Best Practices: Using Spend Analysis to Help Agencies Take a More
Strategic Approach to Procurement (16-SEP-04, GAO-04-870).	 
                                                                 
"Spend analysis" is a tool that provides knowledge about who are 
the buyers, who are the suppliers, how much is being spent for	 
what goods and services, and where are the opportunities to	 
leverage buying power. Private sector companies are using spend  
analysis as a foundation for employing a strategic approach to	 
procurement. Recognizing the potential in government purchasing, 
GAO examined if the departments of Agriculture, Health and Human 
Services (HHS), Justice, Transportation, and Veterans Affairs are
using spend analysis to take a strategic approach. GAO assessed  
(1) if agencies use spend analysis to obtain knowledge to improve
procurement of goods and services and (2) how agencies' practices
compare to leading companies best practices.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-870 					        
    ACCNO:   A12416						        
  TITLE:     Best Practices: Using Spend Analysis to Help Agencies    
Take a More Strategic Approach to Procurement			 
     DATE:   09/16/2004 
  SUBJECT:   Best practices					 
	     Comparative analysis				 
	     Cost control					 
	     Economic analysis					 
	     Federal procurement				 
	     Private sector practices				 
	     Procurement practices				 
	     Property and supply management			 
	     Strategic planning 				 
	     Best practices methodology 			 
	     GSA Federal Procurement Data System		 

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GAO-04-870

United States Government Accountability Office

GAO	Report to the Committee on Governmental Affairs, U.S. Senate, and

          the Committee on Government Reform, House of Representatives

September 2004

BEST PRACTICES

    Using Spend Analysis to Help Agencies Take a More Strategic Approach to
                                  Procurement

                                       a

GAO-04-870

Highlights of GAO-04-870, a report to the Committee on Governmental
Affairs, U.S. Senate, and the Committee on Government Reform, House of
Representatives

"Spend analysis" is a tool that provides knowledge about who are the
buyers, who are the suppliers, how much is being spent for what goods and
services, and where are the opportunities to leverage buying power.
Private sector companies are using spend analysis as a foundation for
employing a strategic approach to procurement.

Recognizing the potential in government purchasing, GAO examined if the
departments of Agriculture, Health and Human Services (HHS), Justice,
Transportation, and Veterans Affairs are using spend analysis to take a
strategic approach. GAO assessed (1) if agencies use spend analysis to
obtain knowledge to improve procurement of goods and services and (2) how
agencies' practices compare to leading companies best practices.

This report includes recommendations to help Veterans Affairs,
Agriculture, and HHS adopt the full range of spend analysis best
practices. This report also includes recommendations intended to help
Justice and Transportation step up the process of gaining knowledge of
their spending to take a more strategic approach to procurement. GAO
received written and oral comments on a draft of this report. The agencies
generally agreed with GAO's findings and recommendations.

www.gao.gov/cgi-bin/getrpt?GAO-04-870.

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 [email protected].

September 2004

BEST PRACTICES

Using Spend Analysis to Help Agencies Take a More Strategic Approach to
Procurement

Taking a strategic approach to procurement involves a range of activities-
from using spend analysis to taking an enterprisewide approach to buying
goods and services. Three of the five surveyed agencies have begun to use
spend analysis to obtain knowledge and improve their spending for goods
and services. Veterans Affairs' success in using spend analysis and a
strategic approach to pharmaceutical procurement helped save $394 million
in 2003. Currently, agency teams are organizing medical-equipment and
supplies purchase data to develop national contracts to save an estimated
$82 million a year. Spend analysis is being used by HHS to support
strategic sourcing of office-related equipment and supplies through
discount agreements with major vendors that could save an estimated $9.5
million per year. Agriculture used a 2001 spend analysis to negotiate a
discount agreement for office supplies that yielded savings of $1.8
million to date and is identifying more such opportunities. Agriculture is
also modernizing its acquisition system to develop automated data-mining,
spend analysis, and reporting capabilities to support future
opportunities. The departments of Justice and Transportation have not yet
used spend analyses to support a more strategic approach to procurement.

Veterans Affairs, HHS, and Agriculture have made good progress using spend
analysis to improve their procurements, and they have adopted some
elements of a strategic approach. Implementing spend analysis is
challenging and can take time, and the agencies have not yet adopted the
full range of private sector best practices. (See table.) Fully adopting
the supporting structure, process, and role changes that companies
institute would enable these agencies to move away from a fragmented
procurement process and determine how effective they are in using spend
analysis to achieve significant savings.

Spend Analysis: Key Processes

Automation: Data automatically compiled.

Extraction: Essential data culled from accounts payable and other internal
systems.

Supplemental information: Additional data sought from other internal and
external sources.

Organization: Review data to ensure accuracy and completeness; organize
data into logical, comprehensive commodity and supplier categories.

Analysis and strategic goals: Using standard reporting and analytical
tools, data analyzed on a continual basis to support decisions on
strategic-sourcing and procurement management in areas such as cost
cutting, streamlining operations, and reducing the number of suppliers.
Scope generally covers an organization's entire spending.

Source: GAO analysis.

Contents

  Letter

Scope and Methodology
Results in Brief
Background
Agencies Have Begun Analyzing Spending Trends to Improve

Knowledge and Procurement

Agencies Have Not Adopted Full Range of Spend Analysis Best Practices and
Lack Some Supporting Structure, Processes, and Roles

Conclusions
Recommendations for Executive Action
Agency Comments and Our Evaluation

1

2 3 5

10

21 24 24 26

Appendix I	GAO Analyses of Agencies' Spend Analysis Practices

Appendix II	Comments from the Department of Veterans Affairs

Appendix III	Comments from the Department of Health & Human Services

Appendix IV Comments from the Department of Agriculture

Appendix V Comments from the Department of Justice

  Tables

Table 1: Veterans Affairs Spend Analysis Practices 30 Table 2: Health and
Human Services Spend Analysis Practices 31 Table 3: Agriculture Spend
Analysis Practices 32

  Figure

Figure 1: Broad Principles and Practices of Leading Companies' Strategic
Approach

Abbreviations

DOD Department of Defense
FPDS Federal Procurement Data System
GSA General Services Administration
HHS Health and Human Services
IT information technology

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separately.

United States Government Accountability Office Washington, DC 20548

September 16, 2004

The Honorable Susan M. Collins
Chairman
The Honorable Joseph I. Lieberman
Ranking Minority Member
Committee on Governmental Affairs
United States Senate

The Honorable Tom Davis
Chairman
The Honorable Henry A. Waxman
Ranking Minority Member
Committee on Government Reform
House of Representatives

Taking a strategic approach to procurement involves a range of
activities-from using "spend analysis" to develop a better picture of what
an agency is spending on goods and services, to taking an enterprisewide
approach for procuring goods and services, to developing new ways of
doing business. Our prior work has shown that such an approach could
help agencies leverage their buying power, reduce costs, and better
manage suppliers of goods and services, as leading private sector
companies have discovered on adopting these activities. One survey of
147 companies in 22 industries indicated that such an approach produced
savings of more than $13 billion in 2000.1

Spend analysis is a tool that provides companies knowledge about how
much is being spent for what goods and services, who are the buyers, and
who are the suppliers, thereby identifying opportunities to leverage
buying, save money, and improve performance. To obtain these answers,
companies use a number of practices involving automating, extracting,
supplementing, organizing, and analyzing procurement data. Companies
establish automated systems to extract and compile internal financial data
covering everything they buy; supplement that data with information from
external sources; organize this data into complete and consistent
categories of products, services, and suppliers; and have the data

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

continually analyzed. Companies then leverage this data to institute a
series of structural, process, and role changes aimed at moving away from
a fragmented procurement process to a more efficient and effective
corporate process in which managers make decisions on a companywide basis.

