[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]



 
              THE SERVICES ACQUISITION REFORM ACT [SARA]
=======================================================================




                                HEARING

                               before the

           SUBCOMMITTEE ON TECHNOLOGY AND PROCUREMENT POLICY

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 7, 2002

                               __________

                           Serial No. 107-151

                               __________

       Printed for the use of the Committee on Government Reform


  Available via the World Wide Web: http://www.gpo.gov/congress/house
                      http://www.house.gov/reform








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                     COMMITTEE ON GOVERNMENT REFORM

                     DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York         HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland       TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut       MAJOR R. OWENS, New York
ILEANA ROS-LEHTINEN, Florida         EDOLPHUS TOWNS, New York
JOHN M. McHUGH, New York             PAUL E. KANJORSKI, Pennsylvania
STEPHEN HORN, California             PATSY T. MINK, Hawaii
JOHN L. MICA, Florida                CAROLYN B. MALONEY, New York
THOMAS M. DAVIS, Virginia            ELEANOR HOLMES NORTON, Washington, 
MARK E. SOUDER, Indiana                  DC
STEVEN C. LaTOURETTE, Ohio           ELIJAH E. CUMMINGS, Maryland
BOB BARR, Georgia                    DENNIS J. KUCINICH, Ohio
DAN MILLER, Florida                  ROD R. BLAGOJEVICH, Illinois
DOUG OSE, California                 DANNY K. DAVIS, Illinois
RON LEWIS, Kentucky                  JOHN F. TIERNEY, Massachusetts
JO ANN DAVIS, Virginia               JIM TURNER, Texas
TODD RUSSELL PLATTS, Pennsylvania    THOMAS H. ALLEN, Maine
DAVE WELDON, Florida                 JANICE D. SCHAKOWSKY, Illinois
CHRIS CANNON, Utah                   WM. LACY CLAY, Missouri
ADAM H. PUTNAM, Florida              DIANE E. WATSON, California
C.L. ``BUTCH'' OTTER, Idaho          STEPHEN F. LYNCH, Massachusetts
EDWARD L. SCHROCK, Virginia                      ------
JOHN J. DUNCAN, Jr., Tennessee       BERNARD SANDERS, Vermont 
------ ------                            (Independent)


                      Kevin Binger, Staff Director
                 Daniel R. Moll, Deputy Staff Director
                     James C. Wilson, Chief Counsel
                     Robert A. Briggs, Chief Clerk
                 Phil Schiliro, Minority Staff Director

           Subcommittee on Technology and Procurement Policy

                  THOMAS M. DAVIS, Virginia, Chairman
JO ANN DAVIS, Virginia               JIM TURNER, Texas
STEPHEN HORN, California             PAUL E. KANJORSKI, Pennsylvania
DOUG OSE, California                 PATSY T. MINK, Hawaii
EDWARD L. SCHROCK, Virginia

                               Ex Officio

DAN BURTON, Indiana                  HENRY A. WAXMAN, California
                    Melissa Wojciak, Staff Director
              Victoria Proctor, Professional Staff Member
                           Teddy Kidd, Clerk
          Mark Stephenson, Minority Professional Staff Member















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on March 7, 2002....................................     1
Statement of:
    Kelman, Steven, professor of public management, Harvard 
      University; Steven Schooner, associate professor of law, 
      the George Washington University Law School; Scott Dever, 
      vice president of global procurement, Hasbro, Inc.; Richard 
      Roberts, senior vice president and managing director, 
      Federal services, KPMG Consulting, Inc.; Roberta 
      StandsBlack-Carver, president and CEO, Four Winds Services, 
      Inc.; and Jerry S. Howe, senior vice president and general 
      counsel, Veridian..........................................    76
    Woods, William, Director for Acquisition and Sourcing 
      Management, U.S. General Accounting Office; Angela Styles, 
      Administrator, Office of Federal Procurement Policy; 
      Stephen Perry, Administrator, U.S. General Services 
      Administration; and Deidre Lee, Director of Procurement, 
      U.S. Department of Defense.................................    12
Letters, statements, etc., submitted for the record by:
    Davis, Hon. Thomas M., a Representative in Congress from the 
      State of Virginia, prepared statement of...................     2
    Dever, Scott, vice president of global procurement, Hasbro, 
      Inc., prepared statement of................................   118
    Howe, Jerry S., senior vice president and general counsel, 
      Veridian, prepared statement of............................   138
    Kelman, Steven, professor of public management, Harvard 
      University, prepared statement of..........................    79
    Kucinich, Hon. Dennis J., a Representative in Congress from 
      the State of Ohio, prepared statement of...................     6
    Lee, Deidre, Director of Procurement, U.S. Department of 
      Defense, prepared statement of.............................    62
    Perry, Stephen, Administrator, U.S. General Services 
      Administration, prepared statement of......................    47
    Roberts, Richard, senior vice president and managing 
      director, Federal services, KPMG Consulting, Inc., prepared 
      statement of...............................................   124
    Schooner, Steven, associate professor of law, the George 
      Washington University Law School, prepared statement of....   104
    StandsBlack-Carver, Roberta, president and CEO, Four Winds 
      Services, Inc., prepared statement of......................   132
    Styles, Angela, Administrator, Office of Federal Procurement 
      Policy, prepared statement of..............................    25
    Turner, Hon. Jim, a Representative in Congress from the State 
      of Texas, prepared statement of............................    10
    Woods, William, Director for Acquisition and Sourcing 
      Management, U.S. General Accounting Office, prepared 
      statement of...............................................    15

















               THE SERVICES ACQUISITION REFORM ACT [SARA]

                              ----------                              


                        THURSDAY, MARCH 7, 2002

                  House of Representatives,
 Subcommittee on Technology and Procurement Policy,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met pursuant to call, at 2:25 p.m., in 
room 2154, Rayburn House Office Building, Hon. Tom Davis 
(chairman of the subcommittee) presiding.
    Present: Representatives Davis, Horn, and Turner.
    Staff present: Melissa Wojciak, staff director; Victoria 
Proctor, professional staff member; Amy Heerink, chief counsel; 
Mark Stephenson, minority professional staff member; and Jean 
Gosa, minority assistant clerk.
    Mr. Davis. I apologize for being late. I was summoned to 
the Speaker's office and I leave when he tells me I can leave. 
I think you know what that is like.
    I want to just say good afternoon and welcome to today's 
legislative hearing on H.R. 3832, the Services Acquisition 
Reform Act. Today's hearing builds on others conducted over the 
past year on the continuing barriers government agencies face 
in acquiring the goods and services necessary to meet mission 
objectives. SARA is intended to assist agencies in overcoming 
those barriers by adopting better management approaches in 
purchasing tools governmentwide to facilitate the efforts of 
acquisition managers in meeting agencies' goals.
    I am going to put the rest of my statement in the record so 
that we can move ahead, and yield to Mr. Turner for any 
statement he may wish to make.
    [The prepared statement of Hon. Thomas M. Davis follows:]


    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    Mr. Turner. Mr. Chairman, I will do the same in the 
interest of time.
    Mr. Davis. Thank you. We may end up being ahead of where we 
were when you--[laughter]--Mr. Horn, you are welcome to make a 
statement.
    Mr. Horn. I will bypass (off-mic).
    We had a hearing on the problem of the interest cards, and 
I see in here that $2,500 is the mark at this point and it 
wants to go to $25,000. We have had a real situation with the 
Navy that is just irresponsibility, and so we need to somehow 
get accountability and responsibility.
    Mr. Davis. Thank you. I think the question is, how do you 
find the right balance and not running for paperwork every time 
you need some little item, but at the same time making sure 
people are accountable for what they do.
    I am going to call--yes, Mr. Turner.
    Mr. Turner. I had a statement handed to me by 
Representative Dennis Kucinich. I would like to offer it into 
the record.
    Mr. Davis. Without objection, it will be put in the record.
    [The prepared statement of Hon. Dennis J. Kucinich 
follows:]


    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]


    Mr. Turner. And if I could also offer my statement as well, 
which also includes a request from the minority that three 
items be included in the record that I might mention, first, 
the comments of the Inspector General at the GSA dated March 5, 
2002, which refers to several provisions of the bill; second, 
the minority would request inclusion of the Acquisition Reform 
Report prepared by the Project of Government Oversight; and 
finally it is my understanding that the Inspector General at 
the Department of Defense is preparing written comments on the 
bill which should be ready within a few days, and we would ask 
that they also be included in the record.
    [The prepared statement of Hon. Jim Turner follows:]



    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    
    Mr. Davis. Thank you.
    I am going to call our first panel of witnesses. As you 
know, it is the policy of the committee that all witnesses be 
sworn before you testify. If you would rise with me and raise 
your right hands.
    [Witnesses sworn.]
    Mr. Davis. Thank you. Be seated.
    To afford sufficient time for questions, if you would try 
to limit yourselves to no more than 5 minutes for your opening 
statement. All written statements will be made part of the 
permanent record, and without objection, Mr. Turner, the items 
that you have just presented will be put in the record.
    We will begin with Mr. Woods, followed by Mr. Perry, Mr. 
Styles and Ms. Lee. Thank you.

   STATEMENTS OF WILLIAM WOODS, DIRECTOR FOR ACQUISITION AND 
  SOURCING MANAGEMENT, U.S. GENERAL ACCOUNTING OFFICE; ANGELA 
 STYLES, ADMINISTRATOR, OFFICE OF FEDERAL PROCUREMENT POLICY; 
      STEPHEN PERRY, ADMINISTRATOR, U.S. GENERAL SERVICES 
 ADMINISTRATION; AND DEIDRE LEE, DIRECTOR OF PROCUREMENT, U.S. 
                     DEPARTMENT OF DEFENSE

    Mr. Woods. Thank you, Mr. Chairman.
    We appreciate the opportunity to be here today to 
participate in the hearing on the Services Acquisition Reform 
Act of 2002. The bill's proposals focus on strengthening the 
acquisition work force, moving toward a performance-based 
contracting environment, and improving the management of 
service acquisitions. Each of these areas is in need of 
improvement and we support the efforts of the subcommittee in 
addressing them.
    In my statement today, I would like to cover three areas. 
First, I would like to discuss our recent findings on how 
leading companies tackle the same kinds of problems the bill is 
seeking to remedy. Second, I would like to cover a number of 
provisions of the bill that emulate the best practices we found 
at those leading companies. And third, I would like to cover a 
number of provisions of the bill about which we have some 
concerns.
    In a recent report January 2002, we covered our review 
about how six leading commercial companies changed their 
approach to acquiring services. The companies we studied found 
themselves in a situation several years ago similar to the one 
that Federal agencies are in today. They were spending a 
substantial amount of money on services, but did not have a 
good grasp of where those dollars were being spent. They were 
not effectively coordinating purchases and they lacked the 
tools to make sure that they were getting the best overall 
value for the taxpayer.
    The companies we studied were able to turn the situation 
around by adopting a more strategic perspective to service 
spending. By that I mean each company focused more on what was 
good for the company as a whole, rather than just individual 
business units.
    On the chart we have here to my right, your left, we tried 
to identify some common elements among each of the six leading 
companies that we reviewed. While each company took a number of 
different approaches in the area of service acquisition, we 
were able to distill some common elements. The first is 
knowledge. We found that the companies we visited analyzed 
their spending on services to answer the basic question about 
how much was being spent and where the dollars were going. In 
doing so, they realized that they were buying similar services 
from numerous providers, often at greatly varying prices.
    The companies we studied used this knowledge to change how 
they were acquiring services in very significant ways. Again, 
they took a variety of approaches. For example, some elevated 
or expanded the role of the company's procurement organization. 
Others designated what they called commodity managers to 
oversee key services. And others made extensive use of cross-
functional teams to help identify their service needs, conduct 
market research, evaluate and select providers, and manage 
performance.
    The third common element that we found was support. By 
that, we really identified two things. One was they used 
communication throughout the organization to make sure that 
everyone understood what the common goals were. Then second, 
each one used a variety of performance measures to keep track 
of how well they were doing in terms of, for example, financial 
performance or customer satisfaction.
    The key, though, that we found was commitment. We found 
that in order to overcome these challenges, the companies found 
that they needed to have sustained commitment from their senior 
leadership, first to provide the initial impetus to change, and 
second to maintain the momentum. The significance and the 
importance of commitment is why we chose to put that in the 
middle of our chart.
    Now, why should all these particular practices matter in 
looking at how to reform the service acquisition approach in 
the Federal Government? Well, in a word, the answer is results. 
Each of these companies was able to achieve significant dollar 
savings and each was able to achieve improved delivery of 
services. In one case, we found a company that saved over $210 
million from adopting some of these approaches.
    Let me turn next to some provisions in the bill that track 
some of the practices that we found in reviewing these leading 
service companies. One is section 401 of the bill, which would 
promote greater use of performance-based contracting. 
Performance-based contracting is simply a process where the 
contracting agency specifies the outcome or the result that it 
desires to achieve, and leaves it to the vendor to decide how 
best to achieve those outcomes. We have work under way for this 
subcommittee to look at how Federal agencies are implementing 
performance-based contracting. Very briefly, we found that 
although they are meeting the goals established by the Office 
of Management and Budget--the OMB established a 20 percent goal 
for the use of performance-based contracting--and the agencies 
are somewhat exceeding that goal. We found that there was 
widespread inconsistency in the application of the definition 
of performance-based contracting.
    The second provision, and this is an example of 
performance-based contracting, is share and savings, which 
under the bill section 301 would be promoted in a variety of 
ways. We have also a job under way for the subcommittee looking 
at how the leading companies are implementing this share and 
savings concept. What we are finding is that the real key to it 
is establishing the baseline. That is a very difficult issue 
and that will be the focus of our review as to how companies 
establish the baseline in order to be able to measure the 
savings.
    The third provision in the bill that we found common among 
the companies we looked at was the chief acquisition officer. 
Section 201 of the bill would create a chief acquisition 
officer in each agency, a practice that we found common among 
the companies. But one of the differences that we found is that 
at the leading companies the chief acquisition officer, and it 
was not always designated as such, but that position, whatever 
it was called, had the authority to influence decisions on 
acquisition to implement needed structural, process or role 
changes, and most importantly to provide the necessary clout 
within the organization to obtain initial buy-in and acceptance 
of whatever changes were required. Under the Services 
Acquisition Reform Act, section 201, it is not clear that the 
chief acquisition officer would have comparable responsibility 
and authority.
    Finally, I would like to mention three provisions in the 
bill that we have some concerns about. The first is section 211 
of the proposed bill which would permit service contractors to 
invoice the government on a bi-weekly rather than monthly 
basis. We have two concerns about that. One is that there would 
be an obvious effect on the Treasury in terms of the time value 
of money. But equally important, we have issued a series of 
reports over the years that have focused on erroneous payments. 
Our concern in this area is that if you increase the frequency 
of payments, that might also increase the possibility for 
erroneous payments.
    Second, there is a provision in the bill, section 223, that 
would strengthen the process under which agencies decide 
challenges to their procurement decisions. That is a provision 
that we support. We support agencies deciding protest at the 
lowest level and the most expeditious way. Our concern here is 
that the bill would require decisions by agencies within 10 
working days. Frankly, we think that is probably too brief a 
period to provide for meaningful consideration and decision of 
the protest.
    The last provision I wanted to mention is section 404 of 
the bill. That provision would designate as a commercial item 
any product or service sold by a commercial entity. Our concern 
is that this provision would allow for products or services 
that had never been sold, or in fact even offered for sale in 
the commercial marketplace, to be considered as a commercial 
item. In such cases, the government may not be able to rely on 
the assurances of the marketplace in terms of quality and 
pricing of the product or service.
    Mr. Chairman, this concludes my prepared statement. I would 
be happy to take your questions.
    [The prepared statement of Mr. Woods follows:]


