Defense Contracted Services: DOD Needs to Reassess Key Leadership Roles and Clarify Policies for Requirements Review Boards
Released: 2017-08-31T00:00:00

Letter

Background

DOD has traditionally approached the acquisition of services differently than the acquisition of products, focusing its attention, policies, and procedures on managing major weapon systems, which it typically does by 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, 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 for Acquisition, Technology, and Logistics (USD(AT&L)), while less complex and risky programs are overseen by the service or component acquisition executive. As of December 2015, DOD managed 78 major defense acquisition programs on which it planned to invest $1.46 trillion over the life of these programs. These 78 programs will require just over one quarter of all DOD’s development and procurement funding over the next 5 years.

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 installations, with little visibility or control at the DOD or military department level. DOD’s January 2016 instruction reiterates that the acquisition of contracted services is a command responsibility. As such, the instruction notes that unit, organization, and installation commanders are responsible for the appropriate, efficient, and effective acquisition of contracted services by their organizations. Services differ from products in several aspects and can offer challenges when attempting to define requirements, establishing measurable and performance-based outcomes, and assessing 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 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.

Over the past 15 years, Congress and DOD have identified actions intended to improve, among other things, service acquisition planning, tracking, and oversight (see figure 1).

Since 2013, DOD took several additional actions to help improve the acquisition and management of services. For example, in April 2013, the USD(AT&L) appointed the Principal Deputy Under Secretary of Defense for Acquisition, Technology, and Logistics, as the Senior DOD Manager for Services Acquisition. Subsequently, in May 2013, DPAP established a Services Acquisition directorate, which is responsible for DOD-level oversight of services as part of its responsibilities; DPAP-SA was the principal author of DOD’s January 2016 instruction. DPAP-SA also leads the Services Acquisition Functional Integrated Product Team, which creates services-acquisition training and tools and provides a forum to share best practices and lessons learned. The Services Acquisition Functional Integrated Product Team is comprised of representatives from DPAP-SA, the Defense Acquisition University, and SSMs, and others from the military departments and defense agencies.

The January 2016 instruction calls for the strategic management of the acquisitions of contracted services. The instruction establishes policy, assigns responsibilities, provides direction for the acquisition of contracted services, and establishes and implements a hierarchical management structure for the acquisition of contracted services, including service categories, thresholds and decision authorities, and an SRRB framework. The instruction identifies three key leadership positions, FDEs, CLLs, and SSMs to strategically manage and oversee services.

These actions were driven by evidence that DOD was increasingly reliant on contracted services, including complex services such as engineering support, and was obligating more of its contracting dollars on services than it was on products. As we noted in February 2016, DOD’s obligations in fiscal year 2014 on its three largest services—knowledge- based, research and development, and facility-related services were more than double the amount DOD obligated for aircraft, land vehicles, and ships, the three largest product categories DOD acquired.

Prior GAO Work

GAO has issued a series of reports that assessed leading commercial practices and DOD’s efforts to improve how it acquires contracted services. In our January 2002 report on commercial practices, for example, we reported that leading companies had examined alternative ways to manage their service spending to stay competitive, respond to market and stockholder pressures, and deal with economic downturns in key overseas markets. In looking at their service acquisitions, these companies discovered that they did not have a good grasp of how much was actually being spent and where these dollars were going. These companies also found that responsibility for acquiring services resided largely with individual business units or functions—such as finance, human resources, manufacturing, engineering, or maintenance—which hindered efforts to coordinate purchases across the company. The companies realized that they lacked the tools needed to make sure that the services they purchased met their business needs at the best overall value. We reported that such challenges were similar to those being experienced by DOD at the time—responsibility for acquiring services was 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 over these acquisitions.

The companies we reviewed instituted a series of structural, process, and role changes aimed at moving away from a fragmented acquisition process to a more efficient and effective enterprise-wide process. For example, they often established or expanded the role of corporate procurement organizations to help business managers acquire key services and made extensive use of cross-functional teams to help the companies better identify service needs, select providers, and manage contractor performance. Some companies found that, in establishing new procurement processes, they needed to overcome resistance from individual business units reluctant to share decision-making responsibility and to involve staff that traditionally did not communicate with each other. To do so, the companies found they needed to have sustained commitment from their senior leadership; to clearly communicate the rationale, goals, and expected results from the reengineering efforts; and to measure whether the changes were having their intended effects. We concluded that the strategic approach taken by the leading firms we reviewed could serve as a general framework to guide DOD’s service contracting initiatives.

We noted, however, that DOD might find that a “one-size-fits-all” approach would not work for all services and that it would need to tailor its approach to meet its specific needs and requirements. DOD officials acknowledged that some services were acquired department-wide, while other services (such as ship support and maintenance) were unique to specific commands, units, or geographic locations. DOD officials agreed that they would need, as a first step, to obtain and analyze data on DOD’s service spending to identify and prioritize specific services where a more coordinated acquisition approach may be appropriate.

Since that January 2002 report, we have issued several reports that examined DOD’s efforts to implement a management structure and address other issues affecting service acquisitions, as illustrated by the following examples: In September 2003, we reported that while DOD and the military departments each had a management structure in place for reviewing individual service acquisitions valued at $500 million or more, that approach did not provide a department-wide assessment of how spending for services could be more effective.

In November 2006, we reported that DOD’s approach to managing service acquisitions tended to be reactive and had not fully addressed the key factors for success at either the strategic or transactional level. At the strategic level, DOD had not set the direction or vision for what it needed, determined how to go about meeting those needs, captured the knowledge to enable more informed decisions, or assessed the resources it had to ensure department-wide goals and objectives were achieved.

In June 2013, we reported that USD(AT&L) and military department leadership had demonstrated a commitment to improving management of service acquisition, but that they faced challenges in developing goals and metrics to assess outcomes due to limitations with corroborating data between their contracting and financial data systems. We recommended that DOD establish baseline data, specific goals for improving service acquisitions, and associated metrics to assess its progress. DOD concurred with the three recommendations.

Most recently, in our February 2016 report, we found, among other things, that DOD program offices we reviewed generally maintained data on current and estimated future spending needs for contracted service requirements, but did not identify spending needs beyond the budget year, since there was no requirement to do so. This limited DOD’s leadership insight into future spending on contracted services. We recommended that the Secretaries of the Army, Navy, and Air Force revise their programming guidance to collect information on how contracted services will be used to meet requirements beyond the budget year. We also recommended that the Secretary of Defense establish a mechanism, such as a working group, to ensure the military departments’ efforts to integrate services into the programming process and to develop forecasts on service contract spending provided the department with consistent data. DOD partially concurred with both recommendations but did not indicate any planned actions to implement the recommendations.

Limited Implementation of Key Leadership Positions Impedes Effective Strategic Management of Service Acquisitions

DOD has not fully implemented the three key leadership positions— FDEs, CLLs, and SSMs—that were identified in DOD’s January 2016 instruction and which were to enable DOD to more strategically manage service acquisitions. DPAP-SA officials noted that the officials appointed to be FDEs had multiple responsibilities, and considered their FDE roles as secondary. Additionally, CLLs largely existed in name only. Consequently, FDEs and CLLs have had a minimal effect on how DOD manages services. More importantly, we found that SSMs were unsure about the value of FDEs and CLLs and how these positions were to influence decisions made by the commands. In particular, SSM officials cited cultural barriers to implementing the hierarchical approach to service acquisition envisioned in DOD’s January 2016 instruction, in part because each military department has traditionally taken a decentralized approach to managing services. Our analysis of DOD fiscal year 2016 service contract obligations found that DOD could improve the management of services by better targeting individual military commands that were responsible for awarding the majority of their department’s contract obligations for service portfolios. DPAP-SA officials responsible for services were aware of the implementation challenges and have efforts underway to revise the January 2016 instruction, in part to further clarify position authorities and responsibilities.

Lack of Priority Hindered DOD’s Ability to Strategically Manage Service Acquisitions through the Use of FDEs and CLLs

We found that FDEs and CLLs have not been effective in improving DOD’s ability to strategically manage service acquisitions. DOD’s January 2016 instruction formalized a hierarchical approach to more strategically manage service acquisitions by portfolio within both OSD—through the use of FDEs—and the components—through the use of CLLs. Specifically, the January 2016 instruction stated that portfolio management enables a framework for strategic oversight by OSD, coupled with decentralized execution by the DOD components to improve the transparency of requirements across DOD, reduce redundant business arrangements, and increase awareness of alternatives. These positions, which were initially established in 2013 as part of the Better Buying Power initiative, were assigned a broad range of responsibilities and were to coordinate their efforts with the military departments’ SSMs, who are responsible for strategic planning, sourcing, execution, and management of services within each military department (see table 1).

Rather than creating new positions within OSD or the military departments to fill these leadership positions, DOD added services acquisitions-related responsibilities to existing positions. For example, see table 2 for the existing positions held by FDEs.

DPAP-SA officials explained that the appointment of senior OSD officials was intended to give the positions the necessary visibility to carry out their responsibilities to provide strategic portfolio leadership to achieve greater efficiencies and reduce costs in services acquisition. DPAP-SA officials acknowledged, however, that implementation of the FDE positions has been beset by challenges. The senior OSD officials already had broad departmental management responsibilities and were assigned additional FDE responsibilities that were not within their control. For example, FDEs were tasked with forecasting and budgeting services requirements and developing policies to help prioritize requirements. In this regard, as noted in the DOD January 2016 instruction, the responsibilities for establishing and budgeting for service acquisitions are the responsibility of officials within the military commands and installations performed under DOD’s Planning, Programming, Budgeting, and Execution process. Neither DOD’s October 2013 letter that appointed the FDEs, nor DOD’s January 2016 instruction provided specific guidance on how to accomplish these responsibilities.

These senior OSD officials also considered their FDE responsibilities as secondary, other duties as assigned and in some cases were assigned multiple portfolios. For example, the Principal Deputy Assistant Secretary of Defense for Logistics and Materiel Readiness—who served as the FDE for three portfolios that comprised $22.9 billion in obligations in fiscal year 2015—has as his primary duty to serve as the principal advisor to the USD(AT&L) in the oversight of logistics policies, practices, operations, and efficiencies. Similarly, the Deputy Director for DPAP-SA—who is responsible for the technical and programmatic evaluation and functional oversight of all aspects of DOD service acquisitions—was named FDE for two out of six knowledge based services portfolio categories, identified in table 2. DPAP-SA officials told us that given their other responsibilities, FDEs devoted only minimal time to fulfilling their FDE responsibilities.

Similarly, we found that the CLLs were generally appointed by the military departments, but were not actively engaged in the strategic management of specific services portfolios, as called for in the January 2016 instruction. For example, Air Force officials said that a previous effort to implement a CLL-like position had been unsuccessfully tried in the past and therefore they were reluctant to establish new CLL positions. Army officials identified staff to serve as CLLs, but acknowledged that the CLLs were not active because it was not a management priority. Navy SSM officials established Portfolio Managers within the SSM’s office to carry out CLL responsibilities, but these positions had not actively managed services at the Navy’s major commands. As a result, CLLs had a minimal effect on how DOD strategically manages and oversees services.

Senior Services Managers Cited Cultural Barriers and Challenges to Strategically Managing Services

Similar to the approach taken to create FDEs and CLLs, each of the three military departments created SSMs by appointing senior officials within their respective acquisition or contract policy offices (see table 3).

However, SSMs identified challenges, including the lack of responsibility for developing or approving requirements or related funding requests and difficulties in identifying data or metrics to support strategic management in executing their SSM responsibilities. Further, while SSMs recognize the need to further improve management of services in their respective military departments, they were not convinced that a hierarchical, portfolio-based approach outlined in the January 2016 instruction would achieve the intended benefits. The three SSMs we interviewed were unsure about the value of FDEs and CLLs and how these positions were to influence decisions made by the commands. Further, SSM officials noted cultural barriers to implementation, in that commanders are reluctant to give up responsibilities on determining how and which services are needed to meet their missions. In addition, the January 2016 instruction underscores that the execution of services is a commander’s responsibility. For example, each of the SSMs told us that commanders are responsible for fulfilling services requirements needed to accomplish missions within their allocated resources.

Consistent with this perspective, SSMs have not implement a hierarchical, portfolio-based approach to services within their departments. The January 2016 instruction requires SSMs to strategically manage each service portfolio group with CLLs as appropriate to develop metrics, best practices, and data to achieve effective execution of the service contract requirements within each portfolio. SSMs told us, however, that they viewed their appropriate role as helping commands improve existing processes to better acquire and manage services. For example, each SSM conducts an annual services health assessment at each command to provide a qualitative picture of programs’ processes and management. For example, at the Air Force in 2015, each command was asked to self-assess six qualitative performance areas, such as program management and fiscal responsibility. In turn, SSMs are to use this and other information to influence and educate the service acquisition community through working groups, training, and sharing best practices.

Services Acquisition Data Highlight Opportunities for DOD to Better Target Management of Services

DPAP-SA officials acknowledged that implementation of the hierarchical approach envisioned in the January 2016 instruction is not working as intended, in part because the approach does not fully address concerns that a more top-down approach to service acquisitions may adversely affect the commanders’ ability to meet their missions. In that regard, our analysis of DOD fiscal year 2016 service contract obligations found that depending on the organization’s structure and mission, specific commands within the military departments award the majority of contract obligations for particular portfolios of services (see table 4).

For example, the Army Materiel Command and Air Force Materiel Command obligated almost all of their respective military department’s dollars for logistics management and equipment-related service contracts. Conversely, the Naval Air Systems Command was responsible for a much smaller percentage of obligations for these and other services. Other Navy commands had the vast majority of service contract obligations for particular portfolios. For example, the Naval Facilities Engineering Command obligated 84 percent of the Navy’s dollars for facility-related service contracts in fiscal year 2016.

DOD Has Efforts Underway to Update the January 2016 Instruction

In February 2017, DPAP-SA held an initial meeting with the key stakeholders in the services management structure—for example, FDEs and SSMs—to discuss revising the instruction. This effort includes providing clearer definitions of terms such as service acquisition, revising service acquisition category review thresholds, and determining whether FDEs are needed in light of federal category management efforts. Federal internal control standards state that management should establish an organizational structure, assign responsibilities, and delegate authorities to achieve its objectives. That structure should allow the organization to plan, execute, control, and assesses progress toward achieving its objectives. Further, management should periodically review its reviews policies, procedures, and related control activities for continued relevance and effectiveness in achieving the organization’s objectives, and if there is a significant change in its process, management should review the process in a timely manner after the change to determine that control activities are designed and implemented appropriately. DOD’s ongoing effort to revise the January 2016 instruction provides the department the opportunity to reassess whether the hierarchical approach currently in place would, if fully implemented and resourced, enable the department to achieve its goal of strategically managing service acquisitions, or conversely, if an approach that focuses on strategically managing services at the military department or command level may fare better.

SRRB Implementation at the Military Departments Has Had a Minimal Effect on Strategic Management of Service Requirements

DOD’s January 2016 instruction formalized the requirement to hold SRRBs to validate, prioritize, and approve service requirements from a holistic viewpoint—an approach that comprehensively considers service requirements within and across portfolios. We found, however, that the three military commands we reviewed did not implement SRRBs that approved service requirements from a holistic perspective, but instead leveraged their existing contract review boards, which focus their efforts on assuring proposed contract solicitations and awards are in compliance with federal acquisition regulations and DOD guidance. As a result, SRRBs had a minimal effect on supporting trade-off decisions in the service portfolios or assessing opportunities for efficiencies and eliminating duplicative requirements.

The January 2016 instruction requires DOD organizations and components to establish a process for senior leaders to review, prioritize, validate, and approve each service requirement with a value of $10 million or greater. DOD guidance for implementing the instruction notes that an SRRB is a structured process that, among other things, is to inform, assess, and support trade-off decisions by senior leaders regarding service requirements cost, schedule, and performance for the acquisition of services; identify opportunities for efficiencies, such as realignment of requirements to better align to mission, identification and elimination of duplicative capabilities, and identification of strategic sourcing capabilities; be holistic and requirement-focused rather than contract-focused; have an outcome of a prioritized list of both funded and non-funded existing and anticipated requirements; be established and managed by and held at the requiring command or organizational unit because that is where the requirement owner and funding is located; be held at least annually, but may be held more often as determined by the requiring organization; and have validated a service requirement before approval of an acquisition strategy.

According to the Deputy Director of DPAP-SA, the SRRB process is intended to provide senior leaders more visibility over contracted services and requirements, and to provide opportunities to collect data and assess lessons learned and best practices from contracting, not only at individual level command levels but across the military departments and DOD. However, the instruction did not specify when boards should occur or how the results of the SRRBs would be captured or used to inform programming and budget decisions. Further, the instruction required commands to ensure, prior to contract award, that more tactical contracting elements were considered, such as workforce needs and the sufficiency of market research. The instruction also provided the military departments with flexibility in how they achieved these objectives.

As a result, military department SSMs noted rather than creating a new SRRB process, they leveraged existing processes for reviewing and approving proposed service contract actions to meet the intent of the January 2016 instruction. For example, pursuant to Air Force Instruction 63-138, the Air Force Materiel Command utilized its Requirements Approval Document and database as its SRRB process. Air Force officials noted that they have used this process since 2008. Similarly, pursuant to Army Regulation 70-13, the Army Materiel Command used its Service Requirements Review Board or SR2B—established in 2010—as its SRRB process, while the Naval Air Systems Command used its Workload and Force Planning process—established in 2004—as its SRRB process. The Navy’s approval process is governed by its 2012 SRRB guidance.

While each of the processes varied in certain regards, these processes are designed to ensure requirements for individual services acquisitions have been validated; sufficient funding is available for the proposed action; appropriate acquisition planning and market research have been the proposed solicitation and proposal evaluation criteria are consistent.

Consequently, we found that the commands’ SRRB processes we reviewed did not holistically assess requirements within specific service portfolios as outlined in the January 2016 instruction. Further, since command SRRB processes were centered on approving individual contract actions, we found that SRRBs were held throughout the year and did not identify or document resulting savings or other efficiencies. As a result, SRRBs at the three commands we reviewed had a minimal effect on supporting trade-off decisions in the service portfolios or assessing opportunities for efficiencies and eliminating duplicative requirements that could inform the command’s program objective memorandum (POM) submissions.

In contrast, we recently reported that non-military department DOD organizations, in accordance with the instruction, conducted SRRBs that holistically assessed service requirements which led to the identification of hundreds of millions of dollars in cost savings for the period fiscal years 2017-2019 and were incorporated in the department’s fiscal year 2018 to 2022 POM. These organizations included the Defense Logistics Agency and the Defense Threat Reduction Agency, among others. To accomplish these savings, the Deputy Chief Management Officer (DCMO) convened SRRBs that required each of the defense agencies and components they reviewed to identify service contracts by portfolio from a holistic perspective and make trade-off decisions based on risk assessment, timelines, and requirements that could be reduced or eliminated to generate efficiencies. In turn, a Senior Review Panel composed of DCMO (chair), the Principal Deputy Under Secretary of Defense for Acquisition, Technology, and Logistics, and Principal Staff Assistants approved the proposed savings or directed alternative reductions.

Some military departments are exploring options to expand the role of SRRBs in the future to integrate service contract requirements into their POM process to allow them to better identify or forecast service contracts spending and trends. For example, the Army SSM noted that the Army plans to direct all Army commands to identify all service requirements and their associated contracts in the fiscal year 2018-2022 POM, and that this effort is intended to improve insight into future service contact requirements and to better control spending on service contracts. DPAP- SA and SSM officials also told us that the SRRB process would be more effective if it were better aligned with the POM, but DPAP-SA have not yet decided whether to include this element as part of the instruction update.

Federal internal control standards call for agency management to identify, analyze, and respond to risks related to achieving defined objectives. Our work found that DOD and military department officials did not implement a portfolio-based approach when conducting SRRBs and given that the SRRB were held throughout the year, it was unclear whether efficiencies were achieved or how the SRRB process helped inform command POM submissions. In February 2016, we recommended that military departments integrate services into the programming process and update programming guidance to collect budget information on how contracted services will be used to meet requirements. Similarly, moving the SRRB to align with the POM process could help the military departments better identify, prioritize, and validate service requirements to support programming and budget decisions. Until DOD clarifies the purpose and timing of the SRRB process, DOD components may not be achieving the expected benefits of DOD’s SRRB process.

Conclusions

DOD’s experience in implementing the January 2016 instruction highlights a number of deeply embedded institutional challenges that must be overcome before DOD can achieve a more strategic and portfolio-based approach to managing services. The January 2016 instruction sought to balance the benefits of a more hierarchical and strategic approach, such as identifying efficiencies and developing useful metrics tailored to portfolios through FDEs and CLLs, while retaining the ability of commanders to meet mission needs. This effort, simply stated, has not been successful. In practice, FDE and CLL positions generally have not produced tangible results or benefits and SSMs have questioned their overall value. Moreover, this concept has faced strong cultural resistance, as it required a change to DOD’s traditional decentralized approach to managing services. As DOD works to update the instruction, it has an opportunity to either reaffirm and empower FDEs and CLLs and then hold them accountable for results, or more broadly reassess and rethink how best to tailor its approach to services. Our past work cautioned that a top-down, one-size-fits-all approach may not work. Our current analysis shows that certain commands already manage or award the majority of a particular service and are more closely aligned to the commanders that are responsible for executing the mission. In turn, this raises the question as to whether they would be in a better position to strategically manage specific service portfolios. Complementing this approach would be to provide clarity on the purpose and timing of the SRRBs to help commanders make better trade-off and resource decisions and inform DOD’s programming and budget processes. Until DOD takes action to address the implementation challenges with the FDEs, CLLs, and SSMs, and clarifies the purpose and timing of SRRBs, its efforts to better manage service acquisitions will not be realized.

Recommendations for Executive Action

To help foster strategic decision making and improvements in the acquisition of services, we recommend that the Under Secretary of Defense for Acquisition, Technology, and Logistics take the following two actions as part of its effort to update the January 2016 instruction:

Reassess the roles, responsibilities, authorities, and organizational placement of key leadership positions, including functional domain experts, senior services managers, and component level leads; and

Clarify the purpose and timing of the SRRB process to better align it with DOD’s programming and budgeting processes.

Agency Comments and Our Evaluation

We provided a draft of this report to DOD for review and comment. In its written comments, reproduced in appendix I, DOD concurred with our two recommendations.

Regarding our first recommendation, DOD concurred with the need to reassess key leadership positions roles and responsibilities. DOD indicated that an internal review of the January 2016 instruction found that portfolio oversight of services through FDEs was not providing the desired benefits, and as such, DOD is considering alternatives. Regarding our second recommendation that DOD clarify the purpose and timing of the SRRB process, DOD concurred, noting that lessons learned from implementation of SRRBs in non-military department organizations showed benefits. DOD stated that a rewrite of the January 2016 instruction will include additional clarifying policy.

We are sending copies of this report to the appropriate congressional committees, the Secretary of Defense; the Secretaries of the Air Force, Army, and Navy; and the Under Secretary of Defense for Acquisition, Technology, and Logistics. In addition the report is available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact me at (202) 512-4841 or DinapoliT@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix II.

Appendix I: Comments from the Department of Defense

Appendix II: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the contact named above, W. William Russell (Assistant Director), Joe E. Hunter (Analyst in Charge), Stephanie Gustafson, Julia Kennon, Jonathan Munetz, Claudia A. Rodriguez, Sylvia Schatz, and Roxanna T. Sun made significant contributions to this review.