We have already issued several reports examining the benefits of using a
strategic approach to procurement and spend analysis at the Department of
Defense.2 Recognizing the potential that similar use might offer in
civilian areas of government purchasing, on the initiative of the
Comptroller General, we reviewed the activities of five federal agencies-
the departments of Agriculture, Health and Human Services (HHS), Justice,
Transportation, and Veterans Affairs-whose goods and services spending
totaled almost $37.2 billion in 2003.3 Specifically, we assessed (1) if
these agencies are using spend analysis to obtain knowledge to improve
procurement of goods and services and (2) how these agencies' spend
analysis practices compare to leading companies' best practices, including
whether agencies have in place the supporting structure, processes, and
roles to effectively use the results of spend analysis. We are addressing
this report to you because of your jurisdiction over the efficiency,
economy, and effectiveness of all agencies and departments of the
government.

To conduct this work, we obtained information from the five agencies about
how they used spend analysis in support of a more cost effective approach
to procurement. We interviewed senior procurement management officials at
departmental headquarters to obtain information and views about any
agencywide spend analysis efforts and how such efforts compared to leading
companies' best practices identified in our recent work.4 We reviewed
internal memorandums and other documents related to ongoing or proposed
agency procurement reforms that

2 GAO, Best Practices: Taking a Strategic Approach Could Improve DOD's
Acquisition of Services, GAO-02-230 (Washington, D.C.: Jan. 18, 2002);
Best Practices: Improved Knowledge of DOD Service Contracts Could Reveal
Significant Savings, GAO-03-661 (Washington, D.C.: June 9, 2003); and
Contract Management: High-Level Attention Needed to Transform DOD Services
Acquisition, GAO-03-935 (Washington, D.C.: Sept. 10, 2003).

3 Fiscal year 2003 data for contract actions (about $30.2 billion) and
purchase card spending (about $7 billion), Federal Procurement Data System
and the Federal Aviation Administration.

4 GAO-02-230 and GAO-03-661.

  Scope and Methodology

  Results in Brief

leveraged buying power, cut costs, and achieved other performance
benefits. For background on the agencies' contract and purchase card
spending on goods and services, we used summary fiscal year 2003 Federal
Procurement Data System (FPDS) data from the General Services
Administration (GSA).5 Because we used FPDS data for information purposes
and not to support our findings, we did not verify the data.6 We also did
not verify the accuracy of any strategic procurement costs savings
reported to us by the agencies. We conducted our work in accordance with
generally accepted government auditing standards between December 2003 and
June 2004.

Three of the five agencies we studied have begun to conduct spend analyses
and used the results to better manage procurements. Veterans Affairs, HHS,
and Agriculture launched or expanded their efforts in the last 2 years,
with noteworthy results. Veterans Affairs, for example, used an automated
spend analysis of pharmaceutical procurement and a strategic approach to
help save $394 million in 2003. Currently, agency commodity teams are
beginning a manual review of medical equipment and supplies procurement
data to identify high-cost, high-technology items such as magnetic
resonance imaging and ultrasound equipment for national contracting that
could save $82 million a year. A recent HHS spend analysis for
office-related products was used to award agencywide discount agreements
with three vendors that will save an estimated $9.5 million a year on
thousands of office and custodial supplies and computer monitors,
scanners, and other peripherals. An Agriculture spend analysis of products
and services purchased in fiscal year 2000 led the department to negotiate
an agreement for office supplies with one major vendor that has so far
yielded savings of $1.8 million.

5 Fiscal year 2003 is the last year for which complete governmentwide data
is available. FPDS is the federal government's central database on
contracting and purchase card transactions. Additionally, we obtained
summary fiscal year 2003 contract action data from the Federal Aviation
Administration, which is not required to report their procurement
activities to the FPDS.

6 The current system contains known errors, as discussed in GAO,
Reliability of Federal Procurement Data, GAO-04-295R (Washington, D.C.:
Dec. 30, 2003). Although we have not fully assessed the extent of
reporting errors, we have found sufficient problems to warrant concern
about the current reliability of FPDS information. As we understand the
design of an ongoing modernization of that system through FPDS-Next
Generation, many of the sources of the errors in the current FPDS should
be eliminated. In the short term, as the transition to FPDS-Next
Generation occurs, we have made recommendations to improve data
reliability.

At the time of our review, the departments of Justice and Transportation,
by contrast, had not begun to collect the data needed for a strategic
approach to procurement. Both agencies are engaged in ongoing efforts to
improve procurements or cut operating costs, and top leadership is
committed to using spend analysis to change the way goods and services are
purchased. One obstacle to using spend analysis cited by both agencies was
the lack of comprehensive and reliable spending data, although since our
review they report stepping up efforts to use currently available data and
evaluate business intelligence software to overcome those obstacles.

Veterans Affairs, HHS, and Agriculture have taken some positive steps in
the use of spend analysis to improve procurements, but to fully optimize
the potential the technique offers, they will need to adopt the full range
of private sector best practices for automating, extracting,
supplementing, organizing, and analyzing data on all their procurement
spending. Although successful in the pharmaceutical area, Veterans Affairs
has made slow progress in improving other medical supplies and services
procurements. HHS had no plans for an automated spend analysis system for
compiling the necessary data on an ongoing basis, although headquarters
officials told us in June that they intend to propose such a system.
Agriculture's automated spend analysis system, to be completed by 2006,
will be a centralized tool shared by constituent agencies that may or may
not elect to use it to chart their own strategic procurement paths.

This report includes recommendations intended to help Veterans Affairs,
Agriculture, and HHS adopt the full range of spend analysis best practices
and to help Justice and Transportation step up the process of gaining
knowledge of their spending to support a more strategic approach to
acquiring goods and services. In written and oral comments on a draft of
this report from Veterans Affairs, Agriculture, Justice, and
Transportation, the agencies generally agreed with our findings and
recommendations. Health and Human Services had no comments. The written
comments we received are reproduced in appendixes II through V.

Background

Our past work studying how leading private-sector companies have
reengineered their approach to procurement offers federal agencies both
valuable insights and a general framework that could serve to guide their
efforts.7 While each of the companies we studied is a leader in its
respective market, each was also not immune to market or stockholder
pressures to improve performance or to challenges from senior corporate
leadership to improve the manner in which the company acquired goods and
services. In turn, these companies adopted a strategic approach to
leverage their buying power, reduce costs, better manage their suppliers,
and improve the quality of goods and services acquired.

As shown in figure 1, we identified broad principles and practices that
were critical to carrying out the companies' strategic approach
successfully. Taking a strategic approach involves a range of activities
from developing a better picture of what the company is spending on
procurement to taking an enterprisewide approach to procuring goods and
services and developing new ways of doing business.

7 Between 2000 and 2003, we studied procurement best practices of eleven
companies- Bausch & Lomb; Brunswick Corporation; ChevronTexaco; Delta Air
Lines; Dell; Dun & Bradstreet Corporation; Electronic Data Systems
Corporation; Exxon Mobil Corporation; Hasbro, Inc.; International Business
Machines; and Merrill Lynch & Co., Inc. Our past work focused on how the
companies used best practices to improve procurement of services where
costs were increasing faster than for procurement of goods. However, the
companies told us that they followed the same practices to procure goods.
See GAO-02-230 and GAO-03-661.

Figure 1: Broad Principles and Practices of Leading Companies' Strategic
Approach

Source: GAO analysis.

Pursuing such an approach in the private sector clearly pays off. Studies
have reported significant cost savings for some companies of 10 to 20
percent of their total procurement costs. And the leading commercial
companies we studied reported savings and anticipated savings in the
billions of dollars.

