total acquisition costs of the programs. This savings methodology is being used to determine the success of Category Management, but the holistic impact of Category Management cannot be measured using this methodology.
The best way to measure the success of Category Management is to look at the benefits the government receives and the costs it incurred to achieve those benefits, but it needs to be recognized that, as long as the savings calculations are measuring discounts from Schedule prices, then every action the Federal Government takes will be appear to be an incredible success, even as contractors face more regulations and increased costs. The focus on lower prices also hurts the quality of goods and services, and will lead to a worse outcome for customer agencies and higher prices in the long-run.
OFPP’s estimate that Category Management has saved $2 billion should be questioned because the data backing up the estimate were not provided and remain unsubstantiated. We do know that the benefits of Category Management are still uncertain, and that while the costs and benefits remain unclear, it is too early to institutionalize it through a circular.
As we mentioned earlier, savings can be achieved through decreasing costs or increasing benefits. The Federal Government should look towards efforts at increasing the benefits it receives from contracting. By reducing barriers to entry to the Federal market and reducing the reporting burden of contractors, the government would be able to lower the costs on contractors and get the innovation it so desperately desires. The goal of the procurement systems should be to help meet agency missions. Instead, we continue to see a focus on lowering prices, regardless of the long term impact it will have on the Federal market. In order to protect the long-term health of the procurement system, the government needs to renew its focus on value-based contracting.
Focusing on value and satisfaction leads to an procurement system. In 2008, Professor Steven Schooner explained that, “In the U.S., because of the potential for poor decision making due to the lack of appreciation of end user satisfaction, the 1990’s procurement reforms increased the attention paid to recipient satisfaction. The introduction of contractor past performance as a mandatory evaluation criterion…empowered the end user and reduced the likelihood that government buyers could effectively foist a poor performer on the user. This requirement reflected the idea that it was better to pay more to obtain a contractor with a good track record because of the likely increased odds of user satisfaction.” (Emphasis added) As this idea was true in the 1990s and in 2008, it is true today.