Homeland Security: Successes and Challenges in DHS's Efforts to  
Create an Effective Acquisition Organization (29-MAR-05,	 
GAO-05-179).							 
                                                                 
Department of Homeland Security (DHS) organizations are expected 
to work together to protect the United States from terrorism. To 
support this primary mission, DHS has been acquiring billions of 
dollars worth of goods and services. DHS also has been working to
integrate the disparate acquisition processes and systems that	 
organizations brought with them when DHS was created 2 years ago.
GAO was asked to identify (1) areas where DHS has been successful
in promoting collaboration among its various organizations and	 
(2) areas where DHS still faces challenges in integrating the	 
acquisition function across the department. GAO was also asked to
assess DHS's progress in implementing an effective review process
for major, complex investments. 				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-179 					        
    ACCNO:   A20237						        
  TITLE:     Homeland Security: Successes and Challenges in DHS's     
Efforts to Create an Effective Acquisition Organization 	 
     DATE:   03/29/2005 
  SUBJECT:   Accountability					 
	     Counterterrorism					 
	     Federal agency reorganization			 
	     Federal procurement				 
	     Federal procurement policy 			 
	     Homeland security					 
	     Performance measures				 
	     Policy evaluation					 
	     Procurement planning				 
	     Procurement practices				 
	     Risk management					 
	     Strategic planning 				 
	     Policies and procedures				 

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GAO-05-179

United States Government Accountability Office

GAO

                       Report to Congressional Committees

March 2005

HOMELAND SECURITY

  Successes and Challenges in DHS's Efforts to Create an Effective Acquisition
                                  Organization

GAO-05-179

[IMG]

March 2005

HOMELAND SECURITY

Successes and Challenges in DHS's Efforts to Create an Effective Acquisition
Organization

                                 What GAO Found

DHS's disparate organizations have quickly established collaborative
relationships to leverage spending for various goods and services without
losing focus on small businesses. DHS is using strategic sourcing, that
is, formulating purchasing strategies to meet departmentwide requirements
for specific commodities, such as office supplies, boats, energy, and
weapons. By fostering collaboration, DHS has leveraged its buying power
and savings are expected to grow. Also off to a good start is the small
business program, whose reach is felt across DHS. Representatives have
been designated in each DHS procurement office to help ensure that small
businesses have opportunities to compete for DHS's contract dollars.

In contrast, lack of clear accountability is hampering DHS's efforts to
integrate the acquisition functions of its numerous organizations into an
effective whole. DHS remains a collection of disparate organizations, many
of which are performing functions with insufficient oversight, giving rise
to an environment rife with challenges, as shown in the following table.

Challenges Facing DHS's Efforts to Integrate Acquisition Functions Problem
areas Challenges

Overall integration 	New policy emphasizes need for unified, integrated
acquisition organization but allows U.S. Coast Guard and U.S. Secret
Service to remain exempt from integration efforts. Possible workload
imbalances have not been addressed, nor has the lack of enforcement of
program managers' training and certification.

Dual accountability	Some of the primary duties delegated to the Chief
Procurement Officer have also been given to heads of DHS's organizations,
resulting in confusion over who is ultimately accountable for acquisition
decisions.

Chief Procurement Office has lacked sufficient staff to ensure compliance
with DHS's Officer's oversight staff acquisition regulations and policies.

Office of Procurement Created almost 1 year after DHS was formed to
support the Operations' use of organizations that lacked their own
procurement support, interagency contracting Procurement Operations lacks
sufficient staff and relies heavily on

interagency contracting, but missing are management controls to properly
oversee this activity, including fees paid to other agencies.

Source: GAO analysis.

Some of DHS's organizations have major, complex acquisition programs that
are subject to a multitiered investment review process to help reduce risk
and increase chances for successful outcomes in terms of cost, schedule,
and performance. Part of the review process features a knowledge-based
acquisition approach pioneered by successful commercial firms. DHS's
adaptation of this best practices approach, however, does not require two
critical management reviews and is missing some key information before
decisions are made to invest additional resources. In addition, contractor
tracking and oversight is not fully incorporated into DHS policy and
guidance. Finally, some aspects of the review process-which has been under
revision for many months-need clarification.

                 United States Government Accountability Office

Contents

Letter

Results in Brief
Background
Initiatives to Leverage Buying Power and Small Business Program

Have Helped Foster Collaboration among DHS Organizations
Goal of Creating an Integrated Acquisition Organization Is
Hampered by Unclear Policy Decisions and Staffing Disparities

Despite Adoption of Many Best Practices, Review Process for
Major Investments Lacks Key Reviews and Some Management
Controls

Conclusions
Recommendations for Executive Action
Agency Comments and Our Evaluation

                                       1

                                      2 4

                                       7

11

21 28 28 30

Appendix I Scope and Methodology

Appendix II	Comments from the Department of Homeland Security

Appendix III Office of Procurement Operations' Customers

Appendix IV	Summary of Selected Commodity Council Strategic Sourcing
Initiatives

Appendix V Selected Acquisition Management Best Practices

Appendix VI GAO Contacts and Staff Acknowledgments 41

Contacts 41
Staff Acknowledgments 41

Tables

Table 1: DHS's Principal Organizations and Their Missions 5 Table 2:
Sampling Error at the 95 Percent Confidence Level for the Sample of
Interagency Agreements 34 Table 3: Sampling Error at the 95 Percent
Confidence Level for the Sample of Interagency Agreements Fee Payments 34

Figures

Figure 1: DHS's Directorates and Other Principal Organizations and Sources
of Contracting Support 6 Figure 2: Reported Monthly Monetary Benefits
Generated by DHS's Strategic Sourcing Program 9 Figure 3: Comparison of
Fiscal Year 2004 Dollars Obligated per Contracting Staff within Each DHS
Contracting Office 18 Figure 4: General Depiction of DHS's Investment
Review Process for Major, Complex Investments 23 Figure 5: Applying the
Knowledge-Based Approach to DHS's Acquisition Framework 25

Abbreviations

DHS Department of Homeland Security
DOD Department of Defense
MANPADS man-portable air defense systems
US-VISIT U.S. Visitor and Immigrant Status Indicator Technology

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United States Government Accountability Office Washington, DC 20548

March 29, 2005

The Honorable Tom Davis
Chairman
Committee on Government Reform
House of Representatives

The Honorable Susan M. Collins
Chairman
Committee on Homeland Security

and Governmental Affairs
United States Senate

Since it was established, in March 2003,1 the Department of Homeland
Security (DHS) has been faced with assembling 23 separate federal
agencies and organizations with multiple missions, values, and cultures
into one cabinet-level department.2 This mammoth task-one of the
biggest mergers ever to take place within the federal government-
involves a variety of transformational efforts, one of which is to design
and
implement the necessary management structure and processes for
acquiring goods and services. In January 2003, we designated DHS's
implementation and transformation as high-risk because of the size and
complexity of the effort and the existing challenges faced by the
components being merged into the department.3 As it progresses through
the early stages of its merger and transformation, DHS has an opportunity
to put into place the necessary elements to become a 21st century federal
department with a high-quality acquisition organization that effectively
supports its critically important missions.

DHS has some of the most extensive acquisition needs within the U.S.
government. In fiscal year 2004, the department obligated $9.8 billion to
acquire a wide range of goods and services-such as information systems,
new technologies, weapons, aircraft, ships, and professional services. At

1The President signed legislation to create DHS on November 25, 2002.
Homeland Security Act of 2002, Pub. L. No. 107-296, 116 stat. 2135, Nov.
25, 2002.

2When the department was established, 22 agencies and organizations were
brought in; Plum Island Animal Disease Center joined DHS afterward.