Conducting a spend analysis to obtain improved knowledge on procurement
spending is a critical component of an effective strategic approach. A
spend analysis permits company executives to review how much their company
has spent each year, what was bought, from whom it was bought, and who was
purchasing it. The analysis identifies where numerous suppliers are
providing similar goods and services-often at varying prices-and where
purchasing costs can be reduced and performance improved by better
leveraging buying power and reducing the number of suppliers to meet the
company's needs.

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
procurement effort, spend analysis allows companies to monitor trends in
small and minority-owned business supplier participation to address the
proper balance between small and minority business utilization and equally
important corporate financial savings goals for strategic sourcing.

Setting up a spend analysis program can be challenging, according to our
prior research. Companies have had 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 have also found that existing databases have
not captured anywhere nearly enough details on the goods and services for
which vendors are being paid.

Despite the challenges, companies that developed formal, centralized spend
analysis programs have found that they have been able to conduct effective
and ongoing spend analysis through the use of five key processes,
involving automating, extracting, supplementing, organizing, and analyzing
data.

Spend Analysis: Key Processes

Automation: Data automatically compiled.

Extraction: Essential data culled from accounts payable and other internal
systems.

Supplemental information: Additional data sought from other internal and
external sources.

Organization: Review data to ensure accuracy and completeness; organize
data into logical, comprehensive commodity and supplier categories.

Analysis and strategic goals: Using standard reporting and analytical
tools, data analyzed on a continual basis to support decisions on
strategic-sourcing and procurement management in areas such as cost
cutting, streamlining operations, and reducing the number of suppliers.
Scope generally covers an organization's entire spending.

Source: GAO analysis.

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 inhouse, although some
companies have hired third-party companies for expertise and technology.

The data are primarily extracted from vendor 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 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 spend analysis to be effective, data files must be accurate, complete,
and consistent. The data are subjected to an extensive review for accuracy
and consistency, and steps are 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.8

In tandem with building a spend analysis foundation, commodity managers or
cross-functional commodity teams are established to access and analyze the
information on an ongoing basis, using standard reporting and analytical
tools.9 Each team is responsible for one or more commodities, which may
also include responsibility for a number of subcategories. Once the
spending data has been organized and reviewed, companies use the data as
the foundation for a variety of ongoing strategic decisions and efforts.

Our past work also shows how federal agencies, in particular DOD, might
apply these private sector best practices to obtain lower prices from
suppliers and improve procurement effectiveness. For example, we noted
that although DOD's spending on services contracts approaches $100 billion
annually, its management of services procurement has been inefficient and
ineffective.10 To achieve the potential for billions of dollars in
savings, we recommended that DOD take a more strategic approach to
services contracting that includes adopting the spend analysis best
practices of leading companies. In response, in 2004 the agency started
developing a spend analysis system that will pull purchasing data from
disparate databases for analysis by newly organized DOD-wide commodity
teams. DOD expects that users of this spend analysis system will be able
to identify procurement trends, buying patterns, and opportunities for
strategic sourcing, which will result in cost savings and quality
improvements.

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 noncomplex item. This grouping will allow volume and
technical leveraging of organizational spending and the establishing of a
network of commodity experts.

9 Companies use commodity teams to make sure they have the right mix of
knowledge, technical expertise, and credibility. The teams can vary in
size but generally include representatives from a company's procurement
unit, internal clients or users of the product or service, and the budget
or finance office. The teams analyze spending data, define internal needs
and requirements, and conduct market research. This approach has helped
companies to define their needs better and to identify, select, and manage
suppliers and, in turn, helped ensure that users' needs were met at the
lowest total costs to the companies.

10 GAO-02-230, GAO-03-661, and GAO-03-935.

The government purchase card program offers yet another arena for the use
of spend analysis. Through the purchase card program, agency personnel can
acquire the routine goods and services they need directly from vendors as
long as the purchase is $2,500 or less. From 1994 to 2003, the use of such
cards exploded from $1 billion to $16 billion, but we found that agencies
generally were not taking advantage of opportunities to negotiate
discounts with major vendors.11 We therefore recommended several
actions-including conducting spend analysis using available data and
gathering additional information where feasible-that would ultimately help
agencies to achieve $300 million annually in potential savings.

Three of the five agencies we reviewed-Veterans Affairs, HHS, and
Agriculture-have each conducted spend analyses, either by using their own
resources or by hiring consultants to do the work. Each agency is
beginning to use spend analysis to obtain knowledge and to plan and carry
out changes in agencywide procurement processes intended to leverage
buying power, eliminate redundant and duplicative acquisition activity,
and reduce purchasing costs for goods and services. The departments of
Justice and Transportation have not begun to collect the data needed for
using spend analysis nor taken steps that would be part of a strategic
approach to procurement.

  Agencies Have Begun Analyzing Spending Trends to Improve Knowledge and
  Procurement

11 GAO, Contract Management: Agencies Can Achieve Significant Savings on
Purchase Card Buys, GAO-04-430 (Washington, D.C.: Mar. 12, 2004) and
Purchase Cards:
Increased Management Oversight and Control Could Save Hundreds of Millions
of
Dollars, GAO-04-717T (Washington, D.C.: Apr. 28, 2004).

Department of Veterans Affairs

Agency Profile

Mission Highlights: To restore the capability of those who suffered harm
during their military service; to ensure a smooth transition as veterans
return to civilian life in their communities. Operates a health care
system to provide about 3.8 million veterans health care through 163
hospitals and more than 800 outpatient clinics nationwide.

Organizations: Veterans Health Administration, Veterans Benefits
Administration, and National Cemetery Administration.

Spending: In fiscal year 2003, contract spending on goods and services
totaled $8.5 billion. Purchase card spending accounted for another $5
billion, which includes about $3.1 billion under the agency's prime vendor
program.

Sources: GAO and FPDS.

For several years, Veterans Affairs has had significant success using
spend analysis on an ongoing basis to take a more strategic approach to
pharmaceutical procurement. Reflecting national trends, Veterans Affairs'
pharmacy procurement costs have risen significantly in recent years,
consuming an increasing percentage of the department's health care budget.
The $2.1 billion the agency spent on such items in 2000 were primarily for
prescription drugs and their dispensing, but also included some supplies
and over-the-counter drugs. To mitigate this increase in pharmacy
procurement costs, the agency created a pharmacy benefits management
strategic health group in 1995 that analyzes pharmaceutical spending
trends across all medical facilities and employs various procurement
arrangements for purchasing prescription drugs at substantial discounts.12
According to the agency, the pharmaceutical procurement standardization
program led to savings of $394 million in fiscal year 2003 alone.

12 GAO, VA and DOD Health Care: Factors Contributing to Reduced Pharmacy
Costs and Continuing Challenges, GAO-02-969T (Washington, D.C.: July 22,
2002) and DOD and VA Pharmacy: Progress and Remaining Challenges in
Jointly Buying and Mailing Out Drugs, GAO-01-588 (May 25, 2001).

Veterans Affairs has also made progress in the areas of medical and
prosthetics supplies and equipment. In fiscal year 2001, the agency
purchased about $500 million in medical-surgical supplies and $1.1 billion
in medical equipment and prosthetics. For example, VA created a national
prosthetics spend database that extracts procurement data from all medical
facilities' systems and organizes data on purchased items into commodity
categories, such as wheelchairs and aids for the blind. The agency's
prosthetics strategic health group also formed a number of commodity teams
with stakeholders from across the medical facilities and health care
regions to use spend analysis to identify commonly used items that can be
purchased at substantial discounts under a national contract.13 The
prosthetics group also uses spend analysis to monitor medical facility
compliance with the national contracts and to ensure potential savings are
realized. As of June 2004, the group's spend analysis and
strategic-sourcing efforts have resulted in 23 national contracts and
accumulated more than $57 million in cost avoidance.

The agency is just beginning to develop a spend analysis tool for medical
and surgical supplies and high-technology medical equipment. Specifically,
it is working with a contractor to create uniform medical-product names
for an agencywide spend analysis system. When the system is fully
operational in fiscal year 2006, it will automatically extract medical
supplies and equipment procurement data into a central data warehouse,
organized by common categories of products. Until this system is fully
operational, this year the agency decided to form several cross-functional
commodity teams to pursue new national contracts on 45 categories of
high-technology, high-cost medical equipment and supplies (such as
magnetic resonance imaging and ultrasound equipment).

13 According to Veterans Affairs, national contracts are used to leverage
the agency's buying power on health care commodities identified as high
usage. The agency develops the requirements for national contracts with
clinician customer input and openly competes the requirements. The
agency's national contracts are generally firm, fixed-price
requirements-type contracts, with a base year and four 1-year option
periods. Veterans Affairs exercises options after market research reveals
that the prices are fair and reasonable and the award is in the best
interest of the government.

Department of Health and Human Services

Agency Profile

Mission Highlights: HHS is the United States government's principal agency
for protecting the health and welfare of all Americans.

Organizations: National Institutes of Health, Administration for Children
and Families, Food and Drug Administration, Centers for Medicare and
Medicaid Services, Centers for Disease Control and Prevention, and Indian
Health Service, to name a few.

Spending: In fiscal year 2003, contract spending for goods and services
totaled $6.7 billion; purchase card spending accounted for another $392
million.

                             Sources: GAO and FPDS.

Since 2003, HHS has been obtaining spend analysis and procurement
consolidation advice from outside consultants to help reduce the
department's operating costs and redirect the savings to programs. Like
other agencies, procurement activities in HHS were operating under a
decentralized environment of independent, transaction-oriented buying
processes, with limited visibility over the agency's total procurement
spending.

For example, HHS has conducted a spend analysis of commonly contracted
products. In its first phase, $100 million in yearly spending for
thousands of office-related products such as custodial supplies, office
supplies, office furniture, office equipment (such as photocopiers and
facsimile machines), and peripheral information technology products (such
as computer monitors and scanners) was analyzed to identify opportunities
for significant savings to purchase card buyers through agencywide
discount agreements.14 Between May and July 2004, HHS awarded the first
agreements to three vendors for the office supplies, custodial products,
and peripheral items.15 HHS estimates the potential

14 Although HHS intends to market the discount agreements to agency
cardholders for small purchase card buys, HHS divisions with larger-dollar
orders will also be able to buy the same discounted items through the
agencywide agreements. However, the agreements are not mandatory sources
of supply for either purchase card holders or other agency buys.

15 HHS anticipates awarding two more agreements in August 2004 for the
office furniture and equipment categories.

savings from these discount agreements range from 7 percent to 54 percent
and could yield at least $9.5 million in annual savings for the department
on just the office supplies, office equipment, and information technology
peripherals. Later this year, the agency will work with its consultant to
do a new round of spend analysis to identify potential categories and
savings opportunities in the next phase of the strategicsourcing
initiative for products.

In a second initiative, HHS procurement headquarters hired a consultant in
August 2003 to support a newly organized agencywide group of 100 senior
procurement and other key managers to work on consolidation of services
acquisitions.16 One of the contractor's key tasks was to conduct a spend
analysis of almost $4.9 billion in fiscal year 2002 HHS contract actions17
to identify high-volume or high-dollar common services for consolidation.
Twenty-four categories-such as security guards and patrol services and
office administrative services-were subsequently identified for possible
consolidation-totaling almost $1.7 billion in value.

The consultant's plan included steps to organize and segment HHS contract
workload and spend data into categories of services and suppliers. This
step was intended to help the services acquisition consolidation working
group identify opportunities across divisions to reduce the number of
suppliers where competition for new agencywide contracts is practical.
However, according to the working group's project officer, in view of
small business and contract-bundling requirements and the long lead times
needed to obtain division consensus on new contract arrangements, the
working group decided instead to pursue alternative consolidation
strategies in the near-term.

As a result, HHS headquarters officials expect the working group to
finalize criteria and a timeline for selecting existing division service

16 HHS hired the consultant to provide spend analysis services and
procedural, technical, and briefing support to and collaboration with the
agencywide workgroup to help implement various phases of the services
acquisitions consolidation initiative. Workgroup members include
representatives from the Office of the Secretary and all HHS divisions,
such as the National Institutes of Health, Centers for Disease Control and
Prevention, and the Food and Drug Administration.

17 For the spend analyses, HHS furnished the contractor fiscal year 2002
data files extracted from the Departmental Contract Information System.
The contractor analyzed contract actions in excess of $25,000 for research
and development, information technology, architectural and engineering,
construction, and other services.

contracts that would be listed in an HHS-wide database that other division
purchasers might use before initiating their own new, stand-alone
contracts. Potential contract categories include temporary services,
information technology services, focus groups, and conference management
and support.

Department of Agriculture

Agency Profile

Mission Highlights: To support agriculture production by ensuring a safe,
affordable, and accessible food supply; caring for agricultural, forest,
and range lands; supporting sound development of rural communities;
expanding global markets for agricultural and forest products and
services; and working to reduce hunger in America and throughout the
world.

Organizations: Forest Service, Food and Nutrition Service, Farm Service,
Rural Housing Service, and Rural Development Service, to name a few.

Spending: In fiscal year 2003, contract spending on goods and services
totaled $4.3 billion. Purchase card spending accounted for another $572
million.

Sources: GAO and FPDS.

Agriculture is currently using the results of a consultant's October 2001
spend analysis as updated with more recent spending data to obtain
favorable prices on small purchase card buys through agencywide discount
agreements with major vendors. The contractor analyzed almost $2.1 billion
in fiscal year 2000 spending data from across the agency, organizing the
agency's spending in terms of commodities and suppliers to identify
high-volume, high-dollar areas that could yield significant savings and
other benefits and also identifying 24 commodities for the agency's more
detailed review.18

18 For the spend analysis, Agriculture furnished the consultant fiscal
year 2000 data files extracted from FPDS and the agency's Purchase Card
Management System. The contractor analyzed about 473,000 contract
transactions totaling about $1.6 billion and 2.3 million purchase card
buys totaling $467 million. The contractor organized the spend data into
52 commodity categories of products and services, such as agricultural
machinery, construction services, fleet maintenance, telecom equipment,
and office supplies and paper.

In 2003, Agriculture's procurement management division began to use this
spend analysis, competitively awarding an agencywide discount agreement
with a national office supply vendor that yielded savings of $1.8 million
to the agency's purchase card holders-a price 10 percent less then the
vendor's Federal Supply Schedule contract prices.19 To receive the
discounts, registered agency purchasers must use the national office
supply vendor's electronic catalog and ordering system.

Building on this experience, Agriculture recently began to use the
consultant's spend analysis to improve its purchase card buying power in
additional commodity areas. A temporary "electronic marketplace"
subcommittee was organized in January 2004, including representatives from
across the agency. According to the co-chair, this subcommittee is using
the consultant's spend analysis and updating it with more recent data on
spending with major vendors to help negotiate more favorable prices based
on the agency's dollar volume. By October, the subcommittee plans to
implement at least three agencywide discount agreements comparable to the
2003 agreement.

In the future, Agriculture plans to provide automated and repeatable spend
analysis, data-mining, and reporting capabilities that identify
opportunities for savings through negotiated volume discounts. These will
be available through electronic catalogs as part of a redesign and
modernization of its agencywide acquisition system, an effort that will be
complete in about two years.20 Agriculture began this effort upon
recognizing that the current multisystem environment does not provide an
integrated, streamlined, or consistent approach to procurement and does
not effectively support the agencywide goal for electronic commerce
between agency purchasers and suppliers.

To develop its spend analysis capabilities, Agriculture will create a
centrally maintained data warehouse to be shared by agency procurement and
financial management organizations. This warehouse will extract and
capture all Agriculture procurement data, to be supplemented with

19 Under the Schedules program, the GSA negotiates to obtain discounted
prices on a wide range of commercial goods and services on its contracts
with multiple vendors.

20 Since 2002, Agriculture has carried out a cross-agency effort, with
contractor technical and program management support, to develop, test, and
phase-in the enterprise Integrated Acquisition System to replace more than
40 different procurement systems in use across eleven agencies and
administrative offices. Agriculture plans to have the replacement system
fully operational by October 2006.

business intelligence and organizational data from internal and external
financial and corporate sources.21 Once the warehouse is in place, it will
allow for comprehensive spend analysis and reporting on procurement in
real time, on issues such as the opportunities to be pursued for
agencywide discount agreements with major suppliers for specific
commodities and the extent of small business utilization.

Department of Justice Agency Profile   Department of Transportation Agency 
Mission Highlights: Enforcing laws in  Profile Mission Highlights: To      
the public interest and protecting the ensure a fast, safe, accessible,    
public from terrorist and criminal     and convenient transportation       
activity. Organizations: Federal       system that meets vital national    
Bureau of Investigations, Office of    interests and enhances the quality  
Justice Programs, Federal Bureau of    of life of the American people,     
Prisons, Drug Enforcement              today and into the future.          
Administration, U.S. Marshal Service,  Organizations: Federal Aviation     
and Bureau of Alcohol, Tobacco,        Administration, Federal Highway     
Firearms, and Explosives. Spending: In Administration, Federal Transit     
fiscal year 2003, contract spending on Administration. Spending: In fiscal 
goods and services totaled $4 billion. year 2003, contract spending on     
Purchase card spending accounted for   goods and services totaled $6.7     
another $588 million.                  billion. Purchase card spending     
                                          accounted for another $442 million. 

Sources: GAO, FPDS, and Federal Aviation Administration.

The departments of Justice and Transportation have not used spend analyses
yet to focus management attention on changing the way they purchase goods
and services to foster a more strategic approach. One of the obstacles to
using spend analysis cited by both was the lack of comprehensive,
detailed, and reliable spending data. Nevertheless, future use of spend
analysis could become an important tool in their efforts to streamline
their administrative functions or improve procurement performance.

21 When fully operational, the data warehouse will automatically extract
procurement data for all contract actions processed via the Integrated
Acquisition System and extract procurement data on all purchase card buys
captured in the agency's purchase card management system.

Department of Justice

Spend analysis could be useful in assisting the Department of Justice to
implement its November 2001 strategic plan, which established
streamlining, eliminating, or consolidating duplicative functions as key
elements of supporting the agency's new counterterrorism mission. In
February 2004, high-level discussions were begun to plan cross-cutting
initiatives to eliminate duplication and cut overall agency operating
costs, so that funding can then be redirected to other critical tasks. The
agency also formed a core group of financial and management executives
responsible for overseeing the streamlining and efficiency initiatives.

Officials told us that it is too early to say if the new core group's
efforts would include analysis of Justice's spending trends or considering
broadbased structure, process, and role changes to support a more
strategic approach to procurement, although some agency officials are
familiar with the concepts. Officials said that some Justice components
had made incremental progress in consolidating and leveraging certain
categories of spending, such as litigation support services, jail
detention space services, and prison system medical supplies. Officials
also told us that the agency will similarly look into pursuing a
comprehensive approach to buying Web-based training services, jail guard
services, and employee household relocation services.

In the near term, Justice officials questioned the agency's ability to
analyze spending trends effectively, even though the officials agreed that
such an analysis could benefit the agency. Lack of a single acquisition
and financial management system makes it difficult to collect accurate and
complete spending data and identify opportunities for coordinated
purchasing, the officials said. Although the agency is trying to establish
a single system, it is not likely to be in place until 2009.22

Before the single system can be put in place, we discussed with these
officials the prospects for using existing contract and purchase card data
that the agency feeds into the FPDS, in the same way that Agriculture and
HHS have used such data to support their spend analysis efforts. Justice
officials expressed interest in potentially using FPDS data for this
purpose.

22 In 2002, the agency launched a unified financial management system
program to replace six major accounting systems now in use with one
agencywide system. Plans for the new system include integration of
financial and acquisition management, assure access to timely information,
and speed up business process and decision making. Justice hired a
contractor in March 2004 to provide software for the new system and plans
to replace legacy systems between fiscal years 2005 and 2009.

According to the procurement executive, for financial audit purposes,
Justice has been analyzing purchase card data and had already obtained
better insight into what goods and services were being bought across the
agency and opportunities to leverage buying power in return for lower
prices from vendors.23 Given that Justice has almost $5 billion in annual
procurements, agency officials acknowledged that their streamlining and
efficiency efforts could be substantially aided by the expanded use of
spend analysis to consider taking a more strategic approach to
procurement.

In commenting on a draft of this report, the agency reports that it is
working to identify additional opportunities for purchase card savings
through current discount agreements and has begun analyzing FPDS data to
identify savings opportunities. We commend the agency for expanding
purchase card spending analyses, which is also responsive to previous
recommendations aimed at achieving agency savings through the purchase
card program.24 Moreover, by taking the promising first step to analyze
FPDS data on contract spending for goods and services-which accounted for
another $4 billion in 2003-we believe that Justice will be able to
identify many more opportunities for leveraging buying power and achieve
even more significant savings in the future.

Transportation's senior procurement officials told us that they plan to
use spend analysis to support ongoing implementation of strategic
procurement practices across the agency. According to these officials,
such support should be facilitated by the favorable experience
Transportation has already gained from similar cross-cutting strategic
procurement planning to modernize information systems and standardize
computer equipment as part of a fiscal year 2007 office relocation of
agency headquarters. Under the agency's chief information officers'
council, commodity councils are being formed to help the agency move to

                          Department of Transportation

23 In fiscal year 2003, Justice had 12,842 purchase cardholders that
accounted for over $588 million in small purchases of goods and services
for $2,500 or less. For more information, see GAO-04-430.

24 GAO-04-430.

a common operating environment and leverage buying power for information
technology goods and services.25

According to these officials, the agency currently has no spend analysis
capability, but a first step was taken this year through the agency's
procurement performance management program that could help drive the
adoption of a more strategic approach to buying goods and services.26 A
general analysis was conducted of fiscal year 2003 FPDS data for $1.6
billion in agency contracts, sorted by the categories of research and
development, other services, and products.27 A more in-depth agencywide
analysis has yet to be achieved, however. Officials told us more detailed
analysis of spending trends-for example, by high-dollar, high-volume
commodity and vendor categories-was inhibited by workload constraints and
their concerns about the accuracy of FPDS data and the lack of more
specific product and service information. Nevertheless, they indicated
that in the future, spend analysis could become an important tool in the
agency's procurement performance management program. Specifically, in
commenting on a draft of this report, the senior procurement executive
indicated that agency leadership supports additional funding in fiscal
year 2005 to enhance spend analysis capabilities. He also told us the
agency is evaluating software options for a future agencywide spend
analysis system as part of the ongoing financial information system
modernization.

25 According to the deputy senior procurement executive director, the
agency's architectural review board was expected to approve a charter and
an enterprisewide information technology procurement business process to
guide the commodity councils' activities.

26 Since 1995, Transportation procurement activities have implemented this
program as a major initiative to improve procurement performance. This
program assists procurement managers in targeting areas for improvement
based on the results of specified metrics chosen for their importance to
the administration, agency management, or agency customers.

