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THE SERVICES ACQUISITION REFORM ACT [SARA]

HEARING

BEFORE THE

SUBCOMMITTEE ON TECHNOLOGY AND

PROCUREMENT POLICY

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

MARCH 7, 2002

Serial No. 107–151

Printed for the use of the Committee on Government Reform

(

Available via the World Wide Web: http://www.gpo.gov/congress/house

http://www.house.gov/reform

(II)

COMMITTEE ON GOVERNMENT REFORM

DAN BURTON, Indiana, Chairman

BENJAMIN A. GILMAN, New York

CONSTANCE A. MORELLA, Maryland

CHRISTOPHER SHAYS, Connecticut

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

STEPHEN HORN, California

JOHN L. MICA, Florida

THOMAS M. DAVIS, Virginia

MARK E. SOUDER, Indiana

STEVEN C. LATOURETTE, Ohio

BOB BARR, Georgia

DAN MILLER, Florida

DOUG OSE, California

RON LEWIS, Kentucky

JO ANN DAVIS, Virginia

TODD RUSSELL PLATTS, Pennsylvania

DAVE WELDON, Florida

CHRIS CANNON, Utah

ADAM H. PUTNAM, Florida

C.L. ‘‘BUTCH’’ OTTER, Idaho

EDWARD L. SCHROCK, Virginia

JOHN J. DUNCAN, JR., Tennessee

——— ———

HENRY A. WAXMAN, California

TOM LANTOS, California

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

PATSY T. MINK, Hawaii

CAROLYN B. MALONEY, New York

ELEANOR HOLMES NORTON, Washington,

DC

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

ROD R. BLAGOJEVICH, Illinois

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

JIM TURNER, Texas

THOMAS H. ALLEN, Maine

JANICE D. SCHAKOWSKY, Illinois

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

———

BERNARD SANDERS, Vermont

(Independent)

KEVIN BINGER, Staff Director

DANIEL R. MOLL, Deputy Staff Director

JAMES C. WILSON, Chief Counsel

ROBERT A. BRIGGS, Chief Clerk

PHIL SCHILIRO, Minority Staff Director

SUBCOMMITTEE ON TECHNOLOGY AND PROCUREMENT POLICY

THOMAS M. DAVIS, Virginia, Chairman

JO ANN DAVIS, Virginia

STEPHEN HORN, California

DOUG OSE, California

EDWARD L. SCHROCK, Virginia

JIM TURNER, Texas

PAUL E. KANJORSKI, Pennsylvania

PATSY T. MINK, Hawaii

EX OFFICIO

DAN BURTON, Indiana HENRY A. WAXMAN, California

MELISSA WOJCIAK, Staff Director

VICTORIA PROCTOR, Professional Staff Member

TEDDY KIDD, Clerk

MARK STEPHENSON, Minority Professional Staff Member

(III)

C O N T E N T S

Page

Hearing held on March 7, 2002 .............................................................................. 1

Statement of:

Kelman, Steven, professor of public management, Harvard University;

Steven Schooner, associate professor of law, the George Washington

University Law School; Scott Dever, vice president of global procurement, Hasbro, Inc.; Richard Roberts, senior vice president and managing director, Federal services, KPMG Consulting, Inc.; Roberta

StandsBlack-Carver, president and CEO, Four Winds Services, Inc.;

and Jerry S. Howe, senior vice president and general counsel, Veridian 76

Woods, William, Director for Acquisition and Sourcing Management, U.S.

General Accounting Office; Angela Styles, Administrator, Office of Federal Procurement Policy; Stephen Perry, Administrator, U.S. General

Services Administration; and Deidre Lee, Director of Procurement, U.S.

Department of Defense ................................................................................. 12

Letters, statements, etc., submitted for the record by:

Davis, Hon. Thomas M., a Representative in Congress from the State

of Virginia, prepared statement of .............................................................. 2

Dever, Scott, vice president of global procurement, Hasbro, Inc., prepared

statement of ................................................................................................... 118

Howe, Jerry S., senior vice president and general counsel, Veridian, prepared statement of ........................................................................................ 138

Kelman, Steven, professor of public management, Harvard University,

prepared statement of ................................................................................... 79

Kucinich, Hon. Dennis J., a Representative in Congress from the State

of Ohio, prepared statement of .................................................................... 6

Lee, Deidre, Director of Procurement, U.S. Department of Defense, prepared statement of ........................................................................................ 62

Perry, Stephen, Administrator, U.S. General Services Administration,

prepared statement of ................................................................................... 47

Roberts, Richard, senior vice president and managing director, Federal

services, KPMG Consulting, Inc., prepared statement of .......................... 124

Schooner, Steven, associate professor of law, the George Washington University Law School, prepared statement of ................................................. 104

StandsBlack-Carver, Roberta, president and CEO, Four Winds Services,

Inc., prepared statement of .......................................................................... 132

Styles, Angela, Administrator, Office of Federal Procurement Policy, prepared statement of ........................................................................................ 25

Turner, Hon. Jim, a Representative in Congress from the State of Texas,

prepared statement of ................................................................................... 10

Woods, William, Director for Acquisition and Sourcing Management, U.S.

General Accounting Office, prepared statement of .................................... 15

(1)

THE SERVICES ACQUISITION REFORM ACT

[SARA]

THURSDAY, MARCH 7, 2002

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON TECHNOLOGY AND PROCUREMENT

POLICY,

COMMITTEE ON GOVERNMENT REFORM,

Washington, DC.

The subcommittee met pursuant to call, at 2:25 p.m., in room

2154, Rayburn House Office Building, Hon. Tom Davis (chairman

of the subcommittee) presiding.

Present: Representatives Davis, Horn, and Turner.

Staff present: Melissa Wojciak, staff director; Victoria Proctor,

professional staff member; Amy Heerink, chief counsel; Mark Stephenson, minority professional staff member; and Jean Gosa, minority assistant clerk.

Mr. DAVIS. I apologize for being late. I was summoned to the

Speaker’s office and I leave when he tells me I can leave. I think

you know what that is like.

I want to just say good afternoon and welcome to today’s legislative hearing on H.R. 3832, the Services Acquisition Reform Act. Today’s hearing builds on others conducted over the past year on the

continuing barriers government agencies face in acquiring the

goods and services necessary to meet mission objectives. SARA is

intended to assist agencies in overcoming those barriers by adopting better management approaches in purchasing tools governmentwide to facilitate the efforts of acquisition managers in meeting agencies’ goals.

I am going to put the rest of my statement in the record so that

we can move ahead, and yield to Mr. Turner for any statement he

may wish to make.

[The prepared statement of Hon. Thomas M. Davis follows:]

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Mr. TURNER. Mr. Chairman, I will do the same in the interest

of time.

Mr. DAVIS. Thank you. We may end up being ahead of where we

were when you—[laughter]—Mr. Horn, you are welcome to make a

statement.

Mr. HORN. I will bypass (off-mic).

We had a hearing on the problem of the interest cards, and I see in here that $2,500 is the mark at this point and it wants to go

to $25,000. We have had a real situation with the Navy that is just

irresponsibility, and so we need to somehow get accountability and

responsibility.

Mr. DAVIS. Thank you. I think the question is, how do you find

the right balance and not running for paperwork every time you

need some little item, but at the same time making sure people are

accountable for what they do.

I am going to call—yes, Mr. Turner.

Mr. TURNER. I had a statement handed to me by Representative

Dennis Kucinich. I would like to offer it into the record.

Mr. DAVIS. Without objection, it will be put in the record.

[The prepared statement of Hon. Dennis J. Kucinich follows:]

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Mr. TURNER. And if I could also offer my statement as well,

which also includes a request from the minority that three items

be included in the record that I might mention, first, the comments

of the Inspector General at the GSA dated March 5, 2002, which

refers to several provisions of the bill; second, the minority would

request inclusion of the Acquisition Reform Report prepared by the

Project of Government Oversight; and finally it is my understanding that the Inspector General at the Department of Defense is preparing written comments on the bill which should be ready within

a few days, and we would ask that they also be included in the

record.

[The prepared statement of Hon. Jim Turner follows:]

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Mr. DAVIS. Thank you.

I am going to call our first panel of witnesses. As you know, it

is the policy of the committee that all witnesses be sworn before

you testify. If you would rise with me and raise your right hands.

[Witnesses sworn.]

Mr. DAVIS. Thank you. Be seated.

To afford sufficient time for questions, if you would try to limit

yourselves to no more than 5 minutes for your opening statement.

All written statements will be made part of the permanent record,

and without objection, Mr. Turner, the items that you have just

presented will be put in the record.

We will begin with Mr. Woods, followed by Mr. Perry, Mr. Styles

and Ms. Lee. Thank you.

STATEMENTS OF WILLIAM WOODS, DIRECTOR FOR ACQUISITION AND SOURCING MANAGEMENT, U.S. GENERAL ACCOUNTING OFFICE; ANGELA STYLES, ADMINISTRATOR, OFFICE OF FEDERAL PROCUREMENT POLICY; STEPHEN

PERRY, ADMINISTRATOR, U.S. GENERAL SERVICES ADMINISTRATION; AND DEIDRE LEE, DIRECTOR OF PROCUREMENT,

U.S. DEPARTMENT OF DEFENSE

Mr. WOODS. Thank you, Mr. Chairman.

We appreciate the opportunity to be here today to participate in

the hearing on the Services Acquisition Reform Act of 2002. The

bill’s proposals focus on strengthening the acquisition work force,

moving toward a performance-based contracting environment, and

improving the management of service acquisitions. Each of these

areas is in need of improvement and we support the efforts of the

subcommittee in addressing them.

In my statement today, I would like to cover three areas. First,

I would like to discuss our recent findings on how leading companies tackle the same kinds of problems the bill is seeking to remedy. Second, I would like to cover a number of provisions of the bill

that emulate the best practices we found at those leading companies. And third, I would like to cover a number of provisions of the

bill about which we have some concerns.

In a recent report January 2002, we covered our review about

how six leading commercial companies changed their approach to

acquiring services. The companies we studied found themselves in

a situation several years ago similar to the one that Federal agencies are in today. They were spending a substantial amount of

money on services, but did not have a good grasp of where those

dollars were being spent. They were not effectively coordinating

purchases and they lacked the tools to make sure that they were

getting the best overall value for the taxpayer.

The companies we studied were able to turn the situation around

by adopting a more strategic perspective to service spending. By

that I mean each company focused more on what was good for the

company as a whole, rather than just individual business units.

On the chart we have here to my right, your left, we tried to

identify some common elements among each of the six leading companies that we reviewed. While each company took a number of different approaches in the area of service acquisition, we were able

to distill some common elements. The first is knowledge. We found

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that the companies we visited analyzed their spending on services

to answer the basic question about how much was being spent and

where the dollars were going. In doing so, they realized that they

were buying similar services from numerous providers, often at

greatly varying prices.

The companies we studied used this knowledge to change how

they were acquiring services in very significant ways. Again, they

took a variety of approaches. For example, some elevated or expanded the role of the company’s procurement organization. Others

designated what they called commodity managers to oversee key

services. And others made extensive use of cross-functional teams

to help identify their service needs, conduct market research,

evaluate and select providers, and manage performance.

The third common element that we found was support. By that,

we really identified two things. One was they used communication

throughout the organization to make sure that everyone understood what the common goals were. Then second, each one used a

variety of performance measures to keep track of how well they

were doing in terms of, for example, financial performance or customer satisfaction.

The key, though, that we found was commitment. We found that

in order to overcome these challenges, the companies found that

they needed to have sustained commitment from their senior leadership, first to provide the initial impetus to change, and second to

maintain the momentum. The significance and the importance of

commitment is why we chose to put that in the middle of our chart.

Now, why should all these particular practices matter in looking

at how to reform the service acquisition approach in the Federal

Government? Well, in a word, the answer is results. Each of these

companies was able to achieve significant dollar savings and each

was able to achieve improved delivery of services. In one case, we

found a company that saved over $210 million from adopting some

of these approaches.

Let me turn next to some provisions in the bill that track some

of the practices that we found in reviewing these leading service

companies. One is section 401 of the bill, which would promote

greater use of performance-based contracting. Performance-based

contracting is simply a process where the contracting agency specifies the outcome or the result that it desires to achieve, and leaves

it to the vendor to decide how best to achieve those outcomes. We

have work under way for this subcommittee to look at how Federal

agencies are implementing performance-based contracting. Very

briefly, we found that although they are meeting the goals established by the Office of Management and Budget—the OMB established a 20 percent goal for the use of performance-based contracting—and the agencies are somewhat exceeding that goal. We found

that there was widespread inconsistency in the application of the

definition of performance-based contracting.

The second provision, and this is an example of performancebased contracting, is share and savings, which under the bill section 301 would be promoted in a variety of ways. We have also a

job under way for the subcommittee looking at how the leading

companies are implementing this share and savings concept. What

we are finding is that the real key to it is establishing the baseline.

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That is a very difficult issue and that will be the focus of our review as to how companies establish the baseline in order to be able

to measure the savings.

The third provision in the bill that we found common among the

companies we looked at was the chief acquisition officer. Section

201 of the bill would create a chief acquisition officer in each agency, a practice that we found common among the companies. But

one of the differences that we found is that at the leading companies the chief acquisition officer, and it was not always designated

as such, but that position, whatever it was called, had the authority to influence decisions on acquisition to implement needed structural, process or role changes, and most importantly to provide the

necessary clout within the organization to obtain initial buy-in and

acceptance of whatever changes were required. Under the Services

Acquisition Reform Act, section 201, it is not clear that the chief

acquisition officer would have comparable responsibility and authority.

Finally, I would like to mention three provisions in the bill that

we have some concerns about. The first is section 211 of the proposed bill which would permit service contractors to invoice the

government on a bi-weekly rather than monthly basis. We have

two concerns about that. One is that there would be an obvious effect on the Treasury in terms of the time value of money. But

equally important, we have issued a series of reports over the years

that have focused on erroneous payments. Our concern in this area

is that if you increase the frequency of payments, that might also

increase the possibility for erroneous payments.

