Best Practices:

Improved Knowledge of DOD Service Contracts Could Reveal Significant Savings

GAO-03-661: Published: Jun 9, 2003. Publicly Released: Jun 9, 2003.

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Department of Defense (DOD) spending on service contracts approaches $100 billion annually, but DOD's management of services procurement is inefficient and ineffective and the dollars are not always well spent. Recent legislation requires DOD to improve procurement practices to achieve savings. Many private companies changed management practices based on analyzing spending patterns and coordinating procurement in order to achieve major savings. This report evaluates five companies' best practices and their conduct and use of "spend analysis" and the extent that DOD can pursue similar practices.

The leading commercial companies GAO studied reported achieving and expecting to achieve billions of dollars in savings by developing companywide spend analysis programs and service-contracting strategies. Spend analysis answers basic questions about how much is being spent for what services, who are the suppliers, and where are the opportunities for leveraged buying to save money and improve performance. To obtain these answers, companies extract internal financial data, supplement this data with external data, organize the data into categories of services and suppliers, and have the data analyzed by managers or cross-functional teams to plan and schedule what services will be bought on a company wide basis. The results of spend analysis are also used for broader strategic purposes--to develop reports for top management, to track financial and other benefits achieved by the company, and to further improve and centralize corporate procurement processes. DOD is in the early stages of a spend analysis pilot. Although DOD is moving in the right direction, it has not yet adopted best practices to the same extent as the companies we studied. Whether DOD can adopt these practices depends on its ability to make long-term changes necessary to implement a more strategic approach to contracting. DOD also cites a number of challenges, such as its large and complex need for a range of services, the fragmentation of spending data across multiple information systems, and contracting goals for small businesses that may constrain its ability to consolidate smaller requirements into larger contracts. Challenges such as these are difficult and deep-rooted, but companies also faced them. For DOD to change management practices for the contracting of services will require sustained executive leadership at DOD as well as the involvement and support of Congress.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In response to this recommendation, DOD is in the process of developing a spend analysis system that can be used to present relevant spending reports to appropriate decisionmakers to establish strategic savings and performance goals, assign accountability, and measure results. Specifically, DOD launched an agencywide Services Sourcing Program to demonstrate several of the key tenets of strategic sourcing. DOD's objectives are consistent with GAO's recommendation, including developing a repeatable, operational business process for analyzing services commodity groups for sourcing. With this program, DOD plans to (1) develop department-wide cross-functional acquisition strategies in order to improve total cost of ownership for acquired services, (2) leverage commercial best practices in order to streamline and standardize DOD acquisition business processes, and (3) improve overall skills of DOD acquisition staff through the utilization of commercial tools and processes. DOD has embraced GAO's recommendation to arm decisionmakers with relevant spending reports to establish savings and performance goals, assign accountability, and measure results. For example, explicit success factors identified by DOD include (1) standardizing service commodity categories, (2) achieving a high level of data automation to increase spending visibility, (3) mandatory utilization of new strategic contracts and holding purchasers accountable for non-compliant spending, and (3) strong senior leadership governance to oversee the program, provide strategic direction, and help achieve buy-in. By October 2004, DOD expects to develop the program's services strategic sourcing process, develop a concept of operations to document the process, and a communications plan for internal and external stakeholders. In fiscal year 2005 and beyond, DOD expects to institutionalize the process and expand to all facets of services acquisitions.

    Recommendation: To achieve significant improvements across the range of services DOD purchases, the Secretary of Defense should direct the Under Secretary of Defense for Acquisition, Technology, and Logistics to work with the military departments and other DOD organizations involved in the spend analysis pilot to adopt the effective processes employed by leading companies. Key elements of DOD's approach should address presenting relevant spending reports to appropriate decision makers to establish strategic savings and performance goals, assign accountability, and measure results.

    Agency Affected: Department of Defense

  2. Status: Closed - Implemented

    Comments: In response to this recommendation and previous GAO work, DOD is in the process of promoting enterprise collaboration aimed at gaining the best value through the establishment of one to three cross-functional commodity teams to develop strategic sourcing projects for services based on enterprise spend analysis. As of June 2004, the DOD-Wide Services Sourcing Program is piloting a demonstration of several of the key tenets of strategic sourcing. The program will define how, from an operational perspective, certain DOD-wide commodity services will be analyzed for identifying strategic sourcing opportunities to minimize acquisition costs through leveraged buying. In launching this program in 2003, DOD acknowledges that the department is not leveraging across the agency when individual units are making many of the same purchases from the same suppliers at different prices. In 2004, DOD used the results of a contractor's analysis of DOD-wide services spending trends to establish the first cross-functional Administrative Services Commodity Team, and plans to establish two more commodity teams for Medical Services and Information Technology Services. DOD has also hired a contractor team with commercial experience to support the teams with expertise, additional spend analyses, facilitate application of standard strategic sourcing business processes, and improve overall skills of DOD acquisition workforce in using more collaborative, knowledge-based purchasing strategies. In May 2004, DOD also established a multi-tiered governance or management structure to provide senior leadership oversight and strategic direction for the program. The structure includes a Governance Board led by the Director, Defense Acquisition and Procurement Policy and the Senior Acquisition Executives for the Army, Navy, Air Force, Missile Defense Agency, and Defense Logistics Agency. Below the board is an Integrated Process Team comprised of senior procurement managers from the same agencies as well as the Office of the Secretary of Defense and a Program Management Office to execute day-to-day activities. By October 2004, DOD expects to develop the services strategic sourcing process, develop a concept of operations to document the process, and a communications plan for internal and external stakeholders. In fiscal year 2005 and beyond, DOD expects to institutionalize the process and expand to all facets of services acquisitions.