3GAO, High-Risk Series: An Update, GAO-03-119 (Washington, D.C.: January
2003).

                    the same time, DHS is working to integrate the many 
                    acquisition processes and systems that the disparate 
					agencies and organizations brought with them. Given DHS's 
					complex merger, you asked us to review the department's 
					progress in establishing an effective acquisition 
					organization. In response to your request, we (1) 
					identified areas where DHS has promoting 
					collaboration among its various organizations and (2) 
					identified  areas where DHS still faces challenges in 
					integrating the acquisition  function across the department. 
					We also assessed the department's progress in implementing
					an effective review process for its major, complex investments.                    
                    To conduct this work, we assessed information from DHS    
                    headquarters and the department's principal organizations
					and compared the information against what our previous work
					be best acquisition practices. We reviewed agency directives, 
                    memorandums, and other documentation; interviewed agency
					officials; and analyzed agency systems and processes. 
					For the purposes of this report, the term acquisition 
					refers to the overall effort to acquire goods and services and 
                    involves a host of activities. Acquisition begins when an 
                    agency establishes its requirements and moves through a
					process that involves soliciting providers of goods and 
					services, awarding contracts, monitoring performance, and 
					handling various contract administration duties. In some 
                    cases, acquisition can include development of a new       
                    product, such as a weapon system or a database system.  
					Acquisition also can be the simple purchase of existing 
					products. The Federal Acquisition Regulation, which 
                    governs acquisitions within the federal government,       
                    defines the term procurement as being synonymous with 
					acquisition. 4 Appendix I presents our scope and 
					methodology in more detail. We conducted our review from 
                    March 2004 through February 2005 in accordance with 
                    generally accepted government auditing standards.  

4Federal Acquisition Regulation 2.1, Definitions.					

Results in Brief 
					             
In the relatively short time since its inception, DHS has 
demonstrated some successes in implementing a strategic 
sourcing program to leverage the department's buying power and in creating a small 
business program.5 

5Strategic sourcing is a process used by leading commercial companies and
a small number of federal agencies to establish an organizationwide
approach to leveraging the organization's buying power and fostering new
ways of doing business.

Both of these efforts have fostered an environment in which DHS's various
organizations work collaboratively toward a common goal. The cornerstone
of the strategic sourcing program is the use of commodity councils, each
consisting of a cross-functional group of acquisition-related personnel
and specialists from the various organizations. These councils are charged
with formulating purchasing strategies to meet departmentwide requirements
for specific commodities, such as office supplies and the department's
vehicle fleet. Even though the councils have faced challenges in gathering
accurate spending data and in managing workload, they have helped spur
collaboration and cooperation across the department. Moreover, DHS already
has reported $14 million in dollar savings as a result of leveraging
resources across DHS, and officials expect the savings to grow over time.
Another area of early success is DHS's small business program, which has
been proactive in working with each organization in the department to
ensure that small businesses have the opportunity to compete for DHS
dollars. In fiscal year 2004, DHS reported that 35 percent of its prime
contract dollars went to small businesses, exceeding its goal of 23
percent.

Notwithstanding these initial successes, DHS's progress in creating a
unified acquisition organization has been slowed by policy decisions that
create ambiguity and by procurement staffing disparities within the
department. An October 2004 management directive emphasizes the need for a
unified, integrated acquisition organization but relies on a system of
dual accountability between the Chief Procurement Officer and the heads of
the department's organizations to make this happen. The Chief Procurement
Officer has been delegated the responsibility to manage, administer, and
oversee all acquisition activity across DHS, but in practice enforcement
of these activities is spread throughout the department with unclear
accountability. Further, the directive states that the U.S. Coast Guard
and U.S. Secret Service are statutorily exempt from its application.
Although the Homeland Security Act provides that both the Coast Guard and
the Secret Service shall be maintained as distinct entities within the
department, we found no reasonable basis to conclude that the directive
could not be made applicable to them. Rather, it appears to be a policy
decision that is likely to hamper efforts to effectively integrate the
acquisition function in DHS. To a great extent, the various acquisition
organizations within the department are still operating in a disparate
manner, with oversight of acquisition activities left primarily up to each
individual organization. Significant disparities in the dollar value of
contracting staff's workloads across DHS have only recently begun to be
addressed. Staffing shortages have led one organization, which handles
about $2 billion in obligations for various departmental organizations, to

rely extensively on outside agencies for contracting support-often for a
fee. We found that this office lacked adequate internal controls to
provide oversight of this interagency contracting activity.

To protect its major, complex investments, DHS's Office of the Chief
Financial Officer has put in place a review process that adopts many best
practices-that is, proven methods, processes, techniques, and activities-
to help the department reduce risk and increase the chances for successful
outcomes in terms of cost, schedule, and performance. One best practice is
an overarching, knowledge-based acquisition approach pioneered by
successful commercial companies. A general principle of this approach is
that program managers should provide sufficient knowledge about important
aspects of their programs at key points in the acquisition process, so
that senior leaders are prepared to make a well-informed investment
decision before an acquisition moves forward. DHS's framework includes key
tenets of this approach but does not require two critical management
reviews to ensure that resources match customer needs and that design
performs as expected. Also missing is important information to help reduce
risk and meet cost and delivery targets for major investments. In
addition, DHS's review process does not fully address how program managers
will conduct effective contractor tracking and oversight. We also found
that program managers lacked sufficient guidance about how to navigate
investment reviews. The review process has been under revision for many
months, and DHS officials could not tell us when the process would be
finalized.

In this report, we are making recommendations to the Secretary of Homeland
Security to help ensure that the department's strategic sourcing program
maintains its current momentum, that acquisition integration efforts
continue, and that DHS leadership has the information it needs to
proactively manage risks that arise during the acquisition of major,
complex systems. In written comments on a draft of this report, DHS
concurred with the recommendations. DHS's comments are included in their
entirety in appendix II.

Background 	The Homeland Security Act of 2002 created DHS, effective March
1, 2003, by merging agencies and organizations that specialize in one or
more aspects of homeland security. Some of those specialties are
intelligence analysis, law enforcement, border security, transportation
security, biological research, critical infrastructure protection, and
disaster recovery. The intent behind DHS's merger and transformation was
to improve coordination, communication, and information sharing among the

multiple federal agencies responsible for protecting the homeland.
Critical to performing the homeland security mission is the effective
interaction between and integration of these agencies and organizations.
Table 1 shows DHS's eight principal organizations and their missions.

Table 1: DHS's Principal Organizations and Their Missions

                       Principal organizationsa Missions

Border and Transportation Security Directorate Ensures security of U.S.
borders and transportation systems

Enforces the nation's immigration laws

Manages and coordinates port-of-entry activities and oversees protection
of government buildings

Emergency Preparedness and Response Directorate 	Prepares for catastrophes
Oversees federal government's national response and recovery strategy

Information Analysis and Infrastructure Protection Identifies and assesses
threats

Directorate 	Recommends measures necessary to protect key resources and
critical infrastructure

Science and Technology Directorate Coordinates DHS's efforts in research
and development

Management Directorate 	Administers DHS's budget, financial management
systems, procurement activities, human resources functions, information
technology systems, facilities management, and performance measurement
efforts

U.S. Secret Service 	Protects U.S. President and other designated
personnel, as well as the country's currency and financial infrastructure,
and provides security for designated national events

U.S. Coast Guard 	Protects the public, the environment and U.S. economic
interests in the nation's ports and waterways, coasts, international
waters, or any maritime region as required to support national security;
has terrorism, counternarcotics border protection roles; and prevents
illegal incursion of U.S. exclusive economic zone

U.S. Citizenship and Immigration Services 	Directs immigration benefit
system and promotes citizenship values by providing immigration services,
such as immigrant and nonimmigrant sponsorship; adjustment of status; work
authorization and other permits; naturalization of qualified applicants;
and asylum or refugee processing

Sources: DHS (data); GAO (analysis).

aThis table does not show the organizations that fall under each of the
five directorates. This table also does not show all organizations that
report directly to the DHS Secretary and Deputy Secretary, such as
executive secretary, legislative affairs, public affairs, chief of staff,
inspector general, and general counsel.

Of the 23 entities that joined DHS from other agencies, only 7 came with
their own procurement support. Providing support to the other entities- as
well as a number of newly created entities, such as the offices of the
Chief Information Officer and Chief Financial Officer-is an eighth office,
the Office of Procurement Operations (Procurement Operations). That office
was not created until January 2004, almost a year after DHS came

into being. Appendix III lists all of the DHS organizations that receive
contracting support from Procurement Operations. Figure 1 shows the
sources of contracting support for DHS's principal organizations.

 Figure 1: DHS's Directorates and Other Principal Organizations and Sources of
                              Contracting Support

Source: DHS (data); GAO (presentation).

To carry out acquisition effectively across a large federal organization
requires an integrated structure with standardized policies and processes,
the appropriate placement of the acquisition function within the
department, leadership that fosters good acquisition practices, and a
general framework that delineates the key phases along the path for a
major acquisition. An effective acquisition organization has in place
knowledgeable personnel who work together to meet cost, quality, and
timeliness goals while adhering to guidelines and standards for federal
acquisition.

