U.S. Postal Service: Purchasing Changes Seem Promising, but	 
Ombudsman Revisions and Continued Oversight Are Needed		 
(15-DEC-05, GAO-06-190).					 
                                                                 
Purchasing makes up a significant portion of annual expenses for 
the U.S. Postal Service (USPS). USPS has recently made		 
significant changes to its purchasing regulations which,	 
according to USPS, will result in a more businesslike purchasing 
process. Some stakeholders, including smaller suppliers who	 
stated they rely on USPS for the majority of their business, have
raised concerns about these changes. GAO was asked to (1)	 
describe these changes, stakeholder views, and USPS's rationale  
for the changes and (2) assess how these changes reflect the	 
principles of postal reform and practices of leading		 
organizations and identify areas, if any, for continued 	 
oversight.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-190 					        
    ACCNO:   A43277						        
  TITLE:     U.S. Postal Service: Purchasing Changes Seem Promising,  
but Ombudsman Revisions and Continued Oversight Are Needed	 
     DATE:   12/15/2005 
  SUBJECT:   Accountability					 
	     Dispute settlement 				 
	     Federal procurement				 
	     Internal controls					 
	     Procurement policy 				 
	     Procurement practices				 
	     Procurement regulations				 
	     Postal service					 
	     Stakeholder consultations				 

******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO Product.                                                 **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
******************************************************************
GAO-06-190

     

     * Report to the Chairman, Committee on Homeland Security and
       Governmental Affairs, U.S. Senate
          * December 2005
     * U.S. POSTAL SERVICE
          * Purchasing Changes Seem Promising, but Ombudsman Revisions and
            Continued Oversight Are Needed
     * Contents
          * Results in Brief
          * Background
          * USPS Actions to Improve its Purchasing Process, Rationale for
            Changes, and Stakeholder Views of These Changes
               * USPS Has Revoked, Superseded, and Replaced All of Its Former
                 Purchasing Regulations
               * USPS Has Added New Provisions Regarding Its Business
                 Relationships with Suppliers and Its Right to Decline to
                 Accept or Consider Proposals from Potential Suppliers
               * USPS Has Revised Its Regulations Regarding Purchasing
                 Disagreements and Added an Ombudsman to Resolve
                 Disagreements
               * Diversity of Comments and Differing Expectations Reflect
                 USPS's Unique Status
          * USPS's Purchasing Changes Are Generally Consistent with Key
            Reform Principles and Practices, Except Those Related to the
            Ombudsman
               * USPS Draft Guidance: The Supplying Principles and Practices
               * Key Principles and Practices Applied by Leading
                 Organizations
          * USPS's Purchasing Changes Are Generally Consistent with
            Principles and Practices of Leading Organizations
               * USPS's Purchasing Changes Are Consistent with the Leading
                 Principle of Flexibility
               * USPS's Purchasing Changes Are Consistent with the Leading
                 Principle of Efficiency
               * USPS's Purchasing Changes Are Consistent with the Leading
                 Principle of Social Responsibility
               * USPS's Purchasing Changes Are Consistent with the Leading
                 Principle of Accountability
          * USPS's Ombudsman Regulatory Provisions and Guidance Are Not
            Consistent with Leading Ombudsman Principles and Practices
               * Leading Principles and Practices for an Ombudsman
               * Inconsistencies in USPS's Ombudsman Provisions and Guidance
          * Continued Oversight of USPS's Implementation of Its New
            Regulations Is Needed
          * Conclusions
          * Recommendations for Executive Action
          * Agency Comments and Our Evaluation
     * Objectives, Scope, and Methodology
     * Selected Federal Laws Applicable to USPS Purchasing
     * USPS Revised Purchasing Regulations- Provisions Governing the
       Acquisition of Goods and Services
     * Comments from the U.S. Postal Service
     * GAO Contact and Staff Acknowledgments

Report to the Chairman, Committee on Homeland Security and Governmental
Affairs, U.S. Senate

December 2005

U.S. POSTAL SERVICE

Purchasing Changes Seem Promising, but Ombudsman Revisions and Continued
Oversight Are Needed

Contents

Tables

Figures

December 15, 2005Letter

The Honorable Susan M. Collins Chairman, Committee on Homeland Security
and Governmental Affairs United States Senate

Dear Chairman Collins:

The U.S. Postal Service (USPS) has one of the largest procurement, also
referred to as purchasing, functions in the federal government. In fiscal
year 2004, it purchased nearly $11.5 billion in goods and services. USPS
has a nationwide network of over 21,000 suppliers that include large,
small, minority-, and women-owned businesses that provide goods and
services such as mail sorting and scanning equipment, airmail
transportation, and mail delivery. Some of the smaller suppliers have
stated that they rely on USPS exclusively for their business.

In recent years we have reported and testified on the significant
financial and operational challenges facing USPS and, in 2001, we placed
its transformation and long-term outlook on our high-risk list.1 The
President and Congress have also recognized these challenges. In 2002, the
President established a commission to examine the future of USPS, and the
commission's 2003 report included a recommendation that USPS revise its
purchasing regulations to maximize flexibility and to reflect commercial
best practices.2 Recent legislation has been proposed to modernize and
reform the postal laws of the United States. Included in postal reform
legislation introduced during 2005 are provisions expressing the sense of
Congress that the USPS's purchasing policies should ensure the fair and
consistent treatment of suppliers and contractors while implementing
commercial best practices to achieve greater efficiency and cost savings,
and directing that Congress be provided a report on the number and value
of contracts and subcontracts that USPS has  with small, minority-, and
women-owned businesses.

A key component of postal reform is increasing USPS's flexibility to
operate in a more efficient, businesslike manner, while providing
appropriate accountability and oversight to ensure fair and transparent
operations. In 1970, Congress passed legislation that gave USPS a unique
status as an independent establishment of the federal government,
authorized USPS to operate more like a business, and exempted it from
specific categories of laws that are generally applicable to other federal
agencies including "Federal law[s] dealing with public or Federal
contracts, property, [or] works, . . ." (39 U.S.C. S:410(a)). As a result,
USPS has not been subject to most federal laws and regulations applicable
to most federal purchasing, including the Competition in Contracting Act
and the Federal Acquisition Regulation (FAR).3 Congress, however, has
applied certain purchasing-related requirements to USPS that apply to
other federal government contracts but are not applicable to private
entities. For example, USPS is required to follow both the Service
Contract Act, which requires that service employees be paid no less than
prevailing wages in the locality, as well as the Davis-Bacon Act, which
requires payment to employees of contractors on the site of federal
government construction projects to be paid no less than prevailing wages
in the locality. This uniqueness has sometimes generated tension in the
expectations of postal stakeholders as to whether USPS should be required
to follow more traditional federal agency procurement practices or those
of private companies. In a number of respects, the differences in the
procurement practices of leading public and private organizations are
diminishing as both strive to create more efficient procurement systems by
taking advantage of best business practices to lower costs and maximize
service and value, while also holding management accountable for its
performance and ensuring that contracting decisions are made in a socially
responsible, ethical manner.

For almost two decades, USPS has focused on changing its purchasing
processes to become more businesslike, most recently by incorporating what
are called "supply chain management" principles and practices to obtain
the best value for property, goods, and services to meet USPS's needs at a
fair and reasonable price. Supply chain management is a process used to
integrate the flow of goods and services from suppliers to the end
customer and has helped successful private-sector companies leverage their
buying power and identify more efficient ways to procure goods and
services.

In March of 2004, USPS issued a proposed rule and requested public comment
on changes to its purchasing regulations. USPS's goal was to streamline
its purchasing regulations to make them more efficient and businesslike.
USPS's final rule, which became effective in May 2005, revised some
provisions contained in the proposed rule but retained the focus of the
proposed rule. The final rule revoked hundreds of pages of legally-binding
regulations contained in its Purchasing Manual and replaced them with nine
pages of legally-binding regulations codified at 39 C.F.R. Part 600 and
accompanying nonbinding internal guidance. USPS plans to replace the
interim guidance with its new Supplying Principles and Practices early in
calendar year 2006. Concerns have been raised about these revisions by
some postal stakeholder groups and suppliers, particularly about whether
such a significant overhaul of the previous regulations was needed and the
potential effects on efficiency, accountability, and fairness. As such,
you asked us to (1) describe the changes USPS made to its purchasing
regulations, stakeholders' views of the changes, and USPS's rationale for
the changes and (2) assess how its purchasing changes (both its new
regulations and draft guidance) reflect the principles of postal reform
and the purchasing practices of leading organizations and identify areas,
if any, for continued oversight.

To describe the major changes to USPS's purchasing regulations,
stakeholders' views of the changes, and USPS's rationale for the changes,
we reviewed various documents, including the proposed and final
regulations published in the Federal Register; USPS's Purchasing Manual
and other procurement handbooks, instructions, and circulars; laws and
legislative history of postal reform; and stakeholder comments on the
proposed changes to USPS's purchasing regulations. We also interviewed
USPS officials to gather information on their rationale behind the changes
and other selected stakeholders and suppliers, some of whom submitted
formal comments on USPS's proposed rule. To assess how these changes
reflect the principles of postal and procurement reform, we identified key
principles of efficiency, flexibility, accountability, and social
responsibility based on various information we analyzed, including our
past GAO reports on postal and procurement reform; the report of the
President's Commission on the United States Postal Service (Commission)
report; proposed postal reform legislation; and interviews and documents
from organizations with expertise in purchasing reform and the ombudsman
process. We compared USPS's changes in the Final Rule, along with its
draft Supplying Principles and Practices guidance, with the practices of
leading public and private organizations. We determined that USPS's data
on contract spending were sufficiently reliable for the purposes of our
review. We requested comments on a draft of this report from USPS, and its
comments, which are reproduced in appendix IV, are discussed later in the
report. Our work was conducted from April 2005 to December 2005 in
accordance with generally accepted government auditing standards.

Results in Brief

USPS made changes to its purchasing regulations to create a more efficient
businesslike approach to its purchasing, which have raised concerns from
some stakeholders about these actions. The three main areas of change in
USPS's new purchasing regulations are (1) revoking and superseding its
former purchasing regulations, procurement handbooks, circulars, and
instructions, and replacing them with streamlined regulations and interim
internal guidance; (2) establishing new provisions for entering into
business relationships with suppliers, including the process for declining
to accept or consider proposals; and (3) creating a new process for
resolving disagreements, disputes, or protests between USPS and
suppliers/potential suppliers, including the establishment of an
ombudsman. While many postal stakeholders recognize the need to promote an
efficient procurement process, some suppliers, including smaller suppliers
who stated they rely on USPS for the majority of their business, have
raised concerns about these changes. In particular, concerns included the
justification for such a significant change (e.g., revoking most of USPS's
purchasing regulations and replacing them with nonbinding guidance, which
could reduce suppliers' basis for appeal of USPS decisions) and whether
such a regulatory change was needed to achieve further cost reductions.
Stakeholders also raised concerns about how USPS contracting practices
would change under the new regulations since USPS had not completed its
final guidance detailing the principles and practices to be followed at
the time the new regulations were implemented. Stakeholders stated that
the subjectivity and lack of detail associated with USPS's new regulations
would make it difficult to hold USPS purchasing officials accountable for
their decisions. Further, while some stakeholders acknowledged that the
ombudsman may be a more efficient way of resolving disagreements, some
raised concerns about how independence and impartiality would be
maintained in this process. According to USPS officials, the regulatory
changes would create a more flexible, businesslike approach to purchasing;
implement the acquisition portions of its Transformation Plan and the
Commission's report; and help it to lower costs and improve customer
service. USPS officials told us that under its prior purchasing rules,
contracting officers were restricted in their decision-making abilities
due to cumbersome and inflexible rules.

