Contract Management: Taking a Strategic Approach to Improving	 
Service Acquisitions (07-MAR-02, GAO-02-499T).			 
								 
The Service Acquisition Reform Act of 2002 focuses on		 
strengthening the acquisition workforce, moving toward a	 
performance-based contracting environment, and especially,	 
improving service acquisitions management. Over the past decade, 
federal agencies have substantially increased their purchases of 
services, particularly for information technology and		 
professional, administrative, and management support. In fiscal  
year 2001 alone, the federal government acquired  $109 billion in
services. This money, however, is not always well-spent. GAO	 
continues to find that millions of service contract dollars are  
at risk at defense and civilian agencies because acquisitions are
poorly planned, not adequately completed, or poorly managed. GAO 
reviewed how leading companies changed their approach to	 
acquiring services after finding themselves spending a		 
substantial amount of money on services without knowing how much 
was being spent and where these dollars were going. Moreover,	 
they were not effectively coordinating purchases, and they lacked
the tools to ensure the best overall value. These companies were 
able to turn this situation around by adopting a more strategic  
perspective to service spending. Each company focused more on	 
what was good for the company as a whole rather than just	 
individual business units, and each began making decisions based 
on enhanced knowledge about service spending. The companies GAO  
reviewed analyzed their spending services to answer basic	 
questions 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 varying	 
prices. The companies used this data to determine the right	 
number of suppliers that met their needs.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-499T					        
    ACCNO:   A02870						        
  TITLE:     Contract Management: Taking a Strategic Approach to      
Improving Service Acquisitions					 
     DATE:   03/07/2002 
  SUBJECT:   Contract administration				 
	     Contract costs					 
	     Contract oversight 				 
	     Cost analysis					 
	     Cost control					 
	     Federal procurement				 
	     Private sector practices				 
	     Procurement practices				 
	     Service contracts					 

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GAO-02-499T
     
United States General Accounting Office

GAO Testimony

Before the Subcommittee on Technology and Procurement Policy, Committee on
Government Reform, House of Representatives

For Release on Delivery
Expected at 2:00 p.m.,
Thursday, March 7, 2002 CONTRACT

MANAGEMENT

Taking a Strategic Approach to Improving Service Acquisitions

Statement of William T. Woods, Acting Director, Acquisition and Sourcing
Management

GAO-02-499T

Best Practices for Service Acquisitions

Mr. Chairman and Members of the Subcommittee:

Thank you for the opportunity to participate in today's hearing on H.R.
3832, the Services Acquisition Reform Act of 2002 (SARA). The bill's
proposals focus on strengthening the acquisition workforce, moving toward a
performance-based contracting environment, and improving the management of
service acquisitions. As we testified1 before you last November, our work
shows that all these areas need attention, particularly in light of the
government's increasing dependence on services.

Today, I would like to discuss our recent findings on how leading companies
tackled the same kinds of problems the bill is seeking to remedy. The
practices that these companies followed clearly paid off in terms of dollar
savings and service enhancements. We believe that the federal government has
an opportunity to achieve similar outcomes with support and commitment from
the Congress. I would also like to discuss our ongoing work related to
specific proposals in the bill as well as concerns we have about other
sections of the bill.

A main goal of the bill is improving the management of service acquisitions.
There is good reason for this. Over the past decade, federal agencies have
substantially increased their purchases of services, particularly for
information technology and professional, administrative, and management
support. In fiscal year 2001 alone, the federal government acquired about
$109 billion2 in services. This money, however, is not always well-spent.
Our work, as well as the work of other oversight agencies, continues to find
that millions of service contract dollars are at risk at defense and
civilian agencies because acquisitions are poorly planned, not adequately
competed, or poorly managed.3

In view of these problems, we examined how leading 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

1U.S. General Accounting Office, Contract Management: Improving Service
Acquisitions, GAO-02-179T (Washington, D.C.: Nov. 1, 2001).

2 Excludes Research and Development. Data developed for actions exceeding
$25,000.

3U.S. General Accounting Office, Contract Management: Trends and Challenges
in Acquiring Services, GAO-01-753T (Washington, D.C.: May 22, 2001).

on services-ranging from routine maintenance, to advertising, to information
management-but did not have a good grasp of how much was being spent and
where these dollars were going. Moreover, they were not effectively
coordinating purchases, and they lacked tools to make sure that they were
getting the best overall value.

The companies we studied were able to turn this situation around by adopting
a more strategic perspective to service spending; that is, each company
focused more on what was good for the company as a whole rather than just
individual business units, and each began making decisions based on enhanced
knowledge about service spending. The specific activities they undertook
ranged from developing a better picture of what they were spending on
services, to taking an enterprisewide approach to acquiring services, to
developing new ways of doing business. Figure 1 highlights key elements of
the strategic approach.

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

Source: GAO analysis.

Specifically, the companies we visited analyzed their spending on services
to answer basic questions 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 used this data to rationalize their supplier base, or in other
words, to determine the right number of suppliers that met their needs.
Hasbro's spend analysis, for example, revealed that it had 17 providers of
temporary administrative, clerical, and light industrial personnel for 7
locations. The company also found that it had inconsistent policies and
processes, multiple contact points, and limited performance measures.
Information was not being shared across locations.

