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Report to Congressional Committees:

United States General Accounting Office:

GAO:

September 2003:

Contract Management:

High-Level Attention Needed to Transform DOD Services Acquisition:

Contract Management:

GAO-03-935:

GAO Highlights:

Highlights of GAO-03-935, a report to congressional committees

Why GAO Did This Study:

The Department of Defense’s (DOD) spending on service contracts 
approaches $100 billion annually, but recent legislation directs DOD 
to manage its services procurement more effectively.

Leading companies transformed management practices and achieved major 
savings after they analyzed spending patterns and coordinated 
procurement.

This report evaluates DOD’s implementation of the legislation in light 
of congressional interest in promoting the use of best commercial 
practices for acquiring services.

What GAO Found:

DOD and the military departments each have a management structure in 
place for reviewing individual services acquisitions valued at $500 
million or more, but that approach does not provide a departmentwide 
assessment of how spending for services could be more effective. 
Greater attention is needed by DOD management to promote a strategic 
orientation by the military and setting performance goals, including 
savings goals, and ensuring accountability for achieving them. 2002 
national defense authorization 

To support management decisions and improve visibility over spending 
on service contracts, DOD is developing an automated system to collect 
and analyze data by piloting a spend analysis. The analysis views 
spending from a DOD-wide perspective and identifies large-scale 
savings opportunities, but its scope is limited, and it is too early 
to tell how the department can make the best use of its results. The 
military departments are in the early stages of separate initiatives 
that may lead them to adopt a strategic approach to buying services, 
but DOD lacks a plan that coordinates these initiatives or provides a 
road map for future efforts. 

What GAO Recommends:

DOD should strengthen its contracting management structure for 
services and business processes to promote use of best practices such 
as centralizing key functions, conducting spend analyses, using 
commodity teams, achieving strategic orientation, reducing purchasing 
costs, and improving performance. DOD also needs a strategic plan on 
how the military departments could best accomplish this.

DOD concurred in principle with the recommendation to change its 
management structure and partially concurred with the recommendation 
for a strategic plan. 

www.gao.gov/cgi-bin/getrpt?GAO-03-935.

To view the full product, including the scope and methodology, click 
on the link above. For more information, contact David Cooper at (202)  
512-4841 or Cooperd@gao.gov.

[End of section]

Contents:

Letter:

Results in Brief:

Background:

DOD Has Made Limited Progress Reforming Management Structure and 
Improving Knowledge of Service Spending:

DOD Does Not Have a Strategic Plan for Integrating Early Initiatives:

Conclusions:

Recommendations for Executive Action:

Agency Comments:

Scope and Methodology:

Appendix I: Comparison of Selected Program Review Structure 
Requirements:

Appendix II: Comments from the Department of Defense:

Appendix III: GAO Contacts and Staff Acknowledgments:

Tables:

Table 1: Companies' Reported 2001 Procurement Spending and Savings:

Table 2: Broad Principles and Practices of Strategic Sourcing at 
Leading Companies:

Table 3: Comparison of Selected Program Review Structure Requirements 
with DOD and the Military Department Policies:

Figure:

Figure 1: DOD's Contract Dollars for Goods and Services:

United States General Accounting Office:

Washington, DC 20548:

September 10, 2003:

The Honorable John Warner 
Chairman 
The Honorable Carl Levin 
Ranking Minority Member 
Committee on Armed Services 
United States Senate:

The Honorable Duncan Hunter 
Chairman 
The Honorable Ike Skelton 
Ranking Minority Member 
Committee on Armed Services 
House of Representatives:

Federal agencies spend billions of tax dollars each year to buy 
services ranging from clerical support and consulting services, to 
information technology services such as network support, to the 
management and operation of government facilities such as national 
laboratories. The Department of Defense (DOD) is, by far, the 
government's largest purchaser of services, acquiring about $93 billion 
in services in fiscal year 2002.[Footnote 1] However, our work, and the 
work of DOD's Inspector General, has found that this spending could be 
managed more efficiently.

Congressional concern over DOD services acquisition has been spurred 
by the contrasting experience of the private sector, depicted by our 
recent work.[Footnote 2] A number of leading companies have achieved 
significant savings--without any reduction in services--by adopting a 
strategic approach involving the implementation of a variety of best 
practices. Using a strategic approach enabled the companies to 
transform their processes and thus get the best value in procuring 
services.

Recognizing that these experiences could help reform DOD, the Congress 
included provisions in the National Defense Authorization Act for 
Fiscal Year 2002[Footnote 3] to achieve significant savings through 
improved management and oversight of services procurement. 
Specifically, section 801 of this law requires DOD to establish (1) a 
management structure designed to provide visibility and establish 
accountability for services contracts, (2) a program review structure 
for major services acquisitions, and (3) an automated system to collect 
and analyze data to support management decisions in contracting for 
services. One of the aims of these requirements is to promote the use 
of best commercial practices, such as centralizing key functions, 
promoting strategic orientation, improving personnel skills and 
capabilities, conducting spending analyses, rationalizing supplier 
bases, and expanding the use of cross-functional, commodity-based 
teams.[Footnote 4]

In this report, we evaluate DOD's implementation of the requirements of 
section 801. To conduct this work, we interviewed acquisition officials 
in the Office of the Under Secretary of Defense for Acquisition, 
Technology, and Logistics and the military departments. We also 
reviewed policy memoranda and other documents pertaining to DOD's 
implementation of section 801 requirements. More information is 
contained in our Scope and Methodology section.

