Best Practices: Improved Knowledge of DOD Service Contracts Could
Reveal Significant Savings (09-JUN-03, GAO-03-661).		 
                                                                 
Department of Defense (DOD) spending on service contracts	 
approaches $100 billion annually, but DOD's management of	 
services procurement is inefficient and ineffective and the	 
dollars are not always well spent. Recent legislation requires	 
DOD to improve procurement practices to achieve savings. Many	 
private companies changed management practices based on analyzing
spending patterns and coordinating procurement in order to	 
achieve major savings. This report evaluates five companies' best
practices and their conduct and use of "spend analysis" and the  
extent that DOD can pursue similar practices.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-661 					        
    ACCNO:   A07116						        
  TITLE:     Best Practices: Improved Knowledge of DOD Service	      
Contracts Could Reveal Significant Savings			 
     DATE:   06/09/2003 
  SUBJECT:   Best practices					 
	     Comparative analysis				 
	     Defense cost control				 
	     Defense procurement				 
	     Financial analysis 				 
	     Private sector practices				 
	     Private sector procurement 			 
	     Procurement practices				 
	     Service contracts					 

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GAO-03-661

Report to the Subcommittee on Readiness and Management Support, Committee
on Armed Services, U. S. Senate

United States General Accounting Office

GAO

June 2003 BEST PRACTICES Improved Knowledge of DOD Service Contracts Could
Reveal Significant Savings

GAO- 03- 661

The leading commercial companies GAO studied reported achieving and
expecting to achieve billions of dollars in savings by developing
companywde spend analysis programs and service- contracting strategies.
Spend analysis answers basic questions about how much is being spent for
what services, who

are the suppliers, and where are the opportunities for leveraged buying to
save money and improve performance. To obtain these answers, companies
extract internal financial data, supplement this data with external data,
organize the data into categories of services and suppliers, and have the
data analyzed by managers or cross- functional teams to plan and schedule
what services will be bought on a company wide basis. The results of spend
analysis are also used for broader strategic purposes* to develop reports
for top management, to track financial and other benefits achieved by the
company, and to further improve and centralize corporate procurement
processes. DOD is in the early stages of a spend analysis pilot. Although
DOD is moving in the right direction, it has not yet adopted best
practices to the same extent as the

companies we studied. Whether DOD can adopt these practices depends on its
ability to make long- term changes necessary to implement a more strategic
approach to contracting. DOD also cites a number of challenges, such as
its large and complex need for a range of services, the fragmentation of
spending data across multiple information systems, and contracting goals
for small businesses that may constrain its ability to consolidate smaller
requirements into larger contracts. Challenges such as these are difficult
and deep- rooted, but

companies also faced them. For DOD to change management practices for the
contracting of services will require sustained executive leadership at DOD
as well as the involvement and support of Congress.

Companies* Reported 2001 Procurement Spending and Savings Company 2001
procurement spend Procurement cost savings

IBM $42.4 billion Focuses on delivering competitive advantage year after
year; reported saving

hundreds of millions of dollars since 1994. ChevronTexaco $16 billion-$ 18
billion

Targeted savings of $300 million a year by 2003. After 2005, targeted
savings of $1.3 billion a year.

Bausch & Lomb $900 million Saved a reported $20 million a year from

1998 to 2001; reduced suppliers from 20,000 to 13,500. Delta Air Lines $7
billion (approximate) Reported saving over $200 million in procurement
costs since 2000.

Dell $26 billion Set goal to save 20% from its general

procurement budget of $3 billion to $4 billion.

Source: GAO analysis. Department of Defense (DOD) spending on service
contracts approaches $100 billion annually, but DOD*s management of
services

procurement is inefficient and ineffective and the dollars are not always
well spent. Recent legislation requires DOD to improve procurement
practices to

achieve savings. Many private companies changed management practices based
on analyzing spending patterns and coordinating procurement in order to
achieve major savings. This

report evaluates five companies* best practices and their conduct and use
of *spend analysis* and the extent that DOD can pursue similar

practices. To achieve savings, DOD should adopt the spend analysis best
practices of leading companies. DOD*s approach should provide for

an agencywide view of service contract spending and promote collaboration
to leverage buying power across multiple organizations. DOD should also

submit a plan and a schedule to Congress for timely changes in management
structure and servicecontracting business processes.

DOD concurred with the recommendation to adopt spend analysis best
practices but not with submitting a plan for management

and business process changes.

www. gao. gov/ cgi- bin/ getrpt? GAO- 03- 661. To view the full report,
including the scope and methodology, click on the link above. For more
information, contact David Cooper (202) 512- 4125, CooperD@ gao. gov.
Highlights of GAO- 03- 661, a report to

Subcommittee on Readiness and Management Support, Committee on Armed
Services, U. S. Senate

June 2003

BEST PRACTICES

Improved Knowledge of DOD Service Contracts Could Reveal Significant
Savings

Page i GAO- 03- 661 Best Practices Letter 1 Results in Brief 3 Background
4 Leading Companies Have Developed Formal Spend Analysis Programs to
Improve Services Procurement 11 DOD Launches a Pilot Spend Analysis with
an Eye toward

Developing a More Strategic Approach 30 Conclusions 37 Recommendations for
Executive Action 38 Agency Comments 38 Scope and Methodology 40 Appendix
Comments from the Department of Defense 43

Tables

Table 1: Leading Companies We Studied and Their Reliance on Buying
Services 8 Table 2: Companies* Reported 2001 Procurement Spending and

Savings 10 Table 3: Comparison of DOD*s Spend Analysis with Leading
Company Practices 31 Figure

Figure 1: DOD Contract Dollars for Goods and Services 5 Abbreviations

DOD Department of Defense IBM International Business Machines Contents

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protection in the United States. It may be reproduced and distributed in
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materials separately from GAO*s product.

Page 1 GAO- 03- 661 Best Practices

June 9, 2003 The Honorable John Ensign Chairman The Honorable Daniel K.
Akaka Ranking Minority Member Subcommittee on Readiness and Management
Support Committee on Armed Services United States Senate

The Department of Defense (DOD) faces critical challenges in deciding how
best to obtain the services it needs to achieve its mission. Within the
federal government, DOD is the dominant buyer of services in terms of
contracting dollars spent, accounting for $79 billion in 2001, more than
half the $140 billion spent by the entire federal government. 1 DOD spends
more on services than it does on supplies and equipment, and that spending
is increasing year after year. In spite of this, our work as well as that
of DOD*s Office of Inspector General has found that DOD*s spending on
services is not well managed* the current process is decentralized,
insufficiently rigorous, and unreliable. Although DOD is taking actions to
address these problems, it has a long way to go.

Like the federal government, private companies increasingly rely on
services and also struggle with methods to better manage their purchasing.
Last year we reported that to reduce costs, improve productivity, and more
effectively procure services, many companies have adopted a strategic
approach* centralizing and reorganizing their operations to get the best
value for the company as a whole* that is based on the implementation of a
variety of best practices. 2 These range from learning much more about
their service spending to buying services on an enterprisewide rather than
business unit basis. Pursuing such an approach

1 DOD- reported data for service contracting dollars, Defense Contract
Action Data System. Governmentwide- reported 2001 data for service
contracting dollars, Federal Procurement Data System. Excludes contracts
valued at $25,000 or less. Fiscal year 2001 is the last year for which
complete governmentwide data is available. For related information for
1997 through 2001, see U. S. General Accounting Office, Federal
Procurement: Spending and

Workforce Trends, GAO- 03- 443 (Washington, D. C.: Apr. 30, 2003). 2 U. S.
General Accounting Office, Best Practices: Taking a Strategic Approach
Could Improve DOD*s Acquisition of Services, GAO- 02- 230 (Washington, D.
C.: Jan. 18, 2002).

United States General Accounting Office Washington, DC 20548

Page 2 GAO- 03- 661 Best Practices

clearly pays off. One recent survey of 147 companies in 22 industries
indicated a strategic approach to procurement had resulted in savings of
more than $13 billion in one year. 3 The very same practices employed by
the private sector could serve as a foundation for improving the

acquisition of services in DOD. When adopting a strategic, best- practices
approach for changing procurement business processes, companies begin with
a *spend analysis* to examine purchasing patterns to see who is buying
what from whom. By arming themselves with this knowledge, companies can
leverage their buying power, reduce purchasing costs, and better manage
their suppliers. In essence, spend analysis is the road map to procurement
cost- savings and performance improvements.

To follow up on our earlier work, you asked us to further evaluate (1) the
best practices of leading companies as they relate to conducting and using
spend analysis, and (2) the extent to which DOD can pursue similar
practices.

To conduct this work, we reviewed the spend analysis practices of five
leading companies that take a strategic approach to managing services
acquisitions: International Business Machines (IBM), ChevronTexaco, Bausch
& Lomb, Delta Air Lines, and Dell Computer. They reported a

combined spending for goods and services between $92 billion and $94
billion in 2001. We selected these companies for review on the basis of
extensive research and because they have been recognized by their peers

for highly effective procurement and spend analysis processes. However, we
did not verify the accuracy of the procurement costs and benefits reported
to us by the companies. More information is presented in our Scope and
Methodology section beginning on page 40 of this report.

