Contract Management: Taking a Strategic Approach to Improving Service Acquisitions
Published: 2002-03-07T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Service Acquisition Reform Act of 2002 seeks to strengthen the acquisition workforce by moving toward a performance-based contracting environment and improving service acquisitions management. During the past decade, federal agencies have substantially increased their purchases of services, particularly for information technology and professional, administrative, and management support. In fiscal year 2001 alone, the federal government acquired $109 billion in services. This money, however, is not always well-spent. GAO continues to find that defense and civilian acquisitions are poorly planned, not adequately completed, and poorly managed. Some leading companies have changed their approach to acquiring services after finding themselves spending a lot of money on services without knowing how much was being spent and where these dollars were going.
section_title: What GAO Found
paragraphs: GAO found that these companies were able to turn this situation around by adopting a more strategic perspective to service spending. Each company focused more on what was good for the company as a whole rather than just individual business units, and each began making decisions using enhanced knowledge about service spending. The companies analyzed their spending services to answer basic questions about how much was being spent and where the money was going. In doing so, they realized that they were buying similar services from many providers, often at different prices. The companies used this data to determine the right number of suppliers that met their needs.

section_title: Letter
paragraphs: Thank you for the opportunity to participate in today’s hearing on H.R.  3832, the Services Acquisition Reform Act of 2002 (SARA). The bill’s  proposals focus on strengthening the acquisition workforce, moving  toward a performance-based contracting environment, and improving the  management of service acquisitions. As we testified before you last  November, our work shows that all these areas need attention, particularly  in light of the government’s increasing dependence on services.
Today, I would like to discuss our recent findings on how leading  companies tackled the same kinds of problems the bill is seeking to  remedy. The practices that these companies followed clearly paid off in  terms of dollar savings and service enhancements. We believe that the  federal government has an opportunity to achieve similar outcomes with  support and commitment from the Congress. I would also like to discuss  our ongoing work related to specific proposals in the bill as well as  concerns we have about other sections of the bill.
subsections: section_title: Best Practices for Service Acquisitions
paragraphs: A main goal of the bill is improving the management of service  acquisitions. There is good reason for this. Over the past decade, federal  agencies have substantially increased their purchases of services,  particularly for information technology and professional, administrative,  and management support. In fiscal year 2001 alone, the federal  government acquired about $109 billion in services. This money, however,  is not always well-spent. Our work, as well as the work of other oversight  agencies, continues to find that millions of service contract dollars are at  risk at defense and civilian agencies because acquisitions are poorly  planned, not adequately competed, or poorly managed.
In view of these problems, we examined how leading companies changed  their approach to acquiring services. The companies we studied found  themselves in a situation several years ago similar to the one that federal  agencies are in today. They were spending a substantial amount of money  on services—ranging from routine maintenance, to advertising, to  information management—but did not have a good grasp of how much  was being spent and where these dollars were going. Moreover, they were  not effectively coordinating purchases, and they lacked tools to make sure  that they were getting the best overall value.
The companies we studied were able to turn this situation around by  adopting a more strategic perspective to service spending; that is, each  company focused more on what was good for the company as a whole  rather than just individual business units, and each began making  decisions based on enhanced knowledge about service spending. The  specific activities they undertook ranged from developing a better picture  of what they were spending on services, to taking an enterprisewide  approach to acquiring services, to developing new ways of doing business.  Figure 1 highlights key elements of the strategic approach.
Specifically, the companies we visited analyzed their spending on services  to answer basic questions about how much was being spent and where the  dollars were going. In doing so, they realized that they were buying similar  services from numerous providers, often at greatly varying prices. The  companies used this data to rationalize their supplier base, or in other  words, to determine the right number of suppliers that met their needs.  Hasbro’s spend analysis, for example, revealed that it had 17 providers of  temporary administrative, clerical, and light industrial personnel for 7  locations. The company also found that it had inconsistent policies and  processes, multiple contact points, and limited performance measures.  Information was not being shared across locations.
The companies we studied changed how they acquired services in  significant ways. Each elevated or expanded the role of the company’s  procurement organization; designated “commodity” managers to oversee  key services; and/or made extensive use of cross-functional teams to help  identify their service needs, conduct market research, evaluate and select  providers, and manage performance. These changes transformed the role  of purchasing units from one focused on mission support to one that was  strategically important to the company’s bottom line. For example, Dun &  Bradstreet officials told us that, with the support of senior corporate  management, their procurement function now exercises far more control  and responsibility over their services and that it acts more in an advisory  capacity to business units rather than just being relied on for negotiating  expertise.
Bringing about these new ways of doing business was challenging. For  example, some companies spent months piecing together data from  various financial management information systems and examining  individual purchase orders just to get a rough idea of what they were  spending on services. Other companies found that establishing new  procurement processes met with resistance from individual business units  reluctant to share decision-making responsibility and involved staff that  traditionally did not communicate with each other.
To overcome these particular challenges, the companies found they  needed to have sustained commitment from their senior leadership—first,  to provide the initial impetus to change and second, to keep up the  momentum. Since service acquisitions were largely viewed as a mission  support activity and peripheral to the bottom line, such commitment  needed to be intense and accompanied by clear communication on the  rationale, goals, and expected results from the reengineering efforts.
Moreover, to help sustain management attention, the companies  implemented performance measures to help them gauge whether  reengineering efforts were really working. For example, ExxonMobil  employed an extensive system to measure performance of its procurement  function, which included metrics on the procurement organization’s  progress in meeting financial, customer satisfaction, and business  operation objectives; compliance with best practices; and more detailed  metrics to assess the performance of local purchasing units.
Why should these particular practices matter in looking how to reform  service acquisition in the federal government? Taking a strategic approach  clearly paid off. Companies were able to negotiate lower rates and better  match their business managers’ needs with potential providers of services.  One official estimated that his company saved more than $210 million over  the past 5 years pursuing more strategic avenues to purchasing  information technology services, while another estimates his company  typically achieved savings of 15 percent or more on efforts that were  undertaken using the new processes.
subsections: section_title: Best Practices and the Services Acquisition Reform Act
paragraphs: The SARA bill touches on some aspects important to the approach  followed by the leading companies. First, the proposed bill also  encourages greater use of performance-based contracting. Performance- based service contracting is a process where the contracting agency  specifies the outcome or result it desires and leaves it to the vendor to  decide how best to achieve the desired outcome. Historically, the  government has not widely used this strategy, but it is beginning to move  in that direction in an effort to attract leading commercial companies to  doing business with the government, gain greater access to technological  innovations, and better ensure contractor performance.
Second, the bill would create a chief acquisition officer within each  agency. We support the concept of a chief acquisition officer. Our  discussions with a number of officials from private sector companies  about how they buy services indicate that a procurement executive or a  chief acquisition officer plays a critical role in changing an organization’s  culture and practices. The bill, however, differs from the approach taken  by leading companies in terms of the scope and the decision-making  authority of this position. Specifically, at the leading companies, these  officials were corporate executives who had authority to influence  decisions on acquisitions; implement needed structural, process, or role  changes; and provide the necessary clout to obtain initial buy-in and  acceptance of reengineering efforts. Under SARA, it is not clear that the  chief acquisition officer would have comparable responsibility and  authority.
section_title: Additional Ongoing Work Related to the Proposed Services Acquisition Reform Act
paragraphs: In addition to our work on best service acquisition practices, we are  performing a number of evaluations related to specific proposals in the  Services Acquisition Reform Act, including those on (1) acquisition  workforce, (2) performance-based contracting, and (3) share-in-savings  contracting. I would like to highlight what this work entails and how it can  be of use to the subcommittee as it moves forward on the bill.
subsections: section_title: Acquisition Workforce
paragraphs: The proposed bill contains several provisions to address the challenges  being faced in the acquisition workforce. Procurement reforms and  technological changes have placed unprecedented demands on the  acquisition workforce. Contracting personnel are now expected to have a  much greater knowledge of market conditions, industry trends, and  technical details of the commodities and services they procure.
We believe it is essential for agencies to define the future capabilities  needed by the workforce and to contrast these needs with where the  workforce is today. Doing so will provide a solid basis for evaluating  whether different management tools are needed to meet the needs of the  future workforce. Specifically, agencies could improve the capacity of the  acquisition workforce by focusing on four key areas:
Requirements—assessing the knowledge and skills needed to effectively  perform operations to support agency mission and goals.
Inventory—determining the knowledge and skills of current staff so that  gaps in needed capabilities can be identified.
Workforce strategies and plans—developing strategies and  implementing plans for hiring, training, and professional development to  fill the gap between requirements and current staffing.
Progress evaluation—evaluating progress made in improving human  capital capability and using the results of these evaluations to  continuously improve the organization’s human capital strategies.