Results in Brief:

DOD and the military departments have a management structure and a 
process in place at their respective headquarters for reviewing 
individual acquisitions valued at $500 million or more, but that 
approach does not provide a departmentwide assessment of how spending 
for services could be more effective. DOD's management structure does 
not adequately promote a strategic orientation across the department by 
setting performance goals, including savings goals, and ensuring 
accountability for achieving them. DOD is starting to develop an 
automated system to collect and analyze data by beginning a spend 
analysis pilot that views spending from a DOD-wide perspective and 
identifies savings opportunities, but the pilot's scope is limited to a 
test of a few service categories. Each of the military departments is 
also in the early stages of separate initiatives that may lead each of 
them to adopt a strategic approach to buying services, but DOD lacks a 
plan that coordinates these initiatives or provides a road map for 
future efforts.

This report includes recommendations that DOD and the military 
departments further strengthen the management structure established 
in response to section 801 and develop a plan with guidance on carrying 
out more strategic and centralized responsibilities for the acquisition 
of services. With these recommendations, DOD can transform services 
acquisition business processes to achieve significant savings and 
improvements across the range of services that DOD purchases.

DOD commented on a draft of this report. DOD concurred in principle 
with the recommendation to further strengthen the management 
structure and partially concurred with the recommendation to develop 
a strategic plan. DOD expects that the various initiatives described in 
this report--such as the management structure for reviewing individual 
service acquisitions valued at $500 million or more and the spend 
analysis pilot--will ultimately provide the information with which to 
decide what overarching joint management and business process changes 
are necessary. While these initiatives are steps in the right 
direction, DOD's strategic plan should be explicit about how and when 
appropriate follow-through actions will take place so that significant, 
long-lasting performance improvements and cost savings are achieved. 
DOD's comments can be found in appendix II.

Background:

DOD is historically the federal government's largest purchaser of 
services. Between 2001 and 2002, DOD's reported spending for services 
contracting increased almost 18 percent, to about 
$93 billion.[Footnote 5] In addition to the sizeable sum of dollars 
involved, DOD contracts for a wide and complex range of services, such 
as professional, administrative, and management support; construction, 
repair, and maintenance; information technology; research and 
development; medical care; operation of government-owned:

facilities; and transportation, travel, and relocation. In each of the 
past 5 years, DOD has spent more on services than on supply and 
equipment goods (which includes weapon systems and other military 
items) (see fig. 1).

Figure 1: DOD's Contract Dollars for Goods and Services:

[See PDF for image]

Note: Data extracted from the Defense Contract Action Data System for 
1998--2002. Data are in constant 2002 dollars and include actions 
categorized as research, development, test, and evaluation activities. 
Figure excludes actions of $25,000 or less and purchase card spending. 
We did not independently verify the information contained in the 
database. There are known data reliability problems with this data 
source, but we determined that the data were sufficient to provide 
general trend information for background reporting purposes.

[End of figure]

Despite this huge investment in buying services, our work--and the 
work of the DOD Inspector General--has found that DOD's spending on 
services could be more efficient and more effectively managed. In fact, 
we have identified DOD's overall contract management as a high-risk 
area, most recently in our Performance and Accountability and High-Risk 
Series issued this past January.[Footnote 6] Responsibility for 
acquiring services is spread among individual military commands, weapon 
system program offices, or functional units in various defense 
organizations, with limited visibility or control at the DOD-or 
military-department level. Our reports on DOD's contract management 
have recommended that DOD use a strategic approach to improve 
acquisition of services.

Our work since 2000 at leading companies found that taking a more 
strategic approach to acquiring services enabled each company to stay 
competitive, reduce costs, and in many cases improve service 
levels.[Footnote 7] Pursuing such a strategic approach clearly pays 
off. Studies have reported some companies achieving savings of 10 to 20 
percent of their total procurement costs, which include savings in the 
procurement of services. These leading companies reported achieving or 
expecting to achieve billions of dollars in savings as a result of 
taking a strategic approach to procurement. For example, table 1 
summarizes the savings reported by the companies we studied most 
recently.

Table 1: Companies' Reported 2001 Procurement Spending and Savings:

Company: IBM; 2001 procurement spend: $42.4 billion; Savings 
on procurement of goods and services: Focuses on delivering competitive 
advantage year after year; reported saving hundreds of millions of 
dollars since 1994.

Company: ChevronTexaco; 2001 procurement spend: $16 billion-
$18 billion; Savings on procurement of goods and services: 
Reported targeted savings of $300 million a year by 2003. After 2005, 
targeted savings of $1.3 billion a year.

Company: Bausch & Lomb; 2001 procurement spend: $900 million; 
Savings on procurement of goods and services: Saved a reported 
$20 million a year from 1998 to 2001.

Company: Delta Air Lines; 2001 procurement spend: $7 billion 
(approximate); Savings on procurement of goods and services: 
Reported saving more than $200 million in procurement costs since 
2000.

Company: Dell; 2001 procurement spend: $26 billion; Savings on 
procurement of goods and services: Set goal to save 20% from its 
general procurement budget of $3 billion to $4 billion.

Source: GAO analysis.

[End of table]

The companies we studied did not follow exactly the same approach in 
the manner and degree to which they employed specific best practices, 
but the bottom line results were the same--substantial savings and, in 
many cases, service improvements. Figure 2 elaborates on the four 
broad principles and practices of leading companies that are critical 
to successfully carrying out the strategic approach. These principles 
and practices largely reflect a common sense approach, yet they also 
represent significant changes in the management approach companies use 
to acquire services.

Figure 2: Broad Principles and Practices of Strategic Sourcing at 
Leading Companies:

Commitment…Secure up front commitment from top leaders: * Recognize and 
communicate the urgency to change service spending practices; * Provide 
clear and strong executive leadership, including goals and targets.

Commitment…Secure up front commitment from top leaders: * Develop 
information system to identify how much is being spent with which 
service provider for what services; * Analyze the data to identify 
opportunities to reduce costs, improve service levels, and provide 
better management of service providers.