3 A. T. Kearney, Inc., Assessment of Excellence in Procurement 2002
(Chicago, Ill.: 2002).

Page 3 GAO- 03- 661 Best Practices

The leading commercial companies we studied report achieving* and
expecting to achieve* billions of dollars in savings by developing
companywide spend analysis programs and services contracting strategies.
These companies* spend analysis programs answer some basic questions* how
much is being spent for what services, who are the suppliers, and where
are the opportunities for leveraged buying to save money and improve
performance. To obtain the answers, these companies extract internal
financial data, supplement that data with external data, organize the data
into categories of services and suppliers, and analyze

it. To obtain this information quickly, spend analysis programs use
automated systems that consolidate accounts payable data, and supplement
it when necessary with purchase card data and additional information on
suppliers* status and services purchased. Once organized, the data are
analyzed by managers or cross- functional teams to plan, prioritize, and
centrally source what services will be bought from what specific
suppliers. At this stage, spend analysis helps companies make the proper
adjustments to achieve expected savings. Spend analysis is also

used to develop reports for top management to establish quarterly and
annual savings goals, to track financial and other benefits achieved, and
to reorganize corporate procurement processes under a more centrally led

management structure. In response to recent legislation requiring
management and cost- saving improvements in service contracts, DOD is in
the beginning stages of a spend analysis pilot. DOD leadership agrees that
viewing spending from a DOD- wide perspective will help identify large-
scale savings opportunities and other efficiencies over the current
decentralized procurement environment. Although moving in the right
direction, DOD has not yet adopted private sector best practices to the
same extent as the companies we reviewed. Whether DOD can adopt these
practices depends on the

ability to make long- term changes that are necessary when organizations
decide to implement a more strategic approach to service contracts. DOD
also cites a number of challenges that may hamper adoption of these
practices. These include the size and complexity of DOD*s need for
services, the fragmentation of the services* spending data across multiple
financial and procurement systems, and socioeconomic goals for contracting
with small and diversely owned businesses. Contract management challenges
such as these are difficult and deep- rooted and will require sustained
executive leadership at DOD as well as the Congress*s continued
involvement and support.

This report includes recommendations intended to help DOD adopt spend
analysis best practices and to use the resulting information to implement
a Results in Brief

Page 4 GAO- 03- 661 Best Practices

more strategic approach to planning and managing the acquisition of
services.

DOD commented on a draft of this report. DOD concurred with the
recommendation to adopt the spend analysis processes employed by leading
companies* and now intends to automate the process of data

collection and analysis to make it repeatable, rather than a one- time
effort. However, DOD did not concur with the recommendation to develop a
plan to institute changes in management structure and services contracting
business processes and to do so as part of its 2005 budget submission. In
response to the portion of DOD*s comment that such a timeframe would be
premature, we modified the recommendation to allow more time for DOD to
complete the spend analysis pilot and use the results to develop a plan.
The DOD comments can be found in appendix I.

DOD is historically the federal government*s largest purchaser of
services. Between 2001 and 2002, DOD*s reported spending for services
contracting jumped almost 18 percent to about $93 billion. 4 In addition
to the sizeable sum of dollars involved, DOD contracts for a wide and
complex range of services, such as professional, administrative, and
management support; construction, repair, and maintenance; information
technology services; research and development; medical services; operation
of governmentowned facilities; and transportation, travel, and relocation.
In each of the past five years, DOD has spent more on services than it has
on supply and equipment goods (that includes contracting for ships,
aircraft, and other military items) (see figure 1).

4 GAO analysis of data extracted from the Defense Contract Action Data
System, adjusted to represent constant fiscal year 2002 dollars. Includes
actions categorized as research, development, test, and evaluation
activities, and excludes actions $25,000 or less and purchase card use.
Background

Page 5 GAO- 03- 661 Best Practices

Figure 1: DOD Contract Dollars for Goods and Services

Note: Data extracted from the Defense Contract Action Data System for
1998* 2002. Figure is in constant 2002 dollars and includes actions
categorized as research, development, test, and evaluation activities.
Figure excludes actions of $25, 000 or less and purchase card spending.

Page 6 GAO- 03- 661 Best Practices

Despite this huge investment in buying services, our work* and the work of
the DOD Inspector General* has found that DOD*s spending on services is
inefficient and not being managed effectively. In fact, we have identified
overall DOD contract management as a high- risk area, most

recently in our Performance and Accountability Series issued this past
January. 5 Responsibility for acquiring services is spread among
individual military commands, weapon system program offices, or functional
units in various defense organizations, with limited visibility or control
at the DOD or military- department level. Too often, requirements are not
clearly defined; competition is not adequately pursued; rigorous price
analyses are not performed; and contractors* performance is not
sufficiently overseen. 6 Information systems that provide reliable data
and are capable of being used as management tools are lacking, and DOD has
established

few enterprisewide contracting- related performance metrics. Further, DOD
lacks a strategic plan to identify and prioritize future service
contracting- related efforts for better management.

Seeking longer- term remedies to bring about sorely needed reform, the
Congress has passed legislation to direct DOD to adopt best practices used
by leading companies and to achieve significant savings through improved
management approaches for services contracts. The National Defense
Authorization Act for Fiscal Year 2002 directs DOD to improve its
management structure and oversight process for acquisition of services. 7
One of the law*s aims is to prompt DOD to undertake a comprehensive

spend analysis of its services contracts. This analysis is intended to
provide DOD the basis for expanding its use of cross- functional commodity
8 teams to leverage its buying power, improve the performance of its
services contractors, organize its supplier base, and ensure that its
dollars are well spent. Moreover, expecting that DOD could achieve
significant savings without any reduction in services, the legislation
also

5 U. S. General Accounting Office, Major Management Challenges and Program
Risks: Department of Defense, GAO- 03- 98 (Washington, D. C.: Jan. 2003).
6 Although DOD is taking actions to address these issues, most of these
actions are in the early stages of implementation. It is uncertain whether
the corrective actions can be fully and successfully implemented in the
near term. See GAO- 03- 98.

7 Sec. 801, Pub. L. No. 107- 107, Dec. 28, 2001. 8 A commodity is a
category of products or services segmented by commonality of materials or
service type. The term does not imply an expendable or non- complex item.
This grouping will allow volume and technical leveraging of organizational
spending and the establishing of a network of commodity experts.

Page 7 GAO- 03- 661 Best Practices

establishes savings goals that DOD should achieve by employing commercial
best practices and effective management. 9 In addition, Congress reduced
the amounts appropriated to DOD in fiscal years 2002 and 2003 by a total
of $2.5 billion to reflect savings from business process reforms in the
procurement of services. 10 Increasingly, private sector companies have
been purchasing a wide range of services from outside suppliers at a cost
rising at an average of

3.5 percent a year. 11 The leading companies we interviewed* IBM,
ChevronTexaco, Bausch & Lomb, Delta Air Lines, and Dell* reported between
$92 billion and $94 billion in combined annual procurement spending for
goods and services in 2001, and they use a large part of their purchasing
dollars to buy services (see table 1).

9 Section 802 of the 2002 Authorization Act established savings goals of 3
percent in fiscal year 2002, 4 percent in fiscal year 2003, 5 percent in
fiscal year 2004, and 10 percent in fiscal year 2011. The following year,
because DOD had been unable to develop a method for measuring savings
achieved through the improved management of services contracts, these
goals were modified to instead focus on increasing the number of services
contracts that are competitive- and performance- based. Bob Stump National
Defense Authorization Act for Fiscal Year 2003, Sec. 805, Pub. L. No. 107-
314, Dec. 2, 2002.

10 Sec. 8123, Pub. L. No. 107- 117, Jan. 10, 2002, and Sec. 8100, Pub. L.
No. 107- 248, Oct. 23, 2002. 11 Elance, Inc. and CAPS Research, *Narrative
Summary: Defining and Determining the *Services Spend* in Today*s Services
Economy* (Tempe, Ariz.: Aug. 2002) http:// www. capsresearch. org/
benchmarking/ spreports. htm (downloaded Feb. 25, 2003). Private Sector*s
Use of

Spend Analysis Bolsters Strategic Approach

Page 8 GAO- 03- 661 Best Practices

Table 1: Leading Companies We Studied and Their Reliance on Buying
Services Company Function Reported 2001

procurement (in billions) Reliance on buying services

IBM A global leader in business services and computer hardware and
software; 2002 revenue of $81.2 billion. $42.4 IBM*s diversification from
strictly computer

hardware and software manufacturing to a broader business model of
consulting, information technology, and financing services has expanded
its procurement scope to include services as well as material goods needed
for production. About 52 percent of IBM*s annual spending is for general
services procurement including complementary workforce, advertising,
telecommunications, and facilities management. ChevronTexaco A leader in
the oil and gas industry, with 2001

sales and operating revenues of $104.4 billion. Involved in exploration
and production, refining, marketing and transportation, chemical
manufacturing and sales, and power generation.

$16 - $18 An estimated 60 percent of ChevronTexaco*s annual spending pays
for contracted services that support the company*s worldwide oil and gas
extraction, refining, and distribution; construction and maintenance of
facilities (such as retail gas stations); and corporate operations,
including consulting and professional services. Bausch & Lomb A global
vision care manufacturer of contact

lenses, lens care products, surgical equipment, and pharmaceuticals,
netting more than $1.7 billion in 2001 sales revenue.

$0.9 About half of Bausch & Lomb*s $535 million in purchases from U. S.
suppliers was for various services to support marketing and advertising,
corporate business operations, and research, development, and engineering
activities. In 2001, Bausch & Lomb*s largest spending category was
management, business, professional, and administrative services. Delta Air
Lines A leader in air transportation for passengers and

freight throughout the United States and around the world; 2001 revenue
was $13.9 billion.

