U.S. DEPARTMENT OF ENERGY
                   OFFICE OF INSPECTOR GENERAL
                                
                                
                                
                                
                                
                                
                                
                                
                                
             AUDIT OF DESKTOP COMPUTER ACQUISITIONS
                                
 AT THE IDAHO NATIONAL ENGINEERING AND ENVIRONMENTAL LABORATORY
 
 
The Office of Inspector General wants to make the distribution of
its reports as customer friendly and cost effective as possible.
Therefore, this report will be available electronically through
the Internet at the following alternative addresses:
                                
            Department of Energy Headquarters Gopher
                        gopher.hr.doe.gov
                                
         Department of Energy Headquarters Anonymous FTP
                       vm1.hqadmin.doe.gov
                                
Department of Energy Human Resources and Administration Home Page
                    http://www.hr.doe.gov/ig
                                
  Your comments would be appreciated and can be provided on the
         Customer Response Form attached to the report.
                                
              This report can be obtained from the
                    U.S. Department of Energy
         Office of Scientific and Technical Information
                           P.O. Box 62
                   Oak Ridge, Tennessee  37831
 
 
 
 
 
 
Report Number:  WR-B-97-07           Western Regional Audit Office
Date of Issue:  August 25, 1997      Albuquerque, New Mexico 87185
             
             
             AUDIT OF DESKTOP COMPUTER ACQUISITIONS
 AT THE IDAHO NATIONAL ENGINEERING AND ENVIRONMENTAL LABORATORY
 
 
 
                                
                                
                        TABLE OF CONTENTS
                                
                                
                                                            Page
          SUMMARY.........................................   1
          
PART I  - APPROACH AND OVERVIEW...........................   2
          
          Introduction....................................   2
          
          Scope and Methodology...........................   2
         
          Background......................................   3
          
          PART II   - FINDING AND RECOMMENDATIONS..........  4
          
          Desktop Computer Acquisitions at the                
          Laboratory......................................   4
          
PART III -MANAGEMENT AND AUDITOR COMMENTS.................   8
          
PART IV - APPENDIX........................................   9
 
          Summary of Related Office of Inspector General      
          Audit Reports....................................  9
          
          
                    U.S. DEPARTMENT OF ENERGY
                   OFFICE OF INSPECTOR GENERAL
                    OFFICE OF AUDIT SERVICES
                  WESTERN REGIONAL AUDIT OFFICE
                                
             AUDIT OF DESKTOP COMPUTER ACQUISITIONS
 AT THE IDAHO NATIONAL ENGINEERING AND ENVIRONMENTAL LABORATORY
                                
Audit Report Number:  WR-B-97-07
                                
                             SUMMARY
 
     Federal and Department of Energy (Department) acquisition
regulations, policies and procedures, as well as the terms of the
current contract between the Idaho Operations Office (Idaho) and
Lockheed Martin Idaho Technologies Company (Lockheed) require
them to pay the lowest possible prices for desktop computers
needed to support the overall mission at the Idaho National
Engineering and Environmental Laboratory (Laboratory).  The
purpose of this audit was to determine Idaho's and Lockheed's
success in achieving this price goal.
 
     Idaho and Lockheed have implemented numerous efficiency
standards that are expected to reduce computer service and
maintenance costs as well as increase employee productivity by
approximately $3.6 million per year.  However, the audit showed
that Lockheed did not always pay the lowest possible prices for
desktop computers because its standard desktop computer
configuration was excessive.  Additionally, some desktop
computers that Lockheed acquired exceeded its established
standard and were not fully justified in accordance with
established policies and procedures.  Further, Lockheed purchased
desktop computers from a local vendor rather than a less costly
alternative source and did not pursue the possibly more
economical option of leasing computers.
 
     We recommended that the Manager, Idaho Operations Office,
reduce computer acquisition costs by having Lockheed establish
and adhere to a more conservative standard configuration for
computers, use alternative sources of supply, and re-evaluate the
feasibility of leasing rather than continuing to purchase
computers.  By implementing these recommendations, the Office of
Inspector General (OIG) estimates that the Department could save
approximately $750,000 annually.  Management concurred with the
recommendations, and the OIG commends both Idaho and Lockheed for
promptly initiating corrective actions.
 
 
 
                              __________/s/_________________
                              Office of Inspector General
                             
                             PART I
                                
                      APPROACH AND OVERVIEW
 
INTRODUCTION
 
     Idaho and Lockheed are required to pay the lowest possible
prices for desktop computer systems needed to support the
Laboratory's overall mission.  The purpose of the audit was to
determine if they were successful in achieving this goal.
 
