DOD is historically the federal government’s largest purchaser of services. Between 2001 and 2002, DOD’s reported spending for services contracting increased almost 18 percent, to about $93 billion. In addition to the sizeable sum of dollars involved, DOD contracts for a wide and complex range of services, such as professional, administrative, and management support; construction, repair, and maintenance; information technology; research and development; medical care; operation of government-owned facilities; and transportation, travel, and relocation. In each of the past 5 years, DOD has spent more on services than on supply and equipment goods (which includes weapon systems and other military items) (see fig. 1). Despite this huge investment in buying services, our work—and the work of the DOD Inspector General—has found that DOD’s spending on services could be more efficient and more effectively managed. In fact, we have identified DOD’s overall contract management as a high-risk area, most recently in our Performance and Accountability and High-Risk Series issued this past January. Responsibility for acquiring services is spread among individual military commands, weapon system program offices, or functional units in various defense organizations, with limited visibility or control at the DOD- or military-department level. Our reports on DOD’s contract management have recommended that DOD use a strategic approach to improve acquisition of services. Our work since 2000 at leading companies found that taking a more strategic approach to acquiring services enabled each company to stay competitive, reduce costs, and in many cases improve service levels. Pursuing such a strategic approach clearly pays off. Studies have reported some companies achieving savings of 10 to 20 percent of their total procurement costs, which include savings in the procurement of services. These leading companies reported achieving or expecting to achieve billions of dollars in savings as a result of taking a strategic approach to procurement. For example, table 1 summarizes the savings reported by the companies we studied most recently. The companies we studied did not follow exactly the same approach in the manner and degree to which they employed specific best practices, but the bottom line results were the same—substantial savings and, in many cases, service improvements. Figure 2 elaborates on the four broad principles and practices of leading companies that are critical to successfully carrying out the strategic approach. These principles and practices largely reflect a common sense approach, yet they also represent significant changes in the management approach companies use to acquire services. Companies that have been successful in transforming procurement generally begin with a corporate decision to pursue a more strategic approach to acquiring services, with senior management providing the direction, vision, and clout necessary to obtain initial buy-in and acceptance of procurement reengineering. When adopting a strategic, best-practices approach for changing procurement business processes, companies begin with a spend analysis to examine purchasing patterns to see who is buying what from whom. By arming themselves with this knowledge, they identify opportunities to leverage their buying power, reduce costs, and better manage their suppliers. Companies also institute a series of structural, process, and role changes aimed at moving away from a fragmented acquisition process to a more efficient and effective corporate process. These changes include adjustments to procurement management structure and processes such as instituting companywide purchasing of specific services; reshaping a decentralized process to follow a more coordinated, strategic approach; and increasing the involvement of the corporate procurement organization, including working across units to help identify service needs, select providers, and better manage contractor performance. DOD has made limited progress in its overall implementation of section 801, particularly with respect to establishing a management structure to oversee a more strategic approach to the acquisition of services, as envisioned by the legislative history of this provision. While DOD’s leaders express support for a strategic approach in this area, they have not translated that support into broad-based reforms. The experience of leading companies offers particularly relevant insights into the nature of long-term changes in management structure and business processes. Long-term changes will be needed if the military departments and the defense agencies are to be successful in adopting a more strategic approach to acquiring services and achieving substantial savings and other benefits. Private sector experience demonstrates the need to change how services are acquired—by modernizing management structure and business processes—and setting performance goals, including savings, and establishing accountability for achieving them. Such changes are needed to move DOD and the military departments from a fragmented approach to doing business to one that is more coordinated and strategically oriented. The end goal is to institute a departmentwide perspective—one that will ensure that the organization is getting the best overall value. Industry has found that several ingredients are critical to the successful adoption of a strategic approach. For example, senior management must provide continued support for common services acquisitions processes beyond the initial impetus. Another example is to cut across traditional organizational boundaries that contributed to the fragmented approach by restructuring procurement management and assigning a central or corporate procurement organization greater responsibility and authority for strategic planning and oversight of the companies’ service spending. Companies also involve business units in this coordinated approach by designating commodity managers to oversee key services and making extensive use of cross-functional commodity teams to make sure they have the right mix of knowledge, technical expertise, and credibility. Finally, companies extensively use metrics to measure total savings and other financial and nonfinancial benefits, to set realistic goals for improvement, and to document results over time. To date, DOD has not significantly transformed its management structure in response to the 2002 national defense authorization requirements, and its crosscutting effort to improve oversight will focus on only a portion of military department spending for services. Specifically, the Under Secretary of Defense for Acquisition, Technology, and Logistics and each of the military departments now have policies in place for a management structure and a process for reviewing major (i.e., large-dollar or program- critical) services acquisitions for adherence to performance-based, competition and other contracting requirements. (See app. I for a descriptive comparison of DOD and military department policies.) DOD modeled its review process for acquiring services after the review process for acquiring major weapons systems; the policy is intended to elevate high-dollar value services to the same level of importance and oversight. DOD intends that the new program review structure provide oversight before it commits the government to a major acquisition to ensure that military departments and defense agencies’ buying strategies are adequately planned, performance-based, and competed. The new policy similarly establishes a high-dollar threshold of $500 million or more for selecting which service acquisitions must move forward from lower-level field activities, commands, and program offices to the military department headquarters (and possibly to DOD) for advance review and approval. We expect that this new policy will lead to very few service acquisition strategies and a small portion of overall service spending being subjected to central oversight at the military department headquarters level or at DOD headquarters. DOD officials acknowledge that most service acquisitions cost less than the $500 million threshold required for headquarters-level reviews, and the total value of the few contract actions likely to be forwarded under that threshold will amount to a small portion of DOD’s total spending on services, which is approaching $100 billion each year. DOD’s review criteria indicate that the central reviews that do take place will be focused on approving individual acquisitions rather than coordinating smaller, more fragmented requirements for service contracts to leverage buying power and assessing how spending could be more effective. Our discussions with procurement policy officials in the various military departments confirmed that they expect no more than a few acquisitions to be reviewed at the DOD or military department headquarters level each year. While the new process complies with the act’s requirements to improve oversight of major service acquisitions, it has not led to centralized responsibility, visibility, or accountability over the majority of contracting for services. In response to the legislative requirement to develop an automated system to collect and analyze data, DOD has started a spend analysis pilot that views spending from a DOD-wide perspective and identifies large-scale savings opportunities. However, the scope of the pilot is limited to a test of a few service categories. Thirteen months after Congress directed that DOD create an automated system to support management decisions for the acquisition of services, the Deputy Secretary of Defense tasked a new team to carry out the pilot. In May 2003, DOD hired a vendor to support the team by performing an initial spend analysis and developing strategic sourcing business cases for only 5 to 10 service categories. Efforts to extract data for the pilot spend analysis will be restricted to information taken from centrally available databases on services contract actions (excluding research and development) in excess of $25,000, a limitation due to the 90-day time frame established for completing the spend analysis. Pilot projects and associated efforts will be completed by September 2004, so it is too early to tell how DOD will make the best use of the results. Even though DOD’s senior leadership called for dramatic changes to current practices for acquiring services about 2 years ago, and proposed various initiatives and plans to transform business processes, DOD’s early initiatives have not moved forward quickly, expanded or broadened in scope, or been well coordinated. The experience of leading companies we studied in our prior work indicates that successfully addressing service acquisition challenges requires concerted action and sustained top-level attention, efforts that must be reinforced by a sound strategic plan. Moreover, section 801 required DOD to issue guidance on how the military departments should carry out their management responsibilities for services contracting. To date, the only guidance that DOD has issued involves review of individual major service acquisitions for adherence to performance-based, competition, and other acquisition strategy requirements. DOD has not established a strategic plan that provides a road map for transforming its services contracting process and recognizes the integrated nature of services contracting management problems and their related solutions. Air Force, Army, and Navy headquarters procurement organizations have initiatives underway to better manage the acquisition of services, but they are in the early stages of development and unconnected to each other.