$7 (approximate) About 60 percent of Delta*s annual procurement spending
is accounted for by service suppliers. Delta contracts with private
vendors to perform various functions, including fueling and cleaning
planes and handling baggage.

Dell A worldwide manufacturer of home and business computer systems and
servers and provider of computer support services, with net 2001 sales
revenue of $31. 9 billion.

$26 Although the bulk of Dell*s $26 billion procurement spending goes
toward purchasing materials and component parts to manufacture its
computer hardware products, between $3 billion and $4 billion

per year is spent on general services. The services include consulting,
facility management, financial operations, training, logistics, marketing,
installation and future product support, and travel. Source: GAO analysis.
Note: GAO analyzed information from IBM, ChevronTexaco, Bausch & Lomb,
Delta Air Lines, and

Dell. Reported 2001 procurement for goods and services.

Page 9 GAO- 03- 661 Best Practices

As service acquisition costs have increased, companies have sought to
reduce them by taking a strategic approach, starting with the use of spend
analysis processes to provide the necessary data. A strategic approach

pulls together participants from a variety of places within an
organization who recommend changes to a company*s personnel, processes,
structure, and culture that can constrain rising acquisition costs. These
changes (often referred to as *strategic sourcing*) can include
adjustments to procurement and other processes such as instituting
enterprisewide purchasing of specific services; reshaping a decentralized
process to follow a more center- led, strategic approach; and increasing
the involvement of the corporate procurement organization, including
working across business units to help identify service needs, select
providers, and manage contractor performance.

A critical component of an effective strategic approach is a comprehensive
spend analysis program. An initial spend analysis permits company
executives to review the total dollars spent by a company each year to see
how much is spent, what was bought, from whom it was bought, and who

is purchasing it. This analysis thus identifies where numerous suppliers
are providing similar services* and at varying prices* and where
purchasing costs can be reduced and performance improved by better
leveraging buying power with the right number of suppliers to meet the
company*s needs.

Overall, spend analysis permits companies to define the magnitude and
characteristics of their spending, track emerging market spending,
understand their internal clients and supply chain, and monitor spending
with diverse suppliers for socioeconomic business goals. Spend analysis is
an important driver of strategic planning and execution, and it allows for

the creation of lower- cost consolidated contracts at the local, regional,
or global level. At the same time, as part of a strategic sourcing effort,
spend analysis allows companies to monitor trends in small and minority-
owned business supplier participation in order to address the proper
balance with equally important corporate supplier diversity goals.

Studies have reported significant cost savings in the private sector, with
some companies achieving reported savings of 10 percent to 20 percent of
their total procurement costs through the use of a strategic approach to

buying goods and services. A recent Purchasing Magazine poll finds that
companies employing procurement best practices* including employing

Page 10 GAO- 03- 661 Best Practices

effective spend analysis processes* are routinely delivering a 3 percent
to 7 percent savings from their procurement costs. 12 Research by A. T.
Kearney, Inc., suggests that, if all companies using procurement

best practices to some extent matched the savings rates of the leading
companies, total savings could reach as much as 41 percent more than the
$13.5 billion achieved in 2000. 13 The leading commercial companies we
studied report achieving and expecting to achieve billions of dollars in
savings by developing companywide spend analysis programs and services
contracting strategies, as shown in table 2.

Table 2: Companies* Reported 2001 Procurement Spending and Savings Company
2001 procurement

spend Procurement cost savings

IBM $42.4 billion Focuses on delivering competitive advantage year after
year; reported saving hundreds of millions of dollars since 1994.
ChevronTexaco $16 billion-$ 18 billion Reported targeted savings of

$300 million a year by 2003. After 2005, targeted savings of $1.3 billion
a year. Bausch & Lomb $900 million Saved a reported $20 million a year
from

1998 to 2001; reduced suppliers from 20,000 to 13,500. Delta Air Lines $7
billion (approximate) Reported saving more than $200 million

in procurement costs since 2000. Dell $26 billion Set goal to save 20%
from its general

procurement budget of $3 billion to $4 billion. Source: GAO analysis.
Note: GAO analyzed information from IBM, ChevronTexaco, Bausch & Lomb,
Delta Air Lines, and

Dell.

12 Anne Millen Porter, *Spend a Little, Save a Lot!*, Purchasing Magazine,
Apr. 4, 2002. 13 A. T. Kearney, Inc., Assessment of Excellence in
Procurement 2002.

Page 11 GAO- 03- 661 Best Practices

Although the financial and other results of spend analysis clearly are
worth the effort, initially setting up these programs can be challenging,
according to research organizations and our interviews with company
executives. Companies have experienced problems accumulating sufficient
data from internal financial systems that do not capture all of what a
company buys or are being used by different parts of the company but are
not connected. Because simplified data may not exist or be available,
companies have frequently been unsure who their buyers are and have had to
contend with databases that include listings of items and suppliers that
in reality are identical to each other but which are all stored under
different names. Companies also found that existing databases have

not captured anywhere near enough details on the services for which
vendors are being paid.

Despite these challenges, companies that developed formal, centralized
spend analysis programs found that they have been able to resolve their
problems over time and go on to engage in effective spend analysis on a
continuous basis through the use of five key processes, according to our
review of research organizations* findings and interviews with company
executives. 14 The processes involve automating, extracting,
supplementing, organizing, and analyzing data.

14 Research organizations* studies on effective spend analysis processes
we reviewed included Aberdeen Group (Boston, Mass.), AMR Research (Boston,
Mass.), RAND (Santa Monica, Calif.), and The Yankee Group (Boston, Mass.).
Leading Companies Have Developed

Formal Spend Analysis Programs to Improve Services Procurement

Page 12 GAO- 03- 661 Best Practices

Building the foundation for a thorough spend analysis involves creating an
automated information system for compiling spending data. The system
routinely extracts vendor payment and related procurement data from
financial and other information systems within the company. The data are
then automatically compiled into a central data warehouse or a spreadsheet
application, which is continually updated. Most of the automated spend
analysis systems currently in use were developed in house, although some
companies have hired third- party companies for expertise and technology.

The data are primarily extracted from accounts payable financial systems
and reviewed for completeness. Accounts payable data can be voluminous and
very detailed. Companies process large numbers of vendor invoices for
payment each year, and each of those must be examined by their spend
analysis systems. When necessary, the accounts payable data are
supplemented with other sources, such as more detailed purchase card data
obtained from external bank- card vendors* systems or other information,
such as suppliers* financial status and performance information. Companies
must obtain as much information as possible from both internal and
external sources to gain a complete understanding of their spending for
services contracts.

Data files must be accurate, complete, and consistent. The data are
subjected to an extensive review for accuracy and consistency, and steps
are then taken to standardize the data in the same format, which involves
the creation of uniform purchasing codes. The data are typically organized
into comprehensive categories of suppliers and commodities that cover all

of the organization*s purchases. Simultaneously, commodity managers,
councils, or teams are established to access and analyze the information
on a ongoing basis, using standard reporting and analytical tools. Each
group is responsible for one or more commodities, which may also include
responsibility for a number of sub- categories. Once the spending data
have been organized and reviewed, companies use the data as the foundation
for a variety of ongoing strategic efforts.

The following company profiles illustrate significant aspects of the spend
analysis and strategic- sourcing processes. Each profile begins with a
description of the savings targets the company has set, achieved, and
expects to achieve in the future. This is followed by a discussion of the
difficulties the company experienced before implementing spend analysis;
the components of its spend analysis system* including how it extracts,
supplements, organizes, and analyzes its data; an example drawn from

Page 13 GAO- 03- 661 Best Practices

company practice of a successful application of spend analysis; and how
the company expects to keep improving its system over time.

Despite the uniformity of this framework, these companies are not
identical in the manner that they implement spend analysis or strategic
sourcing. Some have more mature systems than do others, while some have
strengths or creativity demonstrated in specific aspects of the

process. Each, however, has been cited by procurement and industry
specialists as a role model for procurement and spend analysis, and our
interviews and subsequent analysis have borne that out.

Page 14 GAO- 03- 661 Best Practices

Note: IBM is a registered trademark and used by permission of the
International Business Machines Corporation.

Year after year, IBM*s global procurement organization focuses on
delivering a sustained competitive advantage across its entire portfolio
of purchases, which totaled $42 billion in 2001. IBM*s procurement
transformation began in 1994 and continues to evolve. As a result, IBM
reports having achieved significant efficiencies and globally leveraged
its

spending through strategic sourcing to reduce the number of suppliers and
save hundreds of millions of dollars. In the beginning of its
transformation, IBM lacked sufficient knowledge on what it was spending
across the enterprise. Company buyers were calling the same items and
suppliers by different names and being charged different prices for the
same product or service. The company had disparate accounts payable
systems, and the procurement organization was unable to gather easily a
consolidated view of spending with IBM suppliers. Aggregated data were
unavailable, and the linkage between procurement and accounts payable was
inadequate for leveraging the company*s buying power. To launch a
comprehensive spend analysis, IBM had to address four major challenges:
(1) linking its disjointed legacy systems, (2) investing in a single-
enterprise resource- planning system, (3) establishing uniform naming
conventions for suppliers, goods, and services, and (4) creating a single
procurement management system to support a global process.

