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entitled 'Best Practices: Using Spend Analysis to Help Agencies Take a 
More Strategic Approach to Procurement' which was released on September 
16, 2004.

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Report to the Committee on Governmental Affairs, U.S. Senate, and the 
Committee on Government Reform, House of Representatives:

United States Government Accountability Office:

GAO:

September 2004:

Best Practices:

Using Spend Analysis to Help Agencies Take a More Strategic Approach to 
Procurement:

GAO-04-870:

GAO Highlights:

Highlights of GAO-04-870, a report to the Committee on Governmental 
Affairs, U.S. Senate, and the Committee on Government Reform, House of 
Representatives: 

Why GAO Did This Study:

Spend analysis is a tool that provides knowledge about who are the 
buyers, who are the suppliers, how much is being spent for what goods 
and services, and where are the opportunities to leverage buying power. 
Private sector companies are using spend analysis anas a foundation 
for employing a strategic approach to procurement. 

Recognizing the potential in government purchasing, GAO as a tool 
for strategically identifying significant benefits opportunities 
examined if with goods and services spending in 2002 totaling $30.2 
billionacquired the departments of Agriculture, Health and Human 
Services (HHS), Justice, Transportation, and Veterans Affairs are 
using spend analysis to take a strategic approach. are using to take a 
more strategic approach to acquisition. GAO assessed (1) if agencies 
use spend analysis to obtain knowledge to improve procurement of goods 
and services and to reduce procurement costs,(2) how agencies 
practices compare to leading companies best practices. 

What GAO Found:

Taking a strategic approach to procurement involves a range of 
activitiesfrom using spend analysis to taking an enterprisewide 
approach to buying goods and services. Three of the five surveyed 
agencies have begun to use spend analysis to obtain knowledge and 
improve their spending for goods and services. Veterans Affairs 
success in using spend analysis and a strategic approach to 
pharmaceutical procurement helped save $394 million in 2003. Currently, 
agency teams are organizing medical-equipment and supplies purchase 
data to develop national contracts to save an estimated $82 million a 
year. Spend analysis is being used by HHS to support strategic 
sourcing of office-related equipment and supplies through discount 
agreements with major vendors that could save an estimated $9.5 million 
per year. Agriculture used a 2001 spend analysis to negotiate a 
discount agreement for office supplies that yielded savings of $1.8 
million to date and is identifying more such opportunities. 
Agriculture is also modernizing its acquisition system to develop 
automated data-mining, spend analysis, and reporting capabilities to 
support future opportunities. The departments of Justice and 
Transportation have not yet used spend analyses to support a more 
strategic approach to procurement. 

Veterans Affairs, HHS, and Agriculture have made good progress using 
spend analysis to improve their procurements, and they have adopted 
some elements of a strategic approach. Implementing spend analysis is 
challenging and can take time, and the agencies have not yet adopted 
the full range of private sector best practices. (See table.) Fully 
adopting the supporting structure, process, and role changes that 
companies institute would enable these agencies to move away from a 
fragmented procurement process and determine how effective they are in 
using spend analysis to achieve significant savings. 

[See PDF for image]

[End of figure]

What GAO Recommends:

This report includes recommendations to help Veterans Affairs, 
Agriculture, and HHS adopt the full range of spend analysis best 
practices. This report also includes recommendations intended to help 
Justice and Transportation step up the process of gaining knowledge of 
their spending to take a more strategic approach to procurement. GAO 
received written and oral comments on a draft of this report. The 
agencies generally agreed with GAOs findings and recommendations.

www.gao.gov/cgi-bin/getrpt?GAO-04-870.

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

[End of section]

Contents:

Letter:

Scope and Methodology:

Results in Brief:

Background:

Agencies Have Begun Analyzing Spending Trends to Improve Knowledge and 
Procurement:

Agencies Have Not Adopted Full Range of Spend Analysis Best Practices 
and Lack Some Supporting Structure, Processes, and Roles:

Conclusions:

Recommendations for Executive Action:

Agency Comments and Our Evaluation:

Appendix I: GAO Analyses of Agencies' Spend Analysis Practices:

Appendix II: Comments from the Department of Veterans Affairs:

Appendix III: Comments from the Department of Health & Human Services:

Appendix IV: Comments from the Department of Agriculture:

Appendix V: Comments from the Department of Justice:

Tables:

Table 1: Veterans Affairs Spend Analysis Practices:

Table 2: Health and Human Services Spend Analysis Practices:

Table 3: Agriculture Spend Analysis Practices:

Figure:

Figure 1: Broad Principles and Practices of Leading Companies' 
Strategic Approach:

Abbreviations:

DOD: Department of Defense:

FPDS: Federal Procurement Data System:

GSA: General Services Administration:

HHS: Health and Human Services:

IT: information technology:

United States Government Accountability Office:

Washington, DC 20548:

September 16, 2004:

The Honorable Susan M. Collins: 
Chairman: 
The Honorable Joseph I. Lieberman: 
Ranking Minority Member: 
Committee on Governmental Affairs: 
United States Senate:

The Honorable Tom Davis: 
Chairman: 
The Honorable Henry A. Waxman: 
Ranking Minority Member: 
Committee on Government Reform: 
House of Representatives:

Taking a strategic approach to procurement involves a range of 
activities--from using "spend analysis" to develop a better picture of 
what an agency is spending on goods and services, to taking an 
enterprisewide approach for procuring goods and services, to developing 
new ways of doing business. Our prior work has shown that such an 
approach could help agencies leverage their buying power, reduce costs, 
and better manage suppliers of goods and services, as leading private 
sector companies have discovered on adopting these activities. One 
survey of 147 companies in 22 industries indicated that such an 
approach produced savings of more than $13 billion in 2000.[Footnote 1]

Spend analysis is a tool that provides companies knowledge about how 
much is being spent for what goods and services, who are the buyers, 
and who are the suppliers, thereby identifying opportunities to 
leverage buying, save money, and improve performance. To obtain these 
answers, companies use a number of practices involving automating, 
extracting, supplementing, organizing, and analyzing procurement data. 
Companies establish automated systems to extract and compile internal 
financial data covering everything they buy; supplement that data with 
information from external sources; organize this data into complete and 
consistent categories of products, services, and suppliers; and have 
the data continually analyzed. Companies then leverage this data to 
institute a series of structural, process, and role changes aimed at 
moving away from a fragmented procurement process to a more efficient 
and effective corporate process in which managers make decisions on a 
companywide basis.

We have already issued several reports examining the benefits of using 
a strategic approach to procurement and spend analysis at the 
Department of Defense.[Footnote 2] Recognizing the potential that 
similar use might offer in civilian areas of government purchasing, on 
the initiative of the Comptroller General, we reviewed the activities 
of five federal agencies--the departments of Agriculture, Health and 
Human Services (HHS), Justice, Transportation, and Veterans Affairs--
whose goods and services spending totaled almost $37.2 billion in 
2003.[Footnote 3] Specifically, we assessed (1) if these agencies are 
using spend analysis to obtain knowledge to improve procurement of 
goods and services and (2) how these agencies' spend analysis practices 
compare to leading companies' best practices, including whether 
agencies have in place the supporting structure, processes, and roles 
to effectively use the results of spend analysis. We are addressing 
this report to you because of your jurisdiction over the efficiency, 
economy, and effectiveness of all agencies and departments of the 
government.

Scope and Methodology:

To conduct this work, we obtained information from the five agencies 
about how they used spend analysis in support of a more cost effective 
approach to procurement. We interviewed senior procurement management 
officials at departmental headquarters to obtain information and views 
about any agencywide spend analysis efforts and how such efforts 
compared to leading companies' best practices identified in our recent 
work.[Footnote 4] We reviewed internal memorandums and other documents 
related to ongoing or proposed agency procurement reforms that 
leveraged buying power, cut costs, and achieved other performance 
benefits. For background on the agencies' contract and purchase card 
spending on goods and services, we used summary fiscal year 2003 
Federal Procurement Data System (FPDS) data from the General Services 
Administration (GSA).[Footnote 5] Because we used FPDS data for 
information purposes and not to support our findings, we did not verify 
the data.[Footnote 6] We also did not verify the accuracy of any 
strategic procurement costs savings reported to us by the agencies. We 
conducted our work in accordance with generally accepted government 
auditing standards between December 2003 and June 2004.