  Initiatives to Leverage Buying Power and Small Business Program Have Helped
  Foster Collaboration among DHS Organizations

In the 2 years since its creation, DHS has realized some successes in
opening the lines of communication among the various organizations within
the department through its strategic sourcing and small business programs.
Both of these efforts have involved every principal organization in DHS,
along with strong involvement from the Chief Procurement Officer, and both
have yielded positive results. DHS already has begun to demonstrate that
its strategic sourcing program can foster collaboration across the
department and at the same time maximize the department's overall buying
power. DHS's small business program has a presence departmentwide, and
according to DHS officials, the department exceeded its 23 percent small
business goal for fiscal year 2004.6

Strategic Sourcing Program Has Encouraged Partnerships across DHS and
Begun to Realize Savings

Under the authority of the Chief Procurement Officer, DHS created a
strategic sourcing group in October 2003 to leverage departmentwide
spending for various commodities. The group brought together diverse
expertise from throughout DHS. To identify commodities with the most
potential for savings, strategic sourcing officials conducted a spend
analysis using available acquisition databases, such as the Federal
Procurement Data System, and input from DHS senior management.7 The

6The Small Business Reauthorization Act of 1997 directed the President to
establish a goal of not less than 23 percent of the federal government's
prime contracting dollars to be awarded to small businesses each fiscal
year. The Small Business Administration is charged with ensuring that
federal agencies' goals, in the aggregate, meet or exceed the 23 percent
goal. Pub. L. No. 105-135, 111 stat. 2592, Dec. 2, 1997.

7Spend analysis is a tool that organizations use to acquire knowledge
about how much is being spent for what goods and services, who are the
buyers, and who are the suppliers. GAO, Best Practices: Using Spend
Analysis to Help Agencies Take a More Strategic Approach to Procurement,
GAO-04-870 (Washington, D.C.: Sept. 16, 2004).

following 15 commodities were identified as having potential to leverage
the department's buying power:

o  aviation,

o  boats,

o  business wireless communications,

o  copiers,

o  energy,

o  enterprise software agreements,

o  facilities,

o  facilities security,

o  vehicle fleets,

o  mail,
o  office supplies,

o  professional services,

o  training,

o  uniforms, and

o  weapons.

Consistent with best practices, the strategic sourcing group then
established commodity councils composed of representatives from across
DHS. The commodity councils were assigned responsibility for further
collection and refinement of historical procurement data in order to
better assess future purchasing strategies. Typically, members from the
strategic sourcing group and the DHS organization with the most expertise
in a particular commodity serve as council cochairs. For example, a Coast
Guard official is a cochair for the boats commodity council.

Commodity council cochairs said they were willing to devote time to the
strategic sourcing initiatives because they recognized the unique
opportunity DHS had to move forward to leverage buying power across the
department. Further, the cochairs were virtually unanimous in telling us
that the councils enable stakeholders to build awareness of a particular
commodity and develop strong relationships throughout DHS. They said the
councils foster a sense of community in which the various organizations
can share information, participate in forums, find commonalities, engage
in open and productive communication, and make smarter and more
collaborative business decisions. For example, the weapons commodity
council routinely shares information on ammunition. When one DHS
organization is low on ammunition, others help meet the need. Appendix IV
contains more detail on initiatives that several commodity councils have
undertaken.

In fiscal year 2004, 4 commodity councils-office supplies, boats, energy,
and weapons-reported approximately $14.1 million in cost savings and cost
avoidances, and department officials expect the savings to continue to
grow.8 The savings have resulted from DHS negotiating lower rates with
suppliers and leveraging resources across the department. Figure 2 depicts
the savings trend over a 12-month period. The September 2004 surge
resulted when authorized DHS employees began purchasing pistols through
two large contracts, a strategy spearheaded by the weapons commodity
council.

Figure 2: Reported Monthly Monetary Benefits Generated by DHS's Strategic
Sourcing Program

                             Dollars in millions 6

Source: DHS (data); GAO (presentation).

Some councils are encountering a problem faced by many federal departments
and agencies, namely, a shortage of comprehensive data upon which to draw
an accurate and detailed picture of what is being spent on certain
commodities over time. Strategic sourcing officials and commodity council
members told us that they cannot take full advantage of spend analyses,
nor can they accurately chart historical spending,

8Our review found that the department's strategic sourcing cost savings
methodologies appear reasonable. However, we did not verify the accuracy
of any strategic procurement cost savings reported to us.

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Baseline Data and Workload Demands Have Presented Challenges

because DHS's acquisition databases do not contain enough procurement
data. The problem is compounded by the fact that when parts of existing
agencies, such as the Immigration and Naturalization Service from the
Department of Justice, joined DHS, detailed information on its spending
history was not available. Without an accurate analysis of how DHS
organizations historically purchased a commodity, council members will
likely continue to rely on a patchwork of estimates, as well as
information from suppliers, to glean information on spending history and
develop purchasing strategies for the future.

In addition, some commodity council members have found it challenging to
balance council duties with the demands and responsibilities of their
full-time positions within DHS. Officials told us that council meetings
and activities sometimes stall because council members must shift
attention to their full-time positions. Many commodity councils did not
make much progress during the last month of fiscal year 2004, we were
told, because council members' time was diverted to year-end priorities.
Our prior work on strategic sourcing shows that leading commercial
companies often establish full-time commodity managers to more effectively
manage commodities.9 Commodity managers help commodity councils define
requirements with internal clients, negotiate with potential vendors, and
resolve performance or other issues arising after a contract is awarded
and can help maintain consistency, stability, and a long-term strategic
focus.

Small Business Program Off to Good Start

DHS's small business program has also had initial successes, reporting
that 35 percent of fiscal year 2004 obligations were awarded to small
business prime contractors, exceeding the department's goal of 23 percent.
Although reporting directly to the Deputy Secretary of DHS, the Director
of the Office of Small and Disadvantaged Business Utilization works
closely with the Chief Procurement Officer to emphasize throughout the
department the important public policy objective of small business
inclusion in acquisition activities. The small business office, in
conjunction with the procurement staff across the department, has created
an outreach program that advises small businesses on ways to market goods
and services to DHS. Small business representatives have been designated
in each DHS procurement office, and each office is required to

9GAO, Best Practices: Taking a Strategic Approach Could Improve DOD's
Acquisition of Services, GAO-02-230 (Washington, D.C.: Jan. 18, 2002).

submit a forecast of upcoming contract opportunities above $100,000. DHS
posts this information on a Web site so that small businesses can identify
opportunities to do business with the department. The small business
office has conducted extensive outreach to DHS's business partners through
regular seminars and has established a mentor-protege program that is
designed to motivate and encourage large businesses to provide mutually
beneficial developmental assistance to small businesses.

The Director of the Office of Small and Disadvantaged Business Utilization
and his staff have also been directly involved in DHS's strategic sourcing
efforts to help ensure that, even as the department leverages its buying
power, small businesses continue to have opportunities to compete for
contracts. Several commodity councils have developed strategies to address
this issue. The office supplies council has worked out an arrangement for
DHS employees to purchase office supplies from the Department of Defense's
(DOD) Web-based Emall, where employees can easily identify and order from
small businesses.10 The head of procurement in the Immigration and Customs
Enforcement organization, working closely with the weapons commodity
council, awarded a contract for half of the largest pistol procurement in
the history of U.S. law enforcement to a small business. According to the
chair of the boats council, the council plans to consult with the Coast
Guard's small business specialist to explore future possibilities for
providing opportunities to small businesses.

