Threat to industry and government: Category management

Russell Smith, the president of Organizational Communications Inc., encourages other vendors to speak out against the Obama administration’s category manageme...

The Obama administration’s category management initiative seems to be slipping under the radar. And there is no time to lose, because the comment period ends after Nov. 7. This program will hurt many industry providers, especially small businesses. Yet many people have not yet heard about it.

The Office of Federal Procurement Policy (OFPP) is now at the “draft” stage and plans to roll out the category management paradigm over the next three-to-four years starting right away. There are plenty of good reasons as to why you need to complain about this program to OFPP, your trade groups and congressmen and senators.

If your company is among the 95 percent, this article is written for you. If you are a government administrator wanting to be served by healthy contractor firms, then this also includes you.

Russell Smith is the president of Organizational Communications Inc.

Category management in the federal government

A General Services Administration leader got the idea of applying category management to federal procurement, and Anne Rung, the former administrator of OFPP,  took responsibility for implementing the program in 2014.

She claimed that the program soon started saving money for the government. In 2016, the OFPP formed a council to govern the category management program composed of representatives from the largest agencies/services.

On Sept. 30, Rung left the government, but as a parting “gift,” she left a circular proposing to make category management permanent and widely implemented.

Category management applies to more than half of what the federal government buys.

What is the problem with category management?

  1. Reduces the number of contracts: A central tenet of category management in the federal space is to reduce the number of contracts. For example, let’s say government customers are currently purchasing a certain product or service through 20 contracts. And the category managers determine that these products can be more efficiently acquired through 12 contracts. When the shift is made to the 12 contracts, what happens to vendors providing their products and service through the other eight contracts?We all support the efficiency in government mantra of giving the best value to the taxpayer, cutting out waste and generally improving procurement.  With that said, the category management program appears to many industry vendors to go to far, like trying to squeeze blood from a turnip. If we were communists and did not need to have profitable companies to obtain effective service, then this program would be fine. This program seems to business to go beyond the pale. And many suppliers, large and small, believe that it is not in the long-term interest of the government or the people to implement a disruptive program that reduces the contractors to a level approaching socialism.

    How much and to what extent the concerns of the suppliers identified here are true will not be known until OFPP, etc., step back and conduct a serious study of the type a Big Four accountant firm is qualified to perform. As you can imagine, the changes envisioned by category management would be especially hard on small businesses.The potential for disruption of relationships between small businesses and their customers is huge.

    OFPP has plans to keep the same percentages of business earmarked for small businesses. However, if the vehicles left in place are in a different state and are run by people they don’t know, how long will it take small businesses to adapt to the changes? How many small businesses will be badly hurt, and how many will be forced to go out of business?  How many large businesses will be disrupted? We expect that the industrial disruptions caused by category management as presently envisioned will affect both large and small business. However, the outcomes will likely be worse for small business since they typically have fewer cash reserves and less capability to handle market stress. We will not know what the net effect of this radical program would be until the authorities at OFPP, GAO, and GSA undertake a serious study of likely outcomes.

  2. Reduced cost to buy the same product and service: A second central tenet of category management is for the government to be able to obtain multi-billion dollars in savings. In various reports, Rung commented on the large savings generated by getting better prices. And she projected further multi-billion dollars in savings from the program into the future. What the OFPP has not addressed is, what is the net effect of these large cost reductions on industry, especially on small businesses? Just consider the experience of industry during the past several years: Flat or decreased total spending; a large increase in lowest price technically acceptable (LPTA) buying; and the many best value programs that are really LPTA projects in disguise. Now heaped on top of these other tribulations is category management. Does the government want to squeeze the last drop of profit out of industry? Or is this Darwinism, where only the fittest will survive?

What can contractors do?

Here are some ideas about what you can do to help save us from category management:

  1. Complain to OFPP, and to your congressmen and senators;
  2. Get your trade association involved;
  3. Educate your friends as to why they also need to complain;
  4. Go to the website listed below and make a comment.

Comments could center on:

  • Lack of industry education about category management — Even though category management is being touted as a done deal, APMP’s Proposal Industry Committee (PIC) does not believe enough has been done to educate the government service industry on the issue, why it is being implemented and how it could dramatically alter the way government procurement is performed in the future.Very few procurement professionals within the Association of Proposal Management Professionals’ (APMP) membership are even aware of the issue. In a recent survey to approximately 200 APMP contractor members, only 23 percent had any working knowledge of category management.  More than 77 percent of the survey respondents had no idea what category management is, its intent or its impact on the profession that APMP members serve. The lack of industry education to the very contractors who must comply is troubling. Further, based on strong impressionistic evidence, we believe it likely that not many others among general government service company personnel are even aware of the program, much less understanding its implications.

    APMP recommends with respect to lack of industry education:  OFPP should spend a minimum of six months promoting, informing and educating industry, especially contractors, on the definition of category management, why it is being implemented, and any research data that shows why it was adopted and how it will help both the contracting community and the U.S. government.

  • Impact on small business — Despite assurances to the contrary, small contractors believe that category management will severely hamper their ability to compete against large contractors even though they may be best suited for the contract. Promises of set-asides for small businesses without a formal agency plan have caused fear in the contracting community. For example, under the category management plan, if OFPP currently purchases product “A” through 20 different vehicles, but the category managers decide to cut the number of contracts used to purchase product “A” to 12, eight vehicles will be left out in the cold.There is a pervasive opinion that the reduction of the number of contractors will almost certainly start with small business. This would cause further challenge to those who have already been challenged by the government’s reduction in contracts and will likely drive many out of business.

    APMP recommendation with respect to impact to small business: Prior to implementation, hire a polling firm and/or a group of consulting economists to offer guidance about how implementing such a large initiative will impact small business, based on research data.

  • Impact transparency — With the drop in federal spending, the escalation of LPTA contracts and plans now to apply category management to about half of the items and services that are purchased by federal customers, small contractors are being consistently squeezed.  If OFPP’s underlying goal is to push prices down further to generate a collective price discount and save billions of government dollars, APMP believes that while noble, little consideration has been given on the potentially devastating impact on small business.

APMP recommendation: If there are impact studies or other research that demonstrate the net effect of category management on small business, the OFPP should release those studies.  If there are not, we urge such a study that focuses on the impact of this decision, and if it should be implemented.

Note: The draft circular can be seen here.

The deadline for comments is Nov. 7.

Russell Smith is the president of Organizational Communications Inc., a full-service proposal consulting firm in business for 32 years.

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