Contract Management
High-Level Attention Needed to Transform DOD Services Acquisition Gao ID: GAO-03-935 September 10, 2003The Department of Defense's (DOD) spending on service contracts approaches $100 billion annually, but recent legislation directs DOD to manage its services procurement more effectively. Leading companies transformed management practices and achieved major savings after they analyzed spending patterns and coordinated procurement. This report evaluates DOD's implementation of the legislation in light of congressional interest in promoting the use of best commercial practices for acquiring services.
DOD and the military departments each have a management structure in place for reviewing individual services acquisitions valued at $500 million or more, but that approach does not provide a departmentwide assessment of how spending for services could be more effective. Greater attention is needed by DOD management to promote a strategic orientation by setting performance goals, including savings goals, and ensuring accountability for achieving them. To support management decisions and improve visibility over spending on service contracts, DOD is developing an automated system to collect and analyze data by piloting a spend analysis. The analysis views spending from a DOD-wide perspective and identifies large-scale savings opportunities, but its scope is limited, and it is too early to tell how the department can make the best use of its results. The military departments are in the early stages of separate initiatives that may lead them to adopt a strategic approach to buying services, but DOD lacks a plan that coordinates these initiatives or provides a road map for future efforts.
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-03-935, Contract Management: High-Level Attention Needed to Transform DOD Services Acquisition
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Report to Congressional Committees:
United States General Accounting Office:
GAO:
September 2003:
Contract Management:
High-Level Attention Needed to Transform DOD Services Acquisition:
Contract Management:
GAO-03-935:
GAO Highlights:
Highlights of GAO-03-935, a report to congressional committees
Why GAO Did This Study:
The Department of Defense‘s (DOD) spending on service contracts
approaches $100 billion annually, but recent legislation directs DOD
to manage its services procurement more effectively.
Leading companies transformed management practices and achieved major
savings after they analyzed spending patterns and coordinated
procurement.
This report evaluates DOD‘s implementation of the legislation in light
of congressional interest in promoting the use of best commercial
practices for acquiring services.
What GAO Found:
DOD and the military departments each have a management structure in
place for reviewing individual services acquisitions valued at $500
million or more, but that approach does not provide a departmentwide
assessment of how spending for services could be more effective.
Greater attention is needed by DOD management to promote a strategic
orientation by the military and setting performance goals, including
savings goals, and ensuring accountability for achieving them. 2002
national defense authorization
To support management decisions and improve visibility over spending
on service contracts, DOD is developing an automated system to collect
and analyze data by piloting a spend analysis. The analysis views
spending from a DOD-wide perspective and identifies large-scale
savings opportunities, but its scope is limited, and it is too early
to tell how the department can make the best use of its results. The
military departments are in the early stages of separate initiatives
that may lead them to adopt a strategic approach to buying services,
but DOD lacks a plan that coordinates these initiatives or provides a
road map for future efforts.
What GAO Recommends:
DOD should strengthen its contracting management structure for
services and business processes to promote use of best practices such
as centralizing key functions, conducting spend analyses, using
commodity teams, achieving strategic orientation, reducing purchasing
costs, and improving performance. DOD also needs a strategic plan on
how the military departments could best accomplish this.
DOD concurred in principle with the recommendation to change its
management structure and partially concurred with the recommendation
for a strategic plan.
www.gao.gov/cgi-bin/getrpt?GAO-03-935.
To view the full product, including the scope and methodology, click
on the link above. For more information, contact David Cooper at (202)
512-4841 or Cooperd@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
DOD Has Made Limited Progress Reforming Management Structure and
Improving Knowledge of Service Spending:
DOD Does Not Have a Strategic Plan for Integrating Early Initiatives:
Conclusions:
Recommendations for Executive Action:
Agency Comments:
Scope and Methodology:
Appendix I: Comparison of Selected Program Review Structure
Requirements:
Appendix II: Comments from the Department of Defense:
Appendix III: GAO Contacts and Staff Acknowledgments:
Tables:
Table 1: Companies' Reported 2001 Procurement Spending and Savings:
Table 2: Broad Principles and Practices of Strategic Sourcing at
Leading Companies:
Table 3: Comparison of Selected Program Review Structure Requirements
with DOD and the Military Department Policies:
Figure:
Figure 1: DOD's Contract Dollars for Goods and Services:
United States General Accounting Office:
Washington, DC 20548:
September 10, 2003:
The Honorable John Warner
Chairman
The Honorable Carl Levin
Ranking Minority Member
Committee on Armed Services
United States Senate:
The Honorable Duncan Hunter
Chairman
The Honorable Ike Skelton
Ranking Minority Member
Committee on Armed Services
House of Representatives:
Federal agencies spend billions of tax dollars each year to buy
services ranging from clerical support and consulting services, to
information technology services such as network support, to the
management and operation of government facilities such as national
laboratories. The Department of Defense (DOD) is, by far, the
government's largest purchaser of services, acquiring about $93 billion
in services in fiscal year 2002.[Footnote 1] However, our work, and the
work of DOD's Inspector General, has found that this spending could be
managed more efficiently.
Congressional concern over DOD services acquisition has been spurred
by the contrasting experience of the private sector, depicted by our
recent work.[Footnote 2] A number of leading companies have achieved
significant savings--without any reduction in services--by adopting a
strategic approach involving the implementation of a variety of best
practices. Using a strategic approach enabled the companies to
transform their processes and thus get the best value in procuring
services.
Recognizing that these experiences could help reform DOD, the Congress
included provisions in the National Defense Authorization Act for
Fiscal Year 2002[Footnote 3] to achieve significant savings through
improved management and oversight of services procurement.
Specifically, section 801 of this law requires DOD to establish (1) a
management structure designed to provide visibility and establish
accountability for services contracts, (2) a program review structure
for major services acquisitions, and (3) an automated system to collect
and analyze data to support management decisions in contracting for
services. One of the aims of these requirements is to promote the use
of best commercial practices, such as centralizing key functions,
promoting strategic orientation, improving personnel skills and
capabilities, conducting spending analyses, rationalizing supplier
bases, and expanding the use of cross-functional, commodity-based
teams.[Footnote 4]
In this report, we evaluate DOD's implementation of the requirements of
section 801. To conduct this work, we interviewed acquisition officials
in the Office of the Under Secretary of Defense for Acquisition,
Technology, and Logistics and the military departments. We also
reviewed policy memoranda and other documents pertaining to DOD's
implementation of section 801 requirements. More information is
contained in our Scope and Methodology section.
Results in Brief:
DOD and the military departments have a management structure and a
process in place at their respective headquarters for reviewing
individual acquisitions valued at $500 million or more, but that
approach does not provide a departmentwide assessment of how spending
for services could be more effective. DOD's management structure does
not adequately promote a strategic orientation across the department by
setting performance goals, including savings goals, and ensuring
accountability for achieving them. DOD is starting to develop an
automated system to collect and analyze data by beginning a spend
analysis pilot that views spending from a DOD-wide perspective and
identifies savings opportunities, but the pilot's scope is limited to a
test of a few service categories. Each of the military departments is
also in the early stages of separate initiatives that may lead each of
them to adopt a strategic approach to buying services, but DOD lacks a
plan that coordinates these initiatives or provides a road map for
future efforts.
This report includes recommendations that DOD and the military
departments further strengthen the management structure established
in response to section 801 and develop a plan with guidance on carrying
out more strategic and centralized responsibilities for the acquisition
of services. With these recommendations, DOD can transform services
acquisition business processes to achieve significant savings and
improvements across the range of services that DOD purchases.
DOD commented on a draft of this report. DOD concurred in principle
with the recommendation to further strengthen the management
structure and partially concurred with the recommendation to develop
a strategic plan. DOD expects that the various initiatives described in
this report--such as the management structure for reviewing individual
service acquisitions valued at $500 million or more and the spend
analysis pilot--will ultimately provide the information with which to
decide what overarching joint management and business process changes
are necessary. While these initiatives are steps in the right
direction, DOD's strategic plan should be explicit about how and when
appropriate follow-through actions will take place so that significant,
long-lasting performance improvements and cost savings are achieved.
DOD's comments can be found in appendix II.
Background:
DOD is historically the federal government's largest purchaser of
services. Between 2001 and 2002, DOD's reported spending for services
contracting increased almost 18 percent, to about
$93 billion.[Footnote 5] 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; research and
development; medical care; operation of government-owned:
facilities; and transportation, travel, and relocation. In each of the
past 5 years, DOD has spent more on services than on supply and
equipment goods (which includes weapon systems and other military
items) (see fig. 1).
Figure 1: DOD's Contract Dollars for Goods and Services:
[See PDF for image]
Note: Data extracted from the Defense Contract Action Data System for
1998--2002. Data are in constant 2002 dollars and include actions
categorized as research, development, test, and evaluation activities.
Figure excludes actions of $25,000 or less and purchase card spending.
We did not independently verify the information contained in the
database. There are known data reliability problems with this data
source, but we determined that the data were sufficient to provide
general trend information for background reporting purposes.
[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 could be more efficient and more effectively managed. In fact,
we have identified DOD's overall contract management as a high-risk
area, most recently in our Performance and Accountability and High-Risk
Series issued this past January.[Footnote 6] 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. Our reports on DOD's contract management
have recommended that DOD use a strategic approach to improve
acquisition of services.
Our work since 2000 at leading companies found that taking a more
strategic approach to acquiring services enabled each company to stay
competitive, reduce costs, and in many cases improve service
levels.[Footnote 7] Pursuing such a strategic approach clearly pays
off. Studies have reported some companies achieving savings of 10 to 20
percent of their total procurement costs, which include savings in the
procurement of services. These leading companies reported achieving or
expecting to achieve billions of dollars in savings as a result of
taking a strategic approach to procurement. For example, table 1
summarizes the savings reported by the companies we studied most
recently.
Table 1: Companies' Reported 2001 Procurement Spending and Savings:
Company: IBM; 2001 procurement spend: $42.4 billion; Savings
on procurement of goods and services: 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; Savings on procurement of goods and services:
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;
Savings on procurement of goods and services: Saved a reported
$20 million a year from 1998 to 2001.
Company: Delta Air Lines; 2001 procurement spend: $7 billion
(approximate); Savings on procurement of goods and services:
Reported saving more than $200 million in procurement costs since
2000.
Company: Dell; 2001 procurement spend: $26 billion; Savings on
procurement of goods and services: Set goal to save 20% from its
general procurement budget of $3 billion to $4 billion.
Source: GAO analysis.
[End of table]
The companies we studied did not follow exactly the same approach in
the manner and degree to which they employed specific best practices,
but the bottom line results were the same--substantial savings and, in
many cases, service improvements. Figure 2 elaborates on the four
broad principles and practices of leading companies that are critical
to successfully carrying out the strategic approach. These principles
and practices largely reflect a common sense approach, yet they also
represent significant changes in the management approach companies use
to acquire services.
Figure 2: Broad Principles and Practices of Strategic Sourcing at
Leading Companies:
Commitment—Secure up front commitment from top leaders: * Recognize and
communicate the urgency to change service spending practices; * Provide
clear and strong executive leadership, including goals and targets.
Commitment—Secure up front commitment from top leaders: * Develop
information system to identify how much is being spent with which
service provider for what services; * Analyze the data to identify
opportunities to reduce costs, improve service levels, and provide
better management of service providers.
Commitment—Secure up front commitment from top leaders: * Create or
identify organizations responsible for coordinating or managing service
purchases; * Establish proactive business relationships between end
users, purchasing units, and other stakeholders; * Implement more
integrated team-based sourcing processes; * Create commodity/service
experts.
Commitment—Secure up front commitment from top leaders: * Obtain
sustaining support from senior leadership to facilitate change; *
Establish clear lines of communication between all affected parties; *
Demonstrate value and credibility of new processes through the use of
metrics.
Source: GAO.
[End of figure]
Companies that have been successful in transforming procurement
generally begin with a corporate decision to pursue a more strategic
approach to acquiring services, with senior management providing the
direction, vision, and clout necessary to obtain initial buy-in and
acceptance of procurement reengineering. 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, they identify opportunities to leverage their buying power,
reduce costs, and better manage their suppliers. Companies also
institute a series of structural, process, and role changes aimed at
moving away from a fragmented acquisition process to a more efficient
and effective corporate process. These changes include adjustments to
procurement management structure and processes such as instituting
companywide purchasing of specific services; reshaping a decentralized
process to follow a more coordinated, strategic approach; and
increasing the involvement of the corporate procurement organization,
including working across units to help identify service needs, select
providers, and better manage contractor performance.
DOD Has Made Limited Progress Reforming Management Structure and
Improving Knowledge of Service Spending:
DOD has made limited progress in its overall implementation of section
801, particularly with respect to establishing a management structure
to oversee a more strategic approach to the acquisition of services, as
envisioned by the legislative history of this provision. While DOD's
leaders express support for a strategic approach in this area, they
have not translated that support into broad-based reforms.
The experience of leading companies offers particularly relevant
insights into the nature of long-term changes in management structure
and business processes. Long-term changes will be needed if the
military departments and the defense agencies are to be successful in
adopting a more strategic approach to acquiring services and achieving
substantial savings and other benefits. Private sector experience
demonstrates the need to change how services are acquired--by
modernizing management structure and business processes--and setting
performance goals, including savings, and establishing accountability
for achieving them. Such changes are needed to move DOD and the
military departments from a fragmented approach to doing business to
one that is more coordinated and strategically oriented. The end goal
is to institute a departmentwide perspective--one that will ensure that
the organization is getting the best overall value.
Industry has found that several ingredients are critical to the
successful adoption of a strategic approach. For example, senior
management must provide continued support for common services
acquisitions processes beyond the initial impetus. Another example is
to cut across traditional organizational boundaries that contributed to
the fragmented approach by restructuring procurement management and
assigning a central or corporate procurement organization greater
responsibility and authority for strategic planning and oversight of
the companies' service spending. Companies also involve business units
in this coordinated approach by designating commodity managers to
oversee key services and making extensive use of cross-functional
commodity teams to make sure they have the right mix of knowledge,
technical expertise, and credibility. Finally, companies extensively
use metrics to measure total savings and other financial and
nonfinancial benefits, to set realistic goals for improvement, and to
document results over time.
To date, DOD has not significantly transformed its management structure
in response to the 2002 national defense authorization requirements,
and its crosscutting effort to improve oversight will focus on only a
portion of military department spending for services. Specifically, the
Under Secretary of Defense for Acquisition, Technology, and Logistics
and each of the military departments now have policies in place for a
management structure and a process for reviewing major (i.e., large-
dollar or program-critical) services acquisitions for adherence to
performance-based, competition and other contracting requirements.
(See app. I for a descriptive comparison of DOD and military department
policies.):
DOD modeled its review process for acquiring services after the review
process for acquiring major weapons systems; the policy is intended to
elevate high-dollar value services to the same level of importance and
oversight. DOD intends that the new program review structure provide
oversight before it commits the government to a major acquisition to
ensure that military departments and defense agencies' buying
strategies are adequately planned, performance-based, and competed. The
new policy similarly establishes a high-dollar threshold of $500
million or more for selecting which service acquisitions must move
forward from lower-level field activities, commands, and program
offices to the military department headquarters (and possibly to DOD)
for advance review and approval.[Footnote 8]
We expect that this new policy will lead to very few service
acquisition strategies and a small portion of overall service spending
being subjected to central oversight at the military department
headquarters level or at DOD headquarters. DOD officials acknowledge
that most service acquisitions cost less than the $500 million
threshold required for headquarters-level reviews, and the total value
of the few contract actions likely to be forwarded under that threshold
will amount to a small portion of DOD's total spending on services,
which is approaching $100 billion each year. DOD's review criteria
indicate that the central reviews that do take place will be focused on
approving individual acquisitions rather than coordinating smaller,
more fragmented requirements for service contracts to leverage buying
power and assessing how spending could be more effective. Our
discussions with procurement policy officials in the various military
departments confirmed that they expect no more than a few acquisitions
to be reviewed at the DOD or military department headquarters level
each year. While the new process complies with the act's requirements
to improve oversight of major service acquisitions, it has not led to
centralized responsibility, visibility, or accountability over the
majority of contracting for services.
In response to the legislative requirement to develop an automated
system to collect and analyze data, DOD has started a spend analysis
pilot that views spending from a DOD-wide perspective and identifies
large-scale savings opportunities. However, the scope of the pilot is
limited to a test of a few service categories. Thirteen months after
Congress directed that DOD create an automated system to support
management decisions for the acquisition of services, the Deputy
Secretary of Defense tasked a new team to carry out the pilot. In May
2003, DOD hired a vendor to support the team by performing an initial
spend analysis and developing strategic sourcing business cases for
only 5 to 10 service categories. Efforts to extract data for the pilot
spend analysis will be restricted to information taken from centrally
available databases on services contract actions (excluding research
and development) in excess of $25,000, a limitation due to the 90-day
time frame established for completing the spend analysis.[Footnote 9]
Pilot projects and associated efforts will be completed by September
2004, so it is too early to tell how DOD will make the best use of the
results.[Footnote 10]
DOD Does Not Have a Strategic Plan for Integrating Early Initiatives:
Even though DOD's senior leadership called for dramatic changes to
current practices for acquiring services about 2 years ago, and
proposed various initiatives and plans to transform business processes,
DOD's early initiatives have not moved forward quickly, expanded or
broadened in scope, or been well coordinated. The experience of leading
companies we studied in our prior work indicates that successfully
addressing service acquisition challenges requires concerted action and
sustained top-level attention, efforts that must be reinforced by a
sound strategic plan.
Moreover, section 801 required DOD to issue guidance on how the
military departments should carry out their management responsibilities
for services contracting. To date, the only guidance that DOD has
issued involves review of individual major service acquisitions for
adherence to performance-based, competition, and other acquisition
strategy requirements. DOD has not established a strategic plan that
provides a road map for transforming its services contracting process
and recognizes the integrated nature of services contracting management
problems and their related solutions.[Footnote 11]
Air Force, Army, and Navy headquarters procurement organizations
have initiatives underway to better manage the acquisition of services,
but they are in the early stages of development and unconnected to each
other. Limited progress has taken place on key efforts to coordinate
responsibility and leverage purchasing power, even in the pursuit of
key goals such as reducing unnecessary spending and redirecting funds
to higher priorities such as modernization and readiness. Information
we obtained on the military departments' early efforts suggests that
military department leaders understand the value of a strategic
approach in this area, but they have not yet translated that
understanding into broad-based reforms to meet comprehensive
performance goals, including savings. Although the Air Force, Army, and
Navy initiatives that follow seek to include the basic principles of
the framework used by leading companies when they acquire services, the
initiatives are still under study, or in the early stages of
implementation.
* At a January 2003 symposium, Air Force participants from headquarters
and major commands discussed a vision for transforming contracting
for services and taking a strategic, departmentwide approach based on
commercial best practices.[Footnote 12] At this event, the Deputy
Assistant Secretary for Contracting called for rethinking business
processes, noting that the Air Force spends over half of its
discretionary dollars on services, yet most of the attention goes to
managing goods. To move forward on this initiative, staff from
acquisition headquarters and major commands are to work together on an
18-month project to capture, analyze, and use spend analysis data and
develop an Air Force strategic sourcing plan for services acquisitions.
Another key initiative participants considered was the establishment by
the Air Force of a management council for services contracting. No time
frame has been set for when the Air Force would activate such a
council. However, the deputy assistant secretary's vision for adopting
a best practices approach to contracting for services calls for
radically transforming business processes within 5 years and
establishing cross-functional, Air Force-wide councils to consolidate
market knowledge and carry out strategic sourcing projects. In July
2003, in the first such effort to take advantage of its overall buying
power, the Air Force formed a commodity council responsible for
developing departmentwide strategies for buying and managing
information technology products.[Footnote 13] According to an Air Force
official involved with this council, the lessons learned and best
practices of this council will be carried forward to other commodity
councils that will be established by the Air Force. Another category
that the Air Force is considering for a future commodity council is
construction services.
* In 2001, top Army leadership approved a consolidation of Army
contracting activities that focuses on the areas of installation
management and general-purpose information technology. This initiative
covers only a portion of the Army's service spending, and it involved
the establishment of the Army Contracting Agency in October 2002 to
centralize much installation-support contracting under a corporate
management structure and called for consolidating similar and common
use requirements to reduce costs. This central agency will be fully
responsible for Army-wide purchases of general information technology
and electronic commerce purchases[Footnote 14] and for large
installation management contracting actions over $500,000 that were
previously decentralized. The agency's key anticipated benefit will be
its ability to centralize large buys that are common Army-wide, while
continuing to provide opportunities for small businesses to win
contracts. To have an early demonstration of the value of this
approach, the agency plans an October 2003 spend analysis of several
services that could offer easy savings, including security guards,
furniture refinishing, telecommunications, building demolition, and
photocopying. The agency has yet to set a time frame for carrying out
the consolidated purchases, which could be national or regional in
scope. The agency's organizational structure assigns regional executive
responsibility for managing services contracting, and includes a high-
level council in headquarters for overseeing more strategic approaches
to buying Army installation support services.
