We at GAO use the term human capital because (unlike traditional terms such as personnel and human resource management) it focuses on two principles that are critical in a modern, results-oriented management environment: First, people are assets whose value can be enhanced through investment. As the value of people increases, so does the performance capacity of the organization and therefore its value to clients and other stakeholders. As with any investment, the goal is to maximize value while managing risk. Second, an organization’s human capital approaches must be aligned to support the mission, vision for the future, core values, goals and objectives, and strategies by which the organization has defined its direction and its expectations for itself and its people. An organization’s human capital policies and practices should be designed and implemented to achieve these goals, and assessed accordingly. capital strategies are not appropriate to meet the needs of the nation’s government and its citizens. As agencies wrestle with human capital management, they face a significant challenge in the information management and technology areas. The rapid pace of technological change in these areas is reflected in the investments in information technologies made both in the United States as a whole and by the federal government. By 2004, information technology investments are expected to account for more than 40 percent of all capital investment in the United States. The federal government’s IT investment is conservatively estimated in fiscal year 2002 to be $44 billion—an increase in federal IT spending of 8.6 percent from fiscal year 2000. This substantial investment should provide opportunities for increasing productivity and decreasing costs. For example, the public sector is increasingly turning to the Internet to conduct paperless acquisitions, provide interactive electronic services to the public, and tailor or personalize information. As we testified in July, there are over 1,300 electronic government initiatives throughout the federal government, covering a wide range of activities involving interaction with citizens, business, other governments, and government employees. In addition, the Government Paperwork Elimination Act (GPEA) of 1998 requires that by October 21, 2003, federal agencies provide the public (when practicable) the option of submitting, maintaining, and disclosing required information electronically. We have found that agencies plan to provide an electronic option for 3,048 eligible activities by the GPEA deadline. almost double between 1998 and 2008, and the demand for computer programmers will increase by 30 percent during the same time period. In April 2001, the Information Technology Association of America (ITAA) released a study on the size of the private-sector IT workforce, the demand for qualified workers, and the gap between the supply and demand.Among the study’s findings were the following: Information technology employment directly accounts for approximately 7 percent of the nation’s total workforce. Over 10.4 million people in the United States are IT workers, an increase of 4 percent over the 10 million reported for last year. Overall estimated demand for IT workers is down from last year’s forecast (by 44 percent), partially because of the slowdown in the high-tech sector and the economy in general. However, the demand for IT workers remains high, as employers attempt to fill over 900,000 new IT jobs in 2001. Hiring managers reported an anticipated shortfall of 425,000 IT workers in 2001 because of a lack of applicants with the requisite technical and nontechnical skills. The ITAA also reported that despite softening in overall demand, skills in technical support, database development/administration, programming/ software engineering, web development/administration, and network design/administration remain most in demand by IT and non-IT companies alike. These positions represent nearly 86 percent of the demand for IT workers expected in 2001. The study further notes that the demand for enterprise systems professionals and network designers and administrators is expected to increase by 62 and 13 percent, respectively, over the 2000 forecast. For the IT workforce in particular, agencies are beginning to take action by initiating strategies and plans to attract, retain, and/or train skilled workers. Nevertheless, much remains to be done, as agencies generally lack comprehensive strategies for IT human capital management. To date, we have issued several products on IT human capital management, including studies of practices at four agencies: the Small Business Administration, the United States Coast Guard, the Social Security Administration, and the Centers for Medicare and Medicaid Services. These evaluations focused on agency practices needed to maintain and enhance the capabilities of IT staff. These practices fall in four key areas: Requirements—assessing the knowledge and skills needed to effectively perform IT operations to support agency mission and goals Inventory—determining the knowledge and skills of current IT 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 IT human capital capability, and using the results of these evaluations to continuously improve the organization’s human capital strategies In July, we reported that agencies’ progress in addressing IT human capital strategies had been sluggish. Specifically, we stated that although agencies were initiating strategies and plans to attract, retain, and/or train a skilled IT workforce, key issues in each of the four areas mentioned above were not being effectively addressed. In the area of requirements, several of the agencies we reviewed had begun evaluating their short and longer term IT needs. However, none of them had completed these efforts. For instance, we found that the Small Business Administration did not have any policies or procedures to identify requirements for IT skills. Also, although the U.S. Coast Guard had conducted an assessment of the knowledge and skills needed by its IT officers and enlisted personnel, it had not done so for its civilian workforce. Although an IT inventory identifying the knowledge and skills of current staff is essential to uncovering gaps between current staff and requirements, our work to date has revealed that none of the reviewed agencies had a complete knowledge and skills inventory. For example, the U.S. Coast Guard and the Small Business Administration maintained a limited amount of information on IT knowledge and skills, and the Social Security Administration lacked an IT-specific knowledge and skills inventory. In addition to establishing requirements and creating an inventory, an agency needs to develop a workforce plan that is linked to its strategic and program planning efforts. The workforce plan should identify its current and future human capital needs, including the size of the workforce, its deployment across the organization, and the knowledge, skills, and abilities needed for the agency to pursue its shared vision. The workforce planning strategy should specifically outline the steps and processes that an agency should follow when hiring, training, and professionally developing staff to fill the gap between requirements and current staffing. Among the four agencies we reviewed, none had developed comprehensive IT-specific workforce strategies or plans. For example, although the Social Security Administration did have a broad workforce transition plan that includes actions to improve its processes (for projecting workforce needs, for recruiting, and for training and developing employees), these actions were not specific to IT staff. Finally, meaningful progress evaluation systems are necessary to determine whether agency human capital efforts are effective and to ensure that the results of these evaluations are used to make improvements. While agencies we reviewed did track various human capital efforts, such as progress in filling IT positions, none of the agencies had fully analyzed or reported on the effectiveness of their workforce strategies and plans. Shortcomings in IT human capital management have serious ramifications. Without complete assessments of requirements, agencies will lack assurance that they have identified the number of staff and the specific knowledge and skills needed or that they have developed strategies to fill these needs. Also, without an inventory of knowledge and skills, agencies will not have assurance that they are optimizing the use of their current IT workforce, nor will they have data on the extent of skill gaps. This information is necessary for developing effective workforce strategies and plans. If they cannot analyze and document the effectiveness of workforce strategies and plans, senior decisionmakers will lack assurance that they are effectively addressing knowledge and skill gaps. Judging from trends, the shortage of qualified IT professionals is likely to lead to greater reliance on contracted workers, so that agencies can supplement their existing workforces with external expertise. Indeed, from fiscal year 1990 to 2000, federal spending on contracted IT services increased from $3.7 billion to about $13.4 billion. Relying on contracting to fill workforce gaps is not a panacea. We have previously reported that some procurements of services are not being done efficiently, putting taxpayer dollars at risk. In particular, agencies were not clearly defining their requirements, fully considering alternative solutions, performing vigorous price analyses, or adequately overseeing contractor performance. Also, agencies appear to be at risk of not having enough of the right people with the right skills to manage service procurements. Following a decade of downsizing and curtailed investments in human capital, federal agencies currently face skills, knowledge, and experience imbalances that, without corrective action, will worsen, especially in light of the numbers of federal workers becoming eligible to retire in the coming years. Consequently, a key question we face in the federal government is whether we have today, or will have tomorrow, the ability to acquire and manage the procurement of the increasingly sophisticated services that the government needs. Department of Defense (DOD) found that its workforce reductions had led to a serious shortfall in the acquisition workforce. To improve the efficiency of contracting operations—and in part to help offset the effects of this shortfall—the department instituted streamlined acquisition procedures. However, the DOD Inspector General reported that the efficiency gains from the streamlined procedures had not kept pace with acquisition workforce reductions. The Inspector General reported that while the workforce had been reduced by half, DOD’s contracting workload had increased by about 12 percent and that senior personnel at 14 acquisition organizations believed that workforce reductions had led to such problems as less contractor oversight. Unless these reductions in the acquisition workforce are addressed, they could undermine the government’s ability to efficiently acquire contract services, including IT services. The challenges facing the government in maintaining a high-quality IT workforce are long-standing and widely recognized. As far back as 1994, our study of leading organizations revealed that strengthening the skills of IT professionals is a critical aspect of strategic information management.Specifically, leading organizations identify existing IT skills and needed future skills, as well as determining the right skill mix. Accordingly, we suggested that executives should systematically identify IT skill gaps and targets and integrate skill requirements into performance evaluations. In our more recent study of public and private sector efforts to build effective Chief Information Officer (CIO) organizations, we found that leading organizations develop IT human capital strategies to assess their skill bases and recruit and retain staff who can effectively implement information technology to meet business needs. capital challenges and suggest possible solutions, the CIO Council asked the National Academy of Public Administration (NAPA) to study IT compensation strategies and to make recommendations on how the government can best compete for IT talent. NAPA’s resulting study noted a number of problems inherent in the federal government’s human resource management system. These problems included a pay gap with the private sector and a compensation system that is overly focused on internal equity. The study commented that current pay disparities with the private sector, overly narrow pay ranges, and the inadequacy of special pay rates hinder the government’s ability to compete for IT workers. Regarding compensation, the study noted that the current system is closely aligned with internal equity by law, regulation, and practice, with little real attention paid to external equity and contribution equity. According to the study, private sector organizations typically consider and establish a strategic balance among internal, external, and contribution equity in determining pay rates and reward structures. NAPA’s study also includes an evaluation of two alternative compensation models. The first of these makes limited changes to the current General Schedule (GS) system, such as eliminating steps and combining some grades. The second is a market-based model that introduces more comprehensive reforms, including increased emphasis on performance and competencies. NAPA’s study concluded that the second model embodies the best approach to human capital reform. NAPA’s recommendations are shown in table 1. Human Capital: Attracting and Retaining a High-Quality Information Technology Workforce NAPA recommendation Establish a market-based, pay- for-performance compensation system. Allow for flexibility in the treatment of individuals and occupations. Improve recruiting and hiring processes. Balance the three dimensions of equity. Offer competitive benefits. Promote work/life balance programs. Encourage management ownership. Support technical currency and continuous learning. Build in reliability, clarity, and transparency. Description This compensation approach would establish broad pay ranges, tie base pay to market rates, and link increases in pay to competencies and results to attract and retain IT talent. The new compensation system would ensure that managers have the flexibility to pay individual workers for their respective skills and competencies as well as their contributions to the organization. The new compensation system for IT professionals needs to be linked to faster, enhanced recruitment and hiring processes. A new federal IT compensation system would provide a better balance among internal equity (that is, equity among government jobs), external equity (between jobs in the government and in other sectors), and contribution equity (among individual employees). The new system would offer a more competitive benefits package for senior technical employees as well as executives. Federal managers and human resources specialists must actively market work/life benefits and programs so that potential IT workers are aware of them. Managers must (1) actively participate in the design and implementation of agency-specific features of the new system, (2) be rewarded for effectively implementing and managing the system, and (3) be held accountable for not carrying out their management responsibilities. Agency management should design and support developmental activities such as formalized training, on-the-job training, computer-assisted learning, self- instructional guides, coaching, and other approaches. Agency budgets and management decisions must support full implementation of the new system. The new system must be reliable, meaning that it consistently conforms with policies so that the same set of circumstances always leads to a fair decision and result. Although we have not analyzed all aspects of these recommendations, many of them are consistent with suggestions we have made in prior testimonies, as well as with the practices that we have instituted in our own internal human capital management. For example, we have suggested that government pay systems should be based on performance and contributions rather than on longevity. Similarly, in our own human capital management at GAO, we have implemented pay for performance and are developing a competency-based evaluation system. We have also suggested that government employers use more flexible approaches to setting pay; in our own human capital management system, we have instituted broad pay bands for mission staff. More examples are given in table 2, which compares the NAPA recommendations with related suggestions we have made in previous work and practices we have adopted within GAO. As noted in table 2, we have identified and made use of a variety of tools and flexibilities to address our human capital challenges; some of these were made available to us through the GAO Personnel Act of 1980 and some through legislation passed by the Congress in 2000, but most are available to all federal agencies. Figure 1 shows those flexibilities that were made available to us through legislation. Regarding our own IT and other technical staff, we have taken a number of steps to address our workforce needs, including the following: Using a 25-percent pay differential (equal to the OPM pay differential for executive branch IT hires) to bring aboard entry-level technical staff for our IT team. Offering pay bonuses in attracting and retaining workers for hard-to-fill positions, such as IT positions requiring specific technical skills. Making wide use of contractor resources in the IT area to supplement both the numbers and skills of government employees. Currently, about 60 percent of the staff supporting GAO internal IT operations and initiatives are contractor staff. Given staffing constraints and market conditions, we have found this arrangement to work very well. We focus our training of in-house staff on project management, contract management, and technical training to ensure sound project management and oversight of the contractors. Using contractor resources has given us the ability to quickly bring on staff with the IT skills needed to carry out new projects/initiatives. other specialists—such as our Chief Statistician and Chief Accountant— with new titles and SES-equivalent benefits. We believe that three of the authorities provided in our 2000 legislation may be appropriate to other agencies and are worth congressional consideration at this time. Authority to offer voluntary early retirement and voluntary separation incentives could give agencies additional flexibilities with which to realign their workforces, correct skills imbalances, and reduce high-grade, managerial, or supervisory positions without reducing their overall number of employees. Further, the authority to establish Senior Level positions could help agencies become more competitive in the job market, particularly in critical scientific, technical, or professional areas, such as IT. Implementing reforms in human capital management will present significant challenges. Among most difficult will be (1) the sustained commitment demanded from the executive and legislative branch leaders, including agencies, the Office of Management and Budget (OMB), the Office of Personnel Management (OPM), and Congress, and (2) the cultural transformation that will be required by a new approach to human capital management. In its report on IT human capital, NAPA also recognizes the importance of these two factors. The report identifies a number of steps that would be required for implementation of a new system (see figure 2). Among these, NAPA includes the need to promote leadership by identifying champions for the new system within agencies. Further, NAPA acknowledges in its discussion that implementing its recommendations will challenge the existing culture of many agencies, and it recommends change management and training efforts for both managers and employees. We agree that the steps that NAPA describes are essential elements for an effective implementation strategy. We have, for example, identified six elements that our work suggests are particularly important in implementing and sustaining management improvements that actually resolve the problems they address. These elements are (1) a demonstrated leadership commitment and accountability for change; (2) the integration of management improvement initiatives into programmatic decisionmaking; (3) thoughtful and rigorous planning to guide decisions, particularly to address human capital and information technology issues; (4) employee involvement to elicit ideas and build commitment and accountability; (5) transforming organizational culture and aligning organizations to streamline operations and clarify accountability; and (6) strong and continuing congressional involvement. I would like to particularly highlight leadership and transforming organizational culture, two of the key elements in implementing such reforms. The sustained commitment of leaders within the executive and legislative branches is essential to the success of any implementation. The key players in the human capital area—agency leaders, OPM, OMB, and the Congress—all need to be actively involved in leading and creating change. compares with these needs, and developing effective strategies to fill the gaps. A useful tool for assessing overall human capital management is GAO’s human capital framework, which identifies a number of human capital elements and underlying values that are common to high-performing organizations. As our framework makes apparent, agencies must address a range of interrelated elements to ensure that their human capital approaches effectively support mission accomplishment. Although no single recipe exists for successful human capital management, high- performing organizations recognize that all human capital policies, practices, and investments must be designed, implemented, and assessed by the standard of how well they support the organization’s vision of what it is and where it wants to go. and has launched a Web site on workforce planning issues to facilitate information sharing. Further, OPM recently revised the SES performance management regulations so that in evaluating executive performance, agencies will use a balanced scorecard of customer satisfaction, employee perspectives, and organizational results. In prior testimony, we have pointed out that OPM could make substantial additional contributions by taking advantage of its ability to facilitate information-sharing on best practices among human capital managers throughout the federal government. In short, OPM should continue to move from “rules to tools”; its most valuable contributions will come less from traditional compliance activities than from its initiatives as a strategic partner to the agencies. Like OPM, OMB has increased its efforts to promote strategic human capital management. OMB’s role in setting governmentwide management priorities and defining resource allocations is critical to encouraging agencies to integrate strategic human capital management into their core business processes. In this role, OMB recently released the FY2002 President’s Management Agenda, which provides the President’s strategy for improving the management and performance of the federal government. The report identifies strategic management of human capital as an area for governmentwide improvement. In line with suggestions we have made, OMB is expecting agencies to take full advantage of existing authorities to better acquire and develop a high quality IT workforce. OMB also wants agencies to redistribute staff to front-line service delivery and reduce the number of organizational layers as they make better use of IT systems capabilities and knowledge sharing. Also, OMB’s Circular No. A-11 guidance on preparing annual performance plans states that agencies’ fiscal year 2002 annual performance plans should set goals in such areas as recruitment, retention, training, appraisals linked to program performance, workforce diversity, streamlining, and family-friendly programs. benchmarking and best practices efforts within the executive branch and greater attention during resource allocation to the links between agency missions and the human capital needed to pursue them. We have previously noted that leadership on the part of Congress will be critical if governmentwide improvements in strategic human capital management are to occur. To raise the visibility of the human capital issue and move toward a consensus on legislative reforms, both parties in both houses of Congress must stress commitment to people as an urgent federal management concern. Among the most encouraging developments in this regard have been the efforts of this Subcommittee to draw attention to human capital issues. Congress has opportunities available through its confirmation, oversight and appropriations, and legislative roles to ensure that agencies recognize their responsibilities and have the needed tools to manage their people for results. For example, Congress can draw wider attention to the critical role of human capital in the confirmation process, during which the Senate can make clear its commitment to sound federal management and explore what prospective nominees plan to do to ensure that their agencies recognize and enhance the value of their people. As part of the oversight and appropriations processes, Congress can examine whether agencies are effectively managing their human capital programs. It can also encourage more agencies to use the flexibilities available to them under current law and to reexamine their approaches to strategic human capital management in the context of their individual missions, goals, and other organizational needs. needs, the constraints under which they presently operate, and the flexibilities available to them. For example, before we submitted human capital legislative proposals for GAO last year, we made sure not only to identify in our own minds the human capital flexibilities that we needed, but also to give Congress a clear indication of our needs, our rationale, and the steps we were taking to maximize benefits and manage risks. Ultimately, Congress may wish to consider comprehensive legislative reform in the human capital area to give agencies the tools and reasonable flexibilities they need to manage effectively while retaining appropriate safeguards. As part of this effort, Congress may also wish to consider the extent to which traditional “civil service” approaches—structures, oversight mechanisms, rules and regulations, and direction-setting—make sense for a government that is largely a knowledge-based enterprise that has adopted and is now implementing modern performance management principles. Another critical challenge for implementing any reform is addressing needed changes in prevailing organizational cultures. As we have noted in previous testimony, a cultural transformation will be key for a successful transition to a new approach to human capital management. A culture of hierarchical management approaches will need to yield to one of partnerial approaches; process-oriented ways of doing business will need to yield to results-oriented ones; and organization “silos” will need to become integrated. Although government organizations have often proven to be slow to make these kinds of cultural changes, agencies that expect to make the best use of their human capital will need to create a culture that strongly emphasizes performance and supports employees in accomplishing their missions. Such a culture will include appropriate performance measures and rewards and a focus on continuous learning and knowledge management. performance shortfalls. Cultural issues have also been linked to long- standing security problems at Department of Energy weapons laboratories, and to intractable waste, fraud, abuse, and mismanagement problems in the Social Security Administration’s high-risk Supplemental Security Income program. Overcoming such problems requires overcoming the barriers that result from an entrenched organizational culture. innovation and flexibility in human capital management, as well as continual efforts to capture data not only on employee performance, but also on the effectiveness of agencies’ efforts at human capital management. In summary, Mr. Chairman, designing, implementing, and maintaining effective human capital strategies for all federal workers, but particularly for the IT workforce, will be critical to achieving the goals of maximizing the performance and ensuring the accountability of the federal government. In a performance management environment where federal agencies are held accountable for delivering improvements in program performance, the “people dimension” is of paramount importance. Overcoming human capital management challenges will determine how successfully the federal government can build, prepare, and manage its workforce. Mr. Chairman, this concludes my statement. I would be pleased to respond to any questions that you or other members of the Subcommittee may have at this time. For further information regarding this testimony, please contact me at (202) 512-6240 or by email at mcclured@gao.gov. Individuals making key contributions to this testimony included Barbara Collier and Margaret Davis.

Summary: Federal agencies face few tasks more critical than attracting, retaining, and motivating people. As our society has moved from the industrial age to the knowledge age, the success or failure of federal agencies can depend on having the right number of people with the right mix of knowledge and skills. This is especially true in the information technology (IT) area, where widespread shortfalls in human capital have undermined agency and program performance. This report discusses strategic human capital management as a high-risk area, summarizes agencies progress in addressing IT human capital needs, compares suggestions GAO made in earlier testimonies and those made in a recent report by the National Academy of Public Administration, and highlights important challenges to implementing IT human capital reform proposals.