Sourcing Advisory

Strategic Sourcing of IT Services by the US Government - Budgets and Trends

Kevin S. Parikh and Pradeep K. Mukherji
July 2013

Strategic Sourcing, largely beneficial, has always evoked cautionary reactions from the US Government and public at large. Currently US Government is caught between cutting budget spends and gaining greater efficiencies for public service. Strategic sourcing can not only help the US Government deliver better public services but also gain significant cost savings year on year. This paper attempts at breaking the taboo of outsourcing by showing that if properly managed, strategic sourcing can result in great cost savings while increasing cost and process efficiencies. This paper also further argues that there exists significant latent cost saving potential in US Government IT spending and illuminates and debates on approaches like insourcing and cloud computing.

The global economic downturn of 2008 and the huge fiscal deficits incurred have intensified focus on government savings, efficiency, and effectiveness. The recession has led to unprecedented budget shortfalls, which in turn has taken its toll on budget allocation, staffing and project priorities. The need for food stamps, unemployment compensation, and integrated health care are greater than ever, further exacerbating the situation. With shrinking budgets and rising costs, today’s state, local, and federal governments are experiencing significant cost pressures. Budget crunches has lead to the total federal workforce dropping by 14,000 employees in May 2013 bringing the number to 2,748,000, the lowest staffing levels in more than five years. With the budgets and workforce dropping, Governments are increasingly seeking external assistance and sourcing what they possibly can. As one social service director in California succinctly noted, “We don’t have fire, police, schools- we contract out all of our work. Nothing is in-house and there is never an expectation that any of these things will be done in house”. The observation clearly exemplifies that sourcing of services by Government is the need of the day, to drive efficiency in governmental operations and delivering effective services to its citizens. In a world where every dollar saved is paramount, the savings achieved through enhanced efficiency would further strengthen the government efforts in reviving the economy and focusing on promoting new businesses, increasing tax breaks and creating higher paying jobs for American citizens.

A look at Federal Government Spending

President Obama’s fiscal year 2013 budget envisages spending on information technology (IT) to decrease from .5 billion to .9 billion, a decrease of 1.2% year on year or about 6 million, in the fiscal year. A vast majority of the reduction will be coming from budget cuts in the Department of Defense. A small to moderate increase in IT spending would be visible in the Departments of Treasury, Health and Human Services, and Veterans Affairs. All these budget changes are aimed at President Obama’s strategy of improving financial governance, enhancing healthcare services, and increasing the effectiveness of welfare schemes.

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