Best Practices
Taking a Strategic Approach Could Improve DOD's Acquisition of Services Gao ID: GAO-02-230 January 18, 2002GAO studied several leading companies in the private sector that have made dramatic changes to their process for acquiring services. GAO found that these changes generally began with a corporate decision to pursue a more strategic approach to acquiring services--from developing a better picture of what the company was actually spending on services to developing new ways of doing business. The Defense Department (DOD), the government's largest purchaser of services, already has some elements in place that are essential to such a strategic approach, such as a commitment by top management to adopting best practices. However, DOD has yet to conduct a comprehensive analysis of its spending on services or thoroughly assess it's current structure, processes, and roles. DOD's size, the range and complexity of the services that it acquires, the capacity of its information and financial systems, and the unique requirements of the federal government are among the factors that DOD will need to consider as it tailors a strategic approach to its diverse needs.
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United States General Accounting Office
GAO:
Report to the Chairman and Ranking Minority Member, Subcommittee on
Readiness and Management Support, Committee on Armed Services, U.S.
Senate:
January 2002:
Best Practices:
Taking a Strategic Approach Could Improve DOD's Acquisition of
Services:
GAO-02-230:
Contents:
Letter:
Results in Brief:
Leading Companies Applied a Strategic Approach to Acquiring
Services:
Strategic Approach Could Serve As a Framework to Guide DOD's
Service Contracting Initiatives:
Conclusions:
Recommendation for Executive Action:
Agency Comments:
Scope and Methodology:
Appendix I: Comments From the Department of Defense:
Appendix II: GAO Contact and Staff Acknowledgments:
GAO Contact:
Acknowledgments:
Tables:
Table 1: Leading Companies We Studied:
Table 2: Changes in Senior Management's Involvement in Their
Company's Purchase of Services:
Table 3: Comparison of Traditional and Strategic Approaches to
Spending Data:
Table 4: Examples of How Service Spend Analyses Benefited the
Companies We Studied:
Table 5: The Changing Role of Purchasing in Leading Companies:
Table 6: Examples of How Leading Companies Restructured Their
Procurement Organizations:
Table 7: Examples of Leading Companies' Cross-Functional
Procurement Processes:
Table 8: Characteristics Promoting Successful Strategic
Reengineering Efforts:
Figures:
Figure 1: Key Elements of Strategic Approach Taken by Leading
Companies:
Figure 2: Principles and Practices of Leading Companies:
Figure 3: Services Purchased by DOD in Fiscal Year 2000 (dollars
in billions):
[End of section]
United States General Accounting Office:
Washington, DC 20548:
January 18, 2002:
The Honorable Daniel K. Akaka:
Chairman:
The Honorable James M. Inhofe:
Ranking Minority Member:
Subcommittee on Readiness and Management Support:
Committee on Armed Services:
United States Senate:
Federal agencies spend billions of tax dollars each year to buy
services ranging from clerical support and consulting services, to
information technology services such as network support, to the
management and operation of government facilities, such as national
laboratories. The amount spent on services is growing substantially.
In fiscal year 2000, the federal government acquired more than $87
billion in services”a 24-percent growth in real terms from fiscal year
1990. The Department of Defense (DOD) is, by far, the government's
largest purchaser of services, acquiring more than $53 billion in
services in fiscal year 2000. However, our work, and the work of DOD's
Inspector General, has found that this spending is not being managed
efficiently.
The private sector is also increasingly reliant on services. The
majority of purchasing dollars for some companies now goes to
acquiring a range of services, including complex services such as
advertising, information management, and professional consulting
services to relatively simple services such as lawn mowing, waste
removal, and temporary clerical services. In 2000, about $2.1 trillion
in services, including transportation, communications, health, legal,
and other business services, was sold in the U.S. market place.
In recent years, leading companies have been examining alternative
ways to manage their service spending to stay competitive, respond to
market and stockholder pressures, and deal with economic downturns in
key overseas markets. In looking at their service acquisitions, these
companies discovered that they did not have a good grasp of how much
was actually being spent and where these dollars were going. They
found that responsibility for acquiring services resided largely with
individual business units or functions”such as finance, human
resources, manufacturing, engineering, or maintenance”which hindered
efforts to coordinate purchases across the company. They also came to
realize that they lacked the tools needed to make sure that the
services they purchased met their business needs at the best overall
value. To turn this situation around, leading companies reengineered
their approach to buying services.
You requested that we examine how leading companies reengineered their
approach to purchasing services and the extent to which DOD is
pursuing a similar approach. This report describes a strategic
framework that leading companies have adopted that could help guide
DOD's efforts. We plan to evaluate how specific best practices could
be adopted or adapted for use by DOD on future assignments.
Results in Brief:
The leading companies we studied made a number of dramatic changes to
the way they bought services and found that these changes, in turn,
resulted in significant cost savings and service improvements. These
changes generally began with a corporate decision to pursue a more
strategic approach to acquiring services. Taking a strategic approach
involves a range of activities”from developing a better picture of
what the company is spending on services, to taking an enterprisewide
approach to procuring services, to developing new ways of doing
business (see figure 1).
Figure 1: Key Elements of Strategic Approach Taken by Leading
Companies:
[Refer to PDF for image: illustration]
The illustrations depicts interaction among all elements:
Commitment to a strategic approach:
Obtain improved knowledge on service spending;
Enable success through leadership, communication and metrics;
Create supporting structure, processes and roles.
Source: GAO analysis.
[End of figure]
Once top leaders were committed to taking a strategic approach, the
companies took a hard look at how much they were spending on services
and from whom. By arming themselves with this knowledge, the companies
could identify opportunities to leverage their buying power, reduce
costs, and better manage their suppliers. The companies also
instituted a series of structural, process, and role changes aimed at
moving away from a fragmented acquisition process to a more efficient
and effective enterprisewide process. For example, the companies we
studied often established or expanded the role of corporate
procurement organizations to help business managers acquire key
services and made extensive use of cross-functional teams to help the
companies better identify service needs, select providers, and manage
contractor performance.