Results in Brief:

Three of the five agencies we studied have begun to conduct spend 
analyses and used the results to better manage procurements. Veterans 
Affairs, HHS, and Agriculture launched or expanded their efforts in the 
last 2 years, with noteworthy results. Veterans Affairs, for example, 
used an automated spend analysis of pharmaceutical procurement and a 
strategic approach to help save $394 million in 2003. Currently, agency 
commodity teams are beginning a manual review of medical equipment and 
supplies procurement data to identify high-cost, high-technology items 
such as magnetic resonance imaging and ultrasound equipment for 
national contracting that could save $82 million a year. A recent HHS 
spend analysis for office-related products was used to award agencywide 
discount agreements with three vendors that will save an estimated 
$9.5 million a year on thousands of office and custodial supplies and 
computer monitors, scanners, and other peripherals. An Agriculture 
spend analysis of products and services purchased in fiscal year 2000 
led the department to negotiate an agreement for office supplies with 
one major vendor that has so far yielded savings of $1.8 million.

At the time of our review, the departments of Justice and 
Transportation, by contrast, had not begun to collect the data needed 
for a strategic approach to procurement. Both agencies are engaged in 
ongoing efforts to improve procurements or cut operating costs, and top 
leadership is committed to using spend analysis to change the way goods 
and services are purchased. One obstacle to using spend analysis cited 
by both agencies was the lack of comprehensive and reliable spending 
data, although since our review they report stepping up efforts to use 
currently available data and evaluate business intelligence software to 
overcome those obstacles.

Veterans Affairs, HHS, and Agriculture have taken some positive steps 
in the use of spend analysis to improve procurements, but to fully 
optimize the potential the technique offers, they will need to adopt 
the full range of private sector best practices for automating, 
extracting, supplementing, organizing, and analyzing data on all their 
procurement spending. Although successful in the pharmaceutical area, 
Veterans Affairs has made slow progress in improving other medical 
supplies and services procurements. HHS had no plans for an automated 
spend analysis system for compiling the necessary data on an ongoing 
basis, although headquarters officials told us in June that they intend 
to propose such a system. Agriculture's automated spend analysis 
system, to be completed by 2006, will be a centralized tool shared by 
constituent agencies that may or may not elect to use it to chart their 
own strategic procurement paths.

This report includes recommendations intended to help Veterans Affairs, 
Agriculture, and HHS adopt the full range of spend analysis best 
practices and to help Justice and Transportation step up the process of 
gaining knowledge of their spending to support a more strategic 
approach to acquiring goods and services. In written and oral comments 
on a draft of this report from Veterans Affairs, Agriculture, Justice, 
and Transportation, the agencies generally agreed with our findings and 
recommendations. Health and Human Services had no comments. The written 
comments we received are reproduced in appendixes II through V.

Background:

Our past work studying how leading private-sector companies have 
reengineered their approach to procurement offers federal agencies both 
valuable insights and a general framework that could serve to guide 
their efforts.[Footnote 7] While each of the companies we studied is a 
leader in its respective market, each was also not immune to market or 
stockholder pressures to improve performance or to challenges from 
senior corporate leadership to improve the manner in which the company 
acquired goods and services. In turn, these companies adopted a 
strategic approach to leverage their buying power, reduce costs, better 
manage their suppliers, and improve the quality of goods and services 
acquired.

As shown in figure 1, we identified broad principles and practices that 
were critical to carrying out the companies' strategic approach 
successfully. Taking a strategic approach involves a range of 
activities from developing a better picture of what the company is 
spending on procurement to taking an enterprisewide approach to 
procuring goods and services and developing new ways of doing business.

Figure 1: Broad Principles and Practices of Leading Companies' 
Strategic Approach:

[See PDF for image]

[End of figure]

Pursuing such an approach in the private sector clearly pays off. 
Studies have reported significant cost savings for some companies of 10 
to 20 percent of their total procurement costs. And the leading 
commercial companies we studied reported savings and anticipated 
savings in the billions of dollars.

Conducting a spend analysis to obtain improved knowledge on procurement 
spending is a critical component of an effective strategic approach. A 
spend analysis permits company executives to review how much their 
company has spent each year, what was bought, from whom it was bought, 
and who was purchasing it. The analysis identifies where numerous 
suppliers are providing similar goods and services--often at varying 
prices--and where purchasing costs can be reduced and performance 
improved by better leveraging buying power and reducing the number of 
suppliers to meet the company's needs.

Spend analysis is an important driver of strategic planning and 
execution, and it allows for the creation of lower-cost consolidated 
contracts at the local, regional, or global level. At the same time, as 
part of a strategic procurement effort, spend analysis allows companies 
to monitor trends in small and minority-owned business supplier 
participation to address the proper balance between small and minority 
business utilization and equally important corporate financial savings 
goals for strategic sourcing.

Setting up a spend analysis program can be challenging, according to 
our prior research. Companies have had problems accumulating sufficient 
data from internal financial systems that do not capture all of what a 
company buys or are being used by different parts of the company but 
are not connected. Because simplified data may not exist or be 
available, companies have frequently been unsure who their buyers are 
and have had to contend with databases that include listings of items 
and suppliers that in reality are identical to each other but which are 
all stored under different names. Companies have also found that 
existing databases have not captured anywhere nearly enough details on 
the goods and services for which vendors are being paid.

Despite the challenges, companies that developed formal, centralized 
spend analysis programs have found that they have been able to conduct 
effective and ongoing spend analysis through the use of five key 
processes, involving automating, extracting, supplementing, 
organizing, and analyzing data.

Building the foundation for a thorough spend analysis involves creating 
an automated information system for compiling spending data. The system 
routinely extracts vendor payment and related procurement data from 
financial and other information systems within the company. The data 
are then automatically compiled into a central data warehouse or a 
spreadsheet application, which is continually updated. Most of the 
automated spend analysis systems currently in use were developed in-
house, although some companies have hired third-party companies for 
expertise and technology.

The data are primarily extracted from vendor accounts payable financial 
systems and reviewed for completeness. Accounts payable data can be 
voluminous and very detailed. Companies process large numbers of vendor 
invoices for payment each year, and each of those must be examined by 
their spend analysis systems. When necessary, the accounts payable data 
are supplemented with other sources, such as purchase card data 
obtained from external bank-card vendors' systems or other information, 
such as suppliers' financial status and performance information. 
Companies must obtain as much information as possible from both 
internal and external sources to gain a complete understanding of their 
spending.

For spend analysis to be effective, data files must be accurate, 
complete, and consistent. The data are subjected to an extensive review 
for accuracy and consistency, and steps are taken to standardize the 
data in the same format, which involves the creation of uniform 
purchasing codes. The data are typically organized into comprehensive 
categories of suppliers and commodities that cover all of the 
organization's purchases.[Footnote 8]

In tandem with building a spend analysis foundation, commodity managers 
or cross-functional commodity teams are established to access and 
analyze the information on an ongoing basis, using standard reporting 
and analytical tools.[Footnote 9] Each team is responsible for one or 
more commodities, which may also include responsibility for a number of 
sub-categories. Once the spending data has been organized and reviewed, 
companies use the data as the foundation for a variety of ongoing 
strategic decisions and efforts.

Our past work also shows how federal agencies, in particular DOD, might 
apply these private sector best practices to obtain lower prices from 
suppliers and improve procurement effectiveness. For example, we 
noted that although DOD's spending on services contracts approaches 
$100 billion annually, its management of services procurement has been 
inefficient and ineffective.[Footnote 10] To achieve the potential for 
billions of dollars in savings, we recommended that DOD take a more 
strategic approach to services contracting that includes adopting the 
spend analysis best practices of leading companies. In response, in 
2004 the agency started developing a spend analysis system that will 
pull purchasing data from disparate databases for analysis by newly 
organized DOD-wide commodity teams. DOD expects that users of this 
spend analysis system will be able to identify procurement trends, 
buying patterns, and opportunities for strategic sourcing, which will 
result in cost savings and quality improvements.

The government purchase card program offers yet another arena for the 
use of spend analysis. Through the purchase card program, agency 
personnel can acquire the routine goods and services they need directly 
from vendors as long as the purchase is $2,500 or less. From 1994 to 
2003, the use of such cards exploded from $1 billion to $16 billion, 
but we found that agencies generally were not taking advantage of 
opportunities to negotiate discounts with major vendors.[Footnote 11] 
We therefore recommended several actions--including conducting spend 
analysis using available data and gathering additional information 
where feasible--that would ultimately help agencies to achieve $300 
million annually in potential savings.

