Defense Acquisitions
Tailored Approach Needed to Improve Service Acquisition Outcomes Gao ID: GAO-07-20 November 9, 2006Department of Defense (DOD) obligations for service contracts rose from $82.3 billion in fiscal year 1996 to $141.2 billion in fiscal year 2005. DOD is becoming increasingly more reliant on the private sector to provide a wide range of services, including those for critical information technology and mission support. DOD must maximize its return on investment and provide the warfighter with needed capabilities and support at the best value for the taxpayer. GAO examined DOD's approach to managing services in order to (1) identify the key factors DOD should emphasize to improve its management of services and (2) assess the extent to which DOD's current approach exhibited these factors.
Several key factors are necessary to improve DOD's service acquisition outcomes--that is, obtaining the right service, at the right price, in the right manner. These factors can be found at both the strategic and the transactional levels and should be used together as a comprehensive, but tailored approach to managing service acquisition outcomes. At the strategic level, key success factors include (1) strong leadership that defines a corporate vision and normative goals; (2) sustained, results-oriented communication and metrics; (3) defined responsibilities and associated support structures; and (4) increased knowledge and focus on spending and data trends. The strategic level also sets the context for the transactional level, where the focus is on making sound decisions on individual transactions. Success factors at this level include having (1) valid and well-defined requirements; (2) properly structured business arrangements; and (3) proactively managed outcomes. DOD's current approach to managing service acquisition has tended to be reactive and has not fully addressed the key factors for success at either the strategic or transactional level. At the strategic level, DOD has yet to set the direction or vision for what it needs, determine how to go about meeting those needs, capture the knowledge to enable more informed decisions, or assess the resources it has to ensure departmentwide goals and objectives are achieved. For example, despite implementing a review structure aimed at increasing insight into service transactions, DOD is not able to determine which or how many transactions have actually been reviewed. The military departments, while having some increased visibility, have only reviewed proposed acquisitions accounting for less than 3 percent of dollars obligated for services in fiscal year 2005 and are in a poor position to regularly identify opportunities to leverage buying power or otherwise change existing practices. Actions at the transactional level continue to focus primarily on awarding contracts and do not always ensure that user needs are translated into well-defined requirements or that post-contract award activities result in expected performance.
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-07-20, Defense Acquisitions: Tailored Approach Needed to Improve Service Acquisition Outcomes
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Report to the Subcommittee on Readiness and Management Support,
Committee on Armed Services, U.S. Senate:
United States Government Accountability Office:
GAO:
November 2006:
Defense Acquisitions:
Tailored Approach Needed to Improve Service Acquisition Outcomes:
GAO-07-20:
GAO Highlights:
Highlights of GAO-07-20, a report to the Subcommittee on Readiness and
Management Support, Committee on Armed Services, U.S. Senate
Why GAO Did This Study:
Department of Defense (DOD) obligations for service contracts rose from
$82.3 billion in fiscal year 1996 to $141.2 billion in fiscal year
2005. DOD is becoming increasingly more reliant on the private sector
to provide a wide range of services, including those for critical
information technology and mission support. DOD must maximize its
return on investment and provide the warfighter with needed
capabilities and support at the best value for the taxpayer.
GAO examined DOD‘s approach to managing services in order to (1)
identify the key factors DOD should emphasize to improve its management
of services and (2) assess the extent to which DOD‘s current approach
exhibited these factors.
What GAO Found:
Several key factors are necessary to improve DOD‘s service acquisition
outcomes”that is, obtaining the right service, at the right price, in
the right manner. These factors can be found at both the strategic and
the transactional levels and should be used together as a
comprehensive, but tailored approach to managing service acquisition
outcomes. At the strategic level, key success factors include (1)
strong leadership that defines a corporate vision and normative goals;
(2) sustained, results-oriented communication and metrics; (3) defined
responsibilities and associated support structures; and (4) increased
knowledge and focus on spending and data trends. The strategic level
also sets the context for the transactional level, where the focus is
on making sound decisions on individual transactions. Success factors
at this level include having (1) valid and well-defined requirements;
(2) properly structured business arrangements; and (3) proactively
managed outcomes.
DOD‘s current approach to managing service acquisition has tended to be
reactive and has not fully addressed the key factors for success at
either the strategic or transactional level. At the strategic level,
DOD has yet to set the direction or vision for what it needs, determine
how to go about meeting those needs, capture the knowledge to enable
more informed decisions, or assess the resources it has to ensure
departmentwide goals and objectives are achieved. For example, despite
implementing a review structure aimed at increasing insight into
service transactions, DOD is not able to determine which or how many
transactions have actually been reviewed. The military departments,
while having some increased visibility, have only reviewed proposed
acquisitions accounting for less than 3 percent of dollars obligated
for services in fiscal year 2005 and are in a poor position to
regularly identify opportunities to leverage buying power or otherwise
change existing practices. Actions at the transactional level continue
to focus primarily on awarding contracts and do not always ensure that
user needs are translated into well-defined requirements or that post-
contract award activities result in expected performance.
Figure: Key Strategic and Transactional Factors for Service
Acquisition:
Strategic level: Effective service acquisition requires the leadership,
processes, and information necessary for mitigating risks, leveraging
buying power, and managing outcomes.
Transactional Level: Individual service transactions must focus on
buying the right thing, the right way, while getting the desired
outcomes.
Source: GAO (analysis).
[End of Figure]
What GAO Recommends:
GAO recommends that DOD take a proactive approach to managing strategic
and transactional level service acquisition elements. This includes
establishing a normative position of service spending, determining risk
areas for greater attention, and communicating these in a manner where
individual transactions can then be made to support strategic goals and
meet cost and performance objectives. DOD concurred with all of our
recommendations and noted several actions the department is taking or
plans to take to improve the acquisition of services.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-20].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Paul Francis at (202) 512-
4841 or francisp@gao.gov.
[end of Section]
Contents:
Letter:
Results in Brief:
Background:
Managing Service Acquisition Requires Both a Strategic and a
Transactional Focus:
DOD Service Acquisition Approach Does Not Fully Address Key Elements at
the Strategic or Transactional Levels:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Comments from the Department of Defense:
Appendix III: GAO Contact and Staff Acknowledgements:
Tables:
Table 1: Changes in DOD's Use of Service Contract Obligations, Fiscal
Years 1996 to 2005:
Table 2: Service Acquisitions Reviewed under DOD and Military
Department Review Structure:
Figures:
Figure 1: Key Strategic and Transactional Factors for Service
Acquisition:
Figure 2: Key Factors in Achieving a Strategic Approach to Service
Acquisition:
Figure 3: Key Factors for Managing Service Acquisitions at a
Transactional Level:
Abbreviations:
DAU: Defense Acquisition University:
DOD: Department of Defense:
NETC: Naval Education and Training Command:
United States Government Accountability Office:
Washington, DC 20548:
November 9, 2006:
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:
In fiscal year 2005, the Department of Defense (DOD) obligated more
than $141 billion on service contracts, a 72-percent increase since
fiscal year 1996. DOD is increasingly relying on the private sector to
provide a wide range of services, including consulting and
administrative support, information technology services, and weapon
system and base operations support. As the largest buyer of services in
the federal government, and operating in an environment in which the
nation's large and growing structural deficit will require difficult
resource decisions, DOD must maximize its return on investment and
provide the warfighter with needed capabilities at the best value for
the taxpayer.
Our work and that of others has highlighted examples of long-standing
concerns in planning, executing, and overseeing service acquisition.
For example, GAO has identified DOD contract management to be at high
risk of vulnerabilities to fraud, waste, abuse, and mismanagement for
more than a decade. In our 2005 high-risk report update, we noted that
with regard to service acquisition, DOD had not yet fully implemented a
strategic approach to buying services; did not have a comprehensive
plan to ensure it had the right skills and capabilities in its
acquisition workforce; and did not always make sound use of the tools,
such as performance-based service contracting, to acquire the services
it needed.[Footnote 1]
To ensure that DOD acquires services by means that are in the best
interest of the government and managed in compliance with applicable
statutory requirements, sections 801 and 802 of the National Defense
Authorization Act for Fiscal Year 2002 required DOD to establish a
service acquisition management approach, including developing a
structure for reviewing individual service transactions based on dollar
thresholds and other criteria.[Footnote 2] Further, in January 2006,
additional requirements were established pertaining to DOD's service
contracting management structure and oversight processes.[Footnote 3]
This report assesses DOD's overall approach to managing service
acquisition. Specifically, we (1) identified the key factors necessary
for DOD to emphasize to improve its management of services and (2)
assessed the extent to which DOD's approach, including its current
management structure, exhibited these factors.
To perform our review, we made extensive use of our prior work in this
and other related areas, including our January 2002 report that
identified how leading commercial companies took a strategic approach
to acquiring services.[Footnote 4] For the transactional level, we used
our prior work and that of others on issues related to individual
service contract transactions and held detailed discussions with
relevant contracting experts to confirm and validate key factors. In
total, the results of these efforts proffer a model to improve results
in service acquisition management. To assess the extent to which DOD's
current approach exhibited these characteristics, we collected and
reviewed relevant DOD guidance and policies, including those that
established its current management structure and review processes. We
interviewed officials responsible for implementing the management
structure in the Office of the Secretary of Defense, as well as each of
the cognizant offices within the military departments. We also obtained
information on the types of activities and reviews conducted by these
offices. We visited 20 commands and buying activities to understand the
processes by which these organizations acquire services. We reviewed
various contract files and process documentation for selected service
acquisitions and discussed challenges faced in acquiring services and
efforts to improve service acquisition with policy and contracting
personnel at each of these locations. See appendix I for additional
details on scope and methodology. We conducted our review from August
2005 to September 2006 in accordance with generally accepted government
auditing standards.
Results in Brief:
Achieving good service acquisition outcomes--that is, obtaining the
right service, at the right price, in the right manner--requires
management attention at both a strategic and a transactional level. The
strategic level requires the leadership, processes, and information
necessary for mitigating risks, leveraging buying power, and managing
outcomes across the enterprise. At this level, we identified four key
factors for improving outcomes: strong corporate leadership and vision,
results-oriented goals and metrics, defined responsibilities and
support structures, and improved knowledge of spending. The strategic
level also sets the context for the transactional level, where
individual service acquisitions are executed. Key factors for good
outcomes at the transactional level include clearly defined
requirements, sound business arrangements, and appropriate contract
management and oversight processes. At both levels, risks exist that
can impair an organization's ability to get desired service acquisition
outcomes. A comprehensive management approach tailors the strategic and
transactional factors to address these risks. For example, by knowing
where its service acquisitions are and setting a course for where they
ought to be, an organization provides the context for making decisions
on individual transactions.
DOD's current approach to managing service acquisition has tended to be
reactive and has not fully addressed the key factors for success at
either the strategic or the transactional level. At the strategic
level, DOD has not developed a normative position for gauging whether
ongoing and planned efforts can best achieve intended results. Further,
good information on the volume and composition of service acquisitions
is still wanting, perpetuating the circumstance in which the
acquisition of services tends to happen to DOD, rather than being
proactively managed. For example, despite implementing a review
structure aimed at increasing insight into service transactions, DOD is
not able to determine which or how many transactions have been
reviewed. The military departments have only slightly better
visibility, having reviewed proposed acquisitions accounting for less
than 3 percent of dollars obligated for services in fiscal year 2005.
At the transactional level, DOD tends to focus primarily on those
elements associated with awarding contracts, with much less attention
paid to formulation of service acquisition requirements and to
assessment of the actual delivery of contracted services. Moreover, the
results of individual acquisitions are generally not used to inform or
adjust strategic direction. As a result, DOD is not in a position to
determine whether investments in services are achieving their desired
outcomes.
To put DOD in a position to proactively manage service acquisition
outcomes, we are making six recommendations to assist DOD in
identifying specific solutions at the strategic and transactional
levels. In written comments on a draft of this report, DOD concurred
with our recommendations and agreed that a more coordinated,
integrated, and strategic approach for acquiring services is needed.
