Best Practices: Taking a Strategic Approach Could Improve DOD's  
Acquisition of Services (18-JAN-02, GAO-02-230).		 
                                                                 
GAO studied several leading companies in the private sector that 
have made dramatic changes to their process for acquiring	 
services. GAO found that these changes generally began with a	 
corporate decision to pursue a more strategic approach to	 
acquiring services--from developing a better picture of what the 
company was actually spending on services to developing new ways 
of doing business. The Defense Department (DOD), the government's
largest purchaser of services, already has some elements in place
that are essential to such a strategic approach, such as a	 
commitment by top management to adopting best practices. However,
DOD has yet to conduct a comprehensive analysis of its spending  
on services or thoroughly assess it's current structure,	 
processes, and roles. DOD's size, the range and complexity of the
services that it acquires, the capacity of its information and	 
financial systems, and the unique requirements of the federal	 
government are among the factors that DOD will need to consider  
as it tailors a strategic approach to its diverse needs.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-230 					        
    ACCNO:   A02686						        
  TITLE:     Best Practices: Taking a Strategic Approach Could Improve
DOD's Acquisition of Services					 
     DATE:   01/18/2002 
  SUBJECT:   Best practices					 
	     Defense economic analysis				 
	     Defense procurement				 
	     Federal taxes					 
	     Financial management				 
	     Private sector					 
	     Strategic planning 				 
	     DOD Standard Procurement System			 

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GAO-02-230
     
United States General Accounting Office

GAO Report to the Chairman and Ranking Minority Member, Subcommittee on
Readiness and Management Support, Committee on Armed Services, U.S. Senate

January 2002

BEST PRACTICES

Taking a Strategic Approach Could Improve DOD's Acquisition of Services

GAO-02-230

Contents

Letter

Results in Brief Leading Companies Applied a Strategic Approach to Acquiring
Services Strategic Approach Could Serve As a Framework to Guide DOD's

Service Contracting Initiatives Conclusions Recommendation for Executive
Action Agency Comments Scope and Methodology

                                    1 2

                                     5

17 22 22 23 23

Appendix I Comments From the Department of Defense

Appendix II GAO Contact and Staff Acknowledgments 28

GAO Contact 28 Acknowledgments 28

Tables

Table 1: Leading Companies We Studied Table 2: Changes in Senior
Management's Involvement in Their Company's Purchase of Services Table 3:
Comparison of Traditional and Strategic Approaches to Spending Data Table 4:
Examples of How Service Spend Analyses Benefited the Companies We Studied

Table 5: The Changing Role of Purchasing in Leading Companies

Table 6: Examples of How Leading Companies Restructured Their Procurement
Organizations Table 7: Examples of Leading Companies' Cross-Functional
Procurement Processes Table 8: Characteristics Promoting Successful
Strategic Reengineering Efforts

                                     6

                                     8

                                     9

                                   10 12

                                     13

                                     14

                                     15

Figures

Figure 1: Key Elements of Strategic Approach Taken by Leading

Companies 3
Figure   2:    Principles   and    Practices   of   Leading    Companies   7
Figure  3:   Services  Purchased  by  DOD   in  Fiscal  Year  2000  (dollars

in billions) 18

United States General Accounting Office Washington, DC 20548

January 18, 2002

The Honorable Daniel K. Akaka

Chairman

The Honorable James M. Inhofe

Ranking Minority Member

Subcommittee on Readiness and Management Support Committee on Armed Services
United States Senate

Federal agencies spend billions of tax dollars each year to buy services
ranging from clerical support and consulting services, to information
technology services such as network support, to the management and operation
of government facilities, such as national laboratories. The amount spent on
services is growing substantially. In fiscal year 2000, the federal
government acquired more than $87 billion in services-a 24-percent growth in
real terms from fiscal year 1990. The Department of Defense (DOD) is, by
far, the government's largest purchaser of services, acquiring more than $53
billion in services in fiscal year 2000. However, our work, and the work of
DOD's Inspector General, has found that this spending is not being managed
efficiently.

The private sector is also increasingly reliant on services. The majority of
purchasing dollars for some companies now goes to acquiring a range of
services, including complex services such as advertising, information
management, and professional consulting services to relatively simple
services such as lawn mowing, waste removal, and temporary clerical
services. In 2000, about $2.1 trillion in services, including
transportation, communications, health, legal, and other business services,
was sold in the U.S. market place.

In recent years, leading companies have been examining alternative ways to
manage their service spending to stay competitive, respond to market and
stockholder pressures, and deal with economic downturns in key overseas
markets. In looking at their service acquisitions, these companies
discovered that they did not have a good grasp of how much was actually
being spent and where these dollars were going. They found that
responsibility for acquiring services resided largely with individual
business units or functions-such as finance, human resources, manufacturing,
engineering, or maintenance-which hindered efforts to coordinate purchases
across the company. They also came to realize that

they lacked the tools needed to make sure that the services they purchased
met their business needs at the best overall value. To turn this situation
around, leading companies reengineered their approach to buying services.

You requested that we examine how leading companies reengineered their
approach to purchasing services and the extent to which DOD is pursuing a
similar approach. This report describes a strategic framework that leading
companies have adopted that could help guide DOD's efforts. We plan to
evaluate how specific best practices could be adopted or adapted for use by
DOD on future assignments.

The leading companies we studied made a number of dramatic changes to the
way they bought services and found that these changes, in turn, resulted in
significant cost savings and service improvements. These changes generally
began with a corporate decision to pursue a more strategic approach to
acquiring services. Taking a strategic approach involves a range of
activities-from developing a better picture of what the company is spending
on services, to taking an enterprisewide approach to procuring services, to
developing new ways of doing business (see fig. 1).