Agencies Have Begun Analyzing Spending Trends to Improve Knowledge and 
Procurement:

Three of the five agencies we reviewed--Veterans Affairs, HHS, and 
Agriculture--have each conducted spend analyses, either by using their 
own resources or by hiring consultants to do the work. Each agency is 
beginning to use spend analysis to obtain knowledge and to plan and 
carry out changes in agencywide procurement processes intended to 
leverage buying power, eliminate redundant and duplicative acquisition 
activity, and reduce purchasing costs for goods and services. The 
departments of Justice and Transportation have not begun to collect the 
data needed for using spend analysis nor taken steps that would be part 
of a strategic approach to procurement.

For several years, Veterans Affairs has had significant success using 
spend analysis on an ongoing basis to take a more strategic approach to 
pharmaceutical procurement. Reflecting national trends, Veterans 
Affairs' pharmacy procurement costs have risen significantly in recent 
years, consuming an increasing percentage of the department's health 
care budget. The $2.1 billion the agency spent on such items in 2000 
were primarily for prescription drugs and their dispensing, but also 
included some supplies and over-the-counter drugs. To mitigate this 
increase in pharmacy procurement costs, the agency created a pharmacy 
benefits management strategic health group in 1995 that analyzes 
pharmaceutical spending trends across all medical facilities and 
employs various procurement arrangements for purchasing prescription 
drugs at substantial discounts.[Footnote 12] According to the agency, 
the pharmaceutical procurement standardization program led to savings 
of $394 million in fiscal year 2003 alone.

Veterans Affairs has also made progress in the areas of medical and 
prosthetics supplies and equipment. In fiscal year 2001, the agency 
purchased about $500 million in medical-surgical supplies and $1.1 
billion in medical equipment and prosthetics. For example, VA created a 
national prosthetics spend database that extracts procurement data from 
all medical facilities' systems and organizes data on purchased items 
into commodity categories, such as wheelchairs and aids for the blind. 
The agency's prosthetics strategic health group also formed a number of 
commodity teams with stakeholders from across the medical facilities 
and health care regions to use spend analysis to identify commonly used 
items that can be purchased at substantial discounts under a national 
contract.[Footnote 13] The prosthetics group also uses spend analysis 
to monitor medical facility compliance with the national contracts and 
to ensure potential savings are realized. As of June 2004, the group's 
spend analysis and strategic-sourcing efforts have resulted in 23 
national contracts and accumulated more than $57 million in cost 
avoidance.

The agency is just beginning to develop a spend analysis tool for 
medical and surgical supplies and high-technology medical equipment. 
Specifically, it is working with a contractor to create uniform 
medical-product names for an agencywide spend analysis system. When the 
system is fully operational in fiscal year 2006, it will automatically 
extract medical supplies and equipment procurement data into a central 
data warehouse, organized by common categories of products. Until this 
system is fully operational, this year the agency decided to form 
several cross-functional commodity teams to pursue new national 
contracts on 45 categories of high-technology, high-cost medical 
equipment and supplies (such as magnetic resonance imaging and 
ultrasound equipment).

Since 2003, HHS has been obtaining spend analysis and procurement 
consolidation advice from outside consultants to help reduce the 
department's operating costs and redirect the savings to programs. Like 
other agencies, procurement activities in HHS were operating under a 
decentralized environment of independent, transaction-oriented buying 
processes, with limited visibility over the agency's total procurement 
spending.

For example, HHS has conducted a spend analysis of commonly contracted 
products. In its first phase, $100 million in yearly spending for 
thousands of office-related products such as custodial supplies, office 
supplies, office furniture, office equipment (such as photocopiers and 
facsimile machines), and peripheral information technology products 
(such as computer monitors and scanners) was analyzed to identify 
opportunities for significant savings to purchase card buyers through 
agencywide discount agreements.[Footnote 14] Between May and July 2004, 
HHS awarded the first agreements to three vendors for the office 
supplies, custodial products, and peripheral items.[Footnote 15] HHS 
estimates the potential savings from these discount agreements range 
from 7 percent to 54 percent and could yield at least $9.5 million in 
annual savings for the department on just the office supplies, office 
equipment, and information technology peripherals. Later this year, the 
agency will work with its consultant to do a new round of spend 
analysis to identify potential categories and savings opportunities in 
the next phase of the strategic-sourcing initiative for products.

In a second initiative, HHS procurement headquarters hired a consultant 
in August 2003 to support a newly organized agencywide group of 100 
senior procurement and other key managers to work on consolidation of 
services acquisitions.[Footnote 16] One of the contractor's key tasks 
was to conduct a spend analysis of almost $4.9 billion in fiscal year 
2002 HHS contract actions to identify high-volume or high-dollar common 
services for consolidation. Twenty-four categories--such as security 
guards and patrol services and office administrative services--were 
subsequently identified for possible consolidation--totaling almost 
$1.7 billion in value.

The consultant's plan included steps to organize and segment HHS 
contract workload and spend data into categories of services and 
suppliers. This step was intended to help the services acquisition 
consolidation working group identify opportunities across divisions to 
reduce the number of suppliers where competition for new agencywide 
contracts is practical. However, according to the working group's 
project officer, in view of small business and contract-bundling 
requirements and the long lead times needed to obtain division 
consensus on new contract arrangements, the working group decided 
instead to pursue alternative consolidation strategies in the near-
term.

As a result, HHS headquarters officials expect the working group to 
finalize criteria and a timeline for selecting existing division 
service contracts that would be listed in an HHS-wide database that 
other division purchasers might use before initiating their own new, 
stand-alone contracts. Potential contract categories include temporary 
services, information technology services, focus groups, and conference 
management and support.

Agriculture is currently using the results of a consultant's October 
2001 spend analysis as updated with more recent spending data to obtain 
favorable prices on small purchase card buys through agencywide 
discount agreements with major vendors. The contractor analyzed almost 
$2.1 billion in fiscal year 2000 spending data from across the agency, 
organizing the agency's spending in terms of commodities and suppliers 
to identify high-volume, high-dollar areas that could yield significant 
savings and other benefits and also identifying 24 commodities for the 
agency's more detailed review.[Footnote 17]

In 2003, Agriculture's procurement management division began to use 
this spend analysis, competitively awarding an agencywide discount 
agreement with a national office supply vendor that yielded savings of 
$1.8 million to the agency's purchase card holders--a price 10 percent 
less then the vendor's Federal Supply Schedule contract 
prices.[Footnote 18] To receive the discounts, registered agency 
purchasers must use the national office supply vendor's electronic 
catalog and ordering system.

Building on this experience, Agriculture recently began to use the 
consultant's spend analysis to improve its purchase card buying power 
in additional commodity areas. A temporary "electronic marketplace" 
subcommittee was organized in January 2004, including representatives 
from across the agency. According to the co-chair, this subcommittee is 
using the consultant's spend analysis and updating it with more recent 
data on spending with major vendors to help negotiate more favorable 
prices based on the agency's dollar volume. By October, the 
subcommittee plans to implement at least three agencywide discount 
agreements comparable to the 2003 agreement.

In the future, Agriculture plans to provide automated and repeatable 
spend analysis, data-mining, and reporting capabilities that identify 
opportunities for savings through negotiated volume discounts. These 
will be available through electronic catalogs as part of a redesign and 
modernization of its agencywide acquisition system, an effort that will 
be complete in about two years.[Footnote 19] Agriculture began this 
effort upon recognizing that the current multisystem environment does 
not provide an integrated, streamlined, or consistent approach to 
procurement and does not effectively support the agencywide goal for 
electronic commerce between agency purchasers and suppliers.

To develop its spend analysis capabilities, Agriculture will create a 
centrally maintained data warehouse to be shared by agency procurement 
and financial management organizations. This warehouse will extract and 
capture all Agriculture procurement data, to be supplemented with 
business intelligence and organizational data from internal and 
external financial and corporate sources.[Footnote 20] Once the 
warehouse is in place, it will allow for comprehensive spend analysis 
and reporting on procurement in real time, on issues such as the 
opportunities to be pursued for agencywide discount agreements with 
major suppliers for specific commodities and the extent of small 
business utilization.

The departments of Justice and Transportation have not used spend 
analyses yet to focus management attention on changing the way they 
purchase goods and services to foster a more strategic approach. One of 
the obstacles to using spend analysis cited by both was the lack of 
comprehensive, detailed, and reliable spending data. Nevertheless, 
future use of spend analysis could become an important tool in their 
efforts to streamline their administrative functions or improve 
procurement performance.