Commitment…Secure up front commitment from top leaders: * Create or 
identify organizations responsible for coordinating or managing service 
purchases; * Establish proactive business relationships between end 
users, purchasing units, and other stakeholders; * Implement more 
integrated team-based sourcing processes; * Create commodity/service 
experts.

Commitment…Secure up front commitment from top leaders: * Obtain 
sustaining support from senior leadership to facilitate change; * 
Establish clear lines of communication between all affected parties; * 
Demonstrate value and credibility of new processes through the use of 
metrics.

Source: GAO.

[End of figure]

Companies that have been successful in transforming procurement 
generally begin with a corporate decision to pursue a more strategic 
approach to acquiring services, with senior management providing the 
direction, vision, and clout necessary to obtain initial buy-in and 
acceptance of procurement reengineering. When adopting a strategic, 
best-practices approach for changing procurement business processes, 
companies begin with a spend analysis to examine purchasing patterns 
to see who is buying what from whom. By arming themselves with this 
knowledge, they identify opportunities to leverage their buying power, 
reduce costs, and better manage their suppliers. Companies also 
institute a series of structural, process, and role changes aimed at 
moving away from a fragmented acquisition process to a more efficient 
and effective corporate process. These changes include adjustments to 
procurement management structure and processes such as instituting 
companywide purchasing of specific services; reshaping a decentralized 
process to follow a more coordinated, strategic approach; and 
increasing the involvement of the corporate procurement organization, 
including working across units to help identify service needs, select 
providers, and better manage contractor performance.

DOD Has Made Limited Progress Reforming Management Structure and 
Improving Knowledge of Service Spending:

DOD has made limited progress in its overall implementation of section 
801, particularly with respect to establishing a management structure 
to oversee a more strategic approach to the acquisition of services, as 
envisioned by the legislative history of this provision. While DOD's 
leaders express support for a strategic approach in this area, they 
have not translated that support into broad-based reforms.

The experience of leading companies offers particularly relevant 
insights into the nature of long-term changes in management structure 
and business processes. Long-term changes will be needed if the 
military departments and the defense agencies are to be successful in 
adopting a more strategic approach to acquiring services and achieving 
substantial savings and other benefits. Private sector experience 
demonstrates the need to change how services are acquired--by 
modernizing management structure and business processes--and setting 
performance goals, including savings, and establishing accountability 
for achieving them. Such changes are needed to move DOD and the 
military departments from a fragmented approach to doing business to 
one that is more coordinated and strategically oriented. The end goal 
is to institute a departmentwide perspective--one that will ensure that 
the organization is getting the best overall value.

Industry has found that several ingredients are critical to the 
successful adoption of a strategic approach. For example, senior 
management must provide continued support for common services 
acquisitions processes beyond the initial impetus. Another example is 
to cut across traditional organizational boundaries that contributed to 
the fragmented approach by restructuring procurement management and 
assigning a central or corporate procurement organization greater 
responsibility and authority for strategic planning and oversight of 
the companies' service spending. Companies also involve business units 
in this coordinated approach by designating commodity managers to 
oversee key services and making extensive use of cross-functional 
commodity teams to make sure they have the right mix of knowledge, 
technical expertise, and credibility. Finally, companies extensively 
use metrics to measure total savings and other financial and 
nonfinancial benefits, to set realistic goals for improvement, and to 
document results over time.

To date, DOD has not significantly transformed its management structure 
in response to the 2002 national defense authorization requirements, 
and its crosscutting effort to improve oversight will focus on only a 
portion of military department spending for services. Specifically, the 
Under Secretary of Defense for Acquisition, Technology, and Logistics 
and each of the military departments now have policies in place for a 
management structure and a process for reviewing major (i.e., large-
dollar or program-critical) services acquisitions for adherence to 
performance-based, competition and other contracting requirements. 
(See app. I for a descriptive comparison of DOD and military department 
policies.):

DOD modeled its review process for acquiring services after the review 
process for acquiring major weapons systems; the policy is intended to 
elevate high-dollar value services to the same level of importance and 
oversight. DOD intends that the new program review structure provide 
oversight before it commits the government to a major acquisition to 
ensure that military departments and defense agencies' buying 
strategies are adequately planned, performance-based, and competed. The 
new policy similarly establishes a high-dollar threshold of $500 
million or more for selecting which service acquisitions must move 
forward from lower-level field activities, commands, and program 
offices to the military department headquarters (and possibly to DOD) 
for advance review and approval.[Footnote 8]

We expect that this new policy will lead to very few service 
acquisition strategies and a small portion of overall service spending 
being subjected to central oversight at the military department 
headquarters level or at DOD headquarters. DOD officials acknowledge 
that most service acquisitions cost less than the $500 million 
threshold required for headquarters-level reviews, and the total value 
of the few contract actions likely to be forwarded under that threshold 
will amount to a small portion of DOD's total spending on services, 
which is approaching $100 billion each year. DOD's review criteria 
indicate that the central reviews that do take place will be focused on 
approving individual acquisitions rather than coordinating smaller, 
more fragmented requirements for service contracts to leverage buying 
power and assessing how spending could be more effective. Our 
discussions with procurement policy officials in the various military 
departments confirmed that they expect no more than a few acquisitions 
to be reviewed at the DOD or military department headquarters level 
each year. While the new process complies with the act's requirements 
to improve oversight of major service acquisitions, it has not led to 
centralized responsibility, visibility, or accountability over the 
majority of contracting for services.