Results in Brief

Figure 1: Key Elements of Strategic Approach Taken by Leading Companies

Source: GAO analysis.

Once top leaders were committed to taking a strategic approach, the
companies took a hard look at how much they were spending on services and
from whom. By arming themselves with this knowledge, the companies could
identify opportunities to leverage their buying power, reduce costs, and
better manage their suppliers. The companies also instituted a series of
structural, process, and role changes aimed at moving away from a fragmented
acquisition process to a more efficient and effective enterprisewide
process. For example, the companies we studied often established or expanded
the role of corporate procurement organizations to help business managers
acquire key services and made extensive use of cross-functional teams to
help the companies better

identify service needs, select providers, and manage contractor performance.

Bringing about such changes was not easy. For example, some companies spent
months piecing together data from various financial and management
information systems and examining individual purchase orders just to get a
rough idea of what they were spending on services. Other companies found
that in establishing new procurement processes, they needed to overcome
resistance from individual business units reluctant to share decision-making
responsibility and to involve staff that traditionally did not communicate
with each other. To do so, the companies found they needed to have sustained
commitment from their senior leadership; to clearly communicate the
rationale, goals, and expected results from the reengineering efforts; and
to measure whether the changes were having their intended effects.

Taking a strategic approach clearly paid off, as companies found that they
could save millions of dollars and improve the quality of services received
by instituting these changes. In some cases, thousands of suppliers were
reduced to a few, enabling the companies to negotiate lower rates. In other
cases, new information systems enabled companies to better match their
business managers' needs with potential providers. Company officials
provided various estimates as to how much their companies saved by taking a
strategic approach, with one official estimating his company had saved more
than $210 million over the past 5 years from pursuing more strategic
approaches to purchasing information technology services, while another
estimated his company typically achieved savings of 15 percent or more on
efforts that were undertaken using the new processes.

The strategic approach taken by the leading firms we visited could serve as
a general framework to guide DOD's service contracting initiatives. DOD has
certain elements critical to taking a strategic approach already in place,
such as the commitment by senior DOD leadership to improve its practices for
acquiring services and to adopting best commercial practices. However, DOD
has not conducted a comprehensive analysis of its spending on services or
thoroughly assessed its current structure, processes and roles, two elements
that companies found to be crucial to reengineering their approaches to
purchasing services. DOD's size, the range and complexity of the services it
acquires, the capacity of its information and financial systems, and the
unique requirements of the federal environment are among the factors that
DOD will need to consider in tailoring a strategic approach that meets its
diverse needs.

This report includes a recommendation intended to help DOD assess whether a
strategic reengineering approach, such as that employed by the leading
companies we visited, could be used as a framework to guide DOD's
reengineering efforts.

DOD commented on a draft of this report and concurred with the views
expressed in the draft report. The DOD comments can be found in appendix I.

Leading Companies Applied a Strategic Approach to Acquiring Services

Over the past decade, federal agencies substantially increased their
purchases of services, particular for information technology and
professional, administrative, and management support services. But this
money may not always be well-spent. Our work, as well as the work of other
oversight agencies, continues to find that millions of service contracting
dollars are at risk at DOD and other federal agencies because acquisitions
are poorly planned, not adequately competed, or poorly managed.1

To help improve how services are managed at DOD, we studied the practices
for purchasing services at six leading private sector companies. We selected
these companies, shown in table 1, based on literature searches and
discussions with universities, industry associations, research
organizations, and experts in purchasing practices.2 The six companies have
been recognized by their peers for reengineering their approach to
purchasing services.

1 Contract Management: Trends and Challenges in Acquiring Services
(GAO-01-753T, May 22, 2001).

2 More detailed information about our scope and methodology can be found on
pp. 23 through 25.

Table 1: Leading Companies We Studied

Company Function

Brunswick  Corporation  A  leader in  the  boating,  marine engine,  fitness
equipment, bowling, and billiards industries.

The Dun & Bradstreet Corporation A leading provider of business credit,
marketing and purchasing information, and receivables management services.

Electronic Data Systems (EDS) Corporation A leader in the information
technology services industry, providing business and government clients
high-value consulting, electronic business solutions, business process
management and systems, and technology expertise.

Exxon Mobil Corporation The world's largest integrated oil company, ranking
first in profits, proven reserves, liquids production, natural gas
production, oil production, and refining capacity.

Hasbro, Inc. A leader in the design, manufacture, and marketing of toys and
games, ranging from traditional to high-tech.

Merrill Lynch & Co., Inc. A leading provider of investment, financing,
advisory, insurance, and related products and services, ranking first in
U.S. and global debt and equity underwriting.

Each of these companies is a leader in its respective market, but is not
immune to market or stockholder pressures to improve performance. To respond
to these pressures, senior corporate leadership challenged their companies
to improve their performance, including the manner in which they acquired
services. In turn, these companies reengineered their approach to acquiring
services to leverage their buying power, reduce costs, better manage their
service providers, and improve the quality of services acquired. As shown in
figure 2, we identified four broad principles that were critical to
successfully carrying out the companies' strategic approach. The companies
we studied did not follow the exact same approach as they differed in the
manner and degree to which they employed specific practices. However, the
bottom line results were the same-substantial savings and service
improvements.

Figure 2: Principles and Practices of Leading Companies

Source: GAO analysis.