DHS's goal of integrating the acquisition function more broadly across the
department has not been accomplished, and the introduction of a new policy
has been unsuccessful in breaking down barriers to effective
departmentwide management. An integrated acquisition organization is
essential to the department's success in executing policies and processes
to effectively obligate and administer billions of dollars in acquiring
what DHS needs to accomplish its mission. An October 2004 DHS management
directive emphasizes the need for an integrated acquisition organization
and reiterates the Chief Procurement Officer's responsibility to manage,
administer, and oversee all acquisition activity across DHS and to
establish a qualified acquisition workforce. In practice, these
responsibilities are

  Goal of Creating an Integrated Acquisition Organization Is Hampered by Unclear
  Policy Decisions and Staffing Disparities

10DOD Emall is an Internet-based marketplace that allows DOD and other
federal purchasers to access DOD's wide variety of vendors and catalogs
and acquire off-the-shelf items from the commercial marketplace.

spread throughout the department with unclear accountability. Further
hampering efforts to effectively integrate the acquisition function, the
directive provides that the Coast Guard and the Secret Service are
statutorily exempt from its application. We found no reasonable basis to
conclude that the directive could not be made applicable to them. The
various organizations within DHS continue to operate in a largely
disparate manner, with a lack of centralized oversight of compliance with
the department's acquisition regulation and policies. Staffing disparities
across the procurement organizations have only recently begun to be
addressed. We found that staffing shortfalls led Procurement Operations to
rely extensively on outside agencies for contracting support-often for a
fee-and that this office lacked adequate internal controls to properly
manage this interagency contracting activity. Because of the risks
associated with interagency contracting, we recently designated this
approach as a high-risk issue.11

Not Clear How Recent Management Directive Will Drive Integration of the
Acquisition Organization

In October 2004, the Secretary of DHS signed a management directive
entitled "Acquisition Line of Business Integration and Management." This
directive, the department's principal guidance for "leading, governing,
integrating, and managing" the acquisition function, states that DHS will
standardize acquisition policies and procedures and continue to
consolidate and integrate the number of systems supporting the acquisition
function. It directs managers from each organization to commit resources
to training, development, and certification of acquisition professionals.
The directive also highlights the Chief Procurement Officer's broad
authority, including

o  	management, administration, and oversight of departmentwide
acquisition, financial assistance, strategic sourcing, and competitive
sourcing programs;

o  	promotion of career development and establishment of qualifications,
training, and certification standards for the acquisition and financial
assistance workforce;

o  	development and publication of departmentwide acquisition and
financial assistance regulations, directives, policies, and procedures;

o  designation of all heads of contracting activities; and

11GAO, High-Risk Series: An Update, GAO-05-207 (January 2005, Washington,
D.C.).

o  	development and maintenance of contracting officer warrant and
financial assistance officer programs, including designation of qualified
persons as contracting officers and financial assistance officers.

However, the directive may not achieve its goal of creating an integrated
acquisition organization, because it creates unclear working relationships
between the Chief Procurement Officer and heads of DHS's principal
organizations.12 For example, the Chief Procurement Officer and the
director of Immigration and Customs Enforcement share responsibility for
recruiting and selecting key acquisition officials, preparing performance
ratings for the top manager of the contracting office, and providing
appropriate resources to support the Chief Procurement Officer's
initiatives. The policy leaves unclear how the responsibilities will be
implemented or what enforcement authority the Chief Procurement Officer
has to ensure that initiatives are carried out. In addition, directors are
only required to "consider" the allocation of resources to meet
procurement staffing levels in accordance with the Chief Procurement
Officer's analysis. Agreements have not been developed on how the
resources to train, develop, and certify acquisition professionals in the
principal organizations will be identified or funded. In a relatively new
department like DHS, which is still in the process of instituting
procedures, developing a strong organizational culture, and establishing
clear roles and missions, this concept of dual accountability-absent
effective implementing guidance-may not accomplish the intended goals.

The October 2004 management directive does not apply to the Coast Guard or
the Secret Service, further hampering efforts to integrate the acquisition
organization. The Coast Guard is one of the largest organizations within
DHS, with obligations accounting for about $2.1 billion in fiscal year
2004, nearly 23 percent of the department's total. According to the
directive, the Coast Guard is exempted by statute. We disagree. We are not
aware of any explicit statutory exemption that would prevent the
application of this directive. While several provisions in the Homeland
Security Act would limit the range of management initiatives concerning
the Coast Guard, none of them would appear to be applicable

12Two prior GAO reports, Transportation Security Administration:
High-Level Attention Needed to Strengthen Acquisition Function, GAO-04-544
(Washington, D.C.: May 28, 2004), and Contract Management: INS Contracting
Weaknesses Need Attention from the Department of Homeland Security,
GAO-03-799 (Washington, D.C.: July 25, 2003), address the importance of
having clear lines of authority to ensure that contracting activity is
effective and enables the department to get best value on goods and
services.

in this case. For example, the Homeland Security Act requires the Coast
Guard to be maintained as a distinct entity within the department.13 Other
limitations prevent the transfer of assets,14 alteration of missions,15
and changes in reporting relationships.16 The act also expressly provides
that "the authorities, functions, and capabilities of the Coast Guard to
perform its missions shall be maintained intact and without significant
reduction after the transfer of the Coast Guard to the department." We
find nothing in the directive that contravenes these limitations. Nothing
in the document would reasonably appear to threaten the status of the
Coast Guard as a distinct entity or otherwise impair its ability to
perform statutory missions.

We raised the question of statutory exemption with the DHS General
Counsel, who shared our assessment concerning the explicit statutory
exemptions. He viewed the applicability of the management directive as a
policy matter, noting that "the determination of whether the application
of all or part of this [management directive] would impact the [Coast
Guard's] ability to perform its mission is not a legal matter and is more
appropriately made by DHS policy officials." We agree that DHS officials,
with sufficient reasons, could make a policy decision that a particular
management directive impacts the Coast Guard's ability to perform its
missions. In this instance, however, we found no evidence that such a
decision had been made.

The directive also provides that the Secret Service is exempted by
statute. As with the Coast Guard, we are unaware of any specific statutory
exemption that would prevent the application of the directive. The
Homeland Security Act requires the Secret Service to be maintained as a
distinct entity within the department.17 The 2005 Homeland Security
Appropriations Act reiterates this requirement and imposes additional

13Pub. L. No. 107-296, S: 888(b) November 25, 2002.
14Id. at S: 888(d).
15Pub. L. No. 107-296, S: 888(e), November 25, 2002.
16Id. at S:S:104 and 888(g).
17Pub. L. 107-296, S: 521, November 25, 2002.

limitations on altering reporting relationships.18 Given the nature of the
management directive, we also conclude that there is no apparent reason to
exempt the Secret Service from its application.19

In Environment of Largely Disparate Procurement Organizations, Oversight
of Acquisition Activity Lacking

DHS's principal organizations are, to a large extent, still functioning
much as they did in premerger days with regard to acquisition-related
functions. Embedded within seven of the procurement organizations are, for
the most part, the same contracting staffs that joined DHS from their
former agencies. The eighth organization, Procurement Operations, created
to meet the needs of the many DHS organizations that do not have colocated
procurement support, has a direct reporting chain to the Chief Procurement
Officer.

Until recently, the Chief Procurement Officer, whom DHS's top leadership
delegated with the key responsibility of ensuring compliance with the
department's acquisition regulation and policies, had only two staff
members to carry out this duty. Consequently, the department's acquisition
oversight program relies extensively on self-assessments by personnel in
each procurement organization. A component of the oversight program is a
recent initiative to review DHS acquisition plans, according to dollar
thresholds, and to perform on-site evaluations of each procurement
organization. The fiscal year 2005 budget provided the Chief Procurement
Officer with five additional staff, but it is too soon to tell whether
this number will be adequate to effectively implement the oversight
program. Further, it remains unclear what the result would be if an
organization were found not to be in compliance with DHS's acquisition
regulation and policies.

Our prior work shows that in a highly functioning acquisition
organization, the chief procurement officer is in a position to oversee
compliance with

18Pub. L. 108-334, S: 528, October 18, 2004. "None of the funds available
in this Act shall be available to maintain the United States Secret
Service as anything but a distinct entity within the Department of
Homeland Security and shall not be used to merge the United States Secret
Service with any other department function, cause any personnel and
operational elements of the United States Secret Service to report to an
individual other than the Director of the United States Secret Service, or
cause the Director to report directly to any individual other than the
Secretary of Homeland Security." Department of Homeland Security
Appropriations Act, 2005, Pub. L. No. 108-334, S: 521, 118 stat. 1298,
Oct. 18, 2004.

19Given the similarity of the issue pertaining to the Coast Guard, we did
not separately seek the view of the DHS General Counsel concerning the
exemption of the Secret Service.

acquisition policies and processes by implementing strong oversight
mechanisms.20 Adequate oversight of acquisition activities across DHS is
imperative, in light of the department's mission and the problems that
have been reported by us and inspectors general for some of the large
agencies and organizations within the department. These reports have
highlighted the lack of important management controls for monitoring
contractors and ensuring efficiencies and effectiveness in the acquisition
process. For example, the Department of Homeland Security Inspector
General reported that during its first year of operation, the
Transportation Security Administration relied extensively on contractors
to accomplish its mission. It also found that contracting officers wrote
contracts without clearly defined deliverables, and on occasion,
contractors themselves were permitted to determine requirements and define
deliverables. As a result, the cost of those initial contracts
ballooned.21 The Transportation Security Administration is in the process
of devising policies and procedures that require adequate procurement
planning, contract structure, and contract oversight. We have also
reported that the former U.S. Immigration and Naturalization Service did
not have the basic infrastructure-including oversight of procurement
activities-to ensure that its contracting office was effective. DHS's
Inspector General recently reported that the Federal Emergency Management
Agency discovered it has not been reporting or tracking procurements
handled by its field offices.22

Challenges to Effective In July 2003, we recommended that DHS develop a
data-driven assessment Implementation of of the department's acquisition
personnel, resulting in a workforce plan Acquisition Workforce that would
identify the number, location, skills, and competencies of the Plan
workforce.23 DHS concurred with the recommendation and has drafted a

plan, based on best practices, that defines the acquisition workforce,
focuses on the need for continuous training, and implements a
certification program for contracting officials, program managers, and

20GAO-02-230 and GAO-04-544.