SCOPE AND METHODOLOGY
 
     The audit was conducted at Idaho's and Lockheed's offices in
Idaho Falls, Idaho, from November 1996 through March 1997.  The
audit covered Idaho and Lockheed computer acquisitions (actual
and planned) during the period October 1994 through September
1997.  To accomplish the audit objective, we tested a sample of
70 computer acquisitions to determine whether Lockheed was
adhering to its own internal policies and procedures governing
its computer acquisition process.  Also, we interviewed key
personnel and reviewed:
 
     o    Federal and Department acquisition regulations;
     
     o    Lockheed's contract with the Department;
     
     o    Lockheed's internal policies and procedures governing
          computer acquisition procedures;
     
     o    computer acquisition requisitions, plans, vendor 
          invoices, and accounting records to verify computer 
          acquisition cost information;
     
     o    property reports for identifying total cost, accumulated
          depreciation, and net book values for computers; and,
     
     o    prior reviews and internal audit reports related to
          computers.
 
     The audit was performed according to generally accepted
Government auditing standards for performance audits and included
tests of internal controls and compliance with laws and
regulations to the extent necessary to satisfy the audit
objective.  We limited the review of internal controls to those
controls associated with acquiring computers at the lowest
possible price.  Because the review was limited, it would not
necessarily have disclosed all internal control deficiencies that
may have existed at the time of our audit.  We did not rely
extensively on computer processed data and, therefore, did not
fully examine the reliability of that data.  Management waived
the exit conference.
 
         
BACKGROUND
 
     Prior to Fiscal Year 1995, five separate contractors managed
the Laboratory's mission operations.  Recognizing inefficiencies
associated with this contractual arrangement, as well as the need
to standardize Laboratory operations, the Department awarded a
five-year, consolidated contract to Lockheed.  As part of this
contract, the Department challenged Lockheed to employ good
management practices and eliminate inefficiencies that previously
existed at the Laboratory.  After it accepted this challenge,
Lockheed became the Laboratory's management and operating
contractor at the beginning of Fiscal Year 1995.
 
     Lockheed promptly recognized the need to reduce computer-
related costs.  To accomplish this task, Lockheed made a number
of organizational changes to the Information Resources Management
(IRM) office at the beginning of Fiscal Year 1995.  Since then,
Lockheed's IRM Director has significantly reduced computer-
related costs.  In accordance with provisions outlined in
Department Order 1360.1B, "Acquisition and Management of
Computing Resources," Lockheed planned computer system
acquisitions well in advance of actual need for these resources.
Additionally, with Idaho's approval, Lockheed decommissioned a
super computer that was no longer needed to support the
Laboratory's overall mission and was costing the Department about
$625,000 per year to operate, service, and maintain.
 
     In addition, Idaho and Lockheed recognized a need to replace
more than 60 percent of the Laboratory's computer equipment,
including desktop computers.  Specifically, Laboratory property
reports indicated that there were about 6,500 desktop computer
systems that Idaho and Lockheed concluded should be replaced with
standardized desktop computers.  In establishing this standard
for desktop computers, Idaho and Lockheed expected to increase
employee productivity by as much as an estimated $3 million per
year.  This amount, added to the $625,000 attributed to
eliminating the super computer, will result in the Laboratory
saving about $3.6 million per year.  The Office of Inspector
General commends Idaho and Lockheed for implementing these cost
reduction initiatives.  As Part II of this report demonstrates,
however, Idaho and Lockheed could realize additional cost
savings.
 
                             PART II
                                
                   FINDING AND RECOMMENDATIONS
                                
         Desktop Computer Acquisitions at the Laboratory
 
FINDING
 
     Federal and Department acquisition regulations, policies and
procedures, as well as the performance-based contract currently
in effect, require Idaho and Lockheed to pay the lowest possible
prices for desktop computer systems needed to support the
Laboratory's mission.  The audit showed that Idaho streamlined
its computer procurement process and paid lower prices for
desktop computers than it would have paid under traditional
contracting procedures.  However, at Lockheed, desktop computer
costs were still too high.  Specifically, Lockheed's standard
configuration for its desktop computers was excessive,
acquisitions exceeded the standard configuration, and purchases
were priced higher than necessary for desktop computers.
Lockheed's desktop computer costs were higher than necessary
because its standard computer configuration was based on a
multimedia computer, computer acquisitions that exceeded
established standards were not challenged, and it acquired
computers from a specific vendor rather than alternative supply
sources.  Further, Lockheed did not pursue an option to lease
rather than purchase desktop computers.  As a result, the
Department could pay $750,000 more than necessary for desktop
computer systems purchased each year.
 