Department of Justice:

Spend analysis could be useful in assisting the Department of Justice 
to implement its November 2001 strategic plan, which established 
streamlining, eliminating, or consolidating duplicative functions as 
key elements of supporting the agency's new counterterrorism mission. 
In February 2004, high-level discussions were begun to plan cross-
cutting initiatives to eliminate duplication and cut overall agency 
operating costs, so that funding can then be redirected to other 
critical tasks. The agency also formed a core group of financial and 
management executives responsible for overseeing the streamlining and 
efficiency initiatives.

Officials told us that it is too early to say if the new core group's 
efforts would include analysis of Justice's spending trends or 
considering broad-based structure, process, and role changes to support 
a more strategic approach to procurement, although some agency 
officials are familiar with the concepts. Officials said that some 
Justice components had made incremental progress in consolidating and 
leveraging certain categories of spending, such as litigation support 
services, jail detention space services, and prison system medical 
supplies. Officials also told us that the agency will similarly look 
into pursuing a comprehensive approach to buying Web-based training 
services, jail guard services, and employee household relocation 
services.

In the near term, Justice officials questioned the agency's ability to 
analyze spending trends effectively, even though the officials agreed 
that such an analysis could benefit the agency. Lack of a single 
acquisition and financial management system makes it difficult to 
collect accurate and complete spending data and identify opportunities 
for coordinated purchasing, the officials said. Although the agency is 
trying to establish a single system, it is not likely to be in place 
until 2009.[Footnote 21]

Before the single system can be put in place, we discussed with these 
officials the prospects for using existing contract and purchase card 
data that the agency feeds into the FPDS, in the same way that 
Agriculture and HHS have used such data to support their spend analysis 
efforts. Justice officials expressed interest in potentially using FPDS 
data for this purpose. According to the procurement executive, for 
financial audit purposes, Justice has been analyzing purchase card data 
and had already obtained better insight into what goods and services 
were being bought across the agency and opportunities to leverage 
buying power in return for lower prices from vendors.[Footnote 22] 
Given that Justice has almost $5 billion in annual procurements, agency 
officials acknowledged that their streamlining and efficiency efforts 
could be substantially aided by the expanded use of spend analysis to 
consider taking a more strategic approach to procurement.

In commenting on a draft of this report, the agency reports that it is 
working to identify additional opportunities for purchase card savings 
through current discount agreements and has begun analyzing FPDS data 
to identify savings opportunities. We commend the agency for expanding 
purchase card spending analyses, which is also responsive to previous 
recommendations aimed at achieving agency savings through the purchase 
card program.[Footnote 23] Moreover, by taking the promising first step 
to analyze FPDS data on contract spending for goods and services--which 
accounted for another $4 billion in 2003--we believe that Justice will 
be able to identify many more opportunities for leveraging buying power 
and achieve even more significant savings in the future.

Department of Transportation:

Transportation's senior procurement officials told us that they plan to 
use spend analysis to support ongoing implementation of strategic 
procurement practices across the agency. According to these officials, 
such support should be facilitated by the favorable experience 
Transportation has already gained from similar cross-cutting strategic 
procurement planning to modernize information systems and standardize 
computer equipment as part of a fiscal year 2007 office relocation of 
agency headquarters. Under the agency's chief information officers' 
council, commodity councils are being formed to help the agency move to 
a common operating environment and leverage buying power for 
information technology goods and services.[Footnote 24]

According to these officials, the agency currently has no spend 
analysis capability, but a first step was taken this year through the 
agency's procurement performance management program that could help 
drive the adoption of a more strategic approach to buying goods and 
services.[Footnote 25] A general analysis was conducted of fiscal year 
2003 FPDS data for $1.6 billion in agency contracts, sorted by the 
categories of research and development, other services, and 
products.[Footnote 26] A more in-depth agencywide analysis has yet to 
be achieved, however. Officials told us more detailed analysis of 
spending trends--for example, by high-dollar, high-volume commodity and 
vendor categories--was inhibited by workload constraints and their 
concerns about the accuracy of FPDS data and the lack of more specific 
product and service information. Nevertheless, they indicated that in 
the future, spend analysis could become an important tool in the 
agency's procurement performance management program. Specifically, in 
commenting on a draft of this report, the senior procurement executive 
indicated that agency leadership supports additional funding in fiscal 
year 2005 to enhance spend analysis capabilities. He also told us the 
agency is evaluating software options for a future agencywide spend 
analysis system as part of the ongoing financial information system 
modernization.

Agencies Have Not Adopted Full Range of Spend Analysis Best Practices 
and Lack Some Supporting Structure, Processes, and Roles:

Veterans Affairs, HHS, and Agriculture have made good progress using 
spend analysis to improve their procurements, and they have adopted 
some elements of a strategic approach. Like the private sector's 
experience which indicates that implementing spend analysis can be 
challenging and take time, these three agencies have not had a lot of 
time to adopt the full range of private sector best practices with 
regard to automating, extracting, supplementing, organizing, and 
analyzing data that covers all of their procurement spending. Also, to 
one degree or another, they have not created the type of supporting 
structure, processes, and roles leading companies institute to make the 
best use of the knowledge gained and foster a more strategic approach 
to buying goods and services. The extent to which agencies can do both 
will determine their success in achieving substantial savings and 
performance improvements. Private sector experience suggests that 
agencies that start with effective spend analysis programs will be 
better able to institute the changes needed to move into a more 
coordinated, leveraged purchasing environment.

Veterans Affairs has earned a world-class reputation for highly cost-
effective pharmaceutical procurement practices, which include spend 
analysis as well as supporting structure, processes, and roles. (See 
appendix I, table 1.) Its progress in making similar improvements in 
its procurements of other medical supplies and equipment has been 
slower, however, and its efforts related to clinical care or facilities 
support services are in their very early stages.

A March 2004 inspector general's audit report, for example, noted that 
the agency's efforts to reform medical supplies and equipment 
purchasing practices since 2002 have not yet translated into 
significant national contracting results and medical purchasing cost 
savings. The audit recommended increasing efforts to pursue 
aggressively more national contracts that, if implemented, could 
achieve about $82 million per year in savings.

A spend analysis tool that would examine Veterans Affairs' medical 
supplies and equipment spending trends will not, in fact, be ready 
before 2006, when best practices--such as automated compilation of 
purchase data, extracted from facilities' procurement and vendor 
payment systems and supplemented and organized--will be put in place 
for use by established commodity teams.

The agency is also beginning to focus on taking a more strategic 
approach to acquiring services for veterans medical facilities from 
contract providers. In May 2004, the Secretary announced that Veterans 
Affairs must more effectively purchase contract health care services 
for veterans (such as skilled nursing and laboratory services) by 
leveraging its purchasing power as a national healthcare system. The 
Secretary directed that a national clinical-contracting strategy be 
drafted by November 2004 that would identify high-value, competitively 
priced purchasing options for obtaining medical services from contract 
providers throughout the country. In addition, in commenting on a draft 
of this report, the agency stated its intent to pursue national 
contracts for non-clinical services as well. Facilities now contract 
locally for a wide variety of support services, such as facilities 
maintenance, housekeeping, and food service.[Footnote 27] According to 
the agency, both efforts will use spend analysis as appropriate. 
However, we believe it will be difficult for the agency to accomplish 
this objective since the new spend analysis tool, expected in 2006, 
will only capture data on medical supplies and equipment spending 
trends.

HHS asked its division heads to begin planning for departmentwide 
consolidation of procurement activities in April 2003. Although 
headquarters managers had worked with consultants to conduct spend 
analyses to improve their knowledge of overlapping and duplicative 
procurement spending, they had no plan to develop an automated tool to 
repeat the process and only a small number of consolidated procurement 
actions were expected to result. (See appendix I, table 2.)

In June 2004, however, HHS procurement managers told us that an 
agencywide working group was going to propose obtaining commercial 
software to develop an automated spend analysis system to compile the 
necessary data and generate standardized reports. As result, they 
believe that HHS' spend analysis efforts could make use of an 
automation tool in the future to enable the process to be repeated 
consistently, obtain data from HHS sources such as financial management 
systems, and analyze data on a continual basis. The proposal was 
intended to augment ongoing plans for an HHS-wide standard electronic 
procurement system to be phased in over the next year or so. According 
to these officials, details on the proposed system's spend analysis 
capabilities are forthcoming, pending approval and funding to implement 
it.

Agriculture's current spend analysis efforts are also not automated, 
include no financial management data such as vendor accounts payable 
systems, and do not analyze data on a continual basis. (See app. I, 
table 3.) The agency does have plans to have an agencywide spend 
analysis system in place by 2006, but the system will be a centralized 
tool shared by component organizations that may or may not choose to 
chart their own strategic procurement paths.

