Strategic sourcing: Pennywise but pound foolish?

June 14, 2012 - PRLog -- The General Services Administration says the strategic sourcing initiative for office supplies has saved $39 million over the last 18 months and is on track to save $208 million by 2013.

And office supplies are just the beginning of the products that soon will be part of the governmentwide Federal Strategic Sourcing Initiative (FSSI). The Obama administration plans to use the power of the government's size to buy everything from print management to mobile devices and services to IT hardware.

But some small businesses not on the contract are demanding the White House step back and analyze the broader, unintended costs of these efforts. A growing number say they are in grave danger of losing their businesses, and thousands more could be right behind them.

Bonnie Whittaker says Adams Marketing is one of those small businesses. Whittaker, the company's vice president for federal sales, said Adams Marketing's revenue from the sale of office supplies under Schedule 75 to federal agencies dropped by about 30 percent to $9 million in 2011, and things only are getting worse in 2012. She said her company has earned about $3 million through the first two quarters.

"We've had to lay off five people because our sales have dropped so much," she said in an interview as part of Federal News Radio's week-long special report, Inside the World's Biggest Buyer.

Adams Marketing is not alone. According to StopFSSI.org, there are hundreds of other companies whose revenue has dropped from as much as $19 million to $20,000 between 2010 and 2011 because of the FSSI blanket purchase agreement (BPA) for office supplies.

15 vendors win BPA

GSA awarded the BPA to 15 vendors, including 13 small businesses, in June 2010. The administration is strongly encouraging agencies to use the BPA to buy office supplies because of the potential lower costs.

GSA, under direction from the Office of Federal Procurement Policy, recently awarded commodity contracts for IT hardware such as mobile devices and tablet computers, and other BPAs are coming for computers, monitors and video teleconferencing equipment.

"It's important to understand price is only one of FSSI's key priorities. Socio- economic goals, including small businesses, understanding the government's spending patterns, ease of use and removing government cost drivers are other key goals," said Steve Kempf, commissioner of GSA's Federal Acquisition Service, Thursday before the House Small Business Subcommittee on Contracting and Workforce. "To accomplish these goals, on each specific initiative, we work closely with other agencies to develop features and requirements as well as obtain industry feedback and expertise. This thoughtful process has resulted in significant savings and smarter acquisitions in all of the initiatives we have undertaken."

But not everyone agrees with Kempf's assessment.

With office supplies being the first out of the gate, the 500 or so firms on Schedule 75 but not on the BPA, say FSSI is cutting them out of the $1.4 billion market and forcing them to lay off employees.

In 2009, vendors under Schedule 75 accounted for about $690 million in sales for office supplies, with small firms receiving more than $472 million (68 percent), according to GSA's sales query tool. But in 2010 with the award of FSSI, small firms not under the BPA saw their market share begin to drop, and by 2011, agencies spent $121 million under the BPA and $465 million under Schedule 75. GSA and the firms expect those numbers to continue to come together.

Rick Vogel, a federal government sales manager for Coast to Coast Computer Products in Simi Valley, Calif., and one of the commodity IT winners to provide tablet computers, said the impact of the office supplies BPA on small firms is a microcosm of things to come from the administration's aggressive expansion of strategic sourcing across the other areas.

He and Whittaker are part of the StopFSSI.org effort.

Long term consequences of strategic sourcing?

"The fact of the matter is that there are about 15,000 to 20,000 federal contractors out there and if they source each schedule down to even 40 contractors, you're talking about limiting that original pool of 17,000 contractors, the gross majority of which are small businesses and socio-economic disadvantaged businesses," Vogel said. "They will be closing their doors and laying people off in significant fashion. Our concern is not just the detrimental effect on small businesses, but it's the effect of that loss of the jobs in the U.S. economy as it is. We believe the programs are somewhat penny-wise and a pound foolish in the fact that for every dollar or two they save upfront, they will be losing that same dollar or two, or even a greater amount, through the social programs being supported by the American taxpayer."

Vogel, Whittaker and a growing number of others believe the administration failed to take into account the societal costs of the program.

Sam Bornstein, a professor of accounting and taxation at Kean University in Union, N.J., and a partner with the firm Bornstein and Song CPAs and Consultants, has been studying the impact of strategic sourcing on small businesses. Bornstein said his initial study of the federal initiative is showing the savings by agencies don't present the entire picture.

"In our preliminary work, we discovered among the nine contractors that we had personally interviewed, we found 171 jobs lost to FSSI. That is shocking," Bornstein said. "Based upon our preliminary research, we discovered that all we have to prove is a net job loss of 900 jobs, this will far exceed the $16 million of GSA claimed FSSI savings in [2011]."

He added the costs go beyond just job losses at the effected companies.

"GSA seems to be convinced, and adamantly convinced, that the FSSI is working well, but are not apparently aware or concerned about the off-setting factor, that these displaced small businesses — the financial distress, the failures, the mortgage defaults and foreclosures — and by the way, I should add, these will impact not only the U.S. economic recovery and part of that is the housing market because they are all interrelated," Bornstein said.

He said the administration should have had GSA do a cost-benefit analysis to better understand the impact of FSSI.

Agencies mandating use of BPA

But Dan Gordon, the former administrator of the Office of Federal Procurement Policy (OFPP), said such an analysis wasn't done and may not be possible.

"The idea that if you pay lower prices that some companies are going to say, ‘For that amount of money we will have to lay off staff' and therefore you shouldn't pay lower prices," said Gordon, who now is the associate dean at The George Washington University law school. "I don't think you and I would do that when we were making purchases. We wouldn't walk into CVS and say ‘I know you are selling this product for $11, but I want to give you $15 because I want to be sure the manufacturers' employees are well taken care of.' I don't think anybody would view the fact that vendors who charge higher prices will be losers in a real competition and therefore they may have economic problems. Golly, if that is taken into cost-benefit analysis, everybody's actions would be very different and I don't think in a good way."

Kempf said GSA did a business case around whether this makes sense for the agency and then an acquisition strategy, but it's up to the vendor to do the cost-benefit analysis on whether to bid or not.

"There have been some businesses that have been hurt by this and some who have been helped by this," he said. "In procurement, there are winners and losers, and although it's very tough for those who do not win and can't go forward with us into Office Supplies 2 (OS2), there are consequences to procurements, good and bad."