Highlights of a GAO Forum: Managing the Supplier Base in the 21st
Century (31-MAR-06, GAO-06-533SP).				 
                                                                 
The Department of Defense (DOD) and other federal agencies face  
challenges to maintain suppliers capable of meeting current and  
future mission requirements. Changing security threats, rapidly  
evolving science and technology, and budget imbalances have	 
created an uncertain acquisition environment. As DOD, Department 
of Homeland Security, and others seek to fundamentally transform 
operations, they are giving contractors increased program	 
management responsibilities to develop requirements, design	 
products, and select major system and subsystem contractors. At  
the same time, the government workforce that manages and oversees
these purchases has decreased. An increasingly global and	 
interconnected defense and commercial supplier base also poses	 
significant acquisition challenges. To identify and discuss key  
supplier issues, GAO sponsored a 1-day forum in October 2005	 
where defense policy experts from federal agencies, defense	 
industry, nonprofit organizations, and academia shared insights  
into the current supplier base environment. As agreed with the	 
participants, GAO's goal was to engage in a dialog on a 	 
non-attribution basis to reach consensus on the top challenges	 
facing agencies as they seek to manage the supplier base. This	 
report provides highlights of the forum.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-533SP					        
    ACCNO:   A50817						        
  TITLE:     Highlights of a GAO Forum: Managing the Supplier Base in 
the 21st Century						 
     DATE:   03/31/2006 
  SUBJECT:   Defense procurement				 
	     Department of Defense contractors			 
	     Employee training					 
	     Globalization					 
	     Labor force					 
	     Procurement planning				 
	     Procurement policy 				 
	     Procurement practices				 
	     Property and supply management			 
	     Small business contractors 			 
	     Training utilization				 
	     National policies					 
	     Transparency					 
	     F-16 Aircraft					 
	     F-18 Aircraft					 
	     C-17 Aircraft					 

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GAO-06-533SP

                           HIGHLIGHTS OF A GAO FORUM

Managing the Supplier Base in the 21st Century

What Participants Said

After discussing at length a range of views on the supplier base issues
the government faces, participants identified and reached consensus on the
top five challenges as well as some potential next steps to address them.

1. Balancing acquisition risks and rewards. Participants noted that DOD's
       current acquisition policy can discourage small innovative businesses
       and other suppliers from contracting with the government because of
       perceived risks such as fixed profit margins, uncertain government
       funding, and navigating the complex federal acquisition environment.
       To encourage innovation, spur competition, and provide the government
       with better acquisition options, participants recommended several
       actions, including developing a flexible acquisition strategy that
       distinguishes emerging markets from mature ones and providing rewards
       that incentivize companies with emerging technologies to take more
       risks.
2. Difficulty managing U.S. government policies in an international
       business environment. According to forum participants, the U.S.
       government has not struck an appropriate balance between the
       globalizing

U.S.
           supplier base and protecting U.S.-based companies. Participants
           explained that DOD and other agencies have not clearly identified
           U.S. industries and technologies to protect. Participants also
           suggested that the

U.S.
           may overly restrict technology transfers to allies, which may
           discourage global suppliers to participate in the U.S. supplier
           base. To reap the benefits from globalization and expand the
           supplier base while protecting sensitive technologies,
           participants suggested adjusting the U.S. export control paradigm
           to reflect differing national security relationships.

1. Defining a strategic supplier management policy. Participants noted
       that current supplier policy lacks a comprehensive framework to
       identify and achieve goals. To develop a sound supplier policy,
       participants recommended that the government clearly identify
       investment targets, key technologies to develop, and address
       differences in managing various types of suppliers.
2. Managing multiple tiers of the supplier base. Participants noted that
       the current lack of visibility into the supply chain complicates
       efforts to maintain a strong supplier base. To better manage the
       multi-tier supplier base, participants suggested that DOD improve
       efforts to collect data on the lower tiers of the supply chain.
3. Workforce skills development and culture change. Participants agreed
       that the acquisition workforce-a culture resistant to change-is not
       equipped to manage in a new acquisition environment. To ensure the
       federal acquisition workforce has the right skills, forum participants
       recommended that relevant agencies devote attention to identifying and
       developing the capabilities of the acquisition workforce.

                 United States Government Accountability Office

Contents

Letter 1
Background 4
Balancing Acquisition Risks and Rewards 6
Difficulty Managing U.S. Government Policies in an International Business
Environment 11
Defining a Strategic Supplier Management Policy 14
Managing Multiple Tiers of the Supplier Base 16
Workforce Skills Development and Culture Change 17

Appendix I-Scope and Methodology

Appendix II-Forum Participants

Appendix III-Forum Agenda

Appendix IV-Supplier Base Forum Slide Presentation

Appendix V-Summary of Lunch Speaker Remarks

Appendix VI-Related GAO Products

This is a work of the U.S. government and is not subject to copyright
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separately.

United States Government Accountability Office Washington, DC 20548

March 31, 2006

The U.S. industrial base has been instrumental in the U.S. ability to
provide the warfighter with the best weapons in the world and maintain
military superiority. The Departments of Defense (DOD), Homeland Security
and other agencies such the National Aeronautics and Space Administration
have relied on a common supplier base to meet current and future mission
requirements. However, due in part to a changing acquisition environment,
these agencies face challenges to maintain and manage suppliers. For
example, current and new acquisition efforts are expected to be the most
expensive and complex ever and are intended to fundamentally transform
military operations. Yet poor outcomes result from many of the
government's major system acquisitions. The acquisition process slowly
delivers systems with cost overruns and seemingly defies reform even as
the external environment demands an agile and flexible process that can
quickly deliver cost-effective products and services. In addition, DOD and
related agencies are increasingly purchasing and relying on supplier
services to accomplish agency missions and DOD is giving contractors
increased program management responsibilities to develop requirements,
design products, and select suppliers. At the same time, the government
workforce that manages and oversees these activities has decreased and may
lack necessary skills to ensure proper oversight, transparency, and
accountability in the acquisition process.

Recognizing that decision makers can greatly benefit from a better
understanding of the constraints and challenges DOD and related agencies
face to manage the supplier base, GAO convened a forum on October 17,
2005, to identify and discuss key supplier issues. Specifically, GAO's
Acquisition and Sourcing Management team sponsored a 1-day forum where
defense policy experts from federal agencies, defense industry, nonprofit
organizations, and academia shared insights into the current supplier base
environment. As agreed with the participants, our goal was to engage in a
dialog on a non-attribution basis to reach consensus on the top challenges
facing the management of the supplier base. Accordingly, participants
identified and discussed key challenges and opportunities confronting DOD
and related agencies' management of the supplier base and reached
consensus on the top five challenges with some potential next steps to
address them.1 The forum participants expressed a range of views on the
challenges facing the supplier base. After a lengthy discussion, the
following were identified as the most significant challenges:

     o balancing acquisition risks and rewards;
     o difficulty managing U.S. government policies in an international
       business environment;
     o defining a strategic supplier management policy;
     o managