Best Practices
Improved Knowledge of DOD Service Contracts Could Reveal Significant Savings Gao ID: GAO-03-661 June 9, 2003Department of Defense (DOD) spending on service contracts approaches $100 billion annually, but DOD's management of services procurement is inefficient and ineffective and the dollars are not always well spent. Recent legislation requires DOD to improve procurement practices to achieve savings. Many private companies changed management practices based on analyzing spending patterns and coordinating procurement in order to achieve major savings. This report evaluates five companies' best practices and their conduct and use of "spend analysis" and the extent that DOD can pursue similar practices.
The leading commercial companies GAO studied reported achieving and expecting to achieve billions of dollars in savings by developing companywide spend analysis programs and service-contracting strategies. Spend analysis answers basic questions about how much is being spent for what services, who are the suppliers, and where are the opportunities for leveraged buying to save money and improve performance. To obtain these answers, companies extract internal financial data, supplement this data with external data, organize the data into categories of services and suppliers, and have the data analyzed by managers or cross-functional teams to plan and schedule what services will be bought on a company wide basis. The results of spend analysis are also used for broader strategic purposes--to develop reports for top management, to track financial and other benefits achieved by the company, and to further improve and centralize corporate procurement processes. DOD is in the early stages of a spend analysis pilot. Although DOD is moving in the right direction, it has not yet adopted best practices to the same extent as the companies we studied. Whether DOD can adopt these practices depends on its ability to make long-term changes necessary to implement a more strategic approach to contracting. DOD also cites a number of challenges, such as its large and complex need for a range of services, the fragmentation of spending data across multiple information systems, and contracting goals for small businesses that may constrain its ability to consolidate smaller requirements into larger contracts. Challenges such as these are difficult and deep-rooted, but companies also faced them. For DOD to change management practices for the contracting of services will require sustained executive leadership at DOD as well as the involvement and support of Congress.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-03-661, Best Practices: Improved Knowledge of DOD Service Contracts Could Reveal Significant Savings
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Report to the Subcommittee on Readiness and Management Support,
Committee on Armed Services, U.S. Senate:
United States General Accounting Office:
GAO:
June 2003:
Best Practices:
Improved Knowledge of DOD Service Contracts Could Reveal Significant
Savings:
GAO-03-661:
GAO Highlights:
Highlights of GAO-03-661, a report to Subcommittee on Readiness and
Management Support, Committee on Armed Services, U.S. Senate
Why GAO Did This Study:
Department of Defense (DOD) spending on service contracts approaches
$100 billion annually, but DOD‘s management of services procurement is
inefficient and ineffective and the dollars are not always well spent.
Recent legislation requires DOD to improve procurement practices to
achieve savings.
Many private companies changed management practices based on analyzing
spending patterns and coordinating procurement in order to achieve
major savings. This report evaluates five companies‘ best practices
and their conduct and use of ’spend analysis“ and the extent that DOD
can pursue similar practices.
what GAO Found:
The leading commercial companies GAO studied reported achieving and
expecting to achieve billions of dollars in savings by developing
companywde spend analysis programs and service-contracting strategies.
Spend analysis answers basic questions about how much is being spent
for what services, who are the suppliers, and where are the
opportunities for leveraged buying to save money and improve
performance. To obtain these answers, companies extract internal
financial data, supplement this data with external data, organize the
data into categories of services and suppliers, and have the data
analyzed by managers or cross-functional teams to plan and schedule
what services will be bought on a company wide basis. The results of
spend analysis are also used for broader strategic purposes”to develop
reports for top management, to track financial and other benefits
achieved by the company, and to further improve and centralize
corporate procurement processes.
DOD is in the early stages of a spend analysis pilot. Although DOD is
moving in the right direction, it has not yet adopted best practices
to the same extent as the companies we studied. Whether DOD can adopt
these practices depends on its ability to make long-term changes
necessary to implement a more strategic approach to contracting.
DOD also cites a number of challenges, such as its large and complex
need for a range of services, the fragmentation of spending data
across multiple information systems, and contracting goals for small
businesses that may constrain its ability to consolidate smaller
requirements into larger contracts. Challenges such as these are
difficult and deep-rooted, but companies also faced them. For DOD to
change management practices for the contracting of services will
require sustained executive leadership at DOD as well as the
involvement and support of Congress.
What GAO Recommends:
To achieve savings, DOD should adopt the spend analysis best practices
of leading companies. DOD‘s approach should provide for an agencywide
view of service contract spending and promote collaboration to
leverage buying power across multiple organizations. DOD should also
submit a plan and a schedule to Congress for timely changes in
management structure and service-contracting business processes.
DOD concurred with the recommendation to adopt spend analysis best
practices but not with submitting a plan for management and business
process changes.
www.gao.gov/cgi-bin/getrpt?GAO-03-661.
To view the full report, including the scope
and methodology, click on the link above.
For more information, contact David Cooper (202) 512-4125,
CooperD@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Leading Companies Have Developed Formal Spend Analysis Programs to
Improve Services Procurement:
DOD Launches a Pilot Spend Analysis with an Eye toward Developing a
More Strategic Approach:
Conclusions:
Recommendations for Executive Action:
Agency Comments:
Scope and Methodology:
Appendix: Comments from the Department of Defense:
Tables:
Table 1: Leading Companies We Studied and Their Reliance on Buying
Services:
Table 2: Companies' Reported 2001 Procurement Spending and Savings:
Table 3: Comparison of DOD's Spend Analysis with Leading Company
Practices:
Figure:
Figure 1: DOD Contract Dollars for Goods and Services:
Abbreviations:
DOD: Department of Defense:
IBM: International Business Machines:
United States General Accounting Office:
Washington, DC 20548:
June 9, 2003:
The Honorable John Ensign Chairman The Honorable Daniel K. Akaka
Ranking Minority Member Subcommittee on Readiness and Management
Support Committee on Armed Services United States Senate:
The Department of Defense (DOD) faces critical challenges in deciding
how best to obtain the services it needs to achieve its mission. Within
the federal government, DOD is the dominant buyer of services in terms
of contracting dollars spent, accounting for $79 billion in 2001, more
than half the $140 billion spent by the entire federal
government.[Footnote 1] DOD spends more on services than it does on
supplies and equipment, and that spending is increasing year after
year. In spite of this, our work as well as that of DOD's Office of
Inspector General has found that DOD's spending on services is not well
managed--the current process is decentralized, insufficiently
rigorous, and unreliable. Although DOD is taking actions to address
these problems, it has a long way to go.
Like the federal government, private companies increasingly rely on
services and also struggle with methods to better manage their
purchasing. Last year we reported that to reduce costs, improve
productivity, and more effectively procure services, many companies
have adopted a strategic approach--centralizing and reorganizing their
operations to get the best value for the company as a whole--that is
based on the implementation of a variety of best practices.[Footnote 2]
These range from learning much more about their service spending to
buying services on an enterprisewide rather than business unit basis.
Pursuing such an approach clearly pays off. One recent survey of 147
companies in 22 industries indicated a strategic approach to
procurement had resulted in savings of more than $13 billion in one
year.[Footnote 3] The very same practices employed by the private
sector could serve as a foundation for improving the acquisition of
services in DOD.
When adopting a strategic, best-practices approach for changing
procurement business processes, companies begin with a "spend analysis"
to examine purchasing patterns to see who is buying what from whom. By
arming themselves with this knowledge, companies can leverage their
buying power, reduce purchasing costs, and better manage their
suppliers. In essence, spend analysis is the road map to procurement
cost-savings and performance improvements.
To follow up on our earlier work, you asked us to further evaluate
(1) the best practices of leading companies as they relate to
conducting and using spend analysis, and (2) the extent to which DOD
can pursue similar practices.
To conduct this work, we reviewed the spend analysis practices of
five leading companies that take a strategic approach to managing
services acquisitions: International Business Machines (IBM),
ChevronTexaco, Bausch & Lomb, Delta Air Lines, and Dell Computer. They
reported a combined spending for goods and services between $92 billion
and $94 billion in 2001. We selected these companies for review on the
basis of extensive research and because they have been recognized by
their peers for highly effective procurement and spend analysis
processes. However, we did not verify the accuracy of the procurement
costs and benefits reported to us by the companies. More information is
presented in our Scope and Methodology section beginning on page 40 of
this report.
Results in Brief:
The leading commercial companies we studied report achieving--and
expecting to achieve--billions of dollars in savings by developing
companywide spend analysis programs and services contracting
strategies. These companies' spend analysis programs answer some basic
questions--how much is being spent for what services, who are the
suppliers, and where are the opportunities for leveraged buying to save
money and improve performance. To obtain the answers, these companies
extract internal financial data, supplement that data with external
data, organize the data into categories of services and suppliers, and
analyze it. To obtain this information quickly, spend analysis programs
use automated systems that consolidate accounts payable data, and
supplement it when necessary with purchase card data and additional
information on suppliers' status and services purchased. Once
organized, the data are analyzed by managers or cross-functional teams
to plan, prioritize, and centrally source what services will be bought
from what specific suppliers. At this stage, spend analysis helps
companies make the proper adjustments to achieve expected savings.
Spend analysis is also used to develop reports for top management to
establish quarterly and annual savings goals, to track financial and
other benefits achieved, and to reorganize corporate procurement
processes under a more centrally led management structure.
In response to recent legislation requiring management and cost-saving
improvements in service contracts, DOD is in the beginning stages of a
spend analysis pilot. DOD leadership agrees that viewing spending from
a DOD-wide perspective will help identify large-scale savings
opportunities and other efficiencies over the current decentralized
procurement environment. Although moving in the right direction, DOD
has not yet adopted private sector best practices to the same extent as
the companies we reviewed. Whether DOD can adopt these practices
depends on the ability to make long-term changes that are necessary
when organizations decide to implement a more strategic approach to
service contracts. DOD also cites a number of challenges that may
hamper adoption of these practices. These include the size and
complexity of DOD's need for services, the fragmentation of the
services' spending data across multiple financial and procurement
systems, and socioeconomic goals for contracting with small and
diversely owned businesses. Contract management challenges such as
these are difficult and deep-rooted and will require sustained
executive leadership at DOD as well as the Congress's continued
involvement and support.
This report includes recommendations intended to help DOD adopt spend
analysis best practices and to use the resulting information to
implement a more strategic approach to planning and managing the
acquisition of services.
DOD commented on a draft of this report. DOD concurred with the
recommendation to adopt the spend analysis processes employed by
leading companies--and now intends to automate the process of data
collection and analysis to make it repeatable, rather than a one-time
effort. However, DOD did not concur with the recommendation to develop
a plan to institute changes in management structure and services
contracting business processes and to do so as part of its 2005 budget
submission. In response to the portion of DOD's comment that such a
timeframe would be premature, we modified the recommendation to allow
more time for DOD to complete the spend analysis pilot and use the
results to develop a plan. The DOD comments can be found in appendix I.
Background:
DOD is historically the federal government's largest purchaser of
services. Between 2001 and 2002, DOD's reported spending for services
contracting jumped almost 18 percent to about $93 billion.[Footnote 4]
In addition to the sizeable sum of dollars involved, DOD contracts for
a wide and complex range of services, such as professional,
administrative, and management support; construction, repair, and
maintenance; information technology services; research and
development; medical services; operation of government-owned
facilities; and transportation, travel, and relocation. In each of the
past five years, DOD has spent more on services than it has on supply
and equipment goods (that includes contracting for ships, aircraft, and
other military items) (see figure 1).
Figure 1: DOD Contract Dollars for Goods and Services:
[See PDF for image]
Note: Data extracted from the Defense Contract Action Data System for
1998-2002. Figure is in constant 2002 dollars and includes actions
categorized as research, development, test, and evaluation activities.
Figure excludes actions of $25,000 or less and purchase card spending.
[End of figure]
Despite this huge investment in buying services, our work--and the work
of the DOD Inspector General--has found that DOD's spending on services
is inefficient and not being managed effectively. In fact, we have
identified overall DOD contract management as a high-risk area, most
recently in our Performance and Accountability Series issued this past
January.[Footnote 5] Responsibility for acquiring services is spread
among individual military commands, weapon system program offices, or
functional units in various defense organizations, with limited
visibility or control at the DOD or military-department level. Too
often, requirements are not clearly defined; competition is not
adequately pursued; rigorous price analyses are not performed; and
contractors' performance is not sufficiently overseen.[Footnote 6]
Information systems that provide reliable data and are capable of being
used as management tools are lacking, and DOD has established few
enterprisewide contracting-related performance metrics. Further, DOD
lacks a strategic plan to identify and prioritize future service
contracting-related efforts for better management.
Seeking longer-term remedies to bring about sorely needed reform, the
Congress has passed legislation to direct DOD to adopt best practices
used by leading companies and to achieve significant savings through
improved management approaches for services contracts. The National
Defense Authorization Act for Fiscal Year 2002 directs DOD to improve
its management structure and oversight process for acquisition of
services.[Footnote 7] One of the law's aims is to prompt DOD to
undertake a comprehensive spend analysis of its services contracts.
This analysis is intended to provide DOD the basis for expanding its
use of cross-functional commodity[Footnote 8] teams to leverage its
buying power, improve the performance of its services contractors,
organize its supplier base, and ensure that its dollars are well spent.
Moreover, expecting that DOD could achieve significant savings without
any reduction in services, the legislation also establishes savings
goals that DOD should achieve by employing commercial best practices
and effective management.[Footnote 9] In addition, Congress reduced the
amounts appropriated to DOD in fiscal years 2002 and 2003 by a total of
$2.5 billion to reflect savings from business process reforms in the
procurement of services.[Footnote 10]
Private Sector's Use of Spend Analysis Bolsters Strategic Approach:
Increasingly, private sector companies have been purchasing a wide
range of services from outside suppliers at a cost rising at an average
of 3.5 percent a year.[Footnote 11] The leading companies we
interviewed--IBM, ChevronTexaco, Bausch & Lomb, Delta Air Lines, and
Dell--reported between $92 billion and $94 billion in combined annual
procurement spending for goods and services in 2001, and they use a
large part of their purchasing dollars to buy services (see table 1).
Table 1: Leading Companies We Studied and Their Reliance on Buying
Services:
Company: IBM; Function: A global leader in business services and
computer hardware and software; 2002 revenue of $81.2 billion;
Reported 2001 procurement (in billions): $42.4; Reliance on buying
services: IBM's diversification from strictly computer hardware and
software manufacturing to a broader business model of consulting,
information technology, and financing services has expanded its
procurement scope to include services as well as material goods needed
for production. About 52 percent of IBM's annual spending is for
general services procurement including complementary workforce,
advertising, telecommunications, and facilities management.
Company: ChevronTexaco; Function: A leader in the oil and gas industry,
with 2001 sales and operating revenues of $104.4 billion. Involved in
exploration and production, refining, marketing and transportation,
chemical manufacturing and sales, and power generation; Reported 2001
procurement (in billions): $16 - $18; Reliance on buying services: An
estimated 60 percent of ChevronTexaco's annual spending pays for
contracted services that support the company's worldwide oil and gas
extraction, refining, and distribution; construction and maintenance of
facilities (such as retail gas stations); and corporate operations,
including consulting and professional services.
Company: Bausch & Lomb; Function: A global vision care manufacturer of
contact lenses, lens care products, surgical equipment, and
pharmaceuticals, netting more than $1.7 billion in 2001 sales revenue;
Reported 2001 procurement (in billions): $0.9; Reliance on buying
services: About half of Bausch & Lomb's $535 million in purchases from
U.S. suppliers was for various services to support marketing and
advertising, corporate business operations, and research, development,
and engineering activities. In 2001, Bausch & Lomb's largest spending
category was management, business, professional, and administrative
services.
Company: Delta Air Lines; Function: A leader in air transportation for
passengers and freight throughout the United States and around the
world; 2001 revenue was $13.9 billion; Reported 2001 procurement
(in billions): $7 (approximate); Reliance on buying services: About
60 percent of Delta's annual procurement spending is accounted for by
service suppliers. Delta contracts with private vendors to perform
various functions, including fueling and cleaning planes and handling
baggage.
Company: Dell; Function: A worldwide manufacturer of home and business
computer systems and servers and provider of computer support services,
with net 2001 sales revenue of $31.9 billion; Reported 2001
procurement (in billions): $26; Reliance on buying services: Although
the bulk of Dell's $26 billion procurement spending goes toward
purchasing materials and component parts to manufacture its computer
hardware products, between $3 billion and $4 billion per year is spent
on general services. The services include consulting, facility
management, financial operations, training, logistics, marketing,
installation and future product support, and travel.
Source: GAO analysis.
Note: GAO analyzed information from IBM, ChevronTexaco, Bausch & Lomb,
Delta Air Lines, and Dell. Reported 2001 procurement for goods and
services.
[End of table]
As service acquisition costs have increased, companies have sought to
reduce them by taking a strategic approach, starting with the use of
spend analysis processes to provide the necessary data. A strategic
approach pulls together participants from a variety of places within an
organization who recommend changes to a company's personnel, processes,
structure, and culture that can constrain rising acquisition costs.
These changes (often referred to as "strategic sourcing") can include
adjustments to procurement and other processes such as instituting
enterprisewide purchasing of specific services; reshaping a
decentralized process to follow a more center-led, strategic approach;
and increasing the involvement of the corporate procurement
organization, including working across business units to help identify
service needs, select providers, and manage contractor performance.
A critical component of an effective strategic approach is a
comprehensive spend analysis program. An initial spend analysis permits
company executives to review the total dollars spent by a company each
year to see how much is spent, what was bought, from whom it was
bought, and who is purchasing it. This analysis thus identifies where
numerous suppliers are providing similar services--and at varying
prices--and where purchasing costs can be reduced and performance
improved by better leveraging buying power with the right number of
suppliers to meet the company's needs.
Overall, spend analysis permits companies to define the magnitude
and characteristics of their spending, track emerging market spending,
understand their internal clients and supply chain, and monitor
spending with diverse suppliers for socioeconomic business goals. Spend
analysis is an important driver of strategic planning and execution,
and it allows for the creation of lower-cost consolidated contracts at
the local, regional, or global level. At the same time, as part of a
strategic sourcing effort, spend analysis allows companies to monitor
trends in small and minority-owned business supplier participation in
order to address the proper balance with equally important corporate
supplier diversity goals.
Studies have reported significant cost savings in the private sector,
with some companies achieving reported savings of 10 percent to
20 percent of their total procurement costs through the use of a
strategic approach to buying goods and services. A recent Purchasing
Magazine poll finds that companies employing procurement best
practices--including employing effective spend analysis processes--are
routinely delivering a 3 percent to 7 percent savings from their
procurement costs.[Footnote 12] Research by A.T. Kearney, Inc.,
suggests that, if all companies using procurement best practices to
some extent matched the savings rates of the leading companies, total
savings could reach as much as 41 percent more than the $13.5 billion
achieved in 2000.[Footnote 13] The leading commercial companies we
studied report achieving and expecting to achieve billions of dollars
in savings by developing companywide spend analysis programs and
services contracting strategies, as shown in table 2.
Table 2: Companies' Reported 2001 Procurement Spending and Savings:
Company: IBM; 2001 procurement spend: $42.4 billion; Procurement cost
savings: Focuses on delivering competitive advantage year after year;
reported saving hundreds of millions of dollars since 1994.
Company: ChevronTexaco; 2001 procurement spend: $16 billion-
$18 billion; Procurement cost savings: Reported targeted savings of
$300 million a year by 2003. After 2005, targeted savings of
$1.3 billion a year.
Company: Bausch & Lomb; 2001 procurement spend: $900 million;
Procurement cost savings: Saved a reported $20 million a year from 1998
to 2001; reduced suppliers from 20,000 to 13,500.
Company: Delta Air Lines; 2001 procurement spend: $7 billion
(approximate); Procurement cost savings: Reported saving more than
$200 million in procurement costs since 2000.
Company: Dell; 2001 procurement spend: $26 billion; Procurement cost
savings: Set goal to save 20% from its general procurement budget of
$3 billion to $4 billion.
Source: GAO analysis.
Note: GAO analyzed information from IBM, ChevronTexaco, Bausch & Lomb,
Delta Air Lines, and Dell.
[End of table]
Leading Companies Have Developed Formal Spend Analysis Programs to
Improve Services Procurement:
Although the financial and other results of spend analysis clearly are
worth the effort, initially setting up these programs can be
challenging, according to research organizations and our interviews
with company executives. Companies have experienced problems
accumulating sufficient data from internal financial systems that do
not capture all of what a company buys or are being used by different
parts of the company but are not connected. Because simplified data may
not exist or be available, companies have frequently been unsure who
their buyers are and have had to contend with databases that include
listings of items and suppliers that in reality are identical to each
other but which are all stored under different names. Companies also
found that existing databases have not captured anywhere near enough
details on the services for which vendors are being paid.
Despite these challenges, companies that developed formal, centralized
spend analysis programs found that they have been able to resolve their
problems over time and go on to engage in effective spend analysis on
a continuous basis through the use of five key processes, according to
our review of research organizations' findings and interviews with
company executives.[Footnote 14] The processes involve automating,
extracting, supplementing, organizing, and analyzing data.
[See PDF for figure]
[End of figure]
Building the foundation for a thorough spend analysis involves creating
an automated information system for compiling spending data. The system
routinely extracts vendor payment and related procurement data from
financial and other information systems within the company. The data
are then automatically compiled into a central data warehouse or a
spreadsheet application, which is continually updated. Most of the
automated spend analysis systems currently in use were developed in
house, although some companies have hired third-party companies for
expertise and technology.
The data are primarily extracted from accounts payable financial
systems and reviewed for completeness. Accounts payable data can be
voluminous and very detailed. Companies process large numbers of vendor
invoices for payment each year, and each of those must be examined by
their spend analysis systems. When necessary, the accounts payable data
are supplemented with other sources, such as more detailed purchase
card data obtained from external bank-card vendors' systems or other
information, such as suppliers' financial status and performance
information. Companies must obtain as much information as possible
from both internal and external sources to gain a complete
understanding of their spending for services contracts.
Data files must be accurate, complete, and consistent. The data are
subjected to an extensive review for accuracy and consistency, and
steps are then taken to standardize the data in the same format, which
involves the creation of uniform purchasing codes. The data are
typically organized into comprehensive categories of suppliers and
commodities that cover all of the organization's purchases.
Simultaneously, commodity managers, councils, or teams are established
to access and analyze the information on a ongoing basis, using
standard reporting and analytical tools. Each group is responsible for
one or more commodities, which may also include responsibility for a
number of sub-categories. Once the spending data have been organized
and reviewed, companies use the data as the foundation for a variety of
ongoing strategic efforts.
The following company profiles illustrate significant aspects of the
spend analysis and strategic-sourcing processes. Each profile begins
with a description of the savings targets the company has set,
achieved, and expects to achieve in the future. This is followed by a
discussion of the difficulties the company experienced before
implementing spend analysis; the components of its spend analysis
system--including how it extracts, supplements, organizes, and analyzes
its data; an example drawn from company practice of a successful
application of spend analysis; and how the company expects to keep
improving its system over time.
Despite the uniformity of this framework, these companies are not
identical in the manner that they implement spend analysis or strategic
sourcing. Some have more mature systems than do others, while some have
strengths or creativity demonstrated in specific aspects of the
process. Each, however, has been cited by procurement and industry
specialists as a role model for procurement and spend analysis, and our
interviews and subsequent analysis have borne that out.
[See PDF for figure]
Note: IBM is a registered trademark and used by permission of the
International Business Machines Corporation.
[End of figure]
Company Profile:
Year after year, IBM's global procurement organization focuses on
delivering a sustained competitive advantage across its entire
portfolio of purchases, which totaled $42 billion in 2001. IBM's
procurement transformation began in 1994 and continues to evolve. As a
result, IBM reports having achieved significant efficiencies and
globally leveraged its spending through strategic sourcing to reduce
the number of suppliers and save hundreds of millions of dollars.
In the beginning of its transformation, IBM lacked sufficient knowledge
on what it was spending across the enterprise. Company buyers were
calling the same items and suppliers by different names and being
charged different prices for the same product or service. The company
had disparate accounts payable systems, and the procurement
organization was unable to gather easily a consolidated view of
spending with IBM suppliers. Aggregated data were unavailable, and the
linkage between procurement and accounts payable was inadequate for
leveraging the company's buying power. To launch a comprehensive spend
analysis, IBM had to address four major challenges: (1) linking its
disjointed legacy systems, (2) investing in a single-enterprise
resource-planning system, (3) establishing uniform naming conventions
for suppliers, goods, and services, and (4) creating a single
procurement management system to support a global process.
To address these challenges, IBM developed an extensive "end-to-end"
procurement system, which includes a paperless process for requisitions
and purchase orders, electronic linkages to suppliers, a worldwide
accounts payable system that receives and processes all suppliers'
invoices, and a centralized spend analysis program built around an
automated business data warehouse for efficiently extracting accounts
payable and other enterprise spending data in a common format.
Initially, IBM's data management system did not support aggregating all
of the accounts payable and other data to support management decision
making. Recognizing this situation, IBM quickly responded by
implementing a centralized global business data warehouse to facilitate
decision making based on accounts payable and other data covering the
entirety of IBM's purchases.
IBM's global procurement organization has used spend analysis to
establish a substantial level of control by the company's 31 "commodity
councils".[Footnote 15] The councils analyze the spending data in order
to meet the needs of IBM groups worldwide and to enter into deals with
suppliers by leveraging IBM's total buying power to gain proper volume
discounts. Before 1995, IBM's decentralized buyers controlled only
45 percent of the company's purchasing; centralized councils now
control almost 100 percent. Although IBM business units initially found
it difficult to give up decentralized control over buying to the global
procurement organization, IBM's global procurement organization used
spend analysis presentations to demonstrate the savings that were
possible and to achieve buy-in to the new purchasing process while
being responsive to business units' needs.
IBM's spend analysis approach also supplements information from
internal accounts payable with business intelligence data on suppliers'
businesses and market status from an outside party. This information is
part of the spend analysis process used to create up-to-date profiles
on IBM's top suppliers. IBM spend analysis also integrates external
information on average prices paid in the market in order to measure
the company's strategic-sourcing performance in achieving a competitive
advantage through its procurement processes. IBM works with third-party
consultants to obtain credible market intelligence in order to
determine the "best in class" price for a given commodity and whether
or not IBM is obtaining the lowest market prices from its suppliers.
IBM's global procurement organization created uniform purchasing
codes and upgraded data entry processes for accounts payable in order
to organize the spend analysis categories of products and services
commodities that could be leveraged for strategic-sourcing purposes.
For example, IBM's procurement data, which include related accounts
payable data, are organized under 31 broad categories that correspond
with the commodity councils. Each category encompasses a number of
subcommodities that cover the company's production-related services and
general procurement.[Footnote 16] For example, one high-level services
procurement grouping is temporary technical services--a multi-billion
dollar annual spending category for IBM--which includes eight sub-
commodities, such temporary services as programmers, systems engineers,
technical writing, and systems help-desk support.
Currently, the councils use spend analysis to support their
negotiations with suppliers and to work with internal business units in
order to bring the best value to bear. For example, the technical
services commodity council relied on spend analysis to carry out a
strategic-sourcing effort. The council's analysis revealed that the
company was spending billions annually for temporary technical
services, that its hiring process was taking 10 days on average, and
that multiple suppliers were sending in candidate resumes. As a result
of the council's effort, a centralized Web-based hiring system was
developed internally for sourcing external technical services.
Requesters can go online and select candidates from a database, conduct
interviews, and submit requisitions, while reducing the process of
hiring to less than 3 days. Costs were reduced by a reported
$40 million in 2001 as a result of the commodity council's
prenegotiating various skill payment rates with two-thirds fewer
suppliers.
In summary, IBM has implemented a number of strategic enhancements
to its global purchasing approach. Ongoing enhancements, including
corporate spend analysis capabilities, will focus on deeper integration
of the procurement process into the company's supply chain management
aimed towards a new level of global buying effectiveness. IBM is making
changes to exploit greater electronic procurement capabilities and to
consolidate purchase order processing and procurement support services
in centralized locations around the world. Such changes are intended to
remove administrative workload from the commodity councils, allowing
them to focus on management of suppliers, internal customers, and
IBM costs.
[See PDF for image]
Note: ChevronTexaco's word mark is used by permission.
[End of figure]
ChevronTexaco's phased approach to the strategic sourcing of its
entire procurement spending is expected to result in savings of at
least $300 million a year by 2003 and $1.3 billion a year after 2005.
The company's annual spending on procurement is currently between
$16 billion and $18 billion. The company's procurement savings goals,
established after the two historically decentralized companies merged
in 2001, are based on spend analysis.
Before the merger, each separate company had difficulty understanding
its own spending practices. Chevron had a limited number of personnel
working on the task--its purchasing unit had only a few analysts who
laboriously collected, reviewed, and organized all the accounts payable
data after issuing data calls to various business units. The
information collected was consolidated in large spreadsheet binders,
but these did not capture all company spending or details on suppliers'
diversity of interest to corporate leaders. Chevron lacked the data to
negotiate effectively with suppliers, who knew more about what was
being spent and what business they had with Chevron. Texaco also had
difficulty understanding its supplier base and what it was buying
because its accounts payable data were stored in 14 systems, suppliers'
names were not standardized in those systems, and not enough details
were captured on the goods or services for which vendors were being
paid.
Once the companies merged, ChevronTexaco adopted, as its global
procurement focus, the development of accurate, detailed information on
spending. ChevronTexaco's spend analysis system now automatically
extracts accounts payable data on most purchased goods and services
from these systems. For greater precision, ChevronTexaco supplements
the accounts payable data with external information and internal
expertise to obtain more detailed insight into the products and
services being bought and the vendors that supply them. The data are
organized into three dozen broad categories, including 250 products and
services, which cover most of the company's annual spending.
ChevronTexaco's global procurement leadership and several decision
support staff (who work with a few dozen cross-functional commodity
teams) analyze the spending data. These teams link the procurement
organization, strategic-sourcing processes, and business units by
collaboratively using the spending data to identify, plan, and
recommend sourcing projects for goods and services, including capital
projects. For example, three consulting and professional services
commodity teams are responsible for analyzing data related to spending
for temporary accounting staff, financial and information technology
management, and legal and technical services.
An initial commodity team analysis of the consulting and professional
services' spending data showed close to $600 million spent on
consulting services and many subcategories that needed to be
identified. Further spend analysis showed that the company was using
1,600 suppliers, that buying was highly fragmented with little
standardization, and that consultant contracting was not sufficiently
competitive. The spend analysis identified five consulting services'
supply markets for separate consideration--financial, information
technology, general management, legal, and technical. The team
discovered that most of the five were ripe for competition, that some
were reducing staff and seeking larger client bases, and that some were
laying off employees and going through a slump. After taking into
account internal business unit readiness for supplier consolidation,
the team finally recommended separate strategic-sourcing projects in
information technology, legal, and general management consulting.
ChevronTexaco estimates net savings to be between 8 percent and
10 percent of the company's total spending on those 3 consulting and
professional services' subcategories.
ChevronTexaco uses spend analysis to document and report direct savings
that result from negotiated price reductions, volume discounts, and
leveraged discounts.[Footnote 17] Spend analysis supports
ChevronTexaco's active supplier diversity program by permitting
strategic-sourcing teams to track the company's spending with small and
diversely-owned businesses and identify opportunities to attract
competitive offers from such suppliers. Analysis of the spending data
has also been used to meet a wide range of the company's strategic
goals, including identifying the right stakeholders for participation
in a global procurement organization coordinating key business areas.
To win support, procurement executives used spend analysis to promote
internally the need for procurement reengineering to help business
units reduce costs without sacrificing operations, safety, and
services. Spend analysis also underpins the development of performance
measures used throughout the company's standardized procurement
processes.
ChevronTexaco plans further improvements to its spend analysis system.
The company is investing in a third party's suite of electronic
procurement applications. One of the applications is an automated spend
analysis tool that will more quickly extract even more detailed data
from the company's financial system.
[See PDF for image]
Note: Bausch & Lomb's logo is used by permission.
[End of figure]
Company Profile:
Bausch & Lomb's strategic sourcing effort saved the company a
reported $20 million a year from 1998 through 2001, and is anticipated
to save an additional $11 million in each year through 2005. These
savings were generated through a one-third reduction in the number of
Bausch & Lomb's suppliers from 20,000 to 13,500 and negotiation of
discounts on the volume of business with the remaining suppliers.
In 1997, Bausch & Lomb was having difficulty coordinating information
from multiple internal information systems as it attempted to
understand what it was spending. To overcome this problem, the company
contracted with a consultant during the first 2 years of its effort to
create and automate master vendor files through a central database and
directly provide spend analysis support. Bausch & Lomb's spend
analysis--which focused on developing a comprehensive database and
targeting categories with the most suppliers and the most spending--
became the foundation of its strategic sourcing effort.
To perform its spend analysis, Bausch & Lomb extracted accounts
payable data from more than 50 internal systems and sent the data to
the consultant to review and correct the records to eliminate
duplication and identify "families" of suppliers connected through
corporate ownership that could be used to negotiate better terms. The
consultant also used its technology tool to compile and automate the
analysis of Bausch & Lomb's spending data. Spending data were
standardized by using two publicly available classification systems,
allowing for comparisons to be made between vendor identifiers and the
affiliated commodity codes. These internally available data were
supplemented with other information from the consultant's business
intelligence database that addressed suppliers' risk[Footnote 18] and
status as minority or women-owned businesses and with purchase card
expenditure data.
Bausch & Lomb then organized the data into 50 broad categories of
products and services, each of which was subdivided into 4 to 12
commodities. Responsibility for the categories was divided among
several headquarters commodity managers--including those specializing
in information technology, pharmaceuticals, and business processes. The
commodity managers analyzed the spending data and sought input from
business units to develop strategic sourcing strategies and business
plans for each of the commodities to combine the company's total buying
power and rationalize the supplier base. The commodity managers now
oversee the corporate procurement of specific goods and services across
all the business units.
For example, when the business process commodity manager applied spend
analysis to Bausch & Lomb's use of temporary personnel services, the
outcomes included the opportunity to reduce the number of suppliers,
lower costs, and achieve other streamlining benefits. Business units
had been using purchase orders to obtain temporary services, and the
spend analysis revealed that although 60 suppliers were being used, one
national company was the top temporary services provider. This
knowledge enabled Bausch & Lomb to negotiate a 17 percent reduction
with that company for temporary services by consolidating the supplier
base from 60 companies to 1. The remaining temporary services company
agreed to this reduced rate because it was guaranteed a greater volume
of individual purchase orders and because Bausch & Lomb's business
units were required to use that preferred company unless they had a
need that it could not meet. Bausch & Lomb's ongoing spend analysis of
this $13 million commodity also enables it to monitor business unit
compliance with the contract to use the preferred company and
achievement of savings targets.
Bausch & Lomb's procurement organization now performs and regularly
updates the spend analysis with support from the consultant. Each year,
Bausch & Lomb refreshes its spend analysis data with new supplier
information obtained from the consultant. The annual spend analysis
examines how much its divisions are spending on specific commodities to
determine its potential bargaining power with its suppliers and to
review the risks of existing suppliers. Its commodity managers identify
which strategic sourcing projects to tackle based on the dollar amount
spent, the number of suppliers, the potential cost savings, and
opportunity to consolidate suppliers. The company's annual updating of
the spending data gives enough information to focus strategic efforts
in the right direction. To enhance their spend analysis, Bausch & Lomb
is also working with its consultant to start extracting more detailed
data from its general ledger systems.
[See PDF for image]
Note: Delta Air Lines' logo is used by permission.
[End of figure]
Company Profile:
Spend analysis has been a key element in Delta's transformation of its
more than $7 billion[Footnote 19] procurement operation and its
adoption of a strategic sourcing process. Since 2000, the company's
reported payback has been rapid--more than $200 million saved through
strategic sourcing projects and other supply-chain management
transformation efforts.
Almost 3 years ago, Delta's supply chain management organization faced
challenges in its ability to aggregate purchasing data due to the
presence of multiple legacy systems and a lack of data integrity. In
July 2000, those legacy systems were replaced with a new core financial
system, which was also useful when the supply chain management
organization decided to launch its current spend analysis program.
Delta's spend analysis program is based on the automated extraction of
accounts payable records from its core financial system. The extracted
data are placed in a data warehouse and then compiled in an integrated,
off-the-shelf software tool (accessible through the company's intranet)
that is used to develop spend analysis reports. All company managers
and supply chain management staff can access the company's spend
analysis reporting tool. The internal financial data are supplemented
with purchase card spending data, totaling about $75 million per year,
from the company's bank card vendor. In addition, Delta worked with a
third party to validate the information received from small, minority,
and woman-owned businesses in order that supplier diversity information
was accurately coded in its core financial system.
Delta organized its spending data to correspond with its six broad
purchasing areas: fuel and airport services, corporate operations (such
as finance and human resources), technical operations (such as aircraft
maintenance), marketing and in-flight services, corporate real estate,
and fleet planning and acquisitions. Those 6 purchasing areas are
responsible for purchasing goods and services in more than 270
commodities, such as consultants, legal, and temporary services.
Delta's supply chain management organization worked with a team to
create the commodity codes following a review of the goods and services
the company buys. These codes have made it possible to organize
accounts payable and other data by commodity to support the company's
initial spend analysis, a key part of the first two steps in its
strategic-sourcing process.
Beginning in September 2000, Delta's supply chain management
organization took steps to realize the value that a transformation
could bring. Key elements of this transformation included the
implementation of a strategic sourcing process; establishment of cross-
functional teams; and expansion of the supply chain management
organization's scope of involvement in company spending. Commodity
teams began analyzing the spending data to obtain an upfront
understanding of the supplier base, the company's buying power, and the
estimated savings from consolidated buying. In mid-2002, commodity
teams across Delta's purchasing areas were actively managing 58 cost-
saving projects developed through spend analysis and reported operating
savings of $82.2 million from projects already completed that year.
Delta's supply chain management organization also uses spend analysis
to track and report the company's spending with small business and
minority-and women-owned businesses in order to measure the outcome of
the teams' strategic-sourcing projects in terms of the company's
supplier diversity goals.
An example of Delta's successful outcomes with spend analysis is its
information technology commodity team's strategic sourcing effort in
2001. The team's analysis revealed the company was using more than
60 different information technology contract services suppliers and
purchasing approximately $16 million in external services. The
requisition processes varied within each of the business units; limited
formal metrics were in place for managing supplier performance; and the
existing contracts' pricing structures did not facilitate cost
reduction efforts.
An external industry analysis indicated that Delta could benefit by
bidding information technology contract services given that the
supplier market was hard hit by the downturn in the economy and that a
surplus of high quality information technology service suppliers
existed. Using this knowledge, the commodity team, which included
representatives from the company's human resources and technology
business units, developed a new consolidated-proposal request for
external services and used an on-line reverse auction[Footnote 20] to
complete the sourcing effort. The new contracts resulted in reported
annual savings of $3 million and reduced the number of suppliers from
60 to 6 companies--3 of which qualified as diverse-owned businesses.
Despite Delta's accomplishments in spend analysis, challenges
remain in obtaining reliable and complete data, and its supply chain
management organization is working to improve financial system data
integrity and automated reporting to provide the information needed for
real-time business decisions. Last year a team was formed to improve
the quality of information on suppliers, commodity codes, and buyers.
Recommendations on process improvements will be made in 2003, followed
by an effort to clean up Delta's purchase order and contract files. A
related team is working to improve the availability of automated
reporting from Delta's off-the-shelf spend analysis reporting tool. The
company expects increased accuracy in its spending information will
provide greater visibility into buying patterns and enhance strategic
sourcing decision making and results.
[See PDF for image]
Note: The Dell logo is a trademark and used by permission of the Dell
Computer Corporation.
[end of figure]
Company Profile:
Dell's earlier success in using spend analysis and strategic sourcing
in its manufacturing procurement operations prompted the company to
establish a new procurement savings goal of 20 percent from the
$3 billion to $4 billion it spends in purchasing of nonmanufacturing
services and products.
Before 2000, Dell's spend analysis and strategic-sourcing focused only
on production procurement to support its manufacturing operations. The
company had no spend analysis program to track general procurement of
goods and services needed to support the company's nonmanufacturing
operations. However, once the company decided that general procurement
merited the same strategic approach as production procurement, the
procurement organization quickly developed a second spend analysis
program.
Since 2000, Dell's procurement and finance organizations have worked
together on its internally developed spend analysis system, which
provides automated on-line reporting and cost analysis of the company's
general procurement purchasing.[Footnote 21] Every month, the system
extracts accounts payable records from one of the company's two
financial systems for consolidation into the data warehouse used for
spend analysis. The consolidated spend analysis reports are
supplemented with supplier diversity, business intelligence, and
purchase card information obtained from external sources. For example,
Dell obtains business intelligence information from an outside party
about its suppliers' financial health and utilizes that independent
information to determine percent of revenue based on sales to Dell. The
company also obtains detailed vendor data for purchases obtained under
the corporate purchase card program. However, the supplemental business
intelligence and purchase card information must be separately analyzed
vendor by vendor, item by item, and compared with the consolidated
reports from the accounts payable information.
The need to organize the accounts payable and purchase card data for
spend-analysis and strategic-sourcing purposes required the
procurement organization to identify 15 high-level categories, each
encompassing many products and services commodities. This involved
research with business units familiar with Dell's vendors in order to
"tag" each vendor according to the commodity being supplied. Consulting
is one example of a high level category, and it encompasses consultant
services such as information technology, electronic commerce,
financial, legal, and Dell technology. New suppliers are similarly
tagged to keep the spend analysis system updated. One current
limitation to Dell's tagging methodology is that some vendors do not
fit neatly under a single commodity. Dell's system organizes purchase
data for those vendors under a miscellaneous category, and the staff
regularly analyze the data to later sort spending with those suppliers
into the appropriate commodity.
Dell's procurement organization has four senior managers who are
responsible for several commodity teams in the areas of marketing and
communications, corporate services, and operations. In these teams,
commodity managers partner with the primary business owners to manage
strategic sourcing and other procurement activities in specific
spending areas. Each commodity team uses spend analysis to identify,
prioritize, and leverage the company's combined buying power with
suppliers in order to reduce costs and improve supplier performance.
As an example of a successful outcome using spend analysis, one of
the senior managers worked with the customer services team on a
strategic-sourcing project to staff support call centers and provide
certified technicians and related on-site services for Dell computer
hardware repair. The spend analysis revealed that Dell's business units
were spending more than $200 million annually on an ad-hoc basis with 8
suppliers for the same services. The team discovered that it was
difficult to manage eight suppliers and expensive to have each provide
the entire scope of services on a worldwide basis. The new sourcing
strategy cut the number to four suppliers and provided a volume price
discount, efficiencies in supplier management, and capacity to support
Dell's growing sales in the U.S. and overseas. Dell required two of
those suppliers to provide a global array of services and two to work
only in the U.S. In taking this action, Dell also successfully met its
supplier diversity objectives by awarding two of the new contracts to
diversely-owned companies.
Dell procurement officials plan continued improvements to the spend
analysis program, such as automating the production of analytic reports
and generating reports that focus on detecting corporate relationships
among suppliers. Enhanced analysis and reporting of relationships can
be used to leverage Dell's buying power for additional savings with
related suppliers.
DOD Launches a Pilot Spend Analysis with an Eye toward Developing a
More Strategic Approach:
DOD is in the very early stages of setting up a spend analysis program.
The agency's leaders have made a commitment to improve how DOD acquires
services and to adopt best commercial practices. Although these are the
right first steps, the agency has yet to emulate the best practices of
spend analysis to the same extent as the private sector. DOD also has
not yet pursued more strategic approaches like reorganizing its
procurement processes under a more centrally led management structure.
DOD's initial actions include issuing new policy in May 2002--in
response to our work and the 2002 national defense authorization
legislation--to elevate major purchases of services to the same level
of importance as the purchase of major weapon systems. In February
2003, the Deputy Secretary of Defense tasked a new team to complete, by
September 2003, a pilot spend analysis of services acquisition data
across DOD and to determine if larger scale efficiencies and savings
could be achieved over its current decentralized procurement
environment.[Footnote 22] DOD requested proposals from interested
vendors with commercial spend analysis experience to provide contract
support to the DOD team. Pilot projects associated with the spend
analysis will be completed by September 2004.
Information we obtained during preproposal discussions with prospective
vendors suggest that the DOD pilot project may not engage the full
range of spend analysis best practices as have the private sector
companies we interviewed. (See table 3.):
Table 3: Comparison of DOD's Spend Analysis with Leading Company
Practices:
Spend analysis process: Automation; Leading company practice: Data
automatically compiled to expedite and repeat the spend analysis
process; DOD practice: DOD furnishes the data to the vendor, which may
employ commercially available automation tools to compile the data to
expedite the spend analysis. However, this is a one-time requirement.
The vendor will not develop an automation tool to consistently repeat
the spend analysis process.
Spend analysis process: Extraction; Leading company practice: Essential
data extracted from accounts payable and other internal systems; DOD
practice: DOD wants the pilot spend analysis to cover all its
acquisition of services "as best possible". DOD will furnish only data
extracted from two databases for services contract actions, but is
excluding analysis of research and development services, and the
databases do not include contracts for $25,000 or less. DOD
acknowledges this data may be insufficient, but also says that data
that could be derived from better sources such as accounts payable or
other internal systems may be neither available nor feasible to
incorporate within the project's time frame.
Spend analysis process: Supplemental information; Leading company
practice: Additional data sought from internal and external sources,
such as supplier performance and purchase card data; DOD practice: The
vendor may ask for DOD's help in getting supplemental data for the
spend analysis from DOD, other government agencies, and commercial
sources, such as purchase card and logistics data. While DOD will help,
it cannot guarantee it can provide the data requested.
Spend analysis process: Organization; Leading company practice: Ensure
accuracy and completeness of data; organize data into logical,
comprehensive categories of commodities and suppliers; DOD practice:
The vendor will cleanse and validate data DOD has furnished based on
its spend analysis experience and knowledge. DOD allows the vendor's
discretionary use of external databases to help organize the spend
analysis database. The vendor may also propose classification systems
to organize categories of commodities and suppliers, to meet DOD's
requirement to identify the top ten service categories to target for
strategic sourcing.
Spend analysis process: Analysis and strategic goals; Leading company
practice: Using standard reporting and analytical tools, data analyzed
on a continual basis to support decisions in strategic sourcing and
procurement management to help cut costs, streamline operations, reduce
number of suppliers, achieve supplier diversity, etc. Scope generally
covers entire procurement spending; DOD practice: Within 60 days of
contract award, the vendor must provide the key metrics for reviewing
DOD's spend analysis database. Within 90 days, the vendor must analyze
DOD's spend data, identify the top ten services contract areas with the
largest dollar savings, and prepare business cases and strategic
sourcing strategies for the top ten services in light of DOD's
requirements to fulfill socioeconomic and establish savings goals. In
the second phase, the vendor may have to supply special analyses to
support the DOD team's review of the ten business cases and development
of strategic sourcing procurement strategies for at least five pilot
service categories.
Source: GAO analysis of DOD information.
[End of table]
Although DOD does seek to include basic elements of the key private
sector spend analysis best practices in the prospective pilot, its
efforts fall short of the private sector standard. Its efforts at
automation involve only a one-time requirement, not the repeatable
process found in private companies. Efforts to extract data are
restricted to those taken from two centrally available databases on
services contract actions (excluding research and development[Footnote
23]) in excess of $25,000, a limitation due to the agency's self-
imposed 90-day time frame for completing the spend analysis.[Footnote
24] Although superior data--obtained by the vendor from other internal
and external sources with DOD's help--may be used to supplement what
has been extracted, DOD cannot guarantee that it will be able to
provide what the vendor may request.[Footnote 25] The scope of the
pilot is also relatively limited, compared to the more expansive
private sector programs. Ten service category business cases are being
considered, and procurement savings strategies will be tested for at
least five categories. If time permits, DOD's pilot manager told us
that more than five categories could be tested.
While DOD expects to learn from this pilot spend analysis, only a small
number of procurement actions will result from it. As DOD moves forward
to adopt commercial best practices for service acquisitions on the
basis of its pilot, the scope of its strategic approach may be limited
to smaller organizational units, rather than a major more centralized
reorganization of DOD's procurement processes. To justify its "wait and
see" approach with a pilot, DOD cites several factors that set it apart
from commercial companies. These include its much larger and more
complex services supplier base, decentralized acquisition environment
with many procurement offices spread across the military services and
defense agencies, and no single financial data system relative to
procurements. According to DOD, it must also fulfill numerous
socioeconomic goals for contracting with small and diversely-owned
suppliers and has more regulatory and budgetary constraints around the
acquisition process. In citing these factors in advance of the pilot,
DOD is being cautious about viewing procurement as a strategic (i.e.,
DOD-wide) process that simplifies acquisitions, saves money, and
increases the quality of purchased services, compared to its current
tactical process of numerous individual contract actions.
Once the pilot spend analysis is complete, DOD faces the challenge
of making the best use of the results. It needs to decide what long-
term changes are required to bolster the current organizational
structure and processes to foster a more strategic approach to
acquiring services. The extent to which DOD makes these changes will
determine its success in meeting congressional expectations for major
management reform of--and substantial savings from--the procurement of
services.
Spend Analysis Could Guide Development of a Strategic Approach to Meet
DOD's Diverse Needs:
As we reported last year,[Footnote 26] DOD's size and complex service
needs may lead it to pursue different approaches within the defense
agencies, military departments, and individual commands. In this
regard, private sector experience suggests that DOD must start with
spend analysis to identify and prioritize specific contracted services
and then follow through with organizational and process changes, such
as the establishment of full-time dedicated cross-functional teams or
commodity managers, to improve the coordination and management of key
services.
As DOD attempts to reengineer its approach to purchasing services, it
faces challenges similar to those faced by private sector
organizations. For example, DOD is subject to statutory and regulatory
goals for contracting with small businesses and other socioeconomic
categories, such as woman-owned small businesses and small
disadvantaged businesses, that may constrain it from consolidating
numerous smaller contracts into larger ones.[Footnote 27] This is an
approach often taken by the companies we studied. Those constraints
must be considered in the business cases to be developed by the spend
analysis vendor. The experience of private sector companies--which also
are keenly aware of the importance of small and diversely-owned
business participation as suppliers--may offer DOD valuable insights
into addressing this challenge.
Companies we studied use spend analysis to carefully and successfully
balance supplier consolidation and cost-savings strategies with
corporate supplier diversity goals of equally high priority. Companies'
commodity teams often include supplier diversity specialists, who
propose concrete steps for considering small, minority-, and woman-
owned businesses throughout the strategic-sourcing process.[Footnote
28] Like the companies, DOD can use spend analysis to understand its
current level of supplier diversity on a commodity-by-commodity basis
and to balance cost-saving strategies and socioeconomic goals. Spend
analysis can also support DOD's efforts to comply with small business
requirements to review potential bundling of procurement requirements
in order to determine if the bundling is necessary and justified.
DOD cites its lack of a single financial data system relative to
procurements as another challenge. Because of the pilot's 90-day time
frame for completing the initial spend analysis, DOD acknowledges that
the data it will use may be less complete than what is used by
business, but it cannot guarantee that it will be able to provide data
from other sources that its vendor may request to perform the first
DOD-wide spend analysis. DOD is instead asking the vendor to make a
recommendation on the feasibility of using other DOD financial systems-
-such as systems used to process invoices and pay commercial vendors
for goods and services bought by DOD organizations--that might be
considered for use in the future.
Although DOD will need to consider how existing problems in its
financial management systems[Footnote 29] could affect spend analysis
and services-contracting initiatives, we believe a more businesslike
approach is possible. The companies we interviewed faced similar
challenges in accumulating accounts payable and other internal data
that were highly fragmented across multiple financial and management
systems and not easily accessible. However, the companies automated the
extraction of accounts payable and other internal data and made the
spend analysis process repeatable and more efficient.[Footnote 30] To
see if DOD could engage in similar actions, we discussed this matter
with DOD sources and others knowledgeable about DOD and commercial
vendor payment systems.[Footnote 31] Based on these discussions, DOD's
systems could provide the type of accounts payable data that companies
use and thus could be a data-rich source for DOD spend analysis. In
fact, vendor payment data from multiple processing locations are
already centrally collected by the Defense Manpower Data Center for
auditing and other financial management purposes. Use of this data
could reduce DOD's need to extract and organize data for spend analysis
efforts by providing a "one-stop shop.":
DOD is also likely to face resistance to giving up decentralized buying
authority, cultural barriers, and other impediments to implementing
broad-based management reforms.[Footnote 32] The companies we studied
found several ingredients critical to overcoming such challenges. For
example, senior management must provide continued support for common
services acquisitions processes beyond the initial impetus, since the
companies are engaging in long-term efforts. Second, communication has
to be seen as vital in educating and keeping staff on board with
changes. To achieve buy-in, companies used spend analysis to make a
compelling case to business units that reengineering would enhance
service delivery and reduce costs. Companies also involved the business
units in a new center-led approach by making extensive use of cross-
functional commodity teams to make sure they had the right mix of
knowledge, technical expertise, and credibility.
To cut across traditional organizational boundaries that contributed to
the fragmented approach to acquiring services, companies restructured
their procurement organizations, assigning them greater responsibility
and authority for strategic planning and oversight of the companies'
service spending. Also, companies extensively used metrics--based on
spend analysis--to measure total savings and other financial and non-
financial benefits, to set realistic goals for improvement, and to
document results over time. DOD recently developed new management
structures in response to the 2002 national defense authorization
requirements to improve practices for the acquisition of services, but
the changes are not as far-reaching as those adopted by companies we
studied. For example, although the Under Secretary of Defense
(Acquisition, Technology, and Logistics) and each of the military
departments now has a process for reviewing particular large-dollar or
sensitive acquisitions for adherence to competition and other
contracting requirements, the reviews are piecemeal and focused on
approving individual acquisitions rather than achieving a coordinated
approach for managing services' contracts. DOD could use spend analysis
as a basis for tailoring how the new management structures can adopt
the type of organizational tools and metrics employed in the private
sector to foster an enterprisewide strategic approach that would meet
DOD's unique requirements.
To implement best practices and manage services effectively, DOD must
have the right skills and capabilities in its acquisition workforce.
This is a challenge given decreased staffing levels, increased
workloads, and the need for new skill sets. DOD is engaging in a long-
term strategic planning effort to identify the competencies needed for
its future workforce. Private sector experience indicates that taking a
strategic, integrated, enterprisewide approach can also help DOD
address its acquisition workforce challenges. In our study, companies'
efforts to reengineer their procurement operations have often been
accompanied by acquisition-staffing reductions. The experience has been
that using spend analysis and coordinated sourcing processes allows for
more efficient use of procurement personnel resources by streamlining
the number of contracting tasks. Reducing duplication and fragmentation
in contracting activities also helps free up limited acquisition
workforce resources to perform more strategic business functions, such
as acquiring and using knowledge of market conditions and industry
trends to better manage fewer suppliers and contracts.
Conclusions:
While seemingly daunting, each of the challenges to be faced by DOD
has been faced and overcome by the private sector companies. Careful
observation and analysis of their practices will help the agency to
adapt variations and even to create new approaches through which it
will be able to reach its savings and strategic targets.
Without effective spend analysis, organizations are limited in their
ability to understand buying patterns; maximize purchasing power; carry
out informed acquisition and contracting decisions; measure the impact
of changes in purchasing costs and supplier diversity; and carry out
other planning and management functions for the acquisition of
services.
Given that DOD's spending on services' contracts is approaching
$100 billion annually, the potential benefits of overcoming the
challenges and using best practices to establish an effective spend
analysis program are significant and can:
* achieve a total-spending perspective across DOD,
* make the business case for collaboration in joint purchasing rather
than fragmented purchasing,
* organize an effective management structure to assign accountability
and exercise oversight,
* identify potentially billions of dollars in procurement savings
opportunities by leveraging buying power, and:
* identify opportunities to achieve other procurement efficiencies such
as reducing duplication in purchasing, supporting supplier diversity,
and improving supplier performance.
With the federal government's short-and long-term budget challenges, it
is more important than ever that DOD effectively transform its business
processes to ensure that it gets the most from every dollar spent. At
the same time, DOD's management challenges related to contracting for
services will not be resolved overnight. Two common elements that
pervade discussions of ways to address DOD's challenges are the need
for (1) sustained executive leadership and (2) a strategic, integrated,
and enterprisewide approach. In addition, ensuring that these efforts
achieve the intended results will require the Congress's continued
involvement and support. Such support has already been demonstrated
through the 2002 national defense authorization legislation requiring
that DOD establish a management structure to enhance the acquisition of
services and to collect data on the purchase of services. DOD could use
this legislation--and its first spend analysis effort--as the means for
taking a more strategic approach to contracting for services and for
identifying and achieving substantial savings in the future.
Recommendations for Executive Action:
To achieve significant improvements across the range of services DOD
purchases, we recommend that the Secretary of Defense direct the Under
Secretary of Defense for Acquisition, Technology, and Logistics to work
with the military departments and other DOD organizations involved in
the spend analysis pilot to adopt the effective processes employed by
leading companies. Key elements of DOD's approach should address:
* using technology to centrally automate the spend analysis process to
make it repeatable,
* using accounts payable and other internal financial and procurement
data to gain a comprehensive and reliable view of spending,
* supplementing internal data with external information such as
purchase card expenditures and business intelligence to gain a more
complete picture of DOD spending and to refine analysis,
* reviewing purchase data for accuracy and consistency, organizing the
data by commodity and supplier categories in order to identify
opportunities to leverage buying power,
* promoting enterprise collaboration aimed at gaining the best value,
including the establishment of cross-functional teams to continue
developing strategic-sourcing projects, and:
* presenting relevant spending reports to appropriate decision makers
to establish strategic savings and performance goals, assign
accountability, and measure results.
To ensure that DOD moves forward in a timely manner on its commitment
for taking a more strategic approach to the acquisition of services, we
recommend that the Secretary of Defense direct the Under Secretary of
Defense for Acquisition, Technology, and Logistics develop a plan and a
schedule for accomplishing changes in management structure and business
processes for contracting for services. The plan and schedule should be
based on the results of the spend analysis pilot and should be
submitted to the congressional defense committees for consultation and
approval as part of the fiscal year 2006 budget submission and
justification process.
Agency Comments:
In commenting on a draft of this report, DOD agreed with our findings
and conclusions that the commercial best practice of spend analysis is
important to the design of a strategic approach to acquisitions and can
be used by DOD to achieve substantial savings comparable to those in
the private sector. Moreover, DOD concurred with the recommendation to
adopt the effective spend analysis processes employed by leading
companies--and now intends to automate the process of data collection
and analysis to make it repeatable, rather than a one-time effort.
However, DOD did not concur with the recommendation to develop a
plan as part of its 2005 budget submission process (i.e., early in
2004) to institute changes in management structure and business
processes for contracting for services. Rather, DOD contends that
ongoing initiatives--including follow-on sourcing projects it
anticipates developing after the current spend analysis--may make such
changes unnecessary. In addition, DOD answers that developing a plan
and schedule for making changes in management structure and business
processes before completing the current spend analysis pilot (expected
by September 2004) would be premature.
As we have recognized since our first report on this matter,[Footnote
33] DOD's size and complex service needs may lead it to pursue
different approaches within the defense agencies, military departments,
and individual commands. However, private sector experience suggests
that DOD must follow through on its initial spend analysis pilot with
organizational and process changes such as the establishment of full-
time, dedicated cross-functional teams or commodity managers to improve
the coordination and management of key services. The extent to which
DOD makes these changes will determine its success in meeting
congressional expectations for major management reform of--and
substantial savings from--the procurement of services. Moreover, for
DOD to change management structure and business processes for services-
contracting will require sustained leadership at DOD as well as the
involvement and support of Congress. Thus, for purposes of
accountability and transparency in support of such involvement and
leadership, DOD needs to develop a plan for timely changes necessary to
implement a more strategic approach to contracting.
In response to DOD's concern, we modified the recommendation to
allow time for DOD to complete its current spend analysis pilot and use
the results to develop a plan. Although we are encouraged by DOD's
commitment to undertake the pilot, we firmly believe that once the
pilot is complete, DOD needs to make long-term changes to bolster the
current organizational structure and processes to foster a more
strategic approach to acquiring services.
The DOD comments can be found in appendix I.
Scope and Methodology:
The Chairman and the Ranking Minority Member, Subcommittee on Readiness
and Management Support, Senate Committee on Armed Services, requested
that we develop a body of work that examines the practices of leading
companies and identify best practices that could yield benefits to DOD
in the acquisition of services. This engagement focused on (1) the best
practices of leading companies as they relate to conducting and using
spend analysis, and (2) the extent to which DOD can pursue similar
practices.
To conduct our best practices work, we conducted literature searches,
reviewed studies related to spend analysis and best practices for
services contracting prepared by research and consulting organizations,
attended private sector seminars and conferences, and contacted experts
in purchasing practices. On the basis of these discussions and
analyses, we selected five leading companies that were recognized for
their strategic approach to managing services acquisitions. We provided
a standard agenda to each company prior to our interviews, and
conducted interviews to determine the companies' motivation for
undertaking a procurement transformation; corporate strategic goals;
the organization and role of the purchasing function; the key processes
used for collecting, analyzing, and using spending data--including the
use of technology--to be strategic in planning and managing services
acquisitions; and performance metrics and accountability.
We also asked each company to discuss in more detail a specific service
buy that best exemplified the use of spend analysis for making
strategic acquisition decisions. In addition, we discussed potential
challenges and barriers to employing a spend analysis and subsequent
strategic sourcing efforts. 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 provided each
company a copy of our draft report for review and comment. The
companies we visited were:
* Bausch & Lomb, Rochester, New York;
* ChevronTexaco Corporation, San Ramon, California;
* Dell Computer Corporation, Round Rock, Texas;
* Delta Air Lines, Atlanta, Georgia; and:
* International Business Machines Corporation, Somers, New York.
To assess current efforts underway by DOD to improve its enterprisewide
knowledge of spending on services contracts, and how DOD can better
emulate the best practices learned from these leading companies, we
interviewed procurement policy and management officials in the Office
of the Under Secretary of Defense (Acquisition, Technology, and
Logistics) and the military departments. To assess the feasibility of
using internal accounts payable data similar to the data used in
leading companies' spend analysis programs, we interviewed Defense
Finance and Accounting Service officials knowledgeable about DOD
systems used to process invoices and pay commercial vendors for goods
and services supplied to military and other DOD organizations. We also
reviewed policy memorandums, 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. In addition, we discussed potential
challenges and barriers to employing the best practices approaches we
identified.
Our report summarizes the key elements the companies employed
to conduct spend analysis as one part of their strategic sourcing
initiatives--in particular as they relate to services acquisitions. We
did not verify the accuracy of the procurement costs and benefits the
companies reported receiving from their strategic approaches and spend
analysis outcomes. Our report is not intended to describe or suggest
that we evaluated or endorse all business practices of the companies.
Nor is this report intended to suggest that all companies have followed
exactly the same approach in achieving similar results. Also, we were
limited in our ability to obtain and present some relevant data that
companies considered proprietary in nature.
We conducted our review from March 2002 to May 2003 in accordance with
generally accepted government auditing standards.
We are sending copies of this report to other interested congressional
committees; the Secretary of Defense; the Deputy Secretary of Defense;
the Secretaries of the Army, Navy, and Air Force; the Under Secretaries
of Defense (Acquisition, Technology, and Logistics) and (Comptroller);
the Director, Office of Management and Budget; and the Administrator,
Office of Federal Procurement Policy. We will also provide copies to
others on request. In addition, the report will be available at no
charge on the GAO Web site at http://www.gao.gov.
If you have any questions about this report or need additional
information, please call me at (202) 512-4841, or David Cooper at (202)
512-4125. Major contributors to this report were Lily Chin, Ralph Dawn,
Carolyn Kirby, Nicole Shivers, Shannon Simpson, Cordell Smith, Bob
Swierczek, Ralph White, and Dorothy Yee.
Jack L. Brock, Jr.
Managing Director Acquisition and Sourcing Management:
Signed by Jack L. Brock, Jr.:
[End of section]
Appendix I: Comments from the Department of Defense:
ACQUISITION, TECHNOLOGY AND LOGISTICS:
DPAP/P:
OFFICE OF THE UNDER SECRETARY OF DEFENSE:
3000 DEFENSE PENTAGON WASHINGTON, DC 20301-3000:
Mr. Jack L. Brock, Jr.,
Managing Director
Acquisition and Sourcing Management
United States General Accounting Office
441 G. Street N.W.
Washington, DC 20548:
Dear Mr. Brock:
This memorandum is in response to your May 6, 2003, request for DoD
comments to the GAO draft report, `BEST PRACTICES: Improved Knowledge
of DoD Service Contracts Could Reveal Significant Savings,' dated May
2, 2003 (GAO Code 120133/GAO-03-661).
The Department concurs with the first recommendation to perform a
commercial type spend analysis but does not concur with the second
recommendation to develop a plan to institute changes in the management
structure and services contracting business processes. With
transformation efforts underway, DoD is pursuing strategic business
solutions utilizing commercial best practices wherever possible. As you
cite in your report, the commercial best practice of spend analysis is
important to the design of viable, strategic acquisition solutions and
has allowed for substantial savings in the commercial sector. We share
your optimism that this type of analysis will allow us to obtain
similar results. We are committed to developing this functionality
within the Department and will pursue its usefulness to the maximum
extent practicable.
Thank you for giving the DoD this opportunity to comment on the draft
report. My point of contact is Mr. David Boyd at (703) 697-6710 or via
e-mail at david.boyd@osd.mil:
Sincerely
Deidre A. Lee:
Director, Defense Procurement & Acquisition Policy:
Signed for Deidre A. Lee:
Attachment: As stated:
MAY 21 2003:
GAO DRAFT REPORT - DATED MAY 2, 2003 GAO CODE 120133/GAO-03-661:
"BEST PRACTICES: Improved Knowledge of DoD Service Contracts Could
Reveal Significant Savings":
DEPARTMENT OF DEFENSE COMMENTS TO THE RECOMMENDATIONS:
RECOMMENDATION 1: To achieve significant improvements across the range
of services DoD purchases, the GAO recommended that the Secretary of
Defense direct the Under Secretary of Defense (Acquisition, Technology
and Logistics) to work with the Military Departments and other DoD
organizations involved in the pilot to adopt the effective spend
analysis processes employed by leading companies. Key elements of DoD's
approach should address:
1. Using technology to centrally automate the spend analysis process to
make it repeatable;
2. Using accounts payable and other internal financial and procurement
data to gain a comprehensive and reliable view of spending;
3. Supplementing internal data with external information such as
purchase card expenditures and business intelligence to gain a more
complete picture of spending and to refine analysis;
4. Reviewing purchase data for accuracy and consistency, and organizing
the data by commodity and supplier categories in order to identify
opportunities to leverage buying power;
5. Promoting enterprise collaboration aimed at gaining the best value
which would include the establishment of cross-functional teams to
continue developing strategic sourcing projects; and:
6. Presenting relevant spending reports to appropriate decision makers
to establish strategic savings and performance goals, assign
accountability, and measure results. (pgs. 34-35/GAO Draft Report):
DOD RESPONSE: Concur in general. The Department and the Military
Departments have taken a number of steps to improve the acquisition of
services. We currently have a spend analysis initiative underway which
will provide a foundation for future work in this area. While our
initiative does not exactly mirror the methodologies followed by the
commercial firms discussed in your draft report, it does contain the
essential elements necessary to conduct a spend analysis replete with
commercial data enhancement and the formation of commodity teams to
develop acquisition strategies for pilot programs. The joint Integrated
Process Team responsible for overseeing the effort consists of members
from all facets of the acquisition business process. We are
contracting with a commercial firm experienced in this area to employ
commercial spend
analysis techniques. Your report recognizes our time constraints that
affect the amount of data and number of projects that can be completed.
The Department will utilize the results of this effort to see how best
to incorporate spend analysis and strategic sourcing into our business
practices. The Department does not intend the current spend analysis to
be a one-time effort but intends to automate the process of data
collection and analysis as much as possible to facilitate future
decision-making regarding the acquisition of services.
RECOMMENDATION 2: To ensure that DoD moves forward in a timely manner
on its commitment for taking a more strategic approach to the
acquisition of services, the GAO recommended that the Secretary of
Defense direct the Under Secretary of Defense (Acquisition, Technology
and Logistics) to develop a plan and a schedule for accomplishing
changes in management structure and services contracting business
processes and submit those to the congressional defense committees for
consultation and approval as part of the fiscal year 2005 budget
submission and justification process.
(p. 35/GAO Draft Report):
DOD RESPONSE: Non-Concur. The Department does not believe that a
separate acquisition business process re-engineering effort should be
performed as an integral part of the spend analysis initiative. The
Department is already pursuing internal changes through the President's
Management Agenda as well as other business process initiatives that we
anticipate will allow us to support enhanced data collection and
analysis.
As part of our current efforts to perform a spend analysis and develop
Department-wide acquisition strategies for pilot programs, we will
identify any deficiencies in our management structure or business
processes. To develop a plan and schedule for making changes in
management structure and business processes before completing our
current efforts, therefore, would be premature. Further, the pilot
programs may indicate that such changes are neither needed nor
beneficial.
No single commercial firm compares in size or volume to the Department
of Defense. Any major changes in management structure and acquisition
business processes must be carefully developed, coordinated and
implemented in consonance with all other business process change
efforts. The Department is committed to seeking improved, more
efficient methods of acquiring services and will change our acquisition
business processes accordingly to support them.
[End of section]
FOOTNOTES
[1] DOD-reported data for service contracting dollars, Defense Contract
Action Data System. Governmentwide-reported 2001 data for service
contracting dollars, Federal Procurement Data System. Excludes
contracts valued at $25,000 or less. Fiscal year 2001 is the last year
for which complete governmentwide data is available. For related
information for 1997 through 2001, see U.S. General Accounting Office,
Federal Procurement: Spending and Workforce Trends, GAO-03-443
(Washington, D.C.: Apr. 30, 2003).
[2] U.S. General Accounting Office, Best Practices: Taking a Strategic
Approach Could Improve DOD's Acquisition of Services, GAO-02-230
(Washington, D.C.: Jan. 18, 2002).
[3] A.T. Kearney, Inc., Assessment of Excellence in Procurement 2002
(Chicago, Ill.: 2002).
[4] GAO analysis of data extracted from the Defense Contract Action
Data System, adjusted to represent constant fiscal year 2002 dollars.
Includes actions categorized as research, development, test, and
evaluation activities, and excludes actions $25,000 or less and
purchase card use.
[5] U.S. General Accounting Office, Major Management Challenges and
Program Risks: Department of Defense, GAO-03-98 (Washington, D.C.: Jan.
2003).
[6] Although DOD is taking actions to address these issues, most of
these actions are in the early stages of implementation. It is
uncertain whether the corrective actions can be fully and successfully
implemented in the near term. See GAO-03-98.
[7] Sec. 801, Pub. L. No. 107-107, Dec. 28, 2001.
[8] A commodity is a category of products or services segmented by
commonality of materials or service type. The term does not imply an
expendable or non-complex item. This grouping will allow volume and
technical leveraging of organizational spending and the establishing of
a network of commodity experts.
[9] Section 802 of the 2002 Authorization Act established savings goals
of 3 percent in fiscal year 2002, 4 percent in fiscal year 2003,
5 percent in fiscal year 2004, and 10 percent in fiscal year 2011. The
following year, because DOD had been unable to develop a method for
measuring savings achieved through the improved management of services
contracts, these goals were modified to instead focus on increasing the
number of services contracts that are competitive-and performance-
based. Bob Stump National Defense Authorization Act for Fiscal Year
2003, Sec. 805, Pub. L. No. 107-314, Dec. 2, 2002.
[10] Sec. 8123, Pub. L. No. 107-117, Jan. 10, 2002, and Sec. 8100, Pub.
L. No. 107-248, Oct. 23, 2002.
[11] Elance, Inc. and CAPS Research, "Narrative Summary: Defining and
Determining the 'Services Spend' in Today's Services Economy" (Tempe,
Ariz.: Aug. 2002) http://www.capsresearch.org/benchmarking/
spreports.htm (downloaded Feb. 25, 2003).
[12] Anne Millen Porter, "Spend a Little, Save a Lot!", Purchasing
Magazine, Apr. 4, 2002.
[13] A.T. Kearney, Inc., Assessment of Excellence in Procurement 2002.
[14] Research organizations' studies on effective spend analysis
processes we reviewed included Aberdeen Group (Boston, Mass.), AMR
Research (Boston, Mass.), RAND (Santa Monica, Calif.), and The Yankee
Group (Boston, Mass.).
[15] Since 1994, commodity councils have been a central feature of the
single procurement management system established by IBM. The term
commodity council describes a cross-functional sourcing group charged
with formulating a centralized purchasing strategy and establishing
centralized contracts for enterprisewide requirements for a selected
commodity grouping. Following the council's sourcing actions,
decentralized units then execute tactical ordering against those pre-
established business agreements.
[16] "Production" procurement covers components parts, materials, and
other items bought by a company to directly support the manufacturing
of its own products. "General" procurement covers products and services
bought by a company for other business operation purposes that are
indirectly related to its manufacturing operation, but directly related
to services provided to internal and external customers.
[17] Volume discounts are gained in return for purchasing more units
from individual suppliers. Leveraged discounts are gained in return for
buying more than one type of product or service from a single supplier.
[18] Managing supplier risk is important to companies to avoid supply
chain disruptions and performance problems that could jeopardize
business operations. A number of financial measures are used to assess
risk of a supplier, including business experience, financial condition,
ability to pay bills, suits, liens, and judgments.
[19] Figure is Delta Air Lines' reported procurement spending in
calendar year 2001.
[20] According to industry sources on electronic commerce applications,
reverse auctioning is where suppliers bid, online and in real time, for
product and service contracts as defined by detailed request for
quotes. Each supplier can see the competing bids as they are made, but
bidders are kept unidentified. Through a prequalification process, all
issues are generally settled between the procuring organization and
potential suppliers before the time of the bidding event. The buying
organization may not necessarily choose the lowest bidder, but rather
may use reverse auctioning as a negotiating tool. FreeMarkets, Inc.,
The Strategic Need for Real-Time Competitive Bidding in the Public
Sector Procurement Process (Pittsburgh, Pa.: 2002).
[21] Since 1992, Dell has used a different automated system that it
developed to extract and automate production procurement spend analysis
to support strategic sourcing of direct materials for manufacturing.
[22] DOD's Spend Analysis Integrated Process Team is led by the Defense
Procurement and Acquisition Policy office (in the Under Secretary of
Defense for Acquisition, Technology, and Logistics organization) and
includes senior representatives from each of the military departments,
the Comptroller's and General Counsel's offices, and offices
responsible for defense logistics, missile defense, and small business
issues.
[23] In fiscal year 2002, DOD reported a total of 33,440 contract
actions of more than $25,000 for research, development, test, and
evaluation services, totaling about $26.9 billion.
[24] DOD will furnish the contractor a few dozen data field elements
extracted from the Defense Contract Action Data System (for fiscal
years 2000 through 2002) and the Federal Procurement Data System (for
fiscal years 2001 and 2002). In fiscal year 2002, DOD reported more
than 254,000 contract actions in excess of $25,000 for non-research and
development services, totaling about $66 billion.
[25] A sizeable sum of DOD spending is through other procurement
methods and not captured in the data DOD is furnishing to the spend
analysis vendor on contract actions for more than $25,000. For example,
in fiscal year 2002, DOD reported almost 5 million contract actions for
goods and services of $25,000 or less, totaling about $9.8 billion. In
fiscal year 2001, DOD purchase card spending for goods and services
totaled $6.1 billion.
[26] GAO-02-230.
[27] Contracts that combine requirements to such an extent that they
present a barrier to small businesses' ability to compete are
considered to be "bundled contracts." The Small Business
Reauthorization Act of 1997 defines contract bundling as "consolidating
two or more procurement requirements for goods or services previously
provided or performed under separate, smaller contracts into a
solicitation for offers for a single contract that is unlikely to be
suitable for award to a small business concern." 15 U.S.C. Section 632
(O) (2). For more information regarding measures and information that
will be used to monitor agencies' progress in eliminating unnecessary
contract bundling and mitigating the effects of necessary bundling, see
U.S. General Accounting Office, Small Business Contracting: Concerns
about the Administration's Plan to Address Contract Bundling Issues,
GAO-03-559T (Washington, D.C.: Mar. 18, 2003).
[28] Examples of concrete steps to improve supplier diversity outcomes
during the strategic sourcing process are determining baseline spend
with diverse suppliers; including diverse suppliers in requests for
information and following up if initial response rate is low;
developing selection criteria to enable inclusion of diverse suppliers;
considering the use of regional or multiple requests for proposals;
seeking creative solutions from suppliers such as partnerships; and
encouraging and negotiating aggressively with diverse suppliers.
[29] For example, 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 and ensure accurate vendor payment for goods and services.
See GAO-03-98.
[30] Once companies consolidated spending data from various sources,
the companies also subjected the data to an extensive review to make
corrections and ensure that the data were sufficiently accurate,
complete, and consistent for supporting informed strategic sourcing and
procurement management decisions.
[31] The Defense Finance and Accounting Service operates about 14
systems at several sites to process invoices and disburse payments to
vendors for goods and services sold to Army, Navy, Air Force, and other
DOD organizations.
[32] Our reports have highlighted a number of underlying causes
impeding past reform efforts at DOD. For example, cultural resistance
to change and autonomous operations have hindered DOD's ability to
implement broad-based reforms because stakeholders were not able to put
aside their particular military services' or agencies' interests to
focus on DOD-wide approaches. See GAO-03-98.
[33] GAO-02-230.
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