Bringing about such changes was not easy. For example, some companies
spent months piecing together data from various financial and
management information systems and examining individual purchase
orders just to get a rough idea of what they were spending on
services. Other companies found that in establishing new procurement
processes, they needed to overcome resistance from individual business
units reluctant to share decision-making responsibility and to involve
staff that traditionally did not communicate with each other. To do
so, the companies found they needed to have sustained commitment from
their senior leadership; to clearly communicate the rationale, goals,
and expected results from the reengineering efforts; and to measure
whether the changes were having their intended effects.
Taking a strategic approach clearly paid off, as companies found that
they could save millions of dollars and improve the quality of
services received by instituting these changes. In some cases,
thousands of suppliers were reduced to a few, enabling the companies
to negotiate lower rates. In other cases, new information systems
enabled companies to better match their business managers' needs with
potential providers. Company officials provided various estimates as
to how much their companies saved by taking a strategic approach, with
one official estimating his company had saved more than $210 million
over the past 5 years from pursuing more strategic approaches to
purchasing information technology services, while another estimated
his company typically achieved savings of 15 percent or more on
efforts that were undertaken using the new processes.
The strategic approach taken by the leading firms we visited could
serve as a general framework to guide DOD's service contracting
initiatives. DOD has certain elements critical to taking a strategic
approach already in place, such as the commitment by senior DOD
leadership to improve its practices for acquiring services and to
adopting best commercial practices. However, DOD has not conducted a
comprehensive analysis of its spending on services or thoroughly
assessed its current structure, processes and roles, two elements that
companies found to be crucial to reengineering their approaches to
purchasing services. DOD's size, the range and complexity of the
services it acquires, the capacity of its information and financial
systems, and the unique requirements of the federal environment are
among the factors that DOD will need to consider in tailoring a
strategic approach that meets its diverse needs.
This report includes a recommendation intended to help DOD assess
whether a strategic reengineering approach, such as that employed by
the leading companies we visited, could be used as a framework to
guide DOD's reengineering efforts.
DOD commented on a draft of this report and concurred with the views
expressed in the draft report. The DOD comments can be found in
appendix I.
Leading Companies Applied a Strategic Approach to Acquiring Services:
Over the past decade, federal agencies substantially increased their
purchases of services, particular for information technology and
professional, administrative, and management support services. But
this money may not always be well-spent. Our work, as well as the work
of other oversight agencies, continues to find that millions of
service contracting dollars are at risk at DOD and other federal
agencies because acquisitions are poorly planned, not adequately
competed, or poorly managed.[Footnote 1]
To help improve how services are managed at DOD, we studied the
practices for purchasing services at six leading private sector
companies. We selected these companies, shown in table 1, based on
literature searches and discussions with universities, industry
associations, research organizations, and experts in purchasing
practices.[Footnote 2] The six companies have been recognized by their
peers for reengineering their approach to purchasing services.
Table 1: Leading Companies We Studied:
Company: Brunswick Corporation;
Function: A leader in the boating, marine engine, fitness equipment,
bowling, and billiards industries.
Company: The Dun & Bradstreet Corporation;
Function: A leading provider of business credit, marketing and
purchasing information, and receivables management services.
Company: Electronic Data Systems (EDS) Corporation;
Function: A leader in the information technology services industry,
providing business and government clients high-value consulting,
electronic business solutions, business process management and
systems, and technology expertise.
Company: Exxon Mobil Corporation;
Function: The world's largest integrated oil company, ranking first in
profits, proven reserves, liquids production, natural gas production,
oil production, and refining capacity.
Company: Hasbro, Inc.
Function: A leader in the design, manufacture, and marketing of toys
and games, ranging from traditional to high-tech.
Company: Merrill Lynch & Co., Inc.
Function: A leading provider of investment, financing, advisory,
insurance, and related products and services, ranking first in U.S.
and global debt and equity underwriting.
[End of table]
Each of these companies is a leader in its respective market, but is
not immune to market or stockholder pressures to improve performance.
To respond to these pressures, senior corporate leadership challenged
their companies to improve their performance, including the manner in
which they acquired services. In turn, these companies reengineered
their approach to acquiring services to leverage their buying power,
reduce costs, better manage their service providers, and improve the
quality of services acquired. As shown in figure 2, we identified four
broad principles that were critical to successfully carrying out the
companies' strategic approach. The companies we studied did not follow
the exact same approach as they differed in the manner and degree to
which they employed specific practices. However, the bottom line
results were the same”substantial savings and service improvements.
Figure 2: Principles and Practices of Leading Companies:
[Refer to PDF for image: illustration]
Commitment: Secure up front commitment from top leaders:
* Recognize and communicate the urgency to change service spending
practices;
* Provide clear and strong executive leadership, including goals and
targets.
Knowledge: Obtain improved knowledge on service spending:
* Develop information system to identify how much is being spent with
which service provider for what services;
* Analyze the data to identify opportunities to reduce costs, improve
service levels, and provide better management of service providers.
Change: Create supporting structure, processes, and roles:
* Create or identify organizations responsible for coordinating or
managing service purchases;
* Establish proactive business relationships between end users,
purchasing units, and other stakeholders;
* Implement more integrated team-based sourcing processes;
* Create commodity/service experts.
Support: Enable success through sustained leadership, communication,
and metrics:
* Obtain sustaining support from senior leadership to facilitate
change;
* Establish clear lines of communication between all affected parties;
* Demonstrate value and credibility of new processes through use of
metrics.
Source: GAO analysis.
[End of figure]
The principles and practices largely reflect a common sense approach
toward almost any business venture, that is, providing good
leadership, developing and harnessing knowledge, making sure business
processes maximize return, and measuring results. Yet the practices
represented significant changes to the way services were traditionally
acquired. Company officials generally described their previous
approach to acquiring services as being fragmented, with only limited
corporate visibility and control over the amount spent on services by
their business units. Existing information systems provided only scant
information on services. For the most part, service acquisitions were
viewed as a mission support activity and peripheral to the bottom
line, rarely capturing the attention of top management. As one company
official described it, the traditional approach taken by his company,
and most companies, resulted in spending for services "just happening."
Securing Up-front Commitment from Top Leaders:
In each of the companies we visited, the support and commitment of
senior management was viewed as essential to facilitating the
company's efforts to reengineer its approach to acquiring services.
