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