27 The general analysis did not include data for the Federal Aviation
Administration or organizations transferred to the Department of Homeland
Security (Coast Guard and Transportation Security Agency).
Transportation's analysis used fiscal year 2003 FPDS data for contract
actions in excess of $25,000. Dollars analyzed totaled $1.6 billion and
were sorted by research and development (6 percent), other services (84
percent), and products (10 percent). Transportation did not analyze vendor
or individual product and service details available in the FPDS records.

  Agencies Have Not Adopted Full Range of Spend Analysis Best Practices and Lack
  Some Supporting Structure, Processes, and Roles

Veterans Affairs, HHS, and Agriculture have made good progress using spend
analysis to improve their procurements, and they have adopted some
elements of a strategic approach. Like the private sector's experience
which indicates that implementing spend analysis can be challenging and
take time, these three agencies have not had a lot of time to adopt the
full range of private sector best practices with regard to automating,
extracting, supplementing, organizing, and analyzing data that covers all
of their procurement spending. Also, to one degree or another, they have
not created the type of supporting structure, processes, and roles leading
companies institute to make the best use of the knowledge gained and
foster a more strategic approach to buying goods and services. The extent
to which agencies can do both will determine their success in achieving
substantial savings and performance improvements. Private sector
experience suggests that agencies that start with effective spend analysis
programs will be better able to institute the changes needed to move into
a more coordinated, leveraged purchasing environment.

Veterans Affairs has earned a world-class reputation for highly
costeffective pharmaceutical procurement practices, which include spend
analysis as well as supporting structure, processes, and roles. (See
appendix I, table 1.) Its progress in making similar improvements in its
procurements of other medical supplies and equipment has been slower,
however, and its efforts related to clinical care or facilities support
services are in their very early stages.

A March 2004 inspector general's audit report, for example, noted that the
agency's efforts to reform medical supplies and equipment purchasing
practices since 2002 have not yet translated into significant national
contracting results and medical purchasing cost savings. The audit
recommended increasing efforts to pursue aggressively more national
contracts that, if implemented, could achieve about $82 million per year
in savings.

A spend analysis tool that would examine Veterans Affairs' medical
supplies and equipment spending trends will not, in fact, be ready before
2006, when best practices-such as automated compilation of purchase data,
extracted from facilities' procurement and vendor payment systems and
supplemented and organized-will be put in place for use by established
commodity teams.

The agency is also beginning to focus on taking a more strategic approach
to acquiring services for veterans medical facilities from contract
providers. In May 2004, the Secretary announced that Veterans Affairs

must more effectively purchase contract health care services for veterans
(such as skilled nursing and laboratory services) by leveraging its
purchasing power as a national healthcare system. The Secretary directed
that a national clinical-contracting strategy be drafted by November 2004
that would identify high-value, competitively priced purchasing options
for obtaining medical services from contract providers throughout the
country. In addition, in commenting on a draft of this report, the agency
stated its intent to pursue national contracts for non-clinical services
as well. Facilities now contract locally for a wide variety of support
services, such as facilities maintenance, housekeeping, and food
service.28 According to the agency, both efforts will use spend analysis
as appropriate. However, we believe it will be difficult for the agency to
accomplish this objective since the new spend analysis tool, expected in
2006, will only capture data on medical supplies and equipment spending
trends.

HHS asked its division heads to begin planning for departmentwide
consolidation of procurement activities in April 2003. Although
headquarters managers had worked with consultants to conduct spend
analyses to improve their knowledge of overlapping and duplicative
procurement spending, they had no plan to develop an automated tool to
repeat the process and only a small number of consolidated procurement
actions were expected to result. (See appendix I, table 2.)

In June 2004, however, HHS procurement managers told us that an agencywide
working group was going to propose obtaining commercial software to
develop an automated spend analysis system to compile the necessary data
and generate standardized reports. As result, they believe that HHS' spend
analysis efforts could make use of an automation tool in the future to
enable the process to be repeated consistently, obtain data from HHS
sources such as financial management systems, and analyze data on a
continual basis. The proposal was intended to augment ongoing plans for an
HHS-wide standard electronic procurement system to be phased in over the
next year or so. According to these officials, details on the proposed
system's spend analysis capabilities are forthcoming, pending approval and
funding to implement it.

28 For more information on opportunities to improve Veterans Affairs'
purchasing practices and increase savings, see GAO, Contract Management:
Further Efforts Needed to Sustain VA's Progress in Purchasing Medical
Products and Services, GAO-04-718 (Washington, D.C.: June 22, 2004).

Agriculture's current spend analysis efforts are also not automated,
include no financial management data such as vendor accounts payable
systems, and do not analyze data on a continual basis. (See app. I, table
3.) The agency does have plans to have an agencywide spend analysis system
in place by 2006, but the system will be a centralized tool shared by
component organizations that may or may not choose to chart their own
strategic procurement paths.

A temporary subcommittee in the meantime is reviewing some agencywide
spending data to identify a few categories of high-dollar purchase card
vendors for use in negotiating discount agreements. However, a senior
procurement policy official told us that a large-scale strategic approach
to buying goods and services may be neither feasible or advisable, given
the agency's highly diverse missions and decentralized operations. When it
comes to changing the buying culture across the agency, the agency wants
to use spend analysis to create attractively priced discount agreements
with a few vendors that agency purchasers will be encouraged, not
mandated, to use. Although he indicated that Agriculture may establish a
few agencywide commodity councils in the future to pursue more areas for
consolidated buying, he did not anticipate creating new structure,
processes, and roles within the agency.

Aside from their spend analysis activities, the three agencies have not
consistently created the type of supporting structure, processes, and
roles leading companies institute to foster a more strategic approach to
buying goods and services. While Veterans Affairs has used the best
practice of establishing commodity teams that coordinate buying strategies
for pharmaceutical, prosthetics, and more recently high-cost,
high-technology medical equipment and supply items, the same practice has
not been used to coordinate buying strategies for services. Outside of
forming single, cross-agency working groups to leverage a few categories
of supplies commonly bought by purchase cardholders, Agriculture and HHS
have not fully embraced viewing procurement as an agencywide process for
streamlining acquisitions, saving money, and increasing the quality of
purchased goods and services when compared to the current decentralized
environment of independent, stand-alone contract actions. Agriculture and
HHS have not adopted the best practice of using crossfunctional commodity
teams to establish a network of technical experts to support volume and
technical leveraging of agency spending.

Conclusions

Recommendations for Executive Action

When the government faces enormous fiscal pressures and a growing budget
deficit, agencies' transformations of their business processes is more
important than ever if the agencies are to get the most from every dollar
spent. Leading companies that have successfully used spend analysis as a
foundation for their procurement activities set an example for how the
federal government can more effectively leverage its buying power.

Federal agencies such as the Departments of Veterans Affairs, HHS, and
Agriculture can achieve significant benefits using spend analysis best
practices to support a more strategic approach to buying goods and
services. Like leading companies, agencies that establish an effective
spend analysis program can then achieve a total-spending perspective
across the agency; make the business case for collaboration in joint
purchasing rather than fragmented purchasing, create supporting structure,
processes, and roles to assign accountability and exercise oversight;
identify potentially hundreds of millions of dollars in procurement
savings opportunities by leveraging buying power; and identify
opportunities to achieve other procurement process efficiencies such as
reducing duplication in purchasing, supporting small and minorityowned
business utilization, and improving supplier performance. In contrast,
agencies such as the departments of Justice and Transportation, which have
yet to make extensive use of spend analysis and may well miss out on the
opportunity to achieve savings to the same extent possible as other
agencies.