Second, there is a provision in the bill, section 223, that would

strengthen the process under which agencies decide challenges to

their procurement decisions. That is a provision that we support.

We support agencies deciding protest at the lowest level and the

most expeditious way. Our concern here is that the bill would require decisions by agencies within 10 working days. Frankly, we

think that is probably too brief a period to provide for meaningful

consideration and decision of the protest.

The last provision I wanted to mention is section 404 of the bill.

That provision would designate as a commercial item any product

or service sold by a commercial entity. Our concern is that this provision would allow for products or services that had never been

sold, or in fact even offered for sale in the commercial marketplace,

to be considered as a commercial item. In such cases, the government may not be able to rely on the assurances of the marketplace

in terms of quality and pricing of the product or service.

Mr. Chairman, this concludes my prepared statement. I would be

happy to take your questions.

[The prepared statement of Mr. Woods follows:]

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Ms. STYLES. Chairman Davis, Congressman Turner and Congressman Horn, I commend your leadership in the area of procurement and I appreciate your invitation to participate in today’s discussion.

SARA challenges the procurement community to take a fresh

look at several key aspects of our acquisition processes and policies,

from the way we manage contracts and incentivize our contractors

to the approaches we employ for capitalizing on the ingenuity of

the commercial marketplace. As responsible stewards of the $220

billion in goods and services the Federal Government buys each

year, I share your desire to ensure these subjects receive priority

attention.

Since I appeared before you in November, the President has unveiled a budget that reiterates this administration’s commitment to

results. The fiscal year 2003 budget places a new-found emphasis

on how well programs and the initiatives we have designed to manage them serve the needs of our citizenry. In describing the budget,

Mitch Daniels has emphasized that the days when programs float

along year after year, spending taxpayers’ dollars with never a

showing of reasonable results or returns, must give way to an era

of accountable government.

SARA gives us the opportunity to more carefully study the subcommittee’s vision for positioning the procurement work force to

meet the many challenges that face our country in the 21st century. Since results are what count in the end, our review must consider whether processes as SARA would change them will help

agencies to better execute the programs that you have entrusted

them to carry out.

In this regard, I am pleased by several features of SARA which

offer the promise of greater return on our investment of Federal resources. These aspects of SARA include for instance a pilot to simulate performance-based service contracting and the concept of

statutorily reinforcing more integrated decisionmaking among the

various disciplines that are responsible for the acquisition process.

I believe the path to improved performance begins with ensuring

that the processes are shaped to effectively balance all the acquisition basics. Balance is achieved by appropriate attention to acquisition planning, competition, contract structure and contract management. We also must be sensitive to operational efficiency, but

in doing so recognize that it is not an end in and of itself.

Unfortunately, lax application of acquisition basics continues to

be a major contributor to shortfalls in program performance, insufficient attention to requirements development, weak cost and price

analysis, inconsistent use of competition, ineffective negotiations,

poorly structured contracts, and inadequate contract management

plague even the most streamlined and protest-proof of our acquisition tools. To improve performance, agencies must recognize that

acquisitions are the shared responsibility of a variety of disciplines,

including program, technical, contracting, budget, financial, logistics and legal personnel. These disciplines must work together so

the respective expertise that each offers is better integrated in

agency decisionmaking.

In particular, program offices must be willing to commit sufficient attention to the acquisition planning and contract manageVerDate 11-MAY-2000 10:55 Mar 19, 2003 Jkt 000000 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 D:\DOCS\84514.TXT HGOVREF1 PsN: HGOVREF1
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ment. They must understand that no amount of training on the

part of procurement personnel and no degree of operational efficiency afforded by contracting tools can serve as a substitute for

these activities. For their part, agency procurement officials must

not allow pressures for expediency to divert attention away from

the application of fundamental contracting principles that lie at the

heart of any successful acquisition process, no matter the agency

or the requirement.

Far from the mechanical or administrative-laden label that some

might assign to the contracting function, procurement personnel

are the key component of our acquisition work force and are looked

upon to ensure sound application of the very contracting tools now

available to them. To use the President’s own words, ‘‘We are here

not to mark time, but to make progress to achieve results, and to

leave a record of excellence.’’ The message is clear. We must remain firm in our resolve to improve the performance of government

and the culture that drives our investment decisions.

The importance of agency procurement offices in this transformation cannot be emphasized enough. Program offices across

government, from those that serve the needs of our war fighters to

those that support the government’s efforts to promote educational

excellence for our students, must ultimately depend on our procurement personnel to draft and negotiate the sound contracts that

form the underpinning for successful performance.

I thank the subcommittee for recognizing the critical role played

by procurement officials throughout the government, and also for

challenging us to revisit the principles that lie at the heart of our

procurement processes. On behalf of the administration, I accept

this challenge. In doing so, I intend to ensure that our procurement

processes are results-oriented and to work with this subcommittee

and the other Members of Congress to change them where they are

not.

This concludes my prepared remarks, but I am happy to answer

questions.

[The prepared statement of Ms. Styles follows:]

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Mr. DAVIS. Thank you very much.

Commissioner Perry.

Mr. PERRY. Thank you Congressman Davis and Congressman

Turner and members of the subcommittee. Thank you for inviting

me to appear before you to discuss ideas on how to improve the

Federal Government’s acquisition process.

Chairman Davis, I too would like to take this opportunity to

thank you in particular for your leadership in this area over the

years, and for your current initiative to bring the need for additional acquisition reform to the attention of the Congress.

As you know, each year the Federal Government spends over $200 billion goods and services in order to meet the agency requirements to provide government programs and services to the American public. That is why it is so important for the government’s acquisition process and regulations to focus on efficiency, effectiveness and accountability. Additionally, the acquisition process and

regulations should be easily understood by all the parties who are

involved in the process and should be based upon a common sense

approach. Finally, when appropriate, the Federal Government’s acquisition process and regulations should resemble the best commercial sector buying procedures.

As you know, at GSA we have been actively implementing a

number of initiatives to improve the Federal acquisition process

and work force. This includes items such as the integrated acquisition system, which is a part of the administration’s e-government

strategy. Several of the initiatives that we are working on are detailed in the written testimony that I have submitted for the

record.

At GSA, we are developing our acquisition work force as a part

of our overall human capital management initiative. For example,

to develop the skilled acquisition work force we need at GSA, we

are developing competency-based assessments to determine the

specific areas where our training of the GSA acquisition work force

to date has achieved the needed results. We are also looking at

areas where we still have deficiencies. We are using this information regarding the skill mix of the GSA acquisition work force to

develop and implement a specific action plan tailored to the identified training needs at our agency. We believe that all Federal agencies should be doing the same kind of self-assessment and correction of deficiencies as a part of their human capital management

initiatives.

The Services Acquisition Reform Act proposal to require GSA to

establish a work force fund for interagency training purposes shows

a strong commitment to improving the knowledge and skills of the

acquisition work force in particular, and that of the total Federal

work force in general. While we fully support your concept of developing a well-trained acquisition work force, the administration

would support adequate funding to agencies through normal budget and appropriations processes.

We believe that several of the other provisions of the Services Acquisition Reform Act will help agencies improve their acquisition

work force, for example, section 102 of the bill, which calls for a

government-industry exchange program; additionally, section 105

of the bill which calls for an acquisition work force recruitment and

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retention pilot program; and third, section 107 of the bill which encourages contractors to allow their employees to telecommute.

These sections and others in the bill that I have cited are examples

of the provisions in this legislation which would in fact help agencies improve their acquisition work force.

On another matter having to do with the chief acquisition officer,

as reflected in your legislation it is important to keep in mind that

without management leadership, initiatives to streamline the current acquisition process could end up becoming just another layer

of regulations. That is why we support the concept of each agency

having a chief acquisition officer. We have such a position at GSA

and we believe that the ability of that person to aid GSA in developing a strong acquisition strategy is critically important to our

success.

For that reason, we believe that section 201 of the legislation requiring agency heads to establish a chief acquisition officer position

is an interesting proposal and would signal the importance of

maintaining a well-managed, integrated, agency-wide acquisition

plan.

In summary, Mr. Chairman, we believe that the Service Acquisition Reform Act is a very sweeping proposal offering several beneficial programs and ideas. We appreciate your leadership in bringing these matters before this subcommittee and before the Congress and before the administration. As you can see from our comments and from the various initiatives that we are working on at

GSA, we share your commitment to making the needed improvements to the Federal acquisition process and to the Federal acquisition work force. With that in mind, we are anxious to continue

to work with the subcommittee to find ways to make significant improvements in the current Federal acquisition process.

Once again, thank you for inviting me to discuss these items and

this very important issue with you today. I will be happy to answer

questions.

[The prepared statement of Mr. Perry follows:]

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Mr. DAVIS. Thank you very much.

Ms. Lee.

Ms. LEE. Chairman Davis, Mr. Turner, I appreciate the opportunity to appear before you today and discuss the proposed Services Acquisition Reform Act.

As I testified before you last November, the business environment within the Department of Defense remains very complex, particularly in the acquisition services. The amount of money the Department spends on service has increased significantly over the

past decade, to the point where we now spend approximately an

equal amount of money for the acquisition of services as we do for

equipment.

We must ensure that all acquisitions, whether for products or

services, are well-planned, executed and managed. We fully support

the efforts of the subcommittee in a number of areas related to how

the Department of Defense acquires goods and services. We have

reviewed the draft package of proposals which comprise SARA, and

since the introduction of the bill last week, are more thoroughly

studying these proposals.

I would like to offer my perspective on several of them. First,

people or work force—this is also my No. 1 priority. We must have

talented, well-trained people in the acquisition field, particularly as

we move to more and more challenging business arrangements. As

you know, the Department of Defense has a very robust and continually evolving training program. By centralizing the funding for

training within the Department through the Defense Acquisition

University, we have demonstrated a commitment and provided stability to training our acquisition work force. To keep our acquisition

work force trained and highly qualified to meet challenging missions, we are transforming DAU by moving from purely classroom

training to more Web-based learning modules and by emphasizing

critical thinking skills and business case reasoning.

The DAU provides a strong foundation and we appreciate the

subcommittee’s recognition of this contribution and our exemption

from the training fund. We look forward to working with the civilian agencies in the Federal Acquisition Institute in developing a

training program that ensures the work force acquires the right

skills and capabilities to be able to contribute effectively in this

changing acquisition environment.

We also support a government-industry exchange program. We

believe that by tapping into the knowledge base of the private sector, we not only maximize the business relationships with our industry partners, but we can also improve the Department’s acquisition process and procedures. For years now, the Department has

found it very valuable to have programs where we send our military members and our civilians to work with industry counterparts.

However, we do not have a program to bring industry into the

Department. Currently, an industry person would have to sever

ties with his company in order to accept a government assignment,

which we believe is probably an unrealistic expectation, particularly as people are planning and managing their own retirement

portfolios and those by necessity involve a broad range of other relationships. We applaud the subcommittee’s efforts to establish a

government-industry exchange program, and we believe that issues

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related to conflict of interest and compensation need to be clarified

in the proposed legislation.

The Department is sensitive to retraining and attracting people,

especially since we are faced with 50 percent of our work force

being eligible to retire by the year 2005. We do have a new plan

which was submitted last week about the work force of 2005 that

has some ideas and issues on how the Department plans to deal

with these challenges, and we certainly support the idea of work

force and retention pilot programs as a way to attract a new talent

pool to meet the challenges of our increasingly complex procurement. We note that there are many things going on in this arena,

and we support those activities.

We also support revisions to share-in-savings initiatives. The

share-in-savings authority as defined by the Clinger-Cohen Act has

not been fully implemented by the Department for a number of reasons. A primary concern within DOD has been to ensure that funds

spent for payment of savings are the right type of funds. Additionally, there may have been some reluctance by contractors to providing all of the non-recurring funds for the investment, even with a

long-term payback.

We need a policy for using share-in-savings contracts that not

only encourages our contractors to undertake aggressive cost reduction programs, but one that also stimulates agency interest by allowing them to retain a portion of the savings after contract payment.

I look forward to working with the subcommittee on additional

provisions of SARA. In closing, I would really like to thank the subcommittee for your continued interest in procurement and acquisition issues and focusing all of us on the need to continue to improve. I would like to also make my commitment to work on those

issues in the Department.

Thank you very much for the opportunity to talk about these

things today.

[The prepared statement of Ms. Lee follows:]

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Mr. DAVIS. Thank you very much.

Ms. Lee, let me ask you on these purchasing cards—moving the

threshold from $2,500 to $25,000. In the SPAWAR situation, I

think it was in San Diego——

Ms. LEE. Yes, sir.

Mr. DAVIS. One of the concerns I always have about government

is we spend so much time and energy making sure that nobody

steals any money who is involved in government, whether it is politicians or officials, that we strap them that they cannot do much

of anything else either. The question is to try to find, if you have

confidence in your employees and you train them correctly, that

this ought to be more efficient. Can you talk about that situation

a little bit and some of the safeguards we can put in to make sure

these are not abused, but at the same time not be running papers

around for every procurement over $2,500, because you lose time,

you lose money, you lose efficiency with the thresholds that low. I

do not know what the right balance is, but you might reflect on the

situation there in San Diego. Mr. Horn had raised it, and I just

wanted to ask you to start with that, and then I will yield to Mr.

Horn for questions.

Ms. LEE. Certainly.

Mr. HORN. I thank the chairman, and that is exactly the question I was going to ask. What can the Defense Department and

General Services and the GAO advise us on how you can look at

the fraud, and they were absolutely irresponsible. A Marine major

allegedly conspired with cardholders under his supervision to make

more than $400,000 in fraudulent purchases from five companies,

two of which he owned, two of which were owned by acquaintances,

and one of which was owned by his sister. The charges included

purchases such as DVD players, palm pilots, desktop and laptop

computers.

Another example—a cardholder made more than $17,000 in

fraudulent transactions covering personal items from Wal-Mart,

Home Depot, shoe stores, pet stores, boutiques, eye care centers

and restaurants over a 7-month period.