RECOMMENDATIONS
 
     We recommend that the Manager, Idaho Operations Office,
decrease the Laboratory's computer acquisition costs by having
Lockheed:
 
          establish and adhere to a more conservative standard
          configuration for computers;
     
          use alternative sources of supply; and,
     
          re-evaluate the feasibility of leasing rather than
          purchasing computers and, if practicable, implement 
          the results of this evaluation.
 
MANAGEMENT REACTION
 
     Management concurred with the recommendations and has
already initiated corrective actions.  Detailed management and
auditor comments are provided in Part III of this report.
                       
                       DETAILS OF FINDING
 
     Purchasing goods and services at the lowest possible price
is a requirement stated in the Federal and Department Acquisition
Regulations.  This requirement extends to Idaho as well as
Lockheed's contract with the Department.  Specifically,
Lockheed's contract as well as its own internal policies and
procedures require it to acquire goods and services at the lowest
possible cost to the Department.  The contract also encourages
and authorizes Lockheed to use alternative sources of supply for
goods and services.
 
COMPUTER ACQUISITIONS
 
     While Idaho streamlined its computer acquisition process and
paid lower prices for computers than it would have paid if it had
followed traditional contracting procedures, its contractor,
Lockheed, was not minimizing its acquisition costs for desktop
computers.  Specifically, Lockheed's computer costs were
increased by adopting a standard configuration for desktop
computer systems that exceeded user needs, acquiring systems with
greater capabilities than the standard configuration, and paying
excessive prices for these desktop computers.
 
     Lockheed established a standard configuration for desktop
computer systems that, compared to other organizations, exceeded
its needs.  According to Lockheed's desktop computer evaluation
reports published in 1995 and 1996, the standard computer
configuration included multimedia capabilities, such as an
internal sound card, external speakers, and a 17-inch monitor.
We queried several large private companies (technically-oriented
companies with 6,500 or more employees) to identify the standard
desktop computer configuration they were using to support
operations.  These companies informed us that their standard
configuration for desktop computers did not include the
multimedia features that Lockheed included in its configuration.
Furthermore, while the Laboratory's operations may need some
multimedia computers with 17-inch monitors to support special
applications and uses, we could find no support or justification
for acquiring these multimedia computers for all Laboratory
employees.  By excluding the external speakers and continuing to
use or acquire 15-inch monitors and only acquiring 17-inch
monitors on a limited, justifiable basis, Lockheed could reduce
its computer acquisition costs by as much as $550 per computer.
 
     While we took exception to the standard configuration, we
also found that Lockheed did not consistently adhere to this
standard.  We subjectively selected a sample of 70 Lockheed
computer acquisitions made during the period October 1994 through
March 1997.  Of these 70 desktop computer acquisitions, 15 were
consistent with or below Lockheed's standard configuration.  The
remaining 55 desktop computer acquisitions sampled exceeded
Lockheed's standard configuration.  Specifically, these 55
desktop computers included additional features, such as larger
monitors and hard drives, additional random access memory,
internal tape drives, and more powerful microprocessors.  As a
result, the average amount Lockheed paid for these 55 computers
was $2,120 more per computer than its price for a standard
desktop computer system.
 
     Finally, Lockheed did not minimize its acquisition cost for
desktop computers.  For example, Lockheed paid a local vendor
about $200 more for each desktop computer than it would have paid
if it had used alternative sources of supply.
 
COMPUTER ACQUISITION STRATEGIES
 
     Lockheed paid more than necessary for desktop computers
because it decided to provide Laboratory employees with
multimedia computer systems.  It also allowed computer
acquisitions that exceeded established standards without adequate
justifications, and it did not use alternative sources of supply
or pursue an option to lease desktop computers.
 
     Lockheed's standard configuration exceeded user needs
because management thought that all employees required multimedia
computer systems.  In management's response to a draft of this
report, Lockheed stated that its standard multimedia computer
configuration was a "middle of the road" configuration for normal
business operations.  Furthermore, Lockheed officials told us
that this standard configuration would support a "computer-based
training program."  Yet, our inquiries with private companies
disclosed that they do not acquire multimedia computers for every
employee.  Rather, these companies told us that they acquire and
use multimedia computers in centralized computer-based training
centers, thereby negating the need to acquire multimedia
computers for each employee.
 
     In addition, Lockheed did not consistently adhere to this
standard configuration when purchasing desktop computers because
it did not follow its own internal computer acquisition policies
and procedures.  According to those procedures, users are
required to justify the need for a new computer as well as obtain
Director-level approval for all proposed acquisitions that exceed
Lockheed's standard configuration.  As noted, we identified 55
instances where desktop computer acquisitions exceeded Lockheed's
established standard without the required Director-level
approval.  In only one case was an adequate justification
prepared and Director-level approval obtained, and that occurred
after a Lockheed employee purchased the computer.
 
     Lockheed did not use alternative sources of supply because
of the special services a local vendor could provide.  These
special services included setting up, starting, configuring, and
diagnosing the computer.  The audit disclosed, however, that
Lockheed has an internal support group to provide these services.
Lockheed also stated that the local vendor could deliver
computers within five days after it placed the order.  The audit
showed, however, that Idaho does not require these services or
special delivery schedules when it acquires computers.  In
addition, Lockheed's argument for vendors to deliver computers
within five days was not compelling because it develops computer
acquisition plans three years in advance of an actual need.
Consequently, we concluded that Lockheed needs to carefully
review and justify its continued acquisition of computers through
a local vendor rather than alternative sources of supply, such as
the General Services Administration, Federal Supply Schedules,
the Small Business Administration's contracts, or other desktop
computer vendors.
     
     Lastly, Lockheed did not obtain the lowest possible costs
because it continued to purchase rather than pursue the option to
lease desktop computers.  When Lockheed established its standard
computer system configuration, it also evaluated the costs of
leasing computers.  The evaluation showed that Lockheed could
save the Department about $5 million over a ten-year period by
leasing rather than continuing to purchase desktop computers.
However, Lockheed did not pursue this option because senior
management did not want to commit the Department to a long-term
leasing contract for computer equipment in light of numerous
staffing changes that might cause computer equipment to become
underutilized and/or unnecessary.  Although Lockheed's rationale
for not pursuing an option to lease desktop computers is
understandable, Lockheed's concern about underutilized and
unnecessary computer systems could be resolved by including an
additional clause in the lease agreement that would permit
Lockheed to terminate the lease agreement.
 
COMPUTER ACQUISITION COSTS
 
     For the three-year period ending September 30, 1997, the
Department will have expended about $13.6 million for computer
acquisitions at the Laboratory.  Lockheed and the Department
could significantly reduce future computer acquisition costs.  As
the audit showed, the Department could save about $550 per
computer by adopting a more conservative desktop computer
configuration.  Additionally, by acquiring desktop computers
through alternative sources of supply, the Department could save
an additional $200 per computer.  Based on the acquisition of
1,000 computer systems per year, this would amount to savings of
approximately $750,000 per year.  Further, additional costs could
be saved if the Department limited Lockheed to purchasing desktop
computers based on the standard configuration, unless the
purchase is fully justified and approved beforehand.  Finally,
Lockheed's own analysis published in April 1996 showed that the
Department could potentially save about $5 million over a ten-
year period by leasing rather than continuing to purchase
computers.  Therefore, this alternate means of acquisition should
also be considered in the future.
 
                            PART III
                                
                 MANAGEMENT AND AUDITOR COMMENTS
 
     Management concurred with the finding and recommendations
presented in the initial draft report.  Management and auditor
comments on specific recommendations follow.
 
Recommendation 1
 
     Management Comments.  Management concurred with the
recommendation to establish and implement a more conservative
standard configuration for computers.  Specifically, management
stated that emerging software applications and programs require
significantly greater computing power and capabilities.  However,
management added, the speaker systems have been eliminated and
Idaho will request Lockheed to change its standard of 17-inch
monitors and acquire a 17-inch or larger monitor only when
justified.
 
     Auditor Comments.  Management comments are responsive to the
recommendation.
 
Recommendation 2
 
     Management Comments.  Management concurred with the
recommendation to identify and use alternative sources of supply.
Management explained that the award was made to a local vendor
based on total value received.  Management also stated that the
local vendor adds value to Lockheed's desktop computer
acquisitions by providing many services, including configuration,
diagnostic testing, scheduled delivery, and non-warranty related
telephone support.  However, management stated that any future
personal computer procurements will consider alternative sources
of supply.
 
     Auditor Comments.  Management comments are responsive to the
recommendation.
 
