Defense Acquisitions: Tailored Approach Needed to Improve Service Acquisition Outcomes
Published: 2006-11-09T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Department of Defense (DOD) obligations for service contracts rose from $82.3 billion in fiscal year 1996 to $141.2 billion in fiscal year 2005. DOD is becoming increasingly more reliant on the private sector to provide a wide range of services, including those for critical information technology and mission support. DOD must maximize its return on investment and provide the warfighter with needed capabilities and support at the best value for the taxpayer. GAO examined DOD's approach to managing services in order to (1) identify the key factors DOD should emphasize to improve its management of services and (2) assess the extent to which DOD's current approach exhibited these factors.
section_title: What GAO Found
paragraphs: Several key factors are necessary to improve DOD's service acquisition outcomes--that is, obtaining the right service, at the right price, in the right manner. These factors can be found at both the strategic and the transactional levels and should be used together as a comprehensive, but tailored approach to managing service acquisition outcomes. At the strategic level, key success factors include (1) strong leadership that defines a corporate vision and normative goals; (2) sustained, results-oriented communication and metrics; (3) defined responsibilities and associated support structures; and (4) increased knowledge and focus on spending and data trends. The strategic level also sets the context for the transactional level, where the focus is on making sound decisions on individual transactions. Success factors at this level include having (1) valid and well-defined requirements; (2) properly structured business arrangements; and (3) proactively managed outcomes. DOD's current approach to managing service acquisition has tended to be reactive and has not fully addressed the key factors for success at either the strategic or transactional level. At the strategic level, DOD has yet to set the direction or vision for what it needs, determine how to go about meeting those needs, capture the knowledge to enable more informed decisions, or assess the resources it has to ensure departmentwide goals and objectives are achieved. For example, despite implementing a review structure aimed at increasing insight into service transactions, DOD is not able to determine which or how many transactions have actually been reviewed. The military departments, while having some increased visibility, have only reviewed proposed acquisitions accounting for less than 3 percent of dollars obligated for services in fiscal year 2005 and are in a poor position to regularly identify opportunities to leverage buying power or otherwise change existing practices. Actions at the transactional level continue to focus primarily on awarding contracts and do not always ensure that user needs are translated into well-defined requirements or that post-contract award activities result in expected performance.

section_title: Letter
paragraphs: In fiscal year 2005, the Department of Defense (DOD) obligated more than  $141 billion on service contracts, a 72-percent increase since fiscal year  1996. DOD is increasingly relying on the private sector to provide a wide  range of services, including consulting and administrative support,  information technology services, and weapon system and base operations  support. As the largest buyer of services in the federal government, and  operating in an environment in which the nation’s large and growing  structural deficit will require difficult resource decisions, DOD must  maximize its return on investment and provide the warfighter with needed  capabilities at the best value for the taxpayer.
Our work and that of others has highlighted examples of long-standing  concerns in planning, executing, and overseeing service acquisition. For  example, GAO has identified DOD contract management to be at high risk  of vulnerabilities to fraud, waste, abuse, and mismanagement for more  than a decade. In our 2005 high-risk report update, we noted that with  regard to service acquisition, DOD had not yet fully implemented a  strategic approach to buying services; did not have a comprehensive plan  to ensure it had the right skills and capabilities in its acquisition  workforce; and did not always make sound use of the tools, such as  performance-based service contracting, to acquire the services it needed.
To ensure that DOD acquires services by means that are in the best  interest of the government and managed in compliance with applicable  statutory requirements, sections 801 and 802 of the National Defense  Authorization Act for Fiscal Year 2002 required DOD to establish a service  acquisition management approach, including developing a structure for  reviewing individual service transactions based on dollar thresholds and  other criteria. Further, in January 2006, additional requirements were  established pertaining to DOD’s service contracting management structure  and oversight processes. This report assesses DOD’s overall approach to  managing service acquisition. Specifically, we (1) identified the key factors  necessary for DOD to emphasize to improve its management of services  and (2) assessed the extent to which DOD’s approach, including its current  management structure, exhibited these factors.
To perform our review, we made extensive use of our prior work in this  and other related areas, including our January 2002 report that identified  how leading commercial companies took a strategic approach to acquiring  services. For the transactional level, we used our prior work and that of  others on issues related to individual service contract transactions and  held detailed discussions with relevant contracting experts to confirm and  validate key factors. In total, the results of these efforts proffer a model to  improve results in service acquisition management. To assess the extent to  which DOD’s current approach exhibited these characteristics, we  collected and reviewed relevant DOD guidance and policies, including  those that established its current management structure and review  processes. We interviewed officials responsible for implementing the  management structure in the Office of the Secretary of Defense, as well as  each of the cognizant offices within the military departments. We also  obtained information on the types of activities and reviews conducted by  these offices. We visited 20 commands and buying activities to understand  the processes by which these organizations acquire services. We reviewed  various contract files and process documentation for selected service  acquisitions and discussed challenges faced in acquiring services and  efforts to improve service acquisition with policy and contracting  personnel at each of these locations. See appendix I for additional details  on scope and methodology. We conducted our review from August 2005 to  September 2006 in accordance with generally accepted government  auditing standards.
subsections: section_title: Background
paragraphs: Over the past decade, DOD has increasingly relied on private sector  contractors to provide a range of services, including management and  information technology support. For example, DOD’s obligations on  service contracts rose from $82.3 billion in fiscal year 1996 to $141.2 billion  in fiscal year 2005 (see table 1). DOD committed 20 percent of its total  service obligations in fiscal year 2005 for professional, administrative, and  management support contracts. Overall, according to DOD, the amount  obligated on service contracts exceeded the amount the department spent  on supplies and equipment, including major weapon systems.
The growth in service acquisition spending results, in part, from recent  trends and changes within DOD’s acquisition environment, including the  increased use of contracted services. For example, while spending on  services has increased, DOD’s civilian workforce shrank by about   38 percent between fiscal years 1989 and 2002. DOD performed this  downsizing without proactively shaping the civilian workforce to ensure  that it had the specific skills and competencies needed to accomplish  future DOD missions. In June 2006, DOD issued a human capital strategy  that acknowledged that DOD’s civilian workforce is not balanced by age or  experience. DOD further noted that a proposed reduction of an additional  55,000 personnel through fiscal year 2007, continuing increases in the  number of retirement age employees, and the loss of experienced  personnel and institutional knowledge could make it difficult to mentor its  developing workforce. DOD’s strategy identified a number of steps  planned over the next 2 years to more fully develop a long-term approach  to managing its acquisition workforce.
The increased use of service contracts is also partly attributable to DOD  acquiring capabilities through different acquisition approaches, as well as  needing to meet new requirements and demands. For example, DOD  historically bought space launch vehicles, such as the Delta and Titan  rockets as products. Now, under the Evolved Expendable Launch Vehicle  program, the Air Force purchases launch services using contractor-owned  launch vehicles. Similarly, after the terrorist attacks on September 11,  2001, increased security requirements and the deployment of active duty  and reserve personnel resulted in DOD having fewer military personnel to  protect domestic installations. Consequently, the U.S. Army awarded  contracts worth nearly $733 million to acquire contract guards at   57 installations.
DOD has traditionally approached the acquisition of services differently  than the acquisition of products. DOD and military department officials we  interviewed noted that DOD generally views service acquisition as less  risky than the acquisition of weapon systems, in part because many  services are not tied directly to mission accomplishment and tend to be  composed of far more numerous and lower dollar value contracts. DOD  has long focused its attention, policies, and procedures on managing major  weapon systems and typically does so using the cost of the weapon system  as a proxy for risk. For example, DOD classifies its acquisition programs,  including research and development efforts related to weapon systems  and major automated information systems, in categories based upon  estimated dollar value or designation as a special interest. The largest  programs generally fall under the responsibility of the Under Secretary of  Defense (Acquisition, Technology, and Logistics), while less complex and  risky programs are overseen by the service or component acquisition  executive. Overall, more than 25 percent of DOD’s annual budget is  managed under this framework. For example, as of December 2005, DOD  managed 85 major defense acquisition programs currently estimated to  cost about $1.6 trillion combined over their program life.