Company officials indicated senior management provided the direction
and vision; facilitated the development of common processes and
approaches; and, when necessary, provided the clout necessary to
obtain initial buy-in and acceptance of reengineering efforts. Senior
managers expressed commitment in various ways, ranging from
restructuring the corporate procurement function, to providing greater
visibility and authority over the company's service spending to
issuing a memorandum signaling their support for a new way of doing
business. Table 2 highlights changes that were common in the companies
we studied.
Table 2: Changes in Senior Management's Involvement in Their Company's
Purchase of Services:
Traditional: Services viewed as ancillary to core business.
Strategic: Services viewed as central to core business.
Traditional: Senior managers not actively involved in pursuing changes
to how the company acquires services.
Strategic: Senior management provides direction and vision for change,
establishes goals and targets, and devotes increased attention to
services.
Source: GAO analysis.
[End of table]
In general, successful reengineering efforts are spearheaded by a
company's senior management since they have the authority to require
employees to accept reengineered roles, the responsibility to set the
corporate agenda and to define the organization's culture, and the
ability to remove barriers that block changes to the organization's
corporate mindset. Prior research has found that the lack of top
management commitment is the cause of most reengineering failures.
[Footnote 3]
Obtaining Better Knowledge on Service Spending:
The companies we visited analyzed their spending on services to answer
the basic questions of how much was being spent and where the dollars
were going. After conducting the analyses, the companies realized that
they were buying similar services from numerous providers, often at
greatly varying prices. Such knowledge brought home the need for
companies to become more strategic in planning and managing their
service acquisitions to maintain a competitive edge. Table 3
highlights the differences in the availability and use of spending
data between the practices traditionally used by companies and those
pursuing a more strategic approach.
Table 3: Comparison of Traditional and Strategic Approaches to
Spending Data:
Traditional: Financial and information management systems focus on
components and materials used to make products, but do not provide
data needed to effectively manage the company's service spending.
Strategic: Systems are developed to provide credible, reliable, and
timely data on acquired services.
Traditional: Data is used principally for "after-the-fact" reporting
purposes.
Strategic: Data is used to identify opportunities to rationalize
supplier base and reduce costs.
Source: GAO analysis.
[End of table]
The benefits of having credible and reliable data on service spending
were substantial. Companies used this data to "rationalize" their
supplier base, or in other words, to determine the right number of
suppliers that met their needs. Once the companies determined how many
suppliers they needed to meet their needs, they could then use this
data to help them better leverage their buying power. Table 4
illustrates how companies used spend analyses to identify
opportunities to rationalize their supplier base and reduce costs.
Table 4: Examples of How Service Spend Analyses Benefited the
Companies We Studied:
Company: Hasbro;
What the spend analysis revealed:
Hasbro's spend analysis revealed that it had 17 providers of temporary
administrative, clerical, and light industrial personnel for 7
locations. The company also found that it had inconsistent policies
and processes, multiple contact points, and limited performance
measures and that information was not being shared across locations.
What the company did with this knowledge:
Hasbro consolidated its temporary personnel supplier base to a single
provider, reduced the number of oversight personnel, established a
formal communication program, and had the contractor assume
responsibility for developing consistent policies and processes.
Further, by leveraging its buying power, Hasbro negotiated an overhead
rate that was 45 percent lower than previously obtained and reduced
its total spending on temporary labor from $5 million to $4.3 million.
A Hasbro official told us its efforts often resulted in savings
ranging from 15 percent to 45 percent and improved service levels.
Company: Brunswick;
What the spend analysis revealed:
Brunswick conducted a spend analysis to determine the types of
telecommunication services its business units acquired, monthly usage
rates, and cost data to help it define its requirements and establish
a negotiating position. It found its seven business units had three
different telecommunication providers.
What the company did with this knowledge:
Following a competition in which six potential suppliers participated,
Brunswick awarded a contract to a single supplier. Company officials
told us their negotiated per minute usage rates were about 60 percent
less than the average of its prior rates, saving Brunswick $3.2
million in the first 8 months of the new contract.
Company: Dun & Bradstreet;
What the spend analysis revealed:
Dun & Bradstreet's spend analysis showed that the company employed
hundreds of providers of temporary labor. While Dun & Bradstreet
originally planned to reduce the supplier base to a single provider,
its market research found that no one company could meet its needs.
What the company did with this knowledge:
Dun & Bradstreet revised its acquisition strategy to designate a
preferred supplier that would receive 70 percent of its business and
the contract with a limited number of second tier suppliers that would
provide personnel with specialized skills or provide labor to areas
not served by the preferred supplier. Company officials told us this
strategy enabled them to acquire more actual labor per dollar since
the preferred supplier agreed to charge a lower profit and overhead
rate than it had previously done when it had a smaller portion of Dun
& Bradstreet's business.
Company: EDS;
What the spend analysis revealed:
Prior to implementing its centralized process for procuring
information technology services, a spend analysis revealed that EDS
had more than 3,000 "unleveraged" suppliers.
What the company did with this knowledge:
EDS initially conducted a strategic sourcing exercise to better define
its needs and establish a more manageable number of suppliers and
instituted various interim process changes. EDS' long-term solution
was to develop an integrated, web-based, financial and management
information system capable of systematically matching its business
managers' needs with potential service providers; capturing spending,
wage, and overhead data by skill set and supplier; assessing supplier
performance; and performing various financial management and
accounting tasks. EDS officials told us that it has reduced its
supplier base to 14 national suppliers, 6 regional suppliers, and a
small set of providers of personnel with specialized skills, and it
typically negotiates overhead rates that are at least one-third less
than the industry average.[A] EDS officials estimated they had saved
more than $210 million over the past 5 years by pursuing a more
strategic approach to purchasing information technology services.
[A] According to EDS officials, its system contains cost data on more
than 20 million labor hours, to which data on an additional 500,000 to
600,000 hours are added monthly. EDS officials indicated that the
ability to track and analyze the types of skill sets acquired, from
whom and at what price, provides EDS an ability to aggressively
negotiate future labor and overhead rates with service providers.
Source: GAO analysis.
[End of table]
Company officials told us spend analyses can vary in the degree and
type of information provided. At a minimum, a basic spend analysis
should identify:
* what types of services are being acquired;
* how many suppliers for a specific service the company is using;
* how much they are spending for that service, in total and with each
supplier; and;
* which units within the company are purchasing the services.
Some companies augmented this basic information with more detailed
data, such as the number of labor hours purchased, the hourly wage rate
paid, and the amount of overhead paid.
Preparing an initial service spend analysis was challenging. Company
officials told us their existing financial or management information
systems generally did not provide the right type of data needed to
manage service spending. As one official explained, the systems were
designed to provide detailed information on the components and raw
materials that were used to make their products but often provided
only scant information on services. For example, officials at one
company noted that their systems often reported only a service
provider's name and the total cost of the effort, but they did not
identify the type of service acquired or key cost elements of the
service, such as the number of labor hours supplied, the type or
category of labor acquired, and the cost per hour of the labor.
Further, this information was often not maintained in a standardized
format and was of poor quality, thus hampering efforts to use existing
information to more effectively manage service spending. Consequently,
companies had to spend months collecting, validating, and analyzing
data extracted from their financial or other management systems.
Officials from one company noted that they spent about 3 months
analyzing data provided by their accounts payable and purchasing
systems, and at times, had to review individual purchase orders to
prepare a spend analysis for just one of their business units. Even
after analyzing individual purchase orders, they had to make educated
guesses as to the most likely service the company was buying.
Officials from the companies we spoke with indicate that they have
developed, or are in the process of developing, management or
financial information systems that can provide them reliable spending
data in a timely fashion. These officials stated they now use spend
analyses as part of their process to identify additional targets of
opportunity, measure compliance with preferred supplier agreements,
respond to customer input, and track progress toward meeting annual
performance objectives.
Creating Structure, Processes, and Roles to Support an Enterprisewide
Perspective:
The companies we studied found it necessary to change how they
acquired services, principally in terms of business processes,
organizational structures, and roles and responsibilities. These
changes were meant to take the companies from a fragmented approach to
doing business to one that was more coordinated and strategically-
oriented. The end goal was to institute an enterprisewide perspective”
one that would ensure that the company was getting the best overall
value. Among other changes, each company elevated or expanded the role
of the company's procurement organization; designated commodity
managers to oversee key services; and made extensive use of cross-
functional teams to help identify the company's service needs, conduct
market research, evaluate and select providers, and manage
performance. Table 5 illustrates how these changes affected the role
of purchasing in the companies we studied compared to the traditional
way of doing business.
Table 5: The Changing Role of Purchasing in Leading Companies:
Traditional: Independent, local organizations with limited visibility
over the company's total service spending.
Strategic: Central/matrixed organizations responsible for coordinating
or managing service purchases.
Traditional: Reactive support role to business units.
Strategic: Proactive business relationships.
Traditional: Limited coordination between business and purchasing
units and other functions such as legal or finance.
Strategic: Procurement process based on cross-functional teams.
Traditional: Buyers.
Strategic: Commodity/service experts.
Source: GAO analysis.
[End of table]
In making such changes, the companies positioned themselves to more
effectively manage and coordinate their service purchases. These
changes transformed the role of their purchasing units from one
focused on mission support to one that was strategically important to
the company's bottom line. For example, Dun & Bradstreet officials
told us that, with the support of senior corporate management, their
procurement function now exercises far more control and responsibility
over services that traditionally had been the responsibility of the
business units. These officials indicated they often now act in a
proactive advisory capacity to their business units, rather than just
being relied upon for their sourcing and negotiating expertise.
Elevating Procurement Organizations:
To cut across traditional organizational boundaries that contributed
to the fragmented approach to acquiring services, the companies we
visited generally restructured their procurement organizations,
typically assigning the organizations greater responsibility and
authority for strategic planning and management and oversight of the
companies' service spending. As table 6 illustrates, making this
change was seen as critical to improving coordination and optimizing
resources.
Table 6: Examples of How Leading Companies Restructured Their
Procurement Organizations:
Company: Brunswick:
How the companies restructured their procurement organization:
Historically, Brunswick had allowed its business units to operate
fairly independently, with the corporation acting more like a holding
company. According to Brunswick officials, this decentralized
structure inhibited its ability to conduct an enterprisewide
assessment of its procurement processes and effectiveness. Brunswick's
new chief executive officer believed a more coordinated and
cooperative approach would help rationalize Brunswick's supplier base
and leverage the company's buying power. Consequently, Brunswick
established a corporate procurement organization to provide strategic
planning for and policy and guidance to its business units and
elevated the role of procurement to the vice-presidential level within
its corporate structure.
Company: ExxonMobil;
How the companies restructured their procurement organization:
Senior corporate leadership took the opportunity presented by the 1999
merger of Exxon and Mobil to develop a procurement organization that
would provide the company's 11 business units a competitive advantage
by fully optimizing their supply chain through strategic sourcing of
key services and gain operating cost efficiencies through a fully
integrated procurement and payment process. The president of
ExxonMobil's global services company reports directly to an executive
vice president.
Company: EDS;
How the companies restructured their procurement organization:
EDS employed an informal, decentralized system for obtaining the
services of programmers, systems analysts, and other information
technology professionals employed on a temporary or contract basis.
This system provided managers in the field almost complete authority,
but it provided EDS management with only limited visibility over the
costs, performance, and value of the services acquired. In the mid-
1990s, EDS faced increasing expenditures for labor services needed to
meet its client needs, Additionally, in 1998, the chairman challenged
the company to reduce its costs by $1 billion and looked for the
corporate procurement organization to contribute significantly to this
goal. While the procurement organization previously had been two to
three layers from the chief executive officer, the new procurement
organization now reports directly to the chief financial officer.
Additionally, EDS established a separate unit specifically responsible
for developing, managing, and executing a comprehensive sourcing and
supply process for acquiring information technology professionals,
which EDS officials estimated represented approximately one-third of
the services it acquired.
Source: GAO analysis.
[End of section]
Establishing Cross-Functional Procurement Processes:
The companies we visited generally established new processes for
conducting tasks typically encountered during any procurement action,
such as identifying needs and evaluating potential service providers.
Most importantly, the companies began making extensive use of "cross-
functional" teams to make sure they had the right mix of knowledge,
technical expertise, and credibility.[Footnote 4] The teams varied in
size but generally included representatives from the company's
purchasing unit, its internal clients or users of the service, and its
budget or finance office. The teams were responsible for analyzing
spending data, identifying and prioritizing potential opportunities
for more detailed review, defining internal needs and requirements,
and conducting market research. This approach helped companies to
better define their needs and to identify, select, and manage service
providers, and in turn, helped ensure that users' needs were met at
the lowest total costs to the companies. Table 7 provides two examples
of companies' cross-functional procurement processes.
Table 7: Examples of Leading Companies' Cross-Functional Procurement
Processes:
Company: ExxonMobil;
How the companies use their cross-functional procurement process:
ExxonMobil, the largest company we visited, established a formal
procurement process. ExxonMobil officials noted their processes are
detailed in a sourcing handbook that is intended to be both practical
and flexible enough to provide the basis and support for innovative
sourcing strategies. The handbook provides both general guidelines and
specific procedures and includes a suite of tools, templates, and
checklists needed to effectively conduct sourcing activities.
ExxonMobil uses a four-phase, data-driven procurement process
(opportunity identification, strategy development, strategy execution
and supplier selection, and relationship management) that involves
close interaction with the procurement function, internal clients, and
suppliers. Sourcing strategy development is integrated within the
business units' annual and long term planning cycles to ensure that
the strategies, priorities, and cost reduction objectives are fully
aligned.
Company: Hasbro;
How the companies use their cross-functional procurement process:
Hasbro begins its procurement process almost a year in advance, using
a team-based approach to identify 12 to 15 opportunities each year for
a more comprehensive review. According to a Hasbro official, about 30
people”representatives from purchasing, finance, logistics, and
affected business units”participate in this exercise and consider,
among other things, Hasbro's total spending for that service, the
significance of the service relative to Hasbro's principal product
lines, and market conditions. Once these opportunities are identified,
smaller cross-functional teams are formed to conduct more in-depth
analyses. These teams initially focused their activities on
identifying Hasbro's requirements and conducting market research;
however, the teams subsequently obtained and evaluated information
from potential suppliers, conducted negotiations, and finally selected
the suppliers. A team member is generally designated to monitor the
supplier, in part, as a means to provide feedback into the planning
cycle.
Source: GAO analysis.
[End of table]
Establishing Dedicated Commodity Managers:
Several companies established full-time dedicated commodity managers
to provide more effective management over key services, which were
generally described as those being of high-dollar value or those that
had a significant impact on the company's operations ExxonMobil, for
example, has eight commodity managers responsible for groups of
related materials or services, such as mining and drilling services,
transportation, information technology, advertising, and promotion.
Similarly, Brunswick has established five positions to provide a more
strategic and coordinated approach for key services, including
telecommunications and information technology services. According to
Brunswick officials, these managers will serve both as process and
commodity experts to coordinate Brunswick's service purchases as well
as change agents to further reengineer Brunswick's procurement
processes. Merrill Lynch's commodity managers are expected to be
actively involved in defining requirements with its internal clients,
negotiating with potential service providers, and assisting in
resolving performance or other issues arising after a contract is
awarded.
Enabling Success Through Sustained Leadership, Communication, and
Metrics:
The companies we studied found that three ingredients were critical to
overcoming resistance, cultural barriers, and other impediments to
their reengineering efforts: sustained leadership, communication, and
measurement. Table 8 illustrates how these characteristics differed
from when the companies were pursuing a traditional approach to
purchasing services.
Table 8: Characteristics Promoting Successful Strategic Reengineering
Efforts:
Traditional: Corporate leaders not actively engaged in improving
service acquisitions.
Strategic: Senior leaders actively reinforce commitment to achieve
change.
Traditional: Business units and purchasing organizations do not
clearly communicate or cooperate.
Strategic: Clear lines of communication between all affected parties.
Traditional: Performance measures did not exist.
Strategic: Performance measures used to demonstrate value and
credibility of new processes.
Source: GAO analysis.
[End of table]
First, company officials reiterated the need to have the continued
support of senior management, well beyond just providing the initial
impetus for making changes to service acquisitions, since the
companies were engaging in long-term efforts. Specifically, they noted
that senior managers need to continually back efforts to develop
common processes and approaches and provide the necessary clout to
push for acceptance of reengineering efforts.
Second, communication was viewed as vital to getting and keeping staff
on board with changes. Company officials explained that up until the
reengineering effort, the business units and purchasing organizations
generally did not clearly communicate their needs or work together to
identify solutions; consequently, working together represented a new
and potentially challenging way of doing business. To achieve buy-in
and avoid unforeseen pitfalls, reengineering teams needed to make a
compelling case for change and clearly communicate the rationale,
goals, and expected results from the new processes or practices.
Companies also found that it was important that their reengineering
teams listen to their business units' and other affected parties'
needs and concerns and be open to revising plans as appropriate. Doing
so helped ensure that the changes did not undermine their managers'
ability to produce results, but rather enhanced their ability to carry
out their work in terms of (1) more timely delivery of needed
services, (2) the hiring of better skilled or trained consultants,
(3) reduced costs, or (4) providing an alternative solution to meet
their needs.
Third, while used to various degrees, metrics, according to company
officials, increased the likelihood that reengineering efforts would
be successful. In general, metrics can be used to:
* evaluate and understand an organization's current performance level;
* identify the critical processes that require focused, management
attention;
* obtain the knowledge needed to set realistic goals for improvement;
and;
* document results over time.
Companies typically measured total savings, cost avoidances, or some
other financial measure, which were often reported to senior corporate
officials. For example, Dun & Bradstreet officials told us that
measuring savings is a key element of their procurement process.
Consequently, senior company management sets targets for its
procurement function at the beginning of the year and regularly
reviews progress reports.
Because most companies expanded the traditional role of the
procurement function, several companies surveyed their business units
to assess their satisfaction with the quality, timeliness, and value
of the service provided by their procurement organization. For
example, ExxonMobil employed an extensive, three-tiered system to
measure the performance of the procurement function. Specifically, it
established eight top-level metrics to assess the procurement
organization's progress in meeting financial, customer satisfaction,
and business operation objectives. A second tier of metrics is used
for performance monitoring and internal/external benchmarking, while a
third tier is used at the local site level to manage day-to-day
activities, including compliance with best practices. Company
officials also noted that the measurements needed to be credible to
prevent disagreements over numbers that could undermine the value of
the process itself.
Company officials also cited the need to measure compliance with or
use of the new processes, especially when in the initial stages of the
reengineering effort, since the extent to which business units use a
new, lower cost approach directly affected cost savings. For example,
EDS officials told us that about half of the information technology
services are acquired using their new procurement process. They are
monitoring the degree to which business managers use the process as it
is introduced in their units. EDS estimates that, if business managers
meet the company's target of 70 to 80 percent of usage by the end of
2001, the company would save an estimated $26 million.
Strategic Approach Could Serve As a Framework to Guide DOD's Service
Contracting Initiatives:
Senior DOD leadership has recognized the need to improve its processes
for acquiring services, especially as it increasingly relies on the
acquisition of services to meet its needs. However, DOD lacks a
strategic plan that integrates or coordinates the various initiatives
underway within the Department or that provides a road map for
identifying or prioritizing future efforts. In this regard, the
strategic approach followed by the leading companies we visited could
serve as a general framework to guide DOD's service contracting
initiatives. DOD may find that a "one-size-fits-all" approach will not
work and that it will need to tailor its approach to meet its specific
needs and requirements. In doing so, DOD officials will need to
consider DOD's size and the range and complexity of the services it
acquires, address the existence of insufficient information and
financial systems, and take into account the unique aspects of the
federal acquisition environment.
DOD Leadership Recognizes That Changes Are Needed:
DOD leadership has recognized the need to change DOD's current
practices for acquiring services. In January 2001, DOD's Under
Secretary of Defense (Acquisition, Technology, and Logistics) noted
that while DOD was making important strides in improving the quality
of services acquired, DOD had not achieved the level of excellence and
consistency that it needed to meet its needs. Further, in his annual
report to the President and the Congress for 2001, the Secretary of
Defense noted that DOD is working to adapt the same "revolutionary
business and management practices that helped the commercial sector
gain a competitive edge in a rapidly changing global marketplace."
The need for change is due in part to the increasing role that
services play in DOD. Over the past decade, DOD's total purchases
declined considerably as the end of the Cold War led it to reduce its
purchases of supplies and equipment. During this period, however,
DOD's purchases of services rose by more than 16 percent in real
terms, largely attributable to increased purchases of information
technology services and professional, administrative, and management
support services. Consequently, in fiscal year 2000, DOD purchased
about $53.1 billion in services, roughly the same amount it spent on
supplies and equipment. Figure 3 shows where DOD's service contracting
dollars went in fiscal year 2000.
Figure 3: Services Purchased by DOD in Fiscal Year 2000:
[Refer to PDF for image: vertical bar graph]
Professional, administrative and management support: approximately $12
billion;
Construction, repair and maintenance of structure and facilities:
approximately $11.5 billion;
Maintenance, repair and rebuilding of equipment: approximately $6
billion;
Information technology services: approximately $5.5 billion;
Utilities and housekeeping services: approximately $2.5 billion;
Transportation, travel and relocation: approximately $2.5 billion;
Medical services: approximately $2 billion;
Architect and engineering: approximately $2 billion;
Operation of government-owned facilities: approximately $1.8 billion;
Other services: approximately $6 billion;
Source: GAO analysis of data extracted from the Federal Procurement
Data System for actions exceeding $25,000. Figure excludes actions
categorized as research, development, test and evaluation activities.
[End of figure]
While senior DOD leadership has called for dramatic changes, DOD
currently operates much like the companies we visited operated before
they adopted a strategic approach. For example:
* Responsibility for acquiring services is spread among individual
military commands, weapon system program offices, or functional units
on military bases, with little visibility or control at the DOD- or
military-department level.
* DOD has an information system that can provide information on the
amount spent on services, but the reliability of the information is
questionable and the system itself is seldom used as a tool to manage
or identify opportunities for managing DOD's supplier base.
* Procurement processes within DOD are not always carried out
efficiently and effectively. Our work, as well as that of other
oversight agencies, continues to show that requirements are not
clearly defined for many service contracting efforts, alternatives are
not fully considered, vigorous price analyses are not performed, and
contractors are not adequately overseen. For example, last year, we
raised concerns that DOD has avoided competition when acquiring
services, and the DOD Inspector General found that DOD had not
adequately performed many basic management tasks, including market
research, pricing analyses, and contractor surveillance. Such problems
contributed to our decision to designate contract management as a high-
risk area for DOD.[Footnote 5]
* There are few service contracting-related enterprisewide annual
performance metrics. For example, DOD's key metrics for measuring
changes to its contracting processes include (1) the percentage of
purchases made by purchase card, (2) the percentage of paperless
contracting and payment transactions, and (3) the percentage reduction
in acquisition workforce personnel.[Footnote 6] These metrics do not
measure the cost effectiveness or quality of services obtained.
DOD Does Not Have a Strategic Plan for Addressing Service Contracting
Issues:
DOD and individual defense components have various initiatives
underway to better manage their acquisition of services, including
expanding the use of performance-based contracting approaches.
However, DOD does not have a strategic plan to coordinate current
service contracting initiatives or to serve as a road map for
identifying or prioritizing future efforts.
From a departmentwide perspective, DOD, like other federal agencies,
is expanding the use of performance-based contracting approaches to
help improve its processes for acquiring services. Performance-based
contracting is an approach where the agency specifies the outcome or
result it desires and lets the service provider decide how best to
achieve the desired outcome. The government has not widely used this
process, but it is attempting to do so to attract leading commercial
companies, gain greater access to technological innovations, and
better ensure contractor performance. To support this initiative, DOD
has issued a guidebook and is providing additional training to its
acquisition personnel. Additionally, in January 2001, DOD chartered a
senior-level team to identify best practices, guidance, training, and
additional policy needs for service contracting.[Footnote 7] This team
has focused its initial efforts on drafting policy to provide better
oversight on purchases of high-dollar value services.[Footnote 8]
Additionally, officials from the military departments noted that their
commands are pursuing a number of service contracting-related
initiatives. The Naval Supply Systems Command, for example, is
establishing commodity managers for selected supplies and services
being purchased via electronic procurements. The Naval Sea Systems
Command is developing an electronic procurement system for acquiring
professional services, such as for financial management and logistics
support, for the command's headquarters. Air Force officials noted
that they are considering creating a position at the senior executive
service-level that would have specific responsibility for developing
policy, reviewing acquisition strategies for high-dollar value
services, and providing general oversight of the Air Force's spending
on services. Army officials noted that they are evaluating how to
centralize the processes for acquiring services within the Office of
the Secretary of the Army.