Now, obviously when we go to hold a hearing outside of Washington we use our government card for the hotel and the per diem

that you are paid for restaurants. And people like our administrative people would catch something if there was about the whole

suite or the whole end of the hotel for your buddies for a reunion,

that would be caught on Capitol Hill, and inspectors general are

all over the place. In the Defense Department, they ought to be

looking very carefully at this.

Why should we take the taxpayers’ money—good, hard-earned

money? They would sure like to have $17,000, but they do not. But

when we use their $17,000, we have got to figure out a way to get

the controls. There were no controls with the Navy, and one captain is not going to make admiral, given that. So I do not know if

that is the punishment or what, but I do not want to see it happen

in the first place.

So could you tell us how you do it, Ms. Lee? What kind of program—I know the game. Two subcommittees differ, and the subcommittee that has the Defense Department—fine. But you have

68

got to do something on your side to act like leaders, and not just

let this fraud go out.

Ms. LEE. Yes, sir. It is absolutely unacceptable.

Mr. HORN. OK. Now, how do you do it? How do you organize it?

Ms. LEE. This particular instance, which happens to be

SPAWAR, cards and the entire command have been suspended as

of last Friday. There is new leadership in there. First, they are

going through and making sure everyone has their currency training, and reminding them of what those obligation are. They are reviewing all cards, the thresholds that the cards are authorized, the

number of holders, and the number of cardholders per reviewer,

and the relationship between those reviewers. In addition to that,

we have put in place an electronic system that kind of lets us do

the trend analysis to see what purchases are bought.

Additionally, I have asked our Department of Defense IG to come

with me, and they have done so, and formed a consolidation where

they look across the Department of Defense at all IG audits regarding purchase cards, and they consolidate those. They are also looking for trends and going to give us specific recommendations.

The rest of the Department watched that shot across the bow

and it is very clear to them how important it is.

Mr. HORN. You might have been right the first time. [Laughter.]

OK. I do not care how you do it, just so you do it.

Ms. LEE. It is unacceptable to us.

Mr. HORN. Yes.

Mr. Administrator Perry, for whom I have fond affection and a

fine agency you preside over. What can we do with GSA so they

do not run away with it? Do you have a system right now?

Mr. PERRY. We do. I would just reiterate what my colleague has

said. It is an unacceptable position or situation. We do need to

have the right controls in place and we have to look after it vigorously.

At the same time, I would like to believe that most of our Federal workers are in fact trustworthy and conscientious, and this is

something that would only be done by a few. The remedy that we

take in the case of those few who have been discovered I think will

send a very strong message.

In the case of GSA, we also use the controls, the trend analysis.

On a monthly basis, each manager receives reports from our CFO’s

office indicating if there have been any purchases from vendors

which would appear to be not appropriate or if there have been

purchases of items which would appear to be not appropriate. And

then it is the responsibility for the manager of the person using the

card to oversee that to make sure that inappropriate use is not undetected.

I think we just have to stay with it, but not dispense with the

program entirely because of the actions of a few.

Mr. HORN. Mr. Woods, has GAO gone back to some of these situations now to see if anything has changed? I mean, that is what

I wanted to have done maybe 2 months from now, whatever. Has

it happened in between?

Mr. WOODS. Yes, sir, it has. As you know, the findings that you

talked about earlier were based on a report that we did last year

at two Navy installations in the San Diego area.

69

Mr. HORN. That was the one with Senator Grassley.

Mr. WOODS. That is correct. And we have gone back and you will

be hearing more next week about the results of that review. But

if I could just talk a little bit about the problems or the source of

the problems, it all gets back to internal controls. In order to be

able to properly exercise the flexibilities that the Congress has provided below the micro-purchase threshold and therefore in the use

of purchase cards, there needs to be effective internal controls.

What we have found by and large in the course of that review is

that the controls were there. They were not being exercised properly. It is not a lack of controls, it is just they were not adhering

to those controls.

Another issue was training. Many of the examples that you listed

are obvious. You do not use a government purchase card for personal items. You do not need training on that. But other areas are

not so obvious. For example, meals—my understanding is food is

not a permissible item for the use of the government purchase

card. That may or may not be so obvious. It requires additional

training.

Another issue, frankly, is just too many cards. We found that

there was a proliferation of cards in both of those facilities, and

that is an issue as well.

Mr. HORN. Thank you, Mr. Chairman.

Mr. DAVIS. Let me just ask a question before I yield to Mr. Turner. The number of issued cards at civilian agencies is proportionally

much smaller, is it not? Or are you not familiar with that?

Mr. WOODS. I am not familiar with that, sir.

Mr. DAVIS. Can anybody help me on that?

Ms. STYLES. We did supply data I believe on the exact number

of cards. It is also available on a publicly available Web site.

Mr. DAVIS. I will put that in the record and figure it out.

I think one of the ways you control this is by controlling the people that have access to the cards, making sure they were trained

and you are not supervising everybody. One of the difficulties in

procurement is anytime you move more of the authority out to your

line officials, you have more chances for somebody to make a mistake. On the other hand, we found out that when it is too centralized, it is a very, very inefficient process. So it is a question of finding the right balance.

Mr. Turner.

Mr. TURNER. Thank you, Mr. Chairman.

I wanted to address the issue of share-in-savings contracts. I

know, Ms. Styles, you had some concerns that you expressed. Ms.

Lee, you had some concerns specifically. I notice, Ms. Styles, in

your testimony you express the concern that the expanded sharein-savings contract authority should remain as a pilot project. And

you said that we need to see more results, agencies need to gain

greater experience in developing baselines, obviously, as you say,

proper baselines in combination with guaranteed savings clauses

are critical to ensuring savings can be validated and realized.

I have had a concern about where we get the expertise within

our agencies to actually negotiate share-in-savings contracts. Obviously for them to work, there has got to be a fair deal for both the

government and for the supplier of the service. Both sides need to

70

have competent people negotiating it. Otherwise, it is going to turn

out to be a very unhappy experience for one side or the other.

So your caution that you have expressed, and I think you went

on also in that same statement to say, ‘‘We should also consider the

impact of these contracts on other activities in light of the extended

contract duration that may be required to recoup savings and the

generally high termination costs.’’ If you will, just expand a little

bit on your concerns there, and particularly what you mean by that

statement that I just read there about the problems you see. And

then address for me how we can get the kind of expertise that we

really need to make share-in-savings work effectively.

Ms. STYLES. Certainly. I think we need to take share-in-savings

in some appropriate steps. What we are seeing, we have had some

experience with share-in-savings in the Federal Government. We

have got some contracts with the Department of Education that are

share-in-savings contracts, and we have some contracts with the

Department of Energy that are share-in-savings contracts, energy

savings performance contracts.

The Department of Education ones are short-term contracts, 3-

year contracts dealing with a lot of IT infrastructure complex problems. It took them a long time to develop the baselines and even

then the baselines were not accurate baselines. They had to go

back after an IG report and change the baselines on those contracts. That is not to say that it is wrong for them to be innovative.

I think it is good for them to be innovative, but they also recognize

that they are not going to get the appropriate return on their

money in a longer period than 3 years, particularly when you are

dealing with something like an IT project.

The other concern we have is we have seen no savings yet in

those contracts. Obviously, we are at the very beginning of those

contracts. They had to restructure the baselines, but we still have

not seen any savings with those.

Energy savings performance contracts are 25-year contracts.

That limits the flexibility of the agency if it needs to restructure

or if it needs to be a little bit more nimble in delivering services

to the citizens. Those have been in place for a longer period of time.

We have still not seen savings on those contracts.

So it is not to say that the concept of share-in-savings is not

right. It is that we need to take this in steps. The first step in

many respects is performance-based service contracting. We are

still having some difficulties with performance-based service contracting, with understanding how it works, with negotiating that

with the contractors. So we have to take it in appropriate steps as

we move forward. If we jump to a broad share-in-savings-type proposal, you are learning to run before you actually learn to walk, I

think is the way I put it in my testimony. And you really have to

take appropriate steps to, in many respects, protect the taxpayer

dollars in exactly the way you said, is that we need to know how

to negotiate these contracts and to create appropriate metrics and

baselines.

Mr. TURNER. It seems that you do have to have some experience

to negotiate these kind of contracts. I do not know where you go

in some agencies to find that expertise. Obviously, establishing the

baseline is the critical first step to making sure it works. Do you

71

think it would be helpful if there was some other entity or individual that helps in that process? It has been suggested to me perhaps

the inspector general in the agency should take a second look at

the development of the baseline, be sure it is fair? Is there some

way in there that we can look forward to the point where we could

know that we have got people in the Federal Government who can

actually negotiate these deals and that they are going to be sound?

Ms. STYLES. And a lot of it is training. A lot of it is going forward

with training with performance-based service contracts and training in this area. And I think all of the help they can get as they

negotiate the baselines is appropriate because second looks at these

are good. Even at the Department of Education, they realized in

student financial aid that the second look of the IG at their baseline was appropriate and identified things that they did not see. I

believe they have changed the baselines as a result.

Mr. TURNER. Ms. Lee, you shared some other concerns with

share-in-savings initiatives. One point you made, I am not sure I

understood, but you suggested that, ‘‘A primary concern within

DOD has been to ensure that funds spent for payment of savings

are the right type of funds.’’ What did you mean by that?

Ms. LEE. Particularly on some of the O&M-type work where we

have funds that are for operation and maintenance to make sure

that we have got the contract structured appropriately so in fact

it is an appropriate expenditure of operation and maintenance

funds. Or if, for example, we had R&D funds, so that when the contract is structured and the payments are made on an annual basis,

that they are backed from the funding as appropriated by the Congress.

Mr. TURNER. You also shared an interest in an idea to ensure

that there is some incentive in the agency to enter into share-insavings, not just an incentive on the part of the service provider.

How would you envision that working?

Ms. LEE. Sir, as you know, and I am not sure that it should be

this way, but it is, in that in an organization, the current way our

funding often works is that if you save money, you get less the next

year. And so to recognize from an incentive standpoint that these

people have done a good thing and the fact that they have less

money does not necessarily mean that their appropriations should

be, or that their amount should be decreased the next year, that

it should be recognized that they are doing good things more efficiently and that in fact they should be budgeted accordingly.

Mr. TURNER. Has the Defense Acquisition University entered

into any kind of training program to help people be able to be wellversed in how to negotiate share-in-savings contracts?

Ms. LEE. Not specifically. We are, however, looking at this more

modularized work force and incorporating industry more as well.

So we would have modules that are available both to DOD, industry people, civilian agencies, and are working with agency and academia to say what are the right topics, what are the right formats,

and what is the easiest and most efficient delivery method for our

entire acquisition community—government, industry, academia—

and not just limit it to the Department of Defense.

Mr. TURNER. Is your acquisition education program available to

non-DOD Federal employees?

72

Ms. LEE. Mr. Turner, technically it is, but the reality is that we

can hardly get all the DOD people through it, so the slots are rare

and difficult to come by.

Mr. TURNER. Thank you.

Thank you, Mr. Chairman.

Mr. DAVIS. Thank you very much.

Ms. Styles, let me just say on the Department of Education contract, my understanding is that the Department of Education came

back to the IG and said they had some difficulties measuring baseline; that there were savings and the IG concurred with that. We

can look at it further, and as we draw this, we want to work with

you to try to make sure that this is a vehicle that can achieve

maybe at the Federal level some of the savings we have seen in the

private sector.

Ms. STYLES. If I can clarify, we have not yet seen the savings because it is so early in the contracts, but they do anticipate having

savings. I have to say I want to commend them for doing a very

good job working under the current structure to come up with a

share-in-savings contract and to take hard looks at their baselines.

I think they did a very good job.

Mr. DAVIS. Maybe if we had some tools we would give them

under this, they could have done better, but I think we will continue to dialog on that.

Let me also ask, Ms. Styles, you talked about adequate funding

is needed for training, but that the funding stream ought to be the

result of the normal budget and appropriation process. I think in

a perfect world, I would agree with you, but let me tell you what

happens in the real world. When an agency budget gets cut, the

first two things to go are your travel and your training. That is just

the way it works because agencies like to keep their people. You

can do that maybe with one cycle or another, but I have been in

government at the county level and at the Federal level now for

over 20 years. That is just the nature of government. It does not

work as ideally as we might like.

It is for that reason that I feel if you do not have a specified fund

earmarked to go there, we will continue to see in tough budget

years agencies cut their training budget. It clearly has taken a toll.

I think you can take a look at the situation you had with the Navy

in San Diego and say this is a result of training, of not having appropriate oversight. If you do these things appropriately, you can

cut down on the fraud.

So I think that is where the disagreement is, and I will give you

a chance to respond to that. But I think the current process of relying on normal budget and appropriations has resulted in not funding the work force training the way it should have been.

Ms. STYLES. You know, there may be an opportunity for an interagency fund that is appropriated by Congress. My concerns relate

to the fact that we have to be willing to step up to the plate and

recognize that we need training money, and Congress should recognize that money should be appropriated in a specific fund.

My concern about the structure of the current legislation is that

we may affect a very effective contracting vehicles by taking percentages and money out of that to train people. I am particularly

concerned that, as I look at training, I am trying to integrate civilVerDate 11-MAY-2000 10:55 Mar 19, 2003 Jkt 000000 PO 00000 Frm 00076 Fmt 6633 Sfmt 6633 D:\DOCS\84514.TXT HGOVREF1 PsN: HGOVREF1
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ian and defense people in training. The way it is currently set up,

it would actually take money from the Department of Defense to

train the civilian agencies, because the Department of Defense is

such a high volume user of these contracts, but then they would

not have access to this fund to be able to train their people.

I think we need to recognize the commitment to training to be

able to fund it appropriately. Otherwise, I think we are going to

have trouble holding agencies to a training commitment, or to actually training their people appropriately.