Conversely, we previously reported that DOD’s approach to buying  services is largely fragmented and uncoordinated, as responsibility for  acquiring services is spread among individual military commands, weapon  system program offices, or functional units on military bases, with little  visibility or control at the DOD or military department level. For example,  we noted that    DOD’s information systems could provide data on the amount spent on  services, but the reliability of the information was questionable and the  system itself was seldom used as a tool to manage or identify  opportunities for managing DOD’s supplier base.
Procurement processes within DOD were not always carried out  efficiently and effectively.
There were few service contracting-related enterprisewide annual  performance metrics, none of which measured the cost-effectiveness  or quality of services obtained.
Services differ from products in several aspects and can also be  challenging when attempting to define requirements, establish measurable  and performance-based outcomes, and assess contractor performance.  For example, it can easily take over 10 years to define requirements and  develop a product like a weapon system before it can actually be delivered  for field use. Individual service acquisitions generally proceed through  requirements, solution, and delivery more rapidly. Further, delivery of  services generally begins immediately or very shortly after the contract is  finalized.
In response to the National Defense Authorization Act for Fiscal Year  2002, DOD and the military departments established a service acquisition  management structure, including processes at the headquarters level for  reviewing individual, high-dollar acquisitions. In September 2003, we  reported that this approach did not provide a departmentwide assessment  of how spending for services could be more effective and recommended  that DOD give greater attention to promoting a strategic orientation by  setting performance goals for improvements and ensuring accountability  for achieving those results. In its response, DOD concurred in principle  and agreed that additional actions could strengthen the management  structure as implemented, but also identified challenges for doing so based  on organizational size, complexity, and acquisition environment.
In January 2006, Congress again enacted legislation with specific  requirements for managing the acquisition of services. Among other  things, the legislation required DOD to  identify the critical skills and competencies needed to carry out the  procurement of services;    develop a comprehensive strategy for recruitment, training, and  deploying employees to meet the requirements for skills and  competencies;    establish contract services acquisition categories, based on dollar  thresholds, for the purpose of establishing the level of review, decision  authority, and applicable procedures;    dedicate full-time commodity managers to coordinate the procurement  of key categories of services;    ensure that contract services are procured by means of procurement  actions that are in the best interests of DOD and entered into and  managed in compliance with applicable laws, regulations, directives,  and requirements;    ensure that competitive procedures and performance-based  contracting are used to the maximum extent practicable; and    monitor data and periodically collect spend analyses to ensure that  funds allotted for the procurement of services are expended in the  most rational and economical manner practicable.
The requirements pertaining to establishing contract service acquisition  categories were to be phased in over a period of 3 years, with the first  categories, for acquisitions with an estimated value of $250 million or  more, to be established by October 2006. At the conclusion of our review,  DOD issued a policy memorandum aimed at strengthening service  acquisition management in response to the legislation. DOD is to report on  its implementation by January 2007.
section_title: Managing Service Acquisition Requires Both a Strategic and a Transactional Focus
paragraphs: Several key factors are necessary to improve DOD’s service acquisition  outcomes—that is, obtaining the right service, at the right price, in the  right manner. Our work found that to do this, an organization must  understand the volume, sources, portfolios, and trends related to what it is  buying, then ensure that requirements are valid and understood, services  are purchased properly, and performance delivered with minimum risk  and maximum efficiency. Success factors to achieve these goals can be  defined at both the strategic and the transactional level, as shown in   figure 1.
The strategic level is where the enterprise sets the direction or vision for  what it needs, captures the knowledge to enable more informed  management decisions, ensures deparmentwide goals and objectives are  achieved, determines how to go about meeting those needs, and assesses  the resources it has to achieve desired outcomes. The strategic level also  sets the context for the transactional level, where the focus is on making  sound decisions on individual transactions. Our work found that officials  need to ensure that individual service transactions have valid and well- defined requirements, have appropriate business arrangements, and that  performance is being managed—again, while minimizing related risks and  maximizing efficiency. A comprehensive approach would use the strategic  and transactional factors in a complementary manner to tailor  management activity to ensure preferred outcomes. Without this  management attention, risks exist within each level that can impair an  organization’s ability to get desired service acquisition outcomes.
subsections: section_title: Strategic Focus: Knowing Where Service Acquisition Is Today and Where It Should Be Tomorrow
paragraphs: Our prior work with leading commercial firms found that a successful  organization proactively identifies and manages outcomes of the services  it acquires at a strategic, or enterprisewide, level. Effective service  acquisition requires the leadership, processes, and information necessary  for mitigating risks, leveraging buying power, and managing outcomes.  Several factors are needed to implement a strategic approach, including  (1) strong leadership to define and articulate a corporate vision, including  specific goals and outcomes; (2) results-oriented communication and  metrics; (3) defined responsibilities and associated support structures; and  (4) increased knowledge and focus on spending data and trends. See  figure 2 for key factors to achieve a strategic approach to acquiring  services.
Our work found that organizations seeking to significantly improve service  acquisition outcomes must begin with an established vision and  commitment from senior management. This can come in various ways,  ranging from restructuring the corporate procurement function, providing  greater insight into and authority over the company’s service spending, or  signaling support for a new way of doing business. With an articulated  vision, leaders then have a basis for making commitments to factors  important for realizing the desired end state, such as practices,  procedures, structures, information, and human capital planning. Our  work has shown that when corporate goals and expected outcomes are  not defined, employees becomes less likely to accept new roles or  understand the importance of upcoming changes that are necessary to  reduce risks in service acquisition. These include allowing the sum total of  individual transactions to define the strategy and not providing a context  within which managers of individual transactions can make sound  judgments about the risk and sensitivity of a particular service acquisition.
Being able to define a strategic vision presupposes that leaders can  determine and articulate a normative position for the future. A normative  position would entail defining what end state or goals they want to achieve  at a specified time. This position can then be translated into specifics, both  in the aggregate and by type, such as  the current volume, type, location, and trends of service acquisitions;  the results the organization wants to achieve in a specified time frame;  the definition of a good service acquisition outcome; and  the characteristics of a service acquisition that make it desirable,  undesirable, or sensitive.
Critical to establishing a normative position is knowledge of current  service acquisition expenditures, management priorities, and expected  outcomes. The vision could also dictate which services represent risks to  the organization. For example, acquisitions could be deemed low risk  based on minimal cost exposure, high availability of service providers, or  limited criticality for meeting mission requirements. Conversely, high-risk  acquisitions may be those of higher dollar value, mission-critical  requirements, services that are new or being acquired using a different  approach, or any other services determined to need additional corporate- level involvement or oversight based on management priorities.
subsections: section_title: Vision and Goals Must Be Communicated and Used to Measure Progress
paragraphs: Once a vision and desired end state for service acquisition have been  defined, senior management must be both active and persistent in  supporting ongoing efforts, adjusting the strategy to reflect new  information, and moving toward the established normative position.  Communication and metrics are important management ingredients in  terms of overcoming resistance, cultural barriers, and other impediments  to achieving identified goals. Senior leaders also have the responsibility to  communicate and demonstrate a commitment to sound practices deemed  acceptable for the acquisition function. We have previously reported that  DOD faces vulnerabilities in aspects of its senior leadership because of  certain disconnects, including senior positions that have remained unfilled  for long periods of time, the acquisition culture fostered by management’s  tone at the top, and the management approach used in new industry  partnering relationships.
We have also noted the importance of leadership by senior agency officials  to successfully transform other aspects of DOD’s business operations and  those of other federal agencies. For example, our prior work has shown  that DOD’s substantial financial and business management weaknesses  adversely affect not only its ability to produce auditable financial  information, but also its ability to provide accurate, complete, and timely  information for DOD management and Congress to use in making  informed decisions. We indicated that overcoming these weaknesses  required sustained leadership at the highest level and a strategic and  integrated plan.
Metrics defining specified outcomes are vital to increasing the likelihood  that changes to practices will successfully contribute to the organizational  vision. While they can differ in nature and be used to varying degrees,  metrics can be used to (1) evaluate and understand performance levels,   (2) identify critical processes that require attention, (3) document results  over time, and (4) report information to senior officials for decision- making purposes. To illustrate this, DOD spends 20 percent of its service  dollars on professional and administrative management support contracts.  If senior DOD officials believe that such volume poses risks, then it can  use this information to establish targets to control and monitor the use of  these services. For example, in March 2006 the Secretary of the Air Force  issued a memorandum directing increased visibility and management of  contract services in support of command functions, in an attempt to save  over $6 billion that would then be used for other transformation initiatives.  If the Air Force follows up by collecting timely data on the individual  service transactions made in this area, it can see whether it is making  progress toward its desired end state. For DOD, risks of not doing this at a  strategic level entail losing momentum and failing to sustain positive  change, and such failures can then be manifested in quick fixes, fire drills,  or changes in policy statements that do not have a material effect on  actual operations.
section_title: Structures and Processes Must Be Defined to Facilitate Service Management Direction
paragraphs: Successful service acquisition management also requires attention to the  organization’s ability to move from a fragmented manner of doing business  to one that is more coordinated and strategically oriented. Primarily, this  involves changing how services are acquired in terms of business  processes, organizational structures, and roles and responsibilities. Our  work with leading commercial firms found that typical changes in this area  include  restructuring acquisition organizations and elevating the procurement  function to improve coordination with other internal organizations and  optimize available resources;    establishing new processes for routine tasks and using cross-functional  teams made up of individuals with various skills to ensure the right mix  of knowledge, technical expertise, and credibility; and    establishing full-time, dedicated commodity managers to provide more  effective management over key services.
We reported in March 2005 that the Department of Homeland Security was  pursuing similar approaches as it attempted to integrate the various  acquisition functions it inherited upon its establishment in 2003. For  example, the department designated a Chief Procurement Officer with  broad responsibility for its acquisition function and established  commodity councils composed of representatives from across the  department that were assigned responsibility for assessing future  purchasing strategies. We noted, however, that senior agency leadership  needed to address a number of challenges before fully integrating its  procurement function, such as clearly defining the roles and  responsibilities of key offices, and establishing a structure to ensure  continued support for commodity councils—such as appointing full-time  commodity managers.
In essence, this move toward a more strategic orientation can be  compared to a franchise model of business versus that of individually  owned stores or units. While franchises, like individually owned  businesses, operate at the local level and adapt to the specific needs and  demands of a community, they still must adhere to the consistent set of  standards and processes of the parent organization. For service  acquisition, this translates into recognition that while unique local  requirements need to be understood and met, individual acquisitions  should also be viewed in the context of organizational goals, objectives,  and strategies. In this regard, company officials indicated they can tailor  delivery of services to meet local needs while helping to achieve  organizational cost savings or quality improvement objectives. Risks here  are twofold. First, if a single, monolithic process is used for every service  acquisition regardless of size, sensitivity, or type, it could be overkill for  some transactions and insufficient for others. Second, allowing local  buying activities to operate independent of organizational standards and  processes would impair or defeat an organization’s ability to achieve  desired aggregate goals or outcomes.
section_title: Knowledge on Spending and Workforce Vital to Managing Services
paragraphs: Organizations also need basic, reliable data on how service dollars are  being spent and the capabilities of the workforce in place to acquire and  manage those services. Company officials who were successful with  improving service acquisition management informed us it was critical to  define the relevant types of information that were required and then  develop the appropriate data systems to collect and provide reliable  spending data. Such data enable senior managers to know not only the  current state of service acquisition, but how far it is from the desired end  state. While the type of information may vary depending on the  organization and the types of services acquired, basic spend analysis data  should include information and trends related to  the type of services being acquired;  the number of suppliers for a specific service the organization is using;  the amount the organization is spending for that service, in total and  with each supplier; and   the units in the organization that are acquiring the services.
We have previously reported that several civilian agencies have used this  approach to leverage their buying power, reduce costs, and better manage  suppliers of goods and services. For example, we reported in September  2004 that the Departments of Agriculture and Veterans Affairs, among  others, had launched or expanded spend analysis efforts and in turn  realized savings ranging from $1.8 million to $394 million on related  acquisitions. Similarly, we noted in 2005 that the Department of  Homeland Security identified 15 commodity areas as having the potential  to leverage the department’s buying power. In fiscal year 2004, four  commodity councils reported approximately $14.1 million in cost savings  and avoidances. Some councils encountered difficulties due to a shortage  of comprehensive data upon which to draw an accurate and detailed  picture of what was being spent on certain commodities over time, thereby  preventing them from taking full advantage of their strategic sourcing and  spend analysis efforts.
Equally important and necessary is for an organization to have a  workforce that is manned at the appropriate levels and equipped with the  right skills and abilities. To do this, a comprehensive, data-driven  workforce analysis must be performed in conjunction with establishing  the corporate vision and goals. An organization cannot fully understand  what skills and staffing commitments are necessary at each organizational  level to meet service acquisition requirements until it understands where it  wants to go and how it plans to get there. Once information on spending  and workforce capabilities is known and understood, organizations can be  more strategic in planning and managing service acquisition. The absence  of such data creates several risks, including not knowing how and where  money is being spent on service acquisition or not having the appropriate  workforce skills or staffing levels to ensure it is using sound buying  practices.
section_title: Transactional Focus: Buying the Right Individual Service the Right Way
paragraphs: While the strategic level defines the direction and manner in which an  organization pursues improvements in service acquisition, it is through  individual service transactions that the strategy is implemented. Key  factors at this transactional level include (1) clearly defined and valid  requirements; (2) appropriate business arrangements; and (3) effective  contractor management and oversight. In short, an organization needs to  assure itself that on individual service transactions it is buying the right  thing in the right way and that doing so results in the desired outcome. See  figure 3 for key factors for effectively managing service acquisitions at the  transaction level.
Establishing a valid need and translating that into a service acquisition  requirement is essential for obtaining the right outcome. Without this, an  organization increases the risk that it will pay too much for the services  provided, acquire services that do not meet its needs, or enter too quickly  into a sensitive arrangement that exposes the organization to financial,  performance, or other risks. Moreover, to establish accurate requirements,  the customer organization would benefit by involving stakeholders that  have knowledge about past transactions, current market capabilities and  the potential supplier base, and budgetary and financial management  issues. The makeup of stakeholders may vary across different transactions  depending on the nature, complexity, and risks. In the end, the purpose of  stakeholders with varied knowledge and skills is to ensure at the earliest  point possible that all aspects of the acquisition are necessary, executable,  and tailored to the level of risk commensurate with the individual  transaction. We have found that when DOD uses similar teaming concepts  to develop and deliver products, the results have included superior  outcomes within predicted time frames and budgets. For example, we  reported in April 2001 that the Advanced Amphibious Assault Vehicle  program used teams to reduce the time needed to make a design decision  from 6 months to about a week.
Because the nature of service contracts can vary, they naturally require  different approaches in describing requirements. For example, the time,  discipline, and sophistication of a team developing a requirement for  repetitive building maintenance would be considerably less than that of a  team developing a requirement for the first purchase of a space launch  service. Observing these factors, tailored to the individual requirement at  hand, can help to ensure that risks associated with a requirement for a  service acquisition are fully considered before entering into a business  arrangement. This is especially important for service acquisitions, because  once requirements are developed, most transactions move very quickly  into the business arrangement and contracting stages.
subsections: section_title: Appropriate Business Arrangements Provide Right Way to Buy Services
paragraphs: Once a requirement has been validated and defined, it becomes necessary  to develop an appropriate business arrangement to meet that need while  protecting the government’s interests. Of course, without a sound  requirement, the business arrangement could be relegated to buying the  wrong service the right way. At a basic level, this includes defining a clear  scope of expected contractor performance, developing an objective means  to assess the contractor’s performance, ensuring effective contractor  selection based on competition and sound pricing, and selecting an  appropriate contracting vehicle. Here again, while these are performed  with respect to the individual transaction, they must be done in the  context of the organization’s strategic vision.
As an organization undergoes the process for selecting those contractors  that will provide services, there should be clearly established relationships  among what tasks the contractor is expected to perform, the contract  terms and conditions, and performance evaluation factors and incentives.  This is especially true as federal agencies makes adjustments to their  acquisition practices. For example, in recent years, federal agencies have  made a major shift in the way they buy services, turning increasingly to  interagency contracts as a way to streamline the procurement process. In  these cases, an agency can use an existing contract that has already been  awarded by another agency, or turn to another agency to issue and  administer task orders on its behalf, often for a fee. Requirements, roles,  and responsibilities need to be clear to reduce risks. For example, we  reported in July 2005 that DOD customers did not provide the awarding  agency with detailed information about their needs. Without this  information, these agencies did not translate DOD’s needs into well- defined contract requirements that contained criteria to determine  whether the contractor had performed successfully. In the absence of  well-defined outcomes, DOD and the agencies lacked criteria to provide  effective contractor oversight.
Similarly, competition during the acquisition process is also important in  getting reasonable prices, as offerors put forth their best bid and solution  to meeting the proposed requirements and the government receives the  benefit of market forces on pricing. We have noted, however, that DOD  has, at times, sacrificed the benefits of competition for expediency. For  example, we noted in April 2006 that DOD awarded contracts for security  guard services supporting 57 domestic bases, 46 of which were done on an  authorized, sole-source basis. The sole-source contracts supporting the  last 37 installations were awarded by DOD despite recognizing it was  paying about 25 percent more than previously paid for contracts awarded  competitively.
When proper management controls are not in place, particularly in an  interagency fee-for-service contracting environment, too much emphasis  can be placed on customer satisfaction and revenue generation rather than  on compliance with sound contracting policy and required procedures,  such as competition. Significant problems in the way contracting offices  carry out responsibilities in issuing the orders for services may not be  detected or addressed by management. For example, in April 2005 we  reported that a lack of effective management controls—in particular  insufficient management oversight and a lack of adequate training—led to  the breakdowns in the issuance and administration of task orders for  interrogation and other services in Iraq, including:  issuing 10 out of 11 task orders that were beyond the scope of  underlying contracts, in violation of competition rules;    not complying with additional DOD competition requirements when  issuing task orders for services on existing contracts;    not properly justifying the decision to use interagency contracting;    not complying with ordering procedures meant to ensure best value for  the government; and  inadequate monitoring of contractor performance.
Without appropriate attention, there is an increased risk that the  government will pay too much for the purchased service, will be limited in  its access to new and innovative alternatives, or will not be in the proper  position to effectively manage the contractor after an arrangement is  established.
section_title: Actual Performance Must Be Managed and Assessed
paragraphs: At the transactional level it is also important to implement a post-contract  award process to effectively manage and assess contractor performance to  ensure that the business arrangement is properly executed. Managing and  assessing post-award performance entails various activities performed by  government officials to ensure that the delivery of services meets the  terms of the contract, including adequate surveillance resources, proper  incentives, and a capable workforce for overseeing contractor activities.  Each of these requires metrics and tools to encourage contractors to  provide superior performance and to manage and document that the  contractor’s performance was acceptable. For example, one important  element of this phase is having a plan for assessing performance that  outlines how services will be delivered. In addition, the plan should  provide a mechanism for capturing and documenting performance  information so it can serve as past performance information on future  contracts. Effective use of such a plan can allow the government to  evaluate the contractor’s success in meeting the specified contract  requirements. Further, organizations can use monetary incentives, such as  those provided through award and incentive fee contracts, to promote  desired acquisition outcomes. Finally, quality assurance surveillance— oversight of the services being performed by the contractor—is important  to ensure that contractors are providing timely and high-quality services  and to help mitigate any contractor performance problems.
In an environment that demands increased interaction between DOD and  the contractor to ensure expected outcomes, acquisition personnel must  be adequately trained to understand each of these elements and have the  skills to manage service contractors accordingly. Without appropriate  attention through contract completion, we have found that risks exist that  could result in poor contractor performance, services not being delivered  as expected, or payment to contractors for more than the value of the  services they performed. For example, our March 2005 review of   90 contracts showed wide variance in the level of surveillance, including  15 contracts that had no personnel assigned at all for these  responsibilities. According to DOD officials, this condition existed  because surveillance was not as important to contracting officials as  awarding contracts and contracting oversight personnel were not properly  assigned, evaluated on the performance of their duties, or provided  enough time to complete surveillance tasks. In the same way that the  development of requirements for services must be different from the  development of requirements for products, so is the case for overseeing  contractor performance. Given that performance thresholds may vary  greatly, management and oversight of individual service acquisitions may  need to be tailored to meet specific requirements. In some cases, dollar  value may not be a good proxy for determining risk. For example, some  high dollar contracts could pose relatively little risk to achieving the  agency’s mission. Conversely, certain lower dollar contracts, such as those  used to obtain interrogation services in Iraq, may pose higher risk and,  therefore, require greater management attention.
section_title: DOD Service Acquisition Approach Does Not Fully Address Key Elements at the Strategic or Transactional Levels
paragraphs: DOD and the military departments have not yet fully addressed the key  elements for managing service acquisition at a strategic or a transactional  level. At the strategic level, DOD has not formed a normative position of  where service acquisition needs to be and does not have the data  necessary to know the state of service acquisition today. As a result, DOD  is not in a position to determine whether investments in services are  achieving their desired outcomes. These are precursors to defining and  promoting improved outcomes. At the transactional level, most of DOD’s  efforts have been aimed at improving business arrangements, without  commensurate focus on how requirements are established and  communicated or how service contracts are executed. Despite the  implementation of a senior-level review process, buying commands and  activities have not made significant changes to how they manage  individual service acquisitions.
subsections: section_title: DOD’s Strategic Level Approach Missing Key Elements
paragraphs: DOD’s overall approach to managing service acquisition suffers from the  absence of several key elements. DOD has not developed a strategic vision  and lacks sustained commitment to manage service acquisition risks and  foster more efficient outcomes. As a result, DOD is not in a position to  communicate to its workforce how it intends to improve its acquisition of  services; determine needed changes to structures and processes to better  identify and prioritize risks; or understand the current state of service  spending and the skills of its current workforce. While DOD’s current  approach to managing service acquisition at the strategic level provides  some additional insight into high-dollar value service acquisitions, it lacks  an overall road map for managing risk and integrating key service  acquisition initiatives.
subsections: section_title: Normative Position of Service Acquisition Not Yet Established
paragraphs: DOD has not yet identified the types and quantities of services it  purchases; the outcomes needed in service acquisition so that necessary  changes can be understood and evaluated; or metrics that can be used to  assess whether those changes have actually achieved the expected  outcomes. DOD and military department officials have acknowledged that  DOD has not developed a comprehensive plan that targets areas needing  improvements, coordinates ongoing and planned initiatives, and provides  an overall road map to improve DOD’s management of services. In the  absence of such a vision, DOD’s strategic level efforts do not position the  department to proactively manage service acquisition outcomes, but  rather relegate DOD to a reactive role in which the billions of dollars spent  acquiring services simply reflects the sum total of individual actions.
Further, DOD’s efforts to transform its enterprisewide business operations  may not translate into improved knowledge on how services are acquired.  For example, DOD established the Business Transformation Agency in  October 2005 to lead and coordinate business transformation efforts  across the department. The Business Transformation Agency is tasked  primarily with modernizing key information technology systems and  business processes intended to make reliable data more readily available  while at the same time consolidating the overall number of information  technology systems and ensure consistency across the department.  However, the Business Transformation Agency has few ongoing activities  directly related to the acquisition of services.
In addition, DOD has pursued few opportunities to leverage its buying  power to acquire services through the use of strategic sourcing concepts.  While DOD has undertaken a number of pilot efforts, only a limited  number of these focused specifically on services. In 2006, DOD appointed  the Assistant Deputy Under Secretary of Defense for Strategic Sourcing  and Acquisition Processes to coordinate efforts and assist other DOD  components, including the military departments and the Defense  Acquisition University (DAU), as they develop strategic sourcing plans and  training processes. The Assistant Deputy Under Secretary stated that  initial efforts were focused on developing a concept of operations to  facilitate this requirement, but so far had been limited by a lack of staff  and resources. Further, he acknowledged that his office does not play a  role in DOD’s service acquisition review process. In September 2006, a  senior DOD official indicated that DOD was considering transferring this  responsibility to the Office of the Director, Defense Procurement and  Acquisition Policy. It is uncertain how this change, if implemented, would  affect the roles and responsibilities previously assigned to the office.
section_title: DOD Has Not Communicated Its Vision for Managing Service Acquisition
paragraphs: Because it lacks a strategic vision, DOD is not in a position to  communicate how it intends to improve its approach to service  acquisition. DOD’s primary policy for managing service acquisition came  in the form of a memorandum issued in response to sections 801 and   802 of the Fiscal Year 2002 National Defense Authorization Act. That  memorandum, issued in May 2002, noted DOD’s intent to move to a more  strategic and integrated approach to the acquisition of services and the  need to treat this area as seriously as it does that of hardware. Similarly,  DOD and senior military department officials have testified on the need to  improve service acquisition management within their departments.  Nevertheless, our discussions with command and buying activity officials  found that while recognizing this need, without specific guidance from  DOD, their acquisition practices remain unchanged. As a result, senior  DOD leadership’s call for change has had limited impact on acquisition  practices at lower levels within the department.
Further, one of the biggest obstacles to a more strategic approach to  service acquisition is breaking down cultural barriers at different levels  and across various functions of the acquisition process. In that regard,  officials noted that the acquisition and contracting communities often do  not have a shared vision for improving service acquisition or of their role  in such a vision. For example, DOD has acknowledged that the use of  performance-based service contracting techniques is generally perceived  as a “contracting” initiative, with the rest of the acquisition community  generally not fully participating or embracing the initiative. Consequently,  DOD and military department officials indicate that without senior  leadership and commitment, it is difficult to get support for changes in  business practices within the acquisition community.
section_title: Changes to Supporting Structures, Processes, and Roles Have Had Limited Effect
paragraphs: As part of its May 2002 policy, DOD required the development of a review  process for individual service acquisitions, established oversight  thresholds, and specified which service acquisitions are to be reviewed. In  addition, it required the military departments to establish a similar  management review process. DOD officials noted in 2003 that this  approach, combined with several other initiatives, was expected to have  significant impact on the acquisition of services. The new management  structure DOD implemented to address identified deficiencies associated  with the management of services established three levels: (1) review by  the Under Secretary of Defense (Acquisition, Technology, and Logistics)  for services acquisitions valued over $2 billion; (2) review by the  component or designated acquisition executive for service acquisitions  valued between $500 million and $2 billion; and (3) review by a  component-designated official for the acquisition of services valued at less  than $500 million. In response to this guidance, the Air Force, Army, and  Navy each developed individual service acquisition review processes and  authorities to support the DOD review requirements and identified  respective decision authorities responsible for conducting execution  reviews to assess progress against metrics.
DOD and military department officials with whom we spoke indicated that  the review structure has provided the reviewing office with additional  insight on high-dollar value service acquisitions. However, the Office of  the Under Secretary of Defense (Acquisition, Technology, and Logistics)  lacked complete information on the number and scope of acquisitions of  which it was notified and therefore could not give us a definitive response  as to how many transactions were formally reviewed. Officials from that  office provided a list of 19 service acquisitions that had been notified for  review—9 Army and 2 Air Force acquisitions, in addition to 8 acquisitions  from the Office of the Assistant Secretary of Defense (Networks and  Information Integration), which are subject to review under the guidance  for major automated information systems—but provided no additional  information on the results of those reviews.
Data provided by officials at the military department level indicated that  through September 2005, 69 acquisitions—representing just under   3 percent of service obligations—had been reviewed by the Air Force,  Army, and Navy under the new process (see table 2).
While the DOD reviews to date under this process have provided some  additional visibility over high-dollar value service acquisitions, the reviews  tend to focus more on ensuring compliance with applicable statutes,  regulations, and other requirements, rather than on imparting a vision or  tailored method for strategically managing service acquisition. Senior DOD  and military department officials noted that the process is generally not  intended to review program or customer decisions made at lower levels  within the department as to the need for the particular services or to have  a post-contract award follow-up assessment to ensure expected outcomes.  Also, the reviews have not positioned DOD to regularly identify  opportunities to leverage buying power. Further, they noted that the  reviews are largely perceived as a function and responsibility of the DOD  contracting organization, rather than a shared responsibility of the entire  acquisition community, to include the program office and other customers  for services.
Moreover, DOD’s policy does not require the Under Secretary of Defense  (Acquisition, Technology, and Logistics) to actually review those  acquisitions that exceed the $2 billion threshold. Service acquisitions that  meet this threshold are first reviewed and approved at the military  department level. In turn, the military departments notify the Under  Secretary that a service acquisition exceeding the threshold is available for  review. If there is no response within 10 days, the acquisition is allowed to  proceed without further review. Additionally, at the military department  level, most of the service acquisitions reviewed to date have been  indefinite delivery/indefinite quantity contracts. There is no requirement  to review individual task orders that are subsequently issued even if the  value of the task order exceeds the review thresholds.
We spoke to many officials at buying activities that had proposed service  acquisitions for review under this process. For the most part, they did not  believe the review significantly improved those acquisitions and noted  very few examples of occasions when, as a result of review feedback,  acquisition strategies were changed in a meaningful way. For example, the  reviews tended to focus on compliance with applicable laws, regulations,  and socioeconomic goals, such as small business participation or, in other  words, that the business arrangements are proper—all of which are  covered in the development of the acquisition strategy prior to the review.  These officials indicated that the timing of the review process—which  generally occurs well into the planning cycle—is too late to provide  opportunities to influence the acquisition strategy. These officials told us  that the reviews would be more beneficial if they were conducted earlier  in the process, in conjunction with the program office or customer, and in  the context of a more strategic approach to how best to meet the  requirement, rather than simply from a secondary or tertiary review of the  contract and in an area where they have considerable experience and  expertise. In addition, contracting officials at one buying command stated  that reviewing officials often lack the resources or technical expertise to  provide useful and valuable feedback.
section_title: Knowledge on Spending and Workforce Is Not Readily Available
paragraphs: DOD’s ability to effectively manage service acquisition at either the  strategic or the transactional level is hindered by the absence of reliable  data on which to make informed decisions. DOD and military department  officials acknowledge that the DOD contracting information systems  available to the locations we visited do not provide information on  forecasted demands for services; current and reliable information on what  services are currently being procured; or data to assess whether these  services are being acquired in line with cost, schedule and performance  goals, or otherwise meeting customer needs.
For its part, DOD has not identified the specific data it needs to better  manage service acquisition outcomes or developed appropriate data  systems that are essential for providing the information necessary for  improving results. According to DOD documentation, there are thousands  of individual information systems that have been implemented over  decades to meet various mission needs, and rather than providing usable  information, these systems can hinder collecting information needed by  decision makers. Because these systems were developed independently— often not designed to be interoperable with other such systems—it is a  challenge to share data with other locations or higher organizational levels  in support of broader planning and decision making. Even collecting basic  information on high-dollar services often proves time-consuming. For  example, in April 2005, DOD initiated a formal review of its service  acquisition policy. According to DOD officials, after determining that its  data systems were inadequate to identify and assess the status of service  acquisition policy compliance, the department initiated a data call to each  of the military components asking for a status review of the top 20 service  acquisitions in each military department since inception of the policy. This  data call took more than 6 months to collect, review, and report basic  contracting data. Further, the results did not provide the types of  knowledge DOD had expected.
Finally, DOD has acknowledged that it faces significant workforce  challenges that if not effectively addressed could impair the  responsiveness and quality of acquisition outcomes. In response, DOD is in  the process of identifying the current skill sets and gaps of the acquisition  workforce that routinely are engaged in acquiring services. For example,  DOD’s 2006 Human Capital Strategic Plan noted there are currently efforts  to develop a comprehensive competency model for each functional career  field including the technical tasks, knowledge, skills, abilities, and  personal characteristics required of the acquisition workforce. Similarly,  DAU officials noted that they are revising the training curriculum for  acquisition personnel, in part to provide an increased emphasis on service  acquisition. For example, DAU has an ongoing effort to identify the critical  competencies for service acquisition, determine which of these  competencies require further workforce training, and develop the  appropriate training. DAU officials stated the new courses will be initially  targeted for contracting personnel. In addition, DOD officials stated that  these courses will be made available to noncontracting acquisition  personnel only as time and resources permit.
section_title: DOD Transactional Approach Focuses Principally on Business Arrangement
paragraphs: Our work found that at the transactional level, buying commands and  activities have not significantly adjusted their acquisition practices since  DOD implemented its new review structure. The current transactional- level approach does not always take the necessary steps to ensure  customer needs are translated into well-defined contract requirements or  that post-contract award activities result in expected outcomes. Instead,  DOD service acquisition management activities focus primarily on  awarding the contract. Without clearly defined requirements and attention  after the contract is awarded, DOD cannot be sure it is buying the right  service or using an appropriate means to assess contractor performance.  As a result, DOD is potentially exposed to a variety of risks, including  buying things that do not fully meet customer needs or that should be  provided in a different manner or with better results.
subsections: section_title: Communication Challenges Hinder Establishment of Good Requirements
paragraphs: DOD and military department officials consistently identified poor  communication and the lack of timely interaction between the acquisition  and contracting personnel as key challenges to developing good  requirements. These officials noted that developing well-defined and  clearly articulated requirements in outcome-based performance measures  is difficult in and of itself, but the challenges can be reduced if both  communities work together early in the process. Several officials  identified actions they have initiated to improve working relationships, but  acknowledged that results have not been uniformly achieved. In part,  these issues arise from cultural differences between the contracting and  acquisition communities concerning their roles in managing various  service acquisition elements.
Generally the intended customer of a service, such as a program office,  has the responsibility to identify what type of service it requires, the level  of performance or quality needed, the period of performance, and the  available budget. To avoid problems with the later stages of the acquisition  process, and depending on the complexity of the services needed, early  involvement of the contracting and other functional communities is  important. However, contracting officers we spoke with frequently  commented that the initial statements of work prepared by the customer  were often insufficient, unclear, or not expressed in performance-based  terms, requiring considerable rework. In addition, officials told us it is  important that contracting officers fully understand exactly what the  customer needs in order to get the best business arrangement for the  government. However, contracting officers did not always have the  necessary knowledge or expertise to understand the requirement, such as  translating specific requirements into the statement of work. According to  contracting officials, the resulting frustrations are heightened when  customers identify the need to award a contract for the services in a short  time period.
Similarly, because services are generally funded on an annual basis,  contracting officers are often faced with many pressures at the end of each  fiscal year. For example, officials at the Navy Fleet Industrial Supply  Center in Philadelphia noted the impact of DOD’s recent policy requiring  contracting officers to approve task orders with a value of $100,000 or  more if they are issued against a non-DOD contract. While this does  provide greater visibility in an area of previous concerns, the officials we  spoke to indicated that the policy was issued without first assessing the  impact on the contracting workforce or whether the customer was fully  aware of the new process requirements. Consequently, contracting  personnel were faced with a significant increase in workload, much of it at  the end of the fiscal year. As many of these contracting officials had not  been involved with the original negotiation or award of the contract, and  because of the short time frames needed to issue the orders, they felt  pressured to review and approve task orders without being able to fully  assess whether the overall approach was the most effective or efficient.
The lack of technical knowledge and training was raised as an issue at  several commands we visited. For example, at many locations, officials  commented on the lack of contracting knowledge on the part of the  customer. One contracting manager told us he would be willing to pay for  contracting-related training for customers, so that they could better  understand how to prepare various contract documents, such as a  performance-based statement of work or an award fee evaluation plan.  Contracting officials told us that such documents can be difficult to  prepare without sufficient planning and input from customers who are  familiar with what needs to be accomplished. Similarly, contracting  officers at one location told us that they sometimes have to alter  acquisition approaches because it is too difficult to develop evaluation  plans that can be used by customers to effectively evaluate contractor  performance. Program officials also commented on the lack of technical  knowledge on the part of the contracting community. One Air Force  program official told us that he is required to use the general base  contracting office to procure advanced medical services, even though the  contracting officers usually do not have related technical knowledge and  sometimes have difficulty understanding the requirement. Shared  knowledge and communication are therefore important for ensuring that  customers and contracting personnel are placed in the best position to  achieve expected outcomes.
Officials at some locations reported that better acquisition outcomes can  result from establishing effective working partnerships. For example, Air  Force Space Command officials noted that one of their major service  acquisitions involves support for base operations in Thule, Greenland. The  Air Force has relied on contractors to provide these services for more than  four decades and believed their experience on the program illustrates key  aspects needed to promote a successful acquisition. These officials noted  that the service is a high priority and receives considerable attention from  senior management. Additionally, the command employs a team-based  approach to the acquisition, which means that personnel from both the  customer and contracting communities are assigned and remain on the  acquisition team throughout the development of the requirements,  associated acquisition strategy, and contracting approach. Further, to help  develop the requirements, the team receives considerable input from  program personnel and the contracting officer’s technical representative  as to the contractor’s performance, and makes use of monthly reports that  measure key performance parameters. By including personnel from all  stages of the acquisition process—program managers, contracting officers,  and quality assurance personnel—Space Command officials believed they  were able to make adjustments to their requirements that allowed the  contract to be priced in a manner that reduced cost risk to the  government. Command officials and those involved in the Thule service  acquisition acknowledge, however, that they have not been able to  consistently replicate this success on all other acquisitions.
Because of the recognized need to improve communication and share  knowledge between customers and the acquisition workforce, some of the  buying commands we visited have taken actions to promote  communication and timely interaction. For example, the Army’s  Communications and Electronics Command colocated senior contracting  officers with customers to promote better communication and more  cooperation between the two communities. These staff members, referred  to as customer service representatives, establish early lines of  communication by participating in management meetings with the  customers to identify future acquisition needs. The representatives use  this knowledge to help senior management in the contracting organization  identify resources and approaches to meet customer needs.
section_title: Business Arrangements Receive Majority of Management Attention, but Pressures to Meet Customer Needs Cited as Concerns
paragraphs: Buying commands and activities we visited focused the majority of their  attention on structuring business arrangements to ensure compliance with  applicable laws and regulations. As a result, command officials generally  indicated that their previous practices were already in line with  requirements established under DOD’s review process and therefore  remain largely unchanged. In some cases, the commands have established  additional procedures to review specific areas of interest, such as the  proposed use of an interagency contract or to ensure that task orders  under multiple award contracts comply with competition requirements.
Despite these reviews, however, we have identified examples of  potentially poor contracting practices and the pressure to meet customer  demands. For example,    On one acquisition, an Army contracting officer issued a task order for  a product that the contracting officer knew was outside the scope of  the service contract. The contracting officer noted in an e-mail to the  requestor that this deviation was allowed only because the customer  needed the product quickly and cautioned that no such allowances  would be granted in the future.