* The Navy is considering pilot tests of a more strategic approach for
services spending in a few categories. Senior Navy leadership began a
study in September 2002 to recommend business process changes in the
Navy's acquisition program.[Footnote 15] A Navy official conducting the
preliminary spend analysis of Navy purchasing data estimated
opportunities to save $115 million through taking a more strategic,
coordinated approach to buying $1.5 billion in support services
(engineering; logistics; program, general, and facilities management;
and training). The Navy official said that, sometime this year, senior
Navy leadership is expected to approve the study's recommendations to
pilot-test consolidated acquisition for support services. To lead these
innovative management approaches, the Secretary of the Navy earlier
this year approved a new position for a Director of Program Analysis
and Business Transformation within the Office of the Deputy Assistant
Secretary for Acquisition Management. A Navy procurement policy
official involved with the ongoing effort told us that the Navy's pilot
tests are likely to be affected by DOD's spend analysis pilot that is
testing DOD-wide strategic sourcing strategies for 5 to 10 services.
Since Navy procurement policy officials are also involved in DOD's
pilot, he anticipates having to coordinate the Navy's pilot as both
initiatives move forward.
A strategic plan could help DOD ensure that these early initiatives
successfully lead to lower costs and improved acquisition of services.
Such a plan would identify, coordinate, and prioritize these
initiatives; integrate the military departments' services contracting
management structures; ensure comprehensive coverage of services
spending; promote and support collaboration; and establish
accountability, transparency, and visibility for tracking performance
and achieving results. However, some of the procurement policy
officials we interviewed have expressed skepticism that broad-based
reforms to foster a more strategic approach are necessary or
beneficial, or that DOD could fully adopt private sector strategies in
view of its current decentralized acquisition environment and other
constraints.
Conclusions:
Given the federal government's critical budget challenges, DOD's
transformation of its business processes is more important than ever
if the department is to get the most from every dollar spent. Senior
leadership has for 2 years expressed a commitment to improving the
department's acquisition of services. Nonetheless, DOD and the military
departments remain in the early stages of developing new business
processes for the strategic acquisition of services.
DOD's leaders have made a commitment to adopt best practices and make
dramatic changes. Translating that commitment into specific management
improvements will allow DOD to take on the more difficult tasks of
developing a reliable and accurate picture of spending on services
across DOD; determining what structures, mechanisms, and metrics can be
employed to foster a strategic approach; and tailoring those structures
to meet DOD's unique requirements. Given that DOD's spending on
services contracts is approaching $100 billion annually, the potential
benefits for enhancing visibility and control of services spending are
significant.
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 the defense agencies to
further strengthen the management structure. This structure,
established in response to section 801, should promote the use of best
commercial practices such as centralizing key functions, conducting
spend analyses, expanding the use of cross-functional commodity teams,
achieving strategic orientation, achieving savings by reducing
purchasing costs and other efficiencies, and improving service
contracts' performance and outcomes.
We also recommend that the Secretary of Defense direct the
Under Secretary to develop a strategic plan with guidance for the
military departments and the defense agencies on how to carry out
their responsibilities for managing acquisition of services. Key
elements of this guidance should address:
* improving knowledge of services spending by collecting and analyzing
data about services procurements across DOD and within military
departments and defense agencies,
* promoting collaboration across DOD and within military departments
and defense agencies by establishing cross-functional teams to carry
out coordinated purchasing of services, and:
* establishing strategic savings and performance goals, measuring
results, and ensuring accountability by assigning high-level
responsibility for monitoring those results.
Agency Comments:
In commenting on a draft of this report, DOD concurred in principle
with the recommendation to further strengthen the management structure
established in response to section 801 and partially concurred with the
recommendation to develop a plan with guidance to the military
departments on carrying out their strategic and centralized
responsibilities for the acquisition of services.
DOD expects that various initiatives being pursued to enhance services
acquisition management structures and processes--such as the management
structure for reviewing individual service acquisitions valued at more
than $500 million and the spend analysis pilot assessed in this report-
-will ultimately provide the information with which to decide
what overarching joint management and business process changes are
necessary. DOD cites these initiatives as demonstrating a full
commitment to improving acquisition of services. DOD further states
that these efforts--such as collecting and enhancing data, performing
spend analyses, and establishing commodity teams--are similar to
industry best practices--and have already had significant impacts on
the manner in which services are acquired.
We agree that the initiatives are positive steps in the right direction
to improve acquisition of services. However, it is too early to tell if
these early efforts will lead DOD and the military departments to make
the type of long-term changes that are necessary to achieve significant
results in terms of savings and service improvements.
Moreover, according to DOD, factors such as unusual size,
organizational complexity, and restrictive acquisition environment
mean that DOD cannot adhere strictly to the commercial best practices
described in the report. Yet, none of the companies we studied followed
exactly the same approach in employing specific best practices.
Likewise, DOD and the military departments need to work together and
determine how these practices can be adapted to fit their unique needs,
challenges, and complexities. Significant bottom line results in terms
of savings and service improvements are likely with adequate follow-
through on the various initiatives. DOD's strategic plan should be
explicit about how and when appropriate follow-through actions will
take place so that significant, long-lasting performance improvements
and cost savings are achieved.
DOD's comments can be found in appendix II.