A temporary subcommittee in the meantime is reviewing some agencywide 
spending data to identify a few categories of high-dollar purchase card 
vendors for use in negotiating discount agreements. However, a senior 
procurement policy official told us that a large-scale strategic 
approach to buying goods and services may be neither feasible or 
advisable, given the agency's highly diverse missions and decentralized 
operations. When it comes to changing the buying culture across the 
agency, the agency wants to use spend analysis to create attractively 
priced discount agreements with a few vendors that agency purchasers 
will be encouraged, not mandated, to use. Although he indicated that 
Agriculture may establish a few agencywide commodity councils in the 
future to pursue more areas for consolidated buying, he did not 
anticipate creating new structure, processes, and roles within the 
agency.

Aside from their spend analysis activities, the three agencies have not 
consistently created the type of supporting structure, processes, and 
roles leading companies institute to foster a more strategic approach 
to buying goods and services. While Veterans Affairs has used the best 
practice of establishing commodity teams that coordinate buying 
strategies for pharmaceutical, prosthetics, and more recently high-
cost, high-technology medical equipment and supply items, the same 
practice has not been used to coordinate buying strategies for 
services. Outside of forming single, cross-agency working groups to 
leverage a few categories of supplies commonly bought by purchase 
cardholders, Agriculture and HHS have not fully embraced viewing 
procurement as an agencywide process for streamlining acquisitions, 
saving money, and increasing the quality of purchased goods and 
services when compared to the current decentralized environment of 
independent, stand-alone contract actions. Agriculture and HHS have not 
adopted the best practice of using cross-functional commodity teams to 
establish a network of technical experts to support volume and 
technical leveraging of agency spending.

Conclusions:

When the government faces enormous fiscal pressures and a growing 
budget deficit, agencies' transformations of their business processes 
is more important than ever if the agencies are to get the most from 
every dollar spent. Leading companies that have successfully used spend 
analysis as a foundation for their procurement activities set an 
example for how the federal government can more effectively leverage 
its buying power.

Federal agencies such as the Departments of Veterans Affairs, HHS, and 
Agriculture can achieve significant benefits using spend analysis best 
practices to support a more strategic approach to buying goods and 
services. Like leading companies, agencies that establish an effective 
spend analysis program can then achieve a total-spending perspective 
across the agency; make the business case for collaboration in joint 
purchasing rather than fragmented purchasing, create supporting 
structure, processes, and roles to assign accountability and exercise 
oversight; identify potentially hundreds of millions of dollars in 
procurement savings opportunities by leveraging buying power; and 
identify opportunities to achieve other procurement process 
efficiencies such as reducing duplication in purchasing, supporting 
small and minority-owned business utilization, and improving supplier 
performance. In contrast, agencies such as the departments of Justice 
and Transportation, which have yet to make extensive use of spend 
analysis and may well miss out on the opportunity to achieve savings to 
the same extent possible as other agencies.

Recommendations for Executive Action:

To help ensure that the varying spend analysis efforts by Veterans 
Affairs, HHS, and Agriculture go further in emulating the best 
practices of leading companies and that these agencies have the 
supporting structure, processes, and roles in place to effectively use 
the results of spend analysis, we are making the following three 
recommendations:

* To identify, track, and evaluate what clinical care and support 
services are being purchased by veterans' medical facilities, the 
Secretary of Veterans Affairs should direct procurement headquarters 
officials to expand the planned development by 2006 of an automated 
medical supplies and equipment spend analysis system also to capture 
spending data on services. Such expansion should support automating, 
extracting, organizing, supplementing, and analyzing spending trends 
for clinical care and support services in the same way that 
improvements aimed at medical supplies and equipment are being made. 
The agency's new spend analysis system needs to include healthcare-
related services' procurement data to improve decision makers' 
knowledge and help them identify opportunities for leveraged buying, 
including the planned development of a national strategy to contract 
for services.

* To address agency leadership's direction to eliminate redundant 
management activities, the Secretary of Health and Human Services 
should direct headquarters' procurement officials to identify 
additional steps needed to adopt a more strategic approach to acquiring 
goods and services. HHS headquarters' procurement officials should also 
be directed to consider using current financial and procurement 
management information systems to extract the type of spending data on 
an automated and repeatable basis that the agency needs to identify 
opportunities to leverage its buying power, reduce costs, and provide 
better management and oversight of key suppliers. Such data would 
include what categories of goods and services are being acquired; how 
many suppliers are being used for specific categories; and how much HHS 
is spending on specific categories, in total and with each supplier. 
Their assessment should also address the creation of supporting 
structures, processes, and roles as necessary, such as the 
establishment of cross-functional commodity teams, to help obtain the 
necessary buy-ins across the agency's divisions, eliminate duplication 
of effort, and improve the coordination and volume discounting of high-
dollar, high-volume categories of goods, services, and suppliers on an 
ongoing basis.

* While waiting until 2006 for the planned agencywide spend analysis 
system to come online, the Secretary of Agriculture should assess 
whether the agency's temporary electronic marketplace subcommittee 
provides sufficient structure, processes, and roles for analyzing 
spending trends on an ongoing basis and supporting a more strategic 
approach to acquiring goods and services. Agriculture's assessment 
should address expanding the subcommittee's current narrow focus on 
leveraging the agency's almost $600 million in purchase card buying 
power, to also yield discounts applicable to larger contract actions 
across the range of goods and services being acquired and whether the 
establishment of cross-functional commodity teams would help obtain the 
necessary buy-in across the agency's diverse mission organizations and 
improve the coordination and acquisition of high-dollar, high-volume 
categories across a wide range of goods and services.

In light of the significant potential for savings and performance 
improvements that the two agencies not using spend analysis could 
achieve, we recommend that the Attorney General of the United States 
and the Secretary of Transportation direct officials responsible for 
procurement and financial management and other appropriate stakeholders 
to step up the process of gaining knowledge of their spending to take a 
strategic approach to procurement, adopting the type of best practices 
employed by leading companies. Specifically, we are making the 
following two recommendations:

* Justice and Transportation should assess using current financial or 
procurement information systems such as FPDS and purchase card data on 
an automated and repeatable basis to extract the type of spending data 
that the agencies need to identify opportunities to leverage the 
agencies' buying power, reduce costs, and provide better management and 
oversight of suppliers. Such data would include what categories of 
goods and services are being acquired; how many suppliers are being 
used for specific categories; and how much the agency is spending on 
specific categories, in total and with each supplier.

* Once an initial spend analysis can be completed to arm the agencies 
with the knowledge of such opportunities, Justice and Transportation 
should assess whether their current procurement structure, processes, 
and roles are adequate to support a more strategic approach to 
acquiring goods and services, for example whether cross-functional 
commodity teams would provide more effective, coordinated management of 
high-dollar, high-volume categories of goods, services, and suppliers 
on an ongoing basis.

Agency Comments and Our Evaluation:

We received written comments on a draft of this report from the 
Departments of Veterans Affairs, Agriculture, and Justice, and we 
received oral comments from the Department of Transportation. The 
agencies generally agreed with our findings and recommendations. The 
Department of Health and Human Services had no comments, but provided 
technical comments, which we have incorporated where appropriate. The 
written comments are reproduced in appendixes II through V.

The Department of Veterans Affairs concurred with our recommendation to 
expand the planned development of an automated spend analysis system to 
capture spending data on services as well as medical supplies and 
equipment data. At a later date, the agency plans to provide a more 
complete discussion of its efforts to include clinical and non-clinical 
services in its spend analysis.

In general, the Department of Agriculture agreed with our 
recommendations. Commenting on one of the draft's statements on the 
agency's use of a consultant's 2001 spend analysis to obtain more 
favorable prices, Agriculture indicated they did not solely rely on the 
consultant's report but needed to perform additional analysis for the 
agencywide discount agreements. Further, Agriculture also commented 
that many other federal departments, through the use of existing 
purchase card data and other available data systems, can discern 
sufficient information to begin leveraging their spending to obtain 
reduced prices for commonly acquired services and supplies. We agree.

While the Department of Justice generally agreed with the report's 
findings and recommendations, the agency also clarified the status of 
spend analysis efforts. Specifically, the agency stated that data 
collection efforts have begun to conduct a spend analysis, focusing on 
purchase card spending trends and procurement actions based on reviews 
of agencywide data from a bankcard vendor and the FPDS. We revised the 
report where appropriate to incorporate information on these efforts.

In oral comments, Transportation's senior procurement executive told us 
that he agrees with our recommendations, but believed our report did 
not adequately capture the agency's commitment to strategic procurement 
objectives and support for using spend analysis. In addition, this 
official informed us that the agency is expanding its spend analysis 
efforts. For example, his office recently reviewed purchase card 
spending data to identify volume discount opportunities and is now 
using the results to negotiate new discount agreements with several 
office product vendors. In addition, he told us that to facilitate 
future agencywide purchase card spend analyses, Transportation awarded 
a task order in June 2004 with one bank-card company that includes 
purchase-card audit software and enhanced data-mining capabilities. He 
also indicated that agency leadership supports fiscal year 2005 funding 
to enhance spend analysis capabilities and that software options for a 
new agencywide spend analysis system are now being evaluated as part of 
the ongoing financial and procurement management system modernization. 
We incorporated these comments where appropriate in the text.

We are sending copies of this report to the Secretaries of Agriculture, 
Health and Human Services, Transportation, and Veterans Affairs; the 
Attorney General; the director of the Office of Management and Budget; 
and interested congressional committees. We will provide copies to 
others on request. This report will also be available at no charge on 
GAO's Web site at http://www.gao.gov.

If you have any questions about this report or need additional 
information, please call me at (202) 512-4841 (cooperd@gao.gov) or 
Carolyn Kirby at (202) 512-9843 (kirbyc@gao.gov). Other major 
contributors to this report are Cristina Chaplain, Timothy DiNapoli, 
Bob Swierczek, and Grant Turner.

Signed by: 

David E. Cooper: 
Director: 
Acquisition and Sourcing Management:

[End of section]

Appendix I: GAO Analyses of Agencies' Spend Analysis Practices:

We obtained information about agencywide spend analysis efforts through 
interviews with Veterans Affairs, HHS, and Agriculture procurement 
headquarters officials and documents they provided to us. We reviewed 
this information and also discussed with agency officials how their 
efforts compared to leading companies' best practices identified in our 
recent work.[Footnote 28]

In analyzing agencies' practices, we compared their efforts with the 
five key processes that companies adopt that enable them to conduct 
effective and ongoing spend analysis, which are:

* Automation--data automatically compiled.

* Extraction--essential data culled from accounts payable and other 
internal systems.

* Supplemental information--additional data sought from other internal 
and external sources.

* Organization--review data to ensure accuracy and completeness; 
organize data into logical, comprehensive commodity and supplier 
categories.

* Analysis and strategic goals--using standard reporting and analytical 
tools, data analyzed on a continual basis to support decisions on 
strategic-sourcing and procurement management in areas such as cost 
cutting, streamlining operations, and reducing the number of suppliers. 
Scope generally covers an organization's entire spending.

The following tables summarize our analysis of agencies' spend analysis 
practices.

Table 1: Veterans Affairs Spend Analysis Practices:

Spend Analysis Process: Automation; Agency practice: Automated 
compilation of pharmaceutical and prosthetic and sensory aid purchase 
data into two central databases, which are updated continuously. 
Automated compilation of medical supply and equipment purchase data but 
not clinical care and support services into a central database will be 
available in 2006.

Spend Analysis Process: Extraction; Agency practice: Pharmaceutical and 
prosthetics spend analysis covers all veterans' medical facilities 
purchases. Facilities' pharmaceutical purchase and vendor payment data 
are extracted from centralized commercial distributors' on-line 
ordering and delivery systems. Prosthetics data extracted from multiple 
medical facilities' procurement and vendor payment systems; In 2006, 
standardized medical supply and equipment data will be extracted from 
facilities' procurement and vendor payment systems. None will be 
extracted on facilities' purchases for clinical care and support 
services.

Spend Analysis Process: Supplemental Information; Agency practice: 
Veterans Affairs obtains pharmaceutical sales and payment data from 
centralized commercial distributors' on-line ordering and delivery 
systems. The agency's chief logistics office analyzes weekly summaries 
of bankcard vendor's transactions with the agency. The agency recently 
required purchase card program managers to consolidate quarterly 
reviews from the cardholders and analyze purchases.

Spend Analysis Process: Organization; Agency practice: Pharmaceutical 
and prosthetics spend analysis databases fall into logical 
comprehensive categories of commodities and suppliers. Veterans Affairs 
is organizing and standardizing procurement data on medical supplies 
and equipment purchases; a spend analysis database is planned for 
completion in 2006. In 2004, a naming standard will be developed for 
each high-technology/high-cost medical product given a national 
contract. To track compliance with contracted products, a standard name 
will have to be used when buying. Veterans Affairs will not organize 
facilities' clinical care and support services procurement data into 
logical, comprehensive categories of commodities and suppliers.

Spend Analysis Process: Analysis and strategic goals; Agency practice: 
Commodity teams are continually analyzing pharmaceutical and 
prosthetics spending data to make decisions in contracting and 
procurement management. In 2003, Veterans Affairs saved $394 million 
through discounted pharmaceutical national contracts. As of June 2004, 
prosthetics contract savings were more than $57 million. By 2006, 
standard reporting and analytical tools will be in place for medical 
supplies and equipment purchases, which new commodity teams will use to 
help reduce the number of suppliers, cut costs, streamline operations, 
and address the agency's small business goals. Veterans Affair's spend 
analysis system plan does not include purchased clinical care and 
support services, however.

Source: GAO analysis of agency information.

[End of table]

Table 2: Health and Human Services Spend Analysis Practices:

Spend Analysis Process: Automation; Agency practice: HHS furnishes 
services procurement data to one consultant and products procurement 
data to a second. While both use commercially available automation 
tools to compile data for more rapid spend analyses, these are one-time 
or periodic requirements. No automation tool is available to allow HHS 
to consistently repeat the spend analysis process, but the agency may 
consider obtaining such a system.

Spend Analysis Process: Extraction; Agency practice: HHS wants its 
acquisition consolidation initiative to cover as many of its services 
buys as possible, and provided its spend analysis consultant services 
contract data from one 2002 database. (Contracts for $25,000 or less 
were not included.) For its product-focused strategic sourcing 
initiative, HHS provided a consultant with data from 2002 on office 
supplies, office equipment, office furniture; peripheral information 
technology (IT) equipment, and custodial supplies. Furnished data was 
extracted from two contract databases, actions for $25,000 or less, and 
for more than $25,000. This year, the HHS consultant will receive 2003 
purchase data for all other products, extracted from the same two 
databases, as well as data from HHS financial management sources, such 
as accounts payable systems.

Spend Analysis Process: Supplemental Information; Agency practice: To 
identify the top-selling office product suppliers, HHS provided the 
consultant data from the agency's bankcard vendor on all purchase card 
transactions, as well as other information from prospective commodity 
suppliers on estimated sales to agency purchasers. This enhances 
awareness of the volume and scope of HHS purchasing. This year, the HHS 
consultant will receive 2003 purchase card data as well. HHS sought no 
additional spend analysis data for the services acquisition 
consolidation.

Spend Analysis Process: Organization; Agency practice: In 2003, both 
consultants cleansed and validated data that HHS furnished based on 
their spend analysis experience and supply market knowledge. The 
consultants used the federal product and service classification to 
organize categories of commodities and suppliers. This helped them 
identify and rank high-dollar, high-volume opportunities to target for 
office product strategic-sourcing and services acquisition 
consolidation. In 2004, the consultant will analyze new data involving 
small and larger purchase card and contract buys. The data will be 
organized into logical, comprehensive categories of products and 
supplies to identify and rank top categories to target for additional 
strategic sourcing.

Spend Analysis Process: Analysis and strategic goals; Agency practice: 
HHS is not analyzing data on a continual basis. The agency had two 
consultants analyze data in 2003 and will have one consultant do a 
second round of product-focused spend analysis in 2004. HHS is using 
that analysis to support strategic sourcing decisions for national 
discount agreements with a few major suppliers for office supplies, 
office equipment, office furniture, IT peripherals, and custodial 
supplies. HHS will use the consultant's spend analysis of services 
acquisitions to plan areas where existing contracts can be used by 
agency division purchasers to leverage buying power and reduce the need 
for new stand-alone contracts. As of June 2004, HHS is continuing its 
planning and anticipates shared implementation of at least some of the 
existing contracts in 2005.

Source: GAO analysis of agency information.

[End of table]

Table 3: Agriculture Spend Analysis Practices:

Spend Analysis Process: Automation; Agency practice: In 2001, 
Agriculture furnished 2000 data to a spend analysis consultant, who 
used commercially available automation tools to compile the data to 
expedite the analysis to fulfill a one-time requirement. Agriculture 
plans to create an automated spend analysis tool to extract data from 
the single acquisition system to begin in October 2006. The data is 
expected to be compiled into a new shared data warehouse that will 
extract components' procurement data as the new system goes on line. 
The warehouse is expected to contain business intelligence and data 
mining capability so that the spend analysis process can be repeated at 
the agency or component levels.

Spend Analysis Process: Extraction; Agency practice: Agriculture wanted 
the 2001 spend analysis to cover all products and services procurements 
other than the nonprocurement-related agricultural commodity 
purchases. To accomplish this, the agency extracted data from three 
databases--contract actions for $25,000 or less; contract actions of 
more than $25,000; and the purchase card management system. Spend 
analysis did not include financial management data such as accounts 
payable systems.

Spend Analysis Process: Supplemental Information; Agency practice: 
Agriculture's purchase card management system obtains data from the 
bankcard vendor on all purchase card transactions with agency 
cardholders. The agency furnished 2000 purchase card data for the 2001 
spend analysis. In 2004, Agriculture obtained up-to-date purchase card 
data on agency transactions with high-dollar, high-volume vendors from 
its bankcard vendor to supplement the 2001 spend analysis.

Spend Analysis Process: Organization; Agency practice: Agriculture's 
spend analysis consultant cleansed and validated 2001 data the agency 
furnished, based on its spend analysis experience and supply market 
knowledge. The consultant used federal product and service 
classification to organize agency spending into 15 categories 
encompassing 52 more detailed subcategories. Information technology 
(IT) for example, included telecom equipment, IT equipment, office 
technology, and IT/telecom services. The spend analysis consultant also 
proposed a feasibility classification strategy that could be used for 
more detailed opportunity analyses of high-potential subcategories.

Spend Analysis Process: Analysis and strategic goals; Agency practice: 
Agriculture is not analyzing data on a continual basis. Following the 
completion of the initial spend analysis in October 2001, Agriculture 
used the results to support decisions for an agencywide office supply 
discount agreement with a major supplier. An agreement was awarded in 
2003 so that Agriculture purchase cardholders could use the supplier's 
Web-based catalog to obtain small purchases of a wide range of office 
supplies at reduced prices. In 2004, Agriculture created a temporary 
subcommittee of procurement managers to review the 2001 spend analysis 
report and more recent purchase card data where available. The agency 
will identify a few more high-dollar, high-volume product subcategories 
where purchase card buying power can be leveraged through discount 
agreements with major suppliers.

Source: GAO analysis of agency information.

[End of table]

[End of section]

Appendix II: Comments from the Department of Veterans Affairs:

THE SECRETARY OF VETERANS AFFAIRS: 
WASHINGTON: 

September 8, 2004:

Mr. David E. Cooper: 
Director:
Acquisition and Sourcing Management Team: 
U.S. Government Accountability Office:
441 G Street, NW: 
Washington, DC 20548:

Dear Mr. Cooper:

The Department of Veterans Affairs (VA) has reviewed your draft report, 
BEST PRACTICES: Using "Spend Analysis" to Help Agencies Take a More 
Strategic Approach to Procurement (GAO-04-870).

The Department agrees with your conclusion that Federal agencies can 
achieve significant benefits using spend analysis best practices to 
support a more strategic approach to buying goods and services. As the 
Government Accountability Office (GAO) has observed, VA has achieved 
considerable savings in using spend analysis.

The Department concurs with GAO's recommendation on page 23 
specifically addressed to VA. When responding to GAO's final report, VA 
will provide a more complete discussion of its efforts to include 
clinical and non clinical services in its spend analysis. The enclosure 
contains a technical clarification to your draft report.

Thank you for the opportunity to comment on your draft report.

Sincerely yours,

Signed by: 

Anthony J. Principi:

Enclosure: 

[End of section]

Appendix III: Comments from the Department of Health & Human Services:

DEPARTMENT OF HEALTH & HUMAN SERVICES:
Office of Inspector General:
Washington, D.C. 20201:

AUG 19 2004:

Mr. David E. Cooper: 
Director:
Acquisition and Sourcing Management:
United States Government Accountability Office: 
Washington, D.C. 20548:

Dear Mr. Cooper:

The Department has reviewed your draft report entitled, "Best 
Practices-Using `Spend Analysis' to Help Agencies Take a More Strategic 
Approach to Procurement" (GAO-04-870), and has no comments at this 
time.

The Department provided technical comments directly to your staff.

The Department appreciates the opportunity to comment on this draft 
report before its publication.

Sincerely,

Signed by: 

Lewis Morris:

Chief Counsel to the Inspector General:

The Office of Inspector General (OIG) is transmitting the Department's 
response to this draft report in our capacity as the Department's 
designated focal point and coordinator for Government Accountability 
Office reports. OIG has not conducted an independent assessment of 
these comments and therefore expresses no opinion on them.

[End of section]

Appendix IV: Comments from the Department of Agriculture:

USDA:

United States Department of Agriculture:
Office of the Assistant Secretary for Administration:

Ms. Carolyn Kirby: 
Assistant Director: 
Acquisition and Sourcing Management: 
United States Government Accountability Office: 
441 G Street, NW: 
Washington, DC 20548: 

Dear Ms. Kirby:

AUG 27 2004:

We have reviewed the draft Government Accountability Office (GAO) 
report number GAO-04-870 entitled: "Using Spend Analysis to Help 
Agencies Take a More Strategic Approach to Procurement." In general, we 
agree with the recommendations in the report, but offer the following 
comments:

On page 14, the following sentence: "Agriculture is currently using the 
results of a consultant's October 2001 spend analysis to obtain more 
favorable prices on small purchase card buys through agency-wide 
discount agreements with major purchase card vendors" tells only part 
of the story.	The consultant's report was useful in identifying segments 
of USDA's spend, however, additional analyses were required in areas 
where discount agreement are already in place or planned to be 
implemented. For example, we reviewed additional level 3 purchase card 
information or vendor data beyond that contained in the consultant's 
report.

While we believe detailed spending analyses conducted by consultants 
can be of value, we caution against overplaying the need for such 
studies. Many Federal departments, through the use of existing purchase 
card data and other available data systems, can discern sufficient 
information to begin leveraging their spending to obtain reduced prices 
for commonly acquired services and supplies. We would not want to see 
these efforts delayed by the mistaken impression that consultant 
reports are a prerequisite to such action.

On page 16, the "Department of Agriculture" title is erroneously shown 
in an agency profile that addresses the Department of Transportation.

On page 23, please note that it was always our intention to expand our 
e-Alliance strategic procurement program beyond purchase card spending. 
Purchase card is only the first phase of the program.

Thank you for the opportunity to comment. Should you require any 
further information, please contact the undersigned at (202) 720-6206 
or via e-mail at david.shea@usda.gov.

Sincerely, 

Signed by: 

David J. Shea: 
Chief Procurement Policy Division: 

[End of section]

Appendix V: Comments from the Department of Justice:

U.S. Department of Justice:
Washington, D.C. 20530:

AUG 26 2004:

David E. Cooper:
Director, Acquisition and Sourcing Management: 
U.S. Government Accountability Office:
441 G Street, NW, Rm. 7071: 
Washington, DC 20548:

Dear Mr. Cooper:

Thank you for the opportunity to review the draft report entitled 
"Using "Spend Analysis" to Help Agencies Take a More Strategic Approach 
to Procurement," GAO-04-870. We appreciate the opportunity to review 
and comment on the draft report.

While the Department generally agrees with the findings and 
recommendations in the report, we would like to clarify the status of 
our spend analysis efforts. The report concludes that the Department 
has not yet used spend analysis to foster a more strategic approach to 
acquisition nor has it begun to collect the data needed for such an 
analysis. While we have not yet reached a point with sufficient data to 
allow us to focus on strategic approaches, we have already begun the 
data collection efforts necessary to conduct a spend analysis. Our 
efforts are presently focused based around two key existing databases 
of procurement information: purchase card usage information available 
from our bankcard provider and procurement data contained in the 
Federal Procurement Data System (FPDS).