Company Profile

Page 15 GAO- 03- 661 Best Practices

To address these challenges, IBM developed an extensive *end- to- end*
procurement system, which includes a paperless process for requisitions
and purchase orders, electronic linkages to suppliers, a worldwide
accounts payable system that receives and processes all suppliers*
invoices, and a centralized spend analysis program built around an
automated business data warehouse for efficiently extracting accounts
payable and other enterprise spending data in a common format. Initially,
IBM*s data management system did not support aggregating all of the
accounts payable and other data to support management decision making.
Recognizing this situation, IBM quickly responded by implementing a
centralized global business data warehouse to facilitate decision making
based on accounts payable and other data covering the entirety of IBM*s
purchases.

IBM*s global procurement organization has used spend analysis to establish
a substantial level of control by the company*s 31 *commodity councils*.
15 The councils analyze the spending data in order to meet the needs of
IBM groups worldwide and to enter into deals with suppliers by leveraging
IBM*s total buying power to gain proper volume discounts. Before 1995,
IBM*s decentralized buyers controlled only 45 percent of the company*s
purchasing; centralized councils now control almost

100 percent. Although IBM business units initially found it difficult to
give up decentralized control over buying to the global procurement
organization, IBM*s global procurement organization used spend analysis
presentations to demonstrate the savings that were possible and to achieve
buy- in to the new purchasing process while being responsive to business
units* needs.

IBM*s spend analysis approach also supplements information from internal
accounts payable with business intelligence data on suppliers* businesses
and market status from an outside party. This information is part of the
spend analysis process used to create up- to- date profiles on IBM*s top
suppliers. IBM spend analysis also integrates external information on
average prices paid in the market in order to measure the company*s
strategic- sourcing performance in achieving a competitive advantage 15
Since 1994, commodity councils have been a central feature of the single
procurement management system established by IBM. The term commodity
council describes a

cross- functional sourcing group charged with formulating a centralized
purchasing strategy and establishing centralized contracts for
enterprisewide requirements for a selected commodity grouping. Following
the council*s sourcing actions, decentralized units then execute tactical
ordering against those pre- established business agreements.

Page 16 GAO- 03- 661 Best Practices

through its procurement processes. IBM works with third- party consultants
to obtain credible market intelligence in order to determine the *best in
class* price for a given commodity and whether or not IBM is obtaining the
lowest market prices from its suppliers.

IBM*s global procurement organization created uniform purchasing codes and
upgraded data entry processes for accounts payable in order to organize
the spend analysis categories of products and services commodities that
could be leveraged for strategic- sourcing purposes. For example, IBM*s
procurement data, which include related accounts payable data, are
organized under 31 broad categories that correspond with the commodity
councils. Each category encompasses a number of subcommodities that cover
the company*s production- related services and general procurement. 16 For
example, one high- level services procurement grouping is temporary
technical services* a multi- billion dollar annual spending category for
IBM* which includes eight sub- commodities, such temporary services as
programmers, systems engineers, technical writing,

and systems help- desk support. Currently, the councils use spend analysis
to support their negotiations with suppliers and to work with internal
business units in order to bring the best value to bear. For example, the
technical services commodity council relied on spend analysis to carry out
a strategic- sourcing effort. The council*s analysis revealed that the
company was spending billions annually for temporary technical services,
that its hiring process was taking 10 days on average, and that multiple
suppliers were sending in candidate resumes. As a result of the council*s
effort, a centralized Web- based hiring system was developed internally
for sourcing external technical services. Requesters can go online and
select candidates from a

database, conduct interviews, and submit requisitions, while reducing the
process of hiring to less than 3 days. Costs were reduced by a reported
$40 million in 2001 as a result of the commodity council*s prenegotiating
various skill payment rates with two- thirds fewer suppliers.

In summary, IBM has implemented a number of strategic enhancements to its
global purchasing approach. Ongoing enhancements, including

16 *Production* procurement covers components parts, materials, and other
items bought by a company to directly support the manufacturing of its own
products. *General* procurement covers products and services bought by a
company for other business operation purposes that are indirectly related
to its manufacturing operation, but directly

related to services provided to internal and external customers.

Page 17 GAO- 03- 661 Best Practices

corporate spend analysis capabilities, will focus on deeper integration of
the procurement process into the company*s supply chain management aimed
towards a new level of global buying effectiveness. IBM is making changes
to exploit greater electronic procurement capabilities and to consolidate
purchase order processing and procurement support services in centralized
locations around the world. Such changes are intended to remove
administrative workload from the commodity councils, allowing them to
focus on management of suppliers, internal customers, and IBM costs.

Page 18 GAO- 03- 661 Best Practices

Note: ChevronTexaco*s word mark is used by permission.

ChevronTexaco*s phased approach to the strategic sourcing of its entire
procurement spending is expected to result in savings of at least $300
million a year by 2003 and $1.3 billion a year after 2005. The company*s
annual spending on procurement is currently between $16 billion and $18
billion. The company*s procurement savings goals, established after the
two historically decentralized companies merged in 2001, are based on
spend analysis.

Before the merger, each separate company had difficulty understanding its
own spending practices. Chevron had a limited number of personnel working
on the task* its purchasing unit had only a few analysts who laboriously
collected, reviewed, and organized all the accounts payable data after
issuing data calls to various business units. The information collected
was consolidated in large spreadsheet binders, but these did not capture
all company spending or details on suppliers* diversity of interest to
corporate leaders. Chevron lacked the data to negotiate effectively with
suppliers, who knew more about what was being spent and what business they
had with Chevron. Texaco also had difficulty understanding its supplier
base and what it was buying because its accounts payable data were stored
in 14 systems, suppliers* names were not standardized in those systems,
and not enough details were captured on the goods or services for which
vendors were being paid. Company Profile

Page 19 GAO- 03- 661 Best Practices

Once the companies merged, ChevronTexaco adopted, as its global
procurement focus, the development of accurate, detailed information on
spending. ChevronTexaco*s spend analysis system now automatically extracts
accounts payable data on most purchased goods and services from these
systems. For greater precision, ChevronTexaco supplements the accounts
payable data with external information and internal expertise to obtain
more detailed insight into the products and services being bought and the
vendors that supply them. The data are organized into three dozen broad
categories, including 250 products and services, which cover most of the
company*s annual spending.

ChevronTexaco*s global procurement leadership and several decision support
staff (who work with a few dozen cross- functional commodity teams)
analyze the spending data. These teams link the procurement organization,
strategic- sourcing processes, and business units by collaboratively using
the spending data to identify, plan, and recommend sourcing projects for
goods and services, including capital projects. For example, three
consulting and professional services commodity teams are responsible for
analyzing data related to spending for temporary accounting staff,
financial and information technology management, and legal and technical
services.

An initial commodity team analysis of the consulting and professional
services* spending data showed close to $600 million spent on consulting
services and many subcategories that needed to be identified. Further
spend analysis showed that the company was using 1,600 suppliers, that
buying was highly fragmented with little standardization, and that
consultant contracting was not sufficiently competitive. The spend

analysis identified five consulting services* supply markets for separate
consideration* financial, information technology, general management,
legal, and technical. The team discovered that most of the five were ripe
for competition, that some were reducing staff and seeking larger client
bases, and that some were laying off employees and going through a

slump. After taking into account internal business unit readiness for
supplier consolidation, the team finally recommended separate
strategicsourcing projects in information technology, legal, and general
management consulting. ChevronTexaco estimates net savings to be between 8
percent and 10 percent of the company*s total spending on those 3
consulting and professional services* subcategories.

Page 20 GAO- 03- 661 Best Practices

ChevronTexaco uses spend analysis to document and report direct savings
that result from negotiated price reductions, volume discounts, and
leveraged discounts. 17 Spend analysis supports ChevronTexaco*s active
supplier diversity program by permitting strategic- sourcing teams to
track the company*s spending with small and diversely- owned businesses
and identify opportunities to attract competitive offers from such
suppliers. Analysis of the spending data has also been used to meet a wide
range of the company*s strategic goals, including identifying the right
stakeholders for participation in a global procurement organization
coordinating key

business areas. To win support, procurement executives used spend analysis
to promote internally the need for procurement reengineering to help
business units reduce costs without sacrificing operations, safety, and
services. Spend analysis also underpins the development of performance
measures used throughout the company*s standardized procurement processes.

ChevronTexaco plans further improvements to its spend analysis system. The
company is investing in a third party*s suite of electronic procurement
applications. One of the applications is an automated spend analysis tool
that will more quickly extract even more detailed data from the company*s
financial system.

17 Volume discounts are gained in return for purchasing more units from
individual suppliers. Leveraged discounts are gained in return for buying
more than one type of product or service from a single supplier.

Page 21 GAO- 03- 661 Best Practices

Note: Bausch & Lomb*s logo is used by permission.

Bausch & Lomb*s strategic sourcing effort saved the company a reported $20
million a year from 1998 through 2001, and is anticipated to save an
additional $11 million in each year through 2005. These savings were
generated through a one- third reduction in the number of Bausch & Lomb*s
suppliers from 20,000 to 13, 500 and negotiation of discounts on the
volume of business with the remaining suppliers.