While DOD officials pointed to these initiatives as attempts to
address various service contracting needs and issues, they
acknowledged that DOD has not developed a strategic plan to coordinate
these initiatives or to provide a road map for identifying or
prioritizing future activities. They noted that DOD is just now
turning its attention to improving how it acquires services, but they
believed that DOD has various elements”including the commitment by
senior DOD leadership”in place that could serve as building blocks for
taking a more proactive role in managing services.
Developing a Strategic Approach to Meet DOD's Diverse Needs:
The strategic approach followed by the leading companies we visited
could serve as a general framework to guide DOD's service contracting
initiatives. However, DOD may find that a "one-size-fits-all" approach
will not work for all services and that it will need to tailor its
approach to meet its specific needs and requirements. In doing so, DOD
officials will need to consider DOD's size, the range and complexity
of the services it acquires, and the existence of insufficient
information and financial systems and take into account the unique
aspects of the federal acquisition environment.
While company officials stressed the need to take an enterprisewide
perspective on acquiring services, DOD's size and service needs may
lead it to pursue different approaches depending on the specific
service. DOD officials noted that within the military departments,
there are individual commands that are comparable to a Fortune 500
company, each spending billions of dollars annually on services.
Further, DOD officials noted some services are acquired
departmentwide, while other services (such as ship support and
maintenance) may be unique to specific commands, units, or geographic
locations. DOD officials agreed that they would need, as a first step,
to obtain and analyze data on DOD's service spending to identify and
prioritize specific services where a more coordinated acquisition
approach may be appropriate.
Additionally, DOD will need to consider how existing problems in its
information technology and financial management systems could affect
its service contracting initiatives. For example:
* DOD's efforts to deploy a single automated system”the Standard
Procurement System”to perform numerous contract management-related
functions have encountered cost overruns, schedule delays, and
performance issues. DOD expected the system to replace legacy systems
that supported divergent contracting processes and procedures across
component organizations and to provide electronic commerce
capabilities and a common data repository.
* DOD continues to confront pervasive weaknesses in its financial
management systems, hindering its ability to produce timely and
accurate financial information needed to make sound business decisions.
* DOD envisions using electronic commerce technologies to transform
and streamline business processes. However, we have reported that
DOD's electronic commerce vision is at risk because DOD does not have
an architecture, or common blueprint, that is essential for
effectively introducing modern electronic commerce operations.
[Footnote 9]
Lastly, as a federal agency attempting to reengineer its approach to
purchasing services, DOD faces challenges that private sector
organizations do not face. In particular, DOD is subject to statutes
and regulations governing socio-economic objectives, competition, and
contracting procedures. Under existing statutes and regulations, for
example, DOD is subject to goals for contracting with small businesses
and may be constrained in its ability to consolidate numerous, smaller
requirements into larger contracts, an approach often taken by the
companies we visited. Consequently, DOD will need to consider how to
adapt the practices followed by leading companies to the unique
federal environment.
Conclusions:
The leading companies we visited chose to institute dramatic changes
to the way services were purchased and managed instead of only making
incremental improvements and continuing to treat services as being
peripheral to the bottom line. While difficult and challenging to
carry out, companies pursued a strategic approach because it was
viewed as essential to staying competitive. DOD leaders have already
made a general commitment to adopt best practices and make dramatic
changes. With this commitment in place, they can take on the more
difficult tasks of developing a reliable and accurate picture of
service spending across DOD; determining what structures, mechanisms,
and metrics can be employed to foster a strategic approach; and
tailoring those structures to meet DOD's unique requirements.
Recommendation for Executive Action:
To achieve significant improvements across the range of services DOD
purchases, we recommend that the Secretary of Defense evaluate how a
strategic reengineering approach, such as that employed by the leading
companies we visited, could be used as a framework to guide DOD's
reengineering efforts. Specifically, the Secretary of Defense should
assess whether:
* current or planned financial or management information systems can
provide the type of spending data that DOD needs to identify
opportunities to leverage its buying power, reduce costs, and provide
better management and oversight of its suppliers. Such data would
include what types of services are being acquired; how many suppliers
are being used for specific services; and how much DOD is spending on
specific services, in total and with each supplier.
* DOD's current organizational structure, processes, and roles are
adequate to support a more strategic approach to acquiring services;
for example, whether cross-functional teams would improve the
coordination and management of service acquisitions and whether it
would be beneficial to establish full-time dedicated commodity/service
managers to provide more effective management of key services.
Agency Comments:
In commenting on a draft of this report, DOD concurred with the views
expressed in the draft report. DOD noted that it was committed to
taking a more strategic approach to acquiring services as well as
developing an oversight process for the acquisition of services. DOD
also provided informal technical comments, which we incorporated as
appropriate.
Scope and Methodology:
The Chairman and the Ranking Minority Member, Subcommittee on
Readiness and Management Support, Senate Committee on Armed Services,
requested that GAO develop a body of work that examines the practices
of leading companies and identify "best practices" that could yield
benefits to DOD. This assignment focused on (1) how leading companies
reengineered their practices for acquiring services and (2) the extent
to which DOD is pursuing a similar approach.
To identify the best practices in the commercial sector, we conducted
literature searches and contacted universities, industry associations,
research organizations, and experts in purchasing practices. On the
basis of these discussions and analyses, we selected several leading
companies that were recognized for their purchasing practices for
buying services. We provided a standard agenda to each company to
obtain general information on its organizational structure; the role,
structure, and nature of its purchasing organization; the process by
which it determined its service needs; and the way the company
selected, managed, and evaluated service providers. We also asked each
company to discuss in more detail a specific service buy that best
exemplified its reengineered purchasing practices. After our visits,
we provided a summary of the information obtained to ensure that we
had accurately recorded and understood the information each company
provided. We also provided each company a copy of our draft report for
review and comment. The companies we visited were
* Brunswick Corporation, Lake Forest, Illinois;
* The Dun & Bradstreet Corporation, Murray Hill, New Jersey;
* Electronic Data Systems Corporation, Plano, Texas;
* ExxonMobil Corporation, Fairfax, Virginia;
* Hasbro, Inc., Pawtucket, Rhode Island; and;
* Merrill Lynch & Co., Inc., Jersey City, New Jersey.