USPS's revised regulations and draft guidance are generally consistent
with principles and practices of leading organizations, except for USPS's
new ombudsman provision, which is inconsistent with key principles of
independence and impartiality, and raises issues about the credibility of
USPS's disagreement resolution process. USPS's actions to address this
inconsistency, as well as other areas of concern, warrant continued
oversight. We assessed USPS's new postal purchasing regulations and draft
guidance against key principles of postal reform-flexibility, efficiency,
social responsibility, and accountability-and the purchasing practices of
leading organizations. USPS's changes to its regulations provide
flexibility that should enhance the discretion of contracting officers
when making decisions. The revised regulations may also provide
opportunities for USPS to achieve cost reductions when adhering to leading
practices, such as leveraging the organization's buying power to find more
efficient ways of purchasing goods and services. USPS's draft guidance
also includes key principles related to social responsibility such as
avoiding conflicts of interest, promoting positive supplier relationships,
encouraging support for small, minority-, and women-owned businesses, and
ensuring transparency in financial dealings. USPS's draft guidance states
that USPS will establish goals and metrics to hold its professionals
accountable that will be specific, measurable, and results-oriented and
will be used to assess and reward performance. USPS's Vice President of
Supply Management also stated that goals and measures have been
established related to expected cost savings and cost avoidances for each
major purchasing category. We are concerned, however, about USPS's
regulatory change related to its new ombudsman, because its role,
decision-making authority, and structure are not consistent with key
principles or practices of independence and impartiality embodied by
leading ombudsman organizations. Specifically, the inconsistencies include
the role of USPS's ombudsman as a final decision maker, which is different
from other public and private sector ombudsman who generally make
recommendations, and the reporting relationship of USPS's ombudsman-USPS's
ombudsman is internal to the Supply Management organization and reports to
the head of USPS's Supply Management organization. This type of
relationship is not consistent with the principles of independence and
impartiality and raises the potential for conflicts of interest. In
addition to these inconsistencies, other concerns remain regarding the
implementation of these purchasing changes. These concerns relate to
uncertainty associated with the delayed issuance of USPS's final guidance,
the potential impact of these changes on the number of suppliers and
USPS's ability to track and monitor performance in this area, and USPS's
ability to effectively balance key principles of postal reform of
increasing flexibility and efficiency in its purchasing practices while
ensuring fair and consistent treatment of suppliers. These inconsistencies
and concerns will require continued oversight as USPS implements its new
purchasing regulations.

As such, we recommend that USPS needs to revisit and revise the ombudsman
provisions in the regulations to better reflect key principles and
practices of leading organizations. We provided a draft of this report to
USPS for its review and comment. USPS generally agreed with our findings
and recommendations and stated that it will reassess its ombudsman's role
and reporting relationship.

Background

Prior to 1970, USPS's purchasing policies adhered to federal practices
prevailing at the time. The Postal Reorganization Act of 1970 established
USPS as an independent entity of the executive branch and provided it with
flexibilities to operate in a businesslike manner and be self-supporting
from postal revenues. The 1970 act attempted to eliminate legislative,
budgetary, and financial policies that were inconsistent with efficient
modern management and business practices. The act exempted USPS from many
federal laws and regulations. In particular, USPS was generally exempted
from key procurement laws and regulations, such as the FAR. Although
exempt from many federal laws and regulations, USPS contracts are still
subject to certain federal laws including the Contract Disputes Act, and
USPS's Supply Management program activities, like other postal program
activities, are subject to program plans pursuant to the Government

Performance and Results Act.4 See appendix II for examples of these laws
as identified by USPS.

Since the passage of the Postal Reorganization Act, USPS officials stated
that USPS's purchasing policies have gone through many changes and
iterations in an effort to follow procurement developments in the private
sector, streamline the acquisition process, and reduce purchasing costs.
Table 1 shows a time line of these changes.

Table 1: USPS Procurement and Purchasing Developments

      Date                                 Event                              
Pre-1970   Post Office Department - Purchasing policy was controlled by    
              the Federal Procurement Regulation, the precursor of the FAR.   
1970       Postal Reorganization Act - Established USPS, provided it with  
              flexibility in its purchasing practices, and exempted it from   
              key federal procurement laws.                                   
1971       Postal Contracting Manual - Incorporated by reference into the  
              Code of Federal Regulations.                                    
1987       Procurement Manual - Developed to simplify policy with the goal 
              of combining advantageous aspects of public and private sector  
              procurement. USPS decentralized purchasing authority to provide 
              contracting officers more flexibility in making procurement     
              decisions.                                                      
1988       Procurement and Supply Department's Plan for Improvement -      
              Evolved from five studies addressing practices and performance  
              of procurement and supply operations. This plan focused on      
              enhanced customer service, shorter customer response time, and  
              lower total cost.                                               
1990       Phase I of Plan for Improvement - Concentrated on projects to   
              upgrade the professionalism of the procurement and supply       
              workforce and enhance the efficiency and effectiveness of       
              policies, systems, processes, and structure.                    
1992       Phase II of Plan for Improvement - Focused on projects to       
              enhance customer satisfaction by emphasizing fast response,     
              quality service, and adding value to the buying process.        
1995       Consolidation of all purchasing responsibilities in purchasing, 
              facilities, and transportation areas - Placed purchasing and    
              supplying responsibilities in the Purchasing and Materials      
              organization and gave the Vice President of the Purchasing and  
              Materials organization responsibility for all purchasing        
              policies. Established qualification standards for contracting   
              officers and made contracting officer and purchasing specialist 
              full-time positions.                                            
1995       Procurement Manual revised and reissued as Procurement Manual   
              Transmittal Letter 8 - Established uniform contracting officer  
              qualifications, training requirements, and professional         
              development standards. This letter focused on empowering        
              contracting officers with greater decision-making authority and 
              responsibility.                                                 
1996       Purchasing and Materials Organization strategic plan -          
              Developed strategy to integrate supply chain management aimed   
              at focusing on improving policies, procedures, and information  
              systems to meet business and competitive needs.                 
Jan. 1997  Purchasing Manual, Issue 1 (successor to Procurement Manual) -  
              Effective and transition begins. The manual empowered           
              purchasing professionals with discretion to team with internal  
              business partners so that each purchase meets the business and  
              competitive objectives of USPS.                                 
1998-2001  Purchasing and Materials Organization - Identified 23 core      
              competencies needed to ensure USPS had skilled supply chain     
              management professionals.                                       
Jan. 2000  Purchasing Manual, Issue 1 - Transition period ends.            
2001       e-Business Strategy for USPS Supply Chain Management, 2002-2010 
              - Assessed current business and developed options to align      
              supply chain management e-business strategy with corporate and  
              functional strategies.                                          
Jan. 2002  Purchasing Manual update, Issue 2 - Added a section on the      
              supply chain management philosophy and its importance to USPS   
              purchasing.                                                     
July 2002  Purchasing and Materials organization becomes Supply Management 
              - USPS restructured its purchasing organization to better align 
              the organization with supply chain management best practices.   
Dec. 2003  Purchasing Manual update, Issue 3 - Became effective. The       
              manual contained numerous new and significant changes in        
              purchasing policy.                                              
March 2004 Proposed rule to amend USPS purchasing regulations - Proposed   
              revision to implement the acquisition portions of its           
              Transformation Plan (April 2002) and President's Commission     
              report (July 2003) - USPS received 20 comments from various     
              suppliers.                                                      
April 2005 Final Rule revising purchasing regulations - Revoked all former 
              purchasing policies and rules and replaced them with            
              streamlined regulations and nonbinding internal guidance.       
May 2005   Final Rule - Became effective.                                  

Source: USPS.

In the last decade, USPS has been implementing supply chain management
initiatives that, according to USPS officials, are consistent with leading
practices of the private sector. In 1997, USPS significantly revised its
purchasing policies to emphasize cross-functional purchase teams that were
given more discretion to form effective partnerships with suppliers. The
goal was to use process management, data analysis, and other business
practices to help implement supply chain management throughout USPS
purchasing and material management. USPS also restructured its Purchasing
and Materials organization to better align it with supply chain management
best practices. This organization established five commodity-based teams
(facilities, mail equipment, services, supplies, and transportation) with
the goal of assembling and centralizing commodity-specific expertise and
leveraging USPS's buying volume to decrease costs. In addition, USPS began
emphasizing professional development to facilitate the transition to
supply chain management best practices. This included changing training to
focus more on the private sector and certifying its employees in either
purchasing or materials management disciplines.

In its 2002 Transformation Plan, USPS described its strategy for supply
chain management and modernizing purchasing procedures as focusing
resources on lowering overall cost and furthering competitive and business
objectives. The Transformation Plan described how USPS planned to
implement leading strategies in this area including: process and demand
management, data analysis, and business practices that focus on strategic
sourcing. USPS officials said that they then met with various leading
procurement organizations, both in the public and private sector, to
support the implementation of its supply chain management strategy. In
2003, USPS asked IBM to analyze the effectiveness of its supply chain
management policies and practices by comparing them with commercial best
practices and to make suggestions as to the improvements needed.5 IBM's
December 2003 report suggested that a significant revision of USPS's
policies and practices was needed and that USPS should identify the
philosophies, values, and core procedures it deemed important enough to
make mandatory and elevate those to the policy level and determine what
practices are important but do not meet the "policy" criteria. USPS
responded by reforming its purchasing policies and making this
distinction-its regulatory changes would streamline its purchasing
regulations and its guidance related to its purchasing principles and
practices would be nonbinding. USPS also made improvements in the areas of
benchmarking, training, manuals and instructions, and organizational
structure as a result of these external reviews. USPS has reported over
$1.4 billion in cost reductions and cost avoidance from its purchasing
activities in fiscal years 2000 through fiscal year 2004.

Postal purchasing activities continue to consume a substantial portion of
postal spending. In fiscal year 2004, USPS spent approximately $11.5
billion on its purchasing, which included transportation, supplies,
services, facilities, and mail equipment. These expenses accounted for
nearly 20 percent of USPS's total operating expenses. Figure 1 shows that
in fiscal year 2004, USPS spent approximately $5 billion on
transportation, $2.4 billion for services, $1.3 billion on facilities, $1
billion on supplies, and almost $600 million on capital equipment.

Figure 1: USPS Purchasing Spending for Fiscal Year 2004

Note: "Other" includes rent, training, and other miscellaneous expenses.

USPS Actions to Improve its Purchasing Process, Rationale for Changes, and
Stakeholder Views of These Changes

USPS has recently taken actions to streamline its purchasing regulations
including (1) revoking and superseding its former purchasing regulations,
handbooks, circulars, and instructions and replacing them with streamlined
regulations and interim internal guidance; (2) establishing new provisions
for entering into business relationships with suppliers; and (3) creating
a new process for resolving disputes and disagreements between USPS and
suppliers/potential suppliers arising in connection with its purchasing
process (with the exception of claims that arise under the Contract
Disputes Act or with respect to disputes about debarment, suspension, or
ineligibility from government contracting), including the establishment of
an ombudsman. While many postal stakeholders recognize the need to promote
an efficient procurement process, some stakeholders have raised concerns
about how the regulations would be interpreted and implemented by USPS
officials and whether these changes would have a negative impact on
fairness, consistency, and equal treatment of suppliers. According to USPS
officials, these changes would streamline its purchasing process and
create a more flexible, efficient, businesslike approach to purchasing.

In March of 2004, USPS published a proposed rule in the Federal Register
that described its plan to amend its purchasing regulations and invited
comments from interested parties. USPS received 20 responses, some from
various sized suppliers, as well as membership associations or
organizations that represent numerous suppliers. In May 2005, USPS
implemented its revised purchasing regulations (the Final Rule), which
completely revoked and superseded all of its former purchasing
regulations. USPS also issued its Interim Internal Purchasing Guidelines,
which was to be used by USPS contracting officials when making purchasing
decisions until USPS completes its final guidance, called the Supplying
Principles and Practices. At that time, USPS Supply Management officials
told us that the Supplying Principles and Practices would be issued in
November or December of 2005. USPS in September 2005 then revised its
estimate and stated that the final guidance would be issued in January
2006. Currently, the final guidance is being projected by USPS to be
issued early in calendar year 2006.

Table 2 lists the relevant sections of the Final Rule that were included
in the Code of Federal Regulations (C.F.R.), and a more detailed
explanation of each section is provided in appendix III.

Table 2: Provisions of USPS's Revised Purchasing Regulations

Citations in the C.F.R.                
601.100 - Purchasing policy            601.107 - Initial disagreement      
                                          resolution                          
601.101 - Effective date               601.108 - Ombudsman disagreement    
                                          resolution                          
601.102 - Revocation of prior          601.109 - Contract claims and       
purchasing regulations                 disputes                            
601.103 - Applicability and coverage   601.110 - Payment of claims         
601.104 - Postal purchasing authority  601.111 - Interest on claim amounts 
601.105 - Business relationships       601.112 - Review of adverse         
                                          decisions                           
601.106 - Declining to accept or       601.113 - Debarment, suspension and 
consider proposals                     ineligibility                       

Source: 39 C.F.R. Part 601.

We reviewed the changes in each section and determined that some changes
were likely to have greater impact than the others. For example, section
601.111 - Interest on Claim Amounts simply restates a provision that
existed in the now defunct Purchasing Manual. These changes are very
similar to what USPS included in the preamble to the Final Rule as the
three main categories of comments from stakeholders. We determined that
there were the following three main areas of change, which we will discuss
in greater detail:6

o revoking and superseding all former USPS purchasing regulations,
handbooks, circulars, and instructions and replacing them with streamlined
regulations and internal nonbinding guidance (section 601.102);

o establishing new provisions that specify how USPS enters into business
relationships with suppliers, including USPS's process for declining to
accept or consider proposals (sections 601.105 and 106); and

o creating a new process for resolving disputes, disagreements, or
protests between USPS and suppliers/potential suppliers, including the
establishment of an ombudsman (sections 601.107 and 108).

USPS Has Revoked, Superseded, and Replaced All of Its Former Purchasing
Regulations

Prior to the Final Rule, USPS's purchasing decisions were guided by its
Purchasing Manual; which was incorporated by reference in the C.F.R., and
its other procedural guidelines, which included Management Instructions
and handbooks. The Purchasing Manual contained hundreds of pages of
detailed provisions describing the processes for: purchasing planning,
supplier diversity, contract pricing, contract administration and supplier
relations, among other provisions. Since the Purchasing Manual was
incorporated by reference in the C.F.R., its provisions were legally
binding and carried the full force and effect of law. Suppliers were able
to contest a USPS contract award to USPS's General Counsel and/or a
federal court having jurisdiction over such challenges based on the
policies and procedures contained in USPS's Purchasing Manual. Figure 2
shows that under the Final Rule, the regulations were revised, and the
Purchasing Manual was revoked (except as to existing contracts), and was
replaced with internal guidance which does not have the force and effect
of law. As a result, the basis for suppliers to challenge USPS award
decisions is more limited when compared with the previous regulations.

Figure 2: USPS's Changes to Its Purchasing Regulations and Guidance

Note: According to USPS, the Supplying Principles and Practices will be
released early in calendar year 2006. Until that time, the Interim
Internal Purchasing Guidelines will be used.

The stakeholder comments described below do not apply to the final
guidance because USPS has not yet issued it. USPS states that this
guidance will contain information on the supply chain management
principles and practices that will drive its procurement activities, the
use of competition and sourcing strategies, the evaluation of proposals,
feedback on the rationale used to award contracts, and guidance on the
avoidance of conflicts of interest.

Comments on USPS's proposed regulations came primarily from some of USPS's
largest suppliers, as well as organizations representing both large and
small suppliers. Some of the commenting stakeholders, such as Boise Office
Solutions, Lockheed Martin, and Northrop Grumman, stated that they support
and encourage USPS's desire to operate more effectively and implement best
business practices of the commercial sector. One of these suppliers said
that streamlining USPS's acquisition regulations could be appropriate and
fundamental to realizing the full benefits of postal reform and could
result in greater efficiencies. According to another of these suppliers,
the streamlining would accomplish this by facilitating more flexible
contract relationships and permitting faster acquisition times, which
would benefit both the suppliers and USPS.

Other stakeholders who commented, such as Mail Contractors of America,
Inc., and the Association for Postal Commerce, expressed concerns about
whether USPS's rationale for making such major changes has merit, since
USPS had ample flexibility under its existing legal authority and its
Purchasing Manual to incorporate best practices. Further, some
stakeholders were concerned that the lack of defined purchasing policies
and procedures might create an environment of uncertainty for suppliers,
as well as potentially lead to inconsistent and contradictory practices
and contracting decisions. These stakeholders noted that the previous
regulatory structure provided consistent and transparent procurement
policies and procedures. For example, suppliers stated that prior to the
Final Rule, they knew USPS's policies regarding soliciting proposals,
contract administration, supplier diversity, and how competition and/or
sole sourcing would be used in procurement actions. In USPS's proposed
rule, it had not yet completed or released information on how it would
conduct these functions under its new regulations. As such, some of the
suppliers stated that this uncertainty would make it difficult for them to
know how USPS is making purchasing decisions and how USPS officials could
be held accountable for their decisions. These suppliers stated that this
uncertainty may threaten supplier confidence, particularly related to a
fair and consistent procurement process.

USPS purchasing officials stated that these purchasing rule changes would
promote an efficient, businesslike purchasing system that would allow its
contracting officers and USPS the flexibility to make business decisions
in a more expedited manner. USPS officials told us that under its prior
purchasing rules, contracting officers were restricted in their
decision-making abilities due to cumbersome and inflexible rules.
According to USPS officials, it will be able to update its nonbinding
guidance more expeditiously compared to its previous regulations. To
respond to stakeholder concerns related to subjectivity and
accountability, USPS said that oversight of USPS would not be diminished,
as those charged now with such functions will continue to do so. They also
stated that the new principles and guidance will be publicly available on
USPS's Web site and thus transparent. USPS has also added an ombudsman
that would among other things, review contract award disagreements to
determine whether USPS received best value. Also, regarding supplier
diversity, USPS stated in its draft guidance that it will strive, as a
strategic business initiative, to establish and maintain a strong
competitive supplier base that reflects the diversity of the supplier
community and provides suppliers with equal access to purchasing
opportunities.

USPS Has Added New Provisions Regarding Its Business Relationships with
Suppliers and Its Right to Decline to Accept or Consider Proposals from
Potential Suppliers

Another major change under USPS's Final Rule is a new provision that
allows USPS to refuse to accept or consider proposals from a person or
organization who fails to meet reasonable business expectations. This
regulation includes a new provision where the time limit on the duration
of a USPS decision to not accept or consider proposals may be limited to a
specified length of time or may extend indefinitely. The supplier also has
the right to contest the matter with the ombudsman or seek other
disagreement resolution procedures. This change establishes reasons for
USPS to decline to accept or consider proposals if a person or
organization does not meet "reasonable business expectations." These
reasons are as follows:

o marginal or dilatory contract performance;

o failure to deliver on promises made in the course of dealings with USPS;

o providing false and misleading information as to financial condition,
ability to perform, or other material matters, including any aspect of
contract performance; and

o engaging in other questionable or unprofessional conduct or business
practices.

Some suppliers supported USPS changes in this area, particularly because
they said the changes better reflect the practices of private-sector
organizations. For example, one of these suppliers stated that the private
sector has the ability to do business with a supplier or choose not to,
and private-sector organizations are not required to debrief or provide
explanations to rejected suppliers as is generally required for federal
executive branch agencies under the FAR.

A number of concerns, however, were voiced by other suppliers about the
changes in this area. These stakeholders were concerned with how fairness,
consistency, and equal treatment of suppliers would be ensured under these
more flexible regulations. First, some who had comments on the proposed
rule were concerned that USPS's criteria for entering into business
relationships would involve factors other than contract performance.7 For
example, one supplier suggested that USPS could refuse a proposal from a
supplier who had submitted a bid protest or disputed a contracting
decision in the past. Second, another supplier stated that there would be
a limited right to contest USPS decisions related to business
relationships. Specifically, the supplier noted that USPS already has a
formalized debarment and suspension process for excluding entities, in
certain circumstances, from contracting with USPS that incorporates formal
due process protections.8 Stakeholders also noted that there are not
similar due process protections accompanying USPS's ability to refuse a
proposal from a supplier. For example, there is no definite length of time
mentioned in the rule in which USPS can opt not to do business with an
entity; it may be limited to a specified length of time or may extend
indefinitely. As such, stakeholders raised concerns in their comments on
the proposed rule about the uncertainty associated with this new
provision.

USPS purchasing officials stated that these changes would promote a system
of establishing business relationships similar to that of private-sector
organizations. USPS stated in the preamble to the Final Rule that it is
not in the best interest of USPS's customers, the supplier community, or
general public for USPS to acquire property, goods, or services from
companies that do not perform adequately. According to USPS purchasing
officials, this procedure would allow discussions about a supplier's past
performance to be addressed before a potential supplier would spend time
and money preparing a proposal. This procedure thus allows USPS the
ability to inform suppliers in an efficient manner that their past poor
performance would result in their proposal not being considered or
selected. According to USPS, this new ability to decline to accept
proposals may prove less bureaucratic and more effective in encouraging
suppliers to improve their performance. Also, USPS purchasing officials
stated that the new regulations provide appropriate safeguards that would
give aggrieved suppliers written notice of the reason(s) why their bids
would no longer be considered, and an opportunity to provide
countervailing evidence, justification, or other reasons that the problem
has been corrected. USPS purchasing officials stated that they expect
there to be few occurrences where USPS would decline to accept proposals,
and the decision would be made only after careful analysis of the basis
for the action. Moreover, USPS said that only the Vice President of Supply
Management would have the authority to make these decisions and would be
held accountable for these decisions. These officials also stated that the
difference between this procedure and debarment is that debarment arises
from serious and severe conduct, either unethical or criminal, while
declining to accept proposals arises from the erosion of the business
relationship as a result of poor performance. Furthermore, the head of
USPS's purchasing organization stated that debarment for poor performance
is used rarely and that there was only one such USPS case that he was
aware of.

USPS Has Revised Its Regulations Regarding Purchasing Disagreements and
Added an Ombudsman to Resolve Disagreements

Under its Final Rule, USPS provides that all disagreements, disputes,
protests and claims against USPS arising in connection with its purchasing
process (with the exception of claims that arise under the Contract
Disputes Act or with respect to disputes about debarment, suspension, or
ineligibility from government contracting) must be lodged with the
responsible contracting officer within 10 days of the date of the
disagreement.9 If the disagreement is not resolved within 10 days
following the lodging of the dispute with the contracting officer, the
disagreement can be lodged with a newly created ombudsman.10 This
ombudsman was appointed by USPS, reports to USPS's Vice President of
Supply Management, and is to make decisions based on "best value"
determinations. The decisions of the ombudsman are final and binding, and
under the new regulations cannot be appealed to a federal court of
jurisdiction except for cases where the decision was (1) procured by fraud
or other criminal misconduct or (2) obtained in violation of the
regulations contained in the Final Rule or an applicable public law
enacted by Congress. The Final Rule also includes a statement that
encourages the use of alternative dispute resolution (ADR) to resolve
disagreements and conflicts.11 A person or organization disagreeing with a
USPS decision and the contracting officer are encouraged to consider ADR
methods to resolve a dispute before pursuing the ombudsman process.

These changes differ from the manner in which disagreements were resolved
under the previous regulations. First, under the Purchasing Manual, a
protest could be filed with either the contracting officer or directly
with USPS's General Counsel. If a protest was filed with the contracting
officer but was not resolved, it could be referred to USPS's General
Counsel for review. The General Counsel would either (1) review the
decision of the contracting officer or (2) review the protest that was
filed directly with the General Counsel. Appeals of contracting officer
and/or General Counsel decisions could be made to a federal court of
jurisdiction. Under the Final Rule, the General Counsel is not an official
decision maker in the bid protest process. Furthermore, the Final Rule
restricts the reasons why a protestor can appeal a decision of the
ombudsman and limits a supplier to an appeal from the ombudsman's decision
based only on the grounds listed above.