In response to the legislative requirement to develop an automated 
system to collect and analyze data, DOD has started a spend analysis 
pilot that views spending from a DOD-wide perspective and identifies 
large-scale savings opportunities. However, the scope of the pilot is 
limited to a test of a few service categories. Thirteen months after 
Congress directed that DOD create an automated system to support 
management decisions for the acquisition of services, the Deputy 
Secretary of Defense tasked a new team to carry out the pilot. In May 
2003, DOD hired a vendor to support the team by performing an initial 
spend analysis and developing strategic sourcing business cases for 
only 5 to 10 service categories. Efforts to extract data for the pilot 
spend analysis will be restricted to information taken from centrally 
available databases on services contract actions (excluding research 
and development) in excess of $25,000, a limitation due to the 90-day 
time frame established for completing the spend analysis.[Footnote 9] 
Pilot projects and associated efforts will be completed by September 
2004, so it is too early to tell how DOD will make the best use of the 
results.[Footnote 10]

DOD Does Not Have a Strategic Plan for Integrating Early Initiatives:

Even though DOD's senior leadership called for dramatic changes to 
current practices for acquiring services about 2 years ago, and 
proposed various initiatives and plans to transform business processes, 
DOD's early initiatives have not moved forward quickly, expanded or 
broadened in scope, or been well coordinated. The experience of leading 
companies we studied in our prior work indicates that successfully 
addressing service acquisition challenges requires concerted action and 
sustained top-level attention, efforts that must be reinforced by a 
sound strategic plan.

Moreover, section 801 required DOD to issue guidance on how the 
military departments should carry out their management responsibilities 
for services contracting. To date, the only guidance that DOD has 
issued involves review of individual major service acquisitions for 
adherence to performance-based, competition, and other acquisition 
strategy requirements. DOD has not established a strategic plan that 
provides a road map for transforming its services contracting process 
and recognizes the integrated nature of services contracting management 
problems and their related solutions.[Footnote 11]

Air Force, Army, and Navy headquarters procurement organizations 
have initiatives underway to better manage the acquisition of services, 
but they are in the early stages of development and unconnected to each 
other. Limited progress has taken place on key efforts to coordinate 
responsibility and leverage purchasing power, even in the pursuit of 
key goals such as reducing unnecessary spending and redirecting funds 
to higher priorities such as modernization and readiness. Information 
we obtained on the military departments' early efforts suggests that 
military department leaders understand the value of a strategic 
approach in this area, but they have not yet translated that 
understanding into broad-based reforms to meet comprehensive 
performance goals, including savings. Although the Air Force, Army, and 
Navy initiatives that follow seek to include the basic principles of 
the framework used by leading companies when they acquire services, the 
initiatives are still under study, or in the early stages of 
implementation.

* At a January 2003 symposium, Air Force participants from headquarters 
and major commands discussed a vision for transforming contracting 
for services and taking a strategic, departmentwide approach based on 
commercial best practices.[Footnote 12] At this event, the Deputy 
Assistant Secretary for Contracting called for rethinking business 
processes, noting that the Air Force spends over half of its 
discretionary dollars on services, yet most of the attention goes to 
managing goods. To move forward on this initiative, staff from 
acquisition headquarters and major commands are to work together on an 
18-month project to capture, analyze, and use spend analysis data and 
develop an Air Force strategic sourcing plan for services acquisitions. 
Another key initiative participants considered was the establishment by 
the Air Force of a management council for services contracting. No time 
frame has been set for when the Air Force would activate such a 
council. However, the deputy assistant secretary's vision for adopting 
a best practices approach to contracting for services calls for 
radically transforming business processes within 5 years and 
establishing cross-functional, Air Force-wide councils to consolidate 
market knowledge and carry out strategic sourcing projects. In July 
2003, in the first such effort to take advantage of its overall buying 
power, the Air Force formed a commodity council responsible for 
developing departmentwide strategies for buying and managing 
information technology products.[Footnote 13] According to an Air Force 
official involved with this council, the lessons learned and best 
practices of this council will be carried forward to other commodity 
councils that will be established by the Air Force. Another category 
that the Air Force is considering for a future commodity council is 
construction services.

* In 2001, top Army leadership approved a consolidation of Army 
contracting activities that focuses on the areas of installation 
management and general-purpose information technology. This initiative 
covers only a portion of the Army's service spending, and it involved 
the establishment of the Army Contracting Agency in October 2002 to 
centralize much installation-support contracting under a corporate 
management structure and called for consolidating similar and common 
use requirements to reduce costs. This central agency will be fully 
responsible for Army-wide purchases of general information technology 
and electronic commerce purchases[Footnote 14] and for large 
installation management contracting actions over $500,000 that were 
previously decentralized. The agency's key anticipated benefit will be 
its ability to centralize large buys that are common Army-wide, while 
continuing to provide opportunities for small businesses to win 
contracts. To have an early demonstration of the value of this 
approach, the agency plans an October 2003 spend analysis of several 
services that could offer easy savings, including security guards, 
furniture refinishing, telecommunications, building demolition, and 
photocopying. The agency has yet to set a time frame for carrying out 
the consolidated purchases, which could be national or regional in 
scope. The agency's organizational structure assigns regional executive 
responsibility for managing services contracting, and includes a high-
level council in headquarters for overseeing more strategic approaches 
to buying Army installation support services.

* The Navy is considering pilot tests of a more strategic approach for 
services spending in a few categories. Senior Navy leadership began a 
study in September 2002 to recommend business process changes in the 
Navy's acquisition program.[Footnote 15] A Navy official conducting the 
preliminary spend analysis of Navy purchasing data estimated 
opportunities to save $115 million through taking a more strategic, 
coordinated approach to buying $1.5 billion in support services 
(engineering; logistics; program, general, and facilities management; 
and training). The Navy official said that, sometime this year, senior 
Navy leadership is expected to approve the study's recommendations to 
pilot-test consolidated acquisition for support services. To lead these 
innovative management approaches, the Secretary of the Navy earlier 
this year approved a new position for a Director of Program Analysis 
and Business Transformation within the Office of the Deputy Assistant 
Secretary for Acquisition Management. A Navy procurement policy 
official involved with the ongoing effort told us that the Navy's pilot 
tests are likely to be affected by DOD's spend analysis pilot that is 
testing DOD-wide strategic sourcing strategies for 5 to 10 services. 
Since Navy procurement policy officials are also involved in DOD's 
pilot, he anticipates having to coordinate the Navy's pilot as both 
initiatives move forward.