In 1997, Bausch & Lomb was having difficulty coordinating information from
multiple internal information systems as it attempted to understand what
it was spending. To overcome this problem, the company contracted with a
consultant during the first 2 years of its effort to create and automate
master vendor files through a central database and directly provide spend
analysis support. Bausch & Lomb*s spend analysis* which focused on
developing a comprehensive database and targeting categories with the most
suppliers and the most spending* became the foundation of

its strategic sourcing effort. To perform its spend analysis, Bausch &
Lomb extracted accounts payable data from more than 50 internal systems
and sent the data to the consultant to review and correct the records to
eliminate duplication and identify *families* of suppliers connected
through corporate ownership that could be used to negotiate better terms.
The consultant also used its technology tool to compile and automate the
analysis of Bausch & Lomb*s spending data. Spending data were standardized
by using two publicly

Company Profile

Page 22 GAO- 03- 661 Best Practices

available classification systems, allowing for comparisons to be made
between vendor identifiers and the affiliated commodity codes. These
internally available data were supplemented with other information from
the consultant*s business intelligence database that addressed suppliers*
risk 18 and status as minority or women- owned businesses and with
purchase card expenditure data.

Bausch & Lomb then organized the data into 50 broad categories of products
and services, each of which was subdivided into 4 to 12 commodities.
Responsibility for the categories was divided among several headquarters
commodity managers* including those specializing in information
technology, pharmaceuticals, and business processes. The commodity
managers analyzed the spending data and sought input from business units
to develop strategic sourcing strategies and business plans for each of
the commodities to combine the company*s total buying power and
rationalize the supplier base. The commodity managers now oversee the
corporate procurement of specific goods and services across all the
business units.

For example, when the business process commodity manager applied spend
analysis to Bausch & Lomb*s use of temporary personnel services, the
outcomes included the opportunity to reduce the number of suppliers, lower
costs, and achieve other streamlining benefits. Business units had been
using purchase orders to obtain temporary services, and the spend analysis
revealed that although 60 suppliers were being used, one national company
was the top temporary services provider. This knowledge

enabled Bausch & Lomb to negotiate a 17 percent reduction with that
company for temporary services by consolidating the supplier base from 60
companies to 1. The remaining temporary services company agreed to this
reduced rate because it was guaranteed a greater volume of individual
purchase orders and because Bausch & Lomb*s business units were

required to use that preferred company unless they had a need that it
could not meet. Bausch & Lomb*s ongoing spend analysis of this $13 million
commodity also enables it to monitor business unit compliance with the
contract to use the preferred company and achievement of savings targets.

18 Managing supplier risk is important to companies to avoid supply chain
disruptions and performance problems that could jeopardize business
operations. A number of financial measures are used to assess risk of a
supplier, including business experience, financial condition, ability to
pay bills, suits, liens, and judgments.

Page 23 GAO- 03- 661 Best Practices

Bausch & Lomb*s procurement organization now performs and regularly
updates the spend analysis with support from the consultant. Each year,
Bausch & Lomb refreshes its spend analysis data with new supplier
information obtained from the consultant. The annual spend analysis
examines how much its divisions are spending on specific commodities to
determine its potential bargaining power with its suppliers and to review
the risks of existing suppliers. Its commodity managers identify which
strategic sourcing projects to tackle based on the dollar amount spent,
the number of suppliers, the potential cost savings, and opportunity to
consolidate suppliers. The company*s annual updating of the spending data
gives enough information to focus strategic efforts in the right
direction. To enhance their spend analysis, Bausch & Lomb is also working
with its consultant to start extracting more detailed data from its
general ledger systems.

Page 24 GAO- 03- 661 Best Practices

Note: Delta Air Lines* logo is used by permission.

Spend analysis has been a key element in Delta*s transformation of its
more than $7 billion 19 procurement operation and its adoption of a
strategic sourcing process. Since 2000, the company*s reported payback has
been rapid* more than $200 million saved through strategic sourcing
projects and other supply- chain management transformation efforts.

Almost 3 years ago, Delta*s supply chain management organization faced
challenges in its ability to aggregate purchasing data due to the presence
of multiple legacy systems and a lack of data integrity. In July 2000,
those legacy systems were replaced with a new core financial system, which
was also useful when the supply chain management organization decided to
launch its current spend analysis program.

Delta*s spend analysis program is based on the automated extraction of
accounts payable records from its core financial system. The extracted
data are placed in a data warehouse and then compiled in an integrated,
off- the- shelf software tool (accessible through the company*s intranet)

that is used to develop spend analysis reports. All company managers and
supply chain management staff can access the company*s spend analysis
reporting tool. The internal financial data are supplemented with

19 Figure is Delta Air Lines* reported procurement spending in calendar
year 2001.

Company Profile

Page 25 GAO- 03- 661 Best Practices

purchase card spending data, totaling about $75 million per year, from the
company*s bank card vendor. In addition, Delta worked with a third party
to validate the information received from small, minority, and woman-
owned businesses in order that supplier diversity information was
accurately coded in its core financial system.

Delta organized its spending data to correspond with its six broad
purchasing areas: fuel and airport services, corporate operations (such as
finance and human resources), technical operations (such as aircraft
maintenance), marketing and in- flight services, corporate real estate,
and fleet planning and acquisitions. Those 6 purchasing areas are
responsible for purchasing goods and services in more than 270
commodities, such as consultants, legal, and temporary services. Delta*s
supply chain management organization worked with a team to create the
commodity codes following a review of the goods and services the company
buys. These codes have made it possible to organize accounts payable and
other data by commodity to support the company*s initial spend analysis, a
key part of the first two steps in its strategic- sourcing process.

Beginning in September 2000, Delta*s supply chain management organization
took steps to realize the value that a transformation could bring. Key
elements of this transformation included the implementation of a strategic
sourcing process; establishment of cross- functional teams; and expansion
of the supply chain management organization*s scope of involvement in
company spending. Commodity teams began analyzing the spending data to
obtain an upfront understanding of the supplier base, the company*s buying
power, and the estimated savings from consolidated buying. In mid- 2002,
commodity teams across Delta*s purchasing areas were actively managing 58
cost- saving projects developed through spend analysis and reported
operating savings of $82.2 million from projects already completed that
year. Delta*s supply chain management organization also uses spend
analysis to track and report the company*s spending with small business
and minority- and women- owned businesses in order to measure the outcome
of the teams* strategic- sourcing projects in terms of the company*s
supplier diversity goals. An example of Delta*s successful outcomes with
spend analysis is its

information technology commodity team*s strategic sourcing effort in 2001.
The team*s analysis revealed the company was using more than 60 different
information technology contract services suppliers and purchasing
approximately $16 million in external services. The requisition processes
varied within each of the business units; limited formal metrics

Page 26 GAO- 03- 661 Best Practices

were in place for managing supplier performance; and the existing
contracts* pricing structures did not facilitate cost reduction efforts.

An external industry analysis indicated that Delta could benefit by
bidding information technology contract services given that the supplier
market was hard hit by the downturn in the economy and that a surplus of
high quality information technology service suppliers existed. Using this
knowledge, the commodity team, which included representatives from the
company*s human resources and technology business units, developed a new
consolidated- proposal request for external services and used an online
reverse auction 20 to complete the sourcing effort. The new contracts
resulted in reported annual savings of $3 million and reduced the number
of suppliers from 60 to 6 companies* 3 of which qualified as diverse-
owned businesses.

Despite Delta*s accomplishments in spend analysis, challenges remain in
obtaining reliable and complete data, and its supply chain management
organization is working to improve financial system data integrity and
automated reporting to provide the information needed for real- time
business decisions. Last year a team was formed to improve the quality of
information on suppliers, commodity codes, and buyers. Recommendations on
process improvements will be made in 2003, followed by an effort to clean
up Delta*s purchase order and contract files. A related team is working to
improve the availability of automated reporting from Delta*s off- the-
shelf spend analysis reporting tool. The company expects increased
accuracy in its spending information will provide greater visibility into
buying patterns and enhance strategic sourcing decision making and
results.

20 According to industry sources on electronic commerce applications,
reverse auctioning is where suppliers bid, online and in real time, for
product and service contracts as defined by detailed request for quotes.
Each supplier can see the competing bids as they are made, but bidders are
kept unidentified. Through a prequalification process, all issues are
generally settled between the procuring organization and potential
suppliers before the time of the bidding event. The buying organization
may not necessarily choose the lowest

bidder, but rather may use reverse auctioning as a negotiating tool.
FreeMarkets, Inc., The Strategic Need for Real- Time Competitive Bidding
in the Public Sector Procurement Process (Pittsburgh, Pa.: 2002).

Page 27 GAO- 03- 661 Best Practices

Note: The Dell logo is a trademark and used by permission of the Dell
Computer Corporation.

Dell*s earlier success in using spend analysis and strategic sourcing in
its manufacturing procurement operations prompted the company to establish
a new procurement savings goal of 20 percent from the $3 billion to $4
billion it spends in purchasing of nonmanufacturing services and products.

Before 2000, Dell*s spend analysis and strategic- sourcing focused only on
production procurement to support its manufacturing operations. The
company had no spend analysis program to track general procurement of
goods and services needed to support the company*s nonmanufacturing
operations. However, once the company decided that general procurement
merited the same strategic approach as production procurement, the
procurement organization quickly developed a second spend analysis
program.

Since 2000, Dell*s procurement and finance organizations have worked
together on its internally developed spend analysis system, which provides
automated on- line reporting and cost analysis of the company*s general

procurement purchasing. 21 Every month, the system extracts accounts 21
Since 1992, Dell has used a different automated system that it developed
to extract and automate production procurement spend analysis to support
strategic sourcing of direct materials for manufacturing.

Company Profile

Page 28 GAO- 03- 661 Best Practices

payable records from one of the company*s two financial systems for
consolidation into the data warehouse used for spend analysis. The
consolidated spend analysis reports are supplemented with supplier
diversity, business intelligence, and purchase card information obtained
from external sources. For example, Dell obtains business intelligence
information from an outside party about its suppliers* financial health
and utilizes that independent information to determine percent of revenue
based on sales to Dell. The company also obtains detailed vendor data for
purchases obtained under the corporate purchase card program. However, the
supplemental business intelligence and purchase card information must be
separately analyzed vendor by vendor, item by item, and compared with the
consolidated reports from the accounts payable information.

The need to organize the accounts payable and purchase card data for
spend- analysis and strategic- sourcing purposes required the procurement
organization to identify 15 high- level categories, each encompassing many
products and services commodities. This involved research with business
units familiar with Dell*s vendors in order to *tag* each vendor according
to the commodity being supplied. Consulting is one example of a high level
category, and it encompasses consultant services such as information

technology, electronic commerce, financial, legal, and Dell technology.
New suppliers are similarly tagged to keep the spend analysis system
updated. One current limitation to Dell*s tagging methodology is that some

vendors do not fit neatly under a single commodity. Dell*s system
organizes purchase data for those vendors under a miscellaneous category,
and the staff regularly analyze the data to later sort spending with those
suppliers into the appropriate commodity.

Dell*s procurement organization has four senior managers who are
responsible for several commodity teams in the areas of marketing and
communications, corporate services, and operations. In these teams,

commodity managers partner with the primary business owners to manage
strategic sourcing and other procurement activities in specific spending
areas. Each commodity team uses spend analysis to identify, prioritize,
and leverage the company*s combined buying power with suppliers in order
to reduce costs and improve supplier performance.

Page 29 GAO- 03- 661 Best Practices

As an example of a successful outcome using spend analysis, one of the
senior managers worked with the customer services team on a strategic-
sourcing project to staff support call centers and provide certified
technicians and related on- site services for Dell computer hardware
repair. The spend analysis revealed that Dell*s business units were
spending more than $200 million annually on an ad- hoc basis with 8
suppliers for the same services. The team discovered that it was difficult
to manage eight suppliers and expensive to have each provide the entire
scope of services on a worldwide basis. The new sourcing strategy cut the
number to four suppliers and provided a volume price discount,
efficiencies in supplier management, and capacity to support Dell*s
growing sales in the U. S. and overseas. Dell required two of those
suppliers to provide a global array of services and two to work only in
the U. S. In taking this action, Dell also successfully met its supplier
diversity objectives by awarding two of the new contracts to
diverselyowned companies.

Dell procurement officials plan continued improvements to the spend
analysis program, such as automating the production of analytic reports
and generating reports that focus on detecting corporate relationships
among suppliers. Enhanced analysis and reporting of relationships can be
used to leverage Dell*s buying power for additional savings with related
suppliers.

Page 30 GAO- 03- 661 Best Practices

DOD is in the very early stages of setting up a spend analysis program.
The agency*s leaders have made a commitment to improve how DOD acquires
services and to adopt best commercial practices. Although these are the
right first steps, the agency has yet to emulate the best practices of
spend analysis to the same extent as the private sector. DOD also has not
yet

pursued more strategic approaches like reorganizing its procurement
processes under a more centrally led management structure.

DOD*s initial actions include issuing new policy in May 2002* in response
to our work and the 2002 national defense authorization legislation* to
elevate major purchases of services to the same level of importance as the
purchase of major weapon systems. In February 2003, the Deputy Secretary
of Defense tasked a new team to complete, by September 2003, a pilot spend
analysis of services acquisition data across DOD and to

determine if larger scale efficiencies and savings could be achieved over
its current decentralized procurement environment. 22 DOD requested
proposals from interested vendors with commercial spend analysis
experience to provide contract support to the DOD team. Pilot projects
associated with the spend analysis will be completed by September 2004.

Information we obtained during preproposal discussions with prospective
vendors suggest that the DOD pilot project may not engage the full range
of spend analysis best practices as have the private sector companies we
interviewed. (See table 3.)

22 DOD*s Spend Analysis Integrated Process Team is led by the Defense
Procurement and Acquisition Policy office (in the Under Secretary of
Defense for Acquisition, Technology, and Logistics organization) and
includes senior representatives from each of the military

departments, the Comptroller*s and General Counsel*s offices, and offices
responsible for defense logistics, missile defense, and small business
issues. DOD Launches a Pilot Spend Analysis with

an Eye toward Developing a More Strategic Approach

Page 31 GAO- 03- 661 Best Practices

Table 3: Comparison of DOD*s Spend Analysis with Leading Company Practices
Spend analysis process Leading company practice DOD practice Automation
Data automatically compiled to

expedite and repeat the spend analysis process.

DOD furnishes the data to the vendor, which may employ commercially
available automation tools to compile the data to expedite the spend
analysis. However, this is a one- time requirement. The vendor will not
develop an automation tool to consistently repeat the spend analysis
process. Extraction Essential data extracted from

accounts payable and other internal systems. DOD wants the pilot spend
analysis to cover all its acquisition of

services *as best possible*. DOD will furnish only data extracted from two
databases for services contract actions, but is excluding analysis of
research and development services, and the databases

do not include contracts for $25,000 or less. DOD acknowledges this data
may be insufficient, but also says that data that could be derived from
better sources such as accounts payable or other internal systems may be
neither available nor feasible to incorporate within the project*s time
frame. Supplemental information Additional data sought from internal

and external sources, such as supplier performance and purchase card data.

The vendor may ask for DOD*s help in getting supplemental data for the
spend analysis from DOD, other government agencies, and commercial
sources, such as purchase card and logistics data. While DOD will help, it
cannot guarantee it can provide the data requested. Organization Ensure
accuracy and completeness

of data; organize data into logical, comprehensive categories of
commodities and suppliers.

The vendor will cleanse and validate data DOD has furnished based on its
spend analysis experience and knowledge. DOD allows the vendor*s
discretionary use of external databases to help organize the spend
analysis database. The vendor may also propose classification systems to
organize categories of commodities and suppliers, to meet DOD*s
requirement to identify

the top ten service categories to target for strategic sourcing. Analysis
and strategic goals Using standard reporting and

analytical tools, data analyzed on a continual basis to support decisions
in strategic sourcing and procurement

management to help cut costs, streamline operations, reduce number of
suppliers, achieve supplier diversity, etc. Scope generally covers entire
procurement spending. Within 60 days of contract award, the vendor must
provide the key

metrics for reviewing DOD*s spend analysis database. Within 90 days, the
vendor must analyze DOD*s spend data, identify the top ten services
contract areas with the largest dollar savings, and prepare business cases
and strategic sourcing strategies for the top ten services in light of
DOD*s requirements to fulfill socioeconomic and establish savings goals.
In the second phase, the vendor may have to supply special analyses to
support the DOD team*s review of the ten business cases and development of
strategic sourcing procurement strategies for at least five pilot service
categories. Source: GAO analysis of DOD information.

Although DOD does seek to include basic elements of the key private sector
spend analysis best practices in the prospective pilot, its efforts fall
short of the private sector standard. Its efforts at automation involve
only a one- time requirement, not the repeatable process found in private
companies. Efforts to extract data are restricted to those taken from two
centrally available databases on services contract actions (excluding

Page 32 GAO- 03- 661 Best Practices

research and development 23 ) in excess of $25,000, a limitation due to
the agency*s self- imposed 90- day time frame for completing the spend
analysis. 24 Although superior data* obtained by the vendor from other
internal and external sources with DOD*s help* may be used to supplement
what has been extracted, DOD cannot guarantee that it will be able to
provide what the vendor may request. 25 The scope of the pilot is also
relatively limited, compared to the more expansive private sector
programs. Ten service category business cases are being considered, and
procurement savings strategies will be tested for at least five
categories. If time permits, DOD*s pilot manager told us that more than
five categories

could be tested. While DOD expects to learn from this pilot spend
analysis, only a small number of procurement actions will result from it.
As DOD moves forward to adopt commercial best practices for service
acquisitions on the basis of its pilot, the scope of its strategic
approach may be limited to smaller

organizational units, rather than a major more centralized reorganization
of DOD*s procurement processes. To justify its *wait and see* approach
with a pilot, DOD cites several factors that set it apart from commercial
companies. These include its much larger and more complex services
supplier base, decentralized acquisition environment with many procurement
offices spread across the military services and defense agencies, and no
single financial data system relative to procurements. According to DOD,
it must also fulfill numerous socioeconomic goals for contracting with
small and diversely- owned suppliers and has more regulatory and budgetary
constraints around the acquisition process. In citing these factors in
advance of the pilot, DOD is being cautious about viewing procurement as a
strategic (i. e., DOD- wide) process that simplifies

23 In fiscal year 2002, DOD reported a total of 33, 440 contract actions
of more than $25,000 for research, development, test, and evaluation
services, totaling about $26.9 billion.

24 DOD will furnish the contractor a few dozen data field elements
extracted from the Defense Contract Action Data System (for fiscal years
2000 through 2002) and the Federal Procurement Data System (for fiscal
years 2001 and 2002). In fiscal year 2002, DOD reported more than 254, 000
contract actions in excess of $25, 000 for non- research and development
services, totaling about $66 billion.