A number of stakeholders commented that the use of ADR and the ombudsman
are good steps in achieving a more efficient dispute resolution process.
These stakeholders also stated that the ombudsman process is a promising
idea and step in the right direction toward having a streamlined and fair
resolution process. Some stakeholders, however, stated that uncertainties
and a lack of independence pose serious threats to having a fair ombudsman
process. These uncertainties included how the ombudsman would be appointed
and to whom the ombudsman would report, both of which were not included in
the proposed or Final Rule but may have implications on the independence
of the ombudsman. Some of the stakeholders said that they preferred the
ombudsman to be independent of USPS, or at least report to someone outside
of USPS's purchasing organization. Furthermore, these stakeholders also
believed that the ombudsman should have the authority to impose corrective
and remedial action, and questioned the final and binding nature of the
ombudsman decision making.12 Some stakeholders also noted that federal
court jurisdiction should not be limited to those cases identified by
USPS.13 Some stakeholders stated that federal courts have supported the
right of a protester to appeal a bid protest decision of USPS to a federal
court for review.

USPS officials told us that one of the purposes of these changes is to
ensure that most disagreements arising between suppliers or potential
suppliers and USPS regarding all aspects of solicitations, awards, and
related matters, are resolved in an efficient manner at the management or
contracting officer level. In an effort to avoid costly litigation and
disputes, and mirror leading private and public-sector organizations, USPS
revised its protest procedures to emphasize using ADR processes or its new
ombudsman. USPS has noted that, in the past, it has been involved with
litigation which is lengthy and costly for both parties and which could
have potentially been resolved in a more informal and efficient way. From
calendar year 2000 through 2004, on average each year, 21 contract bid
protests/disputes were filed with USPS's General Counsel, and 2 cases were
filed in federal court. USPS's Vice President of Supply Management also
stated that the new provisions related to restricting appeals of ombudsman
decisions are intended to streamline the appeals process and that,
ultimately, the courts will decide what cases can be appealed.

USPS officials also told us that by placing added emphasis on ADR
processes, they hoped to better resolve disagreements that arise between
USPS and its suppliers and potential suppliers. USPS's Final Rule stated
that USPS supports and encourages the use of ADR as an effective way to
understand, address, and resolve business disagreements and conflicts with
suppliers. Further, the Final Rule states that, in order to better serve
its suppliers, USPS appointed an ombudsman who is to focus on best-value
considerations for USPS and business decisions made by the contracting
officer to determine which supplier should be awarded a contract.
According to USPS, this will ensure that the right business decision for
USPS has been made by the contracting officer. USPS has appointed a person
as ombudsman who is from within the supply management organization,
stating that the ombudsman needed to come from within the organization and
be someone who understands supply management, knows the postal culture,
and has knowledge of postal operations. USPS has said that it wants an
ombudsman who is familiar with the business, which it said would ensure
that a prompt result is more likely and less expensive in the long run
than hiring someone from outside of the agency.

Diversity of Comments and Differing Expectations Reflect USPS's Unique
Status

The diversity of comments on the proposed regulations reflect the
differences in expectations that postal stakeholders have often debated as
part of postal reform. This tension is inherent in USPS's unique status as
a federal agency with a government monopoly that is operating in a more
competitive marketplace than when Congress changed USPS's status in 1970
and removed the application of many federal laws to USPS so that it could
act more like a business. We talked to several postal stakeholders who
commented on USPS's proposed regulatory changes to obtain their views on
whether USPS addressed their concerns in the Final Rule and the potential
impact of the Final Rule.14 Some association representatives that we spoke
with felt that USPS had not addressed their concerns in the Final Rule.
For example, although USPS made a substantive change in the Final Rule (it
revised the basis for cancelling business relationships and dropped three
criteria that were criticized in the comments as being too subjective),
these representatives remain concerned about USPS's additional
flexibilities in this area. Other stakeholders had similar concerns that
USPS has more flexibility and discretion than most other federal agencies.
They also noted that USPS has an advantage over private-sector
organizations in that USPS has the right to terminate contracts for
convenience, which private-sector organizations do not.15 However, we note
that this is not new authority granted under the new regulations since
USPS could terminate contracts for convenience under previous regulations.

Although it is too early to assess the impact of these changes because
USPS has not issued its final guidance, and the regulations have only been
in place for 7 months, the next challenge for USPS will be whether its
implementation of these revised regulations will raise the confidence of
its supplier community so that it can achieve the desired benefits. We
further explored this area by focusing on the key purchasing reform
principles and practices of leading public and private-sector
organizations.

USPS's Purchasing Changes Are Generally Consistent with Key Reform
Principles and Practices, Except Those Related to the Ombudsman

We analyzed the provisions of USPS's purchasing changes, the revised
purchasing regulations and draft guidance, in terms of key principles
incorporated in postal reform legislation and the purchasing practices of
leading public and private-sector organizations. The following summarizes
these key principles:

o flexibility-utilize flexibility to implement leading practices,
effectively respond to changing market conditions and competition, and
revise policies and processes to reflect evolving changes;

o efficiency-promote efficient and effective operations;

o social responsibility-conduct operations in a manner that avoids
conflicts of interest, promotes positive supplier relationships through
courtesy and impartiality, encourages support for small, minority-, and
women-owned businesses, ensures financial transparency in financial
dealings, and treats people with dignity and respect; and,

o accountability-promote appropriate accountability by holding leadership
accountable for the performance of the organization, as well as promote
transparent operations by tracking, monitoring, evaluating, and reporting
results.

For the most part, we found that USPS's changes are consistent with the
key reform principles and purchasing practices of leading public and
private-sector organizations. Leading purchasing organizations aim to
develop an efficient purchasing system that takes advantage of available
flexibilities to limit costs and maximize service and value and promote
socially responsible behavior. However, we have concerns about
inconsistencies between USPS's regulatory change related to its ombudsman
and key practices and principles. Specifically, we believe the role,
structure, and decision-making authority of USPS's ombudsman are not
consistent with key principles or practices of independence and
impartiality applied by leading ombudsman organizations. Based on these
inconsistencies and uncertainties related to whether USPS's implementation
of its new regulations will effectively balance the key principles,
continued oversight of this area will be needed.

USPS Draft Guidance: The Supplying Principles and Practices

As we described earlier, the preamble to USPS's regulatory changes refer
to new guidance that, according to USPS, will provide the principles and
practices to guide USPS's contracting personnel in making purchasing
decisions. This guidance, the Supplying Principles and Practices, has not
yet been publicly released and was not part of the regulatory comment
process. However, USPS provided us with a draft copy for the purposes of
this review, and the references to guidance in this section reflect the
draft guidance.

In order to compare USPS's principles and practices with those of leading
organizations, we reviewed the eight key principles that were included in
USPS's draft guidance. These draft principles are as follows:

o Authority and structure: The Postal Reorganization Act provides
purchasing authority to the Postmaster General. That authority has been
delegated to the Vice President of Supply Management. Only individuals
that have delegated contracting authority from the Vice President or from
other authorized individuals may award, modify, and terminate contracts
for the purchase of goods and services. Individuals with delegated
contracting authority must ensure that their contractual actions,
including contract awards, modifications, and terminations, are within the
scope of the authority delegated to them before taking those actions.

o Best value: USPS's supply management decisions are to be based on best
value, which is defined as the outcome that provides the optimal
combination of elements such as lowest total life cycle cost, technology,
innovation and efficiency, assurance of supply, and quality relative to
USPS's needs. In the sourcing area, best value is generally, but not
always, achieved through competition, which brings market forces to bear
and allows the direct comparison of proposals and life cycle costs. USPS's
supply management teams are provided broad flexibility in (1) deciding
which elements of value will be sought by USPS and expressed in
solicitation evaluation factors and their weightings and (2) determining
the best supply management method.

o Ethics and social responsibility: USPS's supply management professionals
should conduct themselves with integrity and must adhere to the "Standards
of Ethical Conduct for Employees of the Executive Branch," (5 C.F.R. 2635)
and the "Supplemental Standards of Ethical Conduct for Postal Employees,"
(5 C.F.R. Part 7001). In addition, USPS's supply management activities are
guided by the Institute of Supply Management's "Principles of Social
Responsibility."

o People and culture: USPS requires supply management personnel to have
baccalaureate or postgraduate degrees so that they will have appropriate
competencies, such as the ability to perform detailed pricing, market, and
item analyses. Supply Management personnel are encouraged to take prudent
risks to achieve desired goals. These goals will be aligned with Supply
Management's organization goals, and goals will be the basis for metrics
used to assess and reward the performance of supply management
professionals.

o Planning and strategies: USPS will adopt proven supply management tools
and techniques to meet its financial goals. USPS is committed to
continually analyzing and improving its supplying practices to enhance its
competitive advantage, efficiency, and effectiveness. USPS will use a
variety of means, including benchmarking and other market research;
participation in professional organizations; strategic planning;
leveraging spend by centralizing spend categories and standardizing
products to reduce total cost, including transaction costs; and improve
quality and performance.

o Statutory and regulatory requirements: USPS will comply with its
statutory and regulatory obligations contained in the C.F.R.

o Supplier relations: USPS will foster strong, mutually beneficial
relations with its suppliers based upon sound business practices and
mutual trust in which both parties work toward a common goal. USPS will
continuously measure, analyze, and enhance supplier performance relative
to contractual requirements and the best practices of leading supply
organizations. USPS will establish a strong, competitive supplier base
that reflects the diversity of the supplier community. Additionally, USPS
suppliers will be encouraged to use small, minority-, and women-owned
businesses as subcontractors to the maximum extent consistent with
effective contract performance.

o Technology: One of USPS's goals is to have an integrated electronic
business solution for all supply processes so that USPS suppliers will
become capable of conducting business electronically. USPS will attempt to
automate routine transactions to reduce processing time, improve quality
through better record keeping and fewer errors in data, reduce inventory
through faster and more accurate filling of orders, and provide management
with improved decision-making tools through near real-time access to
business information.

The draft guidance also contains the general practices to be used by USPS
employees when making purchasing decisions. These practices include
Identify Key Stakeholders, Select Contract Type, and Provide Feedback and
fall into the following six general areas:

1.identifying needs,

2.evaluating sources,

3.selecting suppliers,

4.delivering and receiving products and services,

5.measuring and managing supply, and

6.disposing of assets (end of life).

The guidance also identifies tools and techniques, roles and
responsibilities, and key questions that need to be addressed by USPS
contracting officials when making purchasing decisions.

Key Principles and Practices Applied by Leading Organizations

We also reviewed numerous documents from organizations involved in postal
and procurement reform efforts and discussed leading procurement reform
practices with experts in this area who consult with both public and
private-sector organizations to determine the key principles that they
follow when making reforms. Based on this information (which is described
below), we identified the key principles of flexibility, efficiency,
social responsibility, and accountability, as well as the practices
applied by leading organizations in this area.

Proposed postal reform legislation: During the past 10 years, Congress has
looked at ways to increase flexibility and authority for USPS so that it
can better adapt to the changing marketplace and remain viable as a
self-financing public institution. These legislative efforts have included
provisions that would reform selected purchasing and contracting
activities. The most recent postal reform legislation introduced in
2005-S. 662 and H.R. 22-would provide USPS additional flexibilities to
operate in a more efficient manner but couple this additional flexibility
with both accountability and oversight mechanisms to ensure fairness and
consistency.16 Specifically, S. 662, states that USPS should (1) ensure
the fair and consistent treatment of suppliers and contractors through the
use of mechanisms such as competitive contract award procedures, effective
dispute resolution mechanisms, and socioeconomic programs and (2)
implement commercial best practices in its purchasing policies to achieve
greater efficiency and cost savings. Further, H.R. 22 included a provision
that would have required USPS to report to the President and Congress on
the number and value of contracts and subcontracts that USPS has entered
into with small, minority-, and women-owned businesses.

President's Commission report: The Commission's 2003 report called for
USPS to take advantage of certain corporate best practices to improve
overall efficiencies and stated that, in instances where USPS is granted
additional flexibility, mechanisms are needed to promote accountability
and oversight of USPS's operations.17 The report said that USPS could save
hundreds of millions of dollars by adopting purchasing practices that have
substantially lowered costs for private-sector companies. The report also
noted that although the 1970 act granted USPS flexibility in its
procurement process, USPS officials have elected not to take advantage of
those flexibilities and instead have abided by standards in line with
those applicable to other federal agencies under the FAR. As such, the
Commission recommended that USPS "take full advantage of the flexibility
it is granted under the current law and that Congress strongly support its
aggressive procurement reforms in acknowledgement of its substantial
benefits to all ratepayers."

OMB Strategic Sourcing Guidance: Although they do not apply to USPS, we
also reviewed the Office of Management and Budget's (OMB) guidance to
federal agencies on implementing its strategic sourcing initiative so that
agencies leverage their spending to the maximum extent possible. OMB
describes strategic sourcing as a collaborative and structured process of
critically analyzing an organization's spending and using this information
to make business decisions about acquiring commodities and services more
effectively and efficiently. This process helps agencies optimize
performance, minimize price, increase achievement of socioeconomic
acquisition goals, evaluate total life cycle management costs, improve
vendor access to business opportunities, and otherwise increase the value
of each dollar spent. Some of the practices included in OMB's guidance
include the following:

o Strategic sourcing governance-A charter should be developed outlining
the members, roles, responsibilities, and operations of an agencywide
Strategic Sourcing Council and any commodity councils to be formed.

o Strategic sourcing goals and objectives-The Strategic Sourcing Council
should establish annual strategic sourcing goals and objectives, by fiscal
year. These goals and objectives should include existing strategic
sourcing efforts, as well as prioritizing new initiatives. In addition to
cost and performance goals, any strategic sourcing plan must be balanced
with socioeconomic goals for small businesses, small disadvantaged
businesses, women-owned small businesses, veteran-owned businesses,
service-disabled veteran-owned businesses, and others, as appropriate.

o Performance measures-The Strategic Sourcing Council should establish
agencywide performance measures and reporting requirements in order to
enhance accountability by monitoring and continuously improving the
strategic sourcing program.

o Communications strategy-The Strategic Sourcing Plan should also include
a communication strategy that clearly conveys senior management's
commitment to the effort, describes the scope of the effort, and
identifies any organizational changes. The communications strategy should
also include steps to make agency employees aware of awarded strategic
sourcing contracts and how they are to be used.

o Training strategy-The plan should identify actions necessary to educate
agency personnel to support effective and efficient strategic sourcing
implementation and management.

GAO reports and testimonies: We have testified and reported on multiple
occasions that we support postal reforms that would provide USPS
additional flexibility to act in a more efficient, businesslike manner
along with appropriate accountability mechanisms to ensure fairness.18 In
September 2005, we established a framework for assessing the acquisition
function at federal agencies, which highlighted the importance of
promoting an efficient, effective, and accountable acquisition process.19
In particular, this framework identified how the consistent implementation
of clear and transparent policies and processes will assist in effectively
managing the acquisition process and promoting successful outcomes. We
also have issued reports examining the savings that leading private-sector
companies, including ChevronTexaco, Dell Computer, and IBM, have achieved
by using a strategic approach to procurement and spend analysis and
concluded that this approach can be effective for federal agencies as
well.20 These reports identified that the Departments of Defense, Veterans
Affairs, Health and Human Services, and Agriculture have made progress in
also have issued reports that focused directly on contracting activities
at USPS. In these reports, we noted that although USPS was using supply
chain management-a process that has helped private-sector companies
leverage their buying power and identify more efficient ways to procure
goods and services-USPS has had mixed success in implementing some of its
initiatives in this area.21 These shortcomings will be discussed in more
detail later in this report.

Private-sector purchasing experts: In addition to our previous work in the
procurement area, we spoke to officials from organizations that are
considered experts in the area of purchasing reform and who also consulted
with USPS about changes needed in its purchasing practices. These included
officials from IBM, the Center for Strategic Supply Research, and the
Institute for Supply Management. These officials stated that leading
organizations in this area continually look for opportunities to increase
efficiency and "best value" in this area. Based upon our past work in this
area, as well as discussions with these experts, we identified some of the
leading practices that are related to implementing a strategic sourcing
approach include the following:

o take an enterprise wide approach to buying goods and services;

o provide clear and strong leadership, including establishing goals and
prioritizing initiatives to enhance accountability for performance;

o utilize supply chain management to leverage the organization's buying
power and identify more efficient ways to procure goods and services;

o develop information systems-i.e., a spend analysis system-to identify
how much is being spent with which supplier for what goods or services;

o create commodity-specific experts and provide these experts the
flexibility and discretion to make market-based decisions;

o demonstrate value and credibility of new processes through the use of
cost and performance metrics and reporting to monitor and make continuous
improvements; and

o establish proactive business relationships, particularly with
high-quality suppliers, such as utilizing prequalified supplier lists.

These experts also noted other leading practices that private-sector
companies incorporate in their purchasing processes. These include efforts
to

o resolve disputes in an efficient manner, including alternative dispute
resolution;

o promote socially responsible contracting that incorporates a diverse
supplier base and ensures that contracting officials act in an ethical,
professional manner; and

o establish flexible policies and procedures that can be updated in an
expeditious manner to effectively respond to market changes.

USPS's Purchasing Changes Are Generally Consistent with Principles and
Practices of Leading Organizations

For the most part, USPS's changes to its purchasing policies-its new
regulations and its draft guidance-reflect leading practices aimed at
increasing the flexibility, efficiency, social responsibility and
accountability in its purchasing system. One area of USPS's regulatory
changes that we do not believe is consistent with leading practices, its
ombudsman, will be discussed in the next section of this report.

USPS's Purchasing Changes Are Consistent with the Leading Principle of
Flexibility

We found that USPS's regulatory changes and guidance include leading
practices related to flexibility. Leading organizations in both the public
and private sector need to have the flexibility to take advantage of
leading practices, such as reengineering their purchasing processes to
incorporate supply management initiatives and strategic sourcing. USPS's
new regulations state that they are designed to permit flexibility so that
USPS may respond to market conditions in acquiring the best property goods
and service to meet its needs at a fair and reasonable price. According to
USPS officials, it will be able to update its non-binding guidance more
expeditiously compared to its previous regulations. This allows for more
timely and responsive reactions to changes in the marketplace. Also,
USPS's new regulations provide flexibilities similar to those for leading
private-sector organizations in terms of how they enter into business
relationships and decline to accept or consider proposals. Further, USPS's
new guidance enhances the discretion of contracting officers when making
decisions.

USPS's Purchasing Changes Are Consistent with the Leading Principle of
Efficiency

We also found that USPS's changes are consistent with leading practices
related to increasing efficiencies. Leading organizations continually look
for opportunities to improve the efficiency of their procurement systems
and use a variety of practices to achieve these efficiencies including

o incorporating supply chain management,

o conducting spend analysis,

o creating commodity-specific experts,

o establishing proactive business relationships with suppliers, and

o determining efficient ways to resolve disputes and disagreements.

USPS's draft guidance incorporates specific leading practices to implement
supply chain management, conduct spend analysis, establish
commodity-specific experts, have effective and expeditious dispute
resolution processes, promote positive business relationships, improve
management structure and oversight, prequalify suppliers, and effectively
use technology. This guidance states that it expects that efficiencies
will be gained by leveraging its nationwide network. For example, instead
of purchasing gas from various suppliers, USPS intends to take advantage
of volume discounts and consolidate its buys with fewer suppliers. These
actions should allow USPS to reduce the number of transactions that occur
and take advantage of volume discounts.

USPS's Purchasing Changes Are Consistent with the Leading Principle of
Social Responsibility

USPS's new regulations include some specific factors that are consistent
with leading supply management principles and practices related to social
responsibility. These principles state that leading public and private
organizations should conduct their operations in a socially responsible,
professional manner by avoiding conflicts of interest, promoting positive
supplier relationships through courtesy and impartiality, encouraging
support for small, minority-, and women-owned businesses, ensuring
financial transparency in financial dealings, and treating people with
dignity and respect.22 The process and policies by which these results are
achieved, however, can vary between public and private organizations. For
example, a couple of USPS suppliers stated that they do not consider
fairness to be a key component of their procurement policies and
procedures, but that principles of socially responsible behavior, such as
incorporating integrity, ethical behavior, and supplier diversity, are
critical to their success. One of the key differences between public and
private sector purchasing is that purchasing regulations for public sector
entities that fall under the FAR include specific references or objectives
related to fairness. For example, the FAR emphasizes conducting business
with integrity and fairness, such as requiring open communication with
stakeholders and developing a trained, qualified procurement workforce.
These actions are aimed at maintaining the public's trust in the federal
procurement system.

USPS's ethics and social responsibility principle in its draft guidance
calls for USPS's supply management professionals to act with the highest
standards of conduct, ethics, and integrity, and these professionals also
will be guided by the key principles of social responsibility identified
by the Institute of Supply Management. This guidance specifies that
contracting officials must maintain necessary professional proficiencies.
Furthermore, under the principle titled "supplier relations," the guidance
states that USPS will attempt to establish and maintain a strong
competitive supplier base that reflects the diversity of the supplier
community and provides suppliers with equal access to purchasing
opportunities. Although it is specifically excluded from the operation of
the Small Business Act by 15 U.S.C. 637c, USPS stated that it continues to
be a leader in this area. For example, USPS reported that. on average over
the past 5 years, it has distributed 4.1 percent of its prime contract
commitments to minority-owned businesses, 6.4 percent to women-owned
businesses, and 42.3 percent overall to small businesses (see table 3). In
comparison, the Small Business Administration's governmentwide aggregate
goals in fiscal year 2004 were 5 percent for women-owned businesses and 23
percent for small businesses.23 USPS reported that in fiscal year 2004 it
had contract commitments worth about $344 million with minority-owned
businesses, $577 million with women-owned businesses, and over $3.4
billion with small businesses.

Table 3: USPS Prime Contract Commitments with Small, Minority-, and
Women-Owned Businesses, Fiscal Years 2000-2004

Dollars  
in    
millions 
Fiscal   Minority-owned              Women-owned                Small    
year       businesses                businesses              businesses  
               Contract   Percentage                Contract  Percentage     Contract  Percentage 
            commitments   of overall             commitments  of overall  commitments  of overall 
                            contract                            contract                 contract 
                        commitmentsa                         commitments              commitments 
2000             $336.8         4.7%                  $488.7        6.8%     $3,564.9       49.6% 
2001              313.9          2.3                   569.5         4.1      3,807.6        27.6 
2002              272.5          4.5                   361.3         6.0      2.463.1        41.1 
2003              334.0          3.8                   590.4         6.6      3,863.9        43.4 
2004              344.8          5.0                   577.3         8.4      3,429.1        49.7 
Average          $320.4         4.1%                  $517.4        6.4%     $3,425.7       42.3% 

Source: USPS.

aOverall contract commitments exclude instances where small, minority-,
and women-owned businesses are not offered contracting opportunities. Such
instances include contracts for mandatory sources, foreign contracts,
utilities, or educational institutions.

Although the social responsibility principles included in the draft
guidance are consistent with key principles and practices and USPS's past
performance in this area exceeds the governmentwide averages, some small
business suppliers are concerned that they may be negatively impacted as
USPS implements its revised regulations and strives to become more
efficient. We and USPS's Inspector General have previously reported on
USPS's difficulties in incorporating small, minority-, and women-owned
businesses into some of its supply chain management initiatives. These
reports raised concerns about USPS not proactively exploring options for
keeping small businesses involved; not setting targets for contracting
with small businesses; and having incomplete and unreliable contracting
data for small, minority-, and women-owned businesses.24 Furthermore,
members of the mailers' Small Business Procurement Coalition told us about
their concerns regarding the extent to which small, minority-, and
women-owned businesses are limited to subcontracts, rather than being
awarded the primary contract where they would have greater authority. As
we will later discuss, establishing targets and effectively tracking
performance, particularly for small, minority-, and women-owned
businesses, will be important to ensuring appropriate accountability.