A strategic plan could help DOD ensure that these early initiatives 
successfully lead to lower costs and improved acquisition of services. 
Such a plan would identify, coordinate, and prioritize these 
initiatives; integrate the military departments' services contracting 
management structures; ensure comprehensive coverage of services 
spending; promote and support collaboration; and establish 
accountability, transparency, and visibility for tracking performance 
and achieving results. However, some of the procurement policy 
officials we interviewed have expressed skepticism that broad-based 
reforms to foster a more strategic approach are necessary or 
beneficial, or that DOD could fully adopt private sector strategies in 
view of its current decentralized acquisition environment and other 
constraints.

Conclusions:

Given the federal government's critical budget challenges, DOD's 
transformation of its business processes is more important than ever 
if the department is to get the most from every dollar spent. Senior 
leadership has for 2 years expressed a commitment to improving the 
department's acquisition of services. Nonetheless, DOD and the military 
departments remain in the early stages of developing new business 
processes for the strategic acquisition of services.

DOD's leaders have made a commitment to adopt best practices and make 
dramatic changes. Translating that commitment into specific management 
improvements will allow DOD to take on the more difficult tasks of 
developing a reliable and accurate picture of spending on services 
across DOD; determining what structures, mechanisms, and metrics can be 
employed to foster a strategic approach; and tailoring those structures 
to meet DOD's unique requirements. Given that DOD's spending on 
services contracts is approaching $100 billion annually, the potential 
benefits for enhancing visibility and control of services spending are 
significant.

Recommendations for Executive Action:

To achieve significant improvements across the range of services DOD 
purchases, we recommend that the Secretary of Defense direct the 
Under Secretary of Defense for Acquisition, Technology, and Logistics 
to work with the military departments and the defense agencies to 
further strengthen the management structure. This structure, 
established in response to section 801, should promote the use of best 
commercial practices such as centralizing key functions, conducting 
spend analyses, expanding the use of cross-functional commodity teams, 
achieving strategic orientation, achieving savings by reducing 
purchasing costs and other efficiencies, and improving service 
contracts' performance and outcomes.

We also recommend that the Secretary of Defense direct the 
Under Secretary to develop a strategic plan with guidance for the 
military departments and the defense agencies on how to carry out 
their responsibilities for managing acquisition of services. Key 
elements of this guidance should address:

* improving knowledge of services spending by collecting and analyzing 
data about services procurements across DOD and within military 
departments and defense agencies,

* promoting collaboration across DOD and within military departments 
and defense agencies by establishing cross-functional teams to carry 
out coordinated purchasing of services, and:

* establishing strategic savings and performance goals, measuring 
results, and ensuring accountability by assigning high-level 
responsibility for monitoring those results.

Agency Comments:

In commenting on a draft of this report, DOD concurred in principle 
with the recommendation to further strengthen the management structure 
established in response to section 801 and partially concurred with the 
recommendation to develop a plan with guidance to the military 
departments on carrying out their strategic and centralized 
responsibilities for the acquisition of services.

DOD expects that various initiatives being pursued to enhance services 
acquisition management structures and processes--such as the management 
structure for reviewing individual service acquisitions valued at more 
than $500 million and the spend analysis pilot assessed in this report-
-will ultimately provide the information with which to decide 
what overarching joint management and business process changes are 
necessary. DOD cites these initiatives as demonstrating a full 
commitment to improving acquisition of services. DOD further states 
that these efforts--such as collecting and enhancing data, performing 
spend analyses, and establishing commodity teams--are similar to 
industry best practices--and have already had significant impacts on 
the manner in which services are acquired.

We agree that the initiatives are positive steps in the right direction 
to improve acquisition of services. However, it is too early to tell if 
these early efforts will lead DOD and the military departments to make 
the type of long-term changes that are necessary to achieve significant 
results in terms of savings and service improvements.

Moreover, according to DOD, factors such as unusual size, 
organizational complexity, and restrictive acquisition environment 
mean that DOD cannot adhere strictly to the commercial best practices 
described in the report. Yet, none of the companies we studied followed 
exactly the same approach in employing specific best practices. 
Likewise, DOD and the military departments need to work together and 
determine how these practices can be adapted to fit their unique needs, 
challenges, and complexities. Significant bottom line results in terms 
of savings and service improvements are likely with adequate follow-
through on the various initiatives. DOD's strategic plan should be 
explicit about how and when appropriate follow-through actions will 
take place so that significant, long-lasting performance improvements 
and cost savings are achieved.

DOD's comments can be found in appendix II.

Scope and Methodology:

Section 801 of the National Defense Authorization Act for Fiscal Year 
2002[Footnote 16] requires DOD to establish a management structure and 
a program review structure and to collect and analyze data on purchases 
in order to improve management of the acquisition of services. As 
described in the legislative history,[Footnote 17] these requirements 
provide tools with which the department can promote the use of best 
commercial practices to reform DOD's services procurement management 
and oversight and to achieve significant savings. Section 801 also 
directed us to assess DOD's compliance with the requirements and to 
report to congressional armed services committees on the assessment.