    Recommendation: To achieve significant improvements across the range of services DOD purchases, the Secretary of Defense should direct the Under Secretary of Defense for Acquisition, Technology, and Logistics to work with the military departments and other DOD organizations involved in the spend analysis pilot to adopt the effective processes employed by leading companies. Key elements of DOD's approach should address promoting enterprise collaboration aimed at gaining the best value, including the establishment of cross-functional teams to continue developing strategic-sourcing projects.

    Agency Affected: Department of Defense

  3. Status: Closed - Implemented

    Comments: DOD is in the process of developing new spend analysis technology that will include reviewing data for accuracy and consistency and organizing the data by commodity and supplier categories in order to identify opportunities to leverage buying power. In response to GAO's report, DOD acknowledges its currently limited insight into what it buys and from whom it buys at the enterprise level. DOD agrees that existing spend information resides in numerous disparate data systems located throughout the department and there is little coordination between procurement offices that are purchasing the same or similar services, resulting in lost opportunities to leverage DOD's vast buying power to obtain lower prices from suppliers. As a result, DOD acquisition and technology managers are working with contractors on an 11-month effort to develop the "Acquisition Spend Analysis Pilot." DOD's new system will use web-based technology to link disparate data sources belonging to the Army, Navy, Air Force, and Missile Defense Agency, as well as business intelligence software to create an aggregated, central spend analysis data source. This "virtual" spend data warehouse will provide a common definition of spend--by type of product, service, and supplier--across DOD components as well as a complete view of spend data. The DOD-wide spend analysis system will provide an ad hoc capability that can be used by strategic sourcing commodity teams to identify high-volume, high-dollar categories of services and product spending and opportunities for strategic purchasing, which will result in cost savings and quality improvements. DOD expects to complete development of the spend analysis system by November 2004.

    Recommendation: To achieve significant improvements across the range of services DOD purchases, the Secretary of Defense should direct the Under Secretary of Defense for Acquisition, Technology, and Logistics to work with the military departments and other DOD organizations involved in the spend analysis pilot to adopt the effective processes employed by leading companies. Key elements of DOD's approach should address reviewing purchase data for accuracy and consistency, organizing the data by commodity and supplier categories in order to identify opportunities to leverage buying power.

    Agency Affected: Department of Defense

  4. Status: Closed - Implemented

    Comments: DOD is in the process of developing new spend analysis technology that will supplement internal data with external business intelligence to gain a more complete picture of DOD spending and refine analysis. In response to GAO's report, DOD acknowledges its currently limited insight into what it buys and from whom it buys at the enterprise level. DOD agrees that each military service and agency procures goods and services across the department with little coordination between procurement offices that are purchasing the same or similar services. As a result, DOD acquisition and technology managers are working with contractors on an 11-month effort to develop the "Acquisition Spend Analysis Pilot." DOD's spend analysis pilot architecture includes pulling spending data from disparate and multiple internal sources into a central data warehouse and then mapping and transforming the data with supplemental business intelligence data on suppliers into a common framework in order to refine analysis. For example, in addition to capability for customized, ad hoc reports, the pilot system will produce standardized reports on supplier diversity, total dollars, and concentration. DOD expects to complete development of the spend analysis system by November 2004.

    Recommendation: To achieve significant improvements across the range of services DOD purchases, the Secretary of Defense should direct the Under Secretary of Defense for Acquisition, Technology, and Logistics to work with the military departments and other DOD organizations involved in the spend analysis pilot to adopt the effective processes employed by leading companies. Key elements of DOD's approach should address supplementing internal data with external information such as purchase card expenditures and business intelligence to gain a more complete picture of DOD spending and to refine analysis.

    Agency Affected: Department of Defense

  5. Status: Closed - Implemented

    Comments: DOD is in the process of developing new spend analysis technology to extract internal business intelligence and procurement data from disparate and multiple systems to gain a comprehensive and reliable view of spending. DOD acquisition and technology managers are working with contractors on an 11-month effort to develop the "Acquisition Spend Analysis Pilot." DOD's pilot objectives include proving that it is possible, from a DOD-wide perspective, to reduce the complexity of data integration by pulling data from disparate data sources, including Army, Missile Defense Agency, Air Force, and Navy contract management systems, as well as other internal systems. DOD also expects the new spend analysis system to increase the amount of information and automate the data collection used to support the DOD-wide services strategic sourcing program. DOD expects to complete development of the spend analysis system by November 2004.