The principles and practices largely reflect a common sense approach toward
almost any business venture, that is, providing good leadership, developing
and harnessing knowledge, making sure business processes maximize return,
and measuring results. Yet the practices represented significant changes to
the way services were traditionally acquired. Company officials generally
described their previous approach to acquiring services as being fragmented,
with only limited corporate visibility and control over the amount spent on
services by their business units. Existing information systems provided only
scant information on services. For the most part, service acquisitions were
viewed as a mission support activity and peripheral to the bottom line,
rarely capturing the attention of top management. As one company official
described it, the traditional approach taken by his company, and most
companies, resulted in spending for services "just happening."

Securing Up-front Commitment from Top Leaders

In each of the companies we visited, the support and commitment of senior
management was viewed as essential to facilitating the company's efforts to
reengineer its approach to acquiring services. Company officials indicated
senior management provided the direction and vision; facilitated the
development of common processes and approaches; and, when necessary,
provided the clout necessary to obtain initial buy-in and acceptance of
reengineering efforts. Senior managers expressed commitment in various ways,
ranging from restructuring the corporate procurement function, to providing
greater visibility and authority over the company's service spending to
issuing a memorandum signaling their support for a new way of doing
business. Table 2 highlights changes that were common in the companies we
studied.

Table  2: Changes  in  Senior Management's  Involvement in  Their  Company's
Purchase of Services

Traditional Strategic

Services  viewed as  ancillary to core  Services viewed  as central to  core
business. business.

Senior managers not actively involved in Senior management provides
direction and pursuing changes to how the company vision for change,
establishes goals and acquires services. targets, and devotes increased
attention to

                                 services.

Source: GAO analysis.

In general, successful reengineering efforts are spearheaded by a company's
senior management since they have the authority to require employees to
accept reengineered roles, the responsibility to set the corporate agenda
and to define the organization's culture, and the ability to remove barriers
that block changes to the organization's corporate mindset. Prior research
has found that the lack of top management commitment is the cause of most
reengineering failures.3

Obtaining  Better   The  companies we  visited  analyzed  their spending  on
services to answer  Knowledge on Service the basic questions of how much was
being spent and where  the dollars Spending were going. After conducting the
analyses, the companies realized that

they were buying similar services from numerous providers, often at

greatly varying prices. Such knowledge brought home the need for

3 Reengineering Organizations:  Results of a GAO Symposium (GAO/NSIAD-95-34,
Dec. 13, 1994).

companies to become more strategic in planning and managing their service
acquisitions to maintain a competitive edge. Table 3 highlights the
differences in the availability and use of spending data between the
practices traditionally used by companies and those pursuing a more
strategic approach.

Table 3: Comparison of Traditional and Strategic Approaches to Spending Data

Traditional Strategic

Financial and information management Systems are developed to provide
systems focus on components and materials credible, reliable, and timely
data on
used to make products, but do not provide data acquired services.
needed to effectively manage the company's
service spending.

Data is used principally for "after-the-fact" reporting purposes.

Data is used to identify opportunities to rationalize supplier base and
reduce costs.

Source: GAO analysis.

The benefits of having credible and reliable data on service spending were
substantial. Companies used this data to "rationalize" their supplier base,
or in other words, to determine the right number of suppliers that met their
needs. Once the companies determined how many suppliers they needed to meet
their needs, they could then use this data to help them better leverage
their buying power. Table 4 illustrates how companies used spend analyses to
identify opportunities to rationalize their supplier base and reduce costs.

Table 4: Examples of How Service Spend Analyses Benefited the Companies We
Studied

Company What the spend analysis revealed What the company did with this
knowledge

Hasbro Hasbro's spend analysis revealed that it Hasbro consolidated its
temporary personnel supplier base to a single had 17 providers of temporary
provider, reduced the number of oversight personnel, established a
administrative, clerical, and light industrial formal communication program,
and had the contractor assume personnel for 7 locations. The company
responsibility for developing consistent policies and processes. Further,
also found that it had inconsistent policies by leveraging its buying power,
Hasbro negotiated an overhead rate that and processes, multiple contact
points, and was 45 percent lower than previously obtained and reduced its
total limited performance measures and that spending on temporary labor from
$5 million to $4.3 million. A Hasbro information was not being shared across
official told us its efforts often resulted in savings ranging from
locations. 15 percent to 45 percent and improved service levels.

Brunswick Brunswick conducted a spend analysis to determine the types of
telecommunication services its business units acquired, monthly usage rates,
and cost data to help it define its requirements and establish a negotiating
position. It found its seven business units had three different
telecommunication providers.

Dun & Dun & Bradstreet's spend analysis showed

Bradstreet that the company employed hundreds of providers of temporary
labor. While Dun & Bradstreet originally planned to reduce the supplier base
to a single provider, its market research found that no one company could
meet its needs.

Following a competition in which six potential suppliers participated,
Brunswick awarded a contract to a single supplier. Company officials told us
their negotiated per minute usage rates were about 60 percent less than the
average of its prior rates, saving Brunswick $3.2 million in the first 8
months of the new contract.

Dun & Bradstreet revised its acquisition strategy to designate a preferred
supplier that would receive 70 percent of its business and the contract with
a limited number of second tier suppliers that would provide personnel with
specialized skills or provide labor to areas not served by the preferred
supplier. Company officials told us this strategy enabled them to acquire
more actual labor per dollar since the preferred supplier agreed to charge a
lower profit and overhead rate than it had previously done when it had a
smaller portion of Dun & Bradstreet's business.

EDS Prior to implementing its centralized process for procuring information
technology services, a spend analysis revealed that EDS had more than 3,000
"unleveraged" suppliers.

EDS initially conducted a strategic sourcing exercise to better define its
needs and establish a more manageable number of suppliers and instituted
various interim process changes. EDS' long-term solution was to develop an
integrated, web-based, financial and management information system capable
of systematically matching its business managers' needs with potential
service providers; capturing spending, wage, and overhead data by skill set
and supplier; assessing supplier performance; and performing various
financial management and accounting tasks. EDS officials told us that it has
reduced its supplier base to 14 national suppliers, 6 regional suppliers,
and a small set of providers of personnel with specialized skills, and it
typically negotiates

a

overhead rates that are at least one-third less than the industry average.
EDS officials estimated they had saved more than $210 million over the past
5 years by pursuing a more strategic approach to purchasing information
technology services.

aAccording to EDS officials, its system contains cost data on more than 20
million labor hours, to which data on an additional 500,000 to 600,000 hours
are added monthly. EDS officials indicated that the ability to track and
analyze the types of skill sets acquired, from whom and at what price,
provides EDS an ability to aggressively negotiate future labor and overhead
rates with service providers.

Source: GAO analysis.

Company officials told us spend analyses can vary in the degree and type of
information provided. At a minimum, a basic spend analysis should identify

* what types of services are being acquired;

* how many suppliers for a specific service the company is using;

* how much they are spending for that service, in total and with each
supplier; and

* which units within the company are purchasing the services.

Some companies augmented this basic information with more detailed data,
such as the number of labor hours purchased, the hourly wage rate paid, and
the amount of overhead paid.

Preparing an initial service spend analysis was challenging. Company
officials told us their existing financial or management information systems
generally did not provide the right type of data needed to manage service
spending. As one official explained, the systems were designed to provide
detailed information on the components and raw materials that were used to
make their products but often provided only scant information on services.
For example, officials at one company noted that their systems often
reported only a service provider's name and the total cost of the effort,
but they did not identify the type of service acquired or key cost elements
of the service, such as the number of labor hours supplied, the type or
category of labor acquired, and the cost per hour of the labor. Further,
this information was often not maintained in a standardized format and was
of poor quality, thus hampering efforts to use existing information to more
effectively manage service spending. Consequently, companies had to spend
months collecting, validating, and analyzing data extracted from their
financial or other management systems. Officials from one company noted that
they spent about 3 months analyzing data provided by their accounts payable
and purchasing systems, and at times, had to review individual purchase
orders to prepare a spend analysis for just one of their business units.
Even after analyzing individual purchase orders, they had to make educated
guesses as to the most likely service the company was buying.

Officials from the companies we spoke with indicate that they have
developed, or are in the process of developing, management or financial
information systems that can provide them reliable spending data in a timely
fashion. These officials stated they now use spend analyses as part of their
process to identify additional targets of opportunity, measure

compliance with preferred supplier agreements, respond to customer input,
and track progress toward meeting annual performance objectives.

Creating Structure, Processes, and Roles to Support an Enterprisewide
Perspective

The companies we studied found it necessary to change how they acquired
services, principally in terms of business processes, organizational
structures, and roles and responsibilities. These changes were meant to take
the companies from a fragmented approach to doing business to one that was
more coordinated and strategically-oriented. The end goal was to institute
an enterprisewide perspective-one that would ensure that the company was
getting the best overall value. Among other changes, each company elevated
or expanded the role of the company's procurement organization; designated
commodity managers to oversee key services; and made extensive use of
cross-functional teams to help identify the company's service needs, conduct
market research, evaluate and select providers, and manage performance.
Table 5 illustrates how these changes affected the role of purchasing in the
companies we studied compared to the traditional way of doing business.

Table 5: The Changing Role of Purchasing in Leading Companies

Traditional Strategic

Independent, local organizations with Central/matrixed organizations
responsible limited visibility over the company's total for coordinating or
managing service service spending. purchases.

Reactive support role to business units. Proactive business relationships.

Limited coordination between business and purchasing units and other
functions such as legal or finance.

Procurement process based on cross-functional teams.

Buyers. Commodity/service experts.

Source: GAO analysis.

In making such changes, the companies positioned themselves to more
effectively manage and coordinate their service purchases. These changes
transformed the role of their purchasing units from one focused on mission
support to one that was strategically important to the company's bottom
line. For example, Dun & Bradstreet officials told us that, with the support
of senior corporate management, their procurement function now exercises far
more control and responsibility over services that traditionally had been
the responsibility of the business units. These officials indicated they
often now act in a proactive advisory capacity to their business units,
rather than just being relied upon for their sourcing and negotiating
expertise.

Elevating Procurement To cut across traditional organizational boundaries
that contributed to the

Organizations fragmented approach to acquiring services, the companies we
visited generally restructured their procurement organizations, typically
assigning the organizations greater responsibility and authority for
strategic planning and management and oversight of the companies' service
spending. As table 6 illustrates, making this change was seen as critical to
improving coordination and optimizing resources.

Table 6: Examples of How Leading Companies Restructured Their Procurement
Organizations

Company How the companies restructured their procurement organization

Brunswick Historically, Brunswick had allowed its business units to operate
fairly independently, with the corporation acting more like a holding
company. According to Brunswick officials, this decentralized structure
inhibited its ability to conduct an enterprisewide assessment of its
procurement processes and effectiveness. Brunswick's new chief executive
officer believed a more coordinated and cooperative approach would help
rationalize Brunswick's supplier base and leverage the company's buying
power. Consequently, Brunswick established a corporate procurement
organization to provide strategic planning for and policy and guidance to
its business units and elevated the role of procurement to the
vice-presidential level within its corporate structure.

ExxonMobil Senior corporate leadership took the opportunity presented by the
1999 merger of Exxon and Mobil to develop a procurement organization that
would provide the company's 11 business units a competitive advantage by
fully optimizing their supply chain through strategic sourcing of key
services and gain operating cost efficiencies through a fully integrated
procurement and payment process. The president of ExxonMobil's global
services company reports directly to an executive vice president.

EDS EDS employed an informal, decentralized system for obtaining the
services of programmers, systems analysts, and other information technology
professionals employed on a temporary or contract basis. This system
provided managers in the field almost complete authority, but it provided
EDS management with only limited visibility over the costs, performance, and
value of the services acquired. In the mid-1990s, EDS faced increasing
expenditures for labor services needed to meet its client needs,
Additionally, in 1998, the chairman challenged the company to reduce its
costs by $1 billion and looked for the corporate procurement organization to
contribute significantly to this goal. While the procurement organization
previously had been two to three layers from the chief executive officer,
the new procurement organization now reports directly to the chief financial
officer. Additionally, EDS established a separate unit specifically
responsible for developing, managing, and executing a comprehensive sourcing
and supply process for acquiring information technology professionals, which
EDS officials estimated represented approximately one-third of the services
it acquired.

Source: GAO analysis.

Establishing Cross-Functional The companies we visited generally established
new processes for

Procurement Processes conducting tasks typically encountered during any
procurement action, such as identifying needs and evaluating potential
service providers. Most importantly, the companies began making extensive
use of "cross-functional" teams to make sure they had the right mix of
knowledge,

technical expertise, and credibility.4 The teams varied in size but
generally included representatives from the company's purchasing unit, its
internal clients or users of the service, and its budget or finance office.
The teams were responsible for analyzing spending data, identifying and
prioritizing potential opportunities for more detailed review, defining
internal needs and requirements, and conducting market research. This
approach helped companies to better define their needs and to identify,
select, and manage service providers, and in turn, helped ensure that users'
needs were met at the lowest total costs to the companies. Table 7 provides
two examples of companies' cross-functional procurement processes.

Table 7: Examples of Leading Companies' Cross-Functional Procurement
Processes

Company How the companies use their cross-functional procurement process

ExxonMobil ExxonMobil, the largest company we visited, established a formal
procurement process. ExxonMobil officials noted their processes are detailed
in a sourcing handbook that is intended to be both practical and flexible
enough to provide the basis and support for innovative sourcing strategies.
The handbook provides both general guidelines and specific procedures and
includes a suite of tools, templates, and checklists needed to effectively
conduct sourcing activities. ExxonMobil uses a four-phase, data-driven
procurement process (opportunity identification, strategy development,
strategy execution and supplier selection, and relationship management) that
involves close interaction with the procurement function, internal clients,
and suppliers. Sourcing strategy development is integrated within the
business units' annual and long term planning cycles to ensure that the
strategies, priorities, and cost reduction objectives are fully aligned.

Hasbro Hasbro begins its procurement process almost a year in advance, using
a team-based approach to identify 12 to 15 opportunities each year for a
more comprehensive review. According to a Hasbro official, about 30 people-
representatives from purchasing, finance, logistics, and affected business
units-participate in this exercise and consider, among other things,
Hasbro's total spending for that service, the significance of the service
relative to Hasbro's principal product lines, and market conditions. Once
these opportunities are identified, smaller cross-functional teams are
formed to conduct more in-depth analyses. These teams initially focused
their activities on identifying Hasbro's requirements and conducting market
research; however, the teams subsequently obtained and evaluated information
from potential suppliers, conducted negotiations, and finally selected the
suppliers. A team member is generally designated to monitor the supplier, in
part, as a means to provide feedback into the planning cycle.

                 Establishing Dedicated Commodity Managers

Source: GAO analysis.

Several companies established full-time dedicated commodity managers to
provide more effective management over key services, which were generally
described as those being of high-dollar value or those that had a
significant impact on the company's operations. ExxonMobil, for example, has
eight commodity managers responsible for groups of related materials

4 For additional information on cross-functional teaming at DOD, see Best
Practices: DOD Teaming Practices Not Achieving Potential Results
(GAO-01-510, Apr. 10, 2001).

or services, such as mining and drilling services, transportation,
information technology, advertising, and promotion. Similarly, Brunswick has
established five positions to provide a more strategic and coordinated
approach for key services, including telecommunications and information
technology services. According to Brunswick officials, these managers will
serve both as process and commodity experts to coordinate Brunswick's
service purchases as well as change agents to further reengineer Brunswick's
procurement processes. Merrill Lynch's commodity managers are expected to be
actively involved in defining requirements with its internal clients,
negotiating with potential service providers, and assisting in resolving
performance or other issues arising after a contract is awarded.

Enabling Success Through The companies we studied found that three
ingredients were critical to Sustained Leadership, overcoming resistance,
cultural barriers, and other impediments to their Communication, and
reengineering efforts: sustained leadership, communication, and Metrics
measurement. Table 8 illustrates how these characteristics differed from

when the companies were pursuing a traditional approach to purchasing

services.

Table 8: Characteristics Promoting Successful Strategic Reengineering
Efforts

Traditional Strategic

Corporate leaders not actively Senior leaders actively reinforce commitment
to
engaged in improving service achieve change.
acquisitions.

Business units and purchasing Clear lines of communication between all
organizations do not clearly affected parties.
communicate or cooperate.

Performance measures did not exist. Performance measures used to demonstrate
value and credibility of new processes.

Source: GAO analysis.

First, company officials reiterated the need to have the continued support
of senior management, well beyond just providing the initial impetus for
making changes to service acquisitions, since the companies were engaging in
long-term efforts. Specifically, they noted that senior managers need to
continually back efforts to develop common processes and approaches and
provide the necessary clout to push for acceptance of reengineering efforts.