Scope and Methodology:
Section 801 of the National Defense Authorization Act for Fiscal Year
2002[Footnote 16] requires DOD to establish a management structure and
a program review structure and to collect and analyze data on purchases
in order to improve management of the acquisition of services. As
described in the legislative history,[Footnote 17] these requirements
provide tools with which the department can promote the use of best
commercial practices to reform DOD's services procurement management
and oversight and to achieve significant savings. Section 801 also
directed us to assess DOD's compliance with the requirements and to
report to congressional armed services committees on the assessment.
To conduct this work, we interviewed officials--including those
responsible for Defense Procurement and Acquisition Policy, and
Acquisition Resources and Analysis--in the Office of the Secretary of
Defense and the Office of the Under Secretary of Defense for
Acquisition, Technology, and Logistics. We also interviewed officials
responsible for service acquisition policy and management in the Air
Force, the Army, and the Navy. We interviewed both DOD's and the
various services' officials about policy memoranda and related actions
taken to implement section 801 requirements, including the evolving
nature of implementation actions over several months. We also discussed
comparisons between DOD's and the military departments' services
acquisition management reforms and leading companies' best practices
for taking a strategic approach, which were identified in our previous
work and promoted by the legislation. To assess compliance with the
policy and guidance requirements for the management and program review
structures, we reviewed internal memoranda and policy documents issued
by the Under Secretary of Defense and the military departments.
For background on DOD's contract spending on services, we analyzed
computer-generated data extracted from the Defense Contract Action Data
System. We did not independently verify the information contained in
the database. There are known data reliability problems with this data
source, but we determined that the data are sufficient to provide
general trend information for background reporting purposes.
We conducted our review from November 2002 to July 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; and the Under
Secretaries of Defense (Acquisition, Technology, and Logistics) and
(Comptroller). 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.
Should you have any questions on matters discussed in this report,
please call me at (202) 512-4841. Other contacts and staff
acknowledgments are listed in appendix III.
David E. Cooper
Director Acquisition and Sourcing Management:
Signed by David E. Cooper:
[End of section]
Appendix I: Comparison of Selected Program Review Structure
Requirements:
In response to 2002 national defense authorization requirements, the
Under Secretary of Defense for Acquisition, Technology, and Logistics
and the military departments developed and implemented policies for a
program review structure to oversee large-dollar and program-critical
services acquisitions. The review process, modeled after DOD's review
process for major weapons systems, seeks to ensure major service
acquisition strategies are adequately planned, performance-based,
competed, and address socioeconomic goals. In most cases, an
acquisition must be valued at $500 million or more to prompt review at
the headquarters level for DOD and the military departments.[Footnote
18] Table 2 compares selected aspects of the legislation's requirements
with, and the implementation status of, DOD and military department
policies.
Table 2: Comparison of Selected Program Review Structure Requirements
with DOD and the Military Department Policies:
Program review structure requirement: Set standards, based on dollar
thresholds or other criteria, on which major services procurements will
be reviewed and approved by either a DOD or military department senior
procurement executive; DOD policy: Except for information technology
and weapon system-related services, the Under Secretary of Defense for
Acquisition, Technology, and Logistics shall review all major service
acquisitions (1) with values of $2 billion or more and (2) deemed
special interest; In February 2003, the Under Secretary delegated
all review responsibility to the military departments, with the
exception of case-by-case acquisitions deemed to have special
interest; Air Force policy: Except for information technology, space,
and weapon system-related services, the Program Executive Officer for
Services in the Office of the Assistant Secretary (Acquisition) shall
review all major service acquisitions (1) with values of $100 million
or more and (2) deemed special interest; This review includes all
competitive sourcing/privatization proposals involving 300 or more Air
Force positions; Army policy: Except for information technology and
weapon system-related services, the Army Acquisition Executive (i.e.,
the Assistant Secretary (Acquisition, Logistics, and Technology)) shall
review all major service acquisitions (1) with values of $500 million
or more and (2) deemed special interest; The executive may delegate
review responsibility to the Deputy Assistant Secretary (Policy and
Procurement); Navy policy: Except for information technology and
weapon system-related services, the Navy Acquisition Executive (i.e.,
the Assistant Secretary (Research, Development, and Acquisition)) shall
review all major service acquisitions (1) with values of $1 billion or
more and (2) deemed special interest; The Deputy Assistant Secretary
for Acquisition Management shall review major service acquisitions with
values between $500 million and $1 billion.
Program review structure requirement: Establish major service
acquisition's decision point when executive's review and approval will
occur; DOD policy: Approval occurs prior to committing DOD to the major
service acquisition's strategy. If the Under Secretary determines
within 10 days of receipt to review, up to 30 working days can be used
to review and approve the strategy; Air Force policy: Approval occurs
prior to committing the Air Force to the major service acquisition's
strategy. Contracting activities should include 30 days in the
acquisition schedule for Air Force headquarters review and 90 days for
DOD review; Army policy: Approval occurs prior to committing the Army
to the major service acquisition's strategy; Navy policy: Approval
occurs prior to committing the Navy to the major service acquisition's
strategy.