To help ensure that the varying spend analysis efforts by Veterans
Affairs, HHS, and Agriculture go further in emulating the best practices
of leading companies and that these agencies have the supporting
structure, processes, and roles in place to effectively use the results of
spend analysis, we are making the following three recommendations:

o  	To identify, track, and evaluate what clinical care and support
services are being purchased by veterans' medical facilities, the
Secretary of Veterans Affairs should direct procurement headquarters
officials to expand the planned development by 2006 of an automated
medical supplies and equipment spend analysis system also to capture
spending data on services. Such expansion should support automating,
extracting, organizing, supplementing, and analyzing spending trends for
clinical care and support services in the same way that improvements aimed
at medical supplies and equipment are being made. The agency's new spend
analysis system needs to include healthcare-related services' procurement
data to

improve decision makers' knowledge and help them identify opportunities
for leveraged buying, including the planned development of a national
strategy to contract for services.

o  	To address agency leadership's direction to eliminate redundant
management activities, the Secretary of Health and Human Services should
direct headquarters' procurement officials to identify additional steps
needed to adopt a more strategic approach to acquiring goods and services.
HHS headquarters' procurement officials should also be directed to
consider using current financial and procurement management information
systems to extract the type of spending data on an automated and
repeatable basis that the agency needs to identify opportunities to
leverage its buying power, reduce costs, and provide better management and
oversight of key suppliers. Such data would include what categories of
goods and services are being acquired; how many suppliers are being used
for specific categories; and how much HHS is spending on specific
categories, in total and with each supplier. Their assessment should also
address the creation of supporting structures, processes, and roles as
necessary, such as the establishment of cross-functional commodity teams,
to help obtain the necessary buy-ins across the agency's divisions,
eliminate duplication of effort, and improve the coordination and volume
discounting of high-dollar, high-volume categories of goods, services, and
suppliers on an ongoing basis.

o  	While waiting until 2006 for the planned agencywide spend analysis
system to come online, the Secretary of Agriculture should assess whether
the agency's temporary electronic marketplace subcommittee provides
sufficient structure, processes, and roles for analyzing spending trends
on an ongoing basis and supporting a more strategic approach to acquiring
goods and services. Agriculture's assessment should address expanding the
subcommittee's current narrow focus on leveraging the agency's almost $600
million in purchase card buying power, to also yield discounts applicable
to larger contract actions across the range of goods and services being
acquired and whether the establishment of cross-functional commodity teams
would help obtain the necessary buy-in across the agency's diverse mission
organizations and improve the coordination and acquisition of high-dollar,
high-volume categories across a wide range of goods and services.

In light of the significant potential for savings and performance
improvements that the two agencies not using spend analysis could achieve,
we recommend that the Attorney General of the United States and the
Secretary of Transportation direct officials responsible for procurement
and financial management and other appropriate stakeholders to step up the
process of gaining knowledge of their spending to take a strategic
approach to procurement, adopting the type of best

practices employed by leading companies. Specifically, we are making the
following two recommendations:

o  	Justice and Transportation should assess using current financial or
procurement information systems such as FPDS and purchase card data on an
automated and repeatable basis to extract the type of spending data that
the agencies need to identify opportunities to leverage the agencies'
buying power, reduce costs, and provide better management and oversight of
suppliers. Such data would include what categories of goods and services
are being acquired; how many suppliers are being used for specific
categories; and how much the agency is spending on specific categories, in
total and with each supplier.

o  Once an initial spend analysis can be completed to arm the agencies
with

  Agency Comments
  and Our Evaluation

the knowledge of such opportunities, Justice and Transportation should
assess whether their current procurement structure, processes, and roles
are adequate to support a more strategic approach to acquiring goods and
services, for example whether cross-functional commodity teams would
provide more effective, coordinated management of high-dollar, highvolume
categories of goods, services, and suppliers on an ongoing basis.

We received written comments on a draft of this report from the
Departments of Veterans Affairs, Agriculture, and Justice, and we received
oral comments from the Department of Transportation. The agencies
generally agreed with our findings and recommendations. The Department of
Health and Human Services had no comments, but provided technical
comments, which we have incorporated where appropriate. The written
comments are reproduced in appendixes II through V.

The Department of Veterans Affairs concurred with our recommendation to
expand the planned development of an automated spend analysis system to
capture spending data on services as well as medical supplies and
equipment data. At a later date, the agency plans to provide a more
complete discussion of its efforts to include clinical and non-clinical
services in its spend analysis.

In general, the Department of Agriculture agreed with our recommendations.
Commenting on one of the draft's statements on the agency's use of a
consultant's 2001 spend analysis to obtain more favorable prices,
Agriculture indicated they did not solely rely on the consultant's report
but needed to perform additional analysis for the agencywide discount
agreements. Further, Agriculture also commented that many other federal
departments, through the use of existing purchase card data and other
available data systems, can discern sufficient

information to begin leveraging their spending to obtain reduced prices
for commonly acquired services and supplies. We agree.

While the Department of Justice generally agreed with the report's
findings and recommendations, the agency also clarified the status of
spend analysis efforts. Specifically, the agency stated that data
collection efforts have begun to conduct a spend analysis, focusing on
purchase card spending trends and procurement actions based on reviews of
agencywide data from a bankcard vendor and the FPDS. We revised the report
where appropriate to incorporate information on these efforts.

In oral comments, Transportation's senior procurement executive told us
that he agrees with our recommendations, but believed our report did not
adequately capture the agency's commitment to strategic procurement
objectives and support for using spend analysis. In addition, this
official informed us that the agency is expanding its spend analysis
efforts. For example, his office recently reviewed purchase card spending
data to identify volume discount opportunities and is now using the
results to negotiate new discount agreements with several office product
vendors. In addition, he told us that to facilitate future agencywide
purchase card spend analyses, Transportation awarded a task order in June
2004 with one bank-card company that includes purchase-card audit software
and enhanced data-mining capabilities. He also indicated that agency
leadership supports fiscal year 2005 funding to enhance spend analysis
capabilities and that software options for a new agencywide spend analysis
system are now being evaluated as part of the ongoing financial and
procurement management system modernization. We incorporated these
comments where appropriate in the text.

We are sending copies of this report to the Secretaries of Agriculture,
Health and Human Services, Transportation, and Veterans Affairs; the
Attorney General; the director of the Office of Management and Budget; and
interested congressional committees. We will provide copies to others on
request. This report will also be available at no charge on GAO's 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 ([email protected]) or Carolyn Kirby at
(202) 512-9843 ([email protected]). Other major contributors to this report
are Cristina Chaplain, Timothy DiNapoli, Bob Swierczek, and Grant
Turner.

David E. Cooper
Director
Acquisition and Sourcing Management

Appendix I: GAO Analyses of Agencies' Spend Analysis Practices

We obtained information about agencywide spend analysis efforts through
interviews with Veterans Affairs, HHS, and Agriculture procurement
headquarters officials and documents they provided to us. We reviewed this
information and also discussed with agency officials how their efforts
compared to leading companies' best practices identified in our recent

1

work.

In analyzing agencies' practices, we compared their efforts with the five
key processes that companies adopt that enable them to conduct effective
and ongoing spend analysis, which are:

o  Automation-data automatically compiled.

o  	Extraction-essential data culled from accounts payable and other
internal systems.

o  	Supplemental information-additional data sought from other internal
and external sources.

o  	Organization-review data to ensure accuracy and completeness; organize
data into logical, comprehensive commodity and supplier categories.

o  	Analysis and strategic goals-using standard reporting and analytical
tools, data analyzed on a continual basis to support decisions on
strategicsourcing and procurement management in areas such as cost
cutting, streamlining operations, and reducing the number of suppliers.
Scope generally covers an organization's entire spending.

The following tables summarize our analysis of agencies' spend analysis
practices.

1 GAO-02-230 and GAO-03-661.

         Appendix I: GAO Analyses of Agencies' Spend Analysis Practices

               Table 1: Veterans Affairs Spend Analysis Practices

                     Spend Analysis Process Agency practice

Automation	Automated compilation of pharmaceutical and prosthetic and
sensory aid purchase data into two central databases, which are updated
continuously. Automated compilation of medical supply and equipment
purchase data but not clinical care and support services into a central
database will be available in 2006.