To conduct this work, we interviewed officials--including those 
responsible for Defense Procurement and Acquisition Policy, and 
Acquisition Resources and Analysis--in the Office of the Secretary of 
Defense and the Office of the Under Secretary of Defense for 
Acquisition, Technology, and Logistics. We also interviewed officials 
responsible for service acquisition policy and management in the Air 
Force, the Army, and the Navy. We interviewed both DOD's and the 
various services' officials about policy memoranda and related actions 
taken to implement section 801 requirements, including the evolving 
nature of implementation actions over several months. We also discussed 
comparisons between DOD's and the military departments' services 
acquisition management reforms and leading companies' best practices 
for taking a strategic approach, which were identified in our previous 
work and promoted by the legislation. To assess compliance with the 
policy and guidance requirements for the management and program review 
structures, we reviewed internal memoranda and policy documents issued 
by the Under Secretary of Defense and the military departments.

For background on DOD's contract spending on services, we analyzed 
computer-generated data extracted from the Defense Contract Action Data 
System. We did not independently verify the information contained in 
the database. There are known data reliability problems with this data 
source, but we determined that the data are sufficient to provide 
general trend information for background reporting purposes.

We conducted our review from November 2002 to July 2003 in accordance 
with generally accepted government auditing standards.

We are sending copies of this report to other interested congressional 
committees; the Secretary of Defense; the Deputy Secretary of Defense; 
the Secretaries of the Army, Navy, and Air Force; and the Under 
Secretaries of Defense (Acquisition, Technology, and Logistics) and 
(Comptroller). We will also provide copies to others on request. In 
addition, the report will be available at no charge on the GAO Web site 
at http://www.gao.gov.

Should you have any questions on matters discussed in this report, 
please call me at (202) 512-4841. Other contacts and staff 
acknowledgments are listed in appendix III.

David E. Cooper 
Director Acquisition and Sourcing Management:

Signed by David E. Cooper: 

[End of section]

Appendix I: Comparison of Selected Program Review Structure 
Requirements:

In response to 2002 national defense authorization requirements, the 
Under Secretary of Defense for Acquisition, Technology, and Logistics 
and the military departments developed and implemented policies for a 
program review structure to oversee large-dollar and program-critical 
services acquisitions. The review process, modeled after DOD's review 
process for major weapons systems, seeks to ensure major service 
acquisition strategies are adequately planned, performance-based, 
competed, and address socioeconomic goals. In most cases, an 
acquisition must be valued at $500 million or more to prompt review at 
the headquarters level for DOD and the military departments.[Footnote 
18] Table 2 compares selected aspects of the legislation's requirements 
with, and the implementation status of, DOD and military department 
policies.

Table 2: Comparison of Selected Program Review Structure Requirements 
with DOD and the Military Department Policies:

Program review structure requirement: Set standards, based on dollar 
thresholds or other criteria, on which major services procurements will 
be reviewed and approved by either a DOD or military department senior 
procurement executive; DOD policy: Except for information technology 
and weapon system-related services, the Under Secretary of Defense for 
Acquisition, Technology, and Logistics shall review all major service 
acquisitions (1) with values of $2 billion or more and (2) deemed 
special interest; In February 2003, the Under Secretary delegated 
all review responsibility to the military departments, with the 
exception of case-by-case acquisitions deemed to have special 
interest; Air Force policy: Except for information technology, space, 
and weapon system-related services, the Program Executive Officer for 
Services in the Office of the Assistant Secretary (Acquisition) shall 
review all major service acquisitions (1) with values of $100 million 
or more and (2) deemed special interest; This review includes all 
competitive sourcing/privatization proposals involving 300 or more Air 
Force positions; Army policy: Except for information technology and 
weapon system-related services, the Army Acquisition Executive (i.e., 
the Assistant Secretary (Acquisition, Logistics, and Technology)) shall 
review all major service acquisitions (1) with values of $500 million 
or more and (2) deemed special interest; The executive may delegate 
review responsibility to the Deputy Assistant Secretary (Policy and 
Procurement); Navy policy: Except for information technology and 
weapon system-related services, the Navy Acquisition Executive (i.e., 
the Assistant Secretary (Research, Development, and Acquisition)) shall 
review all major service acquisitions (1) with values of $1 billion or 
more and (2) deemed special interest; The Deputy Assistant Secretary 
for Acquisition Management shall review major service acquisitions with 
values between $500 million and $1 billion.

Program review structure requirement: Establish major service 
acquisition's decision point when executive's review and approval will 
occur; DOD policy: Approval occurs prior to committing DOD to the major 
service acquisition's strategy. If the Under Secretary determines 
within 10 days of receipt to review, up to 30 working days can be used 
to review and approve the strategy; Air Force policy: Approval occurs 
prior to committing the Air Force to the major service acquisition's 
strategy. Contracting activities should include 30 days in the 
acquisition schedule for Air Force headquarters review and 90 days for 
DOD review; Army policy: Approval occurs prior to committing the Army 
to the major service acquisition's strategy; Navy policy: Approval 
occurs prior to committing the Navy to the major service acquisition's 
strategy.

Program review structure requirement: Set specific matters that will be 
reviewed; DOD policy: The review process covers (1) acquisition 
strategy in terms of performance-based approach, full and open 
competition, and small business goal achievement; and (2) contractor 
performance metrics for tracking cost, schedule, and outcomes; Air 
Force policy: The management and oversight process for the acquisition 
of services covers (1) acquisition strategy in terms of performance-
based approach, full and open competition, and small business goal 
achievement; and (2) contractor performance metrics for tracking cost, 
schedule, and outcomes; Army policy: The management and oversight 
process for the acquisition of services covers (1) acquisition strategy 
in terms of performance-based approach, full and open competition, and 
small business goal achievement; and (2) contractor performance metrics 
for tracking cost, schedule, and outcomes; Navy policy: The management 
and oversight process for the acquisition of services covers (1) 
acquisition strategy in terms of performance-based approach, full and 
open competition, and small business goal achievement; and (2) 
contractor performance metrics for tracking cost, schedule, and 
outcomes.