    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]


    Ms. Styles. Chairman Davis, Congressman Turner and 
Congressman Horn, I commend your leadership in the area of 
procurement and I appreciate your invitation to participate in 
today's discussion.
    SARA challenges the procurement community to take a fresh 
look at several key aspects of our acquisition processes and 
policies, from the way we manage contracts and incentivize our 
contractors to the approaches we employ for capitalizing on the 
ingenuity of the commercial marketplace. As responsible 
stewards of the $220 billion in goods and services the Federal 
Government buys each year, I share your desire to ensure these 
subjects receive priority attention.
    Since I appeared before you in November, the President has 
unveiled a budget that reiterates this administration's 
commitment to results. The fiscal year 2003 budget places a 
new-found emphasis on how well programs and the initiatives we 
have designed to manage them serve the needs of our citizenry. 
In describing the budget, Mitch Daniels has emphasized that the 
days when programs float along year after year, spending 
taxpayers' dollars with never a showing of reasonable results 
or returns, must give way to an era of accountable government.
    SARA gives us the opportunity to more carefully study the 
subcommittee's vision for positioning the procurement work 
force to meet the many challenges that face our country in the 
21st century. Since results are what count in the end, our 
review must consider whether processes as SARA would change 
them will help agencies to better execute the programs that you 
have entrusted them to carry out.
    In this regard, I am pleased by several features of SARA 
which offer the promise of greater return on our investment of 
Federal resources. These aspects of SARA include for instance a 
pilot to simulate performance-based service contracting and the 
concept of statutorily reinforcing more integrated 
decisionmaking among the various disciplines that are 
responsible for the acquisition process.
    I believe the path to improved performance begins with 
ensuring that the processes are shaped to effectively balance 
all the acquisition basics. Balance is achieved by appropriate 
attention to acquisition planning, competition, contract 
structure and contract management. We also must be sensitive to 
operational efficiency, but in doing so recognize that it is 
not an end in and of itself.
    Unfortunately, lax application of acquisition basics 
continues to be a major contributor to shortfalls in program 
performance, insufficient attention to requirements 
development, weak cost and price analysis, inconsistent use of 
competition, ineffective negotiations, poorly structured 
contracts, and inadequate contract management plague even the 
most streamlined and protest-proof of our acquisition tools. To 
improve performance, agencies must recognize that acquisitions 
are the shared responsibility of a variety of disciplines, 
including program, technical, contracting, budget, financial, 
logistics and legal personnel. These disciplines must work 
together so the respective expertise that each offers is better 
integrated in agency decisionmaking.
    In particular, program offices must be willing to commit 
sufficient attention to the acquisition planning and contract 
management. They must understand that no amount of training on 
the part of procurement personnel and no degree of operational 
efficiency afforded by contracting tools can serve as a 
substitute for these activities. For their part, agency 
procurement officials must not allow pressures for expediency 
to divert attention away from the application of fundamental 
contracting principles that lie at the heart of any successful 
acquisition process, no matter the agency or the requirement.
    Far from the mechanical or administrative-laden label that 
some might assign to the contracting function, procurement 
personnel are the key component of our acquisition work force 
and are looked upon to ensure sound application of the very 
contracting tools now available to them. To use the President's 
own words, ``We are here not to mark time, but to make progress 
to achieve results, and to leave a record of excellence.'' The 
message is clear. We must remain firm in our resolve to improve 
the performance of government and the culture that drives our 
investment decisions.
    The importance of agency procurement offices in this 
transformation cannot be emphasized enough. Program offices 
across government, from those that serve the needs of our war 
fighters to those that support the government's efforts to 
promote educational excellence for our students, must 
ultimately depend on our procurement personnel to draft and 
negotiate the sound contracts that form the underpinning for 
successful performance.
    I thank the subcommittee for recognizing the critical role 
played by procurement officials throughout the government, and 
also for challenging us to revisit the principles that lie at 
the heart of our procurement processes. On behalf of the 
administration, I accept this challenge. In doing so, I intend 
to ensure that our procurement processes are results-oriented 
and to work with this subcommittee and the other Members of 
Congress to change them where they are not.
    This concludes my prepared remarks, but I am happy to 
answer questions.
    [The prepared statement of Ms. Styles follows:]



    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    
    Mr. Davis. Thank you very much.
    Commissioner Perry.
    Mr. Perry. Thank you Congressman Davis and Congressman 
Turner and members of the subcommittee. Thank you for inviting 
me to appear before you to discuss ideas on how to improve the 
Federal Government's acquisition process.
    Chairman Davis, I too would like to take this opportunity 
to thank you in particular for your leadership in this area 
over the years, and for your current initiative to bring the 
need for additional acquisition reform to the attention of the 
Congress.
    As you know, each year the Federal Government spends over 
$200 billion goods and services in order to meet the agency 
requirements to provide government programs and services to the 
American public. That is why it is so important for the 
government's acquisition process and regulations to focus on 
efficiency, effectiveness and accountability. Additionally, the 
acquisition process and regulations should be easily understood 
by all the parties who are involved in the process and should 
be based upon a common sense approach. Finally, when 
appropriate, the Federal Government's acquisition process and 
regulations should resemble the best commercial sector buying 
procedures.
    As you know, at GSA we have been actively implementing a 
number of initiatives to improve the Federal acquisition 
process and work force. This includes items such as the 
integrated acquisition system, which is a part of the 
administration's e-government strategy. Several of the 
initiatives that we are working on are detailed in the written 
testimony that I have submitted for the record.
    At GSA, we are developing our acquisition work force as a 
part of our overall human capital management initiative. For 
example, to develop the skilled acquisition work force we need 
at GSA, we are developing competency-based assessments to 
determine the specific areas where our training of the GSA 
acquisition work force to date has achieved the needed results. 
We are also looking at areas where we still have deficiencies. 
We are using this information regarding the skill mix of the 
GSA acquisition work force to develop and implement a specific 
action plan tailored to the identified training needs at our 
agency. We believe that all Federal agencies should be doing 
the same kind of self-assessment and correction of deficiencies 
as a part of their human capital management initiatives.
    The Services Acquisition Reform Act proposal to require GSA 
to establish a work force fund for interagency training 
purposes shows a strong commitment to improving the knowledge 
and skills of the acquisition work force in particular, and 
that of the total Federal work force in general. While we fully 
support your concept of developing a well-trained acquisition 
work force, the administration would support adequate funding 
to agencies through normal budget and appropriations processes.
    We believe that several of the other provisions of the 
Services Acquisition Reform Act will help agencies improve 
their acquisition work force, for example, section 102 of the 
bill, which calls for a government-industry exchange program; 
additionally, section 105 of the bill which calls for an 
acquisition work force recruitment and retention pilot program; 
and third, section 107 of the bill which encourages contractors 
to allow their employees to telecommute. These sections and 
others in the bill that I have cited are examples of the 
provisions in this legislation which would in fact help 
agencies improve their acquisition work force.
    On another matter having to do with the chief acquisition 
officer, as reflected in your legislation it is important to 
keep in mind that without management leadership, initiatives to 
streamline the current acquisition process could end up 
becoming just another layer of regulations. That is why we 
support the concept of each agency having a chief acquisition 
officer. We have such a position at GSA and we believe that the 
ability of that person to aid GSA in developing a strong 
acquisition strategy is critically important to our success.
    For that reason, we believe that section 201 of the 
legislation requiring agency heads to establish a chief 
acquisition officer position is an interesting proposal and 
would signal the importance of maintaining a well-managed, 
integrated, agency-wide acquisition plan.
    In summary, Mr. Chairman, we believe that the Service 
Acquisition Reform Act is a very sweeping proposal offering 
several beneficial programs and ideas. We appreciate your 
leadership in bringing these matters before this subcommittee 
and before the Congress and before the administration. As you 
can see from our comments and from the various initiatives that 
we are working on at GSA, we share your commitment to making 
the needed improvements to the Federal acquisition process and 
to the Federal acquisition work force. With that in mind, we 
are anxious to continue to work with the subcommittee to find 
ways to make significant improvements in the current Federal 
acquisition process.
    Once again, thank you for inviting me to discuss these 
items and this very important issue with you today. I will be 
happy to answer questions.
    [The prepared statement of Mr. Perry follows:]


    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
    Mr. Davis. Thank you very much.
    Ms. Lee.
    Ms. Lee. Chairman Davis, Mr. Turner, I appreciate the 
opportunity to appear before you today and discuss the proposed 
Services Acquisition Reform Act.
    As I testified before you last November, the business 
environment within the Department of Defense remains very 
complex, particularly in the acquisition services. The amount 
of money the Department spends on service has increased 
significantly over the past decade, to the point where we now 
spend approximately an equal amount of money for the 
acquisition of services as we do for equipment.
    We must ensure that all acquisitions, whether for products 
or services, are well-planned, executed and managed. We fully 
support the efforts of the subcommittee in a number of areas 
related to how the Department of Defense acquires goods and 
services. We have reviewed the draft package of proposals which 
comprise SARA, and since the introduction of the bill last 
week, are more thoroughly studying these proposals.
    I would like to offer my perspective on several of them. 
First, people or work force--this is also my No. 1 priority. We 
must have talented, well-trained people in the acquisition 
field, particularly as we move to more and more challenging 
business arrangements. As you know, the Department of Defense 
has a very robust and continually evolving training program. By 
centralizing the funding for training within the Department 
through the Defense Acquisition University, we have 
demonstrated a commitment and provided stability to training 
our acquisition work force. To keep our acquisition work force 
trained and highly qualified to meet challenging missions, we 
are transforming DAU by moving from purely classroom training 
to more Web-based learning modules and by emphasizing critical 
thinking skills and business case reasoning.
    The DAU provides a strong foundation and we appreciate the 
subcommittee's recognition of this contribution and our 
exemption from the training fund. We look forward to working 
with the civilian agencies in the Federal Acquisition Institute 
in developing a training program that ensures the work force 
acquires the right skills and capabilities to be able to 
contribute effectively in this changing acquisition 
environment.
    We also support a government-industry exchange program. We 
believe that by tapping into the knowledge base of the private 
sector, we not only maximize the business relationships with 
our industry partners, but we can also improve the Department's 
acquisition process and procedures. For years now, the 
Department has found it very valuable to have programs where we 
send our military members and our civilians to work with 
industry counterparts.
    However, we do not have a program to bring industry into 
the Department. Currently, an industry person would have to 
sever ties with his company in order to accept a government 
assignment, which we believe is probably an unrealistic 
expectation, particularly as people are planning and managing 
their own retirement portfolios and those by necessity involve 
a broad range of other relationships. We applaud the 
subcommittee's efforts to establish a government-industry 
exchange program, and we believe that issues related to 
conflict of interest and compensation need to be clarified in 
the proposed legislation.
    The Department is sensitive to retraining and attracting 
people, especially since we are faced with 50 percent of our 
work force being eligible to retire by the year 2005. We do 
have a new plan which was submitted last week about the work 
force of 2005 that has some ideas and issues on how the 
Department plans to deal with these challenges, and we 
certainly support the idea of work force and retention pilot 
programs as a way to attract a new talent pool to meet the 
challenges of our increasingly complex procurement. We note 
that there are many things going on in this arena, and we 
support those activities.
    We also support revisions to share-in-savings initiatives. 
The share-in-savings authority as defined by the Clinger-Cohen 
Act has not been fully implemented by the Department for a 
number of reasons. A primary concern within DOD has been to 
ensure that funds spent for payment of savings are the right 
type of funds. Additionally, there may have been some 
reluctance by contractors to providing all of the non-recurring 
funds for the investment, even with a long-term payback.
    We need a policy for using share-in-savings contracts that 
not only encourages our contractors to undertake aggressive 
cost reduction programs, but one that also stimulates agency 
interest by allowing them to retain a portion of the savings 
after contract payment.
    I look forward to working with the subcommittee on 
additional provisions of SARA. In closing, I would really like 
to thank the subcommittee for your continued interest in 
procurement and acquisition issues and focusing all of us on 
the need to continue to improve. I would like to also make my 
commitment to work on those issues in the Department.
    Thank you very much for the opportunity to talk about these 
things today.
    [The prepared statement of Ms. Lee follows:]


    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    
    Mr. Davis. Thank you very much.
    Ms. Lee, let me ask you on these purchasing cards--moving 
the threshold from $2,500 to $25,000. In the SPAWAR situation, 
I think it was in San Diego----
    Ms. Lee. Yes, sir.
    Mr. Davis. One of the concerns I always have about 
government is we spend so much time and energy making sure that 
nobody steals any money who is involved in government, whether 
it is politicians or officials, that we strap them that they 
cannot do much of anything else either. The question is to try 
to find, if you have confidence in your employees and you train 
them correctly, that this ought to be more efficient. Can you 
talk about that situation a little bit and some of the 
safeguards we can put in to make sure these are not abused, but 
at the same time not be running papers around for every 
procurement over $2,500, because you lose time, you lose money, 
you lose efficiency with the thresholds that low. I do not know 
what the right balance is, but you might reflect on the 
situation there in San Diego. Mr. Horn had raised it, and I 
just wanted to ask you to start with that, and then I will 
yield to Mr. Horn for questions.
    Ms. Lee. Certainly.
    Mr. Horn. I thank the chairman, and that is exactly the 
question I was going to ask. What can the Defense Department 
and General Services and the GAO advise us on how you can look 
at the fraud, and they were absolutely irresponsible. A Marine 
major allegedly conspired with cardholders under his 
supervision to make more than $400,000 in fraudulent purchases 
from five companies, two of which he owned, two of which were 
owned by acquaintances, and one of which was owned by his 
sister. The charges included purchases such as DVD players, 
palm pilots, desktop and laptop computers.
    Another example--a cardholder made more than $17,000 in 
fraudulent transactions covering personal items from Wal-Mart, 
Home Depot, shoe stores, pet stores, boutiques, eye care 
centers and restaurants over a 7-month period.
    Now, obviously when we go to hold a hearing outside of 
Washington we use our government card for the hotel and the per 
diem that you are paid for restaurants. And people like our 
administrative people would catch something if there was about 
the whole suite or the whole end of the hotel for your buddies 
for a reunion, that would be caught on Capitol Hill, and 
inspectors general are all over the place. In the Defense 
Department, they ought to be looking very carefully at this.
    Why should we take the taxpayers' money--good, hard-earned 
money? They would sure like to have $17,000, but they do not. 
But when we use their $17,000, we have got to figure out a way 
to get the controls. There were no controls with the Navy, and 
one captain is not going to make admiral, given that. So I do 
not know if that is the punishment or what, but I do not want 
to see it happen in the first place.
    So could you tell us how you do it, Ms. Lee? What kind of 
program--I know the game. Two subcommittees differ, and the 
subcommittee that has the Defense Department--fine. But you 
have got to do something on your side to act like leaders, and 
not just let this fraud go out.
    Ms. Lee. Yes, sir. It is absolutely unacceptable.
    Mr. Horn. OK. Now, how do you do it? How do you organize 
it?
    Ms. Lee. This particular instance, which happens to be 
SPAWAR, cards and the entire command have been suspended as of 
last Friday. There is new leadership in there. First, they are 
going through and making sure everyone has their currency 
training, and reminding them of what those obligation are. They 
are reviewing all cards, the thresholds that the cards are 
authorized, the number of holders, and the number of 
cardholders per reviewer, and the relationship between those 
reviewers. In addition to that, we have put in place an 
electronic system that kind of lets us do the trend analysis to 
see what purchases are bought.
    Additionally, I have asked our Department of Defense IG to 
come with me, and they have done so, and formed a consolidation 
where they look across the Department of Defense at all IG 
audits regarding purchase cards, and they consolidate those. 
They are also looking for trends and going to give us specific 
recommendations.
    The rest of the Department watched that shot across the bow 
and it is very clear to them how important it is.
    Mr. Horn. You might have been right the first time. 
[Laughter.]
    OK. I do not care how you do it, just so you do it.
    Ms. Lee. It is unacceptable to us.
    Mr. Horn. Yes.
    Mr. Administrator Perry, for whom I have fond affection and 
a fine agency you preside over. What can we do with GSA so they 
do not run away with it? Do you have a system right now?
    Mr. Perry. We do. I would just reiterate what my colleague 
has said. It is an unacceptable position or situation. We do 
need to have the right controls in place and we have to look 
after it vigorously.
    At the same time, I would like to believe that most of our 
Federal workers are in fact trustworthy and conscientious, and 
this is something that would only be done by a few. The remedy 
that we take in the case of those few who have been discovered 
I think will send a very strong message.
    In the case of GSA, we also use the controls, the trend 
analysis. On a monthly basis, each manager receives reports 
from our CFO's office indicating if there have been any 
purchases from vendors which would appear to be not appropriate 
or if there have been purchases of items which would appear to 
be not appropriate. And then it is the responsibility for the 
manager of the person using the card to oversee that to make 
sure that inappropriate use is not undetected.
    I think we just have to stay with it, but not dispense with 
the program entirely because of the actions of a few.
    Mr. Horn. Mr. Woods, has GAO gone back to some of these 
situations now to see if anything has changed? I mean, that is 
what I wanted to have done maybe 2 months from now, whatever. 
Has it happened in between?
    Mr. Woods. Yes, sir, it has. As you know, the findings that 
you talked about earlier were based on a report that we did 
last year at two Navy installations in the San Diego area.
    Mr. Horn. That was the one with Senator Grassley.
    Mr. Woods. That is correct. And we have gone back and you 
will be hearing more next week about the results of that 
review. But if I could just talk a little bit about the 
problems or the source of the problems, it all gets back to 
internal controls. In order to be able to properly exercise the 
flexibilities that the Congress has provided below the micro-
purchase threshold and therefore in the use of purchase cards, 
there needs to be effective internal controls. What we have 
found by and large in the course of that review is that the 
controls were there. They were not being exercised properly. It 
is not a lack of controls, it is just they were not adhering to 
those controls.
    Another issue was training. Many of the examples that you 
listed are obvious. You do not use a government purchase card 
for personal items. You do not need training on that. But other 
areas are not so obvious. For example, meals--my understanding 
is food is not a permissible item for the use of the government 
purchase card. That may or may not be so obvious. It requires 
additional training.
    Another issue, frankly, is just too many cards. We found 
that there was a proliferation of cards in both of those 
facilities, and that is an issue as well.
    Mr. Horn. Thank you, Mr. Chairman.
    Mr. Davis. Let me just ask a question before I yield to Mr. 
Turner. The number of issued cards at civilian agencies is 
proportionally much smaller, is it not? Or are you not familiar 
with that?
    Mr. Woods. I am not familiar with that, sir.
    Mr. Davis. Can anybody help me on that?
    Ms. Styles. We did supply data I believe on the exact 
number of cards. It is also available on a publicly available 
Web site.
    Mr. Davis. I will put that in the record and figure it out.
    I think one of the ways you control this is by controlling 
the people that have access to the cards, making sure they were 
trained and you are not supervising everybody. One of the 
difficulties in procurement is anytime you move more of the 
authority out to your line officials, you have more chances for 
somebody to make a mistake. On the other hand, we found out 
that when it is too centralized, it is a very, very inefficient 
process. So it is a question of finding the right balance.
    Mr. Turner.
    Mr. Turner. Thank you, Mr. Chairman.
    I wanted to address the issue of share-in-savings 
contracts. I know, Ms. Styles, you had some concerns that you 
expressed. Ms. Lee, you had some concerns specifically. I 
notice, Ms. Styles, in your testimony you express the concern 
that the expanded share-in-savings contract authority should 
remain as a pilot project. And you said that we need to see 
more results, agencies need to gain greater experience in 
developing baselines, obviously, as you say, proper baselines 
in combination with guaranteed savings clauses are critical to 
ensuring savings can be validated and realized.
    I have had a concern about where we get the expertise 
within our agencies to actually negotiate share-in-savings 
contracts. Obviously for them to work, there has got to be a 
fair deal for both the government and for the supplier of the 
service. Both sides need to have competent people negotiating 
it. Otherwise, it is going to turn out to be a very unhappy 
experience for one side or the other.
    So your caution that you have expressed, and I think you 
went on also in that same statement to say, ``We should also 
consider the impact of these contracts on other activities in 
light of the extended contract duration that may be required to 
recoup savings and the generally high termination costs.'' If 
you will, just expand a little bit on your concerns there, and 
particularly what you mean by that statement that I just read 
there about the problems you see. And then address for me how 
we can get the kind of expertise that we really need to make 
share-in-savings work effectively.
    Ms. Styles. Certainly. I think we need to take share-in-
savings in some appropriate steps. What we are seeing, we have 
had some experience with share-in-savings in the Federal 
Government. We have got some contracts with the Department of 
Education that are share-in-savings contracts, and we have some 
contracts with the Department of Energy that are share-in-
savings contracts, energy savings performance contracts.
    The Department of Education ones are short-term contracts, 
3-year contracts dealing with a lot of IT infrastructure 
complex problems. It took them a long time to develop the 
baselines and even then the baselines were not accurate 
baselines. They had to go back after an IG report and change 
the baselines on those contracts. That is not to say that it is 
wrong for them to be innovative. I think it is good for them to 
be innovative, but they also recognize that they are not going 
to get the appropriate return on their money in a longer period 
than 3 years, particularly when you are dealing with something 
like an IT project.
    The other concern we have is we have seen no savings yet in 
those contracts. Obviously, we are at the very beginning of 
those contracts. They had to restructure the baselines, but we 
still have not seen any savings with those.
    Energy savings performance contracts are 25-year contracts. 
That limits the flexibility of the agency if it needs to 
restructure or if it needs to be a little bit more nimble in 
delivering services to the citizens. Those have been in place 
for a longer period of time. We have still not seen savings on 
those contracts.
    So it is not to say that the concept of share-in-savings is 
not right. It is that we need to take this in steps. The first 
step in many respects is performance-based service contracting. 
We are still having some difficulties with performance-based 
service contracting, with understanding how it works, with 
negotiating that with the contractors. So we have to take it in 
appropriate steps as we move forward. If we jump to a broad 
share-in-savings-type proposal, you are learning to run before 
you actually learn to walk, I think is the way I put it in my 
testimony. And you really have to take appropriate steps to, in 
many respects, protect the taxpayer dollars in exactly the way 
you said, is that we need to know how to negotiate these 
contracts and to create appropriate metrics and baselines.
    Mr. Turner. It seems that you do have to have some 
experience to negotiate these kind of contracts. I do not know 
where you go in some agencies to find that expertise. 
Obviously, establishing the baseline is the critical first step 
to making sure it works. Do you think it would be helpful if 
there was some other entity or individual that helps in that 
process? It has been suggested to me perhaps the inspector 
general in the agency should take a second look at the 
development of the baseline, be sure it is fair? Is there some 
way in there that we can look forward to the point where we 
could know that we have got people in the Federal Government 
who can actually negotiate these deals and that they are going 
to be sound?
    Ms. Styles. And a lot of it is training. A lot of it is 
going forward with training with performance-based service 
contracts and training in this area. And I think all of the 
help they can get as they negotiate the baselines is 
appropriate because second looks at these are good. Even at the 
Department of Education, they realized in student financial aid 
that the second look of the IG at their baseline was 
appropriate and identified things that they did not see. I 
believe they have changed the baselines as a result.
    Mr. Turner. Ms. Lee, you shared some other concerns with 
share-in-savings initiatives. One point you made, I am not sure 
I understood, but you suggested that, ``A primary concern 
within DOD has been to ensure that funds spent for payment of 
savings are the right type of funds.'' What did you mean by 
that?
    Ms. Lee. Particularly on some of the O&M-type work where we 
have funds that are for operation and maintenance to make sure 
that we have got the contract structured appropriately so in 
fact it is an appropriate expenditure of operation and 
maintenance funds. Or if, for example, we had R&D funds, so 
that when the contract is structured and the payments are made 
on an annual basis, that they are backed from the funding as 
appropriated by the Congress.
    Mr. Turner. You also shared an interest in an idea to 
ensure that there is some incentive in the agency to enter into 
share-in-savings, not just an incentive on the part of the 
service provider. How would you envision that working?
    Ms. Lee. Sir, as you know, and I am not sure that it should 
be this way, but it is, in that in an organization, the current 
way our funding often works is that if you save money, you get 
less the next year. And so to recognize from an incentive 
standpoint that these people have done a good thing and the 
fact that they have less money does not necessarily mean that 
their appropriations should be, or that their amount should be 
decreased the next year, that it should be recognized that they 
are doing good things more efficiently and that in fact they 
should be budgeted accordingly.
    Mr. Turner. Has the Defense Acquisition University entered 
into any kind of training program to help people be able to be 
well-versed in how to negotiate share-in-savings contracts?
    Ms. Lee. Not specifically. We are, however, looking at this 
more modularized work force and incorporating industry more as 
well. So we would have modules that are available both to DOD, 
industry people, civilian agencies, and are working with agency 
and academia to say what are the right topics, what are the 
right formats, and what is the easiest and most efficient 
delivery method for our entire acquisition community--
government, industry, academia--and not just limit it to the 
Department of Defense.
    Mr. Turner. Is your acquisition education program available 
to non-DOD Federal employees?
    Ms. Lee. Mr. Turner, technically it is, but the reality is 
that we can hardly get all the DOD people through it, so the 
slots are rare and difficult to come by.
    Mr. Turner. Thank you.
    Thank you, Mr. Chairman.
    Mr. Davis. Thank you very much.
    Ms. Styles, let me just say on the Department of Education 
contract, my understanding is that the Department of Education 
came back to the IG and said they had some difficulties 
measuring baseline; that there were savings and the IG 
concurred with that. We can look at it further, and as we draw 
this, we want to work with you to try to make sure that this is 
a vehicle that can achieve maybe at the Federal level some of 
the savings we have seen in the private sector.
    Ms. Styles. If I can clarify, we have not yet seen the 
savings because it is so early in the contracts, but they do 
anticipate having savings. I have to say I want to commend them 
for doing a very good job working under the current structure 
to come up with a share-in-savings contract and to take hard 
looks at their baselines. I think they did a very good job.
    Mr. Davis. Maybe if we had some tools we would give them 
under this, they could have done better, but I think we will 
continue to dialog on that.
    Let me also ask, Ms. Styles, you talked about adequate 
funding is needed for training, but that the funding stream 
ought to be the result of the normal budget and appropriation 
process. I think in a perfect world, I would agree with you, 
but let me tell you what happens in the real world. When an 
agency budget gets cut, the first two things to go are your 
travel and your training. That is just the way it works because 
agencies like to keep their people. You can do that maybe with 
one cycle or another, but I have been in government at the 
county level and at the Federal level now for over 20 years. 
That is just the nature of government. It does not work as 
ideally as we might like.
    It is for that reason that I feel if you do not have a 
specified fund earmarked to go there, we will continue to see 
in tough budget years agencies cut their training budget. It 
clearly has taken a toll. I think you can take a look at the 
situation you had with the Navy in San Diego and say this is a 
result of training, of not having appropriate oversight. If you 
do these things appropriately, you can cut down on the fraud.
    So I think that is where the disagreement is, and I will 
give you a chance to respond to that. But I think the current 
process of relying on normal budget and appropriations has 
resulted in not funding the work force training the way it 
should have been.
    Ms. Styles. You know, there may be an opportunity for an 
interagency fund that is appropriated by Congress. My concerns 
relate to the fact that we have to be willing to step up to the 
plate and recognize that we need training money, and Congress 
should recognize that money should be appropriated in a 
specific fund.
    My concern about the structure of the current legislation 
is that we may affect a very effective contracting vehicles by 
taking percentages and money out of that to train people. I am 
particularly concerned that, as I look at training, I am trying 
to integrate civilian and defense people in training. The way 
it is currently set up, it would actually take money from the 
Department of Defense to train the civilian agencies, because 
the Department of Defense is such a high volume user of these 
contracts, but then they would not have access to this fund to 
be able to train their people.
    I think we need to recognize the commitment to training to 
be able to fund it appropriately. Otherwise, I think we are 
going to have trouble holding agencies to a training 
commitment, or to actually training their people appropriately.
    Mr. Davis. I just say good luck in being able to get the 
non-Defense agencies and the Defense agencies together on 
training. You have the tiger by the tail there. There is a lot 
of turf and a lot of history on that, but ideally that would 
be----
    Ms. Styles. I think as we face this retirement crisis and 
the human capital crisis, it is more important than ever to be 
able to have one acquisition community working together, and to 
have access to the skills of the Department of Defense and for 
the Department of Defense to have access to the civilian 
agencies.
    Mr. Davis. If we were business, that would be easy to do.
    SARA, as you know, would place commercial services on the 
same level as commercial products by amending the definition of 
commercial items currently in the OFPP Act. You express some 
concern about this proposal, but it is not clear to me why 
commercial services should not be on the same plane as 
products. Could you try to explain?
    Ms. Styles. Which portion specifically are you talking 
about?
    Mr. Davis. SARA puts commercial services on the same level 
as commercial products. Are you with me?
    Ms. Styles. Yes.
    Mr. Davis. OK. It does it by amending the definition of 
commercial items that are currently in the OFPP Act. You have 
expressed concern about the proposal. I am just not sure why 
the commercial services should not be on the same plane as 
products.
    Ms. Styles. If you can tell me which provisions 
specifically--are we talking about time, material, labor, hour 
contracts? Are we talking about the commercial business entity?
    Mr. Davis. It comes from the FAR part 12 amendments.
    Ms. Styles. I mean, there are distinctions between----
    Mr. Davis. OK. I will give you this written and again have 
you get it back, if that would be all right to clarify that.
    Ms. Styles. OK.
    Mr. Davis. Melissa tells me it is section 403, but you can 
get back to us in writing on that.
    Let me ask Mr. Perry, how do you coordinate GSA's 
acquisition strategy over the agency's diverse business units?
    Mr. Perry. That strategy coordination over our diverse 
activities within GSA is in part coordinated through the fact 
that we have an acquisition officer in the organization who 
helps us to make that happen. He also obviously provides 
services beyond GSA. That is a big part of it. Your proposal 
suggests that other agencies might use that same model, and we 
support that idea. But we also at the same time would leave 
open the fact that there may be some agencies where it is more 
crucially important than in others. That may be something for 
agencies to deal with, but we feel that having that centralized 
approach is useful.
    Mr. Davis. Ms. Lee, let me ask you. SARA provides in 
section 223 for a statutory agency-level protest process. Now, 
in that process, we call for 10 working days for resolution of 
protests. Is that adequate, do you think?
    Ms. Lee. Congressman Davis, I do think that we are trying 
to teach our people to be responsive and make sure that when 
there is an issue, they solve it. I would actually ideally like 
to see it solved before it gets to a protest level-type of 
discussion. That would be my No. 1 goal.
    However, if it does get to be a formal protest, 
particularly in an agency as large as the Department of 
Defense, there is a lot of review that is necessary. So I do 
think the 10 days would put us in a very tight timeframe and 
might not get as good and thorough a review as it should have.
    Mr. Davis. OK. Is DOD satisfied with the access it 
currently has to the commercial services market?
    Ms. Lee. We believe there are quite a few other vendors 
that we would like to encourage to do business with the 
Department. We have seen a particular interest after September 
11th. Some of it I think may be perhaps patriotism; others 
realizing all the diverse activities that the government does 
participate in. As a result of our broad agency announcement, 
we got over 12,500 responses from people, and we see a lot of 
people wanting to do business with the government.
    We have also found that creative and aggressive contracting 
officers can accomplish that. There are some additional 
flexibilities that we would like to attain and we would like to 
work with you through SARA and other methods to ensure we can 
get those.
    Mr. Davis. Thank you.
    Mr. Woods, let me just ask you, you note in your testimony 
that the chief acquisition officer that we include in SARA 
ought to be structured differently. Do you have any 
recommendations for the placement and operation of a chief 
acquisition officer within the civilian agencies?
    Mr. Woods. I do not have specific recommendations along 
those lines, but I do note that when you compare that to the 
chief financial officer, for example, the CFO is a direct 
report to the head of the agency. Now, I am not suggesting that 
would need to be the case with the chief acquisition officer, 
because I think agencies need the flexibility to be able to 
determine where the position would best be placed. But the key 
is that wherever it is placed, it needs to have the necessary 
authority to have the clout to make sure that the changes can 
be made.
    Mr. Davis. OK.
    I have one more question for Ms. Styles. You express some 
concern about SARA's expansion of the scope of commercial item 
procedures. Why shouldn't the government just be able to buy 
products and services of a commercial firm without any further 
analysis of the actual nature of the item? That is what the 
private sector does.
    Ms. Styles. It has to be something that commercial firm 
actually sells commercially. As it is structured right now, if 
80 percent of the firm's business is coffee makers and the 
other 20 percent is smart bombs, the smart bombs can be 
considered commercial in nature, even though there is no 
adequate price competition in the commercial marketplace. As a 
result, there is no transparency into the cost for that smart 
bomb and there is no assurance that there is a commercial price 
for that.
    Mr. Davis. Well, I hope that is not how we are buying our 
smart bombs. [Laughter.]
    Ms. Styles. This would allow that.
    Mr. Davis. All right. So the language--just tighten it. You 
do not have any problem with the concept?
    Ms. Styles. With the concept, if it is commercial and it is 
sold commercially in substantial quantities, and we can assess 
the price and protect the government--no, I do not have a 
problem. Or in the alternative, if it is not sold commercially, 
that we have sufficient transparency into how they put that 
price together.
    Mr. Davis. We could give example after example where the 
government goes out and buys items that are more expensive than 
you can get off the shelf. So what we are trying to do in a 
case like this is I think give them the flexibility to get 
things quickly when they are sold across the counter every day.
    Ms. Styles. If it is commercially available on the shelf, 
then they can buy it commercially.
    Mr. Davis. I am just trying to get the concept. We can 
worry about the language later.
    OK, Ms. Lee, smart bombs are not bought from coffee makers 
are they, at DOD? I just wanted to be reassured here.
    All right. That is all the questions I have for this panel. 
Why don't we take about a 3-minute break and get our next panel 
up here.
    Thank you very much.
    We will welcome our second panel--Steve Kelman of Harvard 
University; Professor Steven Schooner of The George Washington 
University Law School; Scott Dever of Hasbro; Mr. Richard 
Roberts of KPMG Consulting, testifying on behalf of the 
Information Technology Association of America; Ms. Roberta 
StandsBlack-Carver of Four Winds Services, testifying on behalf 
of the Contracts Services Association; and Mr. Jerry Howe of 
Veridian, testifying on behalf of the Professional Services 
Council.
    Will you please stand and raise your right hands?
    [Witnesses sworn.]
    Thank you very much.
    Please be seated. Again, we have the statements, if we 
could start with Dr. Kelman and we will move straight down. 
Steve, welcome.

 STATEMENTS OF STEVEN KELMAN, PROFESSOR OF PUBLIC MANAGEMENT, 
  HARVARD UNIVERSITY; STEVEN SCHOONER, ASSOCIATE PROFESSOR OF 
LAW, THE GEORGE WASHINGTON UNIVERSITY LAW SCHOOL; SCOTT DEVER, 
  VICE PRESIDENT OF GLOBAL PROCUREMENT, HASBRO, INC.; RICHARD 
 ROBERTS, SENIOR VICE PRESIDENT AND MANAGING DIRECTOR, FEDERAL 
 SERVICES, KPMG CONSULTING, INC.; ROBERTA STANDSBLACK-CARVER, 
  PRESIDENT AND CEO, FOUR WINDS SERVICES, INC.; AND JERRY S. 
   HOWE, SENIOR VICE PRESIDENT AND GENERAL COUNSEL, VERIDIAN

    Mr. Kelman. Chairman Davis, thanks very much for asking me 
to come and testify. Congressman Turner, thank you for the 
opportunity to be here today. I am here to testify in support 
of the Services Acquisition Reform Act. This piece of 
legislation really is the next step in the continuation of the 
efforts we have undertaken over the last decade to create a 
business-like, modern procurement system in the Federal 
Government.
    Really, it has two basic principles--the reform effort. The 
first is make government contracting, to the extent we can, as 
much as possible like the way a world-class commercial company 
would buy products or service for itself. That has been 
principle No. 1. Principle No. 2 has been, stop the obsessive 
focus with bureaucracy and process, and start focusing the 
system on achieving results for taxpayers.
    The changes in the last decade have not been 
uncontroversial. It is never easy to change old, hide-bound 
processes. But there has really been an alliance of moderates 
in both parties, Democrats and Republicans, often sort of 
fighting against people further to our right and people further 
to our left, that have allowed these changes to take place. I 
think it is fair to say that the procurement system is better 
because of those changes, not just faster, but better.
    The most recent addition of the history of government 
contracting, which comes out of The George Washington 
University Government Contracts Program, it came out in 1999, 
on the last page of the book--this is the new edition, the 
revised edition--says--this is as is described at the end of 
the 1990's--the situation is as healthy as any I can recall in 
the history of peacetime government contracting. That is not to 
say it is idyllic. Protests and lawsuits still abound. See, 
there are other people besides me who still think there is too 
much litigation in the system. Government contracts----
    Mr. Davis. You would never expect a law professor to agree 
with that, though, right?
    Mr. Kelman. This comes out of George Washington Law School. 
[Laughter.]
    Government contracts still dwarf their nongovernment 
counterparts in size, minutiae and risks. Contracting officers 
still trained in the old system--some refuse to change. But all 
in all, the 1990's have improved the process.
    We have seen that in Afghanistan. There has been a lot of 
publicity around the JDAM, the smart bomb that is being used 
very successfully in Afghanistan. It not only works better than 
its predecessor, the laser-guided bombs, but also, as an 
article in my hometown newspaper the Boston Globe pointed out, 
one of the reasons 70 percent of the bombs in Afghanistan are 
smart bombs compared to 3 percent in the Gulf War is that smart 
bombs used to cost $100,000 each. They now cost $20,000 each 
and they work better.
    What has not been pointed out is that JDAM is a poster 
child for acquisition reform. They started procuring it before 
acquisition reform began in the early 1990's, and pulled it 
back and redesignated it an acquisition reform pilot program; 
introduced the various acquisition reform techniques. The price 
went down 50 percent compared to what it had been before.
    If I can add a personal example. A few years ago, I was 
invited by the Defense Department to be a keynoter at an 
electronic commerce conference, and actually I had to get to an 
academic conference at Johns Hopkins about an hour after I was 
supposed to finish speaking, so I said, gee, I don't know if I 
can do it. So they said they would pay my transportation and 
they gave me a driver to drive me down to Baltimore. The driver 
happened to be a Marine who had just returned back to the 
Pentagon after being abroad for 21 years. He was not a 
contracting person. He was a Marine. And he was saying to me, 
``Sir, a few years ago I started noticing that just my every 
day life in the Marines as a Marine was getting better. The 
food was getting better; stuff that had not been there before 
that got out of stock was arriving faster. We could get things 
easier. And I never knew why it was. I just noticed my life was 
getting better.'' He was interested to learn when he now had a 
procurement detail that this was as a result of the acquisition 
reforms of the 1990's.
    I have got to say, and I mentioned this to Deidre Lee, I 
think all of us, when I heard that, was really proud of what 
all of us had accomplished in terms of making this Marine's 
life better. Above all, the people who accomplished it are the 
frontline career contracting people in the Federal Government.
    Mr. Davis. Steve, let me just say, you have accomplished 
then, and I will not take your time on this, but making Army 
chow edible. This is something that for generations we have 
tried to get at and procurement reform did it. [Laughter.]
    Mr. Kelman. Because what happened was we used to buy 
MilSpec food, and now we are buying commercial food from 
commercial vendors. That is the secret to it.
    There has been a bipartisan effort, but just a word on why 
this was initiated by a Democratic administration and why I 
think Democrats should be supporting SARA, this piece of 
legislation. As a Democrat, I believe that government has the 
ability to serve people and to accomplish things for us as a 
society. But to do that, government has to work well. It has to 
work effectively. It has to have modern management principles 
associated with it. That is the basic message behind 
procurement reform.
    So in my testimony, I support pretty much every provision 
in this legislation. There are a number of areas where I have 
made some suggestions for some changes. I hope we have a chance 
to talk about some areas like share-in-savings. The only way to 
get people to learn to walk is give them a chance. And the 
current pilot project--it was an unintended consequence I was 
involved in doing. We were trying to encourage agencies to do 
share-in-savings. It has had the effect of discouraging them. 
Let's teach them to do it by giving them some of the 
authorities in this bill. The very last thing, because I have 
gone a little bit over my time, nobody has talked about the 
provision in the bill on cooperative purchasing. This has been 
an area where you, Chairman Davis, have led a lonely fight 
against special interests, trying to prevent--what this 
basically is saying, let State and local governments on a 
completely voluntary basis, if they would like access to the 
GSA schedules, use them if they want to. A coalition of special 
interests succeeded in repealing the provision in the Federal 
Acquisition Streamlining Act, allowing this. Congressman Davis 
played a lead trying to save it. Congressman Kucinich, I worked 
with Congressman Kucinich while I was in the administration, 
played a lead trying to save it. I am glad to see that this 
pro-taxpayer feature is coming back into legislation again.
    I have a whole bunch of detailed comments in my testimony, 
but this is good government.
    Thank you.
    [The prepared statement of Mr. Kelman follows:]


