Best Practices: Using Spend Analysis to Help Agencies Take a More Strategic Approach to Procurement
Published: 2004-09-16T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: "Spend analysis" is a tool that provides knowledge about who are the buyers, who are the suppliers, how much is being spent for what goods and services, and where are the opportunities to leverage buying power. Private sector companies are using spend analysis as a foundation for employing a strategic approach to procurement. Recognizing the potential in government purchasing, GAO examined if the departments of Agriculture, Health and Human Services (HHS), Justice, Transportation, and Veterans Affairs are using spend analysis to take a strategic approach. GAO assessed (1) if agencies use spend analysis to obtain knowledge to improve procurement of goods and services and (2) how agencies' practices compare to leading companies best practices.
section_title: What GAO Found
paragraphs: Taking a strategic approach to procurement involves a range of activities--from using spend analysis to taking an enterprisewide approach to buying goods and services. Three of the five surveyed agencies have begun to use spend analysis to obtain knowledge and improve their spending for goods and services. Veterans Affairs' success in using spend analysis and a strategic approach to pharmaceutical procurement helped save $394 million in 2003. Currently, agency teams are organizing medical-equipment and supplies purchase data to develop national contracts to save an estimated $82 million a year. Spend analysis is being used by HHS to support strategic sourcing of office-related equipment and supplies through discount agreements with major vendors that could save an estimated $9.5 million per year. Agriculture used a 2001 spend analysis to negotiate a discount agreement for office supplies that yielded savings of $1.8 million to date and is identifying more such opportunities. Agriculture is also modernizing its acquisition system to develop automated data-mining, spend analysis, and reporting capabilities to support future opportunities. The departments of Justice and Transportation have not yet used spend analyses to support a more strategic approach to procurement. Veterans Affairs, HHS, and Agriculture have made good progress using spend analysis to improve their procurements, and they have adopted some elements of a strategic approach. Implementing spend analysis is challenging and can take time, and the agencies have not yet adopted the full range of private sector best practices. Fully adopting the supporting structure, process, and role changes that companies institute would enable these agencies to move away from a fragmented procurement process and determine how effective they are in using spend analysis to achieve significant savings.

section_title: Letter
paragraphs: Taking a strategic approach to procurement involves a range of  activities—from using “spend analysis” to develop a better picture of what  an agency is spending on goods and services, to taking an enterprisewide  approach for procuring goods and services, to developing new ways of  doing business. Our prior work has shown that such an approach could  help agencies leverage their buying power, reduce costs, and better  manage suppliers of goods and services, as leading private sector  companies have discovered on adopting these activities. One survey of  147 companies in 22 industries indicated that such an approach produced  savings of more than $13 billion in 2000.
Spend analysis is a tool that provides companies knowledge about how  much is being spent for what goods and services, who are the buyers, and  who are the suppliers, thereby identifying opportunities to leverage  buying, save money, and improve performance. To obtain these answers,  companies use a number of practices involving automating, extracting,  supplementing, organizing, and analyzing procurement data. Companies  establish automated systems to extract and compile internal financial data  covering everything they buy; supplement that data with information from  external sources; organize this data into complete and consistent  categories of products, services, and suppliers; and have the data  continually analyzed. Companies then leverage this data to institute a  series of structural, process, and role changes aimed at moving away from  a fragmented procurement process to a more efficient and effective  corporate process in which managers make decisions on a companywide  basis.
We have already issued several reports examining the benefits of using a  strategic approach to procurement and spend analysis at the Department  of Defense. Recognizing the potential that similar use might offer in  civilian areas of government purchasing, on the initiative of the  Comptroller General, we reviewed the activities of five federal agencies— the departments of Agriculture, Health and Human Services (HHS),  Justice, Transportation, and Veterans Affairs—whose goods and services  spending totaled almost $37.2 billion in 2003. Specifically, we assessed  (1) if these agencies are using spend analysis to obtain knowledge to  improve procurement of goods and services and (2) how these agencies’  spend analysis practices compare to leading companies’ best practices,  including whether agencies have in place the supporting structure,  processes, and roles to effectively use the results of spend analysis. We are  addressing this report to you because of your jurisdiction over the  efficiency, economy, and effectiveness of all agencies and departments of  the government.
subsections: section_title: Scope and Methodology
paragraphs: To conduct this work, we obtained information from the five agencies  about how they used spend analysis in support of a more cost effective  approach to procurement. We interviewed senior procurement  management officials at departmental headquarters to obtain information  and views about any agencywide spend analysis efforts and how such  efforts compared to leading companies’ best practices identified in our  recent work. We reviewed internal memorandums and other documents  related to ongoing or proposed agency procurement reforms that  leveraged buying power, cut costs, and achieved other performance  benefits. For background on the agencies’ contract and purchase card  spending on goods and services, we used summary fiscal year 2003  Federal Procurement Data System (FPDS) data from the General Services  Administration (GSA). Because we used FPDS data for information  purposes and not to support our findings, we did not verify the data. We  also did not verify the accuracy of any strategic procurement costs savings  reported to us by the agencies. We conducted our work in accordance  with generally accepted government auditing standards between  December 2003 and June 2004.
section_title: Background
paragraphs: Our past work studying how leading private-sector companies have  reengineered their approach to procurement offers federal agencies both  valuable insights and a general framework that could serve to guide their  efforts. While each of the companies we studied is a leader in its  respective market, each was also not immune to market or stockholder  pressures to improve performance or to challenges from senior corporate  leadership to improve the manner in which the company acquired goods  and services. In turn, these companies adopted a strategic approach to  leverage their buying power, reduce costs, better manage their suppliers,  and improve the quality of goods and services acquired.