In our current work for this and other committees, we are examining  efforts to assess and address the needs of the future acquisition  workforce. Specifically, we are looking at (1) the adequacy of agency  training requirements for the acquisition workforce and agency practices  for determining the level of funding needed for training, (2) selected  federal agencies’ strategic planning efforts to manage and improve the  capacity of the acquisition workforce, and (3) strategies being used to  ensure that the acquisition workforce is prepared to meet the new  challenges for acquiring services.
section_title: Performance-Based Contracting
paragraphs: As noted earlier, the proposed bill is promoting greater use of  performance-based contracting. The work we are conducting now for this  subcommittee should be particularly useful in determining the extent to  which performance-based contracting is taking hold and whether there are  governmentwide mechanisms that can be used to encourage greater use of  it.
Our work to date shows that for fiscal year 2001, about 23 percent of  eligible service contracts were reported to be performance-based. This  number is in line with a 20-percent goal set by the Office of Management  and Budget. However, our work shows that there are inconsistencies in  the interpretation of the definition of a performance-based contract.  Moreover, demonstrating either monetary savings or efficiency gains will  be challenging. We look forward to sharing the results of our review with  the subcommittee by August of this year.
section_title: Share-in-Savings Contracting
paragraphs: The proposed bill focuses specifically on promoting greater use of one  particular form of performance-based contract: share-in-savings. Basically,  in share-in-savings contracting, a contractor funds a project up front in  return for a percentage of the savings that are actually realized by an  agency. Almost 6 years after the Clinger-Cohen Act called for the creation  of pilot programs to test the share-in-savings concept in federal  information technology contracts, the government has not identified many  suitable candidates for use of this innovative technique. In large part, this  is because use of this tool requires solid baseline data about the existing  cost of an activity and a reliable method for measuring whether success  has been achieved. Gathering reliable baseline data can be difficult.
The work we are conducting in this area will identify examples of best  practices using the share-in-savings contracting method found in the  commercial sector and assess how these practices can be effectively  applied in the federal government. We are specifically asking commercial  companies why they chose this tool as a means to help achieve their  business goals and what their experiences have been. One particular form  of share-in-savings that has emerged in our discussions is gain sharing.  Under this approach, a contractor does not assume all of the risk, rather it  will reduce its normal fees in return for a percentage of increased earnings  or savings that result from the contractor’s work. The idea is to develop a  “win-win” arrangement, which jointly encourages the contractor and the  client to achieve sustainable business results.
section_title: Specific Concerns About SARA Proposals
paragraphs: I would like to share initial concerns we have with some particular  provisions of SARA based on our previous work and experiences.
First, section 221 of SARA would amend the Office of Federal Procurement Policy Act to increase the micropurchase threshold from  $2,500 to $25,000. The governmentwide commercial purchase card is the  preferred method for making micropurchases and is widely used. We have  not comprehensively examined the use of purchase cards across the  federal government. However, our reviews at selected agencies, including  two Navy units, have found weak internal controls, which have left  agencies vulnerable to a variety of improper purchases. We are concerned,  therefore, that raising the micropurchase threshold may not be advisable  until problems with controls and abuses are addressed and resolved.
Second, section 223 of SARA would strengthen the process under which  agencies decide challenges to their procurement decisions by imposing a  statutory stay of contract award or performance pending resolution of any  bid protest. The bill would require an agency to issue a decision on a bid  protest within 10 business days. We support prompt resolution of protests  and believe the proposed bill may help accomplish this. We are concerned,  however, that the 10-day time limit would be too brief in many cases to  permit meaningful consideration of a protester’s complaints, especially  when the protest involves any degree of complexity.
Third, section 211 of the proposed bill would authorize service contractors  to submit invoices for payment more frequently—biweekly instead of  monthly. Although this change would have a positive effect on service  contractors’ cash flow, it could increase the cost of doing business for the  government. Additionally, this change may increase the risk of erroneous  payments—a significant problem across the government—as it could  increase the volume of invoices and would provide agencies with less time  to process and review them. As such, we believe further study is  warranted on this provision.
Lastly, the bill also makes a number of significant changes to commercial  items, including one, section 404, that would designate as a commercial  item any product or service sold by a commercial entity. Although we have  not fully assessed the possible impact of the proposed change, we are  concerned that the provision would allow for products or services that had  never been sold or offered for sale in the commercial marketplace to be  considered a commercial item. In such cases, the government may not be  able to rely on the assurances of the marketplace in terms of the quality  and pricing of the product or service.