The companies we studied changed how they acquired services in significant
ways. Each elevated or expanded the role of the company's procurement
organization; designated "commodity" managers to oversee key services;
and/or made extensive use of cross-functional teams to help identify their
service needs, conduct market research, evaluate and select providers, and
manage performance. These changes transformed the role of 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 their
services and that it acts more in an advisory capacity to business units
rather than just being relied on for negotiating expertise.

Bringing about these new ways of doing business was challenging. For
example, some companies spent months piecing together data from various
financial 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 establishing new procurement processes met with
resistance from individual business units reluctant to share decision-making
responsibility and involved staff that traditionally did not communicate
with each other.

To overcome these particular challenges, the companies found they needed to
have sustained commitment from their senior leadership-first, to provide the
initial impetus to change and second, to keep up the momentum. Since service
acquisitions were largely viewed as a mission support activity and
peripheral to the bottom line, such commitment needed to be intense and
accompanied by clear communication on the rationale, goals, and expected
results from the reengineering efforts.

Moreover, to help sustain management attention, the companies implemented
performance measures to help them gauge whether reengineering efforts were
really working. For example, ExxonMobil employed an extensive system to
measure performance of its procurement function, which included metrics on
the procurement organization's progress in meeting financial, customer
satisfaction, and business operation objectives; compliance with best
practices; and more detailed metrics to assess the performance of local
purchasing units.

Why should these particular practices matter in looking how to reform
service acquisition in the federal government? Taking a strategic approach
clearly paid off. Companies were able to negotiate lower rates and better

match their business managers' needs with potential providers of services.
One official estimated that his company saved more than $210 million over
the past 5 years pursuing more strategic avenues to purchasing information
technology services, while another estimates his company typically achieved
savings of 15 percent or more on efforts that were undertaken using the new
processes.

Best Practices and the Services Acquisition Reform Act

Additional Ongoing Work Related to the Proposed Services Acquisition Reform
Act

The SARA bill touches on some aspects important to the approach followed by
the leading companies. First, the proposed bill also encourages greater use
of performance-based contracting. Performance-based service contracting is a
process where the contracting agency specifies the outcome or result it
desires and leaves it to the vendor to decide how best to achieve the
desired outcome. Historically, the government has not widely used this
strategy, but it is beginning to move in that direction in an effort to
attract leading commercial companies to doing business with the government,
gain greater access to technological innovations, and better ensure
contractor performance.

Second, the bill would create a chief acquisition officer within each
agency. We support the concept of a chief acquisition officer. Our
discussions with a number of officials from private sector companies about
how they buy services indicate that a procurement executive or a chief
acquisition officer plays a critical role in changing an organization's
culture and practices. The bill, however, differs from the approach taken by
leading companies in terms of the scope and the decision-making authority of
this position. Specifically, at the leading companies, these officials were
corporate executives who had authority to influence decisions on
acquisitions; implement needed structural, process, or role changes; and
provide the necessary clout to obtain initial buy-in and acceptance of
reengineering efforts. Under SARA, it is not clear that the chief
acquisition officer would have comparable responsibility and authority.

In addition to our work on best service acquisition practices, we are
performing a number of evaluations related to specific proposals in the
Services Acquisition Reform Act, including those on (1) acquisition
workforce, (2) performance-based contracting, and (3) share-in-savings
contracting. I would like to highlight what this work entails and how it can
be of use to the subcommittee as it moves forward on the bill.

Acquisition Workforce

The proposed bill contains several provisions to address the challenges
being faced in the acquisition workforce. Procurement reforms and
technological changes have placed unprecedented demands on the acquisition
workforce. Contracting personnel are now expected to have a much greater
knowledge of market conditions, industry trends, and technical details of
the commodities and services they procure.

We believe it is essential for agencies to define the future capabilities
needed by the workforce and to contrast these needs with where the workforce
is today. Doing so will provide a solid basis for evaluating whether
different management tools are needed to meet the needs of the future
workforce. Specifically, agencies could improve the capacity of the
acquisition workforce by focusing on four key areas:

* Requirements-assessing the knowledge and skills needed to effectively
perform operations to support agency mission and goals.

* Inventory-determining the knowledge and skills of current staff so that
gaps in needed capabilities can be identified.

* Workforce strategies and plans-developing strategies and implementing
plans for hiring, training, and professional development to fill the gap
between requirements and current staffing.

* Progress evaluation-evaluating progress made in improving human capital
capability and using the results of these evaluations to continuously
improve the organization's human capital strategies.

In our current work for this and other committees, we are examining efforts
to assess and address the needs of the future acquisition workforce.
Specifically, we are looking at (1) the adequacy of agency training
requirements for the acquisition workforce and agency practices for
determining the level of funding needed for training, (2) selected federal
agencies' strategic planning efforts to manage and improve the capacity of
the acquisition workforce, and (3) strategies being used to ensure that the
acquisition workforce is prepared to meet the new challenges for acquiring
services.

Performance-Based As noted earlier, the proposed bill is promoting greater
use of

Contracting performance-based contracting. The work we are conducting now
for this subcommittee should be particularly useful in determining the
extent to which performance-based contracting is taking hold and whether
there are governmentwide mechanisms that can be used to encourage greater
use of it.

Our work to date shows that for fiscal year 2001, about 23 percent of
eligible service contracts were reported to be performance-based. This
number is in line with a 20-percent goal set by the Office of Management and
Budget. However, our work shows that there are inconsistencies in the
interpretation of the definition of a performance-based contract. Moreover,
demonstrating either monetary savings or efficiency gains will be
challenging. We look forward to sharing the results of our review with the
subcommittee by August of this year.

Share-in-Savings Contracting

The proposed bill focuses specifically on promoting greater use of one
particular form of performance-based contract: share-in-savings. Basically,
in share-in-savings contracting, a contractor funds a project up front in
return for a percentage of the savings that are actually realized by an
agency. Almost 6 years after the Clinger-Cohen Act called for the creation
of pilot programs to test the share-in-savings concept in federal
information technology contracts, the government has not identified many
suitable candidates for use of this innovative technique. In large part,
this is because use of this tool requires solid baseline data about the
existing cost of an activity and a reliable method for measuring whether
success has been achieved. Gathering reliable baseline data can be
difficult.

The work we are conducting in this area will identify examples of best
practices using the share-in-savings contracting method found in the
commercial sector and assess how these practices can be effectively applied
in the federal government. We are specifically asking commercial companies
why they chose this tool as a means to help achieve their business goals and
what their experiences have been. One particular form of share-in-savings
that has emerged in our discussions is gain sharing. Under this approach, a
contractor does not assume all of the risk, rather it will reduce its normal
fees in return for a percentage of increased earnings or savings that result
from the contractor's work. The idea is to develop a "win-win" arrangement,
which jointly encourages the contractor and the client to achieve
sustainable business results.

Specific Concerns I would like to share initial concerns we have with some
particular provisions of SARA based on our previous work and experiences.

About SARA
Proposals First, section 221 of SARA would amend the Office of Federal

Procurement Policy Act to increase the micropurchase threshold from $2,500
to $25,000. The governmentwide commercial purchase card is the preferred
method for making micropurchases and is widely used. We have

not comprehensively examined the use of purchase cards across the federal
government. However, our reviews at selected agencies, including two Navy
units, have found weak internal controls, which have left agencies
vulnerable to a variety of improper purchases. We are concerned, therefore,
that raising the micropurchase threshold may not be advisable until problems
with controls and abuses are addressed and resolved.

Second, section 223 of SARA would strengthen the process under which
agencies decide challenges to their procurement decisions by imposing a
statutory stay of contract award or performance pending resolution of any
bid protest. The bill would require an agency to issue a decision on a bid
protest within 10 business days. We support prompt resolution of protests
and believe the proposed bill may help accomplish this. We are concerned,
however, that the 10-day time limit would be too brief in many cases to
permit meaningful consideration of a protester's complaints, especially when
the protest involves any degree of complexity.

Third, section 211 of the proposed bill would authorize service contractors
to submit invoices for payment more frequently-biweekly instead of monthly.
Although this change would have a positive effect on service contractors'
cash flow, it could increase the cost of doing business for the government.
Additionally, this change may increase the risk of erroneous payments-a
significant problem across the government-as it could increase the volume of
invoices and would provide agencies with less time to process and review
them. As such, we believe further study is warranted on this provision.

Lastly, the bill also makes a number of significant changes to commercial
items, including one, section 404, that would designate as a commercial item
any product or service sold by a commercial entity. Although we have not
fully assessed the possible impact of the proposed change, we are concerned
that the provision would allow for products or services that had never been
sold or offered for sale in the commercial marketplace to be considered a
commercial item. In such cases, the government may not be able to rely on
the assurances of the marketplace in terms of the quality and pricing of the
product or service.

In conclusion, long-standing problems and the increasing significance of
contracting for services point to a need for reforms in how services are
procured, managed, and overseen. Strengthening leadership over service
acquisitions and using performance-based contracting are good steps in this
direction. However, agencies need to take additional measures in

order to achieve the types of outcomes obtained by leading companies. These
include developing a reliable and accurate picture of service spending;
developing new structures, mechanisms, and metrics to foster a strategic
approach; and providing strong leadership to carry out these changes. Such
actions would help agencies to begin learning more about where their service
dollars are going and to find ways to leverage those dollars.

Mr. Chairman, this concludes my statement. We look forward to sharing the
results of our reviews and continuing to assist the subcommittee in its
development of the Services Acquisition Reform Act. I will be happy to
answer any questions you may have.

Contact and Acknowledgement

For further information, please contact William T. Woods at (202) 512-4841.
Individuals making key contributions to this testimony include Cristina
Chaplain, Ralph Dawn, Carolyn Kirby, Gordon Lusby, and Adam Vodraska.
*** End of document. ***