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    Mr. Davis. Thank you very much.
    Professor Schooner. You have been quoted already.
    Mr. Schooner. I should stop while I am ahead, but I won't. 
Thank you.
    Chairman Davis, Congressman Turner, first let me thank you 
for the opportunity to be here today. As the hearing 
highlights, the Federal procurement system has experienced 
dramatic change during the 1990's. Against that backdrop, as I 
flesh out more in my testimony, I will address four topics 
briefly today.
    First, I encourage this committee to do anything within its 
power to restore meaningful oversight to the procurement 
process. Second, I encourage you to invest in the acquisition 
work force. Third, I strongly recommend that you drop the 
proposal to increase the purchase card threshold. And fourth, I 
suggest caution and further study on the provisions related to 
commercial purchasing.
    During the 1990's, it is my opinion that the government 
failed to prepare its acquisition work force for or support it 
through the dramatic transition. At the same time, the 
acquisition work force, particularly at DOD, experienced a 
sustained, dramatic reduction in force that was made without 
empirical evidence supporting the reductions. At the same time, 
the promise of DAWEA and the mirror provisions in the Clinger-
Cohen Act remain underfunded and accordingly unfulfilled. As a 
result, much of our current work force is overwhelmed, 
undertrained, and as you heard earlier, retirement eligible.
    SARA does not offer the solutions to the startling decrease 
in oversight in Federal procurement. In my opinion, the bill's 
provisions related to the acquisition work force unfortunately 
appear more cosmetic and they do not require the necessary 
investment of resources needed to solve the pressing problems. 
You will get only what you pay for, as you discussed earlier 
with Ms. Styles and Ms. Lee. I think we need more and better 
personnel and we need the training of that personnel, and that 
requires money. I believe that this committee is extremely 
well-positioned to make the case that investing in additional 
acquisition personnel and work force training is needed to 
restore meaningful oversight to Federal procurement.
    Specifically, as my written testimony explains at length, I 
fear that the training fund will not enhance the current state 
of training for all acquisition personnel. The government 
repeatedly has issued broad proclamations supporting training 
and professional development, such as DAWEA and Clinger-Cohen, 
while failing to invest in a properly trained work force. I 
believe this initiative continues that trend.
    I have a similar reaction to the government-industry 
acquisition professional exchange program. I applaud the 
initiative, but it will not generate sufficient return on 
investment. My experience in government makes me skeptical that 
senior managers will release their most talented personnel for 
these opportunities. Also, the potential for conflicts of 
interest, both actual and apparent, is sufficiently great so as 
to merit further study.
    I offer a similar response to the proposal regarding 
performance-based service contracting. I support any initiative 
to broaden the government's use of performance-based 
contracting. As the government increases its reliance on the 
private sector for commercial services, performance-based 
service contracting expertise grows in importance, but 
statutory exhortations are not enough. Congress needs to 
appropriate money to train government personnel in the use of 
PBSC. They need to mandate classroom training. They need to 
specify that training will include practical drafting and 
negotiation exercises.
    As I suggest in my testimony, you might want to consider 
establishing an annual high profile, governmentwide contest 
that awards excellence in drafting performance-based statements 
of work and publishing lessons learned from successful 
performance-based acquisitions.
    As I address at length in my testimony, particularly pages 
8 through 10, I am extremely concerned regarding the state of 
high-volume, low-dollar purchasing. The proliferation of 
purchase cards has revolutionized government purchasing, but 
with few exceptions the government has accepted an ostrich-like 
approach to oversight. I do not doubt the efficiency of the 
purchase card when used appropriately. But given the 
proliferation of cardholders, insufficient investment in 
training, and the current absence of oversight, we cannot 
conclude that purchase card use is under control.
    Even as disclosure of purchase card abuse has become 
widespread, few are willing to rein in the purchase card. This 
bill would increase purchase card authority ten-fold, while 
imposing no controls. This expanded authority would encompass 
98.5 percent of all government purchases, and for those 
purchases buyers could ignore all of the government's normal 
procurement rules, procedures and protections.
    Also, it is undeniable that such a change would further 
reduce small business participation in Federal Government 
procurement, and in effect the bill would exempt 98.5 percent 
of the government's purchases from all congressionally mandated 
social and economic policies.
    With regard to the provisions related to commercial 
acquisition, I urge caution. I am concerned with permitting the 
use of time and material or labor hour contracts under FAR Part 
12. Use of these vehicles seems antithetical to your policy 
statement favoring performance-based service contracting. 
Further, the authority in effect would facilitate the 
government's use of cost-plus percentage of cost arrangements, 
which as you know are prohibited.
    Similarly, I question the value of the designation of 
commercial business entities. As I see it, the proposal invites 
corporate organizational gamesmanship, which has no place in 
the public procurement regime.
    Finally, I am not aware that a compelling case has been 
made for changes to the current definition of commercial items. 
I believe the current definition accommodates reasonable and 
appropriate uses of commercial purchasing authority. I think 
the initiatives are premature and they require further study. 
In their current form, they pose undue risk to the system.
    Mr. Chairman, in concluding, I do want to make clear that, 
as Steve Kelman knows, I generally supported the acquisition 
reform
movement. What I call for is appropriate oversight to see that 
those reforms are implemented appropriately.
    Thank you again for the opportunity to be here. Obviously, 
I would be pleased to answer any questions you may have.
    [The prepared statement of Mr. Schooner follows:]


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    Mr. Davis. Thank you very much.
    Mr. Dever.
    Mr. Dever. Chairman Davis, Congressman Turner, Congressman 
Horn, as a private sector purchasing professional and taxpayer, 
I commend you for the work that you are doing here in this 
important area of reform, and thank you for the opportunity to 
participate.
    I am currently Vice President of Global Procurement for 
Hasbro, Incorporated, based in Rhode Island. Hasbro is a 
worldwide leader in children's and family leisure-time 
entertainment products and is involved in the design, 
manufacture and marketing of traditional and high-tech games 
and toys. Mr. Woods from the GAO in panel one mentioned several 
companies that were involved in their study, and Hasbro was one 
of those.
    Over the past 3 years, Hasbro has worked to enhance the 
value of its supplier relationships by taking a more strategic 
approach to the selection and integration of various suppliers. 
We have taken several actions designed to improve our 
purchasing effectiveness across the organization. For example, 
we have centralized the development of sourcing strategies for 
key raw materials and have taken a more broad-scoped approach 
to supplier selection and negotiation.
    We have adopted a more streamlined supply chain management 
organization to reduce costs and improve customer service. We 
have created a new section of the purchasing organization whose 
primary focus is on non-production goods and services. This 
function works collaboratively across the various Hasbro 
businesses and locations to rationalize the supply base in 
various categories. And finally, we have selectively adopted 
new technologies such as electronic procurement and purchasing 
cards to help streamline activities and improve the sourcing 
process.
    In line with the intent of the legislation which you have 
introduced, Mr. Chairman, the focus of this testimony will be 
on Hasbro's experience in managing service providers.
    Hasbro relies on service providers in support of many areas 
of our business. Historically, decisionmaking in the selection 
of providers has been decentralized. Our intent was to improve 
the process for acquiring services, without restricting the 
business manager's ability to select the most appropriate 
suppliers. We noted that there were opportunities to reduce the 
number of suppliers in more tactical areas of service 
acquisition, while providing broader exposure to service 
providers in more strategic areas. We felt that we could, in 
fact, improve the quality of the supplier selection process and 
reduce costs concurrently.
    In this testimony, I would like to define two broad 
categories of service providers and discuss the traditional 
approach for acquiring such services, key considerations, and 
our desired approach to acquisitions. It should be noted that 
Hasbro is in various stages of implementation and is 
continually considering further opportunities for improvement 
in all areas of procurement.
    The first category of service contractors is service 
contractors. In the course of conducting business, Hasbro 
sometimes requires certain services that do not make good 
business sense to develop internally. Facilities maintenance, 
security, administrative and catering are examples of services 
that are purchased externally. Such services are highly 
leverageable because the requirements are easy to define and 
there are several qualified sources which behave competitively 
in the market. Traditionally, each Hasbro location or business 
unit established one or more supplier relationships for a given 
service need. Accordingly, the process for requisitioning and 
contracting for services varied by department and location. Our 
strategy was to reduce the number of suppliers across our 
various locations and to implement a standardized 
requisitioning system that streamlined the ordering process.
    Cross-functional teams representing various stakeholders 
work collaboratively to establish consistent service 
requirements, review supplier proposals, and negotiate primary 
source agreements. Through these efforts, we have negotiated 
lower costs and improved service standards. Such standards 
ensure that all locations are being serviced consistently. We 
measure the performance of the suppliers against the agreed 
standards and renegotiate agreements annually.
    The second category of service acquisition that we 
identified was professional services, which are typically 
provided by independent contractors or specialized agencies 
which represent individuals with unique skill sets. During peak 
workloads, Hasbro requires the support of such resources to 
support our business. There are also situations where we need 
to acquire specific knowledge or experience that we have not 
developed internally. Services provided within this category 
include technology support like programming, systems 
integration, creative services, and business consulting.
    The selection process has not been fully competitive in the 
past. Multiple proposals from alternative suppliers are not 
always obtained. Project specification and desired outcomes 
have not been clearly specified in all cases, and supplier 
payments are not always tied to clear delivery of value against 
specified objectives. We also found that the tactical 
purchasing aspects of their acquisition process were cumbersome 
and often delayed the commencement of work and payment to the 
service providers.
    Our approach in this area has been to provide tools and 
purchasing support to the business, which encourages a more 
thorough review of qualified providers. We recognize and 
support the need for business managers to quickly identify and 
acquire the most qualified resources for their specific 
requirement. We have found that when the process for selecting 
professional service providers is more competitive, there is 
more flexibility on cost and other agreement terms.
    We have also developed a more consistent process for 
requesting such services, thereby ensuring that Hasbro's 
liability and risk is minimized. We require a detailed 
breakdown of resources, time, and billing rates to help ensure 
that each phase of the project is completed successfully and 
invoiced appropriately.
    We have recently adopted a Web-based system which 
facilitates a more rapid identification of multiple qualified 
resources. This system helps ensure competitive pricing and a 
more consistent approach to engagement management. In order to 
ensure that services acquisition is managed effectively, we 
have created a position within the purchasing department which 
is focused on services acquisition. This position will continue 
to provide support in the selection, negotiation, contracting 
and management of service providers from tactical to strategic.
    Thank you again for your time, and I would be happy to 
address any questions you may have.
    [The prepared statement of Mr. Dever follows:]


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    Mr. Davis. Thank you very much.
    Mr. Roberts.
    Mr. Roberts. Mr. Chairman and members of the subcommittee, 
I am a Senior Vice President and Managing Director of Federal 
Services at KPMG Consulting, Incorporated. Thank you for 
inviting me here today to testify on behalf of the 500 
corporate members of the Information Technology Association of 
America, ITAA. KPMG Consulting is one of the world's largest 
consulting and business systems integration firms and is a 
proud member of ITAA. ITAA has long been active on issues 
pertaining to government procurement of IT. Additionally, we 
have worked with your staff to recommend some of the provisions 
contained in the legislation introduced this week.
    We are especially pleased to testify in strong support of 
H.R. 3832, the Services Acquisition Reform Act. A recent ITAA 
survey, which I will include with my testimony, found that this 
year Federal CIOs are highly focused on information security 
and infrastructure. Their overriding concern is to address 
security issues raised by the war on terrorism.
    As Federal agencies and the rest of the Nation shift to 
this new focus, it is particularly important that the Federal 
Government have fast, efficient access to the best IT 
solutions. We are certain that these solutions are resident 
primarily in the private sector, and we believe SARA can help 
the Federal Government to acquire them.
    The leadership shown by this subcommittee to consider 
changes in the acquisition of services by the Federal agencies 
is timely for two other reasons. First, IT services has been 
the fastest growing sector in Federal IT procurement. Second, 
because the Federal Government is forecasting such a dramatic 
decrease in the number of Federal IT workers in the next 5 
years due to retirement, IT services will likely continue to 
grow in importance for both government agencies and 
procurement.
    I would like to focus on what ITAA believes are the few key 
provisions in the bill that will enable meaningful access to 
commercial solutions. Acquisition work force recruitment and 
retention--by the middle of this decade, the government will 
face significant retirement numbers, particularly within the 
acquisition work force. Agencies will be left to track not only 
talented individuals, but also those individuals capable of 
being schooled in the new contracting practices that have 
evolved over the last decade. These individuals will be called 
upon the facilitate the government's increasingly complex 
requirements.
    Recognizing the growing urgency of the government's human 
resource needs, ITAA is pleased to support the chairman's goal 
to establish an acquisition work force recruitment and 
retention pilot program. This program will assist agencies in 
matching their respective work forces efficiently and 
effectively to their needs. ITAA stands ready to assist the 
subcommittee in this important effort.
    Acquisition work force training fund--hand in hand with 
recruitment is the need for the government to train its 
acquisition work force. For acquisition reform to be of any 
value, those who implement the acquisition system must 
understand how it works. Despite programs put in place with 
previous acquisition reform legislation, training programs 
throughout the government are still insufficient. ITAA has long 
been a supporter of increasing funding for employee training. 
We have also been highly critical of the fact that these funds 
were too often the first cut when budget reductions were 
necessary.
    Establish a regulatory review process--despite a decade of 
acquisition reform, many laws and regulations still inhibit 
greater use of commercial practices. A continuous review of 
these laws and regulations is needed, especially in light of 
the ever-changing dynamics of our marketplace. This will 
maintain a constant critical eye on acquisition law, always 
working toward the optimization of the acquisition process. 
ITAA strongly supports such a review process and would also 
appreciate the opportunity to participate in an appropriate 
manner.
    Limitation on commercial liability--Federal contracting 
officers are reluctant to limit the amount of liability a 
contractor must accept, even though the common practice in the 
commercial marketplace is to cap liability at the total 
contract level, a multiple of it, or a specific dollar amount. 
By forcing contractors to assume all risk, the Federal 
Government will attract fewer competitors or companies who will 
offer only low-risk solutions and higher prices. ITAA commends 
the sponsors for considering this change to align more closely 
with commercial practices.
    And the last area, conflict of interest--in many instances, 
the Federal Government may be denying itself services of 
companies with the deepest and best understanding of particular 
agency requirements. Many firms elect to forego opportunities 
to provide front-end consulting to government agencies in order 
to comply with procurement rules that would bar them from 
pursuing larger development and implementation and maintenance 
contracts. ITAA supported the provisions in the earlier drafts 
of the Clinger-Cohen Act that revised the Federal Government's 
rigid conflict of interest requirements. ITAA believes that the 
commercial sector's flexibility in selecting the best contract 
to provide a total solution should also be extended to Federal 
customers.
    Mr. Chairman, that concludes my comments. ITAA thanks you 
for this opportunity to comment on this critical piece of 
legislation. We also stand ready to assist you in any 
modifications or additions to SARA. We again commend you for 
taking this important and timely reform effort.
    Thank you for the opportunity to appear today. I will be 
happy to address any questions.
    [The prepared statement of Mr. Roberts follows:]


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    Mr. Davis. Thank you very much.
    Ms. StandsBlack-Carver.
    Ms. StandsBlack-Carver. Mr. Chairman and members of the 
subcommittee, my name is Roberta Carver, President and CEO of 
Four Winds Services, Inc. I am here today on behalf of Contract 
Services Association of America, where I serve on its board of 
directors.
    I incorporated in 1991 Four Winds Services, Inc., as an 
8(a) certified Native American woman-owned business company 
that provides various types of contracting services to military 
installations nationwide. Based on excellent customer service 
and past performance record of excellence, Four Winds is the 
recipient of several prominent awards.
    I am a member of the Ponca Tribe located in Ponca City, OK. 
I greatly appreciate the opportunity to testify before you on 
services acquisition reform, a subject very important to my 
company, as well as the entire membership of CSA. Services 
acquisition reform remains one of the top three policy issues 
for the members of CSA. We applaud your introduction of 
Services Acquisition Reform, or SARA, and are committed to 
working with you to ensure its passage.
    I would like to touch briefly on a few key areas of your 
bill that are particularly important to my company and all 
small service contractors. I have provided a written statement 
for the record which addresses the majority of the bill's 
provisions in greater detail.
    For CSA, the training and the education is a vital 
component of the acquisition work force and ranks high as a key 
area for all concerned. This is certainly true as we move 
toward greater PBSA contracting, which both Congress and the 
administration have embraced. PBSA allows the government to 
identify the what, and it lets the contractor determine the 
how. PBSA holds great vision and promise to reduce costs, while 
increasing service quality. It capitalizes on the private 
sector expertise and leverages IT innovations. Small businesses 
will greatly benefit from such innovative contract types.
    Properly implementing PBSA as a standard is another story. 
For example, we have bid and won a PBSA contract. It is a 
worthwhile challenge, but it has been our experience that 
continual micromanagement is practiced by the government to the 
extreme, which defeats the whole purpose and leads to 
unnecessary internal conflicts.
    Training is a big stumbling block. Your bill, Mr. Chairman, 
which provides an innovative method for funding for training, 
is necessary and a positive step toward ensuring that the 
acquisition work force have the proper tools to implement PBSA 
and all the acquisition policies. For example, the Native 
American Incentive Act, it took literally an act of God to find 
out the exact source of payment, and then became a self-
training effort for us in explaining the Act and its process to 
our government personnel so that they could properly implement 
it.
    Also, improving payment terms for the service contractors 
is a win-win for both the government and the private sector 
contractors. It has definitely been a cost savings to the 
government because the contractor will have less carrying cost 
that would otherwise be passed on to the government. In this 
electronic age, we should be able to provide electronic 
invoices, which will expedite the process for getting paid for 
services already rendered. The provisions in SARA will help 
alleviate my cash-flow problems and help me meet my payrolls, 
and saves the government from paying late interest fees.
    Recently, it came to our knowledge that a January invoice 
was not submitted in a timely manner by a government 
contracting officer, and the payment was held up for 1 month 
before being submitted to DFAS. Electronic invoicing would have 
alleviated this problem.
    Now, I would like to address the benefits of the longer 
terms of 7 to 10 years for service support contracts, rather 
than the traditional 3 to 5 year. There are currently only a 
few agencies taking advantage of this. The benefits are easy to 
quantify. The government benefits from the ability for 
contractors to invest in more productive and efficient 
capabilities for the job that would not be possible under the 
short-term contracts. It is common knowledge in our industry 
that the first couple of years are trouble-shooting and 
implementing our new innovations to improve the service. A 
longer-term contract would allow us to perfect and improve our 
processes. Examples include state-of-the-art quality control 
plans such as ISO 9000, modern innovative management practices, 
and new software and efficiency programs.
    Finally, as the bill moves through the legislative process, 
I would urge the subcommittee to consider the revisions to the 
Service Contract Act. SCA remains an important element to the 
services contracting arena. It provides basic protections to 
workers employed under government service contracts, 
particularly unskilled and semi-skilled workers. While the 
premise of SCA remains sound, certain revisions are needed to 
update the Act and move ahead in the 21st century.
    For example, the current threshold of $2,500 established 
upon the Act's enactment in 1965 has not been increased since 
that time. The SCA threshold should be increased to $100,000, 
the current simplified acquisition threshold level. There also 
should be a regular inflationary adjustment to tie to the SCA, 
as you proposed in your SAT. I have long pushed for similar 
adjustments in statutory thresholds mandated for the Small 
Business Administration's 8(a) program. It just makes good 
common sense. Increasing the SCA threshold would certainly 
benefit my company and other small service contractors, while 
still ensuring the Act remains in place on a majority of 
government contracts.
    Thank you for this opportunity to share my views with the 
subcommittee, and I will be happy to answer any questions.
    [The prepared statement of Ms. StandsBlack-Carver follows:]


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    Mr. Davis. Thank you very much.
    Mr. Howe.
    Mr. Howe. Chairman Davis, Mr. Turner, Mr. Horn, I am Jerry 
Howe, Senior Vice President and General Counsel of Veridian, a 
leading provider of information-based systems, solutions and 
services to the U.S. Government. We specialize in mission-
critical national security programs, primarily for the 
intelligence community, the Department of Defense, law 
enforcement and other government agencies.
    I am pleased to be testifying today on behalf of the 
Professional Services Council, a membership organization 
including 140 members, which is the Nation's principal trade 
association of government professional and technical services 
providers. The PSC is a strong supporter of the Services 
Acquisition Reform Act of 2002. We support the legislation 
because of its focus on three interrelated aspects of a 
successful system for the acquisition of services--people, 
structure and processes. I will touch on each of these and hold 
the rest of my observations for our written testimony.
    Mr. Chairman, for services companies there is no more 
important aspect of what we do than our people. The same is 
true of the Federal work force. Too often, though, the impact 
of economic change and legislative and regulatory actions are 
ignored or dismissed as immaterial. That is a serious policy 
mistake when dealing with the Federal work force. For our 
members, it is a prescription for disaster.
    Our focus on people is one of the hallmarks of our industry 
and one of the reasons why PSC has been a vocal advocate for a 
well-trained, well-compensated Federal acquisition work force. 
SARA properly includes several provisions that address key 
human capital needs in the Federal acquisition work force. 
Among them are the provisions of Title I of the bill regarding 
a funding mechanism to ensure that work force has meaningful 
access to ongoing relevant training.
    We, like many other witnesses before the committee today, 
would prefer to see direct appropriations made available to 
meet employees' training needs, ensuring that Federal employees 
have ready access to those funds. Regrettably, as has been 
observed several times also this afternoon, that is not the 
reality of the current process.
    Therefore, as a second-best choice, we have recommended and 
strongly supported creating an alternative funding mechanism to 
ensure at least a meaningful amount of training funds are 
available. Section 102 of the bill is clear in moving toward 
this purpose. By setting aside for training of the Federal 
acquisition work force a small portion of the user fees on the 
transactions made under multiple-award contracts, Congress will 
have taken a significant step in addressing this important 
matter.
    Another key theme of the legislation is the focus on the 
appropriate structure for managing growing responsibilities 
placed on the Federal acquisition system. At PSC, we have 
worked successfully with the senior procurement executives in 
many of the Federal agencies. They are dedicated people who 
have a passion for the work and a strong professional 
commitment to the execution of their agency's missions. The 
Federal Government spends $220 billion on goods and services. 
Of that, $87 billion is spent on services. The magnitude of the 
spending, which is increasing every year both in absolute terms 
and as a proportion of the total, deserves the government's 
full attention and commitment. In the formal structure of an 
organization, including the placement of key leadership, is one 
way to reflect that attention and commitment. Section 201 of 
the bill creates in each agency a chief acquisition officer. We 
believe the position of chief acquisition officer with 
authority for assuring uniformity and accountability across 
agency activities is crucial.
    The Federal Government is slowly upgrading the tools and 
techniques it uses to acquire services. Many of the best 
practices for services contracting such as the use of 
performance-based contracting have been around for decades. Not 
as much progress is being made in the Federal sector. While 
progress is being made, agencies' procurements are becoming 
increasingly complex and technology-driven in the services 
area. It is important to recognize that agencies need the 
maximum flexibility to meet their mission needs, consistent 
with smart acquisition planning and responsible oversight and 
safeguards. Many of the provisions in Titles III, IV and V of 
the bill are designed to do just that.
    For instance, section 401 makes permanent the temporary 
authority that exists to treat performance-based contracts or 
task orders valued at less than $5 million as commercial items 
eligible for use as special contracting techniques available 
for commercial items. We support making that authority 
permanent and governmentwide. While the test program being made 
permanent is clearly a step in the right direction, more can 
eventually need be done to address to address the barriers to 
widen Federal agency use of commercial items purchases of 
services.
    Section 402 acknowledges that many services that Federal 
agencies acquire are best performed on a time-and-materials or 
labor-hours basis. These contract types are used widely in 
commercial marketplace for services, and should be made 
available for use by Federal agencies. Many of the specialized 
training needs of Federal employees could be met by such 
contracts.
    The nature and scope of services acquisition is evolving 
and the law should be updated to permit agencies to use a 
contract type that is most appropriate for the needs, and 
consistent with commercial practices.
    Finally, while Congress examines services acquisitions, it 
must do so within the broader context of strategic sourcing 
decisions that agencies make for performing their mission. PSC 
has consistently opposed legislation that would seek to 
specifically mandate or give preference to an in-house sourcing 
policy for the Federal work force or that would further tip the 
evaluation scales in favor of in-house performance. There is no 
need for any legislation in this area particularly at this 
time.
    Mr. Chairman, the Services Acquisition Reform Act of 2002 
is an important contributor to improving the way the Federal 
Government acquires services. We at PSC strongly support it. 
Thank you for the opportunity to appear before the 
subcommittee, and I would be pleased to answer any questions 
you might have.
    [The prepared statement of Mr. Howe follows:]



    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
    Mr. Davis. Thank you very much. I want to thank all the 
panelists very much for your testimony.
    I will start with questions, and I will begin with Mr. 
Horn, the gentleman from California.
    Mr. Horn. Thank you, Mr. Chairman.
    I think all of us respect the purposes of this fine bill 
that you have put together, and we do need flexibility and we 
do need to focus on things. But for those of you that might 
have still been here when the first panel was, my question to 
you is the same, whether you are in a corporate frame or 
whether you are a contractor or whatever, and not in a 
corporate frame. But can you tell me what kind of 
responsibility and accountability will you put in your 
organization so that we do not have the kind of thing that we 
have had in the Navy in San Diego? Can you tell me how you will 
structure it and how you will have accountability and 
responsibility? Because otherwise, it is one great Ponzi 
scheme, just like this Enron thing, and you have once, and you 
get away with it, and then of course Congress will just murder 
it, and they should. So I would like to hear from you, just 
right down the line.
    Dr. Kelman.
    Mr. Kelman. I would like to hear from the gentleman from 
Hasbro. I guess what I would say is that, first of all, if 
people commit fraud, you send them to jail. That is the first 
thing.
    Mr. Horn. That is right.
    Mr. Kelman. You have review procedures--actually the 
purchase card makes it easier to do this kind of review than 
the traditional system. We don't know what was going on in the 
traditional system. The purchase card provides computer records 
of purchases that can be easily scanned, can be data-analyzed 
and so forth. With the proper management controls in place, it 
is easier to detect fraud and problems with a purchase card 
than it is with the pre-purchase card system. I think we should 
also be careful, and I know your concerned with this as well, 
Congressman Horn, that as Chairman Davis said, we keep a 
balance here.
    Let's remember we have 23 million purchase card 
transactions a year. Two facts to keep in mind. First, in these 
small purchases, whether it be in government or in industry, we 
have learned that the administrative costs of the traditional 
system, just putting the paper back and forth in the 
requisition and so forth, are often greater than the amount of 
the purchase itself; that it runs about $150 whether private 
sector or public. I have seen some studies in Intel and some 
private sector companies, and it did that in the government. 
The government is saving $100 per transaction in administrative 
costs from the purchase card. If you ask why were we able to 
downsize the procurement work force in the 1990's, mostly it 
was people doing these small purchase card transactions.
    At 23 million transactions a year, that means the Federal 
Government is saving $2.3 billion a year in administrative 
paperwork using the purchase card. So we have to be careful to 
put in the proper controls, make sure they are there, but it 
would be, in my view, an anti-taxpayer policy to get rid of or 
sort of say the purchase card is bad. The purchase card has 
been a great innovation for the taxpayer, but we need the kinds 
of controls that you have been talking about.
    Mr. Schooner. Congressman Horn, if I could do three things 
first. If you have the opportunity, if I could draw your 
attention to pages 8 through 10 of my testimony where I discuss 
section 221 and the purchase card at great length. I think you 
will find that there are a number of useful statistics in there 
and you will see that I have addressed a number of the concerns 
that you have raised.
    Second, one thing that concerns me quite greatly, and Steve 
Kelman may remember this also, but when the purchase card was 
actually being implemented during the acquisition reform 
movement, and we went to the multiple award program that 
permitted the various agencies to choose purchase card vendors, 
one thing that we pushed very hard, and at the time I was at 
OMB, we encouraged the agencies to adopt and accept those 
vendors that were offering smart card technology power, rather 
than necessarily just blindly chasing the rebates.
    Having said that, in 100 percent of the cases, agencies 
chose rebates over the kind of smart card technology that could 
do the kind of oversight that Steve Kelman was just referring 
to. The kind of oversight that we could do automatically 
through the charge card vendors is mindboggling, but as a 
general rule the government has not invested in that.
    In addition, on page 10 in my testimony, I talk about some 
specific steps that could be made with regard to the purchase 
card, but I think the single most important thing that I would 
recommend in that regard is, as Mr. Woods mentioned, in the 
followup GAO report on the Navy issues and the purchase card, 
they list page after page of potential controls that could be 
used at various agencies. I think those are the kind of things 
that ought to be considered in lieu of what section 221 does, 
which is simply raise the threshold and not impose any 
controls.
    So I think that there are a number of things that could be 
done, and I share your concern on the purchase card. I consider 
221 to be the single most threatening thing in the entire SARA 
legislation.
    Mr. Horn. Mr. Dever.
    Mr. Dever. Congressman Horn, the purchasing card has been 
available in the private sector for probably 10 years. Hasbro 
adopted its purchasing card about 5 years ago. These are 
companies that watch dollars very carefully, and yet they 
continue to find ways to expand the use of p-cards. At Hasbro, 
as have transaction limits. Per transaction, we have limits per 
month. The summary billings are reviewed by management. So if 
there were any abuse, it would be detected quickly.
    Additionally, there are, with the smart card technology 
anyway, the ability to block those cards from being used for 
certain types of purchases. For example at Hasbro, you cannot 
use a p-card to buy a computer because we have a different 
process for procuring computers, so certain retail 
establishments can be blocked. And there are mechanisms to 
highlight things that would point toward abuse as well.
    So I think the controls are in place. It would be a matter 
of consistent policy.
    Mr. Horn. Mr. Roberts.
    Mr. Roberts. I would agree with that. The biggest things we 
have in any business is internal controls. They are 
implemented, they are in place, and they are understood by all. 
People are trained on what the controls are, and the key is it 
comes down to simple individual accountability and 
responsibility, as well as supervisory responsibility and 
accountability, and those two things connected. We do not do 
things at KPMG Consulting with our purchase cards. Again, we 
have controls, but the key is people understand what the 
controls are and they are acted upon, and they are trained on 
it and you know what you are up against in all cases.
    Mr. Horn. Ms. Roberta StandsBlack-Carver.
    Ms. StandsBlack-Carver. Currently, Four Winds Services does 
not maintain a contract in which we utilize the smart card. But 
it is a general consensus in our CSA memberships that we do not 
permit or accept any fraud among our membership companies. In 
our other financial business practices, though, without the 
smart card, we do have our own internal checks and balances in 
which we do random reviews to ensure that there wasn't any 
fraud taking place on any of our contracts. And we also are 
consistently audited by an outside Federal agency, DCAA, on our 
larger cost-plus-type contract.
    Mr. Horn. Mr. Howe.
    Mr. Howe. I will address the question from the point of 
view of the seller of the services. Our company does not sell 
any services since we are in the national security arena that 
could readily be converted to personal use, such as DVD player. 
But I will address the question this way, our company, and I 
dare say all members of the PSC, have adopted codes of ethics 
and standards of conduct which are enforced by internal 
controls and disciplinary actions when appropriate.
    Our company in particular has just opened something that we 
call the Veridian Institute, which gives training a prominent 
place within our company and pulls together all the disparate 
resources and augments them that were previously used to 
reinforce these kinds of procedures and controls. I think that 
brings us back to the point that at least I started with, which 
is the importance of training because you can have as many 
rules as you would like, if people do not understand the 
importance of those rules through training and know how to 
comply with them, it won't work.
    Mr. Horn. Any other comments you want to make on this very 
possible interest of when we need to redraft something in the 
bill? So I will look at a number of yours, and hopefully we can 
work something out. I do not know if there are any other 
suggestions, especially in the training course. You are right, 
Mr. Howe, that if they are not serious and it is not good 
teaching, not much is going to happen. So I would hope that all 
of you would be able to put that program together.
    Is there a model somewhere in the United States right now 
that would be the best kind of corporate teaching, as well as 
control in the particular card?
    Dr. Kelman.
    Mr. Kelman. We have it at Harvard, but I am sure it is not 
a model.
    Mr. Horn. Yes.
    Mr. Kelman. We do have them, though.
    Mr. Horn. You mean the model is Harvard?
    Mr. Kelman. We have p-cards.
    Mr. Horn. Yes.
    Mr. Kelman. My assistant uses one, and actually I have one 
as well for some expenditures, but I will not claim that we are 
a model. Nobody reviews my purchase card expenditures at 
Harvard. I am sure I am engaging in fraud all the time without 
knowing it, but whatever. [Laughter.]
    Don't throw out the baby with the bath water, I would say, 
Mr. Chairman.
    Mr. Horn. Thank you.
    I will yield now to Mr. Turner, the ranking member on this 
subcommittee, for questioning.
    Mr. Turner. Thank you, Mr. Horn.
    Mr. Schooner, I read what you had to say about the purchase 
card authority. As you said, that is your greatest concern with 
this legislation, adding that single zero. Do I take it that 
your position is that it just should not be raised at all, but 
what we should do is impose accountability and controls? Or if 
we had accountability and controls, do you think it would be 
appropriate also to increase it in some amount?
    Mr. Schooner. Well first, as I suggested in I believe a 
footnote, I think that it would be entirely appropriate to put 
an inflationary adjustment on it. I do not see any reason why 
it arbitrarily has to be $2,500 forever. It seems to me that 
if, and this is a significant if, if we can establish internal 
controls, appropriate training and stop the proliferation of 
cards in terms of numbers of shareholders, and demonstrate some 
level of stabilities and use some of this technology in the 
near term to someone's satisfaction, hypothetically GAO's 
satisfaction, then I think we should in fact be looking at 
increasing the threshold. But now is not the time, and I guess 
that the short answer to your question is, for the current, I 
would hold the threshold where it is and increase controls 
dramatically. I think that they should be both technological, 
training-oriented and the like. Only when those controls are in 
place and only when we have accountability should that increase 
be made.
    I think one of the most important things to remember is 
when the original initiative for the purchase card and 
procurement was made, the theory was to make the contracting 
officer more efficient by giving him or her the purchase card 
to, as Dr. Kelman said, save a lot of transaction costs. But a 
funny thing happened on the way to the forum, when 670,000 
government employees have a purchase card who on the average 
have less than 4 hours of training and are unbound by any of 
the conventional rules related to government procurement. This 
is a process gone awry.
    Mr. Turner. Dr. Kelman, do you agree with that?
    Mr. Kelman. It is a little bit unclear what the proposed 
statutory language does. Frankly, I was a little confused when 
I read it. There are two different ways to use a purchase card, 
Congressman Turner. One is as a purchasing device--in other 
words, you use it, you decide what you get and then you use it 
to pay for something. Using the purchase card as a purchasing 
device is limited to $2,500. As I understand it, the language 
in SARA continues using it in terms of the controls, the 
procurement controls--having to get bids, all sorts of things 
that the language in SARA does not change that. What it does is 
to allow it to be used as a payment device from $2,500 to 
$25,000. Now, in fact if that is what it does, and frankly it 
is a little bit unclear to me what exactly it does, but if that 
is what it does, actually since right now you can use it above 
$2,500 only for contracts that have been negotiated already by 
the government. And the biggest way it is being used now over 
$2,500 is on these various large computer contracts where the 
government has negotiated fantastic prices. They are world-
beating contracts. They are amazing contracts. They are 
wonderful vehicles with great prices, great terms and 
conditions and so forth. And people are using a purchasing card 
to buy computers off of those contracts.
    Those, frankly--the ones above $2,500 are actually probably 
the ones least subject to abuse. If there is abuse and problems 
and problems with controls, it is actually probably more in the 
ones under $2,500, which the law does not change at all.
    So I think I agree with Congressman Horn. I agree with 
Steve Schooner that we need to do some more fraud controls in 
general in the system. If all that SARA says is allow people to 
pay for something using the purchasing card above $2,500, where 
the contract has already been pre-negotiated and we know we are 
getting good prices, they are just buying it off the Internet, 
or whatever, I don't think that is an area of concern or 
problem. I think probably the problems are more in the under-
$2,500 that this statute does not touch.
    Mr. Schooner. May I comment?
    Mr. Turner. Yes, Professor.
    Mr. Schooner. My understanding is the intent of the statute 
was to actually change the micro-purchase threshold, and I see 
Mr. Brosnan nodding.
    Going back to the point that Steve made, when the original 
OMB report on electronic payment and purchasing came out in 
1998, the theory was use the purchase card up to $2,500 for 
purchasing, but up to $100,000 for payment. And as Steve has 
suggested, there are huge efficiencies associated with payment. 
But my understanding is this bill would in fact raise the 
micro-purchase threshold to $25,000, which would basically be 
98.5 percent of all government purchase transactions--no rules, 
no controls, no nothing. And I think that is an accident 
waiting to happen.
    Mr. Turner. Well, as Mr. Horn pointed out a minute ago, 
when you have examples of abuse, it is certainly a difficult 
time to make major changes. I think we all understand the 
private sector, if you abuse a purchase card, you are going to 
be held accountable as an employee of the company, but you 
won't likely read it in a newspaper. In government, you are 
going to read it in the newspaper and it is going to be called 
a scandal. So we I think share a common interest in proceeding 
cautiously.
    Professor Schooner, you also made a comment regarding the 
acquisition training exchange portion of this bill in your 
testimony. You suggested that we ought to be more careful about 
protecting against conflicts of interest. Would you expand on 
that? What kind of concerns should be looking out for? What 
kind of protections against conflicts should we be including in 
this legislation to ensure that problem you raised is 
addressed?
    Mr. Schooner. Off the cuff, let me confess that I think it 
would be hard to come up with what those controls could be. I 
think, for example, that an exchange program, whether you call 
it the DigiCorps or in the scientific community, it is very, 
very clear how these exchanges could pay tremendous dividends 
for both sides, both private industry and government.
    But consider the fundamental scenario where, and we are 
only really talking about senior acquisition executives--a 
senior acquisition executive goes to work for Lockheed-Martin 
for a year and then comes back. Under the conventional rules 
today, they would be recused from every doing business with 
them directly, or at least doing business with them for a 
certain period of time. These would be the minimum standards. 
But the amount of pressure that this would put both ways--
imagine the Lockheed-Martin purchaser going to work in the 
government office. Are they simply not to work with Lockheed-
Martin? How would they be perceived by Lockheed-Martin's 
competitors when they came in to negotiate with those people?
    I would love to tell you that I have concrete answers for 
you, but I think that it is so complex, and despite all its 
best intentions it raises issues that really need to be studied 
before we take a shot like this.
    There are plenty of people who have lots of experience with 
regard to this. We have the Office of Government Ethics who 
might be able to draft something, but I think we need to do a 
lot of thinking about this because even if we could come up 
with those rules, the rules that we would probably need would 
probably be disadvantageous to the career progression of the 
people who would most benefit from the program. And so I think 
we could fall into a vicious cycle.
    I apologize I do no have a concrete solution for you, but 
at a minimum I think we need some hardcore study.
    Mr. Turner. Let's address a minute the share-in-savings 
contract concept. I know, Dr. Kelman, you have spent a lot of 
time studying it and advocating it. You heard Ms. Lee make the 
comment today that she thought there ought to be more incentive 
built in for the Federal agency. I think what she was referring 
to is, even though it is fundamental in the definition, that 
the agency shares in savings. She saw a deficiency because I 
guess the specific section of DOD that was doing the 
contracting or the negotiating was not going to get the direct 
share of the savings. It was going to go to the Department of 
Defense generally.
    It does seem that here again we have the potential for 
conflicts of interest; that an agency negotiating a share-in-
savings clearly wants to be able to show sometime during the 
contract period that there is a savings. And so there would be 
a natural tendency to want to make the baseline as low as 
reasonably possible so we can show those savings, that we have 
actually done something that was positive.
    How can we be assured that, No. 1, our Federal work force 
contracting officers have the expertise to negotiate contract-
in-savings? And second, how can we be assured that they are not 
going to have an inherent conflict of interest when they 
structure those contracts, because they want to be sure they 
show some savings?
    Mr. Kelman. Well, I think--a few observations. People were 
talking during the first panel about the need to learn to walk. 
We are not going to learn to walk unless we take some steps 
such as those outlined in SARA to make it easier for agencies 
to get the experience doing this. There is experience. There is 
positive experience in the IT area. Much of it is at the State 
and local level. One very prominent example which has been 
highlighted by the Council for Excellence in Government, which 
is a good government organization here in town, is the 
successful modernization of the California income tax system, 
done through a share-in-savings contract while IRS has had 
many, many problems over the years getting successes in their 
own modernization.
    There have been a number of examples, again at the State 
and local level, involving parking enforcement, actually tax 
modernization in a number of other jurisdictions, and so forth. 
The Education Department contract, which was referred to 
earlier, even if you accept the IG's version of the baseline, 
and the Education Department does not agree with it, and it has 
some--to my mind, I have looked at both the IG report and the 
Education Department response, the IG report has some to me 
very obvious errors in it. But even if you hypothetically were 
to accept the IG baseline, over a 5-year period, the Education 
Department and the taxpayer will be saving $15 million. By 
using the IG's numbers, the taxpayers will be spending $15 
million less for those services than they would be if that 
contract had never been signed. And if you accept a more 
realistic baseline, it is more than $15 million.
    I guess what I would say, sir, I think that we need to 
experiment with how we develop that expertise, get those best 
practices together. One possibility is involving the IGs in the 
development of baselines. There are also Federal, you know, 
FFRDCs, people like Mitre Corp. and so forth, who sort of serve 
as the government's nonprofit, non-partisan consultants. They 
could be brought in to help the government develop baselines. I 
think you are right to raise that as an issue and to say, hey, 
we need to figure out how to do the best possible job here.
    What I think would be a mistake, let's remember the status 
quo. The status quo is far too many failed information 
technology modernization projects in the Federal Government. 
The status quo is agencies having the same conflict of interest 
of claiming that this is going to work--you know, coming up 
with exaggerated budget numbers. I mean, some of those 
problems, that is why we have Congress. That is why we have 
oversight. That is why we have, you know, whatever.
    The status quo is not acceptable. The status quo is not 
enough incentive for contractors to deliver results for the 
taxpayer and for the agencies. This is a very creative--this is 
the most creative idea in contracting that I have come across 
in the last decade. This is a creative approach that rewards 
the contractor only to the extent they deliver results. 
Compared to the status quo, the status quo, sir, is often that 
we pay contractors tens and sometimes even hundreds of millions 
of dollars for projects that deliver no results. Share-in-
savings says that if you don't deliver results, you don't get 
paid.
    I want to do anything we as a government can to move us 
from a situation where we just pay regardless of results, to a 
situation where we pay only for results. Will we make some 
mistakes along the way? Of course, but we have got to work to 
change the way we do business and improve the way we do 
business in the taxpayers' interest. And let's all again, be it 
Mitre, be it agency best practices in sharing information about 
best practices on developing baselines, be it DCAA should be 
brought in maybe to help on these things, other accounting 
firms--baseline issues are often accounting issues. So you 
know, you bring in an accountant or bring in the government's 
own accountants--again, DCAA. Let's instead of sort of saying, 
well, this is not perfect so let's stop it before it gets 
started, let's say we need to move this forward, and I think 
the provisions in SARA do a great job of trying to move it 
forward. Let's move it forward and let's exert careful 
oversight from your end--plural--from Congress' end and let's 
bring in experts and let's do the best we can so we figure out 
how to make this work better.
    But the potential for moving from a culture that allows or 
pays for failure and one that only pays for results for the 
taxpayer, that is too great an opportunity for the taxpayer and 
the government and us as a people to pass up on, I think.
    Mr. Turner. Thank you.
    Thank you, Mr. Chairman.
    Mr. Davis. Mr. Kelman, let me just continue. You and a 
number of other witnesses today have just cautioned that the 
SARA provision that would reserve for work force training 5 
percent of the fees collected by agencies under their multi-
agency contracts could results in agencies merely substituting 
money that is collected for funds currently used for such 
training, rather than adding to the current levels. It is hard 
to measure how much money is used for training. We tried to go 
through the budget, but here is what my cursory research shows, 
is that SARA can produce $600 million to $800 million a year in 
a training pool. DOD, we find, uses about $100 million a year 
in training now.
    So this would, even if they replace it, I think do a better 
job, and more importantly it is there year after year. I know 
that changes--I think we are still want to pay attention to 
what you cautioned on this, but that may make you feel better 
if those numbers indeed go up.
    Mr. Kelman. Yes, that is interesting. What I suggested, 
Chairman Davis, in my written testimony was one way to prevent 
against that danger, if one is worried about the danger, is to 
say that the money cannot be used to meet existing statutory 
requirements under DAWEA or the Clinger-Cohen existing training 
provisions. Instead, we asked the procurement executives to 
come up with some special topics--share-in-saving baselining, 
performance-based contracting, whatever--that would be the 
subjects of training negotiating techniques; things that help 
the government, to use Deidre Lee's expression, become business 
advisor or help the contracting folks become business advisors. 
Have it be topics in intelligent ways to do business, and use 
the fund for that reason.
    If I could add one other thing, the administration in its 
testimony referred to this as being, you know, it should come 
under, this is bad budgeting practice to not have to have sort 
of a separate line item for this. I am not particularly a 
budgeting expert, although I know some budgeting experts at the 
Kennedy School. I guess I would say that there are lots of 
budgeting experts in academia who would strongly disagree with 
the view that we should have a micro-line item for every little 
micro-area. They would argue that this is perfectly acceptable, 
perfectly good budgeting policy.
    Mr. Davis. I am sure in academia you can find someone to 
support almost any position. [Laughter.]
    Let me ask Mr. Schooner, in your testimony, I think if I 
heard you right, you believe that the lack of external 
oversight is negatively impacting the procurement process.
    Mr. Schooner. I do.
    Mr. Davis. And by lack of external oversight, do you mean 
lawyers filing suits? Bid protests?
    Mr. Schooner. To the extent that Steve has already taken 
his cheap shot at me on this one today, and to the extent that 
we disagree, I take your point, Congressman Davis, that I would 
not want to come here today and suggest that litigation is a 
public good. Conversely, the concept of third party monitoring, 
external monitoring, or private attorney general activity is 
more important when we have a massive reduction in internal 
oversight like we saw in the 1990's. It would be absurd for me 
to come before you and say that generally, in a vacuum, that 
third party oversight is the preferred alternative. But we have 
viscerated our oversight system during the 1990's. And so as a 
second-best alternative, it frightens me that we also saw the 
reduction in external oversight.
    Mr. Davis. I think a recurrent theme I am hearing today is 
the concern over the smart card. Whenever you embolden or 
empower your purchasers out there in the field to do things, 
more mistakes are going to happen. That is natural. You gain a 
lot of efficiencies as a result of that, a lot of good things 
happen. But you are going to get more mistakes and one way to 
hopefully curb that and limit your mistakes is by appropriate 
oversight as is appropriate training.
    How you do that, I don't think you are keen on how you do 
that one way or the other, either internally or externally, but 
you feel, and I think probably everybody feels, you need to 
make sure we have enough oversight.
    Mr. Schooner. Right. Clearly, I prefer the internal 
oversight to the extent that we could have it, but let me also 
say to the extent that you mention the smart card technology, 
one of the other things that I propose if you do want to speak 
to the purchase cards, one excellent suggestion that this 
committee could make would be to push the government in the 
direction of leveraging their purchase power. Right now, no one 
is concatenating the data on what the government buys from 
large retailers so that we can go to Home Depot and go to 
Stapes and go to these places----
    Mr. Davis. Economies of scale.
    Mr. Schooner [continuing]. And basically say, we spent $20 
million with you last year, so now we want a point-of-sale 
discount when someone shows up with a government purchase card. 
We do it with the travel card with hotels and rentals cars and 
the like. We should do it with the purchase card as well.
    Mr. Davis. Absolutely.
    Mr. Schooner. And the technology is there to do it.
    Mr. Davis. Mr. Kelman, you would agree with that, too, 
wouldn't you?
    Mr. Kelman. Yes. That is actually done already to a fairly 
large extent. GSA, for example, if you use a purchase card at 
True Value Hardware Stores, you get an automatic I think it is 
10 percent discount off the GSA schedules. And of course, a lot 
of purchases--I think in the long run----
    Mr. Davis. We do it for hotels, at government rates and 
stuff.
    Mr. Kelman. We do it for hotels. We do it--absolutely--we 
do it for air fare and we do it for off-the-shelf computers 
where the government gets fantastic prices.
    Mr. Davis. But obviously this is a place where we can 
expand it and maybe we ought to include something like that 
here.
    Mr. Kelman. Absolutely.
    Mr. Davis. The government's goals in this ought to be able 
to get the best value for the taxpayer dollar; not be concerned 
with whether it gets outsourced or in-house or all these other 
rules, and that is what we are trying to get at.
    Let me just ask a few more questions. Mr. Dever, in your 
statement you describe some of the innovative approaches that 
Hasbro has undertaken to manage its acquisition services. What 
were the drivers or motivators behind your effort?
    Mr. Dever. Improved financial performance for the most 
part, and moving away from a decentralized approach to more of 
a centralized one.
    Mr. Davis. So basically the bottom line drove it.
    Mr. Dever. Yes. And there are significant service 
enhancements, increased value, kind of non-financial value 
opportunities.
    Mr. Davis. Does Hasbro have the equivalent of an executive 
level chief acquisition officer?
    Mr. Dever. That is my role.
    Mr. Davis. OK. So you are the guy, so to speak.
    Mr. Dever. The role was created 4 years ago and I was hired 
into it at that time.
    Mr. Davis. OK. Do you use performance-based contracting for 
services?
    Mr. Dever. Yes. We negotiate service level agreements with 
various providers and measure that performance on a regular 
basis, and ultimately renegotiate those contracts based on 
that.
    Mr. Davis. OK.
    Let me ask Mr. Roberts if you can answer this. Do you know 
what barriers IT companies would encounter when selling 
commercial IT services to the Federal Government under the 
current FAR Part 12 definition?
    Mr. Roberts. Under the current FAR?
    Mr. Davis. Just under the current law. Don't worry about 
the FAR.
    Mr. Roberts. The biggest things right now are probably 
conflict of interest, where current IT providers will go in and 
can do the requirements analysis, but are precluded, though, 
from doing implementations in some cases.
    Mr. Davis. OK.
    Mr. Roberts. On the commercial side usually you will have, 
if they can do both, they will do both. A lot of times in the 
government, some people will be conflicted out just for 
purposes of conflict. I think that needs to--what is nice about 
the SARA bill is that takes that out.
    Mr. Davis. Does KPMG currently do share-in-savings 
contracting?
    Mr. Roberts. We do not.
    Mr. Davis. OK. Do you assist companies in developing 
appropriate baselines?
    Mr. Roberts. What we will do is we will help the government 
determine yes--with some of our clients, we will go and do 
activity-based costing and determine what the cost of that 
activity is. We would be in a position to help set up that 
baseline since you could do a share-in-savings contract. Yes.
    Mr. Davis. Ms. StandsBlack-Carver, let me ask you, you 
point out that the SARA provisions on electronic invoicing and 
agency-level protests are particularly advantageous for 
innovative small businesses like yours. Are there any other 
SARA provisions that you find particularly attractive from a 
small business point of view?
    Ms. StandsBlack-Carver. Since the bill was just really 
introduced on Monday, I really have not had a thorough review 
on it. But I could get back to you in writing on that, because 
there are several that are advantageous to small business.
    Mr. Davis. If you find anything, you can get back to me. 
All right, I was just throwing it off the top.
    Well, let me ask you this, in your testimony you note the 
ongoing problems with DFAS due to problems we are all 
encountering with mail. We are having terrible problems with 
mail on Capitol Hill.
    Ms. StandsBlack-Carver. I have heard.
    Mr. Davis. Is this still the case? Is DOD offering any 
assistance to small businesses in overcoming these significant 
time delays through the mail that you have seen?
    Ms. StandsBlack-Carver. To be honest, no, sir, not really. 
There is very little recourse for small businesses.
    Mr. Davis. OK. Thank you. I don't think that was anything 
that was anticipated when we went through, but the mail has--e-
mails to my office have increased 100fold and regular mail--we 
have some pictures we took with the President and they were 
getting them back and they got zapped in the machine and they 
didn't turn out--I mean, those kind of situations that nobody 
recognizes, but mostly it is just a delay in everything. And 
when you are trying to meet a payroll and you are waiting for 
that check and everything else, it is, for small businesses in 
particular, it can be----
    Ms. StandsBlack-Carver. Luckily, we do have the electronic 
payments, which have really been great.
    Mr. Davis. Right.
    Ms. StandsBlack-Carver. The invoice--the whole process 
should be electronic.
    Mr. Davis. But you cannot invoice electronically?
    Ms. StandsBlack-Carver. No, sir.
    Mr. Davis. You can hand-carry it, I guess. Have you done 
that?
    Ms. StandsBlack-Carver. And we do.
    Mr. Davis. We used to do that.
    Ms. StandsBlack-Carver. We still do that.
    Mr. Davis. Mr. Howe, can you elaborate on the reference you 
made to intellectual property issues in your testimony?
    Mr. Howe. I think that it is important for there to be a 
correct balance between the rights of the owners of the 
intellectual property being the contractors and the government. 
Fundamentally in this area, what the government is trying to 
obtain is a solution to a problem. And if the problem can 
deliver the solution to that problem, there is no reason for 
the government to be obtaining any intellectual property rights 
in all of the research and development and thinking and know-
how that the contractors have put into that.
    Obviously, the government needs a license to use whatever 
technological solution is provided, but it does not need any 
license to any of the background technology or the preceding 
intellectual property.
    Mr. Davis. OK, great.
    Mr. Horn, do you have any other questions? Anyone from the 
panel want to add anything in rebuttal or anything that has 
occurred to you?
    Mr. Dever. Could I make a comment on shared savings 
proposals?
    Mr. Davis. Sure.
    Mr. Dever. I have had the opportunity to negotiate a 
limited number of shared savings, and they tend to be pretty 
complicated for a number of reasons. But there are some 
criteria that we look at or that we consider before entering 
into a shared savings agreement that I think you might adopt.
    First of all, and it has been brought up, the ability to 
accurately benchmark and then measure the savings. If we don't 
agree on what the savings are, it is hard to share.
    Second, these are useful to the supplier. They will take 
some risk up front on the chance that savings will be 
delivered, and then they get paid more as a result. If we are 
very confident that savings will come out of that engagement, 
then there is no need to share it. OK?
    So there is something in between the idea of don't pay 
unless there are results, and we are paying for no results, and 
that is pay a fair price and expect and negotiate results. But 
the shared savings proposals, there is a tendency to overpay.
    Mr. Davis. Well, if you don't know what you are doing, 
absolutely. I mean, the whole point there is making sure that 
your government purchasers when they are doing the deal 
understand enough technically to know what they ought to get 
and what that cost ought to be. And that is difficult. That is 
where the training comes in and that is where we are trying to 
get the private sector into government and back and forth to 
understand the different cultures. It all comes into play. But 
if you have a smart buyer, and you don't want to take the risk 
at the governmental level of ending up as we have so many times 
ended up, buying something that doesn't work or isn't what we 
wanted and paying tremendous costs, share-in-savings is great.
    Now, I think that the difficulty we have is, No. 1, you do 
not have the tools to do that today. You can try to do it, but 
it is kind of convoluted to try and do it within government. 
And second, this will be something that your purchasers are 
going to be reluctant to use initially, because they are afraid 
somebody is going to make a big profit on them. But I will tell 
you what, it is better for that to happen than it is to put a 
lot of money in and end up with nothing, which happens so many 
times.
    I have been on both sides of that equation and it is no 
fun, and usually it is the problem with the government just not 
supervising the contract correctly, asking for what they want. 
The nice thing about the way we are buying things now, the old 
days when I was a general counsel, you would respond to an RFP, 
you would come in and you would go to the best and final. You 
always worried about a bid protest. And at the end of the day, 
the government would get something that wasn't quite what they 
wanted, but it met the criteria and it didn't really work. We 
wasted a lot of money that way, not just on lawyers. We also 
wasted a lot of money on systems and stuff because you had to 
justify it and go through too much external oversight.
    There is always a balance to this, and that is what we are 
trying to get at. It all starts and ends with having your 
government employee, that official on the front lines who is 
buying for the agencies, and there is an assumption somehow 
that purchase knows more about what the agency wants than we do 
in Congress or the other people who are not as closely involved 
are, and that they are then trained and have the know-how to go 
out and drive the best deal for the government.
    That takes a lot of training, and it means good people. But 
if you have it, that is the way it works. And there are 
tremendous savings, in my opinion, that can be made, and that 
is what we are trying to get at. And I recognize in all of this 
that somebody is going to abuse the purchase card. They are 
going to overcharge, take their friends out to dinner. I mean, 
who knows what is going to happen. You have had that in 
government, making long-distance phone calls--you live with a 
certain amount of that petty stuff because of what you make up 
over the long term. But human beings are human beings, and you 
want to exercise oversight so that people are not constrained 
from doing this and creating efficiencies, but on the other 
hand, enough oversight so that it is not abused.
    And what that balance is, I mean if you look at the history 
of government procurement, we never quite find the balance. But 
there is a recognition of the Federal Government being the 
largest purchaser of IT goods in the world today, that we are 
spending and wasting billions of dollars, sometimes just 
because our own rules and regulations require it. And from my 
perspective, I would rather overpay somebody who gives me a 
system that I can use and ends up saving me money, than I would 
to pay somebody who gives me something I can't really use. And 
we see that all too often in government, if you have to make 
that tradeoff. Hopefully, we do not have to make the tradeoff.
    And I will tell you the other thing about a share-in-
savings contract is you incentivize companies to work 
efficiently because, No. 1, they are going to eat any problems, 
they have to eat it, on the one hand. On the other hand, if 
they come up with a good solution, there can be a huge high-
end. But again, if you negotiate the agreement bad from the 
start, then you are going to be overpaying, and the key is 
making sure you have an adequate baseline, our people are 
trained and we can do that. So that is what we are working on.
    But I appreciate everybody's comments today, and I think 
all of you have been on the front lines of this. We don't all 
agree on every single issue. In fact, I will go back and read 
the testimony, and I probably won't agree with some of the 
stuff that I thought earlier in the day, but that is why we 
hold these hearings. And if we can continue to have discussions 
with you and meet with you, maybe we can come out with 
something we can at least get a majority of the committee, at 
least in the House, to agree to and move it through.
    Thank you all very much. Before we close, again I want to 
thank everyone for attending this important oversight hearing. 
I want to thank the witnesses. I want to thank my ranking 
member, Representative Turner. I want to thank Mr. Horn who has 
been a partner in these issues going back several congresses. 
And I want to thank my staff for organizing what I think has 
been a very productive hearing.
    We are going to keep the record open for 2 weeks for 
anybody who wants to add anything, get questions through, and 
the briefing memorandum will be entered into the record.
    These proceedings are closed.
    [Whereupon at 4:48 p.m., the subcommittee was adjourned, to 
reconvene at the call of the Chair.]
    [Additional information submitted for the hearing record 
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