Contract Management: High-Level Attention Needed to Transform DOD
Services Acquisition (10-SEP-03, GAO-03-935).			 
                                                                 
The Department of Defense's (DOD) spending on service contracts  
approaches $100 billion annually, but recent legislation directs 
DOD to manage its services procurement more effectively. Leading 
companies transformed management practices and achieved major	 
savings after they analyzed spending patterns and coordinated	 
procurement. This report evaluates DOD's implementation of the	 
legislation in light of congressional interest in promoting the  
use of best commercial practices for acquiring services.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-935 					        
    ACCNO:   A08413						        
  TITLE:     Contract Management: High-Level Attention Needed to      
Transform DOD Services Acquisition				 
     DATE:   09/10/2003 
  SUBJECT:   Best practices					 
	     Contract costs					 
	     Defense cost control				 
	     Defense procurement				 
	     Federal legislation				 
	     Financial analysis 				 
	     Financial management				 
	     Private sector practices				 
	     Procurement practices				 
	     Service contracts					 
	     Strategic planning 				 

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GAO-03-935

Report to Congressional Committees

United States General Accounting Office

GAO

September 2003 CONTRACT MANAGEMENT

High- Level Attention Needed to Transform DOD Services Acquisition

GAO- 03- 935

DOD and the military departments each have a management structure in place
for reviewing individual services acquisitions valued at $500 million or
more, but that approach does not provide a departmentwide assessment of
how spending for services could be more effective. Greater attention is
needed by DOD management to promote a strategic orientation by setting
performance goals, including savings goals, and ensuring accountability
for achieving them.

To support management decisions and improve visibility over spending on
service contracts, DOD is developing an automated system to collect and
analyze data by piloting a spend analysis. The analysis views spending
from a DOD- wide perspective and identifies large- scale savings
opportunities, but

its scope is limited, and it is too early to tell how the department can
make the best use of its results. The military departments are in the
early stages of separate initiatives that may lead them to adopt a
strategic approach to buying services, but DOD lacks a plan that
coordinates these initiatives or provides a road map for future efforts.

DOD*s Spending on Services Greater than Goods

The Department of Defense*s (DOD) spending on service contracts approaches
$100 billion annually, but recent legislation directs DOD to manage its
services procurement more effectively.

Leading companies transformed management practices and achieved major
savings after they analyzed spending patterns and coordinated procurement.

This report evaluates DOD*s implementation of the legislation in light of
congressional interest

in promoting the use of best commercial practices for acquiring services.
DOD should strengthen its contracting management structure for services
and business processes to promote use of best practices such as
centralizing key functions, conducting spend analyses, using

commodity teams, achieving strategic orientation, reducing purchasing
costs, and improving performance. DOD also needs a strategic plan on how
the military departments could best accomplish this.

DOD concurred in principle with the recommendation to change its
management structure and partially concurred with the recommendation for a
strategic plan. www. gao. gov/ cgi- bin/ getrpt? GAO- 03- 935. To view the
full product, including the scope

and methodology, click on the link above. For more information, contact
David Cooper at (202) 512- 4841 or Cooperd@ gao. gov. Highlights of GAO-
03- 935, a report to

congressional committees

September 2003

CONTRACT MANAGEMENT

High- Level Attention Needed to Transform DOD Services Acquisition

Page i GAO- 03- 935 Contract Management Letter 1 Results in Brief 2
Background 3 DOD Has Made Limited Progress Reforming Management

Structure and Improving Knowledge of Service Spending 7 DOD Does Not Have
a Strategic Plan for Integrating Early Initiatives 10 Conclusions 13
Recommendations for Executive Action 14 Agency Comments 15 Scope and
Methodology 16 Appendix I Comparison of Selected Program Review Structure

Requirements 18

Appendix II Comments from the Department of Defense 20

Appendix III GAO Contacts and Staff Acknowledgments 24

Tables

Table 1: Companies* Reported 2001 Procurement Spending and Savings 5 Table
2: Comparison of Selected Program Review Structure

Requirements with DOD and the Military Department Policies 18 Figures

Figure 1: DOD*s Contract Dollars for Goods and Services 4 Figure 2: Broad
Principles and Practices of Strategic Sourcing at Leading Companies 6
Contents

Page ii GAO- 03- 935 Contract Management

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Page 1 GAO- 03- 935 Contract Management September 10, 2003 The Honorable
John Warner

Chairman The Honorable Carl Levin Ranking Minority Member Committee on
Armed Services United States Senate

The Honorable Duncan Hunter Chairman The Honorable Ike Skelton Ranking
Minority Member Committee on Armed Services House of Representatives

Federal agencies spend billions of tax dollars each year to buy services
ranging from clerical support and consulting services, to information
technology services such as network support, to the management and
operation of government facilities such as national laboratories. The
Department of Defense (DOD) is, by far, the government*s largest purchaser
of services, acquiring about $93 billion in services in fiscal year 2002.
1 However, our work, and the work of DOD*s Inspector General, has found
that this spending could be managed more efficiently.

Congressional concern over DOD services acquisition has been spurred by
the contrasting experience of the private sector, depicted by our recent
work. 2 A number of leading companies have achieved significant savings*
without any reduction in services* by adopting a strategic approach
involving the implementation of a variety of best practices. Using a
strategic approach enabled the companies to transform their processes and
thus get the best value in procuring services. 1 Derived from our analysis
of data extracted from the Defense Contract Action Data System. The data
include actions categorized as research, development, test, and

evaluation activities and exclude actions of $25,000 or less and purchase
card spending. 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) and

Best Practices: Improved Knowledge of DOD Service Contracts Could Reveal
Significant Savings, GAO- 03- 661 (Washington, D. C.: June 9, 2003).

United States General Accounting Office Washington, DC 20548

Page 2 GAO- 03- 935 Contract Management Recognizing that these experiences
could help reform DOD, the Congress included provisions in the National
Defense Authorization Act for Fiscal

Year 2002 3 to achieve significant savings through improved management and
oversight of services procurement. Specifically, section 801 of this law
requires DOD to establish (1) a management structure designed to provide
visibility and establish accountability for services contracts, (2) a
program review structure for major services acquisitions, and (3) an
automated system to collect and analyze data to support management
decisions in contracting for services. One of the aims of these
requirements is to promote the use of best commercial practices, such as
centralizing key functions, promoting strategic orientation, improving
personnel skills and capabilities, conducting spending analyses,
rationalizing supplier bases, and expanding the use of cross- functional,
commodity- based teams. 4 In this report, we evaluate DOD*s implementation
of the requirements of

section 801. To conduct this work, we interviewed acquisition officials in
the Office of the Under Secretary of Defense for Acquisition, Technology,
and Logistics and the military departments. We also reviewed policy
memoranda and other documents pertaining to DOD*s implementation of
section 801 requirements. More information is contained in our Scope and
Methodology section.

DOD and the military departments have a management structure and a process
in place at their respective headquarters for reviewing individual
acquisitions valued at $500 million or more, but that approach does not
provide a departmentwide assessment of how spending for services could be
more effective. DOD*s management structure does not adequately promote a
strategic orientation across the department by setting performance goals,
including savings goals, and ensuring accountability for achieving them.
DOD is starting to develop an automated system to collect and analyze data
by beginning a spend analysis pilot that views spending from a DOD- wide
perspective and identifies savings opportunities, but the pilot*s scope is
limited to a test of a few service categories. Each of the military
departments is also in the early stages of separate initiatives that may
lead each of them to adopt a strategic

3 Sections 801 and 802, Public Law 107- 107, Dec. 28, 2001. Section 802
established goals for DOD to reduce services contracting costs over the
next decade, in the expectation that the department could achieve
significant savings without any reduction in services.

4 Senate Report 107- 62 at pp. 326- 327. Results in Brief

Page 3 GAO- 03- 935 Contract Management approach to buying services, but
DOD lacks a plan that coordinates these initiatives or provides a road map
for future efforts.

This report includes recommendations that DOD and the military departments
further strengthen the management structure established in response to
section 801 and develop a plan with guidance on carrying out more
strategic and centralized responsibilities for the acquisition of
services. With these recommendations, DOD can transform services
acquisition business processes to achieve significant savings and
improvements across the range of services that DOD purchases.

DOD commented on a draft of this report. DOD concurred in principle with
the recommendation to further strengthen the management structure and
partially concurred with the recommendation to develop a strategic plan.
DOD expects that the various initiatives described in

this report* such as the management structure for reviewing individual
service acquisitions valued at $500 million or more and the spend analysis
pilot* will ultimately provide the information with which to decide what
overarching joint management and business process changes are necessary.
While these initiatives are steps in the right direction, DOD*s strategic
plan should be explicit about how and when appropriate follow- through
actions will take place so that significant, long- lasting performance
improvements and cost savings are achieved. DOD*s comments can be found in
appendix II.

DOD is historically the federal government*s largest purchaser of
services. Between 2001 and 2002, DOD*s reported spending for services
contracting increased almost 18 percent, to about $93 billion. 5 In
addition to the sizeable sum of dollars involved, DOD contracts for a wide
and complex range of services, such as professional, administrative, and
management support; construction, repair, and maintenance; information
technology; research and development; medical care; operation of
government- owned

5 Derived from our analysis of data extracted from the Defense Contract
Action Data System, adjusted to represent constant fiscal year 2002
dollars. The data exclude actions of $25,000 or less and purchase card
spending. Background

Page 4 GAO- 03- 935 Contract Management facilities; and transportation,
travel, and relocation. In each of the past 5 years, DOD has spent more on
services than on supply and equipment

goods (which includes weapon systems and other military items) (see fig.
1).

Figure 1: DOD*s Contract Dollars for Goods and Services

Note: Data extracted from the Defense Contract Action Data System for
1998* 2002. Data are in constant 2002 dollars and include actions
categorized as research, development, test, and evaluation activities.
Figure excludes actions of $25,000 or less and purchase card spending. We
did not independently verify the information contained in the database.
There are known data reliability problems with this data source, but we
determined that the data were sufficient to provide general

trend information for background reporting purposes.

Despite this huge investment in buying services, our work* and the work of
the DOD Inspector General* has found that DOD*s spending on services could
be more efficient and more effectively managed. In fact, we have
identified DOD*s overall contract management as a high- risk area,

most recently in our Performance and Accountability and High- Risk

Page 5 GAO- 03- 935 Contract Management Series issued this past January. 6
Responsibility for acquiring services is spread among individual military
commands, weapon system program

offices, or functional units in various defense organizations, with
limited visibility or control at the DOD- or military- department level.
Our reports on DOD*s contract management have recommended that DOD use a
strategic approach to improve acquisition of services.

Our work since 2000 at leading companies found that taking a more
strategic approach to acquiring services enabled each company to stay
competitive, reduce costs, and in many cases improve service levels. 7
Pursuing such a strategic approach clearly pays off. Studies have reported

some companies achieving savings of 10 to 20 percent of their total
procurement costs, which include savings in the procurement of services.
These leading companies reported achieving or expecting to achieve
billions of dollars in savings as a result of taking a strategic approach
to

procurement. For example, table 1 summarizes the savings reported by the
companies we studied most recently.

Table 1: Companies* Reported 2001 Procurement Spending and Savings Company

2001 procurement

spend Savings on procurement of goods and services

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.

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. 6 U. S. General
Accounting Office, High- Risk Series: An Update, GAO- 03- 119 (Washington,
D. C.: January 2003) and Major Management Challenges and Program

Risks: Department of Defense, GAO- 03- 98 (Washington, D. C.: January
2003). 7 GAO- 02- 230 and GAO- 03- 661.

Page 6 GAO- 03- 935 Contract Management The companies we studied did not
follow exactly the same approach in the manner and degree to which they
employed specific best practices,

but the bottom line results were the same* substantial savings and, in
many cases, service improvements. Figure 2 elaborates on the four broad
principles and practices of leading companies that are critical to
successfully carrying out the strategic approach. These principles and
practices largely reflect a common sense approach, yet they also represent
significant changes in the management approach companies use to acquire
services.

Figure 2: Broad Principles and Practices of Strategic Sourcing at Leading
Companies

Companies that have been successful in transforming procurement generally
begin with a corporate decision to pursue a more strategic approach to
acquiring services, with senior management providing the direction,
vision, and clout necessary to obtain initial buy- in and acceptance of
procurement reengineering. When adopting a strategic, best- practices
approach for changing procurement business processes, companies begin with
a spend analysis to examine purchasing patterns to see who is buying what
from whom. By arming themselves with this

Page 7 GAO- 03- 935 Contract Management knowledge, they identify
opportunities to leverage their buying power, reduce costs, and better
manage their suppliers. Companies also institute

a series of structural, process, and role changes aimed at moving away
from a fragmented acquisition process to a more efficient and effective
corporate process. These changes include adjustments to procurement
management structure and processes such as instituting companywide
purchasing of specific services; reshaping a decentralized process to
follow a more coordinated, strategic approach; and increasing the
involvement of the corporate procurement organization, including working
across units to help identify service needs, select providers, and better
manage contractor performance.

DOD has made limited progress in its overall implementation of section
801, particularly with respect to establishing a management structure to
oversee a more strategic approach to the acquisition of services, as
envisioned by the legislative history of this provision. While DOD*s
leaders express support for a strategic approach in this area, they have
not translated that support into broad- based reforms. The experience of
leading companies offers particularly relevant insights into the nature of
long- term changes in management structure and

business processes. Long- term changes will be needed if the military
departments and the defense agencies are to be successful in adopting a
more strategic approach to acquiring services and achieving substantial
savings and other benefits. Private sector experience demonstrates the
need to change how services are acquired* by modernizing management
structure and business processes* and setting performance goals, including
savings, and establishing accountability for achieving them. Such changes
are needed to move DOD and the military departments from a fragmented
approach to doing business to one that is more coordinated and
strategically oriented. The end goal is to institute a departmentwide
perspective* one that will ensure that the organization is getting the
best overall value.

Industry has found that several ingredients are critical to the successful
adoption of a strategic approach. For example, senior management must
provide continued support for common services acquisitions processes
beyond the initial impetus. Another example is to cut across traditional
organizational boundaries that contributed to the fragmented approach by
restructuring procurement management and assigning a central or corporate
procurement organization greater responsibility and authority for
strategic planning and oversight of the companies* service spending. DOD
Has Made

Limited Progress Reforming Management Structure and Improving Knowledge of
Service Spending

Page 8 GAO- 03- 935 Contract Management Companies also involve business
units in this coordinated approach by designating commodity managers to
oversee key services and making

extensive use of cross- functional commodity teams to make sure they have
the right mix of knowledge, technical expertise, and credibility. Finally,
companies extensively use metrics to measure total savings and other
financial and nonfinancial benefits, to set realistic goals for
improvement, and to document results over time.

To date, DOD has not significantly transformed its management structure in
response to the 2002 national defense authorization requirements, and its
crosscutting effort to improve oversight will focus on only a portion of
military department spending for services. Specifically, the Under
Secretary of Defense for Acquisition, Technology, and Logistics and each
of the military departments now have policies in place for a management
structure and a process for reviewing major (i. e., large- dollar or
programcritical) services acquisitions for adherence to performance-
based, competition and other contracting requirements. (See app. I for a
descriptive comparison of DOD and military department policies.)

DOD modeled its review process for acquiring services after the review
process for acquiring major weapons systems; the policy is intended to
elevate high- dollar value services to the same level of importance and
oversight. DOD intends that the new program review structure provide
oversight before it commits the government to a major acquisition to
ensure that military departments and defense agencies* buying strategies
are adequately planned, performance- based, and competed. The new

policy similarly establishes a high- dollar threshold of $500 million or
more for selecting which service acquisitions must move forward from
lower- level field activities, commands, and program offices to the
military department headquarters (and possibly to DOD) for advance review
and approval. 8 8 For service acquisitions under the $500 million
threshold, DOD*s policy assigns review

and approval responsibility to a designated official in component
headquarters below the military department headquarters level, such as a
command headquarters. Also, although DOD*s policy requires the military
department headquarters to review and approve all service acquisition
strategies of $500 million or more, the Air Force policy adopts a lower
threshold. That is, Air Force subordinate organizations must forward all
service acquisitions valued at $100 million or more to headquarters. An
Air Force procurement policy official told us this resulted in identifying
more contracts for headquarters review

than would otherwise be anticipated under DOD*s threshold of $500 million
or more.

Page 9 GAO- 03- 935 Contract Management We expect that this new policy
will lead to very few service acquisition strategies and a small portion
of overall service spending being subjected to central oversight at the
military department headquarters level or

at DOD headquarters. DOD officials acknowledge that most service
acquisitions cost less than the $500 million threshold required for
headquarters- level reviews, and the total value of the few contract
actions likely to be forwarded under that threshold will amount to a small
portion

of DOD*s total spending on services, which is approaching $100 billion
each year. DOD*s review criteria indicate that the central reviews that do
take place will be focused on approving individual acquisitions rather
than coordinating smaller, more fragmented requirements for service
contracts to leverage buying power and assessing how spending could be
more effective. Our discussions with procurement policy officials in the
various military departments confirmed that they expect no more than a few
acquisitions to be reviewed at the DOD or military department headquarters
level each year. While the new process complies with the act*s
requirements to improve oversight of major service acquisitions, it has
not led to centralized responsibility, visibility, or accountability over
the majority of contracting for services.

In response to the legislative requirement to develop an automated system
to collect and analyze data, DOD has started a spend analysis pilot that
views spending from a DOD- wide perspective and identifies large- scale
savings opportunities. However, the scope of the pilot is limited to a
test of a few service categories. Thirteen months after Congress directed
that DOD create an automated system to support management decisions for
the acquisition of services, the Deputy Secretary of Defense tasked a new
team to carry out the pilot. In May 2003, DOD hired a vendor to support
the team by performing an initial spend analysis and developing strategic
sourcing business cases for only 5 to 10 service categories. Efforts to
extract data for the pilot spend analysis will be restricted to
information taken from centrally available databases on services contract
actions (excluding research and development) in excess of $25,000, a
limitation due to the 90- day time frame established for completing the
spend

Page 10 GAO- 03- 935 Contract Management analysis. 9 Pilot projects and
associated efforts will be completed by September 2004, so it is too early
to tell how DOD will make the best use

of the results. 10 Even though DOD*s senior leadership called for dramatic
changes to current practices for acquiring services about 2 years ago, and
proposed various initiatives and plans to transform business processes,
DOD*s early initiatives have not moved forward quickly, expanded or
broadened in scope, or been well coordinated. The experience of leading
companies we

studied in our prior work indicates that successfully addressing service
acquisition challenges requires concerted action and sustained top- level
attention, efforts that must be reinforced by a sound strategic plan.

Moreover, section 801 required DOD to issue guidance on how the military
departments should carry out their management responsibilities for
services contracting. To date, the only guidance that DOD has issued
involves review of individual major service acquisitions for adherence to
performance- based, competition, and other acquisition strategy
requirements. DOD has not established a strategic plan that provides a
road map for transforming its services contracting process and recognizes
the integrated nature of services contracting management problems and
their related solutions. 11 Air Force, Army, and Navy headquarters
procurement organizations

have initiatives underway to better manage the acquisition of services,
but they are in the early stages of development and unconnected to each
other. Limited progress has taken place on key efforts to coordinate

responsibility and leverage purchasing power, even in the pursuit of key
goals such as reducing unnecessary spending and redirecting funds to

9 DOD furnished the spend analysis vendor data extracted from the Defense
Contract Action Data System. In fiscal year 2002, DOD reported more than
254, 000 contract actions in excess of $25,000 for nonresearch and
development services, totaling about $66 billion. However, a sizeable sum
of spending is not captured in the data DOD is furnishing to the spend
analysis vendor. For example, in fiscal year 2002, DOD reported about
$26.9 billion in contract actions for research, development, test, and
evaluation services and another $9.8 billion in contract actions for goods
and services of $25,000 or less. Also missing from the spend analysis is
DOD*s purchase card spending, which totaled about $6.1 billion in 2001.

10 For more information on DOD*s pilot, see GAO- 03- 661. 11 GAO- 02- 230,
GAO- 03- 98, and GAO- 03- 119. DOD Does Not Have

a Strategic Plan for Integrating Early Initiatives

Page 11 GAO- 03- 935 Contract Management higher priorities such as
modernization and readiness. Information we obtained on the military
departments* early efforts suggests that military

department leaders understand the value of a strategic approach in this
area, but they have not yet translated that understanding into broad-
based reforms to meet comprehensive performance goals, including savings.

Although the Air Force, Army, and Navy initiatives that follow seek to
include the basic principles of the framework used by leading companies
when they acquire services, the initiatives are still under study, or in
the

early stages of implementation.  At a January 2003 symposium, Air Force
participants from headquarters

and major commands discussed a vision for transforming contracting for
services and taking a strategic, departmentwide approach based on
commercial best practices. 12 At this event, the Deputy Assistant
Secretary for Contracting called for rethinking business processes, noting
that the Air Force spends over half of its discretionary dollars on
services, yet most of the attention goes to managing goods. To move
forward on this initiative, staff from acquisition headquarters and major
commands are to work together on an 18- month project to capture, analyze,
and use spend analysis data and develop an Air Force strategic sourcing
plan for services acquisitions. Another key initiative participants
considered was the

establishment by the Air Force of a management council for services
contracting. No time frame has been set for when the Air Force would
activate such a council. However, the deputy assistant secretary*s vision
for adopting a best practices approach to contracting for services calls
for radically transforming business processes within 5 years and
establishing cross- functional, Air Force- wide councils to consolidate
market knowledge and carry out strategic sourcing projects. In July 2003,
in the first such effort to take advantage of its overall buying power,
the

Air Force formed a commodity council responsible for developing
departmentwide strategies for buying and managing information

12 This initiative follows on the action by the top leadership of the Air
Force Materiel Command to commit to transforming how the air logistics
centers acquire spare parts and equipment to support depot and field
maintenance activity in Oklahoma City, Oklahoma; Ogden, Utah; and Warner
Robins, Georgia. Since 2001, this command has made a number

of changes in management structure and business processes in order to
adopt a strategic approach to air logistics contracting based on
commercial best practices. More recently, this command began focusing on
services contracting and purchase card buying for similar procurement
transformation. In fiscal year 2002, the command reported spending about
$35 billion on goods and services.

Page 12 GAO- 03- 935 Contract Management technology products. 13 According
to an Air Force official involved with this council, the lessons learned
and best practices of this council will be

carried forward to other commodity councils that will be established by
the Air Force. Another category that the Air Force is considering for a
future commodity council is construction services.

 In 2001, top Army leadership approved a consolidation of Army
contracting activities that focuses on the areas of installation
management and general- purpose information technology. This initiative
covers only a portion of the Army*s service spending, and it involved the
establishment of the Army Contracting Agency in October 2002 to centralize
much installation- support contracting under a corporate management
structure and called for consolidating similar and common use requirements
to reduce costs. This central agency will be fully responsible for Army-
wide purchases of general information technology and electronic commerce
purchases 14 and for large installation management contracting actions
over $500,000 that were previously decentralized. The agency*s key
anticipated benefit will be its ability to centralize large buys that are
common Army- wide, while continuing to provide opportunities for small
businesses to win contracts. To have an early demonstration of the value
of this approach, the agency plans an October 2003 spend analysis of
several services that could offer easy savings, including security guards,
furniture refinishing, telecommunications, building demolition, and
photocopying. The agency has yet to set a time frame for carrying out the
consolidated purchases, which could be national or regional in scope. The
agency*s organizational structure assigns regional executive
responsibility for managing services contracting, and includes a high-
level council in headquarters for overseeing more strategic approaches to
buying Army installation support services.

 The Navy is considering pilot tests of a more strategic approach for
services spending in a few categories. Senior Navy leadership began a

13 The Air Force Standards System Group will lead the new information
technology commodity council, whose initial focus will be on developing
buying strategies for desktop and laptop computers, followed by peripheral
computer products. The council will bring together experts from across the
Air Force to establish information technology procurement strategies and
put servicewide contracts in place for individual organizations to buy
from.

14 The Army Contracting Agency*s E- Commerce and Commercial Contracting
Center will be responsible for Army- wide purchases of general purpose,
commercial off- the- shelf hardware, software, and associated support
services. (Army- wide responsibility is not included for information
technology purchases of tactical and strategic systems.)

Page 13 GAO- 03- 935 Contract Management study in September 2002 to
recommend business process changes in the Navy*s acquisition program. 15 A
Navy official conducting the preliminary

spend analysis of Navy purchasing data estimated opportunities to save
$115 million through taking a more strategic, coordinated approach to
buying $1.5 billion in support services (engineering; logistics; program,
general, and facilities management; and training). The Navy official said
that, sometime this year, senior Navy leadership is expected to approve
the study*s recommendations to pilot- test consolidated acquisition for
support services. To lead these innovative management approaches, the
Secretary of the Navy earlier this year approved a new position for a
Director of Program Analysis and Business Transformation within the Office
of the Deputy Assistant Secretary for Acquisition Management. A Navy
procurement policy official involved with the ongoing effort told us that
the Navy*s pilot tests are likely to be affected by DOD*s spend analysis
pilot that is testing DOD- wide strategic sourcing strategies for 5 to 10
services. Since Navy procurement policy officials are also involved in
DOD*s pilot, he anticipates having to coordinate the Navy*s pilot as both

initiatives move forward. A strategic plan could help DOD ensure that
these early initiatives successfully lead to lower costs and improved
acquisition of services. Such a plan would identify, coordinate, and
prioritize these initiatives; integrate the military departments* services
contracting management structures; ensure comprehensive coverage of
services spending; promote and support collaboration; and establish
accountability, transparency, and visibility for tracking performance and
achieving results. However, some of the procurement policy officials we
interviewed have expressed skepticism that broad- based reforms to foster
a more strategic approach are necessary or beneficial, or that DOD could
fully adopt private sector strategies in view of its current decentralized
acquisition environment and other constraints.

Given the federal government*s critical budget challenges, DOD*s
transformation of its business processes is more important than ever if
the department is to get the most from every dollar spent. Senior
leadership has for 2 years expressed a commitment to improving the

15 In 2002, the Navy hired a consultant to examine the effectiveness and
efficiency of spending on products and services, among other areas.
Although Navy and Marine Corps organizations had a number of ongoing
initiatives to reduce costs, this study was to examine opportunities to
leverage efficiencies across the enterprise. Conclusions

Page 14 GAO- 03- 935 Contract Management department*s acquisition of
services. Nonetheless, DOD and the military departments remain in the
early stages of developing new business

processes for the strategic acquisition of services. DOD*s leaders have
made a commitment to adopt best practices and make dramatic changes.
Translating that commitment into specific management improvements will
allow DOD to take on the more difficult tasks of developing a reliable and
accurate picture of spending on services across DOD; determining what
structures, mechanisms, and metrics can be employed to foster a strategic
approach; and tailoring those structures to meet DOD*s unique
requirements. Given that DOD*s spending on services contracts is
approaching $100 billion annually, the potential benefits for enhancing
visibility and control of services spending are significant.

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 the defense agencies to further
strengthen the management structure. This structure, established in
response to section 801, should promote the use of best commercial
practices such as centralizing key functions, conducting spend analyses,
expanding the use of cross- functional commodity teams, achieving
strategic orientation, achieving savings by reducing purchasing costs and
other efficiencies, and improving service contracts* performance and
outcomes.

We also recommend that the Secretary of Defense direct the Under Secretary
to develop a strategic plan with guidance for the military departments and
the defense agencies on how to carry out their responsibilities for
managing acquisition of services. Key elements of this guidance should
address

 improving knowledge of services spending by collecting and analyzing
data about services procurements across DOD and within military
departments and defense agencies,  promoting collaboration across DOD and
within military departments and

defense agencies by establishing cross- functional teams to carry out
coordinated purchasing of services, and  establishing strategic savings
and performance goals, measuring results,

and ensuring accountability by assigning high- level responsibility for
monitoring those results. Recommendations for

Executive Action

Page 15 GAO- 03- 935 Contract Management In commenting on a draft of this
report, DOD concurred in principle with the recommendation to further
strengthen the management structure

established in response to section 801 and partially concurred with the
recommendation to develop a plan with guidance to the military departments
on carrying out their strategic and centralized responsibilities for the
acquisition of services.