As shown in figure 1, we identified broad principles and practices that  were critical to carrying out the companies’ strategic approach  successfully. Taking a strategic approach involves a range of activities  from developing a better picture of what the company is spending on  procurement to taking an enterprisewide approach to procuring goods and  services and developing new ways of doing business.
Pursuing such an approach in the private sector clearly pays off. Studies  have reported significant cost savings for some companies of 10 to 20  percent of their total procurement costs. And the leading commercial  companies we studied reported savings and anticipated savings in the  billions of dollars.
Conducting a spend analysis to obtain improved knowledge on  procurement spending is a critical component of an effective strategic  approach. A spend analysis permits company executives to review how  much their company has spent each year, what was bought, from whom it  was bought, and who was purchasing it. The analysis identifies where  numerous suppliers are providing similar goods and services—often at  varying prices—and where purchasing costs can be reduced and  performance improved by better leveraging buying power and reducing  the number of suppliers to meet the company’s needs.
Spend analysis is an important driver of strategic planning and execution,  and it allows for the creation of lower-cost consolidated contracts at the  local, regional, or global level. At the same time, as part of a strategic  procurement effort, spend analysis allows companies to monitor trends in  small and minority-owned business supplier participation to address the  proper balance between small and minority business utilization and  equally important corporate financial savings goals for strategic sourcing.
Setting up a spend analysis program can be challenging, according to our  prior research. Companies have had problems accumulating sufficient  data from internal financial systems that do not capture all of what a  company buys or are being used by different parts of the company but are  not connected. Because simplified data may not exist or be available,  companies have frequently been unsure who their buyers are and have had  to contend with databases that include listings of items and suppliers that  in reality are identical to each other but which are all stored under  different names. Companies have also found that existing databases have  not captured anywhere nearly enough details on the goods and services  for which vendors are being paid.
Despite the challenges, companies that developed formal, centralized  spend analysis programs have found that they have been able to conduct  effective and ongoing spend analysis through the use of five key processes,  involving automating, extracting, supplementing, organizing, and analyzing  data.
Automation: Data automatically compiled.
Extraction: Essential data culled from accounts payable and other internal systems.
Supplemental information: Additional data sought from other internal and  external sources.
Organization: Review data to ensure accuracy and completeness; organize data into  logical, comprehensive commodity and supplier categories.
Analysis and strategic goals: Using standard reporting and analytical tools, data  analyzed on a continual basis to support decisions on strategic-sourcing and procurement  management in areas such as cost cutting, streamlining operations, and reducing the  number of suppliers.  Scope generally covers an organization's entire spending.
Building the foundation for a thorough spend analysis involves creating an  automated information system for compiling spending data. The system  routinely extracts vendor payment and related procurement data from  financial and other information systems within the company. The data are  then automatically compiled into a central data warehouse or a  spreadsheet application, which is continually updated. Most of the  automated spend analysis systems currently in use were developed in- house, although some companies have hired third-party companies for  expertise and technology.
The data are primarily extracted from vendor accounts payable financial  systems and reviewed for completeness. Accounts payable data can be  voluminous and very detailed. Companies process large numbers of  vendor invoices for payment each year, and each of those must be  examined by their spend analysis systems. When necessary, the accounts  payable data are supplemented with other sources, such as purchase card  data obtained from external bank-card vendors’ systems or other  information, such as suppliers’ financial status and performance  information. Companies must obtain as much information as possible from  both internal and external sources to gain a complete understanding of  their spending.
For spend analysis to be effective, data files must be accurate, complete,  and consistent. The data are subjected to an extensive review for accuracy  and consistency, and steps are taken to standardize the data in the same  format, which involves the creation of uniform purchasing codes. The data  are typically organized into comprehensive categories of suppliers and  commodities that cover all of the organization’s purchases.
In tandem with building a spend analysis foundation, commodity  managers or cross-functional commodity teams are established to access  and analyze the information on an ongoing basis, using standard reporting  and analytical tools. Each team is responsible for one or more  commodities, which may also include responsibility for a number of sub- categories. Once the spending data has been organized and reviewed,  companies use the data as the foundation for a variety of ongoing strategic  decisions and efforts.
Our past work also shows how federal agencies, in particular DOD, might  apply these private sector best practices to obtain lower prices from  suppliers and improve procurement effectiveness. For example, we  noted that although DOD’s spending on services contracts approaches  $100 billion annually, its management of services procurement has been  inefficient and ineffective. To achieve the potential for billions of dollars  in savings, we recommended that DOD take a more strategic approach to  services contracting that includes adopting the spend analysis best  practices of leading companies. In response, in 2004 the agency started  developing a spend analysis system that will pull purchasing data from  disparate databases for analysis by newly organized DOD-wide commodity  teams. DOD expects that users of this spend analysis system will be able  to identify procurement trends, buying patterns, and opportunities for  strategic sourcing, which will result in cost savings and quality  improvements.
The government purchase card program offers yet another arena for the  use of spend analysis. Through the purchase card program, agency  personnel can acquire the routine goods and services they need directly  from vendors as long as the purchase is $2,500 or less. From 1994 to 2003,  the use of such cards exploded from $1 billion to $16 billion, but we found  that agencies generally were not taking advantage of opportunities to  negotiate discounts with major vendors. We therefore recommended  several actions—including conducting spend analysis using available data  and gathering additional information where feasible—that would  ultimately help agencies to achieve $300 million annually in potential  savings.
section_title: Agencies Have Begun Analyzing Spending Trends to Improve Knowledge and Procurement
paragraphs: Three of the five agencies we reviewed—Veterans Affairs, HHS, and  Agriculture—have each conducted spend analyses, either by using their  own resources or by hiring consultants to do the work. Each agency is  beginning to use spend analysis to obtain knowledge and to plan and carry  out changes in agencywide procurement processes intended to leverage  buying power, eliminate redundant and duplicative acquisition activity,  and reduce purchasing costs for goods and services. The departments of  Justice and Transportation have not begun to collect the data needed for  using spend analysis nor taken steps that would be part of a strategic  approach to procurement.
Mission Highlights: To restore the capability of those who suffered harm during  Mission Highlights: To restore the capability of those who suffered harm during  their military service; to ensure a smooth transition as veterans return to civilian life  their military service; to ensure a smooth transition as veterans return to civilian life  in their communities.  Operates a health care system to provide about 3.8 million  in their communities.  Operates a health care system to provide about 3.8 million  veterans health care through 163 hospitals and more than 800 outpatient clinics  veterans health care through 163 hospitals and more than 800 outpatient clinics  nationwide.   nationwide.
Organizations: Veterans Health Administration, Veterans Benefits Administration,  Organizations: Veterans Health Administration, Veterans Benefits Administration,  and National Cemetery Administration. and National Cemetery Administration.
Spending: In fiscal year 2003, contract spending on goods and services totaled  Spending: In fiscal year 2003, contract spending on goods and services totaled  $8.5 billion.  Purchase card spending accounted for another $5 billion, which  $8.5 billion.  Purchase card spending accounted for another $5 billion, which  includes about $3.1 billion under the agency's prime vendor program. includes about $3.1 billion under the agency's prime vendor program.
For several years, Veterans Affairs has had significant success using spend  analysis on an ongoing basis to take a more strategic approach to  pharmaceutical procurement. Reflecting national trends, Veterans Affairs’  pharmacy procurement costs have risen significantly in recent years,  consuming an increasing percentage of the department’s health care  budget. The $2.1 billion the agency spent on such items in 2000 were  primarily for prescription drugs and their dispensing, but also included  some supplies and over-the-counter drugs. To mitigate this increase in  pharmacy procurement costs, the agency created a pharmacy benefits  management strategic health group in 1995 that analyzes pharmaceutical  spending trends across all medical facilities and employs various  procurement arrangements for purchasing prescription drugs at  substantial discounts. According to the agency, the pharmaceutical  procurement standardization program led to savings of $394 million in  fiscal year 2003 alone.
Veterans Affairs has also made progress in the areas of medical and  prosthetics supplies and equipment. In fiscal year 2001, the agency  purchased about $500 million in medical-surgical supplies and $1.1 billion  in medical equipment and prosthetics. For example, VA created a national  prosthetics spend database that extracts procurement data from all  medical facilities’ systems and organizes data on purchased items into  commodity categories, such as wheelchairs and aids for the blind. The  agency’s prosthetics strategic health group also formed a number of  commodity teams with stakeholders from across the medical facilities and  health care regions to use spend analysis to identify commonly used items  that can be purchased at substantial discounts under a national contract.  The prosthetics group also uses spend analysis to monitor medical facility  compliance with the national contracts and to ensure potential savings are  realized. As of June 2004, the group’s spend analysis and strategic-sourcing  efforts have resulted in 23 national contracts and accumulated more than  $57 million in cost avoidance.
The agency is just beginning to develop a spend analysis tool for medical  and surgical supplies and high-technology medical equipment. Specifically,  it is working with a contractor to create uniform medical-product names  for an agencywide spend analysis system. When the system is fully  operational in fiscal year 2006, it will automatically extract medical  supplies and equipment procurement data into a central data warehouse,  organized by common categories of products. Until this system is fully  operational, this year the agency decided to form several cross-functional  commodity teams to pursue new national contracts on 45 categories of  high-technology, high-cost medical equipment and supplies (such as  magnetic resonance imaging and ultrasound equipment).
Mission Highlights: HHS is the United States government's principal agency for  Mission Highlights: HHS is the United States government's principal agency for  protecting the health and welfare of all Americans.   protecting the health and welfare of all Americans.
Organizations: National Institutes of Health, Administration for Children and  Organizations: National Institutes of Health, Administration for Children and  Families, Food and Drug Administration, Centers for Medicare and Medicaid  Families, Food and Drug Administration, Centers for Medicare and Medicaid  Services, Centers for Disease Control and Prevention, and Indian Health Service, to  Services, Centers for Disease Control and Prevention, and Indian Health Service, to  name a few. name a few.
Spending: In fiscal year 2003, contract spending for goods and services totaled  Spending: In fiscal year 2003, contract spending for goods and services totaled  $6.7 billion; purchase card spending accounted for another $392 million.     $6.7 billion; purchase card spending accounted for another $392 million.
Since 2003, HHS has been obtaining spend analysis and procurement  consolidation advice from outside consultants to help reduce the  department’s operating costs and redirect the savings to programs. Like  other agencies, procurement activities in HHS were operating under a  decentralized environment of independent, transaction-oriented buying  processes, with limited visibility over the agency’s total procurement  spending.
For example, HHS has conducted a spend analysis of commonly  contracted products. In its first phase, $100 million in yearly spending for  thousands of office-related products such as custodial supplies, office  supplies, office furniture, office equipment (such as photocopiers and  facsimile machines), and peripheral information technology products  (such as computer monitors and scanners) was analyzed to identify  opportunities for significant savings to purchase card buyers through  agencywide discount agreements. Between May and July 2004, HHS  awarded the first agreements to three vendors for the office supplies,  custodial products, and peripheral items. HHS estimates the potential  savings from these discount agreements range from 7 percent to  54 percent and could yield at least $9.5 million in annual savings for the  department on just the office supplies, office equipment, and information  technology peripherals. Later this year, the agency will work with its  consultant to do a new round of spend analysis to identify potential  categories and savings opportunities in the next phase of the strategic- sourcing initiative for products.
In a second initiative, HHS procurement headquarters hired a consultant in  August 2003 to support a newly organized agencywide group of 100 senior  procurement and other key managers to work on consolidation of services  acquisitions. One of the contractor’s key tasks was to conduct a spend  analysis of almost $4.9 billion in fiscal year 2002 HHS contract actions to  identify high-volume or high-dollar common services for consolidation.  Twenty-four categories—such as security guards and patrol services and  office administrative services—were subsequently identified for possible  consolidation—totaling almost $1.7 billion in value.
The consultant’s plan included steps to organize and segment HHS  contract workload and spend data into categories of services and  suppliers. This step was intended to help the services acquisition  consolidation working group identify opportunities across divisions to  reduce the number of suppliers where competition for new agencywide  contracts is practical. However, according to the working group’s project  officer, in view of small business and contract-bundling requirements and  the long lead times needed to obtain division consensus on new contract  arrangements, the working group decided instead to pursue alternative  consolidation strategies in the near-term.
As a result, HHS headquarters officials expect the working group to  finalize criteria and a timeline for selecting existing division service  contracts that would be listed in an HHS-wide database that other division  purchasers might use before initiating their own new, stand-alone  contracts. Potential contract categories include temporary services,  information technology services, focus groups, and conference  management and support.
Mission Highlights: To support agriculture production by ensuring a safe, affordable,  Mission Highlights: To support agriculture production by ensuring a safe, affordable,  and accessible food supply; caring for agricultural, forest, and range lands; supporting  and accessible food supply; caring for agricultural, forest, and range lands; supporting  sound development of rural communities; expanding global markets for agricultural  sound development of rural communities; expanding global markets for agricultural  and forest products and services; and working to reduce hunger in America and  and forest products and services; and working to reduce hunger in America and  throughout the world.   throughout the world.
Organizations: Forest Service, Food and Nutrition Service, Farm Service, Rural  Organizations: Forest Service, Food and Nutrition Service, Farm Service, Rural  Housing Service, and Rural Development Service, to name a few.  Housing Service, and Rural Development Service, to name a few.
Spending: In fiscal year 2003, contract spending on goods and services totaled $4.3  Spending: In fiscal year 2003, contract spending on goods and services totaled $4.3  billion.  Purchase card spending accounted for another $572 million. billion.  Purchase card spending accounted for another $572 million.
Agriculture is currently using the results of a consultant’s October 2001  spend analysis as updated with more recent spending data to obtain  favorable prices on small purchase card buys through agencywide  discount agreements with major vendors. The contractor analyzed almost  $2.1 billion in fiscal year 2000 spending data from across the agency,  organizing the agency’s spending in terms of commodities and suppliers to  identify high-volume, high-dollar areas that could yield significant savings  and other benefits and also identifying 24 commodities for the agency’s  more detailed review.
In 2003, Agriculture’s procurement management division began to use this  spend analysis, competitively awarding an agencywide discount  agreement with a national office supply vendor that yielded savings of  $1.8 million to the agency’s purchase card holders—a price 10 percent less  then the vendor’s Federal Supply Schedule contract prices. To receive the  discounts, registered agency purchasers must use the national office  supply vendor’s electronic catalog and ordering system.
Building on this experience, Agriculture recently began to use the  consultant’s spend analysis to improve its purchase card buying power in  additional commodity areas. A temporary “electronic marketplace”  subcommittee was organized in January 2004, including representatives  from across the agency. According to the co-chair, this subcommittee is  using the consultant’s spend analysis and updating it with more recent  data on spending with major vendors to help negotiate more favorable  prices based on the agency’s dollar volume. By October, the subcommittee  plans to implement at least three agencywide discount agreements  comparable to the 2003 agreement.
In the future, Agriculture plans to provide automated and repeatable spend  analysis, data-mining, and reporting capabilities that identify opportunities  for savings through negotiated volume discounts. These will be available  through electronic catalogs as part of a redesign and modernization of its  agencywide acquisition system, an effort that will be complete in about  two years. Agriculture began this effort upon recognizing that the current  multisystem environment does not provide an integrated, streamlined, or  consistent approach to procurement and does not effectively support the  agencywide goal for electronic commerce between agency purchasers and  suppliers.
To develop its spend analysis capabilities, Agriculture will create a  centrally maintained data warehouse to be shared by agency procurement  and financial management organizations. This warehouse will extract and  capture all Agriculture procurement data, to be supplemented with  business intelligence and organizational data from internal and external  financial and corporate sources. Once the warehouse is in place, it will  allow for comprehensive spend analysis and reporting on procurement in  real time, on issues such as the opportunities to be pursued for  agencywide discount agreements with major suppliers for specific  commodities and the extent of small business utilization.
subsections: section_title: Department of Justice Department of Justice
paragraphs: Mission Highlights: Enforcing laws in the public interest  Mission Highlights: Enforcing laws in the public interest  and protecting the public from terrorist and criminal activity.     and protecting the public from terrorist and criminal activity.
Mission Highlights: To ensure a fast, safe, accessible, and  Mission Highlights: To ensure a fast, safe, accessible, and  convenient transportation system that meets vital national  convenient transportation system that meets vital national  interests and enhances the quality of life of the American  interests and enhances the quality of life of the American  people, today and into the future.       people, today and into the future.
Organizations: Federal Bureau of Investigations, Office of  Organizations: Federal Bureau of Investigations, Office of  Justice Programs, Federal Bureau of Prisons, Drug  Justice Programs, Federal Bureau of Prisons, Drug  Enforcement Administration, U.S. Marshal Service, and  Enforcement Administration, U.S. Marshal Service, and  Bureau of Alcohol, Tobacco, Firearms, and Explosives. Bureau of Alcohol, Tobacco, Firearms, and Explosives.
Organizations: Federal Aviation Administration, Federal  Organizations: Federal Aviation Administration, Federal  Highway Administration, Federal Transit Administration.  Highway Administration, Federal Transit Administration.
Spending: In fiscal year 2003, contract spending on goods  Spending: In fiscal year 2003, contract spending on goods  and services totaled $4 billion.  Purchase card spending  and services totaled $4 billion.  Purchase card spending  accounted for another $588 million.   accounted for another $588 million.
Spending: In fiscal year 2003, contract spending on goods  Spending: In fiscal year 2003, contract spending on goods  and services totaled $6.7 billion.  Purchase card spending  and services totaled $6.7 billion.  Purchase card spending  accounted for another $442 million. accounted for another $442 million.
The departments of Justice and Transportation have not used spend  analyses yet to focus management attention on changing the way they  purchase goods and services to foster a more strategic approach. One of  the obstacles to using spend analysis cited by both was the lack of  comprehensive, detailed, and reliable spending data. Nevertheless, future  use of spend analysis could become an important tool in their efforts to  streamline their administrative functions or improve procurement  performance.
section_title: Department of Justice
paragraphs: Spend analysis could be useful in assisting the Department of Justice to  implement its November 2001 strategic plan, which established  streamlining, eliminating, or consolidating duplicative functions as key  elements of supporting the agency’s new counterterrorism mission. In  February 2004, high-level discussions were begun to plan cross-cutting  initiatives to eliminate duplication and cut overall agency operating costs,  so that funding can then be redirected to other critical tasks. The agency  also formed a core group of financial and management executives  responsible for overseeing the streamlining and efficiency initiatives.
Officials told us that it is too early to say if the new core group’s efforts  would include analysis of Justice’s spending trends or considering broad- based structure, process, and role changes to support a more strategic  approach to procurement, although some agency officials are familiar with  the concepts.  Officials said that some Justice components had made  incremental progress in consolidating and leveraging certain categories of  spending, such as litigation support services, jail detention space services,  and prison system medical supplies. Officials also told us that the agency  will similarly look into pursuing a comprehensive approach to buying  Web-based training services, jail guard services, and employee household  relocation services.
In the near term, Justice officials questioned the agency’s ability to analyze  spending trends effectively, even though the officials agreed that such an  analysis could benefit the agency. Lack of a single acquisition and financial  management system makes it difficult to collect accurate and complete  spending data and identify opportunities for coordinated purchasing, the  officials said. Although the agency is trying to establish a single system, it  is not likely to be in place until 2009.
Before the single system can be put in place, we discussed with these  officials the prospects for using existing contract and purchase card data  that the agency feeds into the FPDS, in the same way that Agriculture and  HHS have used such data to support their spend analysis efforts. Justice  officials expressed interest in potentially using FPDS data for this purpose.
According to the procurement executive, for financial audit purposes,  Justice has been analyzing purchase card data and had already obtained  better insight into what goods and services were being bought across the  agency and opportunities to leverage buying power in return for lower  prices from vendors. Given that Justice has almost $5 billion in annual  procurements, agency officials acknowledged that their streamlining and  efficiency efforts could be substantially aided by the expanded use of  spend analysis to consider taking a more strategic approach to  procurement.
In commenting on a draft of this report, the agency reports that it is  working to identify additional opportunities for purchase card savings  through current discount agreements and has begun analyzing FPDS data  to identify savings opportunities. We commend the agency for expanding  purchase card spending analyses, which is also responsive to previous  recommendations aimed at achieving agency savings through the purchase  card program. Moreover, by taking the promising first step to analyze  FPDS data on contract spending for goods and services—which accounted  for another $4 billion in 2003—we believe that Justice will be able to  identify many more opportunities for leveraging buying power and achieve  even more significant savings in the future.
section_title: Department of Transportation
paragraphs: Transportation’s senior procurement officials told us that they plan to use  spend analysis to support ongoing implementation of strategic  procurement practices across the agency. According to these officials,  such support should be facilitated by the favorable experience  Transportation has already gained from similar cross-cutting strategic  procurement planning to modernize information systems and standardize  computer equipment as part of a fiscal year 2007 office relocation of  agency headquarters. Under the agency’s chief information officers’  council, commodity councils are being formed to help the agency move to  a common operating environment and leverage buying power for  information technology goods and services.
According to these officials, the agency currently has no spend analysis  capability, but a first step was taken this year through the agency’s  procurement performance management program that could help drive the  adoption of a more strategic approach to buying goods and services.  A general analysis was conducted of fiscal year 2003 FPDS data for  $1.6 billion in agency contracts, sorted by the categories of research and  development, other services, and products. A more in-depth agencywide  analysis has yet to be achieved, however. Officials told us more detailed  analysis of spending trends—for example, by high-dollar, high-volume  commodity and vendor categories—was inhibited by workload constraints  and their concerns about the accuracy of FPDS data and the lack of more  specific product and service information. Nevertheless, they indicated that  in the future, spend analysis could become an important tool in the  agency’s procurement performance management program. Specifically, in  commenting on a draft of this report, the senior procurement executive  indicated that agency leadership supports additional funding in fiscal year  2005 to enhance spend analysis capabilities. He also told us the agency is  evaluating software options for a future agencywide spend analysis system  as part of the ongoing financial information system modernization.
section_title: Agencies Have Not Adopted Full Range of Spend Analysis Best Practices and Lack Some Supporting Structure, Processes, and Roles
paragraphs: Veterans Affairs, HHS, and Agriculture have made good progress using  spend analysis to improve their procurements, and they have adopted  some elements of a strategic approach. Like the private sector’s  experience which indicates that implementing spend analysis can be  challenging and take time, these three agencies have not had a lot of time  to adopt the full range of private sector best practices with regard to  automating, extracting, supplementing, organizing, and analyzing data that  covers all of their procurement spending. Also, to one degree or another,  they have not created the type of supporting structure, processes, and  roles leading companies institute to make the best use of the knowledge  gained and foster a more strategic approach to buying goods and services.  The extent to which agencies can do both will determine their success in  achieving substantial savings and performance improvements. Private  sector experience suggests that agencies that start with effective spend  analysis programs will be better able to institute the changes needed to  move into a more coordinated, leveraged purchasing environment.
Veterans Affairs has earned a world-class reputation for highly cost- effective pharmaceutical procurement practices, which include spend  analysis as well as supporting structure, processes, and roles. (See  appendix I, table 1.) Its progress in making similar improvements in its  procurements of other medical supplies and equipment has been slower,  however, and its efforts related to clinical care or facilities support  services are in their very early stages.
A March 2004 inspector general’s audit report, for example, noted that the  agency’s efforts to reform medical supplies and equipment purchasing  practices since 2002 have not yet translated into significant national  contracting results and medical purchasing cost savings. The audit  recommended increasing efforts to pursue aggressively more national  contracts that, if implemented, could achieve about $82 million per year in  savings.
A spend analysis tool that would examine Veterans Affairs’ medical  supplies and equipment spending trends will not, in fact, be ready before  2006, when best practices—such as automated compilation of purchase  data, extracted from facilities’ procurement and vendor payment systems  and supplemented and organized—will be put in place for use by  established commodity teams.
The agency is also beginning to focus on taking a more strategic approach  to acquiring services for veterans medical facilities from contract  providers. In May 2004, the Secretary announced that Veterans Affairs  must more effectively purchase contract health care services for veterans  (such as skilled nursing and laboratory services) by leveraging its  purchasing power as a national healthcare system. The Secretary directed  that a national clinical-contracting strategy be drafted by November 2004  that would identify high-value, competitively priced purchasing options for  obtaining medical services from contract providers throughout the  country. In addition, in commenting on a draft of this report, the agency  stated its intent to pursue national contracts for non-clinical services as  well. Facilities now contract locally for a wide variety of support services,  such as facilities maintenance, housekeeping, and food service.  According to the agency, both efforts will use spend analysis as  appropriate. However, we believe it will be difficult for the agency to  accomplish this objective since the new spend analysis tool, expected in  2006, will only capture data on medical supplies and equipment spending  trends.
HHS asked its division heads to begin planning for departmentwide  consolidation of procurement activities in April 2003. Although  headquarters managers had worked with consultants to conduct spend  analyses to improve their knowledge of overlapping and duplicative  procurement spending, they had no plan to develop an automated tool to  repeat the process and only a small number of consolidated procurement  actions were expected to result. (See appendix I, table 2.)
In June 2004, however, HHS procurement managers told us that an  agencywide working group was going to propose obtaining commercial  software to develop an automated spend analysis system to compile the  necessary data and generate standardized reports. As result, they believe  that HHS’ spend analysis efforts could make use of an automation tool in  the future to enable the process to be repeated consistently, obtain data  from HHS sources such as financial management systems, and analyze  data on a continual basis. The proposal was intended to augment ongoing  plans for an HHS-wide standard electronic procurement system to be  phased in over the next year or so. According to these officials, details on  the proposed system’s spend analysis capabilities are forthcoming,  pending approval and funding to implement it.
Agriculture’s current spend analysis efforts are also not automated,  include no financial management data such as vendor accounts payable  systems, and do not analyze data on a continual basis. (See app. I, table 3.)  The agency does have plans to have an agencywide spend analysis system  in place by 2006, but the system will be a centralized tool shared by  component organizations that may or may not choose to chart their own  strategic procurement paths.
A temporary subcommittee in the meantime is reviewing some  agencywide spending data to identify a few categories of high-dollar  purchase card vendors for use in negotiating discount agreements.  However, a senior procurement policy official told us that a large-scale  strategic approach to buying goods and services may be neither feasible or  advisable, given the agency’s highly diverse missions and decentralized  operations. When it comes to changing the buying culture across the  agency, the agency wants to use spend analysis to create attractively  priced discount agreements with a few vendors that agency purchasers  will be encouraged, not mandated, to use. Although he indicated that  Agriculture may establish a few agencywide commodity councils in the  future to pursue more areas for consolidated buying, he did not anticipate  creating new structure, processes, and roles within the agency.