Mr. DAVIS. I just say good luck in being able to get the non-Defense agencies and the Defense agencies together on training. You

have the tiger by the tail there. There is a lot of turf and a lot of

history on that, but ideally that would be——

Ms. STYLES. I think as we face this retirement crisis and the

human capital crisis, it is more important than ever to be able to

have one acquisition community working together, and to have access to the skills of the Department of Defense and for the Department of Defense to have access to the civilian agencies.

Mr. DAVIS. If we were business, that would be easy to do.

SARA, as you know, would place commercial services on the

same level as commercial products by amending the definition of

commercial items currently in the OFPP Act. You express some

concern about this proposal, but it is not clear to me why commercial services should not be on the same plane as products. Could

you try to explain?

Ms. STYLES. Which portion specifically are you talking about?

Mr. DAVIS. SARA puts commercial services on the same level as

commercial products. Are you with me?

Ms. STYLES. Yes.

Mr. DAVIS. OK. It does it by amending the definition of commercial items that are currently in the OFPP Act. You have expressed

concern about the proposal. I am just not sure why the commercial

services should not be on the same plane as products.

Ms. STYLES. If you can tell me which provisions specifically—are

we talking about time, material, labor, hour contracts? Are we talking about the commercial business entity?

Mr. DAVIS. It comes from the FAR part 12 amendments.

Ms. STYLES. I mean, there are distinctions between——

Mr. DAVIS. OK. I will give you this written and again have you

get it back, if that would be all right to clarify that.

Ms. STYLES. OK.

Mr. DAVIS. Melissa tells me it is section 403, but you can get

back to us in writing on that.

Let me ask Mr. Perry, how do you coordinate GSA’s acquisition

strategy over the agency’s diverse business units?

Mr. PERRY. That strategy coordination over our diverse activities

within GSA is in part coordinated through the fact that we have

an acquisition officer in the organization who helps us to make that

happen. He also obviously provides services beyond GSA. That is

a big part of it. Your proposal suggests that other agencies might

use that same model, and we support that idea. But we also at the

same time would leave open the fact that there may be some agencies where it is more crucially important than in others. That may

74

be something for agencies to deal with, but we feel that having that

centralized approach is useful.

Mr. DAVIS. Ms. Lee, let me ask you. SARA provides in section

223 for a statutory agency-level protest process. Now, in that process, we call for 10 working days for resolution of protests. Is that

adequate, do you think?

Ms. LEE. Congressman Davis, I do think that we are trying to

teach our people to be responsive and make sure that when there

is an issue, they solve it. I would actually ideally like to see it

solved before it gets to a protest level-type of discussion. That

would be my No. 1 goal.

However, if it does get to be a formal protest, particularly in an

agency as large as the Department of Defense, there is a lot of review that is necessary. So I do think the 10 days would put us in

a very tight timeframe and might not get as good and thorough a

review as it should have.

Mr. DAVIS. OK. Is DOD satisfied with the access it currently has

to the commercial services market?

Ms. LEE. We believe there are quite a few other vendors that we

would like to encourage to do business with the Department. We

have seen a particular interest after September 11th. Some of it I

think may be perhaps patriotism; others realizing all the diverse

activities that the government does participate in. As a result of

our broad agency announcement, we got over 12,500 responses

from people, and we see a lot of people wanting to do business with

the government.

We have also found that creative and aggressive contracting officers can accomplish that. There are some additional flexibilities

that we would like to attain and we would like to work with you

through SARA and other methods to ensure we can get those.

Mr. DAVIS. Thank you.

Mr. Woods, let me just ask you, you note in your testimony that

the chief acquisition officer that we include in SARA ought to be

structured differently. Do you have any recommendations for the

placement and operation of a chief acquisition officer within the civilian agencies?

Mr. WOODS. I do not have specific recommendations along those

lines, but I do note that when you compare that to the chief financial officer, for example, the CFO is a direct report to the head of

the agency. Now, I am not suggesting that would need to be the

case with the chief acquisition officer, because I think agencies

need the flexibility to be able to determine where the position

would best be placed. But the key is that wherever it is placed, it

needs to have the necessary authority to have the clout to make

sure that the changes can be made.

Mr. DAVIS. OK.

I have one more question for Ms. Styles. You express some concern about SARA’s expansion of the scope of commercial item procedures. Why shouldn’t the government just be able to buy products and services of a commercial firm without any further analysis

of the actual nature of the item? That is what the private sector

does.

Ms. STYLES. It has to be something that commercial firm actually

sells commercially. As it is structured right now, if 80 percent of

75

the firm’s business is coffee makers and the other 20 percent is

smart bombs, the smart bombs can be considered commercial in nature, even though there is no adequate price competition in the

commercial marketplace. As a result, there is no transparency into

the cost for that smart bomb and there is no assurance that there

is a commercial price for that.

Mr. DAVIS. Well, I hope that is not how we are buying our smart

bombs. [Laughter.]

Ms. STYLES. This would allow that.

Mr. DAVIS. All right. So the language—just tighten it. You do not

have any problem with the concept?

Ms. STYLES. With the concept, if it is commercial and it is sold

commercially in substantial quantities, and we can assess the price

and protect the government—no, I do not have a problem. Or in the

alternative, if it is not sold commercially, that we have sufficient

transparency into how they put that price together.

Mr. DAVIS. We could give example after example where the government goes out and buys items that are more expensive than you

can get off the shelf. So what we are trying to do in a case like

this is I think give them the flexibility to get things quickly when

they are sold across the counter every day.

Ms. STYLES. If it is commercially available on the shelf, then they

can buy it commercially.

Mr. DAVIS. I am just trying to get the concept. We can worry

about the language later.

OK, Ms. Lee, smart bombs are not bought from coffee makers are

they, at DOD? I just wanted to be reassured here.

All right. That is all the questions I have for this panel. Why

don’t we take about a 3-minute break and get our next panel up

here.

Thank you very much.

We will welcome our second panel—Steve Kelman of Harvard

University; Professor Steven Schooner of The George Washington

University Law School; Scott Dever of Hasbro; Mr. Richard Roberts

of KPMG Consulting, testifying on behalf of the Information Technology Association of America; Ms. Roberta StandsBlack-Carver of

Four Winds Services, testifying on behalf of the Contracts Services

Association; and Mr. Jerry Howe of Veridian, testifying on behalf

of the Professional Services Council.

Will you please stand and raise your right hands?

[Witnesses sworn.]

Thank you very much.

Please be seated. Again, we have the statements, if we could

start with Dr. Kelman and we will move straight down. Steve, welcome.

76

STATEMENTS OF STEVEN KELMAN, PROFESSOR OF PUBLIC

MANAGEMENT, HARVARD UNIVERSITY; STEVEN SCHOONER,

ASSOCIATE PROFESSOR OF LAW, THE GEORGE WASHINGTON UNIVERSITY LAW SCHOOL; SCOTT DEVER, VICE PRESIDENT OF GLOBAL PROCUREMENT, HASBRO, INC.; RICHARD

ROBERTS, SENIOR VICE PRESIDENT AND MANAGING DIRECTOR, FEDERAL SERVICES, KPMG CONSULTING, INC.; ROBERTA STANDSBLACK-CARVER, PRESIDENT AND CEO, FOUR

WINDS SERVICES, INC.; AND JERRY S. HOWE, SENIOR VICE

PRESIDENT AND GENERAL COUNSEL, VERIDIAN

Mr. KELMAN. Chairman Davis, thanks very much for asking me

to come and testify. Congressman Turner, thank you for the opportunity to be here today. I am here to testify in support of the Services Acquisition Reform Act. This piece of legislation really is the

next step in the continuation of the efforts we have undertaken

over the last decade to create a business-like, modern procurement

system in the Federal Government.

Really, it has two basic principles—the reform effort. The first is

make government contracting, to the extent we can, as much as

possible like the way a world-class commercial company would buy

products or service for itself. That has been principle No. 1. Principle No. 2 has been, stop the obsessive focus with bureaucracy and

process, and start focusing the system on achieving results for taxpayers.

The changes in the last decade have not been uncontroversial. It

is never easy to change old, hide-bound processes. But there has

really been an alliance of moderates in both parties, Democrats and

Republicans, often sort of fighting against people further to our

right and people further to our left, that have allowed these

changes to take place. I think it is fair to say that the procurement

system is better because of those changes, not just faster, but better.

The most recent addition of the history of government contracting, which comes out of The George Washington University Government Contracts Program, it came out in 1999, on the last page

of the book—this is the new edition, the revised edition—says—this

is as is described at the end of the 1990’s—the situation is as

healthy as any I can recall in the history of peacetime government

contracting. That is not to say it is idyllic. Protests and lawsuits

still abound. See, there are other people besides me who still think

there is too much litigation in the system. Government

contracts——

Mr. DAVIS. You would never expect a law professor to agree with

that, though, right?

Mr. KELMAN. This comes out of George Washington Law School.

[Laughter.]

Government contracts still dwarf their nongovernment counterparts in size, minutiae and risks. Contracting officers still trained

in the old system—some refuse to change. But all in all, the 1990’s

have improved the process.

We have seen that in Afghanistan. There has been a lot of publicity around the JDAM, the smart bomb that is being used very

successfully in Afghanistan. It not only works better than its predecessor, the laser-guided bombs, but also, as an article in my homeVerDate 11-MAY-2000 10:55 Mar 19, 2003 Jkt 000000 PO 00000 Frm 00080 Fmt 6633 Sfmt 6633 D:\DOCS\84514.TXT HGOVREF1 PsN: HGOVREF1
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town newspaper the Boston Globe pointed out, one of the reasons

70 percent of the bombs in Afghanistan are smart bombs compared

to 3 percent in the Gulf War is that smart bombs used to cost

$100,000 each. They now cost $20,000 each and they work better.

What has not been pointed out is that JDAM is a poster child

for acquisition reform. They started procuring it before acquisition

reform began in the early 1990’s, and pulled it back and redesignated it an acquisition reform pilot program; introduced the various acquisition reform techniques. The price went down 50 percent

compared to what it had been before.

If I can add a personal example. A few years ago, I was invited

by the Defense Department to be a keynoter at an electronic commerce conference, and actually I had to get to an academic conference at Johns Hopkins about an hour after I was supposed to

finish speaking, so I said, gee, I don’t know if I can do it. So they

said they would pay my transportation and they gave me a driver

to drive me down to Baltimore. The driver happened to be a Marine who had just returned back to the Pentagon after being abroad

for 21 years. He was not a contracting person. He was a Marine.

And he was saying to me, ‘‘Sir, a few years ago I started noticing

that just my every day life in the Marines as a Marine was getting

better. The food was getting better; stuff that had not been there

before that got out of stock was arriving faster. We could get things

easier. And I never knew why it was. I just noticed my life was getting better.’’ He was interested to learn when he now had a procurement detail that this was as a result of the acquisition reforms

of the 1990’s.

I have got to say, and I mentioned this to Deidre Lee, I think

all of us, when I heard that, was really proud of what all of us had

accomplished in terms of making this Marine’s life better. Above

all, the people who accomplished it are the frontline career contracting people in the Federal Government.

Mr. DAVIS. Steve, let me just say, you have accomplished then,

and I will not take your time on this, but making Army chow edible. This is something that for generations we have tried to get at

and procurement reform did it. [Laughter.]

Mr. KELMAN. Because what happened was we used to buy

MilSpec food, and now we are buying commercial food from commercial vendors. That is the secret to it.

There has been a bipartisan effort, but just a word on why this

was initiated by a Democratic administration and why I think

Democrats should be supporting SARA, this piece of legislation. As

a Democrat, I believe that government has the ability to serve people and to accomplish things for us as a society. But to do that,

government has to work well. It has to work effectively. It has to

have modern management principles associated with it. That is the

basic message behind procurement reform.

So in my testimony, I support pretty much every provision in

this legislation. There are a number of areas where I have made

some suggestions for some changes. I hope we have a chance to

talk about some areas like share-in-savings. The only way to get

people to learn to walk is give them a chance. And the current pilot

project—it was an unintended consequence I was involved in doing.

We were trying to encourage agencies to do share-in-savings. It has

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had the effect of discouraging them. Let’s teach them to do it by

giving them some of the authorities in this bill. The very last thing,

because I have gone a little bit over my time, nobody has talked

about the provision in the bill on cooperative purchasing. This has

been an area where you, Chairman Davis, have led a lonely fight

against special interests, trying to prevent—what this basically is

saying, let State and local governments on a completely voluntary

basis, if they would like access to the GSA schedules, use them if

they want to. A coalition of special interests succeeded in repealing

the provision in the Federal Acquisition Streamlining Act, allowing

this. Congressman Davis played a lead trying to save it. Congressman Kucinich, I worked with Congressman Kucinich while I was

in the administration, played a lead trying to save it. I am glad to

see that this pro-taxpayer feature is coming back into legislation

again.

I have a whole bunch of detailed comments in my testimony, but

this is good government.

Thank you.

[The prepared statement of Mr. Kelman follows:]

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Mr. DAVIS. Thank you very much.

Professor Schooner. You have been quoted already.

Mr. SCHOONER. I should stop while I am ahead, but I won’t.

Thank you.

Chairman Davis, Congressman Turner, first let me thank you for

the opportunity to be here today. As the hearing highlights, the

Federal procurement system has experienced dramatic change during the 1990’s. Against that backdrop, as I flesh out more in my

testimony, I will address four topics briefly today.

First, I encourage this committee to do anything within its power

to restore meaningful oversight to the procurement process. Second, I encourage you to invest in the acquisition work force. Third,

I strongly recommend that you drop the proposal to increase the

purchase card threshold. And fourth, I suggest caution and further

study on the provisions related to commercial purchasing.

During the 1990’s, it is my opinion that the government failed to

prepare its acquisition work force for or support it through the dramatic transition. At the same time, the acquisition work force, particularly at DOD, experienced a sustained, dramatic reduction in

force that was made without empirical evidence supporting the reductions. At the same time, the promise of DAWEA and the mirror

provisions in the Clinger-Cohen Act remain underfunded and accordingly unfulfilled. As a result, much of our current work force

is overwhelmed, undertrained, and as you heard earlier, retirement

eligible.