Second, communication was viewed as vital to getting and keeping staff on
board with changes. Company officials explained that up until the

reengineering effort, the business units and purchasing organizations
generally did not clearly communicate their needs or work together to
identify solutions; consequently, working together represented a new and
potentially challenging way of doing business. To achieve buy-in and avoid
unforeseen pitfalls, reengineering teams needed to make a compelling case
for change and clearly communicate the rationale, goals, and expected
results from the new processes or practices. Companies also found that it
was important that their reengineering teams listen to their business units'
and other affected parties' needs and concerns and be open to revising plans
as appropriate. Doing so helped ensure that the changes did not undermine
their managers' ability to produce results, but rather enhanced their
ability to carry out their work in terms of (1) more timely delivery of
needed services, (2) the hiring of better skilled or trained consultants,
(3) reduced costs, or (4) providing an alternative solution to meet their
needs.

Third, while used to various degrees, metrics, according to company
officials, increased the likelihood that reengineering efforts would be
successful. In general, metrics can be used to

* evaluate and understand an organization's current performance level;

* identify the critical processes that require focused, management
attention; * obtain the knowledge needed to set realistic goals for
improvement; and

* document results over time.

Companies typically measured total savings, cost avoidances, or some other
financial measure, which were often reported to senior corporate officials.
For example, Dun & Bradstreet officials told us that measuring savings is a
key element of their procurement process. Consequently, senior company
management sets targets for its procurement function at the beginning of the
year and regularly reviews progress reports.

Because most companies expanded the traditional role of the procurement
function, several companies surveyed their business units to assess their
satisfaction with the quality, timeliness, and value of the service provided
by their procurement organization. For example, ExxonMobil employed an
extensive, three-tiered system to measure the performance of the procurement
function. Specifically, it established eight top-level metrics to assess the
procurement organization's progress in meeting financial, customer
satisfaction, and business operation objectives. A second tier of metrics is
used for performance monitoring and internal/external benchmarking, while a
third tier is used at the local site level to manage day-to-day activities,
including compliance with best practices. Company

officials also noted that the measurements needed to be credible to prevent
disagreements over numbers that could undermine the value of the process
itself.

Company officials also cited the need to measure compliance with or use of
the new processes, especially when in the initial stages of the
reengineering effort, since the extent to which business units use a new,
lower cost approach directly affected cost savings. For example, EDS
officials told us that about half of the information technology services are
acquired using their new procurement process. They are monitoring the degree
to which business managers use the process as it is introduced in their
units. EDS estimates that, if business managers meet the company's target of
70 to 80 percent of usage by the end of 2001, the company would save an
estimated $26 million.

Senior DOD leadership has recognized the need to improve its processes for
acquiring services, especially as it increasingly relies on the acquisition
of services to meet its needs. However, DOD lacks a strategic plan that
integrates or coordinates the various initiatives underway within the
Department or that provides a road map for identifying or prioritizing
future efforts. In this regard, the strategic approach followed by the
leading companies we visited could serve as a general framework to guide
DOD's service contracting initiatives. DOD may find that a
"one-size-fits-all" approach will not work and that it will need to tailor
its approach to meet its specific needs and requirements. In doing so, DOD
officials will need to consider DOD's size and the range and complexity of
the services it acquires, address the existence of insufficient information
and financial systems, and take into account the unique aspects of the
federal acquisition environment.

Strategic Approach Could Serve As a Framework to Guide DOD's Service
Contracting Initiatives

DOD Leadership Recognizes That Changes Are Needed

DOD leadership has recognized the need to change DOD's current practices for
acquiring services. In January 2001, DOD's Under Secretary of Defense
(Acquisition, Technology, and Logistics) noted that while DOD was making
important strides in improving the quality of services acquired, DOD had not
achieved the level of excellence and consistency that it needed to meet its
needs. Further, in his annual report to the President and the Congress for
2001, the Secretary of Defense noted that DOD is working to adapt the same
"revolutionary business and management practices that helped the commercial
sector gain a competitive edge in a rapidly changing global marketplace."

The need for change is due in part to the increasing role that services play
in DOD. Over the past decade, DOD's total purchases declined considerably as
the end of the Cold War led it to reduce its purchases of supplies and
equipment. During this period, however, DOD's purchases of services rose by
more than 16 percent in real terms, largely attributable to increased
purchases of information technology services and professional,
administrative, and management support services. Consequently, in fiscal
year 2000, DOD purchased about $53.1 billion in services, roughly the same
amount it spent on supplies and equipment. Figure 3 shows where DOD's
service contracting dollars went in fiscal year 2000.

Figure 3: Services Purchased by DOD in Fiscal Year 2000 (dollars in
billions)

Source: GAO analysis of data extracted from the Federal Procurement Data
System for actions exceeding $25,000. Figure excludes actions categorized as
research, development, test and evaluation activities.

While senior DOD leadership has called for dramatic changes, DOD currently
operates much like the companies we visited operated before they adopted a
strategic approach. For example:

* Responsibility for acquiring services is spread among individual military
commands, weapon system program offices, or functional units on military
bases, with little visibility or control at the DOD-or military-department
level.

* DOD has an information system that can provide information on the amount
spent on services, but the reliability of the information is questionable
and the system itself is seldom used as a tool to manage or identify
opportunities for managing DOD's supplier base.

* Procurement processes within DOD are not always carried out efficiently
and effectively. Our work, as well as that of other oversight agencies,
continues to show that requirements are not clearly defined for many service
contracting efforts, alternatives are not fully considered, vigorous price
analyses are not performed, and contractors are not adequately overseen. For
example, last year, we raised concerns that DOD has avoided competition when
acquiring services, and the DOD Inspector General found that DOD had not
adequately performed many basic management tasks, including market research,
pricing analyses, and contractor surveillance. Such problems contributed to
our decision to designate contract management as a high-risk area for DOD.5

* There are few service contracting-related enterprisewide annual
performance metrics. For example, DOD's key metrics for measuring changes to
its contracting processes include (1) the percentage of purchases made by
purchase card, (2) the percentage of paperless contracting and payment
transactions, and (3) the percentage reduction in acquisition workforce
personnel.6 These metrics do not measure the cost effectiveness or quality
of services obtained.

DOD Does Not Have a DOD and individual defense components have various
initiatives Strategic Plan for underway to better manage their acquisition
of services, including Addressing Service expanding the use of
performance-based contracting approaches.

However, DOD does not have a strategic plan to coordinate currentContracting
Issues service contracting initiatives or to serve as a road map for
identifying or prioritizing future efforts.

5  Major  Management  Challenges and  Program Risks:  Department of  Defense
(GAO-01-244, Jan. 2001).

6 DOD is also measuring the percentage of service contracts awarded that are
considered to  be performance-based, but this metric  is not included as one
of DOD's annual performance goals.

From a departmentwide perspective, DOD, like other federal agencies, is
expanding the use of performance-based contracting approaches to help
improve its processes for acquiring services. Performance-based contracting
is an approach where the agency specifies the outcome or result it desires
and lets the service provider decide how best to achieve the desired
outcome. The government has not widely used this process, but it is
attempting to do so to attract leading commercial companies, gain greater
access to technological innovations, and better ensure contractor
performance. To support this initiative, DOD has issued a guidebook and is
providing additional training to its acquisition personnel. Additionally, in
January 2001, DOD chartered a senior-level team to identify best practices,
guidance, training, and additional policy needs for service contracting.7
This team has focused its initial efforts on drafting policy to provide
better oversight on purchases of high-dollar value services.8

Additionally, officials from the military departments noted that their
commands are pursuing a number of service contracting-related initiatives.
The Naval Supply Systems Command, for example, is establishing commodity
managers for selected supplies and services being purchased via electronic
procurements. The Naval Sea Systems Command is developing an electronic
procurement system for acquiring professional services, such as for
financial management and logistics support, for the command's headquarters.
Air Force officials noted that they are considering creating a position at
the senior executive service-level that would have specific responsibility
for developing policy, reviewing acquisition strategies for high-dollar
value services, and providing general oversight of the Air Force's spending
on services. Army officials noted that they are evaluating how to centralize
the processes for acquiring services within the Office of the Secretary of
the Army.

While DOD officials pointed to these initiatives as attempts to address
various service contracting needs and issues, they acknowledged that

7 DOD's Services Acquisition Integrated Process Team is co-chaired by the
Deputy Under Secretary of Defense (Acquisition Initiatives) and the
Director, Acquisition Resources and Analysis and includes senior
representatives from each of the military departments, the General Counsel's
office, and offices responsible for DOD's military installations,
environmental security, contract policy, information technology, and small
business issues, respectively.

8 DOD officials also identified DOD's TRICARE health care program and its
efforts to reengineer its acquisition of travel and transportation services
as efforts to better manage services from a DOD-perspective.

DOD has not developed a strategic plan to coordinate these initiatives or to
provide a road map for identifying or prioritizing future activities. They
noted that DOD is just now turning its attention to improving how it
acquires services, but they believed that DOD has various elements-
including the commitment by senior DOD leadership-in place that could serve
as building blocks for taking a more proactive role in managing services.

Developing a Strategic Approach to Meet DOD's Diverse Needs

The strategic approach followed by the leading companies we visited could
serve as a general framework to guide DOD's service contracting initiatives.
However, DOD may find that a "one-size-fits-all" approach will not work for
all services and that it will need to tailor its approach to meet its
specific needs and requirements. In doing so, DOD officials will need to
consider DOD's size, the range and complexity of the services it acquires,
and the existence of insufficient information and financial systems and take
into account the unique aspects of the federal acquisition environment.

While company officials stressed the need to take an enterprisewide
perspective on acquiring services, DOD's size and service needs may lead it
to pursue different approaches depending on the specific service. DOD
officials noted that within the military departments, there are individual
commands that are comparable to a Fortune 500 company, each spending
billions of dollars annually on services. Further, DOD officials noted some
services are acquired departmentwide, while other services (such as ship
support and maintenance) may be unique to specific commands, units, or
geographic locations. DOD officials agreed that they would need, as a first
step, to obtain and analyze data on DOD's service spending to identify and
prioritize specific services where a more coordinated acquisition approach
may be appropriate.

Additionally, DOD will need to consider how existing problems in its
information technology and financial management systems could affect its
service contracting initiatives. For example:

* DOD's efforts to deploy a single automated system-the Standard Procurement
System-to perform numerous contract management-related functions have
encountered cost overruns, schedule delays, and performance issues. DOD
expected the system to replace legacy systems that supported divergent
contracting processes and procedures across component organizations and to
provide electronic commerce capabilities and a common data repository.

* DOD continues to confront pervasive weaknesses in its financial management
systems, hindering its ability to produce timely and accurate financial
information needed to make sound business decisions.

* DOD envisions using electronic commerce technologies to transform and

streamline business processes. However, we have reported that DOD's
electronic commerce vision is at risk because DOD does not have an
architecture, or common blueprint, that is essential for effectively
introducing modern electronic commerce operations.9

Lastly, as a federal agency attempting to reengineer its approach to
purchasing services, DOD faces challenges that private sector organizations
do not face. In particular, DOD is subject to statutes and regulations
governing socio-economic objectives, competition, and contracting
procedures. Under existing statutes and regulations, for example, DOD is
subject to goals for contracting with small businesses and may be
constrained in its ability to consolidate numerous, smaller requirements
into larger contracts, an approach often taken by the companies we visited.
Consequently, DOD will need to consider how to adapt the practices followed
by leading companies to the unique federal environment.