DOD expects that various initiatives being pursued to enhance services
acquisition management structures and processes* such as the management
structure for reviewing individual service acquisitions valued at more
than $500 million and the spend analysis pilot assessed in this report*
will ultimately provide the information with which to decide what
overarching joint management and business process changes are necessary.
DOD cites these initiatives as demonstrating a full commitment to
improving acquisition of services. DOD further states that these efforts*
such as collecting and enhancing data, performing spend analyses, and
establishing commodity teams* are similar to industry best practices* and
have already had significant impacts on the manner in which services are
acquired.

We agree that the initiatives are positive steps in the right direction to
improve acquisition of services. However, it is too early to tell if these
early efforts will lead DOD and the military departments to make the type
of long- term changes that are necessary to achieve significant results in
terms of savings and service improvements.

Moreover, according to DOD, factors such as unusual size, organizational
complexity, and restrictive acquisition environment mean that DOD cannot
adhere strictly to the commercial best practices described in the report.
Yet, none of the companies we studied followed exactly the same approach
in employing specific best practices. Likewise, DOD and the

military departments need to work together and determine how these
practices can be adapted to fit their unique needs, challenges, and
complexities. Significant bottom line results in terms of savings and
service improvements are likely with adequate follow- through on the
various initiatives. DOD*s strategic plan should be explicit about how and
when appropriate follow- through actions will take place so that
significant, long- lasting performance improvements and cost savings are
achieved.

DOD*s comments can be found in appendix II. Agency Comments

Page 16 GAO- 03- 935 Contract Management Section 801 of the National
Defense Authorization Act for Fiscal Year 2002 16 requires DOD to
establish a management structure and a program

review structure and to collect and analyze data on purchases in order to
improve management of the acquisition of services. As described in the
legislative history, 17 these requirements provide tools with which the
department can promote the use of best commercial practices to reform
DOD*s services procurement management and oversight and to achieve
significant savings. Section 801 also directed us to assess DOD*s
compliance with the requirements and to report to congressional armed
services committees on the assessment.

To conduct this work, we interviewed officials* including those
responsible for Defense Procurement and Acquisition Policy, and
Acquisition Resources and Analysis* in the Office of the Secretary of
Defense and the Office of the Under Secretary of Defense for Acquisition,
Technology, and Logistics. We also interviewed officials responsible for
service acquisition policy and management in the Air Force, the Army, and
the Navy. We interviewed both DOD*s and the various services* officials
about policy memoranda and related actions taken to implement section 801
requirements, including the evolving nature of implementation actions over
several months. We also discussed comparisons between DOD*s and

the military departments* services acquisition management reforms and
leading companies* best practices for taking a strategic approach, which
were identified in our previous work and promoted by the legislation. To
assess compliance with the policy and guidance requirements for the
management and program review structures, we reviewed internal memoranda
and policy documents issued by the Under Secretary of Defense and the
military departments.

For background on DOD*s contract spending on services, we analyzed
computer- generated data extracted from the Defense Contract Action Data
System. We did not independently verify the information contained in the
database. There are known data reliability problems with this data source,
but we determined that the data are sufficient to provide general trend
information for background reporting purposes.

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

16 Public Law 107- 107. 17 Senate Report 107- 62 at pp. 326- 327. Scope
and

Methodology

Page 17 GAO- 03- 935 Contract Management 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; and the Under
Secretaries of Defense (Acquisition, Technology, and Logistics) and
(Comptroller). We will also provide copies to others on request. In
addition, the report will be available at no charge on the GAO Web site at
http:// www. gao. gov.

Should you have any questions on matters discussed in this report, please
call me at (202) 512- 4841. Other contacts and staff acknowledgments are
listed in appendix III.

David E. Cooper Director Acquisition and Sourcing Management

Appendix I: Comparison of Selected Program Review Structure Requirements
Page 18 GAO- 03- 935 Contract Management In response to 2002 national
defense authorization requirements, the

Under Secretary of Defense for Acquisition, Technology, and Logistics and
the military departments developed and implemented policies for a program
review structure to oversee large- dollar and program- critical services
acquisitions. The review process, modeled after DOD*s review process for
major weapons systems, seeks to ensure major service acquisition
strategies are adequately planned, performance- based, competed, and
address socioeconomic goals. In most cases, an acquisition must be valued
at $500 million or more to prompt review at the headquarters level for DOD
and the military departments. 1 Table 2 compares selected aspects of the
legislation*s requirements with, and the implementation status of, DOD and
military department policies.

