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Transformation Could Benefit from Practices Emphasizing Transparency 
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Report to Congressional Requesters:

October 2003:

SMALL BUSINESS ADMINISTRATION:

Progress Made, but Transformation Could Benefit from Practices 
Emphasizing Transparency and Communication:

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-76] GAO-04-76:

GAO Highlights:

Highlights of GAO-04-76, a report to congressional requesters 

Why GAO Did This Study:

The Small Business Administration (SBA) has recognized that it needs 
to realign its current organizational structure and processes to 
improve its ability to fulfill its primary mission—supporting the 
nation’s small businesses. In July 2002, SBA announced that it was 
initiating a transformation effort to increase the public’s awareness 
of SBA’s services and products and make its processes more efficient. 
GAO evaluated SBA’s progress in implementing its transformation 
initiatives and challenges that have impeded or could impede 
implementation and whether SBA’s transformation incorporates practices 
GAO has identified in previous work that are important to successful 
organizational change.

What GAO Found:

SBA has made some progress in transforming its organization, although 
efforts could be impeded by budgetary and staffing challenges. SBA 
started three district office pilots to test marketing and outreach 
techniques and two pilots to centralize loan processes. However, SBA 
officials told us that their plans for expanding the pilots and 
implementing additional initiatives have changed because the agency 
did not receive any funding for transformation in fiscal year 2003 and 
may not receive any in fiscal year 2004. GAO found that SBA did not 
provide consistent, clear budget requests with a detailed plan for 
transformation results. The challenge of staffing its centralization 
initiatives, including relocating employees and avoiding undue 
disruptions to operations, could further complicate SBA’s progress.

When SBA initially planned and began implementing transformation, it 
gave some attention to practices important to successful 
organizational change. SBA drafted a plan and created an 
implementation team to manage the transformation. However, significant 
weaknesses in implementation could impede further progress and 
exacerbate the challenges noted above. The transformation could fail 
if practices and implementation steps focusing on transparency and 
communication are not given more attention. 

What GAO Recommends:

SBA should (1) ensure that implementation leadership is clearly 
identified to employees and stakeholders, (2) finalize its 
transformation plan and share it with employees and stakeholders, (3) 
develop performance goals, (4) use the performance management system 
to define responsibility, (5) develop a communication strategy that 
promotes two-way communication, and (6) solicit ideas of employees and 
the union and ensure that their concerns are considered. SBA said it 
would consider our recommendations but disagreed with some of our 
findings related to its budget requests and employee communication and 
involvement.

www.gao.gov/cgi-bin/getrpt?GAO-04-76.

To view the full product, including the scope and methodology, click 
on the link above. For more information, contact Davi D'Agostino at 
(202) 512-8678 or d'agostinod@gao.gov.

[End of section]

Contents:

Letter: 

Results in Brief: 

Background: 

SBA Has Made Some Progress in Implementing Transformation, but Budget 
Constraints and Staffing Challenges Could Continue to Impede Progress: 

SBA Applied Some but Not Many Aspects of Practices and Implementation 
Steps Important to Successful Transformation: 

Conclusions: 

Recommendations for Agency Action: 

Agency Comments: 

Objectives, Scope, and Methodology: 

Appendix:

Appendix I: Comments from the Small Business Administration: 

Table: 

Table 1: Key Practices and Implementation Steps for Organizational 
Transformations: 

Figures Figures: 

Figure 1: Timeline of Major Organizational and Operational Changes by 
Fiscal Year: 

Figure 2: Phoenix, Arizona, District Office Organizational Structure 
"Before and After" Transformation: 

Figure 3: SBA's Available Operating Funds Have Declined Since Fiscal 
Year 2001: 

Figure 4: Comparison of SBA's Fiscal Years 2003 and 2004 Budget Requests 
for Transformation: 

Abbreviations: 

IRS: Internal Revenue Service:

SBA: Small Business Administration:

SCORE: Service Corps of Retired Executives:

Letter October 31, 2003:

The Honorable Olympia J. Snowe: 
Chair, Committee on Small Business and Entrepreneurship: 
United States Senate:

The Honorable Donald A. Manzullo: 
Chairman, Committee on Small Business:  
House of Representatives:

The Honorable Christopher S. Bond: 
Member, Committee on Small Business and Entrepreneurship: 
United States Senate:

Like many federal agencies, the Small Business Administration (SBA) has 
recognized it needs to realign its current organizational structure and 
processes. In doing so, SBA aims to improve its ability to fulfill its 
primary mission--supporting the nation's small businesses and 
protecting their interests--by increasing the public's awareness of 
SBA's services and products and making its business and loan processes 
more efficient. For over a decade, SBA has been centralizing some 
functions of its many district offices to improve efficiency and has 
been moving more toward partnering with outside entities such as 
private sector lenders to provide direct services. SBA's district 
offices were initially created to be the local delivery system for 
SBA's programs, but as SBA has centralized functions and placed more 
responsibilities on its lending partners, the district offices' 
responsibilities have also changed. In a previous report, we found that 
past realignment efforts during the 1990s had changed SBA's 
organization but had also left parts of the previous structure intact, 
contributing to complicated organizational relationships and a field 
structure that was not consistently matched with mission 
requirements.[Footnote 1] For example, we found confusion over the 
mission of the district offices, with SBA headquarters officials 
believing the district office's key customer was small businesses and 
district office staff believing that their key customer was the lender 
who makes the loans to small businesses.

SBA transformation efforts have not been a reaction to any change in 
SBA's mission. Rather, SBA's intent has been to transform the agency so 
that it can more effectively and efficiently achieve its mission. In 
its current transformation effort, SBA intends to expand centralization 
to additional loan functions and some of its other small business 
programs to improve efficiency. As centralization frees up employees in 
the district offices, SBA intends to better define the district office 
role to focus on marketing and outreach to small businesses and 
managing SBA's relationships with lenders and other resource 
partners.[Footnote 2]

Following SBA's testimony in July 2002,[Footnote 3] which stated that 
SBA was initiating a 5-year workforce transformation plan, you 
requested that we (1) review SBA's progress in implementing its 
transformation initiatives and discuss any challenges that have impeded 
or could impede implementation and (2) determine whether SBA's 
transformation incorporates practices that are important to successful 
organizational change and effective human capital management in the 
federal government. This report contains the results of our review of 
SBA's implementation of the first phase--approximately 6 months--of the 
transformation effort. As part of phase one, SBA planned to implement 
pilot initiatives to test a new marketing focus for its district 
offices and centralize some of its loan functions.

To conduct this review, we analyzed planning, budget, and 
implementation documents related to SBA's transformation and 
interviewed key officials at SBA headquarters. We also conducted site 
visits at each of the pilot offices involved in the first phase--three 
district office pilots in Phoenix, Arizona; Miami, Florida; and 
Charlotte, North Carolina; and two center pilots in Santa Ana and 
Sacramento, California. At these locations, we interviewed all 
employees who were directly affected by the pilot. To ensure open 
communication, we met with directors, supervisors, and employees 
separately. We compared SBA's implementation process for transformation 
with practices important to successful transformations, using practices 
we identified in literature and our previous work on reorganizations, 
organizational change, and human capital management.[Footnote 4] We 
performed our review from February through September 2003 in accordance 
with generally accepted government auditing standards.

Results in Brief:

SBA has made some progress in implementing the first phase of its 
transformation, but further progress could be hampered by budget and 
staff realignment challenges. To meet its objectives for phase one, SBA 
(1) implemented a pilot initiative at three district offices to test a 
new marketing focus and (2) centralized a number of loan functions from 
these offices to two centers to assess ways to improve the efficiency 
and consistency of its loan functions. SBA is currently nearing 
completion of phase one, and to prepare for its new marketing focus, it 
has provided marketing-related training to staff at the three district 
offices and also conducted an analysis to identify staffs' 
developmental needs in marketing. In addition, SBA transferred most of 
the loan processing and liquidation cases from the three district 
office pilots to the two centralization pilots. However, SBA officials 
told us that they delayed the start-up of the district office and 
centralization pilots in phase one due to the requirement in their 
appropriations that they notify the appropriations committees prior to 
going forward with any organizational restructuring, the government's 
fiscal year 2003 continuing resolution, and a shrinking operating 
budget. As of our report date, phase two has not yet begun; however, 
SBA officials told us that plans for this phase have been scaled back 
because the agency did not receive any of the funds specifically 
requested for the transformation in its fiscal year 2003 budget, and 
officials believe that SBA may not receive any requested transformation 
funds in its fiscal year 2004 budget request. Thus, SBA would have to 
rely on any available operating funds to carry out the transformation. 
Given the current situation, officials said the focus is now on 
creating a new center for centralizing all of its loan liquidation and 
loan guaranty purchase activities. While SBA's implementation efforts 
have been and could continue to be impeded by budget constraints, we 
found that the agency's budget requests for transformation were 
inconsistent and lacked a detailed plan that showed priorities and 
linked resources to desired results. SBA's centralization efforts could 
also be impeded by the challenge of realigning staff from multiple 
field offices so that SBA can operate its central locations with 
experienced employees.