    Recommendation: To achieve significant improvements across the range of services DOD purchases, the Secretary of Defense should direct the Under Secretary of Defense for Acquisition, Technology, and Logistics to work with the military departments and other DOD organizations involved in the spend analysis pilot to adopt the effective processes employed by leading companies. Key elements of DOD's approach should address using accounts payable and other internal financial and procurement data to gain a comprehensive and reliable view of spending.

    Agency Affected: Department of Defense

  6. Status: Closed - Implemented

    Comments: DOD is in the process of developing new technology to centrally automate the spend analysis process to make it repeatable. Following the release of GAO's report in 2003, the Deputy Secretary of Defense directed establishment of an information technology (IT) investment fund to accelerate "net-centric" business transformation by fielding business case-driven proof of concept pilot projects. In response to this initiative, DOD fund managers selected the "Acquisition Spend Analysis Pilot" as the top pilot among 124 submissions. Since then, pilot managers have (1) worked with contractors on an 11-month effort to develop spend analysis capability that can be scalable across DOD, and (2) proven that it is possible, from a DOD-wide perspective, to reduce the complexity of data integration, to pull data from disparate data sources, to map and organize the data into a common taxonomy of products, services, and suppliers, produce DOD enterprise spend reports, and increase the amount of information and automate the data collection used to support the DOD-wide services strategic sourcing program. DOD expects to complete development of the spend analysis data automation system by November 2004.

    Recommendation: To achieve significant improvements across the range of services DOD purchases, the Secretary of Defense should direct the Under Secretary of Defense for Acquisition, Technology, and Logistics to work with the military departments and other DOD organizations involved in the spend analysis pilot to adopt the effective processes employed by leading companies. Key elements of DOD's approach should address using technology to centrally automate the spend analysis process to make it repeatable.

    Agency Affected: Department of Defense

  7. Status: Closed - Implemented

    Comments: Although DOD did not concur with the recommendation to develop a plan to institute changes in the management structure and services contracting business processes and to do so as part of its 2005 budget submission, action is being taken that will accomplish the intended result. Specifically, in part in response to GAO's recommendations, DOD senior acquisition executives in January 2005 approved a Concept of Operations (i.e., plan) for strategically sourcing services. The approved Concept of Operations for the DOD-Wide Strategic Sourcing Program is more than responsive to GAO's June 2003 recommendation. This is so because DOD has not only developed a plan for accomplishing changes in management structure and business processes, but because the plan has a broader scope than what GAO originally recommended. That is, the DOD-wide strategic sourcing program focuses not just on the acquisition of services, the program will also be used to strategically source more products, potentially saving DOD billions of dollars more by leveraging buying power across the widest range of acquisitions. Moreover, consistent with GAO's recommendation, DOD's new strategic sourcing program plan is based on the results of the agency-wide spend analysis pilot described in GAO's June 2003 report, and calls for ongoing and comprehensive spend analysis to continue to guide strategic sourcing in the future. Importantly, DOD's new plan also has put into place the type of changes in management structure called for in our June 2003 report, which will be critical to ensuring DOD's success in taking a more strategic approach to the acquisition of services. For example, in February 2005, DOD established a Strategic Sourcing Directors Board, with membership comprised of senior individuals within each military department and other defense agencies, as well as the chief financial officers and chief information officers organizations. The Strategic Sourcing Directors Board members are responsible for the oversight of their respective strategic sourcing programs and will report to the high-level Acquisition Governance Board that was established in March 2004 (comprised of the Director of Defense Procurement and senior acquisition executives for the military departments and defense agencies). In July 2005, the rounded-out DOD-wide governance structure will replace the ad-hoc integrated process team that has been piloting strategic sourcing and using spend analysis since 2003. The new Strategic Sourcing Directors Board is responsible for ensuring adequate oversight of DOD-wide commodity councils. Consistent with GAO's recommendation, DOD expects that the Board will develop a plan and a schedule for moving forward in 2005 on the initial commodity councils' sourcing strategies for clerical administrative support services and wireless services later. In the near future, DOD expects the Board to establish additional roll-out organizations and managers to support more DOD-wide or service-level commodity councils and track the results of the DOD-wide strategic sourcing program through consolidated sourcing performance reports.

    Recommendation: To ensure that DOD moves forward in a timely manner on its commitment for taking a more strategic approach to the acquisition of services, the Secretary of Defense should direct the Under Secretary of Defense for Acquisition, Technology, and Logistics to develop a plan and a schedule for accomplishing changes in management structure and business processes for contracting for services. The plan and schedule should be based on the results of the spend analysis pilot and should be submitted to the congressional defense committees for consultation and approval as part of the fiscal year 2006 budget submission and justification process.

    Agency Affected: Department of Defense

 

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