Defense Acquisitions

Tailored Approach Needed to Improve Service Acquisition Outcomes Gao ID: GAO-07-20 November 9, 2006

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.

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.

Recommendations

Our 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 This is the accessible text file for GAO report number GAO-07-20 entitled 'Defense Acquisitions: Tailored Approach Needed to Improve Service Acquisition Outcomes' which was released on November 14, 2006. This text file was formatted by the U.S. Government Accountability Office (GAO) to be accessible to users with visual impairments, as part of a longer term project to improve GAO products' accessibility. Every attempt has been made to maintain the structural and data integrity of the original printed product. Accessibility features, such as text descriptions of tables, consecutively numbered footnotes placed at the end of the file, and the text of agency comment letters, are provided but may not exactly duplicate the presentation or format of the printed version. The portable document format (PDF) file is an exact electronic replica of the printed version. We welcome your feedback. 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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: 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. Procurement processes within DOD were not always carried out efficiently and effectively. 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: identify the critical skills and competencies needed to carry out the procurement of services; develop a comprehensive strategy for recruitment, training, and deploying employees to meet the requirements for skills and competencies; establish contract services acquisition categories, based on dollar thresholds, for the purpose of establishing the level of review, decision authority, and applicable procedures; dedicate full-time commodity managers to coordinate the procurement of key categories of services; 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; ensure that competitive procedures and performance-based contracting are used to the maximum extent practicable; and: 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: the current volume, type, location, and trends of service acquisitions; the results the organization wants to achieve in a specified time frame; the definition of a good service acquisition outcome; and: 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: restructuring acquisition organizations and elevating the procurement function to improve coordination with other internal organizations and optimize available resources; 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: 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: issuing 10 out of 11 task orders that were beyond the scope of underlying contracts, in violation of competition rules; not complying with additional DOD competition requirements when issuing task orders for services on existing contracts; not properly justifying the decision to use interagency contracting; not complying with ordering procedures meant to ensure best value for the government; and: 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:

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