USPS's Purchasing Changes Are Consistent with the Leading Principle of
Accountability

We believe that USPS's draft guidance includes performance mechanisms that
are consistent with leading accountability practices. For example, it
states that USPS will use goals and metrics to hold its professionals
accountable and allow USPS to assess and reward performance. Leading
procurement experts in both the public and private sectors have recognized
the importance of accountability throughout the organization for results.
For example, OMB's guidance to all federal Chief Acquisition Officers
stressed the need for establishing performance goals and measures and for
monitoring, reporting, and evaluating the results. We have also reported
on the purchasing practices that leading private-sector companies, such as
ChevronTexaco, Dell Computer, and IBM use to promote accountability. These
companies have developed formal spend analysis programs that monitor,
track, and analyze spending to improve their procurement processes.25
Spend analysis programs help to identify areas for savings, as well as
develop reports for top management to establish quarterly and annual
savings goals and track financial and other benefits achieved.

USPS's changes identify accountability principles and practices that
reflect those of leading organizations. For example, to enhance
transparency, USPS guidance will be publicly available on USPS's Web site.
USPS's guidance states that USPS plans to have goals that will be used to
assess the performance of its purchasing professionals and metrics to be
used in contract management that will be results-oriented, specific,
measurable and achievable. The guidance also notes that USPS will use
spend analysis to assist it in tracking spending and identifying potential
savings. This process will help to determine whether to renew contract(s)
with an existing supplier or switch to a new one and evaluate whether
purchased products or services met specific USPS needs. These goals and
measures can also address concerns raised by some stakeholders about
whether USPS will achieve its projected efficiency goals under these
regulatory changes.

USPS's Ombudsman Regulatory Provisions and Guidance Are Not Consistent
with Leading Ombudsman Principles and Practices

USPS's ombudsman, as it is currently structured, is not consistent with
the core principles of independence, impartiality, and confidentiality
related to the role of the ombudsman as identified by leading
organizations. USPS's ombudsman is not independent of the Supply
Management organization-the ombudsman reports to the head of Supply
Management-raising issues of conflict of interest or that its decisions
may not be viewed as impartial. Furthermore, the decisions of USPS's
ombudsman are final and binding; typically ombudsman decisions are
recommendations. Concerns remain about USPS's intended purpose for its
ombudsman position and the independence and impartiality of this process
as it is currently structured.

Leading Principles and Practices for an Ombudsman

Leading organizations have established core principles and practices for
developing and implementing an effective and credible ombudsman process.
The American Bar Association (ABA) adopted a resolution in February 2004
that applies to the establishment of an ombudsman for both government and
private-sector entities. The Coalition of Federal Ombudsmen has
incorporated these ABA principles into its draft supplement to the ABA
standards. In our past work, we have also reviewed the professional
standards of practices related to ombudsman.26 The core principles
endorsed by these organizations include having an ombudsman who is
independent, impartial/neutral, and protects confidentiality. According to
leading experts in this area, these principles can apply to ombudsman in
the private or public sector, and are as follows:

o Independent: An ombudsman should be free from interference or control by
an official of the appointing entity or by a person who may be the subject
of a complaint or inquiry. Furthermore, standards for the ombudsman state
that an ombudsman should function independently of line management. This
could include having the ombudsman report directly to the highest agency
official, report directly to the official governing body of the
organization, or having the ombudsman appointed by someone not a subject
of a complaint or inquiry.

o Impartial/neutral: An ombudsman should be free from initial bias and
conflicts of interest when conducting inquiries and investigations. The
ombudsman should not represent complainants or the organization and should
conduct investigations in an impartial manner. Furthermore, leading
organizations state that typically, ombudsman decisions are
"recommendations" rather than legally-binding decisions and emphasize that
periodic reports should be issued regarding the rulings of the ombudsman.

o Protect confidentiality: An ombudsman should not be required to disclose
any information provided in confidence or reveal the identity of a
complainant without the complainant's express consent to prevent the risk
of reprisal.

These leading organizations also stated that typically an ombudsman has
played a more informal mediation role as a neutral third party by
assisting in negotiations to resolve disputes. According to our past work,
the ombudsman is a dispute resolution practitioner who uses a variety of
techniques, including ADR processes, to deal with complaints, concerns,
and questions. The ombudsman is an informal alternative to more formal
processes that an organization has in place to deal with conflict
resolution. Both the ABA's rule and the Coalition of Federal Ombudsman's
supplement provide that an ombudsman should not make binding decisions or
determine rights but instead make recommendations to management.

Inconsistencies in USPS's Ombudsman Provisions and Guidance

We have concerns related to USPS's ombudsman provision and the ombudsman's
ability to fairly resolve business disagreements because its role,
structure, and authority are not consistent with key principles of
impartiality and independence embodied by leading organizations. These
uncertainties may have a negative effect on supplier confidence and
perceptions of fairness, which could severely hinder USPS's credibility
and its ability to achieve successful supplier relationships. Furthermore,
leading ombudsman organizations raised concerns about inconsistencies
between the role and structure of USPS's ombudsman and the key principles
endorsed by these organizations, which could contribute to confusion in
their efforts to develop a common understanding of the role and
responsibilities of an ombudsman in both public and private-sector
organizations.

USPS stated that its ombudsman process was established based on the
structure and role of an ombudsman at leading organizations, including IBM
and National Aeronautics and Space Administration (NASA). Further, USPS
officials told us that one of their key objectives in revising their
purchasing regulations was to ensure that responsibility and
accountability for purchasing decisions was clearly within the supply
management organization. Also, they explained that when they considered
the establishment of the ombudsman provision, they wanted a process that
would resolve disagreements with aggrieved suppliers/potential suppliers
in an expedited manner, both inexpensively and with finality, and that
decisions would be made based on best value determinations for USPS.
Although it is not explicitly stated in the regulation or guidance, USPS
preferred appointing as ombudsman a person from within USPS's Supply
Management organization, who understands supply management, knows the
postal culture, and has knowledge of postal operations. According to USPS
officials, this knowledge would help the person who serves as the
ombudsman ensure that disagreements are resolved in an efficient and
prompt manner.

USPS's draft guidance specifies that USPS would prefer to resolve disputes
prior to their reaching the ombudsman by encouraging the contracting
officer and supplier to come to mutual agreement, whenever possible, and
encourages the use of negotiation to resolve differences before turning to
formal ADR processes.27 The guidance encourages the use of ADR techniques
such as mediation, conciliation, neutral evaluation, expert determination,
adjudication, and arbitration prior to pursuing the ombudsman process.
USPS's guidance describes the process that the ombudsman will use when
making its final and binding decisions and states that litigation should
be considered as a method of last resort.

USPS's ombudsman, as it is currently structured, is not consistent with
the core principles of independence, impartiality, confidentiality, or the
role of the ombudsman as identified by leading ombudsman organizations.
The inconsistencies include the following:

o USPS's ombudsman is not independent of, or impartial from, the Supply
Management organization. The appointed ombudsman holds a position in
USPS's Supply Management organization, is appointed by the Vice President
of Supply Management, reports to the Vice President of Supply Management,
and continues to have other responsibilities within the Supply Management
organization. Furthermore, the Vice President of Supply Management is the
official who may make decisions to decline to accept or consider
proposals. In contrast, both IBM's and NASA's ombudsmen, who handle
purchasing-related disputes, report to someone outside of the procurement
organization.

o USPS's ombudsman makes final, binding decisions, which is inconsistent
with the authority of an ombudsman in leading organizations. Officials
from leading professional organizations stated that an ombudsman typically
makes "recommendations" and works to facilitate negotiations and resolve
issues and complaints. These officials stated that USPS's current
structure is more consistent with that of an arbitrator. One key
difference between USPS's and NASA's ombudsman is that the decisions of
NASA's ombudsman are recommendations, while those of USPS's are binding.

o USPS's ombudsman process does not promote confidentiality of the parties
raising the dispute against USPS. Although the Final Rule provides that
the ombudsman will protect confidential or privileged material, it does
not protect the identity of the complainant. The Final Rule specifies that
the ombudsman provides a copy of the disagreement to the contracting
officer (the person who may make contract award decisions from which the
dispute arises). Officials from leading professional organizations stated
that ombudsman investigations should be conducted in a confidential manner
to protect the identity of the person making the complaint against the
decision-making contracting official to limit any future retribution.

The inconsistencies in USPS's ombudsman from the principles and practices
of leading organizations may have several consequences. For example, based
on comments from experts and stakeholders we spoke with (1) suppliers may
potentially feel reluctant to spend the resources to go through the
ombudsman process or raise complaints against USPS; (2) suppliers may add
additional costs into their initial bid submissions to cover the potential
costs and risk associated with the ombudsman process, particularly because
USPS has set its ombudsman method up as a formal, binding process; and/or
(3) suppliers may lose confidence in the fairness and credibility of the
process and eventually stop contracting with USPS, which could erode the
supplier base. Officials from leading ombudsman organizations also voiced
concerns about how the current structure and role of USPS's ombudsman may
create confusion and impede their organizations' attempts to ensure
consistent, professional ombudsman's standards across both public and
private-sector entities.

To address these inconsistencies, there are several options that USPS
could consider. The first option is to revise its ombudsman regulations so
that they comport with the leading principles and practices. USPS could
change its regulatory provision so that the ombudsman would make
recommendations rather than binding decisions. The recommendations of the
ombudsman could then be reported to someone outside the purchasing
organization who would make a final, binding agency decision. Under this
option, USPS would also then need to revisit the regulatory provisions
related to the basis for appeals of ombudsman decisions because the
ombudsman would no longer be making the final agency decision. USPS could
also consult with leading ombudsman organizations, such as the Coalition
of Federal Ombudsman, to determine appropriate structure, standards, and
training qualifications.

Another option would be for USPS to eliminate its current ombudsman
position, determine who would make the final, binding agency decision, and
make corresponding changes in its regulations and appeals provisions. USPS
could also determine whether it wants to establish or continue to use
other formal or informal dispute resolution mechanisms to reach its goal
of handling disagreements in an expedited manner with finality. For
example, Federal Aviation Administration (FAA) does not have an ombudsman
as part of its dispute resolution process, but has instead established the
Office of Dispute Resolution for Acquisition. This office encourages
parties to mutually agree to the use of ADR mechanisms as the primary
means of resolving bid protests and assigns an officer to facilitate these
discussions.28 The head of this office also stated that he prefers more
informal mechanisms such as neutral evaluation and mediation as opposed to
more formal mechanisms such as binding arbitration because they are
faster, less costly, and parties have more control of the outcome. This
official also serves as the Chair of the Interagency Alternative Dispute
Resolution Working Group and suggested that this working group would be

available to assist USPS and other federal entities in developing their
dispute resolution processes.  29

Continued Oversight of USPS's Implementation of Its New Regulations Is
Needed

Continued oversight of USPS's changes in the purchasing area is needed not
just based on the ombudsman inconsistencies identified above but also due
to other factors such as the uncertainty related to the issuance of USPS's
final guidance, the potential impact on suppliers, and USPS's ability to
achieve efficiencies under these new flexibilities while ensuring fair and
consistent treatment of suppliers. As we previously discussed, we have
concerns related to the credibility of USPS's ombudsman and how its role
and structure is inconsistent with the principles and practices of leading
organizations. Leading organizations favor the use of an ombudsman as a
neutral, third-party facilitator, while USPS's is a final agency decision
maker that focuses on best value decisions for USPS. We also have concerns
related to the uncertainty surrounding the final guidance. USPS continues
to delay the issuance of its final guidance, which we were told would be
available in the fall 2005 and was later changed to early in calendar year
2006. Considering that the final guidance was not yet completed when the
final rule was implemented, and that there have been additional delays
since, uncertainties remain for both the supplier community and other
interested stakeholders about the principles and practices that will guide
future USPS purchasing decisions.