Aside from their spend analysis activities, the three agencies have not  consistently created the type of supporting structure, processes, and roles  leading companies institute to foster a more strategic approach to buying  goods and services. While Veterans Affairs has used the best practice of  establishing commodity teams that coordinate buying strategies for  pharmaceutical, prosthetics, and more recently high-cost, high-technology  medical equipment and supply items, the same practice has not been used  to coordinate buying strategies for services. Outside of forming single,  cross-agency working groups to leverage a few categories of supplies  commonly bought by purchase cardholders, Agriculture and HHS have not  fully embraced viewing procurement as an agencywide process for  streamlining acquisitions, saving money, and increasing the quality of  purchased goods and services when compared to the current  decentralized environment of independent, stand-alone contract actions.  Agriculture and HHS have not adopted the best practice of using cross- functional commodity teams to establish a network of technical experts to  support volume and technical leveraging of agency spending.
section_title: Conclusions
paragraphs: When the government faces enormous fiscal pressures and a growing  budget deficit, agencies’ transformations of their business processes is  more important than ever if the agencies are to get the most from every  dollar spent. Leading companies that have successfully used spend  analysis as a foundation for their procurement activities set an example  for how the federal government can more effectively leverage its buying  power.
Federal agencies such as the Departments of Veterans Affairs, HHS, and  Agriculture can achieve significant benefits using spend analysis best  practices to support a more strategic approach to buying goods and  services. Like leading companies, agencies that establish an effective  spend analysis program can then achieve a total-spending perspective  across the agency; make the business case for collaboration in joint  purchasing rather than fragmented purchasing, create supporting  structure, processes, and roles to assign accountability and exercise  oversight; identify potentially hundreds of millions of dollars in  procurement savings opportunities by leveraging buying power; and  identify opportunities to achieve other procurement process efficiencies  such as reducing duplication in purchasing, supporting small and minority- owned business utilization, and improving supplier performance. In  contrast, agencies such as the departments of Justice and Transportation,  which have yet to make extensive use of spend analysis and may well miss  out on the opportunity to achieve savings to the same extent possible as  other agencies.
section_title: Recommendations for Executive Action
paragraphs: To help ensure that the varying spend analysis efforts by Veterans Affairs,  HHS, and Agriculture go further in emulating the best practices of leading  companies and that these agencies have the supporting structure,  processes, and roles in place to effectively use the results of spend  analysis, we are making the following three recommendations:    To identify, track, and evaluate what clinical care and support services are  being purchased by veterans’ medical facilities, the Secretary of Veterans  Affairs should direct procurement headquarters officials to expand the  planned development by 2006 of an automated medical supplies and  equipment spend analysis system also to capture spending data on  services. Such expansion should support automating, extracting,  organizing, supplementing, and analyzing spending trends for clinical care  and support services in the same way that improvements aimed at medical  supplies and equipment are being made. The agency’s new spend analysis  system needs to include healthcare-related services’ procurement data to  improve decision makers’ knowledge and help them identify opportunities  for leveraged buying, including the planned development of a national  strategy to contract for services.
To address agency leadership’s direction to eliminate redundant  management activities, the Secretary of Health and Human Services  should direct headquarters’ procurement officials to identify additional  steps needed to adopt a more strategic approach to acquiring goods and  services. HHS headquarters’ procurement officials should also be directed  to consider using current financial and procurement management  information systems to extract the type of spending data on an automated  and repeatable basis that the agency needs to identify opportunities to  leverage its buying power, reduce costs, and provide better management  and oversight of key suppliers. Such data would include what categories of  goods and services are being acquired; how many suppliers are being used  for specific categories; and how much HHS is spending on specific  categories, in total and with each supplier. Their assessment should also  address the creation of supporting structures, processes, and roles as  necessary, such as the establishment of cross-functional commodity  teams, to help obtain the necessary buy-ins across the agency’s divisions,  eliminate duplication of effort, and improve the coordination and volume  discounting of high-dollar, high-volume categories of goods, services, and  suppliers on an ongoing basis.
While waiting until 2006 for the planned agencywide spend analysis  system to come online, the Secretary of Agriculture should assess whether  the agency’s temporary electronic marketplace subcommittee provides  sufficient structure, processes, and roles for analyzing spending trends on  an ongoing basis and supporting a more strategic approach to acquiring  goods and services. Agriculture’s assessment should address expanding  the subcommittee’s current narrow focus on leveraging the agency’s  almost $600 million in purchase card buying power, to also yield discounts  applicable to larger contract actions across the range of goods and  services being acquired and whether the establishment of cross-functional  commodity teams would help obtain the necessary buy-in across the  agency’s diverse mission organizations and improve the coordination and  acquisition of high-dollar, high-volume categories across a wide range of  goods and services.
In light of the significant potential for savings and performance  improvements that the two agencies not using spend analysis could  achieve, we recommend that the Attorney General of the United States and  the Secretary of Transportation direct officials responsible for  procurement and financial management and other appropriate  stakeholders to step up the process of gaining knowledge of their spending  to take a strategic approach to procurement, adopting the type of best  practices employed by leading companies. Specifically, we are making the  following two recommendations:    Justice and Transportation should assess using current financial or  procurement information systems such as FPDS and purchase card data  on an automated and repeatable basis to extract the type of spending data  that the agencies need to identify opportunities to leverage the agencies’  buying power, reduce costs, and provide better management and oversight  of suppliers. Such data would include what categories of goods and  services are being acquired; how many suppliers are being used for  specific categories; and how much the agency is spending on specific  categories, in total and with each supplier.