Program review structure requirement: Set specific matters that will be
reviewed; DOD policy: The review process covers (1) acquisition
strategy in terms of performance-based approach, full and open
competition, and small business goal achievement; and (2) contractor
performance metrics for tracking cost, schedule, and outcomes; Air
Force policy: The management and oversight process for the acquisition
of services covers (1) acquisition strategy in terms of performance-
based approach, full and open competition, and small business goal
achievement; and (2) contractor performance metrics for tracking cost,
schedule, and outcomes; Army policy: The management and oversight
process for the acquisition of services covers (1) acquisition strategy
in terms of performance-based approach, full and open competition, and
small business goal achievement; and (2) contractor performance metrics
for tracking cost, schedule, and outcomes; Navy policy: The management
and oversight process for the acquisition of services covers (1)
acquisition strategy in terms of performance-based approach, full and
open competition, and small business goal achievement; and (2)
contractor performance metrics for tracking cost, schedule, and
outcomes.
Program review structure requirement: Number of major service
acquisitions reviewed since implementation; DOD policy: One (for the
Army) as of July 2003; Air Force policy: Three as of July 2003,
including one competitive sourcing action; Army policy: Two as of July
2003; Navy policy: None as of July 2003.
Source: GAO analysis.
[End of table]
[End of section]
Appendix II: Comments from the Department of Defense:
OFFICE OF THE UNDER SECRETARY OF DEFENSE:
3000 DEFENSE PENTAGON WASHINGTON, DC 20301-3000:
ACQUISITION, TECHNOLOGY AND LOGISTICS:
DPAP/P:
SEP 2 2003:
Mr. David E. Cooper:
Acquisition and Sourcing Management United States General Accounting
Office 441 G. Street N.W.
Washington, DC 20548:
Dear Mr. Cooper:
This is the Department of Defense (DoD) response to the GAO draft
report, `CONTRACT MANAGEMENT: High-Level Attention Needed to Transform
DoD Services,' dated August 6, 2003 (GAO Code 120190/GAO-03-935). The
Department concurs in principle with the first recommendation and
partially concurs with the second. The Department is fully committed to
improving our acquisition of services and is actively pursuing changes
in conjunction with other transformation efforts.
Thank you for giving 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.
Attachment: As stated:
Sincerely,
Signed for Deidre A. Lee:
Director, Defense Procurement & Acquisition Policy:
GAO DRAFT REPORT - DATED AUGUST 6, 2003 GAO CODE 120190/GAO-03-935:
"CONTRACT MANAGEMENT: HIGH-LEVEL ATTENTION NEEDED TO TRANSFORM DOD
SERVICES":
DEPARTMENT OF DEFENSE COMMENTS TO THE RECOMMENDATIONS:
RECOMMENDATION 1: 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 defense agencies to
further strengthen the management structure. This structure,
established in response to section 801, should promote the use of best
commercial practices such as centralizing key functions, conducting
spend analyses, expanding the use of cross-functional commodity teams,
achieving strategic orientation, achieving savings by reducing
purchasing costs and other efficiencies, and improving service
contracts' performance and outcomes.
DOD RESPONSE: Concur in Principle: The Department met the statutory
requirements of Section 801 and continues to enhance the management
structures and processes through a variety of activities as outlined
below. These initiatives will provide us with the information to
determine what over-arching joint management and process changes are
necessary.
The draft report compares the Department's efforts to industry best
practices and cites examples of commercial savings through the process
of initiating management structure and process changes, collecting and
enhancing data, performing spend analyses and establishing commodity
teams to develop strategic acquisition plans. The Department initiated
similar efforts. Due to our unusual size in terms of dollars and
actions, the high number of data collection systems and processes, the
large number of personnel involved, legislatively mandated procurement
restrictions and our commitment to socio-economic programs, the
Department cannot adhere strictly to commercial best practices as
described in the report.
The Department is taking action to be more strategic in the acquisition
of services. To date, we have initiated the following actions to
enhance the management of the acquisition of services:
Implemented Services Contracts Oversight Processes for each of the
military departments which ensure that service acquisitions are of the
highest quality and support DoD objectives; are performance based; and
planned and administered to achieve the intended results.
Established and implemented the Army Contracting Agency. This
realignment involved both structural and process changes and will give
Army senior leadership a strategic view of their services acquisition
profile.
Established the Air Force Program Executive Office for Services
responsible for providing centralized program management of services
acquisitions.
Established the DoD Integrated Process Team (IPT) for Spend Analysis.
This effort incorporates the essential elements of commercial spend
analyses (e.g. data enrichment, commodity teams, etc.). Pilot projects
resulting from this spend analysis will provide lessons learned for the
development of future spend analysis efforts. Procured the services of
a commercial firm with spend analysis experience to identify commodity
areas offering potential efficiency improvements.
Initiated the process of establishing commodity teams to begin
developing pilot program strategic plans resulting from the spend
analysis.
Established commodity councils within individual military departments.
Created business intelligence systems collecting budget, financial,
human capital and contract specific data within individual components
possessing significant data capability to support spend analysis and
other management decision making efforts. Established a collaborative
initiative within the Department's Business Management Modernization
Program (BMMP) Acquisition Domain to further the means by which
acquisition data can be automated for utilization in the development of
strategic business decisions.
Collectively, the initiatives outlined above have already made
significant impacts on the manner in which the Department manages the
acquisition of services and also the acquisition of supplies. As these
initiatives evolve, the Department will identify what changes are
required and how best to implement them.
RECOMMENDATION 2: We also recommend that the Secretary of Defense
direct the under secretary to develop a strategic plan with guidance to
the military departments and for the defense agencies on how to carry
out their responsibilities for managing acquisition of services. Key
elements of this guidance should address (1) improving knowledge of
services spending by collecting and analyzing data about services
procurements across DOD and within military departments and defense
agencies, (2) promoting collaboration across DOD and within military
departments and defense agencies by establishing cross-functional teams
to carry out coordinated purchasing of services, and (3) establishing
strategic savings and performance goals, measuring results,
and ensuring accountability by assigning high-level responsibility for
monitoring those results.
DOD RESPONSE: Partially-Concur. As stated in our response to
recommendation 1 above, the Department initiated numerous actions to
strengthen our management of the acquisition of services. Of the three
elements within this recommendation, two have already been addressed.
We are currently working with the BMMP Acquisition Domain to develop
the ability to collect and analyze all procurement data (supplies and
services) at the joint level. We are promoting collaboration across DoD
through the establishment of cross-functional commodity teams as a
result of the spend analysis IPT. Through the development of these
teams and their resulting work, we will ascertain how to better utilize
industry best practices. We believe that the efforts outlined above
will allow the Department to improve its ability to strategically plan
the acquisition of services from which performance and savings goals
then can be developed.
[End of section]
Appendix III: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Ralph Dawn (202) 512-4544 Carolyn Kirby (202) 512-9843:
Acknowledgments:
In addition to those named above, Cordell Smith, Bob Swierczek, and
Ralph White made key contributions to this report.
FOOTNOTES
[1] Derived from our analysis of data extracted from the Defense
Contract Action Data System. The data include actions categorized as
research, development, test, and evaluation activities and exclude
actions of $25,000 or less and purchase card spending.
[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) and Best Practices: Improved
Knowledge of DOD Service Contracts Could Reveal Significant Savings,
GAO-03-661 (Washington, D.C.: June 9, 2003).
[3] Sections 801 and 802, Public Law 107-107, Dec. 28, 2001. Section
802 established goals for DOD to reduce services contracting costs over
the next decade, in the expectation that the department could achieve
significant savings without any reduction in services.
[4] Senate Report 107-62 at pp. 326-327.
[5] Derived from our analysis of data extracted from the Defense
Contract Action Data System, adjusted to represent constant fiscal year
2002 dollars. The data exclude actions of $25,000 or less and purchase
card spending.
[6] U.S. General Accounting Office, High-Risk Series: An Update, GAO-
03-119 (Washington, D.C.: January 2003) and Major Management Challenges
and Program Risks: Department of Defense, GAO-03-98 (Washington, D.C.:
January 2003).
[7] GAO-02-230 and GAO-03-661.
[8] For service acquisitions under the $500 million threshold, DOD's
policy assigns review and approval responsibility to a designated
official in component headquarters below the military department
headquarters level, such as a command headquarters. Also, although
DOD's policy requires the military department headquarters to review
and approve all service acquisition strategies of $500 million or more,
the Air Force policy adopts a lower threshold. That is, Air Force
subordinate organizations must forward all service acquisitions valued
at $100 million or more to headquarters. An Air Force procurement
policy official told us this resulted in identifying more contracts for
headquarters review than would otherwise be anticipated under DOD's
threshold of $500 million or more.
[9] DOD furnished the spend analysis vendor data extracted from the
Defense Contract Action Data System. In fiscal year 2002, DOD reported
more than 254,000 contract actions in excess of $25,000 for nonresearch
and development services, totaling about $66 billion. However, a
sizeable sum of spending is not captured in the data DOD is furnishing
to the spend analysis vendor. For example, in fiscal year 2002, DOD
reported about $26.9 billion in contract actions for research,
development, test, and evaluation services and another $9.8 billion in
contract actions for goods and services of $25,000 or less. Also
missing from the spend analysis is DOD's purchase card spending, which
totaled about $6.1 billion in 2001.
[10] For more information on DOD's pilot, see GAO-03-661.
[11] GAO-02-230, GAO-03-98, and GAO-03-119.
[12] This initiative follows on the action by the top leadership of the
Air Force Materiel Command to commit to transforming how the air
logistics centers acquire spare parts and equipment to support depot
and field maintenance activity in Oklahoma City, Oklahoma; Ogden, Utah;
and Warner Robins, Georgia. Since 2001, this command has made a number
of changes in management structure and business processes in order to
adopt a strategic approach to air logistics contracting based on
commercial best practices. More recently, this command began focusing
on services contracting and purchase card buying for similar
procurement transformation. In fiscal year 2002, the command reported
spending about $35 billion on goods and services.
[13] The Air Force Standards System Group will lead the new information
technology commodity council, whose initial focus will be on developing
buying strategies for desktop and laptop computers, followed by
peripheral computer products. The council will bring together experts
from across the Air Force to establish information technology
procurement strategies and put servicewide contracts in place for
individual organizations to buy from.
[14] The Army Contracting Agency's E-Commerce and Commercial
Contracting Center will be responsible for Army-wide purchases of
general purpose, commercial off-the-shelf hardware, software, and
associated support services. (Army-wide responsibility is not included
for information technology purchases of tactical and strategic
systems.)
[15] In 2002, the Navy hired a consultant to examine the effectiveness
and efficiency of spending on products and services, among other areas.
Although Navy and Marine Corps organizations had a number of ongoing
initiatives to reduce costs, this study was to examine opportunities to
leverage efficiencies across the enterprise.
[16] Public Law 107-107.
[17] Senate Report 107-62 at pp. 326-327.
[18] For service acquisitions under the $500 million threshold, DOD's
policy assigns review and approval responsibility to a designated
official in component headquarters below the military department
headquarters level, such as a command headquarters.
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