The Navy has established Seaport-enhanced, a centralized electronic  ordering system that competes and issues task orders for multiple  customers for program management support contracts. The Navy  instructed buying activities within its virtual system command  structure to use Seaport-enhanced as the “mandatory method of  choice” for these services. However, officials at one Navy buying  command told us they plan to submit waivers to avoid using Seaport- enhanced to meet their customer’s preference for using particular  contractors and to use time- and-materials contracts, neither of which  would be possible using Seaport-enhanced.
An Air Force contracting official noted that his office intended to  award a number of contracts to local firms so that the firms, in turn,  could have increased opportunities to provide services to other civilian  and military organizations in the region, through marketing themselves  as having been awarded a federal contract.
While these cases are anecdotal, they indicate that some contracting  officers feel pressured to meet their customers’ needs and had, or were  considering, options that may not be in the bests interests of the  government.
section_title: Limited Capability to Assess Service Acquisitions
paragraphs: Command and buying activities we reviewed generally had limited  capabilities to assess the degree to which their service acquisitions were  successful. For example, few of the commands or activities could provide  us reliable or current information on the number of service acquisitions  they managed, and others had not developed a means to consistently  monitor or assess, at a command level, whether such acquisitions were  meeting the performance objectives established in the contracts. Many  command officials noted the difficulties in doing so, since service  acquisitions involve a wide range of activities that necessitate different  measures of quality or performance from each other or from acquisitions  involving products or major weapon systems. Often, these officials noted  that their measure of success is reflected in terms of customer satisfaction  or the number of complaints received from the customers.
Command officials noted that cost, delivery, or schedule performance  measures may not be as effective on service contracts as for products or  weapon systems. In this regard, the officials noted that services are often  1-year efforts in which schedule performance provides limited insights.  Similarly, these officials noted that many of their service contracts, which  are often cost reimbursable or time-and-materials in nature, are funded on  a quarterly basis and are limited by the amount of funds made available. In  these cases, program officials noted that if more funds are made available  than expected, the customer may increase the number of staff or labor  hours to be provided; conversely, funding reductions will be reflected in  commensurate reductions in the number of staff or labor hours. In either  case, measuring changes in cost or hours is more reflective of the  availability of funding, rather than an indication of contractor  performance. Command officials noted that their information systems  generally do not provide a capability to assess service acquisition  outcomes.
Additionally, the ability to conduct oversight within DOD’s management  structure is often constrained by resources and workforce availability. For  example, Air Force documentation suggests that 90 percent of planning  activity is focused on getting the contract awarded, leaving very little for  contract administration and oversight. Further, DOD officials noted that  organizations like the Defense Contract Management Agency do not  perform the same level of surveillance functions for services as they do for  products. The Defense Contract Management Agency generally assembles  integrated program support teams to deliver support at prime contractor  facilities, which in turn supply business and technical support and furnish  program managers with insight into program execution at the prime  contract level, as well as the major and critical subcontract tiers. Senior  DOD officials told us that because services tend not to rise to the level of a  program, the Defense Contract Management Agency does not always  provide the resources to support those acquisitions. Rather, the contract  administration task is often assigned to a local contracting officer  technical representative.
section_title: Attention to Strategic and Transactional Elements Has Improved Some Service Acquisition Outcomes
paragraphs: Just as commercial firms have reported positives changes after  implementing management approaches that include strategic and  transactional elements, there are also examples where DOD has had  similar success. DOD officials who report success stated that this can be  achieved by paying attention to and addressing the risks inherent in each  of the key elements in the service acquisition process—at both the  strategic and the transactional levels. For example, the Air Force, in  conjunction with the Army, developed a strategic approach to acquiring  wireless services and generated projected savings of 30 percent annually  for just one of its service providers. According to Air Force officials, the  combination of sustained leadership support, good data, a supporting  structure, and communication with and among customers mitigated risks  and set the context for the transactional level to achieve good acquisition  outcomes. The Air Force’s Chief Information Officer and the Deputy  Assistant Secretary for Contracting actively participated in establishing  and supporting the development of the Information Technology  Commodity Council, which is responsible for managing information  technology-related strategic sourcing initiatives. Clear roles and  responsibilities were established within the supporting structure of the  council, including appointing a single individual to lead the initiative;  identifying stakeholders who were responsible for developing the  requirements; and establishing a team to perform market research and  obtain other necessary data.
The team responsible for obtaining the data upon which to base its  acquisition decisions consisted of Army and Navy officials. These officials  worked together to perform a market analysis to understand the  marketplace, develop a spend analysis to understand current  expenditures, and forecast future demand to understand the needs of the  military departments individually, and of DOD as a whole. As a result of  the team’s efforts, data are now available to help any agency within DOD  save money when it acquires wireless services.
section_title: Conclusions
paragraphs: Over the past 10 years, DOD has seen large growth in the acquisition of  services, to the point where the value of these acquisitions exceeds the  value of major weapon systems. To a large extent, this growth has not  been a managed outcome. Congress, concerned over these rapid  increases, has directed DOD to take several actions to promote more  oversight and discipline in service acquisition. DOD has taken action, but  action has not necessarily equated to progress. At this point, DOD is not in  a good position to say where service acquisition is today in terms of  outcomes, where it wants service acquisition to be in the next few years,  or how to get there. This makes it difficult to set the context within which  individual organizations can make informed judgments on service  acquisition transactions. Without this context, DOD will not be in a  position to determine  the current volume, type, location, and trends of service acquisition;  the results DOD wants to achieve in the next 3 to 5 years in each of  these areas;  the definition of a good service acquisition outcome;  the characteristics of a service acquisition that make it desirable,  undesirable, or sensitive;  the risks that need to be managed at each stage of a transaction; and   the conditions under which a transaction should be referred for review.
Given the diverse nature of services that DOD acquires, multiple sources  of risk, and wide variety of organizations that are involved in individual  acquisitions, until this basic information is available and understood, it  may not be to possible to develop an ideal departmentwide review process  or organizational structure. For example, while setting dollar thresholds as  a basis for reviewing an individual service acquisition is an improvement  over no review, dollars are not always a good proxy for risk. Moreover,  when a service acquisition reaches the review stage, the requirement and  proposed business arrangement are set and expediency becomes an issue  as the contract is ready to be awarded. Ultimately, the majority of  individual service acquisition decisions will be made by organizations at  the local level. The people making these decisions will have to make  judgments regarding the risks and soundness of requirements, sources,  competition, contract types, and execution follow-up. Their decisions will  also trigger which acquisitions receive higher level review. Of primary  importance now is to provide a context for these organizations in which  they can make tailored decisions and recommendations that remain  consistent with DOD’s overarching views of risk, desirable outcomes, and  direction for service acquisition. That context does not yet exist.
The strategic and transactional elements presented in this report can  ultimately provide such a context. While not new, these elements, when  considered together, offer the prospect of a cohesive approach—a  necessary precursor to developing specific solutions to improve service  acquisition outcomes. DOD will then be able to evaluate outcomes against  expected results, provide the basis for making course corrections, and  ultimately make service acquisitions a managed outcome.
section_title: Recommendations for Executive Action
paragraphs: We recommend the Secretary of Defense adopt a proactive approach to  managing service acquisition that leverages strategic and transactional  elements. Specifically, we recommend that the Secretary of Defense take  the following six actions:    establish a normative position of how and where service acquisition  dollars are currently and will be spent (including volume, type, and  trends);    determine areas of specific risk that are inherent in acquiring services  and that should be managed with greater attention (including those  areas considered sensitive or undesirable in terms of quantity or  performance);    on the basis of the above, clearly identify and communicate what  service acquisition management improvements are necessary and the  goals and timelines for completion;    ensure that decisions on individual transactions are consistent with  DOD’s strategic goals and objectives;    ensure that requirements for individual service transactions are based  on input from key stakeholders; and    provide a capability to determine whether service acquisitions are  meeting their cost, schedule, and performance objectives.
section_title: Agency Comments and Our Evaluation
paragraphs: DOD provided written comments on a draft of this report. DOD concurred  with each of our recommendations and identified actions it has taken or  plans to take to address them.  These comments are reprinted in appendix  II. As part of its comments, DOD provided its October 2006 policy  memorandum that implements Section 812 of the National Defense  Authorization Act for Fiscal Year 2006. We did not reprint the policy as it is  publicly available through DOD’s acquisition website  (www.acq.osd.mil/dpap/). DOD also provided technical comments, which  we have incorporated as appropriate.