Recommendation 3
 
     Management Comments.  Management concurred with the
recommendation to evaluate the feasibility of leasing rather than
purchasing computers and, if practicable, implement the results
of that evaluation.  According to management, Lockheed examined
in Fiscal Year 1996 the possibility of leasing computers.
Lockheed determined that no commitment could be made at that time
based on unknown staffing levels, desktop computer configuration
requirements, and quantities needed to continue supporting
Laboratory mission operations.  Since 1996, staffing levels,
desktop computer configuration requirements, and quantities
needed to continue supporting Laboratory mission operations have
become known.  Therefore, Idaho will request Lockheed to initiate
another lease study for future computer acquisitions.
 
     Auditor Comments.  Management comments are responsive to the
recommendation.
                             PART IV
                                
                            APPENDIX
 
  Summary of Related Office of Inspector General Audit Reports
 
     Listed below are prior OIG audit reports on acquisition
issues related to automated data processing equipment.
 
     WR-B-96-06, Audit of Bonneville Power Administration's
Management of Information Resources, April 1996
 
     The audit reported that improvements could be made in
implementing credit card and property procedures for computer
related equipment.  For example, almost 43 percent of a sample of
credit card purchases were made by employees whose authority to
buy computer-related equipment was not documented properly and
inventory reports showing shortages were not being followed up on
a timely manner.  Additionally, unused equipment was not being
redistributed.
 
     AP-B-95-01, Audit of Management and Control of Information
Resources at Sandia National Laboratories, November 1994
 
     The audit reported that inefficiencies and weaknesses
existed in Sandia's acquisition, use, and control of computer
resources, and in the protection of computer-processed
information.
 
     WR-B-94-4, Audit of Computer Maintenance at Lawrence
Livermore National Laboratory June 1994
 
     The audit showed that Lawrence Livermore National Laboratory
used extended warranty subcontracts, rather than more economical
and efficient time and materials subcontracts for computer
maintenance, which cost about $437,000 more than necessary over a
6-month period.  Further, the Department's Oakland Operations
Office did not ensure that Livermore identified and selected the
most economical and efficient approach for computer maintenance.
 
     WR-B-94-5, Audit of Implementation of Long Range Plans to
Reduce Computer Support Costs at Lawrence Livermore National
Laboratory, September 1994
 
     The audit disclosed that Lawrence Livermore National
Laboratory maintained and operated a mainframe and six more
computers in its Administrative Information Systems Center rather
than acquiring and using more economical and efficient
workstations.  Further, the Department's Oakland Operations
Office did not ensure that Livermore evaluated the Administrative
Center's long-range computer plans for economy and efficiency.
     
     WR-B-93-02, Audit of Computer Equipment Maintenance at Los
Alamos National Laboratory, June 1993
 
     The audit showed that Los Alamos maintained service
contracts which covered retired computer equipment and used in-
house facilities to repair computer equipment already covered by
a manufacturer's warranty.
                                         
                                         Report No.:   WR-B-97-07
 
                     CUSTOMER RESPONSE FORM
 
The Office of Inspector General has a continuing interest in
improving the usefulness of its products.  We wish to make our
reports as responsive as possible to our customers' requirements
and, therefore, ask that you consider sharing your thoughts with
us.  On the back of this form, you may suggest improvements to
enhance the effectiveness of future reports.  Please include
answers to the following questions if they are applicable to you:
 
1.   What additional background information about the selection,
     scheduling, scope, or procedures of the audit or inspection
     would have been helpful to the reader in understanding this
     report?
 
2.   What additional information related to the findings and
     recommendations could have been included in this report 
     to assist management in implementing corrective action?
 
3.   What format, stylistic, or organizational changes might 
     have made this report's overall message more clear to the 
     reader?
 
4.   What additional actions could the Office of Inspector
     General have taken on the issues discussed in this report 
     which would have been helpful?
 
Please include your name and telephone number so that we may
contact you should we have any questions about your comments.
 
Name___________________        Date _______________________
 
Telephone ______________       Organization _______________
 
When you have completed this form, you may telefax it 
to the Office of Inspector General at (202) 586-0948, or you 
may mail it to:
 
                 Office of Inspector General  (IG-1)
                 U.S. Department of Energy
                 Washington, D.C.  20585
                 
                 Attn:  Customer Relations
 
If you wish to discuss this report or you comments with a staff
member of the Office of Inspector General, please contact Wilma
Slaughter on (202) 586-1924.