Table 2: Comparison of Selected Program Review Structure Requirements with
DOD and the Military Department Policies Program review structure
requirement DOD policy Air Force policy Army policy Navy policy

Set standards, based on dollar thresholds or other criteria, on which
major services procurements will be reviewed and approved by either a DOD
or military department senior procurement executive

Except for information technology and weapon system- related services, the
Under Secretary of Defense for Acquisition, Technology, and Logistics
shall review all major service acquisitions (1) with values of $2 billion
or more and (2) deemed special interest.

In February 2003, the Under Secretary delegated all review responsibility
to the military departments, with the exception of case- by- case
acquisitions deemed to

have special interest. Except for information

technology, space, and weapon system- related services, the Program
Executive Officer for Services in the Office of the Assistant Secretary
(Acquisition) shall review all major service acquisitions (1) with values
of $100 million or more and (2) deemed special interest.

This review includes all competitive sourcing/ privatization proposals
involving 300 or more Air Force positions.

Except for information technology and weapon system- related services, the
Army Acquisition Executive (i. e., the Assistant Secretary (Acquisition,
Logistics, and Technology)) shall review all major service acquisitions
(1) with values of $500 million or more and (2) deemed special interest.

The executive may delegate review responsibility to the

Deputy Assistant Secretary (Policy and Procurement).

Except for information technology and weapon system- related services, the
Navy Acquisition Executive (i. e., the Assistant Secretary (Research,
Development, and Acquisition)) shall review all major service acquisitions
(1) with values of $1 billion or more and (2) deemed special interest.

The Deputy Assistant Secretary for Acquisition Management shall review
major service acquisitions with values between $500 million and $1
billion.

1 For service acquisitions under the $500 million threshold, DOD*s policy
assigns review and approval responsibility to a designated official in
component headquarters below the military department headquarters level,
such as a command headquarters. Appendix I: Comparison of Selected Program

Review Structure Requirements

Appendix I: Comparison of Selected Program Review Structure Requirements
Page 19 GAO- 03- 935 Contract Management Program review structure
requirement DOD policy Air Force policy Army policy Navy policy

Establish major service acquisition*s decision point when executive*s

review and approval will occur

Approval occurs prior to committing DOD to the major service acquisition*s
strategy. If the Under Secretary determines within 10 days of receipt to
review, up to 30 working days can be used to review and approve the
strategy.

Approval occurs prior to committing the Air Force to the major service
acquisition*s strategy. Contracting activities should include 30 days in
the

acquisition schedule for Air Force headquarters review and 90 days for DOD
review.

Approval occurs prior to committing the Army to the major service
acquisition*s strategy.

Approval occurs prior to committing the Navy to the major service
acquisition*s strategy.

Set specific matters that will be reviewed The review process

covers (1) acquisition strategy in terms of performance- based approach,
full and open competition, and small business goal achievement; and (2)
contractor performance metrics for tracking cost, schedule, and outcomes.
The management and

oversight process for the acquisition of services covers (1) acquisition
strategy in terms of performance- based approach, full and open
competition, and small business goal achievement; and (2) contractor
performance metrics for tracking cost, schedule, and outcomes.

The management and oversight process for the acquisition of services
covers (1) acquisition strategy in terms of performance- based approach,
full and open competition, and small business goal achievement; and (2)
contractor performance metrics for tracking cost, schedule, and outcomes.
The management and

oversight process for the acquisition of services covers (1) acquisition
strategy in terms of performance- based approach, full and open
competition, and small business goal achievement; and (2) contractor
performance metrics for tracking cost, schedule, and outcomes. Status
Number of major service

acquisitions reviewed since implementation One (for the Army) as of

July 2003. Three as of July 2003, including one competitive

sourcing action. Two as of July 2003. None as of July 2003. Source: GAO
analysis.

Appendix II: Comments from the Department of Defense

Page 20 GAO- 03- 935 Contract Management Appendix II: Comments from the
Department of Defense

Appendix II: Comments from the Department of Defense Page 21 GAO- 03- 935
Contract Management

Appendix II: Comments from the Department of Defense Page 22 GAO- 03- 935
Contract Management

Appendix II: Comments from the Department of Defense Page 23 GAO- 03- 935
Contract Management

Appendix III: GAO Contacts and Staff Acknowledgments Page 24 GAO- 03- 935
Contract Management Ralph Dawn (202) 512- 4544

Carolyn Kirby (202) 512- 9843 In addition to those named above, Cordell
Smith, Bob Swierczek, and Ralph White made key contributions to this
report. Appendix III: GAO Contacts and Staff

Acknowledgments GAO Contacts Acknowledgments

(120190)

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