To assess what lessons can be drawn from these companies' experiences
to guide DOD's efforts, we interviewed officials within the Office of
the Secretary of Defense and the military departments to determine
what efforts they had underway to improve the acquisition of services.
We also reviewed policy memoranda, guidance, and other documents
pertaining to ongoing and planned initiatives that affected service
contracting. We discussed with these officials our assessment of the
leading companies' approaches and obtained their views on their
approaches similarities and differences. We also asked them about
potential barriers to employing the approaches we identified. We plan
to evaluate how specific best practices could be adopted or adapted
for use by DOD on future assignments.
Our report summarizes the approaches and key elements that the
companies employed to reengineer their purchasing practices for
services. We did not intend to suggest that all companies have
followed the same approaches or to imply that other approaches could
not be taken to achieve similar results. Also, we were limited in our
ability to obtain and present some relevant data that companies
considered proprietary in nature. Due to the competitive nature of
their businesses, the companies did not wish to release details of how
their reengineered purchasing practices resulted in specific
successful outcomes.
We conducted our review from June 2000 to December 2001 in accordance
with generally accepted government auditing standards.
We are sending copies of this report to the Secretary of Defense; the
Secretaries of the Army, Navy, and Air Force; the Director, Office of
Management and Budget; the Administrator, Office of Federal
Procurement Policy; and interested congressional committees. We will
also provide copies to others on request.
If you have any questions about this report or need additional
information, please call me on (202) 512-4841. Key contributors to
this report are listed in appendix II.
Signed by:
Jack L. Brock, Jr.
Managing Director:
Acquisition and Sourcing Management:
[End of section]
Appendix I: Comments From the Department of Defense:
Office Of The Under Secretary Of Defense:
Acquisition, Technology And Logistics:
3000 Defense Pentagon:
Washington, DC 20301-3000:
January 16, 2002:
Mr. Jack Brock:
Managing Director:
Acquisition and Sourcing Management:
U.S General Accounting Office:
Washington, DC 20548:
Dear Mr. Brock:
Attached is the Department of Defense (DoD) response to the General
Accounting Office (GAO) draft report GAO-02-230, "Best Practices:
Taking a Strategic Approach Could Improve DoD's Acquisition of
Services," dated December 12, 2001 (GAO Code 120031). The Department
concurs in the views express in the GAO draft report; however,
specific comments concerning your report are attached.
Sincerely,
Signed by:
Donna S. Richbourg:
Director, Acquisition Initiatives:
Attachments: As stated:
[End of letter]
General Accounting Office Draft Report:
Dated: December 12, 2001:
(GAO Code 120031):
"Best Practices: Taking a Strategic Approach Could Improve DoD's
Acquisition of Services"
DOD Comments In Response To The GAO Recommendations:
Recommendation: The GAO recommended that the Secretary of Defense
expand the current charter of the senior-level integrated process team
to include evaluating and reporting on how a strategic reengineering
approach, such as that employed by the leading companies we visited,
could be used as a framework to guide DOD's reengineering efforts.
Specifically, the team should be tasked to assess whether:
* current or planned financial or management information systems can
provide the type of spending data that commercial companies believed
were critical to identify opportunities to leverage their buying
power, reduce costs, and provide better management and oversight of
their suppliers. Such data would include what types of services are
being acquired; how many suppliers are being used for specific
services; and how much DOD is spending on specific services, in total
and with each supplier.
* DOD's current organizational structure, processes, and roles are
adequate to support a more strategic approach to purchasing services;
for example, whether cross-functional teams could be used to
coordinate and manage service purchases and whether DOD could
establish full-time dedicated commodity/service managers to provide
more effective management over key services.
DOD Response: Concur. The Department is committed to taking a more
strategic approach to the acquisition of services. In that regard, DoD
is already implementing plans to upgrade the Federal Procurement Data
System to provide more detail on service acquisitions. The upgrade
will include all those elements required by Section 801 of the FY2002
National Defense Authorization Act. As the GAO report accurately
states, DoD is developing an oversight process for the acquisition of
services. One of the principal purposes of that oversight process is
to ensure that acquisitions of services are clear in their
requirements, are properly planned, and that desired outcomes are
identified and can be measured.
[End of section]
Appendix II: GAO Contact and Staff Acknowledgments:
GAO Contact:
Ralph Dawn (202) 512-4544:
Acknowledgments:
In addition to those named above, Cristina Chaplain, Timothy DiNapoli,
Gordon Lusby, Ronald Schwenn, and John Van Schaik made key
contributions to this report.
[End of section]
Footnotes:
[1] Contract Management: Trends and Challenges in Acquiring Services
[hyperlink, http://www.gao.gov/products/GAO-01-753T], May 22, 2001.
[2] More detailed information about our scope and methodology can be
found on pp. 23 through 25.
[3] Reengineering Organizations: Results of a GAO Symposium
[hyperlink, http://www.gao.gov/products/GAO/NSIAD-95-34], Dec. 13,
1994.
[4] For additional information on cross-functional teaming at DOD, see
Best Practices: DOD Teaming Practices Not Achieving Potential Results
[hyperlink, http://www.gao.gov/products/GAO-01-510], Apr. 10, 2001.
[5] Major Management Challenges and Program Risks: Department of
Defense [hyperlink, http://www.gao.gov/products/GAO-01-244], Jan. 2001.
[6] DOD is also measuring the percentage of service contracts awarded
that are considered to be performance-based, but this metric is not
included as one of DOD's annual performance goals.
[7] DOD's Services Acquisition Integrated Process Team is co-chaired
by the Deputy Under Secretary of Defense (Acquisition Initiatives) and
the Director, Acquisition Resources and Analysis and includes senior
representatives from each of the military departments, the General
Counsel's office, and offices responsible for DOD's military
installations, environmental security, contract policy, information
technology, and small business issues, respectively.
[8] DOD officials also identified DOD's TRICARE health care program
and its efforts to reengineer its acquisition of travel and
transportation services as efforts to better manage services from a
DOD-perspective.
[9] High Risk Series: An Update [hyperlink,
http://www.gao.gov/products/GAO-01-263], Jan. 2001.
[End of section]
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