When SBA initially planned and implemented its transformation it gave 
some attention to practices important to successful organizational 
transformation. However, over time SBA began to overlook key aspects of 
these practices involving leadership, setting implementation goals and 
a timeline, establishing an integrated mission and strategic goals, 
using the performance management system, communication, and employee 
involvement that are important to successful organizational change. 
SBA's top leadership, the Administrator and Deputy Administrator, has 
demonstrated support for the transformation. However, after SBA's Chief 
Operating Officer left the agency shortly after initiating the pilots, 
it was not evident to employees and stakeholders who was responsible 
for implementing the transformation. Although SBA had developed a sound 
draft transformation plan explaining the purpose, implementation goals 
and a timeline, it did not make the draft plan public or provide the 
reasons for upcoming steps. As a result, it appeared to many district 
office employees and stakeholders that headquarters lacked a plan and 
direction. In its fiscal year 2004 performance plan, SBA reported 
strategic goals to guide the transformation, but it has not linked 
transformation to existing performance goals or developed new goals 
against which to measure its marketing and outreach efforts. In 
addition, in the human capital area, although SBA has taken steps 
toward creating a performance management system that would define 
responsibility and set expectations for employees, it too is at risk 
because the agency has not yet created a clear and defined linkage 
between the employees' roles and the goals of the transformation. Also, 
SBA has not established an effective strategy for communicating with 
employees and stakeholders to engage them in the transformation 
process, encourage two-way communication, and communicate early and 
often to build trust. Many district office employees and stakeholders 
told us that they generally heard about transformation-related actions 
through rumors. Finally, district office employees and union officials 
told us that they have not been actively involved in planning or 
implementing the transformation.

This report includes recommendations to SBA's Administrator. To improve 
implementation of its transformation, we are recommending that SBA (1) 
ensure that implementation leadership is clearly identified to 
employees and stakeholders, (2) finalize its draft transformation plan 
and share it with employees and stakeholders, (3) develop and link 
performance goals to its strategic goals, (4) use the new performance 
management system to define responsibility, (5) develop a communication 
strategy that promotes two-way communication, and (6) involve employees 
and the union to solicit ideas and ensure that their concerns are 
considered.

We obtained written comments on a draft of this report from SBA's Chief 
Financial Officer. SBA's comments and our response are discussed near 
the end of this report, and SBA's letter is reprinted in appendix I. In 
commenting on the draft, SBA did not state whether it concurred with 
our recommendations but said it would consider them as it continues to 
plan for and implement its transformation efforts. SBA specifically 
noted that it had already addressed recommendations related to 
developing performance goals and using the performance management 
system to define responsibility as a result of a new strategic plan 
issued after the completion of our audit work and implementing its new 
performance management system for employees on October 1, 2003. SBA 
disagreed with our finding that its budget requests for transformation 
were unclear. SBA also disagreed with our characterization of the 
extent to which it had communicated with and involved employees.

Background:

In pursuing its mission of aiding small businesses, SBA provides small 
businesses with access to credit, primarily by guaranteeing loans 
through its 7(a) and other loan programs, and provides entrepreneurial 
assistance through partnerships with private entities that offer small 
business counseling and technical assistance. SBA also administers 
various small business procurement programs, which are designed to 
assist small and small disadvantaged businesses in obtaining federal 
contracts and subcontracts. In addition, SBA makes loans to businesses 
and individuals trying to recover from a disaster.

As figure 1 shows, SBA has experienced many organizational changes over 
the past 20 years partly due to changing the way it delivers its 
services and partly due to budget cuts. Perhaps the largest change to 
SBA's service delivery has occurred in its lending programs, where the 
agency went from making loans directly to guaranteeing loans made by 
commercial lenders. SBA provides small businesses with access to 
credit, primarily by guaranteeing loans through its 7(a) and 504 
programs. For the 7(a) program, SBA can guarantee up to 85 percent of 
the loan amount made by private lenders to small businesses. Within the 
7(a) program, for smaller loans, SBA offers SBA Express as an option to 
lenders who will use their own applications and underwriting procedures 
by agreeing to a lower guaranty of 50 percent. Within the 7(a) program, 
there are three classifications of lenders--regular, certified, and 
preferred lenders--that illustrate the various range of 
responsibilities handed over to lenders. SBA continues to provide final 
approval of loans made by its regular lenders through the district 
offices. Certified lenders have the authority to process, close, 
service, and may liquidate SBA guaranteed loans, and SBA provides 
expedited loan processing and servicing. Preferred lenders are given 
full authority to make loans without prior SBA approval. However, these 
lender-approved preferred loans are submitted to SBA's Sacramento 
Processing Center, which, among other things, verifies that the lender 
has documented eligibility requirements, issues a loan number, and 
processes the loan guaranty. Under the 504 program, SBA provides its 
guaranty through certified development companies--private nonprofit 
corporations--that sell debentures that are fully guaranteed by SBA to 
private investors and lend the proceeds to qualified small businesses 
for acquiring real estate, machinery, and equipment, and for building 
or improving facilities. When a 7(a) or 504 loan defaults, SBA reviews 
the lender's request for SBA to purchase the guaranty, and if the 
lender met SBA's program requirements, SBA pays the claim. SBA usually 
relies on the lender to recover as much as it can by liquidating 
collateral or SBA takes over the loan servicing and 
liquidation.[Footnote 5]

Figure 1: Timeline of Major Organizational and Operational Changes by 
Fiscal Year:

[See PDF for image]

[End of figure]

SBA's loan programs have also been the focus of a major organizational 
change with the creation of centers to process and service the majority 
of SBA's loans--work once handled largely by district office staff. 
(See fig. 1.) About 92 percent of the processing and servicing of SBA-
guaranteed loans are handled in centers instead of district offices. 
Among other things, these centers process the loan guaranty and review 
servicing requests submitted by lenders and borrowers.

In response to budget reductions, SBA streamlined its field structure 
during the 1990s, downsizing the 10 regional offices, moving the 
workload to either district offices or headquarters offices, and 
eliminating most of the regions' role as an intermediate management 
layer between headquarters and the field. SBA created the Office of 
Field Operations to take over the role of intermediary. SBA's overall 
workforce has decreased by over 20 percent since 1992 and as of 2002 
includes about 4,075 employees, including 956 for the Office of 
Disaster Assistance and 102 employees for the Office of the Inspector 
General.

When SBA embarked on this current transformation effort, it planned its 
implementation in three phases. The key pilot initiatives SBA undertook 
in phase 1 that began on March 10, 2003, focuses on (1) transforming 
the role of the district office to focus on outreach to small 
businesses about SBA's products and services and linking these 
businesses to the appropriate resources, including lenders and (2) 
centralizing its loan functions to improve efficiency and consistency 
of its loan approval, servicing, and liquidation processes. Later 
phases will include expanding these pilots to the remaining district 
offices. As SBA proceeds in transforming the district offices and 
centralizing many of its processes, it will analyze its business 
processes to identify opportunities for improvement and reduce its 
office space to achieve some cost savings. Finally, SBA's plan included 
initiatives to apply technology and use the Internet to reach out to 
more small businesses.

SBA Has Made Some Progress in Implementing Transformation, but Budget 
Constraints and Staffing Challenges Could Continue to Impede Progress:

As part of the first phase of SBA's transformation, the agency began 
implementing pilot initiatives to test a new marketing focus for its 
district offices and centralizing some of its loan functions. As the 
first phase nears completion, SBA has made some progress in 
implementing the pilot initiatives at three district offices and two 
centers. While SBA's implementation efforts have been and could 
continue to be impeded by budget constraints, we found that the agency 
did not always clearly communicate its budget requirements. SBA's 
centralization efforts could also be impeded by the challenge of 
realigning staff from multiple field offices so that it can operate its 
central locations with experienced employees.

SBA Made Progress in Implementing Initial District Office and 
Centralization Pilots:

SBA's purpose for transformation is to realign its organization, 
operations, and workforce to better serve its small business customers. 
Based on SBA transformation documents and agency officials, the agency 
planned to approach its transformation in phases to allow it to test a 
number of initiatives and to make refinements before implementing the 
initiatives agencywide. In our July 2002 testimony on SBA's workforce 
transformation plan, we noted that SBA had started to develop a sound 
implementation plan for its transformation.[Footnote 6] As part of 
phase one, SBA intended to test a new marketing and outreach initiative 
for its district offices that would refocus their efforts on becoming 
more responsible and accountable for promoting small business growth 
and development as well as on providing better oversight and management 
of its lenders and resource partners. Additionally, SBA planned to 
centralize a number of the offices' loan functions to (1) free up 
district office staff to reach and respond to the needs of local 
businesses and to do more lender and partner management and oversight 
and (2) improve the efficiency and consistency of its loan processing, 
servicing, and liquidation functions. To accomplish these initiatives, 
in March 2003, SBA began its initial pilot initiative at three district 
offices and two centers and based on its initial transformation plan, 
it expected to run the pilots for 6 months before moving to the second 
phase of its transformation. As of our report date, SBA is nearing the 
completion of phase one of its district office and centralization 
pilots and plans to expand the results of phase one to all of its other 
district offices. Based on our site visits to the pilot offices and 
discussions with SBA headquarters officials, we identified a number of 
transformation-related activities that SBA has made progress in since 
implementing its initial pilot initiative. Specifically, for its 
district office initiative to:

* prepare staff in carrying out their new marketing and outreach roles, 
during March through June 2003, SBA provided training at the three 
district office pilots on topics such as marketing and outreach, 
presentation skills, and customer/partner relationships;

* develop the competencies necessary for staff to carry out their new 
roles and to evaluate gaps in the existing skill sets of its staff, SBA 
has hired a contractor to conduct a skills analysis. In July 2003, the 
contractor completed the analysis for the three pilot district offices 
and according to SBA officials, district office management will use the 
results to identify its employees' developmental needs in the marketing 
and outreach areas;

* update and clarify the specific duties that SBA expects its district 
office staff to perform in their new marketing roles, the agency 
developed new job descriptions for its marketing and outreach 
specialist positions at the district office level; and:

* allow staff at the three pilot district offices more time to conduct 
marketing and outreach functions, in March 2003, these offices had 
stopped processing any new 7(a) liquidations and guaranty purchase 
cases and 504 loan origination applications. In addition, the offices 
had also transferred most of their outstanding 7(a) liquidation cases 
to SBA's liquidation center in Santa Ana, California.

Additionally, a key component of SBA's transformation is to make 
fundamental changes over the next 5 years at its district office level 
to reflect the change in the agency's vision for its district offices 
from making and servicing loans to primarily reaching out to new 
markets and overseeing its private-sector partners. Based on our site 
visits to the three pilot district offices, we found that the offices 
have begun to move toward SBA's new vision for its district offices. 
Specifically, SBA's Phoenix, Arizona, office has officially changed its 
organization structure to allow its staff to focus mainly on marketing 
and outreach-related activities. As shown in figure 2, the office has 
replaced its portfolio management division with divisions for lender 
development and marketing and outreach, and it also moved some staff 
formerly in portfolio management to its business development division. 
The Miami and Charlotte district pilots have also started to expand 
their marketing and outreach efforts. For example, a Charlotte official 
told us that it plans to use "SBA Days" as a way to reach out to small 
businesses in its district. SBA Days are events conducted at local 
chambers of commerce around the district's state where SBA staff along 
with chamber members and other firms in the area conduct one-on-one 
counseling sessions with business owners and potential entrepreneurs. 
To reach small businesses in the Miami area, officials told us that the 
office is using one of its resource partners to work with a national 
chain of office supply stores to provide on-site counseling to small 
business customers when they are in the stores.

SBA headquarters officials provided us with briefing slides that show 
that the three district office pilots have submitted proposals for 
establishing alternative customer service sites so that SBA employees 
can provide direct customer service in areas outside the physical 
location of the district offices. For example, the Phoenix district 
office already has one marketing specialist located in Tucson and is 
proposing two additional positions to support lender relations. 
Officials also told us they are working with local governments and 
resource partners to identify free office space for these new sites, 
but in some cases there may be some rental expenses.

Figure 2: Phoenix, Arizona, District Office Organizational Structure 
"Before and After" Transformation:

[See PDF for image]

[End of figure]

Finally, as part of its centralization initiative to improve the 
efficiency and consistency of its loan approval, servicing, and 
liquidation processes, in March 2003, SBA's two pilot centers assumed 
their new roles and responsibilities. The liquidation center in Santa 
Ana, California, began processing new 7(a) liquidations and guaranty 
purchase cases from the three pilot district offices, and the loan 
processing center in Sacramento, California started processing new 504 
loan origination applications from these offices. In May 2003, the 
Santa Ana center also started working on 1,275 outstanding 7(a) 
liquidation cases from the three pilot district offices. Based on SBA's 
benchmark reporting data for its centralization pilot, as of October 
2003, the Santa Ana center had processed 185 of 227 new 7(a) guaranty 
purchase cases it had received and closed 55 of 450 7(a) liquidation 
cases. The Sacramento center had processed 582 new 504 applications 
that it had received since beginning the pilot initiative.

According to SBA and representatives from two lender trade 
associations, the centralization pilot has resulted in a more efficient 
and consistent processing of SBA's 7(a) liquidation and guaranty 
purchases and 504 loan approvals. SBA headquarters officials told us 
that the agency would be able to perform these functions with far fewer 
resources than it has to date. According to the officials, based on 
results from a workload analysis SBA did of the Santa Ana 
centralization initiative, it found that the 7(a) liquidation and 
purchase guaranty process could be done by 40 employees in a center, as 
opposed to the 266 employees that now process the cases in its district 
offices. SBA officials also told us that centralization results in 
faster processing times. SBA data indicate that the average turnaround 
time for processing 7(a) guaranty purchases has decreased from 129 days 
to 32 days and, for 504 applications, it has gone from about 14 days on 
average to about 2 days. We reviewed about 450 cases of the 504 
application approvals from the pilot and found that most applications 
were processed and returned to the certified development companies in 
about 2 days. We did not review data for any of the other measures. 
When we visited the two centers participating in the pilots, center 
officials showed us documentation they were using to make the process 
more efficient and consistent. For example, for the 504 pilot, the 
Sacramento center developed standardized letters to send to certified 
development companies in situations where the center receives an 
incomplete application package from a company. According to a center 
official, some district offices spend a lot of time making telephone 
calls to the development companies requesting the necessary data to 
complete the processing. However, by using the letters, the official 
said the center is saving time because it stops processing the 
application until it receives the needed information, and in the 
meantime it can continue processing applications that are complete. One 
official representing certified development companies told us that the 
companies participating in the pilot initiative for SBA's 504 program 
are pleased with the results of the pilot. Officials representing 7(a) 
lenders said that some lenders might not be in favor of centralization 
because they have good working relationships with the local SBA 
district office and would prefer to continue working directly with 
them.

Budget Uncertainties and Constraints Affected Transformation, but SBA 
Needs to Better Communicate Budget Requirements:

SBA transformation efforts have been impeded and could continue to be 
impeded by budget uncertainties and constraints. SBA officials stated 
that due to inflation and increases in employee compensation and 
benefits, available operating funds had been declining since 2001 as 
shown in figure 3. Therefore, SBA requested specific funding for its 
transformation. According to SBA officials, the agency expected to 
start its pilot initiative in July 2002 with funds from its 2002 
operating budget and then expand the initiative in phase two of its 
transformation, 6 months later, with funds specifically requested for 
transformation in its 2003 budget. But SBA delayed the start of the 
pilot until March 2003 due to a number of uncertainties about its 
budget. SBA officials explained that language in its appropriations 
bills requires that SBA notify the appropriations committees 15 days 
prior to reprogramming its funds for relocating an office or employees, 
or reorganizing offices.[Footnote 7] In the summer of 2002, SBA 
notified the appropriations committees about its intent to go forward 
with the pilots. However, SBA was told that it should first negotiate 
with its union before moving forward. Although SBA reached agreement 
with its union, starting the initiative still remained an issue for SBA 
because, according to officials, it was too late to use 2002 operating 
funds as it initially planned. While SBA then planned to use 2003 
operating funds to start the pilot initiative, officials said that the 
government's 2003 continuing resolution[Footnote 8] further delayed the 
start because without an approved operating budget, SBA did not know 
the portion of its operating budget that would be available for 
transformation.

Figure 3: SBA's Available Operating Funds Have Declined Since Fiscal 
Year 2001:

[See PDF for image]

[End of figure]

For its 2003 budget, Congress did not approve any of the $15 million 
that SBA specifically requested for transformation activities planned 
for phase two, and SBA officials told us they do not believe the agency 
will receive any of the $21.1 million for transformation in its 2004 
budget request. According to officials, SBA has had to change its 
transformation plans and the level of funding associated with these 
plans because of its shrinking operating budget and the lack of 
specific appropriations for transformation. Specifically, officials 
stated that SBA actually spent $96,000 in 2003 operating funds on the 
first phase of its transformation for activities associated with its 
pilot initiative, including shipping files, training, travel, and pilot 
office evaluations. Officials could not tell us how much money SBA 
initially planned to spend in phase one when it was going to use 2002 
operating funds or whether any of the activities associated with this 
phase had to be cut back due to the lack of funds. However, many 
employees in the district offices we visited told us that they had not 
received the level of funding needed to support marketing and outreach 
functions including money for travel, laptops, and cell phones that 
would allow them to cover a wider geographic area in the districts and 
to test telecommuting and alternative work sites.

Although SBA struggled with budget uncertainties and constraints as it 
began implementation of its transformation, SBA could have provided 
better information about its budget requirements. Based on our analysis 
of SBA budget request data for fiscal years 2003 and 2004, SBA has not 
clearly defined its budgetary needs for transformation. As shown in 
figure 4, the labeling of specific transformation initiatives varies 
between SBA's fiscal years 2003 and 2004 Budget Request and Performance 
Plans, making it difficult to compare and align its transformation 
activities from year to year. Also, as shown in figure 4, in its fiscal 
year 2004 budget request, SBA requested $21.1 million for a number of 
investment initiatives, of which $8.8 million was for transformation. 
The $8.8 million figure was also the amount cited by SBA's 
Administrator during two congressional hearings.[Footnote 9] When we 
met with SBA headquarters officials to discuss the variances in its 
budget request data, the officials told us that SBA's 2004 budget 
request for transformation is the entire $21.1 million, and not the 
$8.8 million. In response to our questions about the budget data 
inconsistencies, SBA officials attributed the differences to the 
agency's changing environment. However, the inconsistencies we found in 
SBA budget request data and the lack of a detailed plan make it 
difficult for outsiders, including congressional stakeholders, to 
understand the direction SBA wants to take with transformation and the 
resources it needs to achieve results.

Figure 4: Comparison of SBA's Fiscal Years 2003 and 2004 Budget 
Requests for Transformation:

Dollars in millions:

[See PDF for image]

Note: In SBA's fiscal year 2004 budget request for transformation, SBA 
listed $2,000,000 for space restructuring. This amount should have been 
$2,750,000, which SBA had listed in another location of the document.

[End of figure]

Staffing Challenges Could Impact Centralization Efforts:

To staff its centralization initiatives, SBA will have to relocate 
employees from its 68 district offices scattered throughout the 
country.[Footnote 10] Realigning staff from multiple field offices to 
central locations is and will be an ongoing challenge for SBA. 
Relocations could not only prove potentially disruptive for employees 
but can also have an effect on SBA's operations by negatively impacting 
morale and productivity. As part of phase one of its transformation, 
SBA centralized a number of loan functions from the three pilot 
district offices to two of its existing loan processing and servicing 
centers. In phases two and three of its transformation, SBA had planned 
to expand its centralization initiative until all of its loan functions 
performed by its remaining 65 district offices were centralized. In 
addition, SBA had planned to have fewer centers by consolidating some 
of its existing ones.

Based on our discussions with SBA staff in the pilot offices, the 
staffing of any centralization initiative with experienced staff could 
be potentially challenging for SBA. Specifically, some staff believed 
that the two pilot centers would not have a sufficient number of staff 
to handle the increased workloads when SBA expands its centralization 
initiative to include more district offices. According to one district 
office employee, unless the two pilot centers or any other center have 
enough staff with the right skill mix, they will be unable to 
adequately respond to lenders, which the employee believed could 
potentially affect relationships between SBA and the lending community. 
One center official characterized the problem as fundamental because in 
his view staff are not all equally adept and SBA is faced with matching 
jobs with people who do not have the skills to do the work. An official 
representing one of SBA's lender trade associations also expressed 
concern that if SBA forced employees to move, that the centralization 
initiatives will be staffed with employees with low morale that could 
hurt productivity.

SBA's first attempt to realign staff with one of its centralization 
initiatives was to establish a new 7(a) liquidation and guaranty 
purchase center near Washington, D.C., beginning in early October 2003 
and operate it with 40 liquidation staff relocated to the center from 
its district offices. Based on SBA transformation documents, SBA plans 
to relocate those staff with the greatest experience into the center to 
take advantage of their expertise. According to SBA officials, to 
identify experienced staff the agency used results from a cost 
allocation survey that provided information on the amount of time 
district office staff spend on loan liquidation functions. On September 
10, 2003, SBA sent notification letters to certain district office 
employees identified as having worked on liquidations, informing them 
that they were eligible for a monetary buy-out if they separated from 
federal service not later than September 30, 2003. While the letter 
also states that the employee has 7 calendar days to accept the buy-out 
offer, it is unclear how SBA would handle reassigning those staff who 
do not accept the buy-out offer. Specifically, the letter does not 
mention where staff are being assigned, or what relocation costs SBA 
would pay.

According to the memorandum of understanding between SBA and its 
employees' union signed September 9, 2003, the two parties agreed that 
current district office staff at the GS-9 level and above who reported 
spending at least 25 percent of their time performing liquidations on 
SBA's most recent cost allocation study would be directly reassigned to 
the new liquidation center in the Washington, D.C., metropolitan area, 
or to one of the six most severely understaffed SBA district offices in 
New York, New York; Newark, New Jersey; Atlanta, Georgia; Chicago, 
Illinois; and San Francisco and Los Angeles, California. The memorandum 
indicates that SBA identified the six offices based on staffing levels 
for those district offices with the lowest ratio of SBA staff to small 
businesses in their service area, as of August 1, 2003. Also, the 
memorandum states that SBA plans to begin relocating staff 30 days from 
the time it notifies them about their reassignment to the center and 
that it will pay all of an employee's relocation cost in accordance 
with the law. While SBA has indicated that it will make reassignments 
as minimally disruptive for its employees as possible, depending on 
where the 40 staff being reassigned to the center currently work, 
logistical factors associated with moving, such as finding a new home, 
could pose a challenge for these staff. As of our review date, SBA had 
not informed us about when it expects to begin the reassignments or the 
number of and office locations for the employees that it intends to 
relocate.

SBA Applied Some but Not Many Aspects of Practices and Implementation 
Steps Important to Successful Transformation:

We compared SBA's implementation process to practices that have been 
identified in major private and public sector organizational 
transformations as key for a successful transformation. Building on 
lessons learned from the experiences of large private and public sector 
organizations, these practices can help agencies successfully transform 
their cultures so that they can be more results oriented, customer 
focused, and collaborative. While SBA applied some key practices, such 
as involving top leadership, dedicating an implementation team and 
developing an implementation plan, it also overlooked key aspects that 
emphasize transparency and communication. For example, although it 
developed a draft transformation plan with implementation goals and a 
timeline, it did not share the plan with employees and stakeholders. 
SBA developed strategic goals for transformation but still needs to 
link those goals with performance goals and its performance management 
system. Finally, a lack of communication and employee involvement in 
SBA's communication approach did not encourage two-way communication to 
obtain feedback from employees and stakeholders and involve employees 
to obtain their ideas and gain their ownership for the transformation.

Practices Important to Successful Transformation:

According to key transformation practices, people are at the center of 
any change management initiative--people define the organization's 
culture, drive its performance, and embody its knowledge base. 
Experience shows that failure to adequately address--and often even 
consider--a wide variety of people and cultural issues are at the heart 
of unsuccessful transformations. Recognizing the "people" element in 
these initiatives and implementing strategies to help individuals 
maximize their full potential in the new organization, while 
simultaneously managing the risk of reduced productivity and 
effectiveness that often occurs as a result of the changes, is the key 
to a successful transformation. Thus, transformations that incorporate 
strategic human capital management approaches will help to sustain 
agency efforts to improve efficiency, effectiveness, and accountability 
in the federal government.

We convened a forum on September 24, 2002, to identify and discuss 
useful practices and lessons learned from major private and public 
sector mergers, acquisitions, and transformations.[Footnote 11] The 
invited participants were a cross section of leaders who have had 
experience managing large-scale organizational mergers, acquisitions, 
and transformations, as well as academics and others who have studied 
these efforts. The forum neither sought nor achieved consensus on all 
of the issues identified through the discussion. Nevertheless, there 
was general agreement on a number of key practices that have 
consistently been found at the center of successful mergers, 
acquisitions, and transformations. In a follow-up report issued on July 
2, 2003, we identified specific implementation steps for these key 
practices.[Footnote 12] These practices and implementation steps are 
shown in table 1.

Table 1: Key Practices and Implementation Steps for Organizational 
Transformations:

Practice: Ensure top leadership drives the transformation; 
Implementation step: * Define and articulate a succinct and compelling 
reason for change; * Balance continued delivery of services with 
merger and transformation activities.

Practice: Establish a coherent mission and integrated strategic goals 
to guide the transformation; Implementation step: * Adopt leading 
practices for results-oriented strategic planning and reporting.

Practice: Focus on a key set of principles and priorities at the outset 
of the transformation; Implementation step: * Embed core values in 
every aspect of the organization to reinforce the new culture.

Practice: Set implementation goals and a timeline to build momentum and 
show progress from day one; Implementation step: * Make public 
implementation goals and timeline; * Seek and monitor employee 
attitudes and take appropriate follow-up actions; * Identify cultural 
features of merging organizations to increase understanding of former 
work environments; * Attract and retain key talent; * Establish an 
organizationwide knowledge and skills inventory to exchange knowledge 
among merging organizations.

Practice: Dedicate an implementation team to manage the transformation 
process; Implementation step: * Establish networks to support 
implementation team; * Select high-performing team members.

Practice: Use the performance management system to define the 
responsibility and assure accountability for change; Implementation 
step: * Adopt leading practices to implement effective performance 
management systems with adequate safeguards.

Practice: Establish a communication strategy to create shared 
expectations and report related progress; Implementation step: * 
Communicate early and often to build trust; * Ensure consistency of 
message; * Encourage two-way communication; * Provide information to 
meet specific needs of employees.

Practice: Involve employees to obtain their ideas and gain ownership 
for the transformation; Implementation step: * Use employee teams; * 
Involve employees in planning and sharing performance information; * 
Incorporate employee feedback into new policies and procedures; * 
Delegate authority to appropriate organizational levels.

Practice: Build a world-class organization; Implementation step: * 
Adopt leading practices to build a world-class organization.

Source: GAO.

[End of table]

SBA Transformation Has Top Leadership Support and a Designated 
Implementation Team, but Senior Officials' Roles Were Not Always 
Transparent:

One of the key practices important to a successful transformation is 
for the agency to ensure that top leadership drives the transformation. 
SBA has followed this practice, with both the Administrator and the 
Deputy Administrator demonstrating support for the transformation. The 
SBA Administrator has provided a rationale behind the purpose of the 
agency and the goals of the transformation by addressing district 
directors and visiting field offices to discuss the importance and 
goals of transformation--to increase awareness of SBA's services and to 
make SBA a better trained, better equipped, and more efficient 
organization. SBA officials told us that the Deputy Administrator has 
also visited many field offices to discuss the transformation.

Designating a strong and stable implementation team that will be 
responsible for the transformation's day-to-day management is also 
important to ensuring that transformation receives the focused, full-
time attention needed to be sustained and successful. SBA has dedicated 
an implementation team to manage the transformation process, but it has 
experienced leadership changes that were not made apparent to employees 
and stakeholders. The composition of the team is important because of 
the visual sign it communicates regarding which organizational 
components are dominant and subordinate or whether the transformation 
team involves a team of equals. Prior to the Deputy Administrator 
assuming the lead for implementing the transformation, the Chief 
Operating Officer was responsible. The Chief Operating Officer, along 
with SBA's Associate Administrator for the Office of Field Operations, 
visited the pilot district offices during the kick off to promote the 
transformation and to address questions and concerns of the pilot 
district office staff. However, the Chief Operating Officer left SBA 
shortly after the first pilot phase was initiated.[Footnote 13] 
Similarly, the person who was initially the Associate Administrator for 
the Office of Field Operations, who was responsible for overseeing the 
district office pilots,was no longer involved in the transformation 
shortly after implementation. SBA officials told us that it was not 
productive for its Chief Operating Officer to be in charge of the 
transformation because the Chief Operating Officer position was equal 
in terms of authority to the other key positions on the implementation 
team. Since the Chief Operating Officer left the agency, SBA has not 
publicly designated a day-to-day manager for the transformation effort. 
Based on our discussions with stakeholders and field and union 
officials, the Counselor to the Administrator appeared to be the 
manager. However, SBA has not issued any announcement or otherwise 
clarified the leadership or implementation team to employees and 
stakeholders. SBA officials told us that the person now serving as the 
Associate Administrator for the Office of Field Operations leads the 
weekly conference calls with the district and center directors involved 
in the pilots and is the person most involved in the day-to-day 
management of the transformation.

The Deputy Administrator, who can direct the other members of the 
implementation team, leads the current team, which comprises senior 
executives of the key program areas affected by the transformation such 
as the Associate Deputy Administrator for Capital Access, the Associate 
Administrator for the Office of Field Operations, Chief Human Capital 
Officer, and the three pilot district office directors. The team also 
includes the Counselor to the Administrator and two Regional 
Administrators. Officials on the implementation team told us that they 
meet on a weekly basis with the Deputy Administrator and sometimes the 
Administrator to discuss the status and concerns related to the pilot's 
implementation. SBA officials also emphasized that the implementation 
team includes a mix of political appointees and senior career 
officials. For example, the Associate Deputy Administrator for Capital 
Access and the Associate Administrator for Office of Field Operations 
are political appointees. The Chief Human Capital Officer and the 
Counselor to the Administrator are career officials.

Lack of a Transparent Plan and Changing Focus Made SBA's Implementation 
Goals and Progress Reports Confusing:

A key practice in organizational transformations is to set 
implementation goals and a timeline to build momentum and show progress 
from day one. Although SBA had developed a transformation plan that 
contains goals, anticipated results, and an implementation strategy, it 
never made the plan public. SBA headquarters officials told us that all 
of its plans provided to us were "preliminary" documents because of 
changes made to the plan; therefore, it had not been shared with 
employees or stakeholders. Making the implementation goals and timeline 
public is important for transparency and accountability in a 
transformation and because employees and stakeholders are not only 
concerned with what results are to be achieved, but also how to achieve 
those results. According to SBA's draft transformation plan, SBA 
intended to keep its employees apprised of the current status of 
activities, and continuously inform its employees on what the agency 
intended to do. However, SBA has not made much information available to 
its employees and stakeholders regarding the details of upcoming steps, 
measures for success, and reasons for decisions. As a result, it 
appeared to many district office employees and stakeholders that 
headquarters lacked a plan and direction. Stakeholders, including 
representatives from lender trade associations, informed us that SBA 
has not been forthcoming in discussing its transformation plans with 
them. Generally, district office employees told us they thought SBA had 
no clear plan and lacked direction. Specifically, two district office 
employees told us that despite any planning that SBA had done for the 
transformation, headquarters officials kept adding to the plan, and 
changing goals during mid-year, which left employees in the district 
office uncertain about what to expect.

SBA officials told us that internal and external factors, such as 
budget uncertainties, caused SBA to alter aspects of the draft 
transformation plan. Initially, phases two and three of its 
transformation were to expand its district office and centralization 
pilot initiatives to additional district offices. SBA had also planned 
a number of other initiatives as part of the later phases, including 
analyzing its business processes to identify opportunities for 
improvement, restructuring its surety bond program, and expanding its 
technology systems. According to a revised plan dated August 1, 2003, 
and discussions with SBA officials, the focus of SBA's transformation 
is now on creating a new center for centralizing all of its 7(a) loan 
liquidation and loan guaranty cases. Also, the plan and other 
documentation describing SBA's new centralization initiative indicate 
that SBA's reason for the initiative is to allow it to correct staffing 
imbalances at its district offices nationwide and will allow these 
districts to increase the number of people in the field offices who are 
providing direct assistance to small businesses, including providing 
assistance in areas that have not had access to SBA services. While SBA 
officials told us the focus of the transformation had changed, we had 
difficulty in determining the extent of changes to the specific 
initiatives in its initial transformation plan, including to what 
extent SBA would test new marketing and outreach approaches, centralize 
other functions, and improve business processes. According to a senior 
SBA official, although there has not been a formal announcement about 
creating the liquidation center, he expected that staff would be aware 
that SBA was moving toward centralizing loan-related functions based on 
the new marketing and outreach focus in the pilot district offices, and 
because the union had been informed.

Similarly, although SBA planned for evaluating the progress of its 
pilot initiatives, the SBA evaluations provided to us have been limited 
to measuring the results of its centralization pilots and not the 
results of the district office pilots or lessons learned from the 
implementation process. As a result, employees and stakeholders are 
uncertain about the results of the district office pilots. According to 
key transformation practices, it is essential to establish and track 
implementation goals to pinpoint performance shortfalls and suggest 
midcourse corrections. According to SBA transformation documents and 
officials, follow-up evaluations of its pilot initiatives were to take 
place after kick off--every 90 days for the district office pilots and 
every 30 days for the center pilots--to evaluate the progress of the 
pilots, and to monitor and validate the information SBA received. In 
addition, these reviews were intended to identify any problems related 
to the transformation process, as well as best practices, which would 
be documented and shared with the others in the pilot to improve 
efficiency and effectiveness. For its centralization initiative, SBA 
has established some evaluation standards--such as measuring average 
turnaround and processing time for the centers, and has generated a 
benchmark report reflecting the results of these measures. While SBA 
gathered benchmark measurements to monitor progress in the district 
office pilots as part of its quality service reviews conducted in 
January 2003, SBA did not provide an evaluation of the results of SBA's 
district office initiative. As of our report date, it is unclear to us 
whether SBA has completed or begun district office evaluations. SBA 
officials told us that they are working on developing a way to evaluate 
the impact of the district office pilots and to link their marketing 
and outreach focus with their existing performance goals, such as loan 
volume, so that they would have a road map on lessons learned to use 
when adding more district offices to the pilot.

SBA Has Developed Strategic Goals for Its Transformation, but Needs to 
Link Performance Goals to Its Marketing and Outreach Focus:

Establishing a coherent mission and integrated strategic goals is 
another key practice in organizational transformations. Although SBA 
has developed strategic goals to guide its transformation and included 
these goals in its fiscal year 2004 performance plan, SBA has not 
linked them with measurable performance goals that demonstrate the 
success of the agency's expanded focus on marketing and outreach. 
According to the Government Performance and Results Act, agencies are 
required to develop annual performance plans that use performance 
measurement to reinforce the connection between the long-term strategic 
goals outlined in their strategic plans and the day-to-day activities 
of their staff, and include performance indicators that will be used to 
measure performance and how the performance information will be 
verified. District office employees we interviewed generally indicated 
an understanding of the strategic goals and the purpose of the 
transformation, and had a sense of what the transformation intends to 
accomplish. However, some district office employees told us that they 
did not know what the measures would be for determining whether the new 
marketing and outreach focus was successful, while others told us that 
they were unclear on how the district office staff should conduct 
marketing and outreach. SBA officials told us that the agency was still 
struggling with how to link its marketing and outreach focus with its 
existing performance goals, such as number of loans made by lending 
partners.

SBA currently uses quantitative measures, such as the number of jobs 
created, number of loans made, and dollar volume of loans to determine 
how well it is achieving its strategic goals. SBA officials told us 
that SBA uses an Execution Scorecard, which is an Intranet-based 
system, as the internal management tool to track data on each district 
offices' performance goals, for monthly progress reviews with the 
Deputy Administrator on key initiatives, including transformation. 
According to an SBA official, the scorecard shows that the loan volume 
in two of the three pilot district offices has increased more than in 
nonpilot district offices when compared to last year's volume. However, 
we identified other factors that could have contributed to an increase 
in loan volume. For instance, the policy changes made to its SBA 
Express program, which allows the lender to use its own documentation 
and applications, also most likely contributed to an increase in loan 
volume. In fact, other district offices not in the pilot have also seen 
an increase in loan volume. As a result, the scorecard may be limited 
in measuring success that could be directly attributed to the pilot 
efforts for marketing and outreach.

Lack of Clear Performance Goals Puts New Performance Management System 
At Risk:

Using the performance management system to define responsibility and 
assure accountability for change is a key practice in organizational 
transformations. SBA has taken steps toward creating a performance 
management system that would define responsibility and set expectations 
for the individuals' role in the transformed SBA. However, since SBA is 
still struggling with how to define measurable outcomes for the new 
marketing and outreach focus, its performance management system may 
also send a confusing or ambiguous message to employees. We previously 
reported that as agencies continued to shift towards a greater focus on 
results, they would need to make progress connecting employee 
performance with agency success.[Footnote 14] An explicit alignment of 
daily activities with broader results helps individuals see the 
connection between their daily activities and organizational goals. 
According to SBA headquarters officials, SBA's performance management 
system, modeled after IBM's, would focus more on results and not on 
activity. SBA officials told us that SBA implemented its performance 
management system for senior executives and supervisory staff in fiscal 
year 2003. SBA is implementing the system for its nonsupervisory staff 
beginning in fiscal year 2004. SBA officials provided us with 
documentation of the new position descriptions for the marketing and 
outreach positions that explained the duties and expectations. However, 
at the time of our review SBA was still developing the performance 
standards and had not yet implemented them for nonsupervisory staff. 
SBA recognized that it would need to provide training to help employees 
make the transition from their former areas of expertise to a new, 
broader, and in some respects, more complex job.

It was unclear what the linkage will be between these new job 
responsibilities, performance standards, agency performance goals, and 
the strategic goals for the transformation. District office employees 
who have been conducting new marketing and outreach activities told us 
that they were not sure how their performance will be measured because 
they have not received information on their performance management 
standards, and are unclear as to how their job responsibilities would 
change, or how they would be rated. Specifically, one district office 
employee told us that it was easy to measure loan specialist 
performance prior to the pilot because the standards were clear and 
concise--he knew from his own self-assessment where his performance 
stood--and that under the new performance management system, it will be 
harder to measure results because they are not tangible. In addition, 
another district office employee told us that although many employees 
see benefits to the transformation, they do not know how SBA will 
measure its progress toward reaching more of the public since employees 
do not understand what exactly they need to accomplish, such as number 
of clients the staff should contact or how many marketing events staff 
should attend, to help SBA reach its goals.

Communication Strategy Is Limited:

While establishing a communication strategy is a key practice in 
organizational transformations, SBA has not established an effective 
and on-going communication strategy that would allow the agency to 
create shared expectations and report related progress to its employees 
and stakeholders. Organizations implementing transformations have 
found that communicating information early and often helps build an 
understanding of the purpose of planned changes and builds trust among 
employees and stakeholders. In particular, SBA does not have an 
effective communication strategy that reaches out to its employees and 
stakeholders to engage them in the transformation process, encourages 
two-way communication, and communicates early and often to build trust. 
A comprehensive communication strategy that reaches out to employees 
and stakeholders and seeks to genuinely engage them in the 
transformation process is essential to implementing a transformation.

SBA officials acknowledged that it was important for headquarters to 
communicate and address staffs' concerns. However, when we reviewed 
SBA's current methods of communication and asked employees in the pilot 
offices how they received information, we determined that communication 
is one-way and through a chain of command model, newsletters, or 
rumors. Communication is not about just "pushing the message out," but 
also involves facilitating an honest two-way exchange and allows for 
feedback from employees and stakeholders. SBA officials told us that 
SBA headquarters disseminated information to the employees through the 
regional administrators and the district directors--and a newsletter--
The SBA Times. District office employees told us that they generally 
hear about transformation-related events either through their district 
director or their immediate supervisor, while other employees stated 
that they get most of their information through rumors. In addition, 
stakeholders also told us that they initially hear information through 
rumors. For instance, a representative from a lender association 
informed us that they get information through rumors because SBA did 
not provide any information about the transformation to them. As we 
noted in an earlier report, it is important for stakeholders to be 
involved because it helps to ensure that resources are targeted at the 
highest priorities, and it creates a basic understanding among the 
stakeholders of the competing demands that confront most agencies, such 
as the limited resources available.[Footnote 15]

It is also important to consider and use employee feedback and make any 
appropriate changes to the implementation of a transformation. 
According to union officials, SBA had set up an e-mail address in June 
2002 to which employees could send their questions regarding the 
transformation. However, despite staff submitting questions, the 
district office staff told us they have yet to see a list of the 
questions or SBA's responses. According to SBA officials, these emails 
were provided to senior management officials to respond to questions in 
conference calls held with field staff. The draft transformation plan 
we reviewed included a set of questions and answers about the 
transformation, but they were never made public. SBA officials told us 
that because all the transformation plans were preliminary, SBA has not 
drafted a thorough list of questions and answers and therefore had not 
made them available to employees.

SBA did not communicate sufficiently with its employees. The 
information on the transformation initiative found in SBA's monthly 
newsletters from June 2002 through March 2003 reported on the status of 
the transformation effort, described the purpose of transformation, 
announced when the pilots began, and described them. We reviewed all of 
the newsletters issued after the kick off of the pilots in March 2003, 
to see what kind of information was provided to SBA employees. With one 
exception, the newsletters had no information about the transformation 
or the creation of the new 7(a) Liquidation and Purchase Guaranty 
Center and SBA's intention to reassign staff from overstaffed district 
offices to understaffed offices. The topic related to transformation 
included in one issue was a brief reference to the district office 
pilot in Phoenix. None of the newsletters mentioned who would replace 
two people who had been key leaders in the transformation--the Chief 
Operating Officer who left the agency or the Associate Administrator 
for Office of Field Operations who had moved to a different position 
within SBA. SBA officials told us that no one has filled the position 
of the Chief Operating Officer and the replacement for the Associate 
Administrator for Office of Field Operations was announced in an 
agencywide e-mail. However, as we stated earlier, after the Chief 
Operating Officer left the agency, SBA had not clarified who was 
leading the implementation team for transformation.

Transformation Has Not Adequately Involved Employees:

Involving employees from the beginning to obtain their ideas and gain 
ownership of the transformation is important to successful 
transformations. It strengthens the process by including frontline 
perspectives and experiences. In addition, a study conducted by the 
National Academy of Public Administration indicates that agencies that 
have effectively restructured have also worked with their unions to 
implement changes.[Footnote 16] The Academy reported that when Congress 
mandated in 1998 that the Internal Revenue Service (IRS) restructure, 
IRS management worked with the National Treasury Employees Union to 
implement benchmarks and develop alternatives. As a result of this 
collaboration, according to the Academy, IRS facilitated the process of 
moving employees into new jobs and made the transition easier. Although 
SBA officials told us that SBA has involved its union, the American 
Federation of Government Employees, and signed memorandums of 
understanding with the union on implementation of the pilot and on 
establishing a liquidation center, union officials told us that they 
had very little involvement. A union representative told us that SBA 
does not involve them in any of the planning and only includes the 
union after it has decided what it wants to accomplish. In addition, 
another union representative told us that since signing the memorandum 
of understanding for the first pilot phase in October 2002, SBA has not 
included the union in aspects of the transformation, such as creating 
SBA's competency models, or following up on training courses. SBA made 
a presentation to the union in July 2003 regarding the second phase of 
the pilot--to create a new liquidation center in the Washington, D.C., 
metropolitan area--prior to signing the second memorandum of 
understanding but did not give the union an opportunity for input on 
planning for the second phase. In September 2003, SBA and the union 
signed a memorandum of understanding on the creation of the new center 
in which SBA agreed to offer an early retirement for all agency 
personnel and a buyout option to those employees who performed the 
liquidation function.

SBA's transformation has not involved employees in the planning or 
implementation stages. During our field visits, we found that because 
SBA has not actively involved its employees in the transformation 
process, there is often anxiety and apprehension, as well as low morale 
in the pilot district offices. However, based on our field visit, we 
observed that the Arizona District Office's former Portfolio Management 
Team appeared to be less anxious about the transformation than 
Portfolio Management teams in the other district office pilots, mostly 
because the team leader and her staff were involved early in the 
transformation by preparing the loan files for the Santa Ana 7(a) 
center, and training the center staff. We found that because of this 
early involvement, they had a better sense of their role and were more 
optimistic about the transformation. An SBA headquarters official told 
us that SBA intends to use its employee feedback from training 
evaluations to modify its training curriculum for the next pilot phase, 
but we were unable to identify any other examples where employee 
opinions and perspectives were sought. During our field visits to the 
pilot offices, we found that the employees had valuable input on 
lessons learned and on ways that SBA could improve its implementation 
process. For example, one employee suggested that SBA create a 
guidebook for its employees on what to expect from the transformation, 
and that the three district office pilots be a resource for the 
guidebook. In addition, one district office employee suggested that SBA 
change the order of the training curriculum so that the course on 
results management is offered first to help supervisors communicate 
with their staff regarding the transformation. We also observed that 
employees generally were not opposed to the transformation and saw 
benefits resulting from the transformation; however, a few employees 
expressed frustration with the way the process was implemented. If 
employees had a larger role in implementing and planning the 
transformation, such as through employee teams, they could help to 
facilitate the process by sharing their knowledge and expertise, 
particularly those employees who have had experience in the marketing 
and outreach area.

Conclusions:

SBA has made some progress in implementing its transformation plan for 
phase one. However, continued success and progress in implementing its 
transformation may be impeded by budget uncertainties and constraints 
and the difficulties in realigning employees to staff centralization 
efforts. To some extent, SBA has compounded the budget challenge by not 
sharing its plan with a key stakeholder--Congress--and not providing 
clear, consistent budget requests with a detailed plan that show 
priorities and link resources to desired results. In addition, as SBA 
moves forward in centralizing its loan and other functions, realigning 
staff will likely present additional challenges, such as problems with 
employee morale and productivity.

Transforming an organization is not an easy endeavor. It requires a 
comprehensive, strategic approach that takes leadership, time, and 
commitment. Although SBA may achieve progress in the short-term by 
establishing new centers to improve some of its business processes, its 
long-term success in defining and institutionalizing a new role for its 
district offices will take more time and commitment. The practices we 
have identified as being important to successful transformation are 
especially important as SBA moves forward with its transformation and 
could also help mitigate the challenges it faces with its budget and 
staff realignment. However, the weaknesses we identified in SBA's 
implementation process could derail or negatively impact its 
transformation effort as the agency attempts to expand transformation 
and affect more of its operations and employees. SBA's leadership 
changes, plans, and rationales for decisions have not been made public 
and therefore have created an environment of confusion about the 
leadership, specific goals, and timeline for transformation. SBA is in 
the infant stages of developing a link between its broad strategic 
objectives and measurable performance goals, which will be important 
for determining the success of transformation. The lack of frequent and 
two-way communication has exacerbated an environment of confusion, even 
though many employees understand the goals of transformation. Finally, 
SBA is missing out on one of its key strengths--its employees--by not 
adequately involving employees in the transformation process. This lack 
of employee involvement means that SBA does not receive information and 
perspectives that could improve and facilitate the transformation and 
promote employee buy-in.

Recommendations for Agency Action:

In order to improve and build on transformation efforts under way at 
SBA, we recommend that the Administrator adopt key practices that have 
helped other organizations succeed in transforming their organizations. 
Based on our review of SBA's initial implementation of phase one of its 
transformation, we specifically recommend that the Administrator:

* Clarify for employees, congressional, and other stakeholders the 
leadership and implementation team members who are guiding 
transformation.

* Finalize the draft transformation plan that clearly states SBA's 
strategic goals for transformation and includes implementation goals, 
timeline, and resource requirements, and share the plan with 
stakeholders and employees.

* Develop performance goals that reflect the strategic goals for 
transformation and more clearly link the strategic goals of 
transformation to existing performance goals. In addition, develop 
budget requests that clearly link resource needs to achieving these 
strategic and performance goals.

* Ensure that the new performance management system is clearly linked 
to well-defined goals to help individuals see the connection of their 
daily activities and organizational goals and encourage individuals to 
focus on their roles and responsibilities to help achieve those goals.

* Develop a communication strategy that facilitates and promotes 
frequent and two-way communication between senior managers and 
employees and between the agency and its stakeholders, such as Congress 
and SBA's lenders. For example, SBA could electronically post 
frequently asked questions and answers on its Intranet.

* Facilitate employees' involvement by soliciting ideas and feedback 
from its union and staff, ensuring that their concerns and ideas are 
considered. For example, SBA could develop employee teams and expand 
employee feedback mechanisms like those it employed in the pilot 
training.

Agency Comments:

We received written comments on a draft of this report from SBA's Chief 
Financial Officer, which are reprinted in appendix I. In commenting on 
the draft, SBA did not state whether it concurred with our 
recommendations but said it would consider them as it continues to plan 
for and implement its transformation efforts. SBA specifically noted 
that it had already addressed recommendations regarding developing 
performance goals and using the performance management system to define 
responsibility as a result of issuing a new strategic plan with revised 
performance goals and implementing its new performance management 
system for employees on October 1, 2003. SBA provided us with a draft 
strategic plan but then told us that the plan was being revised 
significantly and that we should wait until the revised plan was 
completed. Since this revised strategic plan was issued after we had 
completed our work, we did not have time to determine whether SBA had 
sufficiently addressed our recommendations related to linking its 
transformation efforts to strategic and performance goals and 
performance expectations for employees. Therefore, these 
recommendations will remain in the report, and we will determine 
whether SBA has implemented the recommendations as part of our 
recommendation follow-up process.

SBA disagreed with our finding that its budget requests for 
transformation were unclear. SBA stated that it clearly lays out its 
funding requests for transformation in the Fiscal Year 2003 and Fiscal 
Year 2004 Budget Request and Performance Plans. We used these documents 
to review SBA's budget requests for transformation and as the source 
for our analysis shown in figure 4 of the report. In its comments, SBA 
said that it had made changes to its budget format in fiscal year 2004 
to bring it more in line with the requirements of the Results Act by 
integrating budget with performance goals. We clarified some language 
in the final report to better reflect the issues we identified with 
SBA's transformation budget requests. While the fiscal year 2004 budget 
request may have at some level integrated its budget request with 
performance goals for its programs, it did not make clear linkages 
between its request for transformation funds and its performance goals. 
The budget requests for transformation were not consistent in terms of 
amounts requested or stated purposes nor were they accompanied by a 
detailed plan that showed priorities and linked resources to desired 
transformation results. Therefore, we still maintain that SBA could 
improve its transformation budget request presentation to better ensure 
that it links the request to transformation performance goals and 
outcomes.

SBA also disagreed with our findings related to communication and 
employee involvement. SBA stated that officials have traveled to the 
pilot district offices to explain the agency's transformation plans and 
solicited comments from district directors in a May 2002 district 
director conference. However, our draft report did not state that 
management was not involved or was uninformed, but that employees below 
the district director level in the pilot offices were not sufficiently 
involved and informed. Furthermore, SBA cites its efforts to 
communicate prior to the implementation of the pilots, which we recited 
in our draft report, but employees told us that their level of 
involvement and the amount of information they received was lacking 
after the pilot began. In its comments, SBA also stated that it 
conducts weekly telephone calls with the pilot district directors who 
in turn have regular meetings with their employees. Our draft report 
acknowledged SBA's use of conference calls with the district directors 
and the expectation that directors would then have meetings with their 
employees. However, we also found that notwithstanding communications 
with district directors, district office employees remained confused 
and lacked avenues for two-way communication with headquarters about 
the transformation. SBA also stated that it has worked with its union 
to gain agreement through memorandums of understanding for different 
parts of the plan, and these efforts were reflected in our draft 
report. However, in more than one discussion with us, union officials 
expressed concerns that SBA had approached them after having already 
decided what it was going to do and had not adequately informed the 
union about new initiatives or changes to the plan. We continue to 
maintain that SBA's transformation efforts could benefit from improved 
communication and employee involvement.

SBA also provided technical corrections, which we incorporated as 
appropriate in this report.

Objectives, Scope, and Methodology:

In preparing this report, we focused on the district office and 
centralization pilots of phase one of SBA's transformation effort 
because (1) they were initiatives that had begun at about the same time 
we began our review and, therefore, we could observe the implementation 
process and (2) these pilot initiatives, if expanded, would impact all 
68 SBA district offices.

To determine SBA's progress in implementing its transformation effort 
and challenges that have or could impede progress, we analyzed 
planning, budget, and implementation documents related to SBA's 
transformation and interviewed key officials at SBA headquarters 
involved in the transformation planning and implementation processes. 
We also conducted site visits at each of the pilot offices involved in 
the first phase--three district office pilots in Phoenix, Arizona; 
Miami, Florida; and Charlotte, North Carolina; and two center pilots in 
Santa Ana and Sacramento, California. At the center locations, we 
reviewed documents that were developed to make the process more 
efficient and consistent (for example, checklists and standardized 
letters). We also reviewed measures that SBA is using to assess the 
centralization pilots. From data SBA headquarters uses to track the 
pilots, we reviewed about 450 approvals for the 504 loan program pilot 
and calculated an average total response and processing time using the 
dates that were included in the data. At each of the pilot locations, 
we interviewed all employees who were directly affected by the pilot--
in the case of the district offices, we met with virtually all 
employees.[Footnote 17] To ensure open communication, we met with 
directors, supervisors, and employees separately. We asked them to 
describe how their office, role, and job had changed; how information 
was communicated to them about transformation; and whether they had 
been provided training and resources to transition into new roles. We 
also asked them to identify the top five or fewer challenges and 
benefits of transformation and lessons learned from the initial 
implementation process.

To assess whether SBA applied practices that are important to 
organizational change and human capital management in the federal 
government, we reviewed the literature and our previous work on 
reorganizations, organizational change, and human capital management to 
identify key practices that have been recognized as contributing to 
successful organizational transformation. The main document we relied 
on in identifying key practices was our recent report Results Oriented 
Cultures: Implementation Steps to Assist Mergers and Organizational 
Transformations.[Footnote 18] We used these criteria as a basis to 
assess SBA's planning process for transformation, implementation 
process for the pilots for phase one, leadership of the transformation, 
communication with employees and key stakeholders, and level of 
employee involvement. When interviewing SBA employees for objective 
one, we also asked questions to determine their understanding of the 
transformation effort and how they received information and 
communicated their questions or concerns. In addition to talking with 
employees involved in the pilots, we also interviewed representatives 
of SBA's union and asked the extent to which they were involved in the 
transformation process. To obtain feedback from SBA stakeholders, we 
interviewed officials representing the National Association of 
Government Guaranteed Lenders and the National Association of 
Development Companies, whose members include SBA 7(a) lenders and 
certified development companies that make 504 loans, respectively. We 
also met with SBA's congressional stakeholders who expressed views 
about their role in SBA's transformation process.

We conducted our work in Washington, D.C; Phoenix, Arizona; Sacramento 
and Santa Ana, California; Miami, Florida; and Charlotte, North 
Carolina, between February and September 2003, in accordance with 
generally accepted government auditing standards.

:

Unless you publicly announce its contents earlier, we plan no further 
distribution until 30 days after the date of this report. At that time, 
we will send copies of the report to the Ranking Minority Member of the 
Senate Committee on Small Business and Entrepreneurship, the Ranking 
Minority Member of the House Committee on Small Business, other 
interested congressional committees, the Administrator of the Small 
Business Administration, and the Director of the Office of Management 
and Budget. We will make copies available to others on request. This 
report will also be available at no charge on the GAO Web site at 
http:/www.gao.gov.

Signed by:

Please contact me at (202) 512-8678, [Hyperlink, dagostinod@gao.gov] 
dagostinod@gao.gov or Katie Harris at (202) 512-8415, [Hyperlink, 
harrism@gao.gov] harrism@gao.gov if you or your staff have any 
questions. Major contributors to this report were Patty Hsieh, Kay 
Kuhlman, and Rose Schuville.

Signed by: 

Davi M. D'Agostino: 
Director, Financial Markets and Community Investment:

[End of section]

Appendixes: 

Appendix I: Comments from the Small Business Administration:

U.S. SMALL BUSINESS ADMINISTRATION WASHINGTON, DC 20416:

Ms. Davi M. D'Agostino Director:

Financial Markets and Community Investment: 
U.S. General Accounting Office: 
Washington, DC 20548:

Dear Ms. D'Agostino:

Thank you for the opportunity to comment on your draft report "Small 
Business Administration: Progress Made But Transformation Could Benefit 
From Practices Emphasizing Transparency and Communication" (GAO-04-
76). SBA will take into consideration your recommendations as it 
continues to plan for and execute its transformation efforts.

SBA's transformation has three major objectives to assist in fulfilling 
the Agency's mission: increasing the number of people in our field 
offices who are directly assisting small businesses, reducing the cost 
of SBA operations not directly related to assisting small businesses, 
and ensuring that key positions in all field offices are filled with 
capable professionals. As has been reflected in discussions with your 
staff, SBA must act now to address the imbalances in its workforce. The 
Agency is doing this through establishing alternate work sites within 
districts, centralizing or eliminating "back room operations," and more 
effectively managing its workforce so SBA staff can directly interact 
with the community more frequently. These changes will not adversely 
affect our products and services, but will allow us to better meet the 
needs of our clients.

After reviewing your draft report, SBA has several comments on the 
document and the recommendations you have put forward. SBA's workforce 
transformation plan, as initially presented to GAO and Congress in a 
July 2002 hearing, was an initial draft. This draft was based on 
findings by GAO, SBA's Inspector General and SBA's own internal audits. 
As you correctly stated in the draft report, the purpose of 
transformation is to make SBA a cost effective and cost efficient 
organization that successfully fulfills its mission. To accomplish this 
SBA is reengineering its processes and realigning its personnel and 
making maximum use of technology within the restraints of budgetary 
realities and Congressional mandates. By necessity, SBA's 
transformation plan needs to be flexible. The plan and subsequent 
timetable have continually been revised due to changing financial 
situations and Congressional intervention as well as analyzing what 
worked and didn't work in the pilots.

SBA disagrees with your assessment that it did not provide clear budget 
requests for transformation. In both SBA's FY 2003 and FY 2004 Budget 
Request and Performance Plan, the Agency clearly lays out its funding 
request for efforts under the transformation umbrella. SBA did change 
its budget format in FY 2004 to bring it more in line with the 
requirements of GPRA by integrating its budget with performance goals. 
This relates to SBA's most recent strategic 
plan, released earlier this month, which we regret was released too 
late for your review. The new plan further integrates SBA's performance 
measures with outcomes and strategic goals, allowing a clear line of 
sight between all measures. SBA feels this strategic plan addresses 
your expressed belief that the goals of transformation are not directly 
tied to performance goals or SBA's strategic goals. SBA feels the new 
plan also better ties budgets to performance, addressing your concerns 
mentioned above.

SBA disagrees that it did not benefit from employee perspectives or 
attempt to gain employee support. SBA officials traveled to pilot 
district offices to explain on the Agency's plans for transformation, 
and as you note later in the report, SBA employees in the pilots 
expressed more support for the change. Also, senior Agency officials 
have been addressing the field staff since 2002 on transformation 
efforts and solicited comments on the Agency's well being in May 2002 
during its district director's conference. In addition, SBA conducts 
weekly phone calls with the pilot district directors which include the 
Administrator or Deputy Administrator, the senior officials in 
headquarters involved with transformation, as well as the district 
directors and regional administrators of the pilot offices to 
communicate any changes, problems, and successes. District directors, 
in turn, have regular meetings with their employees. Comments and 
results are used in tailoring the plan to the varied districts' needs. 
To the extent practicable and beyond the requirements in the union 
contract, SBA has worked with its union to gain MOU agreements in going 
forward with different parts of the plan. Finally, SBA is expanding its 
efforts to keep its Congressional overseers informed of the progress 
and plans of transformation.

SBA believes it has already addressed draft recommendations 3 and 4 
through the development of SBA's new strategic plan and the 
implementation of its new performance measurement system for its 
employees. The new performance system went into effect in October 2002 
for supervisors and members of the SES and on October 1, 2003 for all 
remaining employees. SBA also believes that the opportunity is 
available for employees to raise their concerns to management through 
their district directors or immediate supervisor. SBA's senior 
management did engage district directors in the conferences it has had 
over the past 2 years on the transformation issue. These events have 
been, and will continue to be, open forums for district directors to 
express their ideas. It is also worth noting that the expansion of 
phase one of transformation will be to over 20 volunteer district 
offices.

Attached you will find some specific comments that SBA feels will 
enhance the accuracy of your report. Thank you for taking our views 
into consideration.

Sincerely,

Signed by: 

Thomas Dumaresq: 
Chief Financial Officer: 

Attachment:

(250119):

FOOTNOTES

[1] U.S. General Accounting Office, Small Business Administration: 
Current Structure Presents Challenges for Service Delivery, GAO-02-17 
(Washington, D.C.: Oct. 26, 2001).

[2] SBA's resource partners include organizations such as Small 
Business Development Centers and Women's Business Centers that provide 
management and technical assistance and the Service Corps of Retired 
Executives (SCORE) chapters in which volunteer business executives 
counsel small businesses and potential entrepreneurs.

[3] House Committee on Small Business, Subcommittee on Workforce, 
Empowerment, and Government Programs, Maximizing Organization and 
Leadership in a Federal Agency to Fulfill Its Statutory Mission: 
Restructuring of the Small Business Administration, 107TH Cong., 2ND 
sess., 2002.

[4] The main document we relied on in identifying key practices was our 
recent report, U.S. General Accounting Office, Results Oriented 
Cultures: Implementation Steps to Assist Mergers and Organizational 
Transformations, GAO-03-669 (Washington, D.C.: July 2, 2003).

[5] Liquidation is the act of enforcing collection on a debt that has 
defaulted by selling underlying securities that the borrower has 
pledged as collateral. If collateral proceeds are insufficient to cover 
the outstanding balance, lenders may pursue personal guarantees or 
obligations provided by business owners or others in support of the 
loan.

[6] U.S. General Accounting Office, Small Business Administration: 
Workforce Transformation Plan Is Evolving, GAO-02-931T (Washington, 
D.C.: July 16, 2002).

[7] Consolidated Appropriations Resolution FY 2003, (H.J. Res. 2) Pub. 
L. 108-7, Div. B, Title VI, § 605 (2003).

[8] If Congress has not enacted an annual appropriations for an agency 
by the beginning of a fiscal year the agency must begin an orderly 
shutdown of most of its activities and operations due to the funding 
gap, unless Congress passes a continuing resolution. A continuing 
resolution is a temporary appropriations authorizing an agency to incur 
obligations during an interim period at a fixed rate until Congress 
enacts the annual appropriations for the agency.

[9] During his statements on June 4 and February 26, 2003, regarding 
SBA's fiscal year 2004 budget request, before the Senate Committee on 
Small Business & Entrepreneurship and the House Committee on Small 
Business, SBA's Administrator, Hector V. Barreto, indicated that its 
budget request included $8.8 million for its transformation effort in 
fiscal year 2004.

[10] Prior to February 2003, SBA had 70 district offices. In February 
2003, SBA notified Congress of its intent to designate two of its 
district offices--Spokane, Washington; and Cedar Rapids, Iowa--as 
branch offices and this change was formally made in September 2003.

[11] U.S. General Accounting Office, Highlights of a GAO Forum: Mergers 
and Transformation: Lessons Learned for a Department of Homeland 
Security and Other Federal Agencies, GAO-03-293SP (Washington, D.C.: 
Nov. 14, 2002).

[12] U.S. General Accounting Office, Results-Oriented Cultures: 
Implementation Steps to Assist Mergers and Organizational 
Transformations, GAO-03-669 (Washington, D.C.: July 2, 2003).

[13] This position was still vacant as of October 23, 2003.

[14] U.S. General Accounting Office, Managing for Results: Emerging 
Benefits from Selected Agencies' Use of Performance Agreements, GAO-01-
115 (Washington, D.C.: Oct. 30, 2000).

[15] U.S. General Accounting Office, Executive Guide: Effectively 
Implementing the Government Performance and Results Act, GAO/GGD-96-118 
(Washington, D.C.: June 1996).

[16] National Academy of Public Administration, Equal Employment 
Opportunity Commission: Organizing for the Future (February 2003). This 
report also includes the Academy's observations on the IRS 
restructuring.

[17] For employees that were not available at the time of our visits, 
we followed up through telephone calls, in most cases.

[18] GAO-03-669, July 2003.

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