The leading companies we visited chose to institute dramatic changes to the
way services were purchased and managed instead of only making incremental
improvements and continuing to treat services as being peripheral to the
bottom line. While difficult and challenging to carry out, companies pursued
a strategic approach because it was viewed as essential to staying
competitive. DOD leaders have already made a general commitment to adopt
best practices and make dramatic changes. With this commitment in place,
they can take on the more difficult tasks of developing a reliable and
accurate picture of service spending across DOD; determining what
structures, mechanisms, and metrics can be employed to foster a strategic
approach; and tailoring those structures to meet DOD's unique requirements.

To achieve significant improvements across the range of services DOD
purchases, we recommend that the Secretary of Defense evaluate how a
strategic reengineering approach, such as that employed by the leading

Conclusions

Recommendation for Executive Action

           9 High Risk Series: An Update (GAO-01-263, Jan. 2001).

companies we visited, could be used as a framework to guide DOD's
reengineering efforts. Specifically, the Secretary of Defense should assess
whether

* current or planned financial or management information systems can provide
the type of spending data that DOD needs to identify opportunities to
leverage its buying power, reduce costs, and provide better management and
oversight of its suppliers. Such data would include what types of services
are being acquired; how many suppliers are being used for specific services;
and how much DOD is spending on specific services, in total and with each
supplier.

* DOD's current organizational structure, processes, and roles are adequate
to support a more strategic approach to acquiring services; for example,
whether cross-functional teams would improve the coordination and management
of service acquisitions and whether it would be beneficial to establish
full-time dedicated commodity/service managers to provide more effective
management of key services.

In commenting on a draft of this report, DOD concurred with the views
expressed in the draft report. DOD noted that it was committed to taking

                               Agency Comments

a more strategic approach to acquiring services as well as developing an
oversight process for the acquisition of services. DOD also provided
informal technical comments, which we incorporated as appropriate.

Scope and Methodology

The Chairman and the Ranking Minority Member, Subcommittee on Readiness and
Management Support, Senate Committee on Armed Services, requested that GAO
develop a body of work that examines the practices of leading companies and
identify "best practices" that could yield benefits to DOD. This assignment
focused on (1) how leading companies reengineered their practices for
acquiring services and (2) the extent to which DOD is pursuing a similar
approach.

To identify the best practices in the commercial sector, we conducted
literature searches and contacted universities, industry associations,
research organizations, and experts in purchasing practices. On the basis of
these discussions and analyses, we selected several leading companies that
were recognized for their purchasing practices for buying services. We
provided a standard agenda to each company to obtain general information on
its organizational structure; the role, structure, and nature of its
purchasing organization; the process by which it determined its service
needs; and the way the company selected, managed, and evaluated

service providers. We also asked each company to discuss in more detail a
specific service buy that best exemplified its reengineered purchasing
practices. After our visits, we provided a summary of the information
obtained to ensure that we had accurately recorded and understood the
information each company provided. We also provided each company a copy of
our draft report for review and comment. The companies we visited were

* Brunswick Corporation, Lake Forest, Illinois;

* The Dun & Bradstreet Corporation, Murray Hill, New Jersey;

* Electronic Data Systems Corporation, Plano, Texas;

* ExxonMobil Corporation, Fairfax, Virginia;

* Hasbro, Inc., Pawtucket, Rhode Island; and

* Merrill Lynch & Co., Inc., Jersey City, New Jersey.

To assess what lessons can be drawn from these companies' experiences to
guide DOD's efforts, we interviewed officials within the Office of the
Secretary of Defense and the military departments to determine what efforts
they had underway to improve the acquisition of services. We also reviewed
policy memoranda, guidance, and other documents pertaining to ongoing and
planned initiatives that affected service contracting. We discussed with
these officials our assessment of the leading companies' approaches and
obtained their views on their approaches similarities and differences. We
also asked them about potential barriers to employing the approaches we
identified. We plan to evaluate how specific best practices could be adopted
or adapted for use by DOD on future assignments.

Our report summarizes the approaches and key elements that the companies
employed to reengineer their purchasing practices for services. We did not
intend to suggest that all companies have followed the same approaches or to
imply that other approaches could not be taken to achieve similar results.
Also, we were limited in our ability to obtain and present some relevant
data that companies considered proprietary in nature. Due to the competitive
nature of their businesses, the companies did not wish to release details of
how their reengineered purchasing practices resulted in specific successful
outcomes.

We conducted our review from June 2000 to December 2001 in accordance with
generally accepted government auditing standards.

We are sending copies of this report to the Secretary of Defense; the
Secretaries of the Army, Navy, and Air Force; the Director, Office of
Management and Budget; the Administrator, Office of Federal
Procurement Policy; and interested congressional committees. We will
also provide copies to others on request.

If you have any questions about this report or need additional information,
please call me on (202) 512-4841. Key contributors to this report are listed
in appendix II.

Jack L. Brock, Jr.
Managing Director
Acquisition and Sourcing Management

Appendix I: Comments From the Department of Defense

Appendix II: GAO Contact and Staff Acknowledgments

GAO Contact Ralph Dawn (202) 512-4544

Acknowledgments In addition to those named above, Cristina Chaplain, Timothy
DiNapoli, Gordon Lusby, Ronald Schwenn, and John Van Schaik made key
contributions to this report.

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