This relatively short implementation period of these regulatory
changes-they have only been in place 7 months-creates additional
uncertainties regarding the potential impact of these changes on USPS's
suppliers and the sufficiency of USPS's accountability mechanisms for
tracking and monitoring its performance in this area. USPS officials have
acknowledged that the changes in USPS's purchasing regulations could
result in a decrease in the number of USPS suppliers and that the number
of small, minority-, or women-owned businesses could be impacted by these
changes. These officials also stated, however, that USPS's contracting
with small, minority-, and women-owned businesses have continually
exceeded that of other federal agencies and that USPS's draft guidance
promotes supplier diversity and encourages the use of these businesses
when issuing certain contracts. Although we recognize USPS efforts in this
area, our past reports have raised concerns about the sufficiency of
USPS's accountability mechanisms in this area. In 2004, we reported that
USPS had difficulties in achieving its desired efficiencies for its bulk
fuel program initiative, had unreliable data on the dollar amounts of
small business contracts, and no longer included targets for contract
dollars awarded to these businesses.30 We recommended that USPS focus
attention on small business concerns in carrying out its supply chain
management initiatives and develop targets to promote accountability in
its small business contracting. At that time, USPS generally agreed with
our recommendation but stated that it did not plan to establish small
business targets at that time but would consider reestablishing targets
for small business contracts if its achievements slipped. In 2003, we also
reported that USPS did not meet its savings targets related to its office
supply contract, and it was not accurately tracking small, minority-, and
women-owned business participation.31 We recommended that USPS develop a
plan that accurately and clearly reflects realistic contracting goals for
small, women-, and minority-owned businesses. We recently discussed these
reports with USPS officials who stated that USPS has made significant
progress in achieving efficiencies in its supply chain initiatives since
these reports were issued, particularly in tracking small, minority-, and
women-owned participation, but they continue to disagree with our
recommendation to establish targets because of their positive performance
in this area and the difficulty in developing useful targets. We continue
to believe that targets are necessary because without establishing targets
and providing reliable information on performance goals and results
related to USPS's purchasing activities, including its contracts with
small, minority-, and women-owned businesses, it will be difficult for
stakeholders to hold USPS decision makers accountable for their actions or
ensure that USPS (1) maintains a diversified supplier base, (2) achieves
its desired efficiencies, and (3) implements its revised regulations in a
manner consistent with the principles of postal and procurement reform.

Concerns also remain about the use of ADR mechanisms in the purchasing
area, given that they were available under the previous regulations by
rarely used. Although USPS encourages the use of ADR as an effective way
to understand, address, and resolve disagreements, the head of Supply
Management has stated that past USPS efforts in this area did not gain
much traction. Considering the increased focus on ADR under the new
rule-the rule stated that any party disagreeing with a USPS decision must
consider the use of ADR to resolve particular disagreement regardless of
the nature of the disagreement or when it occurs during the purchasing
process-it will be important for these ADR mechanisms to be effectively
implemented to have a credible dispute resolution process.

Proposed legislation and oversight mechanisms by Congress have also
identified issues related to how USPS can achieve efficiencies by taking
advantage of increased flexibility, while at the same time ensuring fair
and consistent treatment of suppliers. In the legislative arena, we have
mentioned that pending postal reform bills include provisions related to
USPS's purchasing activities. Specifically, the Senate's bill, S. 662,
states that USPS should implement commercial best practices to achieve
greater efficiency and cost savings in a manner that is compatible with
the fair and consistent treatment of suppliers and contractors. Further,
H.R. 22, the House postal reform bill, includes a requirement that USPS's
Board of Governors submit a report to the President and the Congress
concerning the number and value of contracts and subcontracts USPS has
entered into with women, minorities, and small businesses. Congress'
oversight mechanisms include annual reports from USPS, such as its annual
operations report, the Comprehensive Statement on Postal Operations, which
provide information related to USPS's supply management activities. The
2004 Comprehensive Statement reported that USPS's supply management
activities had achieved $1.4 billion in cost savings, reductions,
avoidances, and revenue since fiscal year 2000, discussed how cost
efficiencies were achieved, described key initiatives in this area, and
discussed its supplier diversity achievements and contract commitments.
USPS is also required to report to the Senate Committee on Homeland
Security and Governmental Affairs and the House Committee on Government
Reform on the actions it plans to take to respond to our recommendations
within 60 days of the issuance. Finally, as another oversight mechanism,
Congress has asked us to report on USPS's activities in this area as
indicated by this report and other reports previously mentioned.

Continued oversight will be needed to ensure that USPS successfully
implements the recent changes to it purchasing regulations. The areas for
oversight include

o how USPS has addressed the inconsistencies in its ombudsman regulatory
provisions to better reflect the principles and practices of leading
organizations;

o when USPS will issue its final guidance, which details how it plans to
implement the changes to its purchasing regulations;

o how USPS intends on ensuring accountability and supplier diversity by
effectively tracking, monitoring, and reporting its contracting
performance, including the impacts on small, minority-, and women-owned
businesses;

o the extent to which USPS is utilizing ADR methods for resolving bid
protests; and

o whether USPS has taken advantage of its increased flexibility and
achieved greater efficiency while ensuring fair and consistent treatment
of suppliers.

Conclusions

USPS continues to face financial and operational challenges, and its
procurement program represents a key part of its annual expenses. USPS has
recognized opportunities to increase efficiencies in this area by making
major changes to its purchasing regulations. Generally, USPS's recent
changes to its procurement regulations and draft guidance are consistent
with the principles of postal and procurement reform and the leading
practices in this area. However, the regulatory provision related to
USPS's new ombudsman process is not consistent with core principles
related to independence and impartiality that were identified by various
ombudsman authorities. Specifically, the reporting relationship is
inconsistent because the ombudsman reports to the Vice President of Supply
Management, the head of the purchasing organization, and the ombudsman's
decisions are final and binding, rather than recommendations. These
inconsistencies may lead to a loss of supplier confidence in the fairness
or credibility of USPS's dispute resolution process. Also, the ombudsman
organizations were concerned that the inconsistencies in USPS's ombudsman
regulatory provision would create confusion about the role of an ombudsman
as an independent neutral facilitator. There are several options that USPS
could consider to address the inconsistencies of its ombudsman provision.

Recommendations for Executive Action

We recommend that the Postmaster General take actions to address the
inconsistencies in USPS's ombudsman with the leading principles and
practices related to independence and impartiality. USPS should consult
with expert ombudsman and dispute resolution organizations to explore
options related to its intended purpose for the ombudsman position and
alternatives for changing this position to conform to leading principles
and practices. If USPS wants to retain the ombudsman position, it should
revise (1) the ombudsman's reporting relationship to the purchasing
organization so that it is independent and neutral; (2) the ombudsman's
role so that it makes recommendations rather than final, binding
decisions; and (3) the appeals provision so that it applies to the final,
binding agency decision rather than the ombudsman's recommendation.
Another alternative is that USPS could eliminate the ombudsman position
and use other dispute resolution mechanisms, such as ADR. USPS could then
designate another agency official to make the final, binding decision. For
either alternative, USPS would need to change its regulations and guidance
accordingly.

Agency Comments and Our Evaluation

We provided a draft of this report to USPS for its review and comment.
USPS provided its comments in a letter from the Vice President, Supply
Management, dated December 5, 2005. These comments are summarized below
and included in appendix IV. USPS concurred with our finding that its
regulatory changes, including its draft internal guidance, are generally
consistent with key reform principles and practices of leading public and
private-sector organizations. In its comments, USPS also reiterated that
its new Supplying Principles and Practices will be issued early next year.
Regarding our recommendations related to its new supplier ombudsman, USPS
stated that it understood our concerns, and in keeping with our
recommendations, would consult with appropriate ombudsman and dispute
resolution organizations and reassess its ombudsman's role and reporting
relationship. Further, USPS stated that it would keep us informed of its
progress and decisions related to its ombudsman. Changes to the ombudsman
will help to ensure independence and impartiality in USPS's dispute
resolution process, and we will continue to monitor USPS's actions related
to this issue.

We are sending copies of this report to the Chairman and Ranking Minority
Member of the House Committee on Government Reform, Ranking Minority
Member of the Senate Committee on Homeland Security and Governmental
Affairs, Senator Thomas R. Carper, the Postmaster General, and other
interested parties. We also will provide copies to others on request. In
addition, the report will be available at no charge on the GAO Web site at
http://www.gao.gov.

If you or your staff have any questions regarding this report, please
contact me at [email protected] or by telephone at (202) 512-2834. Contact
points for our Offices of Congressional Relations and Public Affairs may
be found on the last page of this report. GAO staff who made major
contributions to this report are listed in appendix V.

Sincerely yours,

Katherine Siggerud Director, Physical Infrastructure Issues

Objectives, Scope, and Methodology Appendix I

To describe the major changes to the U.S. Postal Service's (USPS)
purchasing regulations, we reviewed the Final Rule in the Federal Register
that was issued on April 19, 2005, as well as USPS's proposed rule that
was issued on March 24, 2004. To describe the stakeholder views of those
changes, we reviewed all of the comments that were filed in response to
the proposed rule, which included such suppliers as Northwest Airlines;
Hewlett-Packard; Siemans Dematic Postal Automation, L.P.; and the National
Star Route Mail Contractors' Association. We also followed up with
selected parties to discuss with them the comments their organizations
provided on the proposed rule, including both large and small suppliers,
as well as other legal representatives such as Wickwire, Gavin P.C., the
American Bar Association, and Thompson Coburn LLP. We also spoke with
selected stakeholders who did not directly provide formal comments,
including various representatives of small business associations such as
the National Small Business Association and the Association for
Procurement Technical Assistance Centers. To describe USPS's rationale for
making these changes, we met with USPS officials and reviewed USPS's
purchasing manuals, circulars, and instructions, the preambles and
regulatory case files for the proposed and Final Rule, USPS's
Comprehensive Statement on Postal Operations, and USPS's purchasing
information. We assessed the reliability of USPS data on contract spending
for inconsistencies. In those cases where we found discrepancies, we
worked with USPS to address those problems. We determined that the data
were sufficiently reliable for our review.

In order to conduct an assessment of USPS's purchasing changes, we needed
to determine what information would be contained in USPS's internal
guidance, the Supplying Principles and Practices. As such, we requested a
draft copy of this document from USPS, which provided it to us for use in
our analysis. Then, to assess how USPS's regulatory changes and its draft
guidance reflect the principles of postal and procurement reform, we
developed key principles of efficiency, flexibility, accountability, and
fairness or social responsibility based on reviewing information from a
variety of sources. These included our past work on postal reform and on
procurement leading practices, which included reviewing the spend analysis
purchasing efforts at various federal agencies (Departments of Defense,
Veterans Affairs, Health and Human Services, Agriculture, Justice, and
Transportation) as well as leading private organizations that were
recognized for their acquisition services (IBM, ChevronTexaco, Bausch &
Lomb, Delta Air Lines, and Dell). We also met with officials from the
Institute for Supply Chain Management and Center for Strategic Supply
Research, which are two leading procurement organizations. We also
reviewed USPS's Transformation Plan and its respective updates; USPS's
Supply Management 5-Year Strategic Plan; the President's Commission's
report; OMB's sourcing guidance, "Implementing Strategic Sourcing"; and
proposed postal reform legislation. We also talked to various ombudsman
experts from organizations such as the Coalition of Federal Ombudsman, the
United States Ombudsman Association, the International Ombudsman
Association, and the Interagency Alternative Dispute Resolution Working
Group. Key members of these organizations serve as the ombudsman for
various federal and state organizations including the National Institutes
of Health, the State of Iowa, and the State of Hawaii. Representatives
from these groups also provided the names of Coca-Cola and United
Technologies Corporation as leading organizations that use ombudsman, with
whom we also followed up. These experts also recommended that we consult
the American Bar Association's adopted resolution entitled "Standards for
the Establishment and Operations of Ombuds Offices," for leading
principles that should be considered when implementing an ombudsman, which
we reviewed and discussed this document with these experts. Our work was
conducted from April 2005 to December 2005 in accordance with generally
accepted government auditing standards.