Extraction	Pharmaceutical and prosthetics spend analysis covers all
veterans' medical facilities purchases. Facilities' pharmaceutical
purchase and vendor payment data are extracted from centralized commercial
distributors' on-line ordering and delivery systems. Prosthetics data
extracted from multiple medical facilities' procurement and vendor payment
systems.

In 2006, standardized medical supply and equipment data will be extracted
from facilities' procurement and vendor payment systems. None will be
extracted on facilities' purchases for clinical care and support services.

Supplemental Information 	Veterans Affairs obtains pharmaceutical sales
and payment data from centralized commercial distributors' on-line
ordering and delivery systems. The agency's chief logistics office
analyzes weekly summaries of bankcard vendor's transactions with the
agency. The agency recently required purchase card program managers to
consolidate quarterly reviews from the cardholders and analyze purchases.

Organization 	Pharmaceutical and prosthetics spend analysis databases fall
into logical comprehensive categories of commodities and suppliers.
Veterans Affairs is organizing and standardizing procurement data on
medical supplies and equipment purchases; a spend analysis database is
planned for completion in 2006. In 2004, a naming standard will be
developed for each hightechnology/high-cost medical product given a
national contract. To track compliance with contracted products, a
standard name will have to be used when buying. Veterans Affairs will not
organize facilities' clinical care and support services procurement data
into logical, comprehensive categories of commodities and suppliers.

Analysis and strategic goals 	Commodity teams are continually analyzing
pharmaceutical and prosthetics spending data to make decisions in
contracting and procurement management. In 2003, Veterans Affairs saved
$394 million through discounted pharmaceutical national contracts. As of
June 2004, prosthetics contract savings were more than $57 million. By
2006, standard reporting and analytical tools will be in place for medical
supplies and equipment purchases, which new commodity teams will use to
help reduce the number of suppliers, cut costs, streamline operations, and
address the agency's small business goals. Veterans Affair's spend
analysis system plan does not include purchased clinical care and support
services, however.

                  Source: GAO analysis of agency information.

         Appendix I: GAO Analyses of Agencies' Spend Analysis Practices

          Table 2: Health and Human Services Spend Analysis Practices

Spend Analysis Process Agency practice

Automation	HHS furnishes services procurement data to one consultant and
products procurement data to a second. While both use commercially
available automation tools to compile data for more rapid spend analyses,
these are one-time or periodic requirements. No automation tool is
available to allow HHS to consistently repeat the spend analysis process,
but the agency may consider obtaining such a system.

Extraction	HHS wants its acquisition consolidation initiative to cover as
many of its services buys as possible, and provided its spend analysis
consultant services contract data from one 2002 database. (Contracts for
$25,000 or less were not included.) For its product-focused strategic
sourcing initiative, HHS provided a consultant with data from 2002 on
office supplies, office equipment, office furniture; peripheral
information technology (IT) equipment, and custodial supplies. Furnished
data was extracted from two contract databases, actions for $25,000 or
less, and for more than $25,000. This year, the HHS consultant will
receive 2003 purchase data for all other products, extracted from the same
two databases, as well as data from HHS financial management sources, such
as accounts payable systems.

Supplemental Information 	To identify the top-selling office product
suppliers, HHS provided the consultant data from the agency's bankcard
vendor on all purchase card transactions, as well as other information
from prospective commodity suppliers on estimated sales to agency
purchasers. This enhances awareness of the volume and scope of HHS
purchasing. This year, the HHS consultant will receive 2003 purchase card
data as well. HHS sought no additional spend analysis data for the
services acquisition consolidation.

Organization 	In 2003, both consultants cleansed and validated data that
HHS furnished based on their spend analysis experience and supply market
knowledge. The consultants used the federal product and service
classification to organize categories of commodities and suppliers. This
helped them identify and rank high-dollar, high-volume opportunities to
target for office product strategicsourcing and services acquisition
consolidation. In 2004, the consultant will analyze new data involving
small and larger purchase card and contract buys. The data will be
organized into logical, comprehensive categories of products and supplies
to identify and rank top categories to target for additional strategic
sourcing.

Analysis and strategic goals 	HHS is not analyzing data on a continual
basis. The agency had two consultants analyze data in 2003 and will have
one consultant do a second round of product-focused spend analysis in
2004. HHS is using that analysis to support strategic sourcing decisions
for national discount agreements with a few major suppliers for office
supplies, office equipment, office furniture, IT peripherals, and
custodial supplies. HHS will use the consultant's spend analysis of
services acquisitions to plan areas where existing contracts can be used
by agency division purchasers to leverage buying power and reduce the need
for new stand-alone contracts. As of June 2004, HHS is continuing its
planning and anticipates shared implementation of at least some of the
existing contracts in 2005.

                  Source: GAO analysis of agency information.

         Appendix I: GAO Analyses of Agencies' Spend Analysis Practices

Table 3: Agriculture Spend Analysis Practices

                     Spend Analysis Process Agency practice

Automation	In 2001, Agriculture furnished 2000 data to a spend analysis
consultant, who used commercially available automation tools to compile
the data to expedite the analysis to fulfill a one-time requirement.
Agriculture plans to create an automated spend analysis tool to extract
data from the single acquisition system to begin in October 2006. The data
is expected to be compiled into a new shared data warehouse that will
extract components' procurement data as the new system goes on line. The
warehouse is expected to contain business intelligence and data mining
capability so that the spend analysis process can be repeated at the
agency or component levels.

Extraction	Agriculture wanted the 2001 spend analysis to cover all
products and services procurements other than the nonprocurement-related
agricultural commodity purchases. To accomplish this, the agency extracted
data from three databases-contract actions for $25,000 or less; contract
actions of more than $25,000; and the purchase card management system.
Spend analysis did not include financial management data such as accounts
payable systems.

Supplemental Information 	Agriculture's purchase card management system
obtains data from the bankcard vendor on all purchase card transactions
with agency cardholders. The agency furnished 2000 purchase card data for
the 2001 spend analysis. In 2004, Agriculture obtained up-to-date purchase
card data on agency transactions with high-dollar, high-volume vendors
from its bankcard vendor to supplement the 2001 spend analysis.

Organization 	Agriculture's spend analysis consultant cleansed and
validated 2001 data the agency furnished, based on its spend analysis
experience and supply market knowledge. The consultant used federal
product and service classification to organize agency spending into 15
categories encompassing 52 more detailed subcategories. Information
technology (IT) for example, included telecom equipment, IT equipment,
office technology, and IT/telecom services. The spend analysis consultant
also proposed a feasibility classification strategy that could be used for
more detailed opportunity analyses of high-potential subcategories.

Analysis and strategic goals 	Agriculture is not analyzing data on a
continual basis. Following the completion of the initial spend analysis in
October 2001, Agriculture used the results to support decisions for an
agencywide office supply discount agreement with a major supplier. An
agreement was awarded in 2003 so that Agriculture purchase cardholders
could use the supplier's Web-based catalog to obtain small purchases of a
wide range of office supplies at reduced prices. In 2004, Agriculture
created a temporary subcommittee of procurement managers to review the
2001 spend analysis report and more recent purchase card data where
available. The agency will identify a few more high-dollar, high-volume
product subcategories where purchase card buying power can be leveraged
through discount agreements with major suppliers.

                  Source: GAO analysis of agency information.

Appendix II: Comments from the Department of Veterans Affairs

Appendix III: Comments from the Department of Health & Human Services Appendix
IV: Comments from the Department of Agriculture

            Appendix IV: Comments from the Department of Agriculture

                       Page 37 GAO-04-870 Best Practices

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