Program review structure requirement: Number of major service 
acquisitions reviewed since implementation; DOD policy: One (for the 
Army) as of July 2003; Air Force policy: Three as of July 2003, 
including one competitive sourcing action; Army policy: Two as of July 
2003; Navy policy: None as of July 2003.

Source: GAO analysis.

[End of table]

[End of section]

Appendix II: Comments from the Department of Defense:

OFFICE OF THE UNDER SECRETARY OF DEFENSE:

3000 DEFENSE PENTAGON WASHINGTON, DC 20301-3000:

ACQUISITION, TECHNOLOGY AND LOGISTICS:

DPAP/P:

SEP 2 2003:

Mr. David E. Cooper:

Acquisition and Sourcing Management United States General Accounting 
Office 441 G. Street N.W.

Washington, DC 20548:

Dear Mr. Cooper:

This is the Department of Defense (DoD) response to the GAO draft 
report, `CONTRACT MANAGEMENT: High-Level Attention Needed to Transform 
DoD Services,' dated August 6, 2003 (GAO Code 120190/GAO-03-935). The 
Department concurs in principle with the first recommendation and 
partially concurs with the second. The Department is fully committed to 
improving our acquisition of services and is actively pursuing changes 
in conjunction with other transformation efforts.

Thank you for giving DoD this opportunity to comment on the draft 
report. My point of contact is Mr. David Boyd at (703) 697-6710 or via 
e-mail at david.boyd@ osd.mil.

Attachment: As stated:

Sincerely,

Signed for Deidre A. Lee: 

Director, Defense Procurement & Acquisition Policy:

GAO DRAFT REPORT - DATED AUGUST 6, 2003 GAO CODE 120190/GAO-03-935:

"CONTRACT MANAGEMENT: HIGH-LEVEL ATTENTION NEEDED TO TRANSFORM DOD 
SERVICES":

DEPARTMENT OF DEFENSE COMMENTS TO THE RECOMMENDATIONS:

RECOMMENDATION 1: To achieve significant improvements across the range 
of services DOD purchases, we recommend that the Secretary of Defense 
direct the Under Secretary of Defense for Acquisition, Technology, and 
Logistics to work with the military departments and defense agencies to 
further strengthen the management structure. This structure, 
established in response to section 801, should promote the use of best 
commercial practices such as centralizing key functions, conducting 
spend analyses, expanding the use of cross-functional commodity teams, 
achieving strategic orientation, achieving savings by reducing 
purchasing costs and other efficiencies, and improving service 
contracts' performance and outcomes.

DOD RESPONSE: Concur in Principle: The Department met the statutory 
requirements of Section 801 and continues to enhance the management 
structures and processes through a variety of activities as outlined 
below. These initiatives will provide us with the information to 
determine what over-arching joint management and process changes are 
necessary.

The draft report compares the Department's efforts to industry best 
practices and cites examples of commercial savings through the process 
of initiating management structure and process changes, collecting and 
enhancing data, performing spend analyses and establishing commodity 
teams to develop strategic acquisition plans. The Department initiated 
similar efforts. Due to our unusual size in terms of dollars and 
actions, the high number of data collection systems and processes, the 
large number of personnel involved, legislatively mandated procurement 
restrictions and our commitment to socio-economic programs, the 
Department cannot adhere strictly to commercial best practices as 
described in the report.

The Department is taking action to be more strategic in the acquisition 
of services. To date, we have initiated the following actions to 
enhance the management of the acquisition of services:

Implemented Services Contracts Oversight Processes for each of the 
military departments which ensure that service acquisitions are of the 
highest quality and support DoD objectives; are performance based; and 
planned and administered to achieve the intended results.

Established and implemented the Army Contracting Agency. This 
realignment involved both structural and process changes and will give 
Army senior leadership a strategic view of their services acquisition 
profile.

Established the Air Force Program Executive Office for Services 
responsible for providing centralized program management of services 
acquisitions.

Established the DoD Integrated Process Team (IPT) for Spend Analysis. 
This effort incorporates the essential elements of commercial spend 
analyses (e.g. data enrichment, commodity teams, etc.). Pilot projects 
resulting from this spend analysis will provide lessons learned for the 
development of future spend analysis efforts. Procured the services of 
a commercial firm with spend analysis experience to identify commodity 
areas offering potential efficiency improvements.

Initiated the process of establishing commodity teams to begin 
developing pilot program strategic plans resulting from the spend 
analysis.

Established commodity councils within individual military departments.

Created business intelligence systems collecting budget, financial, 
human capital and contract specific data within individual components 
possessing significant data capability to support spend analysis and 
other management decision making efforts. Established a collaborative 
initiative within the Department's Business Management Modernization 
Program (BMMP) Acquisition Domain to further the means by which 
acquisition data can be automated for utilization in the development of 
strategic business decisions.

Collectively, the initiatives outlined above have already made 
significant impacts on the manner in which the Department manages the 
acquisition of services and also the acquisition of supplies. As these 
initiatives evolve, the Department will identify what changes are 
required and how best to implement them.

RECOMMENDATION 2: We also recommend that the Secretary of Defense 
direct the under secretary to develop a strategic plan with guidance to 
the military departments and for the defense agencies on how to carry 
out their responsibilities for managing acquisition of services. Key 
elements of this guidance should address (1) improving knowledge of 
services spending by collecting and analyzing data about services 
procurements across DOD and within military departments and defense 
agencies, (2) promoting collaboration across DOD and within military 
departments and defense agencies by establishing cross-functional teams 
to carry out coordinated purchasing of services, and (3) establishing 
strategic savings and performance goals, measuring results, 
and ensuring accountability by assigning high-level responsibility for 
monitoring those results.