Selected Federal Laws Applicable to USPS Purchasing Appendix II

In its draft Supplying Principles and Practices, the U.S. Postal Service
(USPS) identified the following list of laws governing purchasing at USPS,
which are either mandated in Title 39, as enacted or amended, or apply to
USPS by their own terms (see table 4). The draft guidance states that the
Supply Management organization must comply with these requirements in all
activities. We did not conduct an independent assessment of USPS's list or
other laws which may apply to USPS, which was not within the scope of this
review.

In addition, USPS provided in its draft Supplying Principles and Practices
a list of additional laws and executive orders, which are applicable to
it, and may affect USPS purchasing. These include: the National
Environmental Policy Act, the Interstate Commerce Act, the Resource
Conservation and Recovery Act, and the Program Fraud and Civil Remedies
Act. USPS also included a listing of federal laws that do not apply to its
purchasing processes, including the Competition in Contracting Act, the
Federal Acquisition Streamlining Act, Truth in Negotiations Act, and the
Procurement Integrity Act.

Table 4: USPS Compilation of Selected Federal Laws That Apply to USPS
Purchasing

     Law, regulation, executive                   Description                 
          order, or policy         
Laws mandated in Title 39       
either as enacted or since      
amended                         
Randolph-Sheppard Act, 20       Requires that licensed blind suppliers     
U.S.C. 107 et esq., made        must be given priority for the operation   
applicable by 39 U.S.C.         of food vending services in USPS           
410(b)(3)                       facilities.                                
Miller Act, 40 U.S.C.           Requires contract surety bonds on federal  
270a-270f, made applicable by   construction; contractor must post a       
39 U.S.C. 410(b)(4)(B)          performance bond and a labor and material  
                                   payment bond.                              
Davis-Bacon Act, 40 U.S.C. 276a Requires that construction contracts over  
et seq., made applicable by 39  $2,000 contain a provision setting the     
U.S.C. 410(b)(4)(C)             minimum wages to be paid to all classes of 
                                   laborers and mechanics working on the work 
                                   site. Wage rates determined by Secretary   
                                   of Labor.                                  
Copeland Anti-Kickback Act, 18  Applies to any construction contract over  
U.S.C. 874 and 41 U.S.C.        $2,000 (subject to the Davis Bacon Act)    
276(c), made applicable by 39   and makes it unlawful to force laborers or 
U.S.C. 410(b)(4)(D)             mechanics to give up any part of their     
                                   compensation except for permissible        
                                   deductions such as taxes and union dues.   
Contract Work Hours and Safety  Requires that certain contracts contain a  
Standards Act, 40 U.S.C.        clause specifying that no laborer or       
327-333, made applicable by 39  mechanic doing any work under the contract 
U.S.C. 410(b)(4)(E)             may be required or permitted to work more  
                                   than 40 hours per work week unless paid    
                                   time and a half for all overtime hours.    
Walsh Healey Public Contracts   Applies to indefinite delivery contracts   
Act, 41 U.S.C. 35-45, made      and ordering agreements if the aggregate   
applicable by 39 U.S.C.         amount of all orders is expected to exceed 
410(b)(5)(A)                    $10,000 during the year following award.   
                                   Requires these contracts to incorporate    
                                   certain requirements by reference.         
Service Contract Act, Pub. L.   Applies to any contract whose principal    
No. 89-286, 41 U.S.C. 351 et    purpose is to provide services to be       
seq., made applicable by 39     performed by service employees. Employees  
U.S.C. 410(b)(5)(B)             working under a service contract must be   
                                   paid no less than the minimum wage         
                                   specified by the Fair Labor Standards Act. 
Prohibition on Convict Labor,   Requires USPS not contract for supplies    
39 U.S.C. 2201                  manufactured by convict labor except from  
                                   Federal Prison Industries, Inc.            
Architectural Barriers Act, 42  Requires that postal buildings are         
U.S.C. Chapter 51, made         accessible to the physically handicapped.  
applicable by 39 U.S.C.         
410(b)(8)                       
Prompt Payment Act, 31 U.S.C.   Provides incentives for USPS to pay its    
Chapter 39, made applicable by  bills on time to suppliers. Requires the   
39 U.S.C. 410(b)(9)             head of an agency acquiring property or    
                                   service who does not pay for each complete 
                                   delivered item by the required payment     
                                   date to pay an interest penalty on the     
                                   amount of the payment due.                 
Freedom of Information Act, 5   Provides the public with a right to access 
U.S.C. 552 made applicable by   to records maintained by federal agencies. 
39 U.S.C. 410(b)(1)             
The Privacy Act of 1974, 5      Provides privacy protections for personal  
U.S.C. 552a made applicable by  information maintained by federal          
39 U.S.C. 410(b)(1)             agencies. Provides that, when an agency    
                                   maintains a system of records with such    
                                   information, it must publish a notice      
                                   describing that system in the Federal      
                                   Register and must provide information on   
                                   how that information is collected, used,   
                                   disclosed, stored, and discarded. Includes 
                                   how individuals can obtain access to and   
                                   amend their personal information.          
Laws applied to USPS by their   
own terms                       
Contract Disputes Act, 41       Creates comprehensive system for resolving 
U.S.C. 601 et seq.              disputes between supplier and supply       
                                   management relating to performance of most 
                                   purchase contracts. The trigger point is   
                                   the contracting officer's decision. Claims 
                                   of the supplier and USPS must be the       
                                   subject of a contract officer's decision.  
                                   Supplier may appeal to appropriate agency  
                                   board of contract appeals or file suit in  
                                   U.S. Court of Federal Claims. Supplier and 
                                   USPS can appeal a decision of a board of   
                                   contract appeals or the federal court to   
                                   the U.S. Court of Appeals for the Federal  
                                   Circuit. Provisions of the Contract        
                                   Disputes Act with regard to administrative 
                                   resolution of disputes made by the         
                                   Administrative Dispute Resolution Act      
                                   (ADRA) are applicable to USPS, although    
                                   other portions of the ADRA codified in 28  
                                   U.S.C. are not.                            
Administrative Dispute          Requires USPS to have policies that        
Resolution Act of 1996 (ADRA),  address the use of alternative dispute     
28 U.S.C. 1491(b)               resolution (ADR) techniques and to appoint 
                                   a Dispute Resolution Specialist. Requires  
                                   USPS to examine use of ADR in connection   
                                   with rulemakings, formal and informal      
                                   adjudications, enforcement actions,        
                                   issuing and revoking licenses or permits,  
                                   contract administration, litigation, or    
                                   other actions.                             
Vietnam Era Veterans            Requires suppliers to take affirmative     
Readjustment Assistance Act of  action to employ and advance in employment 
1972, 38 U.S.C. 4212            qualified special disabled veterans,       
                                   veterans of the Vietnam era, and other     
                                   eligible veterans without discrimination   
                                   based on their disability or veterans'     
                                   status, and list all employment openings   
                                   with appropriate local employment          
                                   services.                                  
Javits-Wagner-O'Day Act, 41     Requires that USPS and other federal       
U.S.C. 46-48                    agencies purchase certain supplies and     
                                   services from qualified workshops which    
                                   employ people who are blind or severely    
                                   disabled.                                  
Rehabilitation Act of 1973, 29  Requires suppliers to take affirmative     
U.S.C. 702 et seq. including    action to employ and advance qualified     
Section 508                     individuals without discrimination as to   
                                   their physical or mental handicaps.        

Source: USPS.

USPS Revised Purchasing Regulations-Provisions Governing the Acquisition
of Goods and Services Appendix III

Source: USPS.

Comments from the U.S. Postal Service Appendix IV

GAO Contact and Staff Acknowledgments Appendix V

Katherine Siggerud (202) 512-2834

In addition to the individual named above, Teresa Anderson, Joshua
Bartzen, Tonnye ConnerWhite, Micah McMillan, Edda Emmanuelli-Perez, Collin
Fallon, Kathy Gilhooly, Brandon Haller, Carolyn Kirby, and Anthony Lofaro
made key contributions to this report.

(542053)

transparent illustrator graphic

www.gao.gov/cgi-bin/getrpt?GAO-06-190.

To view the full product, including the scope

and methodology, click on the link above.

For more information, contact Katherine Siggerud at (202) 512-2834 or
[email protected].

Highlights of GAO-06-190, a report to the Chairman, Committee on Homeland
Security and Governmental Affairs, U.S. Senate

December 2005

U.S. POSTAL SERVICE

Purchasing Changes Seem Promising, but Ombudsman Revisions and Continued
Oversight Are Needed

Purchasing makes up a significant portion of annual expenses for the U.S.
Postal Service (USPS). USPS has recently made significant changes to its
purchasing regulations which, according to USPS, will result in a more
businesslike purchasing process. Some stakeholders, including smaller
suppliers who stated they rely on USPS for the majority of their business,
have raised concerns about these changes. GAO was asked to (1) describe
these changes, stakeholder views, and USPS's rationale for the changes and
(2) assess how these changes reflect the principles of postal reform and
practices of leading organizations and identify areas, if any, for
continued oversight.

What GAO Recommends

To address inconsistencies in USPS's ombudsman, GAO is recommending that
the Postmaster General revisit the intended purpose for its ombudsman,
consult with experts to determine other options, and make the necessary
changes in its regulations and guidance to conform with leading principles
and practices. GAO provided a draft of this report to USPS for its review
and comment. USPS generally agreed with our findings and recommendations
and stated that it will reassess its ombudsman's role and reporting
relationship.

USPS has recently taken actions to streamline its purchasing regulations.
The three main changes are (1) revoking and superseding its former
purchasing regulations, handbooks, circulars, manuals, and guidelines and
replacing them with streamlined regulations and interim internal guidance;
(2) establishing new provisions for entering into business relationships
with suppliers, including the process for declining to accept or consider
proposals; and (3) creating a new process for resolving disputes,
disagreements, or arguments between USPS and suppliers/potential
suppliers, including the establishment of an ombudsman. Some postal
stakeholders stated these were positive changes, while others raised
concerns about the need or justification for such major changes; potential
limitations on suppliers' ability to appeal USPS decisions; and how USPS
officials would be held accountable for the fairness of purchasing
decisions and its results (i.e., ability to achieve cost savings) given
this additional flexibility and discretion. USPS stated these changes
would result in a more flexible, efficient, businesslike purchasing
system.

GAO assessed USPS's new postal purchasing regulations and draft internal
guidance against key principles of postal reform-flexibility, efficiency,
accountability, and social responsibility-and the purchasing practices of
leading organizations. GAO found that USPS's changes are generally
consistent with these principles and practices of leading organizations,
except for USPS's new ombudsman position (see table below).

How USPS's Changes Reflect Key Principles and Leading Practices

Reflect                         Do Not Reflect                             
                                                                              
      o  Flexibility: Provides        o  Ombudsman: Its role, structure, and  
      more flexibility when           decision-making authority are not       
      updating its policies and       consistent with leading ombudsman       
      procedures to respond to        practices of independence and           
      changes in market condition.    impartiality. Inconsistencies include   
      o  Efficiency: Emphasizes       the reporting relationship (reports to  
      efficiency, including           head of USPS purchasing organization)   
      leveraging its buying power.    and decision-making authority (issues   
      o  Social responsibility:       binding decisions rather than           
      Promotes the use of a           recommendations).                       
      diverse supplier base and    
      ethical behavior.            
      o  Accountability: Plans to  
      establish goals and methods  
      for measurement.             

Source: GAO.

In addition to the ombudsman inconsistencies, concerns remain about how
USPS's purchasing changes will be implemented. These concerns relate to
the delayed issuance of USPS's final guidance, the potential impact on
suppliers and USPS's ability to track and monitor its performance, and
USPS's ability to achieve efficiencies under these new flexibilities while
ensuring the fair and consistent treatment of suppliers. These
inconsistencies and concerns will require continued oversight.
*** End of document. ***