25 A sizeable sum of DOD spending is through other procurement methods and
not captured in the data DOD is furnishing to the spend analysis vendor on
contract actions for more than $25, 000. For example, in fiscal year 2002,
DOD reported almost 5 million contract actions for goods and services of
$25, 000 or less, totaling about $9.8 billion. In fiscal year 2001, DOD
purchase card spending for goods and services totaled $6.1 billion.

Page 33 GAO- 03- 661 Best Practices

acquisitions, saves money, and increases the quality of purchased
services, compared to its current tactical process of numerous individual
contract actions.

Once the pilot spend analysis is complete, DOD faces the challenge of
making the best use of the results. It needs to decide what long- term
changes are required to bolster the current organizational structure and
processes to foster a more strategic approach to acquiring services. The
extent to which DOD makes these changes will determine its success in
meeting congressional expectations for major management reform of* and
substantial savings from* the procurement of services.

As we reported last year, 26 DOD*s size and complex service needs may lead
it to pursue different approaches within the defense agencies, military
departments, and individual commands. In this regard, private sector
experience suggests that DOD must start with spend analysis to identify
and prioritize specific contracted services and then follow through with
organizational and process changes, such as the establishment of full-
time dedicated cross- functional teams or commodity managers, to improve
the coordination and management of key services.

As DOD attempts to reengineer its approach to purchasing services, it
faces challenges similar to those faced by private sector organizations.
For example, DOD is subject to statutory and regulatory goals for
contracting with small businesses and other socioeconomic categories, such
as woman- owned small businesses and small disadvantaged businesses, that
may constrain it from consolidating numerous smaller contracts into larger
ones. 27 This is an approach often taken by the companies we studied.
Those constraints must be considered in the

26 GAO- 02- 230. 27 Contracts that combine requirements to such an extent
that they present a barrier to small businesses* ability to compete are
considered to be *bundled contracts.* The Small Business Reauthorization
Act of 1997 defines contract bundling as *consolidating two or more
procurement requirements for goods or services previously provided or
performed under separate, smaller contracts into a solicitation for offers
for a single

contract that is unlikely to be suitable for award to a small business
concern.* 15 U. S. C. Section 632 (O) (2). For more information regarding
measures and information that will be used to monitor agencies* progress
in eliminating unnecessary contract bundling and mitigating the effects of
necessary bundling, see U. S. General Accounting Office, Small Business
Contracting: Concerns about the Administration*s Plan to Address Contract
Bundling Issues, GAO- 03- 559T (Washington, D. C.: Mar. 18, 2003). Spend
Analysis Could

Guide Development of a Strategic Approach to Meet DOD*s Diverse Needs

Page 34 GAO- 03- 661 Best Practices

business cases to be developed by the spend analysis vendor. The
experience of private sector companies* which also are keenly aware of the
importance of small and diversely- owned business participation as

suppliers* may offer DOD valuable insights into addressing this challenge.
Companies we studied use spend analysis to carefully and successfully
balance supplier consolidation and cost- savings strategies with corporate
supplier diversity goals of equally high priority. Companies* commodity
teams often include supplier diversity specialists, who propose concrete
steps for considering small, minority-, and woman- owned businesses

throughout the strategic- sourcing process. 28 Like the companies, DOD can
use spend analysis to understand its current level of supplier diversity
on a commodity- by- commodity basis and to balance cost- saving strategies
and socioeconomic goals. Spend analysis can also support DOD*s efforts to
comply with small business requirements to review potential bundling of
procurement requirements in order to determine if the bundling is
necessary and justified. DOD cites its lack of a single financial data
system relative to

procurements as another challenge. Because of the pilot*s 90- day time
frame for completing the initial spend analysis, DOD acknowledges that the
data it will use may be less complete than what is used by business, but
it cannot guarantee that it will be able to provide data from other
sources that its vendor may request to perform the first DOD- wide spend
analysis. DOD is instead asking the vendor to make a recommendation on the
feasibility of using other DOD financial systems* such as systems used to
process invoices and pay commercial vendors for goods and services

bought by DOD organizations* that might be considered for use in the
future.

Although DOD will need to consider how existing problems in its financial
management systems 29 could affect spend analysis and services

28 Examples of concrete steps to improve supplier diversity outcomes
during the strategic sourcing process are determining baseline spend with
diverse suppliers; including diverse suppliers in requests for information
and following up if initial response rate is low; developing selection
criteria to enable inclusion of diverse suppliers; considering the use of
regional or multiple requests for proposals; seeking creative solutions
from suppliers such as partnerships; and encouraging and negotiating
aggressively with diverse suppliers.

29 For example, 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 and
ensure accurate vendor payment for goods and services. See GAO- 03- 98.

Page 35 GAO- 03- 661 Best Practices

contracting initiatives, we believe a more businesslike approach is
possible. The companies we interviewed faced similar challenges in
accumulating accounts payable and other internal data that were highly
fragmented across multiple financial and management systems and not easily
accessible. However, the companies automated the extraction of accounts
payable and other internal data and made the spend analysis process
repeatable and more efficient. 30 To see if DOD could engage in similar
actions, we discussed this matter with DOD sources and others
knowledgeable about DOD and commercial vendor payment systems. 31 Based on
these discussions, DOD*s systems could provide the type of

accounts payable data that companies use and thus could be a data- rich
source for DOD spend analysis. In fact, vendor payment data from multiple
processing locations are already centrally collected by the Defense
Manpower Data Center for auditing and other financial management purposes.
Use of this data could reduce DOD*s need to extract and organize data for
spend analysis efforts by providing a *onestop shop.*

DOD is also likely to face resistance to giving up decentralized buying
authority, cultural barriers, and other impediments to implementing
broadbased management reforms. 32 The companies we studied found several
ingredients critical to overcoming such challenges. For example, senior
management must provide continued support for common services acquisitions
processes beyond the initial impetus, since the companies are engaging in
long- term efforts. Second, communication has to be seen as vital in
educating and keeping staff on board with changes. To achieve buy- in,
companies used spend analysis to make a compelling case to business units
that reengineering would enhance service delivery and reduce costs.
Companies also involved the business units in a new center

30 Once companies consolidated spending data from various sources, the
companies also subjected the data to an extensive review to make
corrections and ensure that the data were sufficiently accurate, complete,
and consistent for supporting informed strategic

sourcing and procurement management decisions. 31 The Defense Finance and
Accounting Service operates about 14 systems at several sites to process
invoices and disburse payments to vendors for goods and services sold to
Army, Navy, Air Force, and other DOD organizations.

32 Our reports have highlighted a number of underlying causes impeding
past reform efforts at DOD. For example, cultural resistance to change and
autonomous operations have hindered DOD*s ability to implement broad-
based reforms because stakeholders were

not able to put aside their particular military services* or agencies*
interests to focus on DOD- wide approaches. See GAO- 03- 98.

Page 36 GAO- 03- 661 Best Practices

led approach by making extensive use of cross- functional commodity teams
to make sure they had the right mix of knowledge, technical expertise, and
credibility.

To cut across traditional organizational boundaries that contributed to
the fragmented approach to acquiring services, companies restructured
their procurement organizations, assigning them greater responsibility and
authority for strategic planning and oversight of the companies* service
spending. Also, companies extensively used metrics* based on spend
analysis* to measure total savings and other financial and non- financial
benefits, to set realistic goals for improvement, and to document results
over time. DOD recently developed new management structures in response to
the 2002 national defense authorization requirements to improve practices
for the acquisition of services, but the changes are not as far- reaching
as those adopted by companies we studied. For example, although the Under
Secretary of Defense (Acquisition, Technology, and Logistics) and each of
the military departments now has a process for reviewing particular large-
dollar or sensitive acquisitions for adherence to competition and other
contracting requirements, the reviews are piecemeal and focused on
approving individual acquisitions rather than achieving a coordinated
approach for managing services* contracts. DOD could use spend analysis as
a basis for tailoring how the new management structures can adopt the type
of organizational tools and metrics employed in the private sector to
foster an enterprisewide strategic approach that would meet DOD*s unique
requirements.

To implement best practices and manage services effectively, DOD must have
the right skills and capabilities in its acquisition workforce. This is a
challenge given decreased staffing levels, increased workloads, and the
need for new skill sets. DOD is engaging in a long- term strategic
planning effort to identify the competencies needed for its future
workforce. Private sector experience indicates that taking a strategic,
integrated, enterprisewide approach can also help DOD address its
acquisition workforce challenges. In our study, companies* efforts to
reengineer their procurement operations have often been accompanied by
acquisitionstaffing reductions. The experience has been that using spend
analysis and coordinated sourcing processes allows for more efficient use
of procurement personnel resources by streamlining the number of

contracting tasks. Reducing duplication and fragmentation in contracting
activities also helps free up limited acquisition workforce resources to
perform more strategic business functions, such as acquiring and using
knowledge of market conditions and industry trends to better manage fewer
suppliers and contracts.

Page 37 GAO- 03- 661 Best Practices

While seemingly daunting, each of the challenges to be faced by DOD has
been faced and overcome by the private sector companies. Careful
observation and analysis of their practices will help the agency to adapt
variations and even to create new approaches through which it will be able
to reach its savings and strategic targets.

Without effective spend analysis, organizations are limited in their
ability to understand buying patterns; maximize purchasing power; carry
out informed acquisition and contracting decisions; measure the impact of
changes in purchasing costs and supplier diversity; and carry out other
planning and management functions for the acquisition of services.