SARA does not offer the solutions to the startling decrease in

oversight in Federal procurement. In my opinion, the bill’s provisions related to the acquisition work force unfortunately appear

more cosmetic and they do not require the necessary investment of

resources needed to solve the pressing problems. You will get only

what you pay for, as you discussed earlier with Ms. Styles and Ms.

Lee. I think we need more and better personnel and we need the

training of that personnel, and that requires money. I believe that

this committee is extremely well-positioned to make the case that

investing in additional acquisition personnel and work force training is needed to restore meaningful oversight to Federal procurement.

Specifically, as my written testimony explains at length, I fear

that the training fund will not enhance the current state of training for all acquisition personnel. The government repeatedly has

issued broad proclamations supporting training and professional

development, such as DAWEA and Clinger-Cohen, while failing to

invest in a properly trained work force. I believe this initiative continues that trend.

I have a similar reaction to the government-industry acquisition

professional exchange program. I applaud the initiative, but it will

not generate sufficient return on investment. My experience in government makes me skeptical that senior managers will release

their most talented personnel for these opportunities. Also, the potential for conflicts of interest, both actual and apparent, is sufficiently great so as to merit further study.

I offer a similar response to the proposal regarding performancebased service contracting. I support any initiative to broaden the

government’s use of performance-based contracting. As the governVerDate 11-MAY-2000 10:55 Mar 19, 2003 Jkt 000000 PO 00000 Frm 00105 Fmt 6633 Sfmt 6633 D:\DOCS\84514.TXT HGOVREF1 PsN: HGOVREF1
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ment increases its reliance on the private sector for commercial

services, performance-based service contracting expertise grows in

importance, but statutory exhortations are not enough. Congress

needs to appropriate money to train government personnel in the

use of PBSC. They need to mandate classroom training. They need

to specify that training will include practical drafting and negotiation exercises.

As I suggest in my testimony, you might want to consider establishing an annual high profile, governmentwide contest that

awards excellence in drafting performance-based statements of

work and publishing lessons learned from successful performancebased acquisitions.

As I address at length in my testimony, particularly pages 8

through 10, I am extremely concerned regarding the state of highvolume, low-dollar purchasing. The proliferation of purchase cards

has revolutionized government purchasing, but with few exceptions

the government has accepted an ostrich-like approach to oversight.

I do not doubt the efficiency of the purchase card when used appropriately. But given the proliferation of cardholders, insufficient investment in training, and the current absence of oversight, we cannot conclude that purchase card use is under control.

Even as disclosure of purchase card abuse has become widespread, few are willing to rein in the purchase card. This bill would

increase purchase card authority ten-fold, while imposing no controls. This expanded authority would encompass 98.5 percent of all

government purchases, and for those purchases buyers could ignore

all of the government’s normal procurement rules, procedures and

protections.

Also, it is undeniable that such a change would further reduce

small business participation in Federal Government procurement,

and in effect the bill would exempt 98.5 percent of the government’s purchases from all congressionally mandated social and economic policies.

With regard to the provisions related to commercial acquisition,

I urge caution. I am concerned with permitting the use of time and

material or labor hour contracts under FAR Part 12. Use of these

vehicles seems antithetical to your policy statement favoring performance-based service contracting. Further, the authority in effect

would facilitate the government’s use of cost-plus percentage of cost

arrangements, which as you know are prohibited.

Similarly, I question the value of the designation of commercial

business entities. As I see it, the proposal invites corporate organizational gamesmanship, which has no place in the public procurement regime.

Finally, I am not aware that a compelling case has been made

for changes to the current definition of commercial items. I believe

the current definition accommodates reasonable and appropriate

uses of commercial purchasing authority. I think the initiatives are

premature and they require further study. In their current form,

they pose undue risk to the system.

Mr. Chairman, in concluding, I do want to make clear that, as

Steve Kelman knows, I generally supported the acquisition reform

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movement. What I call for is appropriate oversight to see that

those reforms are implemented appropriately.

Thank you again for the opportunity to be here. Obviously, I

would be pleased to answer any questions you may have.

[The prepared statement of Mr. Schooner follows:]

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Mr. DAVIS. Thank you very much.

Mr. Dever.

Mr. DEVER. Chairman Davis, Congressman Turner, Congressman

Horn, as a private sector purchasing professional and taxpayer, I

commend you for the work that you are doing here in this important area of reform, and thank you for the opportunity to participate.

I am currently Vice President of Global Procurement for Hasbro,

Incorporated, based in Rhode Island. Hasbro is a worldwide leader

in children’s and family leisure-time entertainment products and is

involved in the design, manufacture and marketing of traditional

and high-tech games and toys. Mr. Woods from the GAO in panel

one mentioned several companies that were involved in their study,

and Hasbro was one of those.

Over the past 3 years, Hasbro has worked to enhance the value

of its supplier relationships by taking a more strategic approach to

the selection and integration of various suppliers. We have taken

several actions designed to improve our purchasing effectiveness

across the organization. For example, we have centralized the development of sourcing strategies for key raw materials and have

taken a more broad-scoped approach to supplier selection and negotiation.

We have adopted a more streamlined supply chain management

organization to reduce costs and improve customer service. We

have created a new section of the purchasing organization whose

primary focus is on non-production goods and services. This function works collaboratively across the various Hasbro businesses

and locations to rationalize the supply base in various categories.

And finally, we have selectively adopted new technologies such as

electronic procurement and purchasing cards to help streamline activities and improve the sourcing process.

In line with the intent of the legislation which you have introduced, Mr. Chairman, the focus of this testimony will be on

Hasbro’s experience in managing service providers.

Hasbro relies on service providers in support of many areas of

our business. Historically, decisionmaking in the selection of providers has been decentralized. Our intent was to improve the process for acquiring services, without restricting the business manager’s ability to select the most appropriate suppliers. We noted

that there were opportunities to reduce the number of suppliers in

more tactical areas of service acquisition, while providing broader

exposure to service providers in more strategic areas. We felt that

we could, in fact, improve the quality of the supplier selection process and reduce costs concurrently.

In this testimony, I would like to define two broad categories of

service providers and discuss the traditional approach for acquiring

such services, key considerations, and our desired approach to acquisitions. It should be noted that Hasbro is in various stages of

implementation and is continually considering further opportunities for improvement in all areas of procurement.

The first category of service contractors is service contractors. In

the course of conducting business, Hasbro sometimes requires certain services that do not make good business sense to develop internally. Facilities maintenance, security, administrative and caterVerDate 11-MAY-2000 10:55 Mar 19, 2003 Jkt 000000 PO 00000 Frm 00119 Fmt 6633 Sfmt 6633 D:\DOCS\84514.TXT HGOVREF1 PsN: HGOVREF1
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ing are examples of services that are purchased externally. Such

services are highly leverageable because the requirements are easy

to define and there are several qualified sources which behave competitively in the market. Traditionally, each Hasbro location or

business unit established one or more supplier relationships for a

given service need. Accordingly, the process for requisitioning and

contracting for services varied by department and location. Our

strategy was to reduce the number of suppliers across our various

locations and to implement a standardized requisitioning system

that streamlined the ordering process.

Cross-functional teams representing various stakeholders work

collaboratively to establish consistent service requirements, review

supplier proposals, and negotiate primary source agreements.

Through these efforts, we have negotiated lower costs and improved service standards. Such standards ensure that all locations

are being serviced consistently. We measure the performance of the

suppliers against the agreed standards and renegotiate agreements

annually.

The second category of service acquisition that we identified was

professional services, which are typically provided by independent

contractors or specialized agencies which represent individuals

with unique skill sets. During peak workloads, Hasbro requires the

support of such resources to support our business. There are also

situations where we need to acquire specific knowledge or experience that we have not developed internally. Services provided within this category include technology support like programming, systems integration, creative services, and business consulting.

The selection process has not been fully competitive in the past.

Multiple proposals from alternative suppliers are not always obtained. Project specification and desired outcomes have not been

clearly specified in all cases, and supplier payments are not always

tied to clear delivery of value against specified objectives. We also

found that the tactical purchasing aspects of their acquisition process were cumbersome and often delayed the commencement of

work and payment to the service providers.

Our approach in this area has been to provide tools and purchasing support to the business, which encourages a more thorough review of qualified providers. We recognize and support the need for

business managers to quickly identify and acquire the most qualified resources for their specific requirement. We have found that

when the process for selecting professional service providers is

more competitive, there is more flexibility on cost and other agreement terms.

We have also developed a more consistent process for requesting

such services, thereby ensuring that Hasbro’s liability and risk is

minimized. We require a detailed breakdown of resources, time,

and billing rates to help ensure that each phase of the project is

completed successfully and invoiced appropriately.

We have recently adopted a Web-based system which facilitates

a more rapid identification of multiple qualified resources. This system helps ensure competitive pricing and a more consistent approach to engagement management. In order to ensure that services acquisition is managed effectively, we have created a position

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quisition. This position will continue to provide support in the selection, negotiation, contracting and management of service providers from tactical to strategic.

Thank you again for your time, and I would be happy to address

any questions you may have.

[The prepared statement of Mr. Dever follows:]

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Mr. DAVIS. Thank you very much.

Mr. Roberts.

Mr. ROBERTS. Mr. Chairman and members of the subcommittee,

I am a Senior Vice President and Managing Director of Federal

Services at KPMG Consulting, Incorporated. Thank you for inviting

me here today to testify on behalf of the 500 corporate members

of the Information Technology Association of America, ITAA.

KPMG Consulting is one of the world’s largest consulting and business systems integration firms and is a proud member of ITAA.

ITAA has long been active on issues pertaining to government procurement of IT. Additionally, we have worked with your staff to

recommend some of the provisions contained in the legislation introduced this week.

We are especially pleased to testify in strong support of H.R.

3832, the Services Acquisition Reform Act. A recent ITAA survey,

which I will include with my testimony, found that this year Federal CIOs are highly focused on information security and infrastructure. Their overriding concern is to address security issues

raised by the war on terrorism.

As Federal agencies and the rest of the Nation shift to this new

focus, it is particularly important that the Federal Government

have fast, efficient access to the best IT solutions. We are certain

that these solutions are resident primarily in the private sector,

and we believe SARA can help the Federal Government to acquire

them.

The leadership shown by this subcommittee to consider changes

in the acquisition of services by the Federal agencies is timely for

two other reasons. First, IT services has been the fastest growing

sector in Federal IT procurement. Second, because the Federal

Government is forecasting such a dramatic decrease in the number

of Federal IT workers in the next 5 years due to retirement, IT

services will likely continue to grow in importance for both government agencies and procurement.

I would like to focus on what ITAA believes are the few key provisions in the bill that will enable meaningful access to commercial

solutions. Acquisition work force recruitment and retention—by the

middle of this decade, the government will face significant retirement numbers, particularly within the acquisition work force.

Agencies will be left to track not only talented individuals, but also

those individuals capable of being schooled in the new contracting

practices that have evolved over the last decade. These individuals

will be called upon the facilitate the government’s increasingly

complex requirements.

Recognizing the growing urgency of the government’s human resource needs, ITAA is pleased to support the chairman’s goal to establish an acquisition work force recruitment and retention pilot

program. This program will assist agencies in matching their respective work forces efficiently and effectively to their needs. ITAA

stands ready to assist the subcommittee in this important effort.

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force. For acquisition reform to be of any value, those who implement the acquisition system must understand how it works. Despite programs put in place with previous acquisition reform legisVerDate 11-MAY-2000 10:55 Mar 19, 2003 Jkt 000000 PO 00000 Frm 00126 Fmt 6633 Sfmt 6633 D:\DOCS\84514.TXT HGOVREF1 PsN: HGOVREF1
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lation, training programs throughout the government are still insufficient. ITAA has long been a supporter of increasing funding for

employee training. We have also been highly critical of the fact

that these funds were too often the first cut when budget reductions were necessary.

Establish a regulatory review process—despite a decade of acquisition reform, many laws and regulations still inhibit greater use

of commercial practices. A continuous review of these laws and regulations is needed, especially in light of the ever-changing dynamics of our marketplace. This will maintain a constant critical eye

on acquisition law, always working toward the optimization of the

acquisition process. ITAA strongly supports such a review process

and would also appreciate the opportunity to participate in an appropriate manner.

Limitation on commercial liability—Federal contracting officers

are reluctant to limit the amount of liability a contractor must accept, even though the common practice in the commercial marketplace is to cap liability at the total contract level, a multiple of it,

or a specific dollar amount. By forcing contractors to assume all

risk, the Federal Government will attract fewer competitors or

companies who will offer only low-risk solutions and higher prices.

ITAA commends the sponsors for considering this change to align

more closely with commercial practices.

And the last area, conflict of interest—in many instances, the

Federal Government may be denying itself services of companies

with the deepest and best understanding of particular agency requirements. Many firms elect to forego opportunities to provide

front-end consulting to government agencies in order to comply

with procurement rules that would bar them from pursuing larger

development and implementation and maintenance contracts. ITAA

supported the provisions in the earlier drafts of the Clinger-Cohen

Act that revised the Federal Government’s rigid conflict of interest

requirements. ITAA believes that the commercial sector’s flexibility

in selecting the best contract to provide a total solution should also

be extended to Federal customers.

Mr. Chairman, that concludes my comments. ITAA thanks you

for this opportunity to comment on this critical piece of legislation.

We also stand ready to assist you in any modifications or additions

to SARA. We again commend you for taking this important and

timely reform effort.

Thank you for the opportunity to appear today. I will be happy

to address any questions.

[The prepared statement of Mr. Roberts follows:]

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Mr. DAVIS. Thank you very much.

Ms. StandsBlack-Carver.

Ms. STANDSBLACK-CARVER. Mr. Chairman and members of the

subcommittee, my name is Roberta Carver, President and CEO of

Four Winds Services, Inc. I am here today on behalf of Contract

Services Association of America, where I serve on its board of directors.

I incorporated in 1991 Four Winds Services, Inc., as an 8(a) certified Native American woman-owned business company that provides various types of contracting services to military installations

nationwide. Based on excellent customer service and past performance record of excellence, Four Winds is the recipient of several

prominent awards.

I am a member of the Ponca Tribe located in Ponca City, OK. I

greatly appreciate the opportunity to testify before you on services

acquisition reform, a subject very important to my company, as

well as the entire membership of CSA. Services acquisition reform

remains one of the top three policy issues for the members of CSA.

We applaud your introduction of Services Acquisition Reform, or

SARA, and are committed to working with you to ensure its passage.

I would like to touch briefly on a few key areas of your bill that

are particularly important to my company and all small service

contractors. I have provided a written statement for the record

which addresses the majority of the bill’s provisions in greater detail.

For CSA, the training and the education is a vital component of

the acquisition work force and ranks high as a key area for all concerned. This is certainly true as we move toward greater PBSA

contracting, which both Congress and the administration have embraced. PBSA allows the government to identify the what, and it

lets the contractor determine the how. PBSA holds great vision and

promise to reduce costs, while increasing service quality. It capitalizes on the private sector expertise and leverages IT innovations.

Small businesses will greatly benefit from such innovative contract

types.

Properly implementing PBSA as a standard is another story. For

example, we have bid and won a PBSA contract. It is a worthwhile

challenge, but it has been our experience that continual micromanagement is practiced by the government to the extreme, which

defeats the whole purpose and leads to unnecessary internal conflicts.

Training is a big stumbling block. Your bill, Mr. Chairman,

which provides an innovative method for funding for training, is

necessary and a positive step toward ensuring that the acquisition

work force have the proper tools to implement PBSA and all the

acquisition policies. For example, the Native American Incentive

Act, it took literally an act of God to find out the exact source of

payment, and then became a self-training effort for us in explaining the Act and its process to our government personnel so that

they could properly implement it.

Also, improving payment terms for the service contractors is a

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cause the contractor will have less carrying cost that would otherwise be passed on to the government. In this electronic age, we

should be able to provide electronic invoices, which will expedite

the process for getting paid for services already rendered. The provisions in SARA will help alleviate my cash-flow problems and help

me meet my payrolls, and saves the government from paying late

interest fees.

Recently, it came to our knowledge that a January invoice was

not submitted in a timely manner by a government contracting officer, and the payment was held up for 1 month before being submitted to DFAS. Electronic invoicing would have alleviated this problem.

Now, I would like to address the benefits of the longer terms of

7 to 10 years for service support contracts, rather than the traditional 3 to 5 year. There are currently only a few agencies taking

advantage of this. The benefits are easy to quantify. The government benefits from the ability for contractors to invest in more productive and efficient capabilities for the job that would not be possible under the short-term contracts. It is common knowledge in

our industry that the first couple of years are trouble-shooting and

implementing our new innovations to improve the service. A

longer-term contract would allow us to perfect and improve our

processes. Examples include state-of-the-art quality control plans

such as ISO 9000, modern innovative management practices, and

new software and efficiency programs.

Finally, as the bill moves through the legislative process, I would

urge the subcommittee to consider the revisions to the Service Contract Act. SCA remains an important element to the services contracting arena. It provides basic protections to workers employed

under government service contracts, particularly unskilled and

semi-skilled workers. While the premise of SCA remains sound,

certain revisions are needed to update the Act and move ahead in

the 21st century. For example, the current threshold of $2,500 established upon

the Act’s enactment in 1965 has not been increased since that time.

The SCA threshold should be increased to $100,000, the current

simplified acquisition threshold level. There also should be a regular inflationary adjustment to tie to the SCA, as you proposed in

your SAT. I have long pushed for similar adjustments in statutory

thresholds mandated for the Small Business Administration’s 8(a)

program. It just makes good common sense. Increasing the SCA

threshold would certainly benefit my company and other small

service contractors, while still ensuring the Act remains in place on

a majority of government contracts.

Thank you for this opportunity to share my views with the subcommittee, and I will be happy to answer any questions.

[The prepared statement of Ms. StandsBlack-Carver follows:]

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Mr. DAVIS. Thank you very much.

Mr. Howe.

Mr. HOWE. Chairman Davis, Mr. Turner, Mr. Horn, I am Jerry

Howe, Senior Vice President and General Counsel of Veridian, a

leading provider of information-based systems, solutions and services to the U.S. Government. We specialize in mission-critical national security programs, primarily for the intelligence community,

the Department of Defense, law enforcement and other government

agencies.

I am pleased to be testifying today on behalf of the Professional

Services Council, a membership organization including 140 members, which is the Nation’s principal trade association of government professional and technical services providers. The PSC is a

strong supporter of the Services Acquisition Reform Act of 2002.

We support the legislation because of its focus on three interrelated

aspects of a successful system for the acquisition of services—people, structure and processes. I will touch on each of these and hold

the rest of my observations for our written testimony.

Mr. Chairman, for services companies there is no more important

aspect of what we do than our people. The same is true of the Federal work force. Too often, though, the impact of economic change

and legislative and regulatory actions are ignored or dismissed as

immaterial. That is a serious policy mistake when dealing with the

Federal work force. For our members, it is a prescription for disaster.

Our focus on people is one of the hallmarks of our industry and

one of the reasons why PSC has been a vocal advocate for a welltrained, well-compensated Federal acquisition work force. SARA

properly includes several provisions that address key human capital needs in the Federal acquisition work force. Among them are

the provisions of Title I of the bill regarding a funding mechanism

to ensure that work force has meaningful access to ongoing relevant training.

We, like many other witnesses before the committee today, would

prefer to see direct appropriations made available to meet employees’ training needs, ensuring that Federal employees have ready

access to those funds. Regrettably, as has been observed several

times also this afternoon, that is not the reality of the current process.

Therefore, as a second-best choice, we have recommended and

strongly supported creating an alternative funding mechanism to

ensure at least a meaningful amount of training funds are available. Section 102 of the bill is clear in moving toward this purpose.

By setting aside for training of the Federal acquisition work force

a small portion of the user fees on the transactions made under

multiple-award contracts, Congress will have taken a significant

step in addressing this important matter.

Another key theme of the legislation is the focus on the appropriate structure for managing growing responsibilities placed on

the Federal acquisition system. At PSC, we have worked successfully with the senior procurement executives in many of the Federal agencies. They are dedicated people who have a passion for the

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lion on goods and services. Of that, $87 billion is spent on services.

The magnitude of the spending, which is increasing every year both

in absolute terms and as a proportion of the total, deserves the government’s full attention and commitment. In the formal structure

of an organization, including the placement of key leadership, is

one way to reflect that attention and commitment. Section 201 of

the bill creates in each agency a chief acquisition officer. We believe the position of chief acquisition officer with authority for assuring uniformity and accountability across agency activities is crucial.

The Federal Government is slowly upgrading the tools and techniques it uses to acquire services. Many of the best practices for

services contracting such as the use of performance-based contracting have been around for decades. Not as much progress is being

made in the Federal sector. While progress is being made, agencies’

procurements are becoming increasingly complex and technologydriven in the services area. It is important to recognize that agencies need the maximum flexibility to meet their mission needs, consistent with smart acquisition planning and responsible oversight

and safeguards. Many of the provisions in Titles III, IV and V of

the bill are designed to do just that.

For instance, section 401 makes permanent the temporary authority that exists to treat performance-based contracts or task orders valued at less than $5 million as commercial items eligible for

use as special contracting techniques available for commercial

items. We support making that authority permanent and governmentwide. While the test program being made permanent is clearly

a step in the right direction, more can eventually need be done to

address to address the barriers to widen Federal agency use of

commercial items purchases of services.

Section 402 acknowledges that many services that Federal agencies acquire are best performed on a time-and-materials or laborhours basis. These contract types are used widely in commercial

marketplace for services, and should be made available for use by

Federal agencies. Many of the specialized training needs of Federal

employees could be met by such contracts.

The nature and scope of services acquisition is evolving and the

law should be updated to permit agencies to use a contract type

that is most appropriate for the needs, and consistent with commercial practices.

Finally, while Congress examines services acquisitions, it must

do so within the broader context of strategic sourcing decisions that

agencies make for performing their mission. PSC has consistently

opposed legislation that would seek to specifically mandate or give

preference to an in-house sourcing policy for the Federal work force

or that would further tip the evaluation scales in favor of in-house

performance. There is no need for any legislation in this area particularly at this time.

Mr. Chairman, the Services Acquisition Reform Act of 2002 is an

important contributor to improving the way the Federal Government acquires services. We at PSC strongly support it. Thank you

for the opportunity to appear before the subcommittee, and I would

be pleased to answer any questions you might have.

[The prepared statement of Mr. Howe follows:]

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Mr. DAVIS. Thank you very much. I want to thank all the panelists very much for your testimony.

I will start with questions, and I will begin with Mr. Horn, the

gentleman from California.

Mr. HORN. Thank you, Mr. Chairman.

I think all of us respect the purposes of this fine bill that you

have put together, and we do need flexibility and we do need to

focus on things. But for those of you that might have still been here

when the first panel was, my question to you is the same, whether

you are in a corporate frame or whether you are a contractor or

whatever, and not in a corporate frame. But can you tell me what

kind of responsibility and accountability will you put in your organization so that we do not have the kind of thing that we have had

in the Navy in San Diego? Can you tell me how you will structure

it and how you will have accountability and responsibility? Because

otherwise, it is one great Ponzi scheme, just like this Enron thing,

and you have once, and you get away with it, and then of course

Congress will just murder it, and they should. So I would like to

hear from you, just right down the line.

Dr. Kelman.

Mr. KELMAN. I would like to hear from the gentleman from

Hasbro. I guess what I would say is that, first of all, if people commit fraud, you send them to jail. That is the first thing.

Mr. HORN. That is right.

Mr. KELMAN. You have review procedures—actually the purchase

card makes it easier to do this kind of review than the traditional

system. We don’t know what was going on in the traditional system. The purchase card provides computer records of purchases

that can be easily scanned, can be data-analyzed and so forth. With

the proper management controls in place, it is easier to detect

fraud and problems with a purchase card than it is with the prepurchase card system. I think we should also be careful, and I

know your concerned with this as well, Congressman Horn, that as

Chairman Davis said, we keep a balance here.

Let’s remember we have 23 million purchase card transactions a

year. Two facts to keep in mind. First, in these small purchases,

whether it be in government or in industry, we have learned that

the administrative costs of the traditional system, just putting the

paper back and forth in the requisition and so forth, are often

greater than the amount of the purchase itself; that it runs about

$150 whether private sector or public. I have seen some studies in

Intel and some private sector companies, and it did that in the government. The government is saving $100 per transaction in administrative costs from the purchase card. If you ask why were we able

to downsize the procurement work force in the 1990’s, mostly it

was people doing these small purchase card transactions.

At 23 million transactions a year, that means the Federal Government is saving $2.3 billion a year in administrative paperwork

using the purchase card. So we have to be careful to put in the

proper controls, make sure they are there, but it would be, in my

view, an anti-taxpayer policy to get rid of or sort of say the purchase card is bad. The purchase card has been a great innovation

for the taxpayer, but we need the kinds of controls that you have

been talking about.

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Mr. SCHOONER. Congressman Horn, if I could do three things

first. If you have the opportunity, if I could draw your attention to

pages 8 through 10 of my testimony where I discuss section 221

and the purchase card at great length. I think you will find that

there are a number of useful statistics in there and you will see

that I have addressed a number of the concerns that you have

raised.

Second, one thing that concerns me quite greatly, and Steve

Kelman may remember this also, but when the purchase card was

actually being implemented during the acquisition reform movement, and we went to the multiple award program that permitted

the various agencies to choose purchase card vendors, one thing

that we pushed very hard, and at the time I was at OMB, we encouraged the agencies to adopt and accept those vendors that were

offering smart card technology power, rather than necessarily just

blindly chasing the rebates.

Having said that, in 100 percent of the cases, agencies chose rebates over the kind of smart card technology that could do the kind

of oversight that Steve Kelman was just referring to. The kind of

oversight that we could do automatically through the charge card

vendors is mindboggling, but as a general rule the government has

not invested in that.

In addition, on page 10 in my testimony, I talk about some specific steps that could be made with regard to the purchase card, but

I think the single most important thing that I would recommend

in that regard is, as Mr. Woods mentioned, in the followup GAO

report on the Navy issues and the purchase card, they list page

after page of potential controls that could be used at various agencies. I think those are the kind of things that ought to be considered in lieu of what section 221 does, which is simply raise the

threshold and not impose any controls.

So I think that there are a number of things that could be done,

and I share your concern on the purchase card. I consider 221 to

be the single most threatening thing in the entire SARA legislation.

Mr. HORN. Mr. Dever.

Mr. DEVER. Congressman Horn, the purchasing card has been

available in the private sector for probably 10 years. Hasbro adopted its purchasing card about 5 years ago. These are companies that

watch dollars very carefully, and yet they continue to find ways to

expand the use of p-cards. At Hasbro, as have transaction limits.

Per transaction, we have limits per month. The summary billings

are reviewed by management. So if there were any abuse, it would

be detected quickly.

Additionally, there are, with the smart card technology anyway,

the ability to block those cards from being used for certain types

of purchases. For example at Hasbro, you cannot use a p-card to

buy a computer because we have a different process for procuring

computers, so certain retail establishments can be blocked. And

there are mechanisms to highlight things that would point toward

abuse as well.

So I think the controls are in place. It would be a matter of consistent policy.

Mr. HORN. Mr. Roberts.

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Mr. ROBERTS. I would agree with that. The biggest things we

have in any business is internal controls. They are implemented,

they are in place, and they are understood by all. People are

trained on what the controls are, and the key is it comes down to

simple individual accountability and responsibility, as well as supervisory responsibility and accountability, and those two things

connected. We do not do things at KPMG Consulting with our purchase cards. Again, we have controls, but the key is people understand what the controls are and they are acted upon, and they are

trained on it and you know what you are up against in all cases.

Mr. HORN. Ms. Roberta StandsBlack-Carver.

Ms. STANDSBLACK-CARVER. Currently, Four Winds Services does

not maintain a contract in which we utilize the smart card. But it

is a general consensus in our CSA memberships that we do not

permit or accept any fraud among our membership companies. In

our other financial business practices, though, without the smart

card, we do have our own internal checks and balances in which

we do random reviews to ensure that there wasn’t any fraud taking

place on any of our contracts. And we also are consistently audited

by an outside Federal agency, DCAA, on our larger cost-plus-type

contract.

Mr. HORN. Mr. Howe.

Mr. HOWE. I will address the question from the point of view of

the seller of the services. Our company does not sell any services

since we are in the national security arena that could readily be

converted to personal use, such as DVD player. But I will address

the question this way, our company, and I dare say all members

of the PSC, have adopted codes of ethics and standards of conduct

which are enforced by internal controls and disciplinary actions

when appropriate.

Our company in particular has just opened something that we

call the Veridian Institute, which gives training a prominent place

within our company and pulls together all the disparate resources

and augments them that were previously used to reinforce these

kinds of procedures and controls. I think that brings us back to the

point that at least I started with, which is the importance of training because you can have as many rules as you would like, if people do not understand the importance of those rules through training and know how to comply with them, it won’t work.

Mr. HORN. Any other comments you want to make on this very

possible interest of when we need to redraft something in the bill?

So I will look at a number of yours, and hopefully we can work

something out. I do not know if there are any other suggestions,

especially in the training course. You are right, Mr. Howe, that if

they are not serious and it is not good teaching, not much is going

to happen. So I would hope that all of you would be able to put

that program together.

Is there a model somewhere in the United States right now that

would be the best kind of corporate teaching, as well as control in

the particular card?

Dr. Kelman.

Mr. KELMAN. We have it at Harvard, but I am sure it is not a

model.

Mr. HORN. Yes.

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Mr. KELMAN. We do have them, though.

Mr. HORN. You mean the model is Harvard?

Mr. KELMAN. We have p-cards.

Mr. HORN. Yes.

Mr. KELMAN. My assistant uses one, and actually I have one as

well for some expenditures, but I will not claim that we are a

model. Nobody reviews my purchase card expenditures at Harvard.

I am sure I am engaging in fraud all the time without knowing it,

but whatever. [Laughter.]

Don’t throw out the baby with the bath water, I would say, Mr.

Chairman.

Mr. HORN. Thank you.

I will yield now to Mr. Turner, the ranking member on this subcommittee, for questioning.

Mr. TURNER. Thank you, Mr. Horn.

Mr. Schooner, I read what you had to say about the purchase

card authority. As you said, that is your greatest concern with this

legislation, adding that single zero. Do I take it that your position

is that it just should not be raised at all, but what we should do

is impose accountability and controls? Or if we had accountability

and controls, do you think it would be appropriate also to increase

it in some amount?

Mr. SCHOONER. Well first, as I suggested in I believe a footnote,

I think that it would be entirely appropriate to put an inflationary

adjustment on it. I do not see any reason why it arbitrarily has to

be $2,500 forever. It seems to me that if, and this is a significant

if, if we can establish internal controls, appropriate training and

stop the proliferation of cards in terms of numbers of shareholders,

and demonstrate some level of stabilities and use some of this technology in the near term to someone’s satisfaction, hypothetically

GAO’s satisfaction, then I think we should in fact be looking at increasing the threshold. But now is not the time, and I guess that

the short answer to your question is, for the current, I would hold

the threshold where it is and increase controls dramatically. I

think that they should be both technological, training-oriented and

the like. Only when those controls are in place and only when we

have accountability should that increase be made.

I think one of the most important things to remember is when

the original initiative for the purchase card and procurement was

made, the theory was to make the contracting officer more efficient

by giving him or her the purchase card to, as Dr. Kelman said,

save a lot of transaction costs. But a funny thing happened on the

way to the forum, when 670,000 government employees have a purchase card who on the average have less than 4 hours of training

and are unbound by any of the conventional rules related to government procurement. This is a process gone awry.

Mr. TURNER. Dr. Kelman, do you agree with that?

Mr. KELMAN. It is a little bit unclear what the proposed statutory

language does. Frankly, I was a little confused when I read it.

There are two different ways to use a purchase card, Congressman

Turner. One is as a purchasing device—in other words, you use it,

you decide what you get and then you use it to pay for something.

Using the purchase card as a purchasing device is limited to

$2,500. As I understand it, the language in SARA continues using

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it in terms of the controls, the procurement controls—having to get

bids, all sorts of things that the language in SARA does not change

that. What it does is to allow it to be used as a payment device

from $2,500 to $25,000. Now, in fact if that is what it does, and

frankly it is a little bit unclear to me what exactly it does, but if

that is what it does, actually since right now you can use it above

$2,500 only for contracts that have been negotiated already by the

government. And the biggest way it is being used now over $2,500

is on these various large computer contracts where the government

has negotiated fantastic prices. They are world-beating contracts.

They are amazing contracts. They are wonderful vehicles with

great prices, great terms and conditions and so forth. And people

are using a purchasing card to buy computers off of those contracts.

Those, frankly—the ones above $2,500 are actually probably the

ones least subject to abuse. If there is abuse and problems and

problems with controls, it is actually probably more in the ones

under $2,500, which the law does not change at all.

So I think I agree with Congressman Horn. I agree with Steve

Schooner that we need to do some more fraud controls in general

in the system. If all that SARA says is allow people to pay for

something using the purchasing card above $2,500, where the contract has already been pre-negotiated and we know we are getting

good prices, they are just buying it off the Internet, or whatever,

I don’t think that is an area of concern or problem. I think probably

the problems are more in the under-$2,500 that this statute does

not touch.

Mr. SCHOONER. May I comment?

Mr. TURNER. Yes, Professor.

Mr. SCHOONER. My understanding is the intent of the statute

was to actually change the micro-purchase threshold, and I see Mr.

Brosnan nodding.

Going back to the point that Steve made, when the original OMB

report on electronic payment and purchasing came out in 1998, the

theory was use the purchase card up to $2,500 for purchasing, but

up to $100,000 for payment. And as Steve has suggested, there are

huge efficiencies associated with payment. But my understanding

is this bill would in fact raise the micro-purchase threshold to

$25,000, which would basically be 98.5 percent of all government

purchase transactions—no rules, no controls, no nothing. And I

think that is an accident waiting to happen.

Mr. TURNER. Well, as Mr. Horn pointed out a minute ago, when

you have examples of abuse, it is certainly a difficult time to make

major changes. I think we all understand the private sector, if you

abuse a purchase card, you are going to be held accountable as an

employee of the company, but you won’t likely read it in a newspaper. In government, you are going to read it in the newspaper

and it is going to be called a scandal. So we I think share a common interest in proceeding cautiously.

Professor Schooner, you also made a comment regarding the acquisition training exchange portion of this bill in your testimony.

You suggested that we ought to be more careful about protecting

against conflicts of interest. Would you expand on that? What kind

of concerns should be looking out for? What kind of protections

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against conflicts should we be including in this legislation to ensure that problem you raised is addressed?

Mr. SCHOONER. Off the cuff, let me confess that I think it would

be hard to come up with what those controls could be. I think, for

example, that an exchange program, whether you call it the

DigiCorps or in the scientific community, it is very, very clear how

these exchanges could pay tremendous dividends for both sides,

both private industry and government.

But consider the fundamental scenario where, and we are only

really talking about senior acquisition executives—a senior acquisition executive goes to work for Lockheed-Martin for a year and

then comes back. Under the conventional rules today, they would

be recused from every doing business with them directly, or at

least doing business with them for a certain period of time. These

would be the minimum standards. But the amount of pressure that

this would put both ways—imagine the Lockheed-Martin purchaser

going to work in the government office. Are they simply not to

work with Lockheed-Martin? How would they be perceived by Lockheed-Martin’s competitors when they came in to negotiate with

those people?

I would love to tell you that I have concrete answers for you, but

I think that it is so complex, and despite all its best intentions it

raises issues that really need to be studied before we take a shot

like this.

There are plenty of people who have lots of experience with regard to this. We have the Office of Government Ethics who might

be able to draft something, but I think we need to do a lot of thinking about this because even if we could come up with those rules,

the rules that we would probably need would probably be disadvantageous to the career progression of the people who would most

benefit from the program. And so I think we could fall into a vicious cycle.

I apologize I do no have a concrete solution for you, but at a minimum I think we need some hardcore study.

Mr. TURNER. Let’s address a minute the share-in-savings contract concept. I know, Dr. Kelman, you have spent a lot of time

studying it and advocating it. You heard Ms. Lee make the comment today that she thought there ought to be more incentive built

in for the Federal agency. I think what she was referring to is,

even though it is fundamental in the definition, that the agency

shares in savings. She saw a deficiency because I guess the specific

section of DOD that was doing the contracting or the negotiating

was not going to get the direct share of the savings. It was going

to go to the Department of Defense generally.

It does seem that here again we have the potential for conflicts

of interest; that an agency negotiating a share-in-savings clearly

wants to be able to show sometime during the contract period that

there is a savings. And so there would be a natural tendency to

want to make the baseline as low as reasonably possible so we can

show those savings, that we have actually done something that was

positive.

How can we be assured that, No. 1, our Federal work force contracting officers have the expertise to negotiate contract-in-savings?

And second, how can we be assured that they are not going to have

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an inherent conflict of interest when they structure those contracts,

because they want to be sure they show some savings?

Mr. KELMAN. Well, I think—a few observations. People were

talking during the first panel about the need to learn to walk. We

are not going to learn to walk unless we take some steps such as

those outlined in SARA to make it easier for agencies to get the

experience doing this. There is experience. There is positive experience in the IT area. Much of it is at the State and local level. One

very prominent example which has been highlighted by the Council

for Excellence in Government, which is a good government organization here in town, is the successful modernization of the California income tax system, done through a share-in-savings contract

while IRS has had many, many problems over the years getting

successes in their own modernization.

There have been a number of examples, again at the State and

local level, involving parking enforcement, actually tax modernization in a number of other jurisdictions, and so forth. The Education

Department contract, which was referred to earlier, even if you accept the IG’s version of the baseline, and the Education Department does not agree with it, and it has some—to my mind, I have

looked at both the IG report and the Education Department response, the IG report has some to me very obvious errors in it. But

even if you hypothetically were to accept the IG baseline, over a

5-year period, the Education Department and the taxpayer will be

saving $15 million. By using the IG’s numbers, the taxpayers will

be spending $15 million less for those services than they would be

if that contract had never been signed. And if you accept a more

realistic baseline, it is more than $15 million.

I guess what I would say, sir, I think that we need to experiment

with how we develop that expertise, get those best practices together. One possibility is involving the IGs in the development of

baselines. There are also Federal, you know, FFRDCs, people like

Mitre Corp. and so forth, who sort of serve as the government’s

nonprofit, non-partisan consultants. They could be brought in to

help the government develop baselines. I think you are right to

raise that as an issue and to say, hey, we need to figure out how

to do the best possible job here.

What I think would be a mistake, let’s remember the status quo.

The status quo is far too many failed information technology modernization projects in the Federal Government. The status quo is

agencies having the same conflict of interest of claiming that this

is going to work—you know, coming up with exaggerated budget

numbers. I mean, some of those problems, that is why we have

Congress. That is why we have oversight. That is why we have, you

know, whatever.

The status quo is not acceptable. The status quo is not enough

incentive for contractors to deliver results for the taxpayer and for

the agencies. This is a very creative—this is the most creative idea

in contracting that I have come across in the last decade. This is

a creative approach that rewards the contractor only to the extent

they deliver results. Compared to the status quo, the status quo,

sir, is often that we pay contractors tens and sometimes even hundreds of millions of dollars for projects that deliver no results.

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Share-in-savings says that if you don’t deliver results, you don’t get

paid.

I want to do anything we as a government can to move us from

a situation where we just pay regardless of results, to a situation

where we pay only for results. Will we make some mistakes along

the way? Of course, but we have got to work to change the way we

do business and improve the way we do business in the taxpayers’

interest. And let’s all again, be it Mitre, be it agency best practices

in sharing information about best practices on developing baselines, be it DCAA should be brought in maybe to help on these

things, other accounting firms—baseline issues are often accounting issues. So you know, you bring in an accountant or bring in the

government’s own accountants—again, DCAA. Let’s instead of sort

of saying, well, this is not perfect so let’s stop it before it gets started, let’s say we need to move this forward, and I think the provisions in SARA do a great job of trying to move it forward. Let’s

move it forward and let’s exert careful oversight from your end—

plural—from Congress’ end and let’s bring in experts and let’s do

the best we can so we figure out how to make this work better.

But the potential for moving from a culture that allows or pays

for failure and one that only pays for results for the taxpayer, that

is too great an opportunity for the taxpayer and the government

and us as a people to pass up on, I think.

Mr. TURNER. Thank you.

Thank you, Mr. Chairman.

Mr. DAVIS. Mr. Kelman, let me just continue. You and a number

of other witnesses today have just cautioned that the SARA provision that would reserve for work force training 5 percent of the fees

collected by agencies under their multi-agency contracts could results in agencies merely substituting money that is collected for

funds currently used for such training, rather than adding to the

current levels. It is hard to measure how much money is used for

training. We tried to go through the budget, but here is what my

cursory research shows, is that SARA can produce $600 million to

$800 million a year in a training pool. DOD, we find, uses about

$100 million a year in training now.

So this would, even if they replace it, I think do a better job, and

more importantly it is there year after year. I know that changes—

I think we are still want to pay attention to what you cautioned

on this, but that may make you feel better if those numbers indeed

go up.

Mr. KELMAN. Yes, that is interesting. What I suggested, Chairman Davis, in my written testimony was one way to prevent

against that danger, if one is worried about the danger, is to say

that the money cannot be used to meet existing statutory requirements under DAWEA or the Clinger-Cohen existing training provisions. Instead, we asked the procurement executives to come up

with some special topics—share-in-saving baselining, performancebased contracting, whatever—that would be the subjects of training

negotiating techniques; things that help the government, to use

Deidre Lee’s expression, become business advisor or help the contracting folks become business advisors. Have it be topics in intelligent ways to do business, and use the fund for that reason.

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If I could add one other thing, the administration in its testimony referred to this as being, you know, it should come under,

this is bad budgeting practice to not have to have sort of a separate

line item for this. I am not particularly a budgeting expert, although I know some budgeting experts at the Kennedy School. I

guess I would say that there are lots of budgeting experts in academia who would strongly disagree with the view that we should

have a micro-line item for every little micro-area. They would

argue that this is perfectly acceptable, perfectly good budgeting policy.

Mr. DAVIS. I am sure in academia you can find someone to support almost any position. [Laughter.]

Let me ask Mr. Schooner, in your testimony, I think if I heard

you right, you believe that the lack of external oversight is negatively impacting the procurement process.

Mr. SCHOONER. I do.

Mr. DAVIS. And by lack of external oversight, do you mean lawyers filing suits? Bid protests?

Mr. SCHOONER. To the extent that Steve has already taken his

cheap shot at me on this one today, and to the extent that we disagree, I take your point, Congressman Davis, that I would not

want to come here today and suggest that litigation is a public

good. Conversely, the concept of third party monitoring, external

monitoring, or private attorney general activity is more important

when we have a massive reduction in internal oversight like we

saw in the 1990’s. It would be absurd for me to come before you

and say that generally, in a vacuum, that third party oversight is

the preferred alternative. But we have viscerated our oversight system during the 1990’s. And so as a second-best alternative, it

frightens me that we also saw the reduction in external oversight.

Mr. DAVIS. I think a recurrent theme I am hearing today is the

concern over the smart card. Whenever you embolden or empower

your purchasers out there in the field to do things, more mistakes

are going to happen. That is natural. You gain a lot of efficiencies

as a result of that, a lot of good things happen. But you are going

to get more mistakes and one way to hopefully curb that and limit

your mistakes is by appropriate oversight as is appropriate training.

How you do that, I don’t think you are keen on how you do that

one way or the other, either internally or externally, but you feel,

and I think probably everybody feels, you need to make sure we

have enough oversight.

Mr. SCHOONER. Right. Clearly, I prefer the internal oversight to

the extent that we could have it, but let me also say to the extent

that you mention the smart card technology, one of the other

things that I propose if you do want to speak to the purchase cards,

one excellent suggestion that this committee could make would be

to push the government in the direction of leveraging their purchase power. Right now, no one is concatenating the data on what

the government buys from large retailers so that we can go to

Home Depot and go to Stapes and go to these places——

Mr. DAVIS. Economies of scale.

Mr. SCHOONER [continuing]. And basically say, we spent $20 million with you last year, so now we want a point-of-sale discount

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when someone shows up with a government purchase card. We do

it with the travel card with hotels and rentals cars and the like.

We should do it with the purchase card as well.

Mr. DAVIS. Absolutely.

Mr. SCHOONER. And the technology is there to do it.

Mr. DAVIS. Mr. Kelman, you would agree with that, too, wouldn’t

you?

Mr. KELMAN. Yes. That is actually done already to a fairly large

extent. GSA, for example, if you use a purchase card at True Value

Hardware Stores, you get an automatic I think it is 10 percent discount off the GSA schedules. And of course, a lot of purchases—I

think in the long run——

Mr. DAVIS. We do it for hotels, at government rates and stuff.

Mr. KELMAN. We do it for hotels. We do it—absolutely—we do it

for air fare and we do it for off-the-shelf computers where the government gets fantastic prices.

Mr. DAVIS. But obviously this is a place where we can expand it

and maybe we ought to include something like that here.

Mr. KELMAN. Absolutely.

Mr. DAVIS. The government’s goals in this ought to be able to get

the best value for the taxpayer dollar; not be concerned with

whether it gets outsourced or in-house or all these other rules, and

that is what we are trying to get at.

Let me just ask a few more questions. Mr. Dever, in your statement you describe some of the innovative approaches that Hasbro

has undertaken to manage its acquisition services. What were the

drivers or motivators behind your effort?

Mr. DEVER. Improved financial performance for the most part,

and moving away from a decentralized approach to more of a centralized one.

Mr. DAVIS. So basically the bottom line drove it.

Mr. DEVER. Yes. And there are significant service enhancements,

increased value, kind of non-financial value opportunities.

Mr. DAVIS. Does Hasbro have the equivalent of an executive level

chief acquisition officer?

Mr. DEVER. That is my role.

Mr. DAVIS. OK. So you are the guy, so to speak.

Mr. DEVER. The role was created 4 years ago and I was hired

into it at that time.

Mr. DAVIS. OK. Do you use performance-based contracting for

services?

Mr. DEVER. Yes. We negotiate service level agreements with various providers and measure that performance on a regular basis,

and ultimately renegotiate those contracts based on that.

Mr. DAVIS. OK.

Let me ask Mr. Roberts if you can answer this. Do you know

what barriers IT companies would encounter when selling commercial IT services to the Federal Government under the current FAR

Part 12 definition?

Mr. ROBERTS. Under the current FAR?

Mr. DAVIS. Just under the current law. Don’t worry about the

FAR.

Mr. ROBERTS. The biggest things right now are probably conflict

of interest, where current IT providers will go in and can do the

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requirements analysis, but are precluded, though, from doing implementations in some cases.

Mr. DAVIS. OK.

Mr. ROBERTS. On the commercial side usually you will have, if

they can do both, they will do both. A lot of times in the government, some people will be conflicted out just for purposes of conflict. I think that needs to—what is nice about the SARA bill is

that takes that out.

Mr. DAVIS. Does KPMG currently do share-in-savings contracting?

Mr. ROBERTS. We do not.

Mr. DAVIS. OK. Do you assist companies in developing appropriate baselines?

Mr. ROBERTS. What we will do is we will help the government

determine yes—with some of our clients, we will go and do activitybased costing and determine what the cost of that activity is. We

would be in a position to help set up that baseline since you could

do a share-in-savings contract. Yes.

Mr. DAVIS. Ms. StandsBlack-Carver, let me ask you, you point

out that the SARA provisions on electronic invoicing and agencylevel protests are particularly advantageous for innovative small

businesses like yours. Are there any other SARA provisions that

you find particularly attractive from a small business point of

view?

Ms. STANDSBLACK-CARVER. Since the bill was just really introduced on Monday, I really have not had a thorough review on it.

But I could get back to you in writing on that, because there are

several that are advantageous to small business.

Mr. DAVIS. If you find anything, you can get back to me. All

right, I was just throwing it off the top.

Well, let me ask you this, in your testimony you note the ongoing

problems with DFAS due to problems we are all encountering with

mail. We are having terrible problems with mail on Capitol Hill.

Ms. STANDSBLACK-CARVER. I have heard.

Mr. DAVIS. Is this still the case? Is DOD offering any assistance

to small businesses in overcoming these significant time delays

through the mail that you have seen?

Ms. STANDSBLACK-CARVER. To be honest, no, sir, not really.

There is very little recourse for small businesses.

Mr. DAVIS. OK. Thank you. I don’t think that was anything that

was anticipated when we went through, but the mail has—e-mails

to my office have increased 100fold and regular mail—we have

some pictures we took with the President and they were getting

them back and they got zapped in the machine and they didn’t

turn out—I mean, those kind of situations that nobody recognizes,

but mostly it is just a delay in everything. And when you are trying

to meet a payroll and you are waiting for that check and everything else, it is, for small businesses in particular, it can be——

Ms. STANDSBLACK-CARVER. Luckily, we do have the electronic

payments, which have really been great.

Mr. DAVIS. Right.

Ms. STANDSBLACK-CARVER. The invoice—the whole process

should be electronic.

Mr. DAVIS. But you cannot invoice electronically?

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Ms. STANDSBLACK-CARVER. No, sir.

Mr. DAVIS. You can hand-carry it, I guess. Have you done that?

Ms. STANDSBLACK-CARVER. And we do.

Mr. DAVIS. We used to do that.

Ms. STANDSBLACK-CARVER. We still do that.

Mr. DAVIS. Mr. Howe, can you elaborate on the reference you

made to intellectual property issues in your testimony?

Mr. HOWE. I think that it is important for there to be a correct

balance between the rights of the owners of the intellectual property being the contractors and the government. Fundamentally in

this area, what the government is trying to obtain is a solution to

a problem. And if the problem can deliver the solution to that problem, there is no reason for the government to be obtaining any intellectual property rights in all of the research and development

and thinking and know-how that the contractors have put into

that.

Obviously, the government needs a license to use whatever technological solution is provided, but it does not need any license to

any of the background technology or the preceding intellectual

property.

Mr. DAVIS. OK, great.

Mr. Horn, do you have any other questions? Anyone from the

panel want to add anything in rebuttal or anything that has occurred to you?

Mr. DEVER. Could I make a comment on shared savings proposals?

Mr. DAVIS. Sure.

Mr. DEVER. I have had the opportunity to negotiate a limited

number of shared savings, and they tend to be pretty complicated

for a number of reasons. But there are some criteria that we look

at or that we consider before entering into a shared savings agreement that I think you might adopt.

First of all, and it has been brought up, the ability to accurately

benchmark and then measure the savings. If we don’t agree on

what the savings are, it is hard to share.

Second, these are useful to the supplier. They will take some risk

up front on the chance that savings will be delivered, and then

they get paid more as a result. If we are very confident that savings will come out of that engagement, then there is no need to

share it. OK?

So there is something in between the idea of don’t pay unless

there are results, and we are paying for no results, and that is pay

a fair price and expect and negotiate results. But the shared savings proposals, there is a tendency to overpay.

Mr. DAVIS. Well, if you don’t know what you are doing, absolutely. I mean, the whole point there is making sure that your government purchasers when they are doing the deal understand

enough technically to know what they ought to get and what that

cost ought to be. And that is difficult. That is where the training

comes in and that is where we are trying to get the private sector

into government and back and forth to understand the different

cultures. It all comes into play. But if you have a smart buyer, and

you don’t want to take the risk at the governmental level of ending

up as we have so many times ended up, buying something that

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doesn’t work or isn’t what we wanted and paying tremendous costs,

share-in-savings is great.

Now, I think that the difficulty we have is, No. 1, you do not

have the tools to do that today. You can try to do it, but it is kind

of convoluted to try and do it within government. And second, this

will be something that your purchasers are going to be reluctant

to use initially, because they are afraid somebody is going to make

a big profit on them. But I will tell you what, it is better for that

to happen than it is to put a lot of money in and end up with nothing, which happens so many times.

I have been on both sides of that equation and it is no fun, and

usually it is the problem with the government just not supervising

the contract correctly, asking for what they want. The nice thing

about the way we are buying things now, the old days when I was

a general counsel, you would respond to an RFP, you would come

in and you would go to the best and final. You always worried

about a bid protest. And at the end of the day, the government

would get something that wasn’t quite what they wanted, but it

met the criteria and it didn’t really work. We wasted a lot of money

that way, not just on lawyers. We also wasted a lot of money on

systems and stuff because you had to justify it and go through too

much external oversight.

There is always a balance to this, and that is what we are trying

to get at. It all starts and ends with having your government employee, that official on the front lines who is buying for the agencies, and there is an assumption somehow that purchase knows

more about what the agency wants than we do in Congress or the

other people who are not as closely involved are, and that they are

then trained and have the know-how to go out and drive the best

deal for the government.

That takes a lot of training, and it means good people. But if you

have it, that is the way it works. And there are tremendous savings, in my opinion, that can be made, and that is what we are trying to get at. And I recognize in all of this that somebody is going

to abuse the purchase card. They are going to overcharge, take

their friends out to dinner. I mean, who knows what is going to

happen. You have had that in government, making long-distance

phone calls—you live with a certain amount of that petty stuff because of what you make up over the long term. But human beings

are human beings, and you want to exercise oversight so that people are not constrained from doing this and creating efficiencies,

but on the other hand, enough oversight so that it is not abused.

And what that balance is, I mean if you look at the history of

government procurement, we never quite find the balance. But

there is a recognition of the Federal Government being the largest

purchaser of IT goods in the world today, that we are spending and

wasting billions of dollars, sometimes just because our own rules

and regulations require it. And from my perspective, I would rather

overpay somebody who gives me a system that I can use and ends

up saving me money, than I would to pay somebody who gives me

something I can’t really use. And we see that all too often in government, if you have to make that tradeoff. Hopefully, we do not

have to make the tradeoff.

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And I will tell you the other thing about a share-in-savings contract is you incentivize companies to work efficiently because, No.

1, they are going to eat any problems, they have to eat it, on the

one hand. On the other hand, if they come up with a good solution,

there can be a huge high-end. But again, if you negotiate the agreement bad from the start, then you are going to be overpaying, and

the key is making sure you have an adequate baseline, our people

are trained and we can do that. So that is what we are working

on.

But I appreciate everybody’s comments today, and I think all of

you have been on the front lines of this. We don’t all agree on every

single issue. In fact, I will go back and read the testimony, and I

probably won’t agree with some of the stuff that I thought earlier

in the day, but that is why we hold these hearings. And if we can

continue to have discussions with you and meet with you, maybe

we can come out with something we can at least get a majority of

the committee, at least in the House, to agree to and move it

through.

Thank you all very much. Before we close, again I want to thank

everyone for attending this important oversight hearing. I want to

thank the witnesses. I want to thank my ranking member, Representative Turner. I want to thank Mr. Horn who has been a partner in these issues going back several congresses. And I want to

thank my staff for organizing what I think has been a very productive hearing.

We are going to keep the record open for 2 weeks for anybody

who wants to add anything, get questions through, and the briefing

memorandum will be entered into the record.

These proceedings are closed.

[Whereupon at 4:48 p.m., the subcommittee was adjourned, to reconvene at the call of the Chair.]

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