DOD noted that it is developing an integrated assessment of how best to
acquire services and expects this assessment will result in a
comprehensive, departmentwide architecture. DOD expects its assessment
will be completed in early 2007. Our discussions with DOD officials
indicate that this architecture may hold the potential for making
fundamental changes at the strategic and transactional levels. The
extent to which DOD successfully integrates the key factors we
identified as it develops and implements its architecture will be
essential to fostering the appropriate attention and action needed to
make service acquisitions a managed outcome. The full text of DOD's
comments may be found in appendix II.
Background:
Over the past decade, DOD has increasingly relied on private sector
contractors to provide a range of services, including management and
information technology support. For example, DOD's obligations on
service contracts rose from $82.3 billion in fiscal year 1996 to $141.2
billion in fiscal year 2005 (see table 1). DOD committed 20 percent of
its total service obligations in fiscal year 2005 for professional,
administrative, and management support contracts. Overall, according to
DOD, the amount obligated on service contracts exceeded the amount the
department spent on supplies and equipment, including major weapon
systems.
Table 1: Changes in DOD's Use of Service Contract Obligations, Fiscal
Years 1996 to 2005 (fiscal year 2005 dollars in billions):
Service category: Professional, administrative, and management support;
Service obligations Fiscal year: 1996: $10.8;
Service obligations Fiscal year: 2005: $28.3;
Percentage of service obligations, fiscal year 2005: 20.0;
Percentage change, fiscal years 1996 to 2005: 161.
Service category: Construction of facilities;
Service obligations Fiscal year: 1996: 7.3;
Service obligations Fiscal year: 2005: 11.7;
Percentage of service obligations, fiscal year 2005: 8.3;
Percentage change, fiscal years 1996 to 2005: 62.
Service category: Maintenance and repair of equipment;
Service obligations Fiscal year: 1996: 6.6;
Service obligations Fiscal year: 2005: 11.4;
Percentage of service obligations, fiscal year 2005: 8.1;
Percentage change, fiscal years 1996 to 2005: 74.
Service category: Information technology;
Service obligations Fiscal year: 1996: 4.9;
Service obligations Fiscal year: 2005: 10.3;
Percentage of service obligations, fiscal year 2005: 7.3;
Percentage change, fiscal years 1996 to 2005: 110.
Service category: Medical services;
Service obligations Fiscal year: 1996: 1.6;
Service obligations Fiscal year: 2005: 8.0;
Percentage of service obligations, fiscal year 2005: 5.6;
Percentage change, fiscal years 1996 to 2005: 412.
Service category: Housekeeping services;
Service obligations Fiscal year: 1996: 2.4;
Service obligations Fiscal year: 2005: 4.8;
Percentage of service obligations, fiscal year 2005: 3.4;
Percentage change, fiscal years 1996 to 2005: 98.
Service category: Transportation, travel, and relocation;
Service obligations Fiscal year: 1996: 2.4;
Service obligations Fiscal year: 2005: 6.2;
Percentage of service obligations, fiscal year 2005: 4.4;
Percentage change, fiscal years 1996 to 2005: 154.
Service category: All other services, excluding research and
development[A];
Service obligations Fiscal year: 1996: 22.7;
Service obligations Fiscal year: 2005: 23.6;
Percentage of service obligations, fiscal year 2005: 16.7;
Percentage change, fiscal years 1996 to 2005: 4.
Service category: All services excluding research and development;
Service obligations Fiscal year: 1996: $58.6;
Service obligations Fiscal year: 2005: $104.2;
Percentage of service obligations, fiscal year 2005: 73.8;
Percentage change, fiscal years 1996 to 2005: 78.
Service category: Research and development;
Service obligations Fiscal year: 1996: 23.7;
Service obligations Fiscal year: 2005: 37.0;
Percentage of service obligations, fiscal year 2005: 26.2;
Percentage change, fiscal years 1996 to 2005: 56.
Service category: Total, all service contracts;
Service obligations Fiscal year: 1996: $82.3;
Service obligations Fiscal year: 2005: $141.2;
Percentage of service obligations, fiscal year 2005: 100.0;
Percentage change, fiscal years 1996 to 2005: 72.
Source: DOD's DD350 database for all actions exceeding $25,000 (data);
GAO (analysis).
[A] Other services include photographic, mapping, and printing;
education and training; and social services, among others.
[End of table]
The growth in service acquisition spending results, in part, from
recent trends and changes within DOD's acquisition environment,
including the increased use of contracted services. For example, while
spending on services has increased, DOD's civilian workforce shrank by
about 38 percent between fiscal years 1989 and 2002. DOD performed this
downsizing without proactively shaping the civilian workforce to ensure
that it had the specific skills and competencies needed to accomplish
future DOD missions. In June 2006, DOD issued a human capital strategy
that acknowledged that DOD's civilian workforce is not balanced by age
or experience. DOD further noted that a proposed reduction of an
additional 55,000 personnel through fiscal year 2007, continuing
increases in the number of retirement age employees, and the loss of
experienced personnel and institutional knowledge could make it
difficult to mentor its developing workforce. DOD's strategy identified
a number of steps planned over the next 2 years to more fully develop a
long-term approach to managing its acquisition workforce.
The increased use of service contracts is also partly attributable to
DOD acquiring capabilities through different acquisition approaches, as
well as needing to meet new requirements and demands. For example, DOD
historically bought space launch vehicles, such as the Delta and Titan
rockets as products. Now, under the Evolved Expendable Launch Vehicle
program, the Air Force purchases launch services using contractor-owned
launch vehicles. Similarly, after the terrorist attacks on September
11, 2001, increased security requirements and the deployment of active
duty and reserve personnel resulted in DOD having fewer military
personnel to protect domestic installations. Consequently, the U.S.
Army awarded contracts worth nearly $733 million to acquire contract
guards at 57 installations.