Given that DOD*s spending on services* contracts is approaching $100
billion annually, the potential benefits of overcoming the challenges and
using best practices to establish an effective spend analysis program are
significant and can

 achieve a total- spending perspective across DOD,  make the business
case for collaboration in joint purchasing rather than fragmented
purchasing,  organize an effective management structure to assign
accountability and exercise oversight,

 identify potentially billions of dollars in procurement savings
opportunities by leveraging buying power, and  identify opportunities to
achieve other procurement efficiencies such as

reducing duplication in purchasing, supporting supplier diversity, and
improving supplier performance.

With the federal government*s short- and long- term budget challenges, it
is more important than ever that DOD effectively transform its business
processes to ensure that it gets the most from every dollar spent. At the
same time, DOD*s management challenges related to contracting for services
will not be resolved overnight. Two common elements that pervade
discussions of ways to address DOD*s challenges are the need for (1)
sustained executive leadership and (2) a strategic, integrated, and
enterprisewide approach. In addition, ensuring that these efforts achieve
the intended results will require the Congress*s continued involvement and
support. Such support has already been demonstrated through the 2002
national defense authorization legislation requiring that DOD establish a
management structure to enhance the acquisition of services and to collect
data on the purchase of services. DOD could use this legislation* and its
first spend analysis effort* as the means for taking a more strategic
Conclusions

Page 38 GAO- 03- 661 Best Practices

approach to contracting for services and for identifying and achieving
substantial savings in the future. To achieve significant improvements
across the range of services DOD purchases, we recommend that the
Secretary of Defense direct the Under Secretary of Defense for
Acquisition, Technology, and Logistics to work

with the military departments and other DOD organizations involved in the
spend analysis pilot to adopt the effective processes employed by leading
companies. Key elements of DOD*s approach should address

 using technology to centrally automate the spend analysis process to
make it repeatable,  using accounts payable and other internal financial
and procurement data

to gain a comprehensive and reliable view of spending,  supplementing
internal data with external information such as purchase

card expenditures and business intelligence to gain a more complete
picture of DOD spending and to refine analysis,  reviewing purchase data
for accuracy and consistency, organizing the data

by commodity and supplier categories in order to identify opportunities to
leverage buying power,  promoting enterprise collaboration aimed at
gaining the best value,

including the establishment of cross- functional teams to continue
developing strategic- sourcing projects, and  presenting relevant
spending reports to appropriate decision makers to

establish strategic savings and performance goals, assign accountability,
and measure results.

To ensure that DOD moves forward in a timely manner on its commitment for
taking a more strategic approach to the acquisition of services, we
recommend that the Secretary of Defense direct the Under Secretary of
Defense for Acquisition, Technology, and Logistics develop a plan and a
schedule for accomplishing changes in management structure and business
processes for contracting for services. The plan and schedule should be
based on the results of the spend analysis pilot and should be submitted
to the congressional defense committees for consultation and approval as
part of the fiscal year 2006 budget submission and justification process.

In commenting on a draft of this report, DOD agreed with our findings and
conclusions that the commercial best practice of spend analysis is
important to the design of a strategic approach to acquisitions and can be
Recommendations for

Executive Action Agency Comments

Page 39 GAO- 03- 661 Best Practices

used by DOD to achieve substantial savings comparable to those in the
private sector. Moreover, DOD concurred with the recommendation to adopt
the effective spend analysis processes employed by leading companies* and
now intends to automate the process of data collection and analysis to
make it repeatable, rather than a one- time effort.

However, DOD did not concur with the recommendation to develop a plan as
part of its 2005 budget submission process (i. e., early in 2004) to
institute changes in management structure and business processes for
contracting for services. Rather, DOD contends that ongoing initiatives*
including follow- on sourcing projects it anticipates developing after the
current spend analysis* may make such changes unnecessary. In addition,
DOD answers that developing a plan and schedule for making changes in
management structure and business processes before completing the current
spend analysis pilot (expected by September 2004) would be premature.

As we have recognized since our first report on this matter, 33 DOD*s size
and complex service needs may lead it to pursue different approaches
within the defense agencies, military departments, and individual
commands. However, private sector experience suggests that DOD must follow
through on its initial spend analysis pilot with organizational and
process changes such as the establishment of full- time, dedicated
crossfunctional teams or commodity managers to improve the coordination
and management of key services. The extent to which DOD makes these
changes will determine its success in meeting congressional expectations
for major management reform of* and substantial savings from* the
procurement of services. Moreover, for DOD to change management structure
and business processes for services- contracting will require sustained
leadership at DOD as well as the involvement and support of Congress.
Thus, for purposes of accountability and transparency in support of such
involvement and leadership, DOD needs to develop a plan for timely changes
necessary to implement a more strategic approach to contracting. In
response to DOD*s concern, we modified the recommendation to

allow time for DOD to complete its current spend analysis pilot and use
the results to develop a plan. Although we are encouraged by DOD*s
commitment to undertake the pilot, we firmly believe that once the pilot
is 33 GAO- 02- 230.

Page 40 GAO- 03- 661 Best Practices

complete, DOD needs to make long- term changes to bolster the current
organizational structure and processes to foster a more strategic approach
to acquiring services.

The DOD comments can be found in appendix I. The Chairman and the Ranking
Minority Member, Subcommittee on Readiness and Management Support, Senate
Committee on Armed Services, requested that we develop a body of work that
examines the practices of leading companies and identify best practices
that could yield benefits to DOD in the acquisition of services. This
engagement focused on (1) the best practices of leading companies as they
relate to conducting and using spend analysis, and (2) the extent to which
DOD can pursue similar practices.

To conduct our best practices work, we conducted literature searches,
reviewed studies related to spend analysis and best practices for services
contracting prepared by research and consulting organizations, attended
private sector seminars and conferences, and contacted experts in

purchasing practices. On the basis of these discussions and analyses, we
selected five leading companies that were recognized for their strategic
approach to managing services acquisitions. We provided a standard agenda
to each company prior to our interviews, and conducted interviews to
determine the companies* motivation for undertaking a procurement
transformation; corporate strategic goals; the organization and role of
the purchasing function; the key processes used for collecting, analyzing,
and using spending data* including the use of technology* to be strategic
in planning and managing services acquisitions; and performance metrics
and accountability.

We also asked each company to discuss in more detail a specific service
buy that best exemplified the use of spend analysis for making strategic
acquisition decisions. In addition, we discussed potential challenges and
barriers to employing a spend analysis and subsequent strategic sourcing

efforts. 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 provided each company a copy of our
draft report for review and comment. The companies we visited were

 Bausch & Lomb, Rochester, New York;  ChevronTexaco Corporation, San
Ramon, California;  Dell Computer Corporation, Round Rock, Texas; Scope
and

Methodology

Page 41 GAO- 03- 661 Best Practices

 Delta Air Lines, Atlanta, Georgia; and  International Business Machines
Corporation, Somers, New York. To assess current efforts underway by DOD
to improve its enterprisewide knowledge of spending on services contracts,
and how DOD can better emulate the best practices learned from these
leading companies, we

interviewed procurement policy and management officials in the Office of
the Under Secretary of Defense (Acquisition, Technology, and Logistics)
and the military departments. To assess the feasibility of using internal
accounts payable data similar to the data used in leading companies* spend
analysis programs, we interviewed Defense Finance and Accounting Service
officials knowledgeable about DOD systems used to process invoices and pay
commercial vendors for goods and services supplied to military and other
DOD organizations. We also reviewed policy memorandums, 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. In

addition, we discussed potential challenges and barriers to employing the
best practices approaches we identified.

Our report summarizes the key elements the companies employed to conduct
spend analysis as one part of their strategic sourcing initiatives* in
particular as they relate to services acquisitions. We did not verify the
accuracy of the procurement costs and benefits the companies reported
receiving from their strategic approaches and spend analysis outcomes. Our
report is not intended to describe or suggest that we evaluated or endorse
all business practices of the companies. Nor is this report intended to
suggest that all companies have followed exactly the same approach in
achieving similar results. Also, we were limited in our ability to obtain
and present some relevant data that companies considered proprietary in
nature.

We conducted our review from March 2002 to May 2003 in accordance with
generally accepted government auditing standards.

We are sending copies of this report to other interested congressional
committees; the Secretary of Defense; the Deputy Secretary of Defense; the
Secretaries of the Army, Navy, and Air Force; the Under Secretaries of
Defense (Acquisition, Technology, and Logistics) and (Comptroller); the
Director, Office of Management and Budget; and the Administrator, Office
of Federal Procurement Policy. We will also provide copies to others on

Page 42 GAO- 03- 661 Best Practices

request. In addition, the report will be available at no charge on the GAO
Web site at http:// www. gao. gov.

If you have any questions about this report or need additional
information, please call me at (202) 512- 4841, or David Cooper at (202)
512- 4125. Major contributors to this report were Lily Chin, Ralph Dawn,
Carolyn Kirby, Nicole Shivers, Shannon Simpson, Cordell Smith, Bob
Swierczek, Ralph White, and Dorothy Yee.

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

Appendix: Comments from the Department of Defense

Page 43 GAO- 03- 661 Best Practices

Appendix: Comments from the Department of Defense

Appendix: Comments from the Department of Defense

Page 44 GAO- 03- 661 Best Practices

Appendix: Comments from the Department of Defense

Page 45 GAO- 03- 661 Best Practices (120133)

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