We have begun an analysis of purchase card expenditure patterns to 
identify opportunities for savings and to assess whether cardholders 
are taking advantage of current discount agreements such as the General 
Services Administration's (GSA) lower pricing under its Federal Supply 
Schedule (FSS) contracts. In this effort, we are working closely with 
our purchase card provider, Bank One, to analyze our purchase card data 
and determine a baseline of our current performance as well as future 
opportunities for savings. Similarly, we have begun to examine our FPDS 
data to identify patterns and opportunities for efficiencies and 
savings.

Again, we appreciate the opportunity to comment on this report. If you 
have any questions regarding our comments, please contact Richard P. 
Theis, Acting Director, Audit Liaison Office, on (202) 514-0469.

Sincerely,

Signed for: 

Paul R. Corts: 
Assistant Attorney General for Administration: 

[End of section]

FOOTNOTES

[1] A.T. Kearney, Inc., Assessment of Excellence in Procurement 2002 
(Chicago, Ill.: 2002).

[2] GAO, Best Practices: Taking a Strategic Approach Could Improve 
DOD's Acquisition of Services, GAO-02-230 (Washington, D.C.: Jan. 18, 
2002); Best Practices: Improved Knowledge of DOD Service Contracts 
Could Reveal Significant Savings, GAO-03-661 (Washington, D.C.: June 9, 
2003); and Contract Management: High-Level Attention Needed to 
Transform DOD Services Acquisition, GAO-03-935 (Washington, D.C.: Sept. 
10, 2003).

[3] Fiscal year 2003 data for contract actions (about $30.2 billion) 
and purchase card spending (about $7 billion), Federal Procurement Data 
System and the Federal Aviation Administration.

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

[5] Fiscal year 2003 is the last year for which complete governmentwide 
data is available. FPDS is the federal government's central database on 
contracting and purchase card transactions. Additionally, we obtained 
summary fiscal year 2003 contract action data from the Federal Aviation 
Administration, which is not required to report their procurement 
activities to the FPDS. 

[6] The current system contains known errors, as discussed in GAO, 
Reliability of Federal Procurement Data, GAO-04-295R (Washington, D.C.: 
Dec. 30, 2003). Although we have not fully assessed the extent of 
reporting errors, we have found sufficient problems to warrant concern 
about the current reliability of FPDS information. As we understand the 
design of an ongoing modernization of that system through FPDS-Next 
Generation, many of the sources of the errors in the current FPDS 
should be eliminated. In the short term, as the transition to FPDS-Next 
Generation occurs, we have made recommendations to improve data 
reliability. 

[7] Between 2000 and 2003, we studied procurement best practices of 
eleven companies--Bausch & Lomb; Brunswick Corporation; ChevronTexaco; 
Delta Air Lines; Dell; Dun & Bradstreet Corporation; Electronic Data 
Systems Corporation; Exxon Mobil Corporation; Hasbro, Inc; 
International Business Machines; and Merrill Lynch & Co., Inc. Our past 
work focused on how the companies used best practices to improve 
procurement of services where costs were increasing faster than for 
procurement of goods. However, the companies told us that they followed 
the same practices to procure goods. See GAO-02-230 and GAO-03-661.

[8] A commodity is a category of products or services segmented by 
commonality of materials or service type. The term does not imply an 
expendable or noncomplex item. This grouping will allow volume and 
technical leveraging of organizational spending and the establishing of 
a network of commodity experts.

[9] Companies use commodity teams to make sure they have the right mix 
of knowledge, technical expertise, and credibility. The teams can vary 
in size but generally include representatives from a company's 
procurement unit, internal clients or users of the product or service, 
and the budget or finance office. The teams analyze spending data, 
define internal needs and requirements, and conduct market research. 
This approach has helped companies to define their needs better and to 
identify, select, and manage suppliers and, in turn, helped ensure that 
users' needs were met at the lowest total costs to the companies. 

[10] GAO-02-230, GAO-03-661, and GAO-03-935.

[11] GAO, Contract Management: Agencies Can Achieve Significant Savings 
on Purchase Card Buys, GAO-04-430 (Washington, D.C.: Mar. 12, 2004) and 
Purchase Cards: Increased Management Oversight and Control Could Save 
Hundreds of Millions of Dollars, GAO-04-717T (Washington, D.C.: Apr. 
28, 2004).

[12] GAO, VA and DOD Health Care: Factors Contributing to Reduced 
Pharmacy Costs and Continuing Challenges, GAO-02-969T (Washington, 
D.C.: July 22, 2002) and DOD and VA Pharmacy: Progress and Remaining 
Challenges in Jointly Buying and Mailing Out Drugs, GAO-01-588 (May 25, 
2001).

[13] According to Veterans Affairs, national contracts are used to 
leverage the agency's buying power on health care commodities 
identified as high usage. The agency develops the requirements for 
national contracts with clinician customer input and openly competes 
the requirements. The agency's national contracts are generally firm, 
fixed-price requirements-type contracts, with a base year and four 1-
year option periods. Veterans Affairs exercises options after market 
research reveals that the prices are fair and reasonable and the award 
is in the best interest of the government.

[14] Although HHS intends to market the discount agreements to agency 
cardholders for small purchase card buys, HHS divisions with larger-
dollar orders will also be able to buy the same discounted items 
through the agencywide agreements. However, the agreements are not 
mandatory sources of supply for either purchase card holders or other 
agency buys.

[15] HHS anticipates awarding two more agreements in August 2004 for 
the office furniture and equipment categories. 

[16] HHS hired the consultant to provide spend analysis services and 
procedural, technical, and briefing support to and collaboration with 
the agencywide workgroup to help implement various phases of the 
services acquisitions consolidation initiative. Workgroup members 
include representatives from the Office of the Secretary and all HHS 
divisions, such as the National Institutes of Health, Centers for 
Disease Control and Prevention, and the Food and Drug Administration. 

[17] For the spend analysis, Agriculture furnished the consultant 
fiscal year 2000 data files extracted from FPDS and the agency's 
Purchase Card Management System. The contractor analyzed about 473,000 
contract transactions totaling about $1.6 billion and 2.3 million 
purchase card buys totaling $467 million. The contractor organized the 
spend data into 52 commodity categories of products and services, such 
as agricultural machinery, construction services, fleet maintenance, 
telecom equipment, and office supplies and paper.

[18] Under the Schedules program, the GSA negotiates to obtain 
discounted prices on a wide range of commercial goods and services on 
its contracts with multiple vendors.

[19] Since 2002, Agriculture has carried out a cross-agency effort, 
with contractor technical and program management support, to develop, 
test, and phase-in the enterprise Integrated Acquisition System to 
replace more than 40 different procurement systems in use across eleven 
agencies and administrative offices. Agriculture plans to have the 
replacement system fully operational by October 2006.

[20] When fully operational, the data warehouse will automatically 
extract procurement data for all contract actions processed via the 
Integrated Acquisition System and extract procurement data on all 
purchase card buys captured in the agency's purchase card management 
system.

[21] In 2002, the agency launched a unified financial management system 
program to replace six major accounting systems now in use with one 
agencywide system. Plans for the new system include integration of 
financial and acquisition management, assure access to timely 
information, and speed up business process and decision making. Justice 
hired a contractor in March 2004 to provide software for the new system 
and plans to replace legacy systems between fiscal years 2005 and 2009. 


[22] In fiscal year 2003, Justice had 12,842 purchase cardholders that 
accounted for over $588 million in small purchases of goods and 
services for $2,500 or less. For more information, see GAO-04-430.

[23] GAO-04-430.

[24] According to the deputy senior procurement executive director, the 
agency's architectural review board was expected to approve a charter 
and an enterprisewide information technology procurement business 
process to guide the commodity councils' activities. 

[25] Since 1995, Transportation procurement activities have implemented 
this program as a major initiative to improve procurement performance. 
This program assists procurement managers in targeting areas for 
improvement based on the results of specified metrics chosen for their 
importance to the administration, agency management, or agency 
customers. 

[26] The general analysis did not include data for the Federal Aviation 
Administration or organizations transferred to the Department of 
Homeland Security (Coast Guard and Transportation Security Agency). 
Transportation's analysis used fiscal year 2003 FPDS data for contract 
actions in excess of $25,000. Dollars analyzed totaled $1.6 billion and 
were sorted by research and development (6 percent), other services (84 
percent), and products (10 percent). Transportation did not analyze 
vendor or individual product and service details available in the FPDS 
records.

[27] For more information on opportunities to improve Veterans Affairs' 
purchasing practices and increase savings, see GAO, Contract 
Management: Further Efforts Needed to Sustain VA's Progress in 
Purchasing Medical Products and Services, GAO-04-718 (Washington, D.C.: 
June 22, 2004).

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

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