DOD has traditionally approached the acquisition of services
differently than the acquisition of products. DOD and military
department officials we interviewed noted that DOD generally views
service acquisition as less risky than the acquisition of weapon
systems, in part because many services are not tied directly to mission
accomplishment and tend to be composed of far more numerous and lower
dollar value contracts. DOD has long focused its attention, policies,
and procedures on managing major weapon systems and typically does so
using the cost of the weapon system as a proxy for risk. For example,
DOD classifies its acquisition programs, including research and
development efforts related to weapon systems and major automated
information systems, in categories based upon estimated dollar value or
designation as a special interest.[Footnote 5] The largest programs
generally fall under the responsibility of the Under Secretary of
Defense (Acquisition, Technology, and Logistics), while less complex
and risky programs are overseen by the service or component acquisition
executive. Overall, more than 25 percent of DOD's annual budget is
managed under this framework. For example, as of December 2005, DOD
managed 85 major defense acquisition programs currently estimated to
cost about $1.6 trillion combined over their program life.
Conversely, we previously reported that DOD's approach to buying
services is largely fragmented and uncoordinated, as responsibility for
acquiring services is spread among individual military commands, weapon
system program offices, or functional units on military bases, with
little visibility or control at the DOD or military department
level.[Footnote 6] For example, we noted that:
² DOD's information systems could provide data on the amount spent on
services, but the reliability of the information was questionable and
the system itself was seldom used as a tool to manage or identify
opportunities for managing DOD's supplier base.
² Procurement processes within DOD were not always carried out
efficiently and effectively.
² There were few service contracting-related enterprisewide annual
performance metrics, none of which measured the cost-effectiveness or
quality of services obtained.
Services differ from products in several aspects and can also be
challenging when attempting to define requirements, establish
measurable and performance-based outcomes, and assess contractor
performance. For example, it can easily take over 10 years to define
requirements and develop a product like a weapon system before it can
actually be delivered for field use. Individual service acquisitions
generally proceed through requirements, solution, and delivery more
rapidly. Further, delivery of services generally begins immediately or
very shortly after the contract is finalized.
In response to the National Defense Authorization Act for Fiscal Year
2002, DOD and the military departments established a service
acquisition management structure, including processes at the
headquarters level for reviewing individual, high-dollar acquisitions.
In September 2003, we reported that this approach did not provide a
departmentwide assessment of how spending for services could be more
effective and recommended that DOD give greater attention to promoting
a strategic orientation by setting performance goals for improvements
and ensuring accountability for achieving those results.[Footnote 7] In
its response, DOD concurred in principle and agreed that additional
actions could strengthen the management structure as implemented, but
also identified challenges for doing so based on organizational size,
complexity, and acquisition environment.
In January 2006, Congress again enacted legislation with specific
requirements for managing the acquisition of services.[Footnote 8]
Among other things, the legislation required DOD to:
² identify the critical skills and competencies needed to carry out the
procurement of services;
² develop a comprehensive strategy for recruitment, training, and
deploying employees to meet the requirements for skills and
competencies;
² establish contract services acquisition categories, based on dollar
thresholds, for the purpose of establishing the level of review,
decision authority, and applicable procedures;
² dedicate full-time commodity managers to coordinate the procurement
of key categories of services;
² ensure that contract services are procured by means of procurement
actions that are in the best interests of DOD and entered into and
managed in compliance with applicable laws, regulations, directives,
and requirements;
² ensure that competitive procedures and performance-based contracting
are used to the maximum extent practicable; and:
² monitor data and periodically collect spend analyses to ensure that
funds allotted for the procurement of services are expended in the most
rational and economical manner practicable.
The requirements pertaining to establishing contract service
acquisition categories were to be phased in over a period of 3 years,
with the first categories, for acquisitions with an estimated value of
$250 million or more, to be established by October 2006. At the
conclusion of our review, DOD issued a policy memorandum aimed at
strengthening service acquisition management in response to the
legislation. DOD is to report on its implementation by January 2007.
Managing Service Acquisition Requires Both a Strategic and a
Transactional Focus:
Several key factors are necessary to improve DOD's service acquisition
outcomes--that is, obtaining the right service, at the right price, in
the right manner. Our work found that to do this, an organization must
understand the volume, sources, portfolios, and trends related to what
it is buying, then ensure that requirements are valid and understood,
services are purchased properly, and performance delivered with minimum
risk and maximum efficiency. Success factors to achieve these goals can
be defined at both the strategic and the transactional level, as shown
in figure 1.
Figure 1: Key Strategic and Transactional Factors for Service
Acquisition:
[See PDF for image]
Source: GAO (analysis).
[End of figure]
The strategic level is where the enterprise sets the direction or
vision for what it needs, captures the knowledge to enable more
informed management decisions, ensures deparmentwide goals and
objectives are achieved, determines how to go about meeting those
needs, and assesses the resources it has to achieve desired outcomes.
The strategic level also sets the context for the transactional level,
where the focus is on making sound decisions on individual
transactions. Our work found that officials need to ensure that
individual service transactions have valid and well-defined
requirements, have appropriate business arrangements, and that
performance is being managed--again, while minimizing related risks and
maximizing efficiency. A comprehensive approach would use the strategic
and transactional factors in a complementary manner to tailor
management activity to ensure preferred outcomes. Without this
management attention, risks exist within each level that can impair an
organization's ability to get desired service acquisition outcomes.
Strategic Focus: Knowing Where Service Acquisition Is Today and Where
It Should Be Tomorrow:
Our prior work with leading commercial firms found that a successful
organization proactively identifies and manages outcomes of the
services it acquires at a strategic, or enterprisewide, level.
Effective service acquisition requires the leadership, processes, and
information necessary for mitigating risks, leveraging buying power,
and managing outcomes. Several factors are needed to implement a
strategic approach, including (1) strong leadership to define and
articulate a corporate vision, including specific goals and outcomes;
(2) results-oriented communication and metrics; (3) defined
responsibilities and associated support structures; and (4) increased
knowledge and focus on spending data and trends. See figure 2 for key
factors to achieve a strategic approach to acquiring services.
Figure 2: Key Factors in Achieving a Strategic Approach to Service
Acquisition:
[See PDF for image]
Source: GAO (analysis).
[End of figure]
Leadership Must Establish Vision and Goals:
Our work found that organizations seeking to significantly improve
service acquisition outcomes must begin with an established vision and
commitment from senior management. This can come in various ways,
ranging from restructuring the corporate procurement function,
providing greater insight into and authority over the company's service
spending, or signaling support for a new way of doing business. With an
articulated vision, leaders then have a basis for making commitments to
factors important for realizing the desired end state, such as
practices, procedures, structures, information, and human capital
planning. Our work has shown that when corporate goals and expected
outcomes are not defined, employees becomes less likely to accept new
roles or understand the importance of upcoming changes that are
necessary to reduce risks in service acquisition. These include
allowing the sum total of individual transactions to define the
strategy and not providing a context within which managers of
individual transactions can make sound judgments about the risk and
sensitivity of a particular service acquisition.
Being able to define a strategic vision presupposes that leaders can
determine and articulate a normative position for the future. A
normative position would entail defining what end state or goals they
want to achieve at a specified time. This position can then be
translated into specifics, both in the aggregate and by type, such as:
² the current volume, type, location, and trends of service
acquisitions;
² the results the organization wants to achieve in a specified time
frame;
² the definition of a good service acquisition outcome; and:
² the characteristics of a service acquisition that make it desirable,
undesirable, or sensitive.
Critical to establishing a normative position is knowledge of current
service acquisition expenditures, management priorities, and expected
outcomes. The vision could also dictate which services represent risks
to the organization. For example, acquisitions could be deemed low risk
based on minimal cost exposure, high availability of service providers,
or limited criticality for meeting mission requirements. Conversely,
high-risk acquisitions may be those of higher dollar value, mission-
critical requirements, services that are new or being acquired using a
different approach, or any other services determined to need additional
corporate-level involvement or oversight based on management
priorities.
Vision and Goals Must Be Communicated and Used to Measure Progress:
Once a vision and desired end state for service acquisition have been
defined, senior management must be both active and persistent in
supporting ongoing efforts, adjusting the strategy to reflect new
information, and moving toward the established normative position.
Communication and metrics are important management ingredients in terms
of overcoming resistance, cultural barriers, and other impediments to
achieving identified goals. Senior leaders also have the responsibility
to communicate and demonstrate a commitment to sound practices deemed
acceptable for the acquisition function. We have previously reported
that DOD faces vulnerabilities in aspects of its senior leadership
because of certain disconnects, including senior positions that have
remained unfilled for long periods of time, the acquisition culture
fostered by management's tone at the top, and the management approach
used in new industry partnering relationships.[Footnote 9]
We have also noted the importance of leadership by senior agency
officials to successfully transform other aspects of DOD's business
operations and those of other federal agencies. For example, our prior
work has shown that DOD's substantial financial and business management
weaknesses adversely affect not only its ability to produce auditable
financial information, but also its ability to provide accurate,
complete, and timely information for DOD management and Congress to use
in making informed decisions. We indicated that overcoming these
weaknesses required sustained leadership at the highest level and a
strategic and integrated plan.[Footnote 10]
Metrics defining specified outcomes are vital to increasing the
likelihood that changes to practices will successfully contribute to
the organizational vision. While they can differ in nature and be used
to varying degrees, metrics can be used to (1) evaluate and understand
performance levels, (2) identify critical processes that require
attention, (3) document results over time, and (4) report information
to senior officials for decision-making purposes. To illustrate this,
DOD spends 20 percent of its service dollars on professional and
administrative management support contracts. If senior DOD officials
believe that such volume poses risks, then it can use this information
to establish targets to control and monitor the use of these services.
For example, in March 2006 the Secretary of the Air Force issued a
memorandum directing increased visibility and management of contract
services in support of command functions, in an attempt to save over $6
billion that would then be used for other transformation initiatives.
If the Air Force follows up by collecting timely data on the individual
service transactions made in this area, it can see whether it is making
progress toward its desired end state. For DOD, risks of not doing this
at a strategic level entail losing momentum and failing to sustain
positive change, and such failures can then be manifested in quick
fixes, fire drills, or changes in policy statements that do not have a
material effect on actual operations.
Structures and Processes Must Be Defined to Facilitate Service
Management Direction:
Successful service acquisition management also requires attention to
the organization's ability to move from a fragmented manner of doing
business to one that is more coordinated and strategically oriented.
Primarily, this involves changing how services are acquired in terms of
business processes, organizational structures, and roles and
responsibilities. Our work with leading commercial firms found that
typical changes in this area include:
² restructuring acquisition organizations and elevating the procurement
function to improve coordination with other internal organizations and
optimize available resources;
² establishing new processes for routine tasks and using cross-
functional teams made up of individuals with various skills to ensure
the right mix of knowledge, technical expertise, and credibility; and:
² establishing full-time, dedicated commodity managers to provide more
effective management over key services.
We reported in March 2005 that the Department of Homeland Security was
pursuing similar approaches as it attempted to integrate the various
acquisition functions it inherited upon its establishment in 2003. For
example, the department designated a Chief Procurement Officer with
broad responsibility for its acquisition function and established
commodity councils composed of representatives from across the
department that were assigned responsibility for assessing future
purchasing strategies. We noted, however, that senior agency leadership
needed to address a number of challenges before fully integrating its
procurement function, such as clearly defining the roles and
responsibilities of key offices, and establishing a structure to ensure
continued support for commodity councils--such as appointing full-time
commodity managers.[Footnote 11]
In essence, this move toward a more strategic orientation can be
compared to a franchise model of business versus that of individually
owned stores or units. While franchises, like individually owned
businesses, operate at the local level and adapt to the specific needs
and demands of a community, they still must adhere to the consistent
set of standards and processes of the parent organization. For service
acquisition, this translates into recognition that while unique local
requirements need to be understood and met, individual acquisitions
should also be viewed in the context of organizational goals,
objectives, and strategies. In this regard, company officials indicated
they can tailor delivery of services to meet local needs while helping
to achieve organizational cost savings or quality improvement
objectives. Risks here are twofold. First, if a single, monolithic
process is used for every service acquisition regardless of size,
sensitivity, or type, it could be overkill for some transactions and
insufficient for others. Second, allowing local buying activities to
operate independent of organizational standards and processes would
impair or defeat an organization's ability to achieve desired aggregate
goals or outcomes.
Knowledge on Spending and Workforce Vital to Managing Services:
Organizations also need basic, reliable data on how service dollars are
being spent and the capabilities of the workforce in place to acquire
and manage those services. Company officials who were successful with
improving service acquisition management informed us it was critical to
define the relevant types of information that were required and then
develop the appropriate data systems to collect and provide reliable
spending data. Such data enable senior managers to know not only the
current state of service acquisition, but how far it is from the
desired end state. While the type of information may vary depending on
the organization and the types of services acquired, basic spend
analysis data should include information and trends related to:
* the type of services being acquired;
* the number of suppliers for a specific service the organization is
using;
* the amount the organization is spending for that service, in total
and with each supplier; and:
* the units in the organization that are acquiring the services.
We have previously reported that several civilian agencies have used
this approach to leverage their buying power, reduce costs, and better
manage suppliers of goods and services. For example, we reported in
September 2004 that the Departments of Agriculture and Veterans
Affairs, among others, had launched or expanded spend analysis efforts
and in turn realized savings ranging from $1.8 million to $394 million
on related acquisitions.[Footnote 12] Similarly, we noted in 2005 that
the Department of Homeland Security identified 15 commodity areas as
having the potential to leverage the department's buying power. In
fiscal year 2004, four commodity councils reported approximately $14.1
million in cost savings and avoidances.[Footnote 13] Some councils
encountered difficulties due to a shortage of comprehensive data upon
which to draw an accurate and detailed picture of what was being spent
on certain commodities over time, thereby preventing them from taking
full advantage of their strategic sourcing and spend analysis efforts.
Equally important and necessary is for an organization to have a
workforce that is manned at the appropriate levels and equipped with
the right skills and abilities. To do this, a comprehensive, data-
driven workforce analysis must be performed in conjunction with
establishing the corporate vision and goals. An organization cannot
fully understand what skills and staffing commitments are necessary at
each organizational level to meet service acquisition requirements
until it understands where it wants to go and how it plans to get
there. Once information on spending and workforce capabilities is known
and understood, organizations can be more strategic in planning and
managing service acquisition. The absence of such data creates several
risks, including not knowing how and where money is being spent on
service acquisition or not having the appropriate workforce skills or
staffing levels to ensure it is using sound buying practices.
Transactional Focus: Buying the Right Individual Service the Right Way:
While the strategic level defines the direction and manner in which an
organization pursues improvements in service acquisition, it is through
individual service transactions that the strategy is implemented. Key
factors at this transactional level include (1) clearly defined and
valid requirements; (2) appropriate business arrangements; and (3)
effective contractor management and oversight. In short, an
organization needs to assure itself that on individual service
transactions it is buying the right thing in the right way and that
doing so results in the desired outcome. See figure 3 for key factors
for effectively managing service acquisitions at the transaction level.
Figure 3: Key Factors for Managing Service Acquisitions at a
Transactional Level:
[See PDF for image]
Source: GAO (analysis).
[End of figure]
Good Outcomes Begin with Sound Requirements:
Establishing a valid need and translating that into a service
acquisition requirement is essential for obtaining the right outcome.
Without this, an organization increases the risk that it will pay too
much for the services provided, acquire services that do not meet its
needs, or enter too quickly into a sensitive arrangement that exposes
the organization to financial, performance, or other risks. Moreover,
to establish accurate requirements, the customer organization would
benefit by involving stakeholders that have knowledge about past
transactions, current market capabilities and the potential supplier
base, and budgetary and financial management issues. The makeup of
stakeholders may vary across different transactions depending on the
nature, complexity, and risks. In the end, the purpose of stakeholders
with varied knowledge and skills is to ensure at the earliest point
possible that all aspects of the acquisition are necessary, executable,
and tailored to the level of risk commensurate with the individual
transaction. We have found that when DOD uses similar teaming concepts
to develop and deliver products, the results have included superior
outcomes within predicted time frames and budgets. For example, we
reported in April 2001 that the Advanced Amphibious Assault Vehicle
program used teams to reduce the time needed to make a design decision
from 6 months to about a week.[Footnote 14]
Because the nature of service contracts can vary, they naturally
require different approaches in describing requirements. For example,
the time, discipline, and sophistication of a team developing a
requirement for repetitive building maintenance would be considerably
less than that of a team developing a requirement for the first
purchase of a space launch service. Observing these factors, tailored
to the individual requirement at hand, can help to ensure that risks
associated with a requirement for a service acquisition are fully
considered before entering into a business arrangement. This is
especially important for service acquisitions, because once
requirements are developed, most transactions move very quickly into
the business arrangement and contracting stages.
Appropriate Business Arrangements Provide Right Way to Buy Services:
Once a requirement has been validated and defined, it becomes necessary
to develop an appropriate business arrangement to meet that need while
protecting the government's interests. Of course, without a sound
requirement, the business arrangement could be relegated to buying the
wrong service the right way. At a basic level, this includes defining a
clear scope of expected contractor performance, developing an objective
means to assess the contractor's performance, ensuring effective
contractor selection based on competition and sound pricing, and
selecting an appropriate contracting vehicle. Here again, while these
are performed with respect to the individual transaction, they must be
done in the context of the organization's strategic vision.
As an organization undergoes the process for selecting those
contractors that will provide services, there should be clearly
established relationships among what tasks the contractor is expected
to perform, the contract terms and conditions, and performance
evaluation factors and incentives. This is especially true as federal
agencies makes adjustments to their acquisition practices. For example,
in recent years, federal agencies have made a major shift in the way
they buy services, turning increasingly to interagency contracts as a
way to streamline the procurement process. In these cases, an agency
can use an existing contract that has already been awarded by another
agency, or turn to another agency to issue and administer task orders
on its behalf, often for a fee.[Footnote 15] Requirements, roles, and
responsibilities need to be clear to reduce risks. For example, we
reported in July 2005 that DOD customers did not provide the awarding
agency with detailed information about their needs.[Footnote 16]
Without this information, these agencies did not translate DOD's needs
into well-defined contract requirements that contained criteria to
determine whether the contractor had performed successfully. In the
absence of well-defined outcomes, DOD and the agencies lacked criteria
to provide effective contractor oversight.
Similarly, competition during the acquisition process is also important
in getting reasonable prices, as offerors put forth their best bid and
solution to meeting the proposed requirements and the government
receives the benefit of market forces on pricing. We have noted,
however, that DOD has, at times, sacrificed the benefits of competition
for expediency. For example, we noted in April 2006 that DOD awarded
contracts for security guard services supporting 57 domestic bases, 46
of which were done on an authorized, sole-source basis. The sole-source
contracts supporting the last 37 installations were awarded by DOD
despite recognizing it was paying about 25 percent more than previously
paid for contracts awarded competitively.[Footnote 17]
When proper management controls are not in place, particularly in an
interagency fee-for-service contracting environment, too much emphasis
can be placed on customer satisfaction and revenue generation rather
than on compliance with sound contracting policy and required
procedures, such as competition. Significant problems in the way
contracting offices carry out responsibilities in issuing the orders
for services may not be detected or addressed by management. For
example, in April 2005 we reported that a lack of effective management
controls--in particular insufficient management oversight and a lack of
adequate training--led to the breakdowns in the issuance and
administration of task orders for interrogation and other services in
Iraq, including:
² issuing 10 out of 11 task orders that were beyond the scope of
underlying contracts, in violation of competition rules;
² not complying with additional DOD competition requirements when
issuing task orders for services on existing contracts;
² not properly justifying the decision to use interagency contracting;
² not complying with ordering procedures meant to ensure best value for
the government; and:
² inadequate monitoring of contractor performance.[Footnote 18]
Without appropriate attention, there is an increased risk that the
government will pay too much for the purchased service, will be limited
in its access to new and innovative alternatives, or will not be in the
proper position to effectively manage the contractor after an
arrangement is established.
Actual Performance Must Be Managed and Assessed:
At the transactional level it is also important to implement a post-
contract award process to effectively manage and assess contractor
performance to ensure that the business arrangement is properly
executed. Managing and assessing post-award performance entails various
activities performed by government officials to ensure that the
delivery of services meets the terms of the contract, including
adequate surveillance resources, proper incentives, and a capable
workforce for overseeing contractor activities. Each of these requires
metrics and tools to encourage contractors to provide superior
performance and to manage and document that the contractor's
performance was acceptable. For example, one important element of this
phase is having a plan for assessing performance that outlines how
services will be delivered. In addition, the plan should provide a
mechanism for capturing and documenting performance information so it
can serve as past performance information on future contracts.
Effective use of such a plan can allow the government to evaluate the
contractor's success in meeting the specified contract requirements.
Further, organizations can use monetary incentives, such as those
provided through award and incentive fee contracts, to promote desired
acquisition outcomes. Finally, quality assurance surveillance--
oversight of the services being performed by the contractor--is
important to ensure that contractors are providing timely and high-
quality services and to help mitigate any contractor performance
problems.
In an environment that demands increased interaction between DOD and
the contractor to ensure expected outcomes, acquisition personnel must
be adequately trained to understand each of these elements and have the
skills to manage service contractors accordingly. Without appropriate
attention through contract completion, we have found that risks exist
that could result in poor contractor performance, services not being
delivered as expected, or payment to contractors for more than the
value of the services they performed. For example, our March 2005
review of 90 contracts showed wide variance in the level of
surveillance, including 15 contracts that had no personnel assigned at
all for these responsibilities.[Footnote 19] According to DOD
officials, this condition existed because surveillance was not as
important to contracting officials as awarding contracts and
contracting oversight personnel were not properly assigned, evaluated
on the performance of their duties, or provided enough time to complete
surveillance tasks. In the same way that the development of
requirements for services must be different from the development of
requirements for products, so is the case for overseeing contractor
performance. Given that performance thresholds may vary greatly,
management and oversight of individual service acquisitions may need to
be tailored to meet specific requirements. In some cases, dollar value
may not be a good proxy for determining risk. For example, some high
dollar contracts could pose relatively little risk to achieving the
agency's mission. Conversely, certain lower dollar contracts, such as
those used to obtain interrogation services in Iraq, may pose higher
risk and, therefore, require greater management attention.
DOD Service Acquisition Approach Does Not Fully Address Key Elements at
the Strategic or Transactional Levels:
DOD and the military departments have not yet fully addressed the key
elements for managing service acquisition at a strategic or a
transactional level. At the strategic level, DOD has not formed a
normative position of where service acquisition needs to be and does
not have the data necessary to know the state of service acquisition
today. As a result, DOD is not in a position to determine whether
investments in services are achieving their desired outcomes. These are
precursors to defining and promoting improved outcomes. At the
transactional level, most of DOD's efforts have been aimed at improving
business arrangements, without commensurate focus on how requirements
are established and communicated or how service contracts are executed.
Despite the implementation of a senior-level review process, buying
commands and activities have not made significant changes to how they
manage individual service acquisitions.
DOD's Strategic Level Approach Missing Key Elements:
DOD's overall approach to managing service acquisition suffers from the
absence of several key elements. DOD has not developed a strategic
vision and lacks sustained commitment to manage service acquisition
risks and foster more efficient outcomes. As a result, DOD is not in a
position to communicate to its workforce how it intends to improve its
acquisition of services; determine needed changes to structures and
processes to better identify and prioritize risks; or understand the
current state of service spending and the skills of its current
workforce. While DOD's current approach to managing service acquisition
at the strategic level provides some additional insight into high-
dollar value service acquisitions, it lacks an overall road map for
managing risk and integrating key service acquisition initiatives.
Normative Position of Service Acquisition Not Yet Established:
DOD has not yet identified the types and quantities of services it
purchases; the outcomes needed in service acquisition so that necessary
changes can be understood and evaluated; or metrics that can be used to
assess whether those changes have actually achieved the expected
outcomes. DOD and military department officials have acknowledged that
DOD has not developed a comprehensive plan that targets areas needing
improvements, coordinates ongoing and planned initiatives, and provides
an overall road map to improve DOD's management of services. In the
absence of such a vision, DOD's strategic level efforts do not position
the department to proactively manage service acquisition outcomes, but
rather relegate DOD to a reactive role in which the billions of dollars
spent acquiring services simply reflects the sum total of individual
actions.
Further, DOD's efforts to transform its enterprisewide business
operations may not translate into improved knowledge on how services
are acquired. For example, DOD established the Business Transformation
Agency in October 2005 to lead and coordinate business transformation
efforts across the department. The Business Transformation Agency is
tasked primarily with modernizing key information technology systems
and business processes intended to make reliable data more readily
available while at the same time consolidating the overall number of
information technology systems and ensure consistency across the
department. However, the Business Transformation Agency has few ongoing
activities directly related to the acquisition of services.
In addition, DOD has pursued few opportunities to leverage its buying
power to acquire services through the use of strategic sourcing
concepts. While DOD has undertaken a number of pilot efforts, only a
limited number of these focused specifically on services. In 2006, DOD
appointed the Assistant Deputy Under Secretary of Defense for Strategic
Sourcing and Acquisition Processes to coordinate efforts and assist
other DOD components, including the military departments and the
Defense Acquisition University (DAU), as they develop strategic
sourcing plans and training processes. The Assistant Deputy Under
Secretary stated that initial efforts were focused on developing a
concept of operations to facilitate this requirement, but so far had
been limited by a lack of staff and resources. Further, he acknowledged
that his office does not play a role in DOD's service acquisition
review process. In September 2006, a senior DOD official indicated that
DOD was considering transferring this responsibility to the Office of
the Director, Defense Procurement and Acquisition Policy. It is
uncertain how this change, if implemented, would affect the roles and
responsibilities previously assigned to the office.
DOD Has Not Communicated Its Vision for Managing Service Acquisition:
Because it lacks a strategic vision, DOD is not in a position to
communicate how it intends to improve its approach to service
acquisition. DOD's primary policy for managing service acquisition came
in the form of a memorandum issued in response to sections 801 and 802
of the Fiscal Year 2002 National Defense Authorization Act. That
memorandum, issued in May 2002, noted DOD's intent to move to a more
strategic and integrated approach to the acquisition of services and
the need to treat this area as seriously as it does that of
hardware.[Footnote 20] Similarly, DOD and senior military department
officials have testified on the need to improve service acquisition
management within their departments. Nevertheless, our discussions with
command and buying activity officials found that while recognizing this
need, without specific guidance from DOD, their acquisition practices
remain unchanged. As a result, senior DOD leadership's call for change
has had limited impact on acquisition practices at lower levels within
the department.
Further, one of the biggest obstacles to a more strategic approach to
service acquisition is breaking down cultural barriers at different
levels and across various functions of the acquisition process. In that
regard, officials noted that the acquisition and contracting
communities often do not have a shared vision for improving service
acquisition or of their role in such a vision. For example, DOD has
acknowledged that the use of performance-based service contracting
techniques is generally perceived as a "contracting" initiative, with
the rest of the acquisition community generally not fully participating
or embracing the initiative. Consequently, DOD and military department
officials indicate that without senior leadership and commitment, it is
difficult to get support for changes in business practices within the
acquisition community.
Changes to Supporting Structures, Processes, and Roles Have Had Limited
Effect:
As part of its May 2002 policy, DOD required the development of a
review process for individual service acquisitions, established
oversight thresholds, and specified which service acquisitions are to
be reviewed. In addition, it required the military departments to
establish a similar management review process. DOD officials noted in
2003 that this approach, combined with several other initiatives, was
expected to have significant impact on the acquisition of services. The
new management structure DOD implemented to address identified
deficiencies associated with the management of services established
three levels: (1) review by the Under Secretary of Defense
(Acquisition, Technology, and Logistics) for services acquisitions
valued over $2 billion; (2) review by the component or designated
acquisition executive for service acquisitions valued between $500
million and $2 billion; and (3) review by a component-designated
official for the acquisition of services valued at less than $500
million. In response to this guidance, the Air Force, Army, and Navy
each developed individual service acquisition review processes and
authorities to support the DOD review requirements and identified
respective decision authorities responsible for conducting execution
reviews to assess progress against metrics.
DOD and military department officials with whom we spoke indicated that
the review structure has provided the reviewing office with additional
insight on high-dollar value service acquisitions. However, the Office
of the Under Secretary of Defense (Acquisition, Technology, and
Logistics) lacked complete information on the number and scope of
acquisitions of which it was notified and therefore could not give us a
definitive response as to how many transactions were formally reviewed.
Officials from that office provided a list of 19 service acquisitions
that had been notified for review--9 Army and 2 Air Force acquisitions,
in addition to 8 acquisitions from the Office of the Assistant
Secretary of Defense (Networks and Information Integration), which are
subject to review under the guidance for major automated information
systems--but provided no additional information on the results of those
reviews.
Data provided by officials at the military department level indicated
that through September 2005, 69 acquisitions--representing just under 3
percent of service obligations--had been reviewed by the Air Force,
Army, and Navy under the new process (see table 2).
Table 2: Service Acquisitions Reviewed under DOD and Military
Department Review Structure (dollars in millions):
Review level/office: Under Secretary of Defense (Acquisition,
Technology, and Logistics);
Criteria[A]: Proposed service actions valued at $2 billion or more;
Number of proposed contract actions reviewed: Unknown;
Fiscal year 2005 obligations from reviewed actions[B]: [Empty];
Total fiscal year 2005 obligations for services: [Empty];
Percentage of obligations from reviewed actions: [Empty].
Review level/office: Army; Assistant Secretary of the Army
(Acquisition, Logistics, and Technology); Deputy Assistant Secretary of
the Army (Policy and Procurement);
Criteria[A]: ; Proposed service acquisitions exceeding $500 million;
Number of proposed contract actions reviewed: 16;
Fiscal year 2005 obligations from reviewed actions[B]: $326;
Total fiscal year 2005 obligations for services: $40,267;
Percentage of obligations from reviewed actions:
