Contract Management: High-Level Attention Needed to Transform DOD Services Acquisition
Published: 2003-09-10T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Department of Defense's (DOD) spending on service contracts approaches $100 billion annually, but recent legislation directs DOD to manage its services procurement more effectively. Leading companies transformed management practices and achieved major savings after they analyzed spending patterns and coordinated procurement. This report evaluates DOD's implementation of the legislation in light of congressional interest in promoting the use of best commercial practices for acquiring services.
section_title: What GAO Found
paragraphs: DOD and the military departments each have a management structure in place for reviewing individual services acquisitions valued at $500 million or more, but that approach does not provide a departmentwide assessment of how spending for services could be more effective. Greater attention is needed by DOD management to promote a strategic orientation by setting performance goals, including savings goals, and ensuring accountability for achieving them. To support management decisions and improve visibility over spending on service contracts, DOD is developing an automated system to collect and analyze data by piloting a spend analysis. The analysis views spending from a DOD-wide perspective and identifies large-scale savings opportunities, but its scope is limited, and it is too early to tell how the department can make the best use of its results. The military departments are in the early stages of separate initiatives that may lead them to adopt a strategic approach to buying services, but DOD lacks a plan that coordinates these initiatives or provides a road map for future efforts.

section_title: Letter
paragraphs: Federal agencies spend billions of tax dollars each year to buy services  ranging from clerical support and consulting services, to information  technology services such as network support, to the management and  operation of government facilities such as national laboratories. The  Department of Defense (DOD) is, by far, the government’s largest  purchaser of services, acquiring about $93 billion in services in fiscal  year 2002. However, our work, and the work of DOD’s Inspector General,  has found that this spending could be managed more efficiently.
Congressional concern over DOD services acquisition has been spurred  by the contrasting experience of the private sector, depicted by our  recent work. A number of leading companies have achieved significant  savings—without any reduction in services—by adopting a strategic  approach involving the implementation of a variety of best practices.  Using a strategic approach enabled the companies to transform their  processes and thus get the best value in procuring services.
Recognizing that these experiences could help reform DOD, the Congress  included provisions in the National Defense Authorization Act for Fiscal  Year 2002 to achieve significant savings through improved management  and oversight of services procurement. Specifically, section 801 of this law  requires DOD to establish (1) a management structure designed to provide  visibility and establish accountability for services contracts, (2) a program  review structure for major services acquisitions, and (3) an automated  system to collect and analyze data to support management decisions in  contracting for services. One of the aims of these requirements is to  promote the use of best commercial practices, such as centralizing key  functions, promoting strategic orientation, improving personnel skills and  capabilities, conducting spending analyses, rationalizing supplier bases,  and expanding the use of cross-functional, commodity-based teams.
In this report, we evaluate DOD’s implementation of the requirements of  section 801. To conduct this work, we interviewed acquisition officials in  the Office of the Under Secretary of Defense for Acquisition, Technology,  and Logistics and the military departments. We also reviewed policy  memoranda and other documents pertaining to DOD’s implementation of  section 801 requirements. More information is contained in our Scope and  Methodology section.
subsections: section_title: Background
paragraphs: DOD is historically the federal government’s largest purchaser of services.  Between 2001 and 2002, DOD’s reported spending for services contracting  increased almost 18 percent, to about $93 billion. In addition to the  sizeable sum of dollars involved, DOD contracts for a wide and complex  range of services, such as professional, administrative, and management  support; construction, repair, and maintenance; information technology;  research and development; medical care; operation of government-owned  facilities; and transportation, travel, and relocation. In each of the past  5 years, DOD has spent more on services than on supply and equipment  goods (which includes weapon systems and other military items)  (see fig. 1).
Despite this huge investment in buying services, our work—and the  work of the DOD Inspector General—has found that DOD’s spending on  services could be more efficient and more effectively managed. In fact,  we have identified DOD’s overall contract management as a high-risk area,  most recently in our Performance and Accountability and High-Risk  Series issued this past January. Responsibility for acquiring services is  spread among individual military commands, weapon system program  offices, or functional units in various defense organizations, with limited  visibility or control at the DOD- or military-department level. Our reports  on DOD’s contract management have recommended that DOD use a  strategic approach to improve acquisition of services.
Our work since 2000 at leading companies found that taking a more  strategic approach to acquiring services enabled each company to stay  competitive, reduce costs, and in many cases improve service levels.  Pursuing such a strategic approach clearly pays off. Studies have reported  some companies achieving savings of 10 to 20 percent of their total  procurement costs, which include savings in the procurement of services.  These leading companies reported achieving or expecting to achieve  billions of dollars in savings as a result of taking a strategic approach to  procurement. For example, table 1 summarizes the savings reported by the  companies we studied most recently.
The companies we studied did not follow exactly the same approach in  the manner and degree to which they employed specific best practices,  but the bottom line results were the same—substantial savings and, in  many cases, service improvements. Figure 2 elaborates on the four  broad principles and practices of leading companies that are critical to  successfully carrying out the strategic approach. These principles and  practices largely reflect a common sense approach, yet they also represent  significant changes in the management approach companies use to  acquire services.
Companies that have been successful in transforming procurement  generally begin with a corporate decision to pursue a more strategic  approach to acquiring services, with senior management providing the  direction, vision, and clout necessary to obtain initial buy-in and  acceptance of procurement reengineering. When adopting a strategic,  best-practices approach for changing procurement business processes,  companies begin with a spend analysis to examine purchasing patterns  to see who is buying what from whom. By arming themselves with this  knowledge, they identify opportunities to leverage their buying power,  reduce costs, and better manage their suppliers. Companies also institute  a series of structural, process, and role changes aimed at moving away  from a fragmented acquisition process to a more efficient and effective  corporate process. These changes include adjustments to procurement  management structure and processes such as instituting companywide  purchasing of specific services; reshaping a decentralized process to  follow a more coordinated, strategic approach; and increasing the  involvement of the corporate procurement organization, including  working across units to help identify service needs, select providers,  and better manage contractor performance.
section_title: DOD Has Made Limited Progress Reforming Management Structure and Improving Knowledge of Service Spending
paragraphs: DOD has made limited progress in its overall implementation of section  801, particularly with respect to establishing a management structure  to oversee a more strategic approach to the acquisition of services, as  envisioned by the legislative history of this provision. While DOD’s leaders  express support for a strategic approach in this area, they have not  translated that support into broad-based reforms.
The experience of leading companies offers particularly relevant insights  into the nature of long-term changes in management structure and  business processes. Long-term changes will be needed if the military  departments and the defense agencies are to be successful in adopting a  more strategic approach to acquiring services and achieving substantial  savings and other benefits. Private sector experience demonstrates the  need to change how services are acquired—by modernizing management  structure and business processes—and setting performance goals,  including savings, and establishing accountability for achieving them. Such  changes are needed to move DOD and the military departments from a  fragmented approach to doing business to one that is more coordinated  and strategically oriented. The end goal is to institute a departmentwide  perspective—one that will ensure that the organization is getting the best  overall value.
Industry has found that several ingredients are critical to the successful  adoption of a strategic approach. For example, senior management must  provide continued support for common services acquisitions processes  beyond the initial impetus. Another example is to cut across traditional  organizational boundaries that contributed to the fragmented approach  by restructuring procurement management and assigning a central or  corporate procurement organization greater responsibility and authority  for strategic planning and oversight of the companies’ service spending.
Companies also involve business units in this coordinated approach by  designating commodity managers to oversee key services and making  extensive use of cross-functional commodity teams to make sure they  have the right mix of knowledge, technical expertise, and credibility.  Finally, companies extensively use metrics to measure total savings  and other financial and nonfinancial benefits, to set realistic goals for  improvement, and to document results over time.
To date, DOD has not significantly transformed its management structure  in response to the 2002 national defense authorization requirements, and  its crosscutting effort to improve oversight will focus on only a portion  of military department spending for services. Specifically, the Under  Secretary of Defense for Acquisition, Technology, and Logistics and each  of the military departments now have policies in place for a management  structure and a process for reviewing major (i.e., large-dollar or program- critical) services acquisitions for adherence to performance-based,  competition and other contracting requirements. (See app. I for a  descriptive comparison of DOD and military department policies.)
DOD modeled its review process for acquiring services after the review  process for acquiring major weapons systems; the policy is intended to  elevate high-dollar value services to the same level of importance and  oversight. DOD intends that the new program review structure provide  oversight before it commits the government to a major acquisition to  ensure that military departments and defense agencies’ buying strategies  are adequately planned, performance-based, and competed. The new  policy similarly establishes a high-dollar threshold of $500 million or  more for selecting which service acquisitions must move forward from  lower-level field activities, commands, and program offices to the military  department headquarters (and possibly to DOD) for advance review  and approval.
We expect that this new policy will lead to very few service acquisition  strategies and a small portion of overall service spending being subjected  to central oversight at the military department headquarters level or  at DOD headquarters. DOD officials acknowledge that most service  acquisitions cost less than the $500 million threshold required for  headquarters-level reviews, and the total value of the few contract actions  likely to be forwarded under that threshold will amount to a small portion  of DOD’s total spending on services, which is approaching $100 billion  each year. DOD’s review criteria indicate that the central reviews that do  take place will be focused on approving individual acquisitions rather than  coordinating smaller, more fragmented requirements for service contracts  to leverage buying power and assessing how spending could be more  effective. Our discussions with procurement policy officials in the  various military departments confirmed that they expect no more than  a few acquisitions to be reviewed at the DOD or military department  headquarters level each year. While the new process complies with the  act’s requirements to improve oversight of major service acquisitions, it  has not led to centralized responsibility, visibility, or accountability over  the majority of contracting for services.
In response to the legislative requirement to develop an automated system  to collect and analyze data, DOD has started a spend analysis pilot that  views spending from a DOD-wide perspective and identifies large-scale  savings opportunities. However, the scope of the pilot is limited to a test  of a few service categories. Thirteen months after Congress directed that  DOD create an automated system to support management decisions for  the acquisition of services, the Deputy Secretary of Defense tasked a new  team to carry out the pilot. In May 2003, DOD hired a vendor to support  the team by performing an initial spend analysis and developing strategic  sourcing business cases for only 5 to 10 service categories. Efforts to  extract data for the pilot spend analysis will be restricted to information  taken from centrally available databases on services contract actions  (excluding research and development) in excess of $25,000, a limitation  due to the 90-day time frame established for completing the spend  analysis. Pilot projects and associated efforts will be completed by  September 2004, so it is too early to tell how DOD will make the best use  of the results.
section_title: DOD Does Not Have a Strategic Plan for Integrating Early Initiatives
paragraphs: Even though DOD’s senior leadership called for dramatic changes to  current practices for acquiring services about 2 years ago, and proposed  various initiatives and plans to transform business processes, DOD’s early  initiatives have not moved forward quickly, expanded or broadened in  scope, or been well coordinated. The experience of leading companies we  studied in our prior work indicates that successfully addressing service  acquisition challenges requires concerted action and sustained top-level  attention, efforts that must be reinforced by a sound strategic plan.
Moreover, section 801 required DOD to issue guidance on how the military  departments should carry out their management responsibilities for  services contracting. To date, the only guidance that DOD has issued  involves review of individual major service acquisitions for adherence  to performance-based, competition, and other acquisition strategy  requirements. DOD has not established a strategic plan that provides a  road map for transforming its services contracting process and recognizes  the integrated nature of services contracting management problems and  their related solutions.
Air Force, Army, and Navy headquarters procurement organizations  have initiatives underway to better manage the acquisition of services,  but they are in the early stages of development and unconnected to each  other. Limited progress has taken place on key efforts to coordinate  responsibility and leverage purchasing power, even in the pursuit of key  goals such as reducing unnecessary spending and redirecting funds to  higher priorities such as modernization and readiness. Information we  obtained on the military departments’ early efforts suggests that military  department leaders understand the value of a strategic approach in this  area, but they have not yet translated that understanding into broad-based  reforms to meet comprehensive performance goals, including savings.  Although the Air Force, Army, and Navy initiatives that follow seek to  include the basic principles of the framework used by leading companies  when they acquire services, the initiatives are still under study, or in the  early stages of implementation.
At a January 2003 symposium, Air Force participants from headquarters  and major commands discussed a vision for transforming contracting  for services and taking a strategic, departmentwide approach based on  commercial best practices. At this event, the Deputy Assistant Secretary  for Contracting called for rethinking business processes, noting that the  Air Force spends over half of its discretionary dollars on services, yet  most of the attention goes to managing goods. To move forward on this  initiative, staff from acquisition headquarters and major commands are to  work together on an 18-month project to capture, analyze, and use spend  analysis data and develop an Air Force strategic sourcing plan for services  acquisitions. Another key initiative participants considered was the  establishment by the Air Force of a management council for services  contracting. No time frame has been set for when the Air Force would  activate such a council. However, the deputy assistant secretary’s vision  for adopting a best practices approach to contracting for services calls for  radically transforming business processes within 5 years and establishing  cross-functional, Air Force-wide councils to consolidate market  knowledge and carry out strategic sourcing projects. In July 2003, in  the first such effort to take advantage of its overall buying power, the  Air Force formed a commodity council responsible for developing  departmentwide strategies for buying and managing information  technology products. According to an Air Force official involved with  this council, the lessons learned and best practices of this council will be  carried forward to other commodity councils that will be established by  the Air Force. Another category that the Air Force is considering for a  future commodity council is construction services.
In 2001, top Army leadership approved a consolidation of Army  contracting activities that focuses on the areas of installation management  and general-purpose information technology. This initiative covers only a  portion of the Army’s service spending, and it involved the establishment  of the Army Contracting Agency in October 2002 to centralize much  installation-support contracting under a corporate management structure  and called for consolidating similar and common use requirements to  reduce costs. This central agency will be fully responsible for Army-wide  purchases of general information technology and electronic commerce  purchases and for large installation management contracting actions  over $500,000 that were previously decentralized. The agency’s key  anticipated benefit will be its ability to centralize large buys that are  common Army-wide, while continuing to provide opportunities for small  businesses to win contracts. To have an early demonstration of the value  of this approach, the agency plans an October 2003 spend analysis of  several services that could offer easy savings, including security guards,  furniture refinishing, telecommunications, building demolition, and  photocopying. The agency has yet to set a time frame for carrying out the  consolidated purchases, which could be national or regional in scope. The  agency’s organizational structure assigns regional executive responsibility  for managing services contracting, and includes a high-level council in  headquarters for overseeing more strategic approaches to buying Army  installation support services.
The Navy is considering pilot tests of a more strategic approach for  services spending in a few categories. Senior Navy leadership began a  study in September 2002 to recommend business process changes in the  Navy’s acquisition program. A Navy official conducting the preliminary  spend analysis of Navy purchasing data estimated opportunities to save  $115 million through taking a more strategic, coordinated approach to  buying $1.5 billion in support services (engineering; logistics; program,  general, and facilities management; and training). The Navy official said  that, sometime this year, senior Navy leadership is expected to approve  the study’s recommendations to pilot-test consolidated acquisition for  support services. To lead these innovative management approaches,  the Secretary of the Navy earlier this year approved a new position for a  Director of Program Analysis and Business Transformation within the  Office of the Deputy Assistant Secretary for Acquisition Management.  A Navy procurement policy official involved with the ongoing effort told  us that the Navy’s pilot tests are likely to be affected by DOD’s spend  analysis pilot that is testing DOD-wide strategic sourcing strategies for  5 to 10 services. Since Navy procurement policy officials are also involved  in DOD’s pilot, he anticipates having to coordinate the Navy’s pilot as both  initiatives move forward.
A strategic plan could help DOD ensure that these early initiatives  successfully lead to lower costs and improved acquisition of services.  Such a plan would identify, coordinate, and prioritize these initiatives;  integrate the military departments’ services contracting management  structures; ensure comprehensive coverage of services spending; promote  and support collaboration; and establish accountability, transparency, and  visibility for tracking performance and achieving results. However, some  of the procurement policy officials we interviewed have expressed  skepticism that broad-based reforms to foster a more strategic approach  are necessary or beneficial, or that DOD could fully adopt private sector  strategies in view of its current decentralized acquisition environment and  other constraints.
section_title: Conclusions
paragraphs: Given the federal government’s critical budget challenges, DOD’s  transformation of its business processes is more important than ever  if the department is to get the most from every dollar spent. Senior  leadership has for 2 years expressed a commitment to improving the  department’s acquisition of services. Nonetheless, DOD and the military  departments remain in the early stages of developing new business  processes for the strategic acquisition of services.
DOD’s leaders have made a commitment to adopt best practices and make  dramatic changes. Translating that commitment into specific management  improvements will allow DOD to take on the more difficult tasks of  developing a reliable and accurate picture of spending on services across  DOD; determining what structures, mechanisms, and metrics can be  employed to foster a strategic approach; and tailoring those structures to  meet DOD’s unique requirements. Given that DOD’s spending on services  contracts is approaching $100 billion annually, the potential benefits for  enhancing visibility and control of services spending are significant.
section_title: Recommendations for Executive Action
paragraphs: To achieve significant improvements across the range of services DOD  purchases, we recommend that the Secretary of Defense direct the  Under Secretary of Defense for Acquisition, Technology, and Logistics to  work with the military departments and the defense agencies to further  strengthen the management structure. This structure, established in  response to section 801, should promote the use of best commercial  practices such as centralizing key functions, conducting spend analyses,  expanding the use of cross-functional commodity teams, achieving  strategic orientation, achieving savings by reducing purchasing costs  and other efficiencies, and improving service contracts’ performance  and outcomes.
We also recommend that the Secretary of Defense direct the  Under Secretary to develop a strategic plan with guidance for the  military departments and the defense agencies on how to carry out  their responsibilities for managing acquisition of services. Key elements  of this guidance should address  improving knowledge of services spending by collecting and analyzing  data about services procurements across DOD and within military  departments and defense agencies,    promoting collaboration across DOD and within military departments and  defense agencies by establishing cross-functional teams to carry out  coordinated purchasing of services, and    establishing strategic savings and performance goals, measuring results,  and ensuring accountability by assigning high-level responsibility for  monitoring those results.
section_title: Agency Comments
paragraphs: In commenting on a draft of this report, DOD concurred in principle with  the recommendation to further strengthen the management structure  established in response to section 801 and partially concurred with the  recommendation to develop a plan with guidance to the military  departments on carrying out their strategic and centralized responsibilities  for the acquisition of services.
DOD expects that various initiatives being pursued to enhance services  acquisition management structures and processes—such as the  management structure for reviewing individual service acquisitions valued  at more than $500 million and the spend analysis pilot assessed in this  report—will ultimately provide the information with which to decide  what overarching joint management and business process changes are  necessary. DOD cites these initiatives as demonstrating a full commitment  to improving acquisition of services. DOD further states that these  efforts—such as collecting and enhancing data, performing spend  analyses, and establishing commodity teams—are similar to industry best  practices—and have already had significant impacts on the manner in  which services are acquired.
We agree that the initiatives are positive steps in the right direction to  improve acquisition of services. However, it is too early to tell if these  early efforts will lead DOD and the military departments to make the type  of long-term changes that are necessary to achieve significant results in  terms of savings and service improvements.
Moreover, according to DOD, factors such as unusual size, organizational  complexity, and restrictive acquisition environment mean that DOD  cannot adhere strictly to the commercial best practices described in the  report. Yet, none of the companies we studied followed exactly the same  approach in employing specific best practices. Likewise, DOD and the  military departments need to work together and determine how these  practices can be adapted to fit their unique needs, challenges, and  complexities. Significant bottom line results in terms of savings and  service improvements are likely with adequate follow-through on the  various initiatives. DOD’s strategic plan should be explicit about how  and when appropriate follow-through actions will take place so that  significant, long-lasting performance improvements and cost savings  are achieved.
DOD’s comments can be found in appendix II.
section_title: Scope and Methodology
paragraphs: Section 801 of the National Defense Authorization Act for Fiscal Year  2002 requires DOD to establish a management structure and a program  review structure and to collect and analyze data on purchases in order to  improve management of the acquisition of services. As described in the  legislative history, these requirements provide tools with which the  department can promote the use of best commercial practices to reform  DOD’s services procurement management and oversight and to achieve  significant savings. Section 801 also directed us to assess DOD’s  compliance with the requirements and to report to congressional armed  services committees on the assessment.
To conduct this work, we interviewed officials—including those  responsible for Defense Procurement and Acquisition Policy, and  Acquisition Resources and Analysis—in the Office of the Secretary of  Defense and the Office of the Under Secretary of Defense for Acquisition,  Technology, and Logistics. We also interviewed officials responsible for  service acquisition policy and management in the Air Force, the Army, and  the Navy. We interviewed both DOD’s and the various services’ officials  about policy memoranda and related actions taken to implement section  801 requirements, including the evolving nature of implementation actions  over several months. We also discussed comparisons between DOD’s and  the military departments’ services acquisition management reforms and  leading companies’ best practices for taking a strategic approach, which  were identified in our previous work and promoted by the legislation.  To assess compliance with the policy and guidance requirements for  the management and program review structures, we reviewed internal  memoranda and policy documents issued by the Under Secretary of  Defense and the military departments.
For background on DOD’s contract spending on services, we analyzed  computer-generated data extracted from the Defense Contract Action Data  System. We did not independently verify the information contained in the  database. There are known data reliability problems with this data source,  but we determined that the data are sufficient to provide general trend  information for background reporting purposes.
We conducted our review from November 2002 to July 2003 in accordance  with generally accepted government auditing standards.
We are sending copies of this report to other interested congressional  committees; the Secretary of Defense; the Deputy Secretary of Defense;  the Secretaries of the Army, Navy, and Air Force; and the Under  Secretaries of Defense (Acquisition, Technology, and Logistics) and  (Comptroller). We will also provide copies to others on request. In  addition, the report will be available at no charge on the GAO Web site  at http://www.gao.gov.
Should you have any questions on matters discussed in this report, please  call me at (202) 512-4841. Other contacts and staff acknowledgments are  listed in appendix III.
section_title: Appendix I: Comparison of Selected Program Review Structure Requirements
paragraphs: In response to 2002 national defense authorization requirements, the  Under Secretary of Defense for Acquisition, Technology, and Logistics  and the military departments developed and implemented policies for a  program review structure to oversee large-dollar and program-critical  services acquisitions. The review process, modeled after DOD’s review  process for major weapons systems, seeks to ensure major service  acquisition strategies are adequately planned, performance-based,  competed, and address socioeconomic goals. In most cases, an acquisition  must be valued at $500 million or more to prompt review at the  headquarters level for DOD and the military departments. Table 2  compares selected aspects of the legislation’s requirements with, and the  implementation status of, DOD and military department policies.
section_title: Appendix II: Comments from the Department of Defense
section_title: Appendix III: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Acknowledgments
paragraphs: In addition to those named above, Cordell Smith, Bob Swierczek, and  Ralph White made key contributions to this report.