21DHS Office of the Inspector General, Semiannual Report to the Congress,
(Washington, D.C.: April 30, 2003), and Review of the Status of Department
of Homeland Security Efforts to Address Its Major Management Challenges,
OIG-04-21 (Washington, D.C.: March 2004).

22OIG-04-21.

23GAO-03-799.

contracting officers' technical representatives.24 However, the department
faces challenges in implementing the plan.

As part of its acquisition workforce planning efforts, the department has
not conducted an assessment of whether contracting staff within DHS are
appropriately distributed for the varying workloads in each procurement
organization. Our analysis shows that some disparities may exist. We
divided the obligated fiscal year 2004 dollars for each contracting office
by the number of contracting staff. While this approach is limited in that
it does not take into account the complexity of the acquisitions being
performed, it can provide senior leadership with an indication of whether
disparities may exist in the contracting workforce. Figure 3 shows the
amount of contracting obligations per contracting staff within DHS
contracting activities.

24Contracting officers' technical representatives represent the
contracting officer in monitoring the contractor's performance.

Figure 3: Comparison of Fiscal Year 2004 Dollars Obligated per Contracting
Staff within Each DHS Contracting Office

Dollars in millions 110

100 90

80

70

60

50

40

30

20

10 0

Customs and Customs EnfderBor

ansportation rT

Security Administration

                   otection ency Preparedness Secret Service

cementor

Enfaining CenterrT

wcement

oror

ment - Office ofeUndersecretar g

                     Immigration and dCoast Guar Federal La

y f

                                       Pr

S..U

S..U

ManaocurPr

gEmer

Source: DHS (data); GAO (analysis and presentation).

As of September 2004, Procurement Operations had only 19 contracting staff
to support a number of DHS organizations that, taken together, accounted
for about 21 percent, or almost $2 billion, of DHS's fiscal year 2004
obligations. That year, Procurement Operations contracting staff on the
average handled $101 million per employee, whereas the contracting staff
for the Federal Law Enforcement Training Center on the average handled
close to $2.7 million per employee. Disparities such as this may indicate
the need to assess the numbers of contracting staff across the department
to determine whether imbalances exist and whether actions are needed to
correct the imbalances.

Another challenge to effectively implementing the acquisition workforce
plan pertains to the lack of enforcement of DHS's certification program.
While the plan calls for program managers responsible for acquisitions to
be certified in accordance with DHS's established training and experience
requirements, in practice, the means to enforce compliance is lacking. In

January 2005, the Director for the Acquisition Workforce Program, within
the Office of the Chief Procurement Officer, determined that only 22
percent of the identified programs in the department had program managers
that had documented that they had the training and experience requirements
for certification. While the Office of the Chief Procurement Officer has
issued a management directive requiring program mangers to meet the
department's certification and training requirements-and the number of
certified program managers has been increasing- accountability for
complying with the certification program rests with the principal
organizations to whom the program managers report. At present, according
to DHS officials, no mechanism is in place to ensure that program managers
take the required training and obtain certification from the Chief
Procurement Officer.

Struggling with Staffing Shortfalls, Procurement Operations Has Relied on
Interagency Agreements but Failed to Follow DHS Guidance in Doing So

Established almost 1 year after DHS was formed and tasked with providing
contracting support to the department organizations that did not have
their own contracting support, Procurement Operations has struggled to
manage its almost $2 billion workload because of staffing shortfalls.
Lacking in-house capability, Procurement Operations has turned extensively
to interagency contracting, and we found that management controls were not
in place to effectively oversee this activity. Interagency contracting
occurs when a federal agency obtains supplies or services through another
federal agency, either by placing orders on existing contracts that have
already been awarded by the other agency, or by asking the other agency to
award and administer contracts or issue and administer task orders on its
behalf. Use of these contracts demands a high degree of business acumen
and flexibility on the part of the federal acquisition workforce.

We found that Procurement Operations had transferred almost 90 percent of
its obligations to other federal agencies through interagency agreements
in fiscal year 2004. For example, DHS transferred $12 million to the
Department of the Interior's National Business Center to obtain contractor
operations and maintenance services at the Plum Island Animal Disease
Center. Interior charged DHS $62,000 for this assistance. While some of
the interagency agreements were for contracting support, others were for
program support, such as sending funds to Department of Energy
laboratories for providing a threat and capability assessment.

DHS has issued a management directive that sets forth a number of
requirements meant to ensure that internal controls are in place when
using interagency contracting. Based on a random sample of

136 interagency agreements between Procurement Operations and outside
agencies, we found that the office had not complied with the requirements
in the directive.25 We can project, for example, that in fiscal year 2004:

o  	94 percent of Procurement Operations' files did not document that the
contracting staff had conducted the required analysis of alternatives to
justify the decision to pay an outside agency for contracting support;

o  	47 percent of the files did not identify the contracting officer's
technical representative, although this information is required to be in
the files;

o  	35 percent of the files did not contain the required determination and
findings;26 and

o  	96 percent of the files lacked an indication that contractor oversight
had been performed.

Further, we found that Procurement Operations was not tracking how much it
is paying in fees to other agencies for contracting support. On the basis
of our sample, we found that the office had spent $12.9 million in fees in
fiscal year 2004.

While the oversight problems we identified are in large part due to the
staffing shortages in the office, we also found evidence that contracting
staff lacked basic information on how to use interagency contracting. For
example, a memo from Procurement Operations to DHS's Director of
Acquisition Policy and Oversight requested clarification on what
documentation is required in order to use another agency for contracting
support. In September 2004, DHS's Office of General Counsel reviewed 20 of
Procurement Operations' interagency agreements and found that 16 were not
legally sufficient. For example, 13 agreements appeared to require
performance by a contractor, but appropriate documentation was not
included in the contract files. Three were insufficient because it was
unclear whether the servicing agency would perform cost/price analysis and
trade-off, or whether Procurement Operations had conducted a technical
competition and expected the servicing agency to award without a
trade-off. According to a Procurement Operations official, a fiscal year

25See appendix I for details on our methodology and sampling error rates.

26Determination and findings is a written approval by an authorized
official to take certain contract actions. The determination is a
conclusion or decision supported by the findings. The findings are
statements of fact or rationale essential to support the determination.

2005 initiative for the office is to establish a policy for processing
interagency agreements that provides clear guidance to staff.

Procurement Operations to Use Working Capital Fund to Increase Staffing
Levels

  Despite Adoption of Many Best Practices, Review Process for Major Investments
  Lacks Key Reviews and Some Management Controls

Since January 2004, Procurement Operations has increased its staffing
level from 7 to 42 employees, and it plans to build to 127 staff in fiscal
year 2005. Rather than use direct appropriations to fund the additional
positions, the office plans to require the DHS organizations that rely on
its contracting services to contribute to a working capital fund, to be
replenished on a no-profit basis with payments based on the extent to
which the various organizations use the office's support. Although the DHS
budget for fiscal year 2005 includes $8.9 million to add contracting staff
through the fund, we found that the mechanics of making the fund viable
have not been worked out. Currently, Procurement Operations is negotiating
agreements with each organization it supports to determine the terms and
conditions of support and the dollar level to be contributed to the fund.
According to DHS officials, this negotiation process has been problematic.
For example, at the time of our review, the Science and Technology
Directorate and Procurement Operations were having difficulty reaching a
decision about who would be responsible for hiring the contracting staff
that would support the directorate. As of January 2005, no agreements had
been reached.

Some DHS organizations have large, complex, and high-cost acquisition
programs that need to be closely managed. For example, the Bureau of
Customs and Border Protection's Automated Commercial Environment system,
which is a new trade processing system intended to improve the movement of
goods imported into the United States, is projected to cost $5 billion,
and the Coast Guard's Deepwater Program is expected to cost $17 billion
and take 2 to 3 decades to complete.27 To review major, complex
investments such as these (referred to as level 1 investments), DHS's
Office of the Chief Financial Officer has put in place a multitiered
process. DHS has taken positive steps in creating a knowledge-based
framework, or philosophy, for managing major investments; however, it
still lacks key reviews and deliverables-both best practices-within this
framework to ensure that cost and schedule estimates for major investments
are as accurate as possible. These reviews take place at

27At the time of our review, the Coast Guard had revised its requirements
for the Deepwater program based on the new homeland security mission. We
did not have information on the new cost of the program.

critical junctures in the process and include demonstrating knowledge
about technologies, design, and manufacturing processes. In addition, we
found that contractor oversight, an important tool for managing programs,
is not receiving high-level attention in the review process. Finally, we
identified several areas of confusion surrounding the mechanics of
implementing the process from a program manager's perspective. The
management directive on the review process has been under revision for
many months, and DHS officials could not tell us when the directive would
be finalized.

Key Elements of DHS's Investment Review Process

DHS's investment review process involves several different levels of
review, depending on the dollar threshold and risk level of the program.
The Investment Review Board makes decisions on level 1 investments with
prior review and input from the Joint Requirements Council, which in turn
seeks input from other DHS specialists who have expertise in such areas as
asset management and information technology. In classifying investments as
level 1, DHS considers the following criteria: contract costs; importance
to DHS strategic and performance plans; high development, operating, or
maintenance costs; high risk; high return; and significance in resource
administration. Investments classified as levels 2, 3, or 4 are considered
lower-level acquisitions and follow different investment review processes.
In addition, many of the major DHS organizations, such as the
Transportation Security Administration and the Coast Guard, have their own
review processes, which occur prior to higher-level review in the
department. Figure 4 illustrates who is involved in the decision-making
process and the levels of review.

Figure 4: General Depiction of DHS's Investment Review Process for Major,
Complex Investments

Source: DHS (data); GAO (analysis and presentation).

Although Policy Governing the Review Process Has Established a Solid Risk
Management Framework, Additional Best Practices Would Benefit DHS

DHS has adopted several best practices from lessons learned from leading
commercial companies and successful federal programs that, if applied
consistently, could refine its ability to reduce risk to meet cost and
delivery targets for major investments. One of the best practices is a
knowledge-based approach, or framework, for managers to hold reviews at
key decision points in order to reduce risk before investing resources in
the next phase of a program's development. The investment review policy
provides guidance to program managers to provide knowledge about important
aspects of a product at key points in the acquisition process and
encourages them to reduce technology risk through demonstration prior to
beginning a project. The policy also encourages program managers to
demonstrate a product's design with critical design reviews and reduce
manufacturing risk prior to a production decision. However, we found,
based on our extensive body of work on this knowledge-based approach, that
additional program reviews and knowledge deliverables could be
incorporated into the process as internal controls to better position DHS
to make well-informed decisions on its major, complex investments.

Figure 5 generally depicts the major phases of the knowledge-based
approach and the positioning of three knowledge points, or gates, when key
reviews are scheduled. The figure applies the knowledge-based approach to
DHS's investment review framework and displays an exclamation mark where
key reviews or information are missing.

Figure 5: Applying the Knowledge-Based Approach to DHS's Acquisition
Framework

Start of Start of program production

Knowledge point 1

Technologies, schedule, funding, and other resources match customer needs

Knowledge point 2

Design performs as expected

Knowledge point 3

Product must be producible within cost, schedule, and quality targets and
demonstrated to be reliable before production begins

Start of Start of program production

Knowledge point 1

Aligns with knowledge-based approach but some key information for matching
resources to customer needs is missing

Knowledge point 2

Missing is the knowledge point that ensures design performs as expected;
also missing is some of the information needed before deciding to proceed
to production

Knowledge point 3

Knowledge point is discretionary; a required review does not occur until
after low-rate production is well underway

              Source: DHS (data); GAO (analysis and presentation).

As shown in figure 5, DHS review points do not fully align with the
knowledge-based approach. For example, DHS does not require a review to
ensure that an investment's design performs as expected before investing
in a prototype. In addition, DHS's mandatory review to proceed to
production does not occur until after low-rate initial production is well
under way. DHS does have a review for low-rate initial production;
however, it is at the discretion of the Investment Review Board. Our past
work has shown that successful investments reduce risk by ensuring that
high levels of knowledge are achieved at these key points of development.
We found that investments that were not reviewed at the appropriate points
faced problems-such as redesign-that resulted in cost increases and
schedule delays.

We also found that some critical information is not addressed in DHS's
investment review policy or the guidance provided to program managers. In
other cases, it is made optional. For example, before program start
(knowledge point 1) is approved, DHS policy requires program managers to
identify an acquisition's key performance requirements and to have
technical solutions in place. This information is then used to form cost
and schedule estimates for the product's development to ensure that a
match exists between requirements and resources. However, DHS policy does
not establish cost and schedule estimates for the acquisition based on
knowledge from preliminary designs. At knowledge point 2, while DHS policy
requires program managers to identify and resolve critical operational
issues before proceeding to production, initial reviews-such as the system
and subsystem reviews-are not mandatory.

Not all investments require the use of every piece of information included
under a knowledge-based approach. Many of DHS's major investments use
commercial, off-the-shelf products that do not require the same level of
review as a complex, developmental investment would. However, DHS is
investing in a number of major, complex systems, such as the Coast Guard's
Deepwater Program and the U.S. Visitor and Immigrant Status Indicator
Technology (US-VISIT),28 which incorporate new technology and therefore
require greater adherence to the knowledge-based approach in order to
ensure risk is reduced before committing to the next phase of the
investment. In addition, the added reviews and information included in the
knowledge-based approach may still be required for programs that use
existing technology, such as the Counter-MANPADS program, which involves
placing military technology on commercial aircraft.29

In addition to the knowledge-based approach and its associated controls,
DHS's investment review policy and guidance adopt a number of other
important acquisition management practices, such as requiring program

28US-VISIT is a governmentwide program to collect, maintain, and share
information on foreign nationals. The program's goals are to enhance
national security, facilitate legitimate trade and travel, contribute to
the integrity of the U.S. immigration system, and adhere to U.S. privacy
laws and policies.

29Counter-MANPADS (man-portable air defense systems) is a protective
system for U.S. commercial aircraft against shoulder-fired missiles. We
recently issued a report that recommended additional information be
provided at key decision points. See GAO, The Department of Homeland
Security Needs to Fully Adopt a Knowledge-based Approach to Its
Counter-MANPADS Development Program, GAO-04-341R (Washington, D.C.: Jan.
30, 2004).

managers to submit acquisition plans and project management plans.
However, a key practice, contractor tracking and oversight, is not fully
incorporated in the policy and guidance. We have cited the need for
increased contractor tracking and oversight for several large DHS
programs. For example, we previously reported that the Coast Guard's
Deepwater program needed increased management and contractor oversight.
One activity of contract tracking and oversight requires that a
quantitative set of software and system metrics are used to define and
measure product quality and contractor performance. The Coast Guard had
not developed measurable performance goals or adhered to effective
procedures for holding the contractor accountable for its ongoing
performance. In addition, we previously recommended that the US-VISIT
program should improve attention to implementing acquisition best
practices. While DHS agreed, and the US-VISIT program office has assigned
responsibility for implementing the recommended management controls, the
department has not yet developed explicit plans or time frames for
defining and implementing acquisition best practices. A list of selected
acquisition management practices and required activities is in appendix V.

As Review Process Matures, Some Mechanics Still to Be Worked Out

The investment review process has been under revision for many months.
According to DHS officials, the changes will include shifting
responsibilities of some tiers in the review process and increasing the
dollar threshold for level 1 investments. To date, the new process has not
been finalized, and officials could not provide us with a time frame for
completion. In the meantime, we found unclear guidance and confusion about
several aspects of the process. In some cases, the confusion has resulted
in key stakeholders, such as the Chief Procurement Officer, not receiving
materials in time to conduct a thorough review and provide meaningful
feedback prior to investment review meetings.

The issues we found include the following:

o  	Program managers have been provided with only draft guidance regarding
the information they are required to submit and the time frames for
submissions. This draft guidance is, in some cases, unclear.

o  	Some DHS officials noted that their submissions to the review board
had been rejected on an inconsistent basis with no explanation.

o  	Program managers have not received formal training on the investment
review process. Officials told us that some program managers have been
unaware of when to submit information about their programs for review.

Conclusions

Recommendations for Executive Action

o  	In practice, major investments in services are exempt from the review
process and are only reviewed when done as part of a capital investment.
Officials from the Office of the Chief Financial Officer who are in charge
of the process told us that services investments are reviewed only when
they are part of a capital investment because these acquisitions are not
complex and therefore do not need the same level of scrutiny reserved for
the acquisition of goods.

Currently, program managers receive assistance in developing their review
board submissions from a small number of staff in the Chief Financial
Officer's Office of Program Analysis and Evaluation at the beginning of a
program and at DHS's key decision points. However, because of limited
resources, the office has only been able to provide limited support to
programs to assist them in completing their submissions.

In the 2 years since its merger, DHS has taken strides toward putting in
place an acquisition organization that contains many promising elements,
but the steps taken so far are not enough to ensure that the department is
effectively managing the acquisition of the multitude of goods and
services it needs to meet its mission. More needs to be done to fully
integrate the department's acquisition function, to pave the way for the
Chief Procurement Officer to fully carry out his responsibilities in a
modern-day acquisition organization, and to put in place the strong
internal controls needed to effectively manage interagency contracting
activity and large, complex investments. Unless DHS's top leaders address
these challenges, the department is at risk of continuing to exist with a
fragmented acquisition organization that provides stopgap, ad hoc
solutions. DHS has an opportunity, while it is still involved in
transformational efforts, to avoid the complications that plague
acquisition efforts in other longestablished federal departments.

To help ensure that DHS receives the goods and services it needs at the
best value to the government, we recommend that the Secretary of Homeland
Security take the following six actions:

o  	establish a structure to ensure continued support for commodity
councils, such as appointing full-time dedicated commodity managers, to
ensure that the commodity councils develop long-term strategies, maintain
momentum, and continue to realize savings;

o  	provide the Office of the Chief Procurement Officer with sufficient
resources and enforcement authority to enable effective, departmentwide
oversight of acquisition policies and procedures;

o  	conduct a departmentwide assessment of the number of contracting staff
and, if a workload imbalance is found, take steps to correct it by
re-aligning resources;

o  	direct higher-level management attention to the implementation of the
working capital fund (which is to be used to fund contracting staff for
the Office of Procurement Operations) by, for example, determining the
level of contracting support needed by the organizations relying on this
office, ensuring that appropriate funds are committed to hire needed
contracting staff, and ensuring that funds are available on an ongoing
basis for continuity;

o  	revise the October 2004 management directive "Acquisition Line of
Business Integration and Management" to eliminate reference to the Coast
Guard and Secret Service being statutorily exempt from complying; and

o  	ensure that DHS's management directive on interagency agreements is
followed and that fees paid to other agencies are tracked.

To help ensure that DHS leadership is aware of risks as they arise during
the acquisition of major, complex systems, we recommend that the Secretary
of Homeland Security take the following seven actions:

o  in making revisions to the investment review policy:

o  	require for all complex, developmental investments a formal design
review between the integration and demonstration of a program to ensure
that the design is stable and has been demonstrated through prototype
testing;

o  	require for all complex, developmental investments a review before
initial production;

o  	require that program managers supply additional information-such as
cost and schedule estimates based on results of a preliminary design
review and critical design review-when their major, complex programs are
reviewed; and

o  	require program managers to specifically address contractor oversight
in their submissions to investment review boards.

o  	ensure that stakeholders, including acquisition officials in the
Office of the Chief Procurement Officer, have adequate time to review
investment submissions and provide formal input to decision-making review
boards;

o  	implement training for program managers on the investment review
process that emphasizes the importance of a knowledge-based approach; and

o  require that major acquisitions of services be subject to oversight by
the

  Agency Comments
  and Our Evaluation

investment review board.

We provided a draft of this report to DHS for review and comment. In
written comments, DHS generally agreed with our facts and conclusions and
concurred with all of our recommendations. Regarding three of our
recommendations on the investment review process, DHS stated that the
actions exist in current directives and are already being done. We
disagree. Our work demonstrated that DHS's review points do not fully
align with the knowledge-based approach. For example, DHS's mandatory
review to proceed into production does not occur until after low-rate
initial production is well under way, and the review for starting low-rate
initial production only occurs at the discretion of the Investment Review
Board. Also, DHS's framework lacks the knowledge deliverables necessary at
each key review to ensure that cost and schedule estimates for major
investments are as predictable as possible. Our past work has shown that
investments that were not reviewed at the appropriate points faced
problems that resulted in cost increases and schedule delays.

The department's comments are reprinted in appendix II.

As arranged with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days from
its issue date. We are sending copies of this report to other interested
congressional committees, the Secretary of the Department of Homeland
Security, and the Director of the Office of Management and Budget. In
addition, the report will be available on GAO's Web site at
http://www.gao.gov.

If you or your staff have any questions concerning this report, please
contact me at (937) 258-7915. Staff making major contributions to this
report are listed in appendix VI.

Michael J. Sullivan, Director Acquisition and Sourcing Management

                       Appendix I: Scope and Methodology

To identify the areas where the Department of Homeland Security (DHS) has
been successful in promoting collaboration among its various
organizations, we interviewed senior acquisition officials at DHS
headquarters and analyzed pertinent documents. We obtained information
from the Office of Strategic Sourcing and Acquisition Systems to analyze
how DHS has used strategic sourcing to leverage the department's buying
power. We interviewed senior strategic sourcing officials at DHS
headquarters to obtain information on how they identified the commodities
with potential for savings. We reviewed studies, policies, guidance, and
other documents related to ongoing or proposed strategic sourcing
initiatives that leveraged buying power, cut costs, or achieved other
performance benefits. Our review found that the department's strategic
sourcing cost savings methodologies appear reasonable; however, we did not
verify the accuracy of any strategic procurement costs savings reported to
us. We asked senior strategic sourcing and commodity council participants
about potential barriers to employing strategic sourcing at DHS. We
interviewed the Director, Office of Small and Disadvantaged Business
Utilization, and procurement officials within the department. We obtained
policies, memorandums, and other documents from the small business office,
procurement organizations, and the U.S. Small Business Administration.

To determine areas where DHS faces challenges in integrating the
acquisition function, we reviewed DHS organizational charts to gain
insight into where the procurement offices fall in the hierarchy and to
determine the lines of responsibility and authority between the various
stakeholders in the acquisition process. We reviewed DHS policies,
guidance, and procedures governing acquisition and analyzed internal audit
reports, when available, to determine if those policies and procedures
were being followed. We obtained statistics from DHS's Office of the Chief
Procurement Officer on the department's procurements and the acquisition
workforce. We interviewed procurement policy officials at headquarters and
conducted interviews with personnel in each of the procurement
organizations. To assess DHS's effectiveness in managing its acquisition
workforce, we interviewed contracting and human resource officials at DHS
headquarters. We analyzed DHS's processes and procedures for certifying
program managers, warranting contracting officers, and tracking the
acquisition workforce training. Lastly, we reviewed previous GAO work
regarding best acquisition practices for organizational alignment and
oversight.

Because the Office of Procurement Operations has, by far, the highest
level of interagency contracting activity in the department, we examined

Appendix I: Scope and Methodology

the office's database of contracts to gain an understanding of the general
scope of activity involving interagency agreements. We randomly selected
and then reviewed 136 interagency agreement contract files. We interviewed
officials responsible for the data to ensure that the system they use to
track procurement activity was adequate for identifying the sample
population. We reviewed the interagency agreement contract files to assess
key aspects of the acquisition process-such as a signed determination and
findings in accordance with the Federal Acquisition Regulation,
acquisition planning, and interagency agreement contract administration,
including contractor oversight. We held follow-on discussions with the
Office of Procurement Operations to discuss discrepancies noted in the
files. Further information on our methodology and sampling error rates is
as follows:

o  	In fiscal year 2004, the Office of Procurement Operations
predominately obtained contracting services for its customers through the
issuance of interagency agreements with other government agencies. We drew
our sample from an original population of 984 agreements. Of the 150 items
we initially sampled, the department deleted 14 of these agreements and
withdrew them from the data. As a result, we adjusted the population of
agreements to which we are making estimates to 892 agreements. All
estimates are to these 892 agreements based upon a sample size of 136
agreements. In addition, 4 files were missing and were not able to be
reviewed, and one agreement was a duplicate. This resulted in only 131
files being reviewed. As we conducted our reviews, the agency became
better at recording the agreements that should be included in its
database. Currently, Procurement Operations reports that 1,104 agreements
are contained in its records and total $1.8 billion.

o  	We reviewed the files and documents for these 131 agreements, using as
our criteria the department's directive on interagency agreements. The
following projections are made from our sample of 136 agreements. The
estimates from a statistical sample are always subject to some uncertainty
because the entire collection is not reviewed. This uncertainty is called
sampling error. Tables 2 and 3 show the sampling errors for certain
factors relating to the issuance of interagency agreements.

Appendix I: Scope and Methodology

  Table 2: Sampling Error at the 95 Percent Confidence Level for the Sample of
         Interagency Agreements Number Percentage Observation Estimate

Sampling error Estimate

Sampling error

               Analysis of alternatives not conducted             840 36 94.1 
Contracting officer's technical representatives not identified 420 76 47.1 
              Determination and findings not prepared             308 72 34.6 
         No indication that contractor oversight performed        853 31 95.6 

                        Source: GAO (data and analysis).

  Table 3: Sampling Error at the 95 Percent Confidence Level for the Sample of
Interagency Agreements Fee Payments Number Dollars Observation Estimate Sampling
                         error Estimate Sampling error

    Fees paid on use of interagency agreements 433 76 $12,991,079 $2,280,189

Source: GAO (data and analysis).

To assess the department's progress in implementing a review process for
major, complex systems, we compared DHS's acquisition policies for major
acquisitions to our knowledge-based approach. We used information from
several of our prior reports that examine how commercial best practices
can improve outcomes for acquisition programs. Specifically, we compared
and contrasted DHS's investment review process with the best practices for
commercial acquisitions identified in our past reports. Our analysis
focused on whether DHS's policies contained the measurable criteria and
management controls necessary for minimizing cost, schedule, and
performance risks. To clarify the content of the investment review
process, we met with various DHS officials from the Office of the Chief
Procurement Officer and the Office of Program Evaluation and Analysis
within the Office of the Chief Financial Officer. We also discussed the
review process with officials from DHS procurement organizations and
collected reports and analyzed available program data on the current
status of major acquisitions being carried out by DHS.

We conducted our review from March 2004 through February 2005 in
accordance with generally accepted government auditing standards.

Appendix II: Comments from the Department of Homeland Security

Appendix II: Comments from the Department of Homeland Security

Appendix II: Comments from the Department of Homeland Security

Appendix III: Office of Procurement Operations' Customers

Chief Financial Officer
Chief Human Capital Officer
Chief Information Officer
Chief Procurement Officer
Chief of Administrative Services
Chief of Staff
Citizenship and Immigration Services
Citizenship and Immigration Services Ombudsman
Civil Rights and Civil Liberties
Communications Director
Counter Narcotics Officer
Deputy Secretary
Executive Secretary
General Counsel
Headquarters Operational Integration Staff
Homeland Security Advisory Council
Homeland Security Operations Center
Immigration Statistics
Information Analysis and Infrastructure Protection
International Affairs
Office of the Secretary
Legislative Affairs
National Capital Region
Office of the Under Secretary--Border and Transportation Security
Press Secretary
Privacy Officer
Private Sector
Public Affairs
Science and Technology
Security
State and Local Government Coordination (includes Office of

Domestic Preparedness)
Under Secretary for Management
White House Liaison

Appendix IV: Summary of Selected Commodity Council Strategic Sourcing
Initiatives

               Commodity council Strategic sourcing actions taken

Office Supplies Leverages DHS's purchasing power and reduces amount spent
on office supplies:

o  	For its main strategic sourcing initiative, this council partnered
with the Department of Defense's Electronic Mall (DOD Emall). DOD Emall is
an Internet-based catalog ordering system that provides 24hour-a-day,
7-day-a-week access to over 200 small and large office supply vendors.

o  	Because many military services also purchase office supplies through
DOD Emall, DHS can take advantage of large volume discounts to increase
its buying power.

o  	As of June 1, 2004, DHS mandated all of its purchase cardholders to
exclusively use DOD Emall to buy office supplies. As a result, DHS has
already become the third-largest federal government user of DOD Emall. For
the 4-month period starting June 1, 2004, DHS spent over $14.5 million on
DOD Emall, representing 16.7 percent of the total dollars spent on Emall.

o  	Before the full implementation of DOD Emall, the council also
generated savings by using an office supplies blanket purchase agreement
that the Transportation Security Administration had in place to provide
office supplies to other DHS principal organizations.

o  Through September 30, 2004, the council estimated cost savings of $8
million.

Boats 	Establishes standard boat procurements to decrease life cycle
costs, facilitate interoperability, reduce training burden, and provide
immediate cost savings:

o  	For example, Customs and Border Patrol needed six boats in fiscal year
2004. Instead of creating a new contract, the council explored whether
there were any existing contract vehicles within DHS that could satisfy
the need.

o  	The council purchased the six boats through an existing Coast Guard
contract and took advantage of large volume discounts.

o  	As a result of these strategic sourcing efforts, the council was able
to acquire each boat for $50,000 less than anticipated, resulting in a
total of $300,000 in cost savings.

Weapons Identifies and consolidates emerging firearms and ammunition
requirements for DHS:

o  	In fiscal year 2004, the council planned to acquire pistols for DHS
organizations to meet critical, mission-driven requirements.

o  	The council surveyed all DHS organizations interested in weapons,
factored in the end users' requirements, and established a list of
potential vendors that could provide best value for pistols and satisfy
requirements.

o  	As a result, DHS awarded contracts to two vendors for 65,000 pistols
each over 5 years-the largest pistol acquisition in the history of U.S.
law enforcement.

o  	As of September 20, 2004, the council has reported cost savings of
over $4.1 million and $915,000 in cost avoidance.

Energy Identifies strategies for aggregating and centralizing DHS's energy
    procurements to take advantage of economies of scale and negotiate more
                       competitive prices with suppliers:

o  	Although DHS spent approximately $58 million for electricity in fiscal
year 2003, only $9 million of the spending was for negotiable energy
services in states with deregulated electricity industries. Nevertheless,
the council estimates more than $705,000 in cost savings through September
30, 2004.

                    Source: DHS (data); GAO (presentation).

Appendix V: Selected Acquisition Management Best Practices

                            Best practices Activity

Acquisition planning Plans are prepared during acquisition planning and To
ensure that maintained throughout the acquisition.

reasonable planning for Planning addresses the entire acquisition process,
as well as all parts of the life cycle support of the products being
acquired.

acquisition is conducted 	The acquisition organization has a written
policy for planning the acquisition.

Responsibility for acquisition planning activities is designated.

Contract tracking and The acquiring organization has sufficient insight
into the oversight contractor's activities to manage and control the
contractor To ensure that contract and ensure that contract requirements
are met.

activities are performed The acquiring organization and contractor
maintain ongoing in accordance with communication; commitments are agreed
to and implemented contractual requirements by both parties.

All contract changes are managed throughout the life of the contract.

The acquisition organization has a written policy for contract tracking
and oversight.

Responsibility for contract tracking and oversight activities is
designated.

The acquiring organization involves contracting specialists in the
execution of the contract.

A quantitative set of software and system metrics is used to define and
measure product quality and contractor performance.

In addition to incentives for meeting cost and schedule estimates,
measurable, metrics-based product quality incentives are explicitly stated
in the contract.

Risk management Projectwide participation in the identification and
mitigation of

To ensure that risks are risks is encouraged. proactively identified and
The defined acquisition process provides for the identification,
systematically mitigated analysis, and mitigation of risks.

Milestone reviews include the status of identified risks.

The acquisition organization has a written policy for managing acquisition
risk.

Responsibility for acquisition risk management activities is designated.

Source: GAO (data); GAO (presentation).

Note: See GAO, Information Technology: DoD's Acquisition Policies and
Guidance Need to Incorporate Additional Best Practices and Controls,
GAO-04-722 (Washington, D.C.: July 30, 2004) for a complete list of the
acquisition management practices and required activities.

Appendix VI: GAO Contacts and Staff Acknowledgments

Contacts

  Staff Acknowledgments

(120328)

Michael J. Sullivan, (937) 258-7915 Michele Mackin, (202) 512-4309

In addition to those named above, Daniel Chen, Lily Chin, Benjamin
Federlein, Arthur James Jr., John Krump, Jose Ramos, and Russell Reiter
made key contributions to this report.

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