DOD agreed that a more coordinated, integrated and strategic approach  for acquiring services is needed. In particular, DOD noted that it is  reassessing its strategic approach to acquiring services, including  examining the types and kinds of services it acquires and developing an  integrated assessment of how best to acquire such services. DOD expects  this assessment will result in a comprehensive, departmentwide  architecture for acquiring services that will, among other improvements,  help refine the process to develop requirements, ensure that individual  transactions are consistent with DOD’s strategic goals and initiatives, and  provide a capability to assess whether service acquisitions are meeting  their cost, schedule and performance objectives. DOD expects its  assessment will be completed in early 2007.
DOD also noted that it has taken a number of initiatives to improve  specific issues associated with acquiring services. For example, DOD  noted that its October 2006 policy will modify certain aspects of the  current management structure, including providing lower dollar  thresholds for reviewing proposed services acquisitions and requiring  senior DOD officials to annually review whether service contracts were  meeting established cost, schedule and performance objectives. Further,  DOD noted that it had made organizational changes to improve its  strategic sourcing efforts; it is assessing the skills and competencies  needed by its workforce to acquire services; and the military departments  and defense agencies are currently conducting self-assessments intended  to address contract management issues we identified in our January 2005  high-risk report.
While these efforts are steps in the right direction, they appear to be  primarily incremental improvements to DOD’s current approach to  acquiring services. Our discussions with DOD officials indicate that the  architecture being developed may hold the potential for making the more  fundamental changes at the strategic and transactional level that we have  recommended.  We have identified a number of elements that are needed  at each of these levels, such as clearly articulating where DOD wants  service acquisition to be in the next few years, setting the context for  making informed and tailored decisions at the transactional level, and  assuring that requirements are well-defined and consistent with DOD’s  strategic objectives. The extent to which DOD successfully integrates  these elements as it develops and implements its new architecture will be  the key to fostering the appropriate attention and action needed to make  service acquisitions a managed outcome.
We are sending copies of this report to interested congressional  committees; the Secretary of Defense; the Secretaries of the Air Force,  Army, and Navy; the Commandant of the Marine Corps; and the Director,  Office of Management and Budget. 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 or your staff have any questions about this report or need additional  information, please contact me at (202) 512-4841 or francisp@gao.gov.  Contact points for our Offices of Congressional Relations and Public  Affairs may be found on the last page of this report. Staff  acknowledgments are listed in appendix III.
section_title: Appendix I: Scope and Methodology
paragraphs: To identify the key factors needed to improve service acquisition, we drew  heavily on our prior work in this and other areas. We primarily used our  January 2002 report that identified how leading commercial companies  took a strategic approach to acquiring services. In addition, we reviewed  previous GAO reports related to overall contract management and those  related to individual service contract transactions, specifically in areas  such as business transformation, interagency contracting, strategic  sourcing, and contract surveillance. To confirm and validate key factors,  we held detailed discussions with relevant defense contracting experts in  the Office of the Under Secretary of Defense (Acquisition, Technology, and  Logistics); the Office of the Assistant Secretary of Defense (Networks and  Information Integration); the Office of the Deputy Undersecretary of  Defense (Business Transformation); the Office of the Assistant Secretary  of Defense (Health Affairs); and the Defense Acquisition University. In  addition, we spoke with various offices within each of the military  departments, including the Air Force Program Executive Office (Combat  and Mission Support); the Deputy Assistant Secretary of the Army (Policy  and Procurement); the Assistant Secretary of the Navy (Research,  Development, and Acquisition); and the Air Force Information Technology  Commodity Council.
To assess the extent to which the Department of Defense (DOD)  approach, including its current management structure, exhibited these  characteristics, we reviewed relevant DOD guidance and policy  memoranda, including those that established its current management  structure and review processes. We interviewed officials responsible for  implementing the management structure within the Office of the Secretary  of Defense, as well as each of the offices mentioned above. Discussions  with these officials focused on DOD and military department service  acquisition approaches, including those in put in place in response to  sections 801 and 802 of the National Defense Authorization Act for Fiscal  Year 2002 and other service contracting issues and initiatives. Data  collected includes the number of service contract management reviews  that have occurred under the newly implemented structure as well as the  composition and purpose of those review boards. We obtained  information on the types of activities and reviews conducted by these  offices, including the number and value of service acquisitions they  reviewed.
To document and analyze the processes by which individual military  commands and buying activities acquired services, we visited 20 locations.  We selected these locations based both on recommendations from DOD  officials and from our own internal knowledge. While our selection of  locations cannot be generalized to the population of all DOD contracting  locations, those selected represented each of the military services and  represented a range of DOD service types. Locations visited include:    Air Force Space Command, Colorado Springs, Colorado;    Air Force 21st Space Wing, Peterson Air Force Base, Colorado Springs,    Air Force 50th Space Wing, Schriever Air Force Base, Colorado    Air Force 460th Space Wing, Buckley Air Force Base, Aurora,    United States Air Force Academy, Colorado Springs, Colorado;    Army Contracting Center of Excellence, Arlington, Virginia;    Army Contracting Agency, Fort Carson, Colorado Springs, Colorado;    Army Communications and Electronics Command, Fort Monmouth,    Army Information Technology, E-Commerce and Commercial  Contracting Center, Alexandria, Virginia;    Surface Deployment and Distribution Command, Alexandria, Virginia;    Naval Sea Systems Command, Washington Navy Yard, District of    Naval Supply Systems Command, Mechanicsburg, Pennsylvania;    Navy Fleet and Industrial Supply Center, Philadelphia, Pennsylvania;    Navy Fleet and Industrial Supply Center, Norfolk, Virginia;    Navy Fleet and Industrial Supply Center, San Diego, California;    Naval Personnel Development Command, Norfolk, Virginia;    Navy Space and Warfare Command, San Diego, California;    Naval Education and Training Command (NETC), Pensacola Naval Air    NETC Professional Development and Technology Center, Pensacola,    TRICARE Management Activity, Acquisition Management and Support,  Aurora, Colorado.
We conducted field observations at these locations and distributed a  structured set of questions to solicit information from contracting officials  designated to respond to our inquiry. Discussions with these officials  focused on the level and type of contracting activity and service  acquisition management approaches. These discussions centered on topics  such as service acquisition culture and relationships between contracting  personnel and customers (including program office and user personnel),  changes in policy and practice under the new review structure, challenges  faced in acquiring services, efforts to improve individual service  acquisitions; databases for capturing service contract data, performance  based contracting, strategic sourcing, and other service acquisition  initiatives. We discussed the review processes for selected service  acquisitions (as determined by buying activity officials); including those  that met criteria for review by either the Office of the Secretary of Defense  or the military departments and, for comparison, those that were not  subject to review at these levels. We reviewed contract file documentation  to examine standard processes, review authority, requirements  determination, and risk management activity. Information collected  included contract solicitations, acquisition strategies, status reports,  performance certifications; review and approval checklists, and other  contract specific documents.
section_title: Appendix II: Comments from the Department of Defense
section_title: Appendix III: GAO Contact and Staff Acknowledgements
subsections: section_title: GAO Contact
section_title: Acknowledgements
paragraphs: In addition to the contact above, Tim DiNapoli, Assistant Director;   Brian Mullins; Christina Cromley Bruner; Whitney Havens;   Moshe Schwartz; Andrew Redd; Julia Kennon; and John Krump made   key contributions to this report.