Once an initial spend analysis can be completed to arm the agencies with  the knowledge of such opportunities, Justice and Transportation should  assess whether their current procurement structure, processes, and roles  are adequate to support a more strategic approach to acquiring goods and  services, for example whether cross-functional commodity teams would  provide more effective, coordinated management of high-dollar, high- volume categories of goods, services, and suppliers on an ongoing basis.
section_title: Agency Comments and Our Evaluation
paragraphs: We received written comments on a draft of this report from the  Departments of Veterans Affairs, Agriculture, and Justice, and we received  oral comments from the Department of Transportation. The agencies  generally agreed with our findings and recommendations. The Department  of Health and Human Services had no comments, but provided technical  comments, which we have incorporated where appropriate. The written  comments are reproduced in appendixes II through V.
The Department of Veterans Affairs concurred with our recommendation  to expand the planned development of an automated spend analysis  system to capture spending data on services as well as medical supplies  and equipment data. At a later date, the agency plans to provide a more  complete discussion of its efforts to include clinical and non-clinical  services in its spend analysis.
In general, the Department of Agriculture agreed with our  recommendations. Commenting on one of the draft’s statements on the  agency’s use of a consultant’s 2001 spend analysis to obtain more  favorable prices, Agriculture indicated they did not solely rely on the  consultant’s report but needed to perform additional analysis for the  agencywide discount agreements. Further, Agriculture also commented  that many other federal departments, through the use of existing purchase  card data and other available data systems, can discern sufficient  information to begin leveraging their spending to obtain reduced prices for  commonly acquired services and supplies. We agree.
While the Department of Justice generally agreed with the report’s findings  and recommendations, the agency also clarified the status of spend  analysis efforts. Specifically, the agency stated that data collection efforts  have begun to conduct a spend analysis, focusing on purchase card  spending trends and procurement actions based on reviews of agencywide  data from a bankcard vendor and the FPDS. We revised the report where  appropriate to incorporate information on these efforts.
In oral comments, Transportation’s senior procurement executive told us  that he agrees with our recommendations, but believed our report did not  adequately capture the agency’s commitment to strategic procurement  objectives and support for using spend analysis. In addition, this official  informed us that the agency is expanding its spend analysis efforts. For  example, his office recently reviewed purchase card spending data to  identify volume discount opportunities and is now using the results to  negotiate new discount agreements with several office product vendors. In  addition, he told us that to facilitate future agencywide purchase card  spend analyses, Transportation awarded a task order in June 2004 with  one bank-card company that includes purchase-card audit software and  enhanced data-mining capabilities. He also indicated that agency  leadership supports fiscal year 2005 funding to enhance spend analysis  capabilities and that software options for a new agencywide spend  analysis system are now being evaluated as part of the ongoing financial  and procurement management system modernization. We incorporated  these comments where appropriate in the text.
We are sending copies of this report to the Secretaries of Agriculture,  Health and Human Services, Transportation, and Veterans Affairs; the  Attorney General; the director of the Office of Management and Budget;  and interested congressional committees. We will provide copies to others  on request. This report will also be available at no charge on GAO’s Web  site at http://www.gao.gov.
If you have any questions about this report or need additional information,  please call me at (202) 512-4841 (cooperd@gao.gov) or Carolyn Kirby at  (202) 512-9843 (kirbyc@gao.gov). Other major contributors to this report  are Cristina Chaplain, Timothy DiNapoli, Bob Swierczek, and Grant  Turner.
section_title: Appendix I: GAO Analyses of Agencies’ Spend Analysis Practices
paragraphs: We obtained information about agencywide spend analysis efforts through  interviews with Veterans Affairs, HHS, and Agriculture procurement  headquarters officials and documents they provided to us. We reviewed  this information and also discussed with agency officials how their efforts  compared to leading companies’ best practices identified in our recent  work.
In analyzing agencies’ practices, we compared their efforts with the five  key processes that companies adopt that enable them to conduct effective  and ongoing spend analysis, which are:    Automation—data automatically compiled.    Extraction—essential data culled from accounts payable and other  internal systems.
Supplemental information—additional data sought from other internal and  external sources.
Organization—review data to ensure accuracy and completeness; organize  data into logical, comprehensive commodity and supplier categories.    Analysis and strategic goals—using standard reporting and analytical  tools, data analyzed on a continual basis to support decisions on strategic- sourcing and procurement management in areas such as cost cutting,  streamlining operations, and reducing the number of suppliers. Scope  generally covers an organization’s entire spending.
The following tables summarize our analysis of agencies’ spend analysis  practices.
section_title: Appendix II: Comments from the Department of Veterans Affairs
section_title: Appendix III: Comments from the Department of Health & Human Services
section_title: Appendix IV: Comments from the Department of Agriculture
section_title: Appendix V: Comments from the Department of Justice
subsections: section_title: GAO’s Mission
paragraphs: The Government Accountability Office, the audit, evaluation and  investigative arm of Congress, exists to support Congress in meeting its  constitutional responsibilities and to help improve the performance and  accountability of the federal government for the American people. GAO  examines the use of public funds; evaluates federal programs and policies;  and provides analyses, recommendations, and other assistance to help  Congress make informed oversight, policy, and funding decisions. GAO’s  commitment to good government is reflected in its core values of  accountability, integrity, and reliability.
section_title: Obtaining Copies of GAO Reports and Testimony
paragraphs: The fastest and easiest way to obtain copies of GAO documents at no cost  is through GAO’s Web site (www.gao.gov). Each weekday, GAO posts  newly released reports, testimony, and correspondence on its Web site. To  have GAO e-mail you a list of newly posted products every afternoon, go  to www.gao.gov and select “Subscribe to Updates.”
subsections: section_title: Order by Mail or Phone
section_title: To Report Fraud, Waste, and Abuse in Federal Programs
section_title: Congressional Relations
section_title: Public Affairs