DOD RESPONSE: Partially-Concur. As stated in our response to 
recommendation 1 above, the Department initiated numerous actions to 
strengthen our management of the acquisition of services. Of the three 
elements within this recommendation, two have already been addressed. 
We are currently working with the BMMP Acquisition Domain to develop 
the ability to collect and analyze all procurement data (supplies and 
services) at the joint level. We are promoting collaboration across DoD 
through the establishment of cross-functional commodity teams as a 
result of the spend analysis IPT. Through the development of these 
teams and their resulting work, we will ascertain how to better utilize 
industry best practices. We believe that the efforts outlined above 
will allow the Department to improve its ability to strategically plan 
the acquisition of services from which performance and savings goals 
then can be developed.

[End of section]

Appendix III: GAO Contacts and Staff Acknowledgments:

GAO Contacts:

Ralph Dawn (202) 512-4544 Carolyn Kirby (202) 512-9843:

Acknowledgments:

In addition to those named above, Cordell Smith, Bob Swierczek, and 
Ralph White made key contributions to this report.

FOOTNOTES

[1] Derived from our analysis of data extracted from the Defense 
Contract Action Data System. The data include actions categorized as 
research, development, test, and evaluation activities and exclude 
actions of $25,000 or less and purchase card spending.

[2] U.S. General Accounting Office, Best Practices: Taking a Strategic 
Approach Could Improve DOD's Acquisition of Services, GAO-02-230 
(Washington, D.C.: Jan. 18, 2002) and Best Practices: Improved 
Knowledge of DOD Service Contracts Could Reveal Significant Savings, 
GAO-03-661 (Washington, D.C.: June 9, 2003).

[3] Sections 801 and 802, Public Law 107-107, Dec. 28, 2001. Section 
802 established goals for DOD to reduce services contracting costs over 
the next decade, in the expectation that the department could achieve 
significant savings without any reduction in services.

[4] Senate Report 107-62 at pp. 326-327.

[5] Derived from our analysis of data extracted from the Defense 
Contract Action Data System, adjusted to represent constant fiscal year 
2002 dollars. The data exclude actions of $25,000 or less and purchase 
card spending.

[6] U.S. General Accounting Office, High-Risk Series: An Update, GAO-
03-119 (Washington, D.C.: January 2003) and Major Management Challenges 
and Program Risks: Department of Defense, GAO-03-98 (Washington, D.C.: 
January 2003).

[7] GAO-02-230 and GAO-03-661.

[8] For service acquisitions under the $500 million threshold, DOD's 
policy assigns review and approval responsibility to a designated 
official in component headquarters below the military department 
headquarters level, such as a command headquarters. Also, although 
DOD's policy requires the military department headquarters to review 
and approve all service acquisition strategies of $500 million or more, 
the Air Force policy adopts a lower threshold. That is, Air Force 
subordinate organizations must forward all service acquisitions valued 
at $100 million or more to headquarters. An Air Force procurement 
policy official told us this resulted in identifying more contracts for 
headquarters review than would otherwise be anticipated under DOD's 
threshold of $500 million or more.

[9] DOD furnished the spend analysis vendor data extracted from the 
Defense Contract Action Data System. In fiscal year 2002, DOD reported 
more than 254,000 contract actions in excess of $25,000 for nonresearch 
and development services, totaling about $66 billion. However, a 
sizeable sum of spending is not captured in the data DOD is furnishing 
to the spend analysis vendor. For example, in fiscal year 2002, DOD 
reported about $26.9 billion in contract actions for research, 
development, test, and evaluation services and another $9.8 billion in 
contract actions for goods and services of $25,000 or less. Also 
missing from the spend analysis is DOD's purchase card spending, which 
totaled about $6.1 billion in 2001.

[10] For more information on DOD's pilot, see GAO-03-661.

[11] GAO-02-230, GAO-03-98, and GAO-03-119.

[12] This initiative follows on the action by the top leadership of the 
Air Force Materiel Command to commit to transforming how the air 
logistics centers acquire spare parts and equipment to support depot 
and field maintenance activity in Oklahoma City, Oklahoma; Ogden, Utah; 
and Warner Robins, Georgia. Since 2001, this command has made a number 
of changes in management structure and business processes in order to 
adopt a strategic approach to air logistics contracting based on 
commercial best practices. More recently, this command began focusing 
on services contracting and purchase card buying for similar 
procurement transformation. In fiscal year 2002, the command reported 
spending about $35 billion on goods and services.

[13] The Air Force Standards System Group will lead the new information 
technology commodity council, whose initial focus will be on developing 
buying strategies for desktop and laptop computers, followed by 
peripheral computer products. The council will bring together experts 
from across the Air Force to establish information technology 
procurement strategies and put servicewide contracts in place for 
individual organizations to buy from.

[14] The Army Contracting Agency's E-Commerce and Commercial 
Contracting Center will be responsible for Army-wide purchases of 
general purpose, commercial off-the-shelf hardware, software, and 
associated support services. (Army-wide responsibility is not included 
for information technology purchases of tactical and strategic 
systems.) 

[15] In 2002, the Navy hired a consultant to examine the effectiveness 
and efficiency of spending on products and services, among other areas. 
Although Navy and Marine Corps organizations had a number of ongoing 
initiatives to reduce costs, this study was to examine opportunities to 
leverage efficiencies across the enterprise.

[16] Public Law 107-107.

[17] Senate Report 107-62 at pp. 326-327.

[18] For service acquisitions under the $500 million threshold, DOD's 
policy assigns review and approval responsibility to a designated 
official in component headquarters below the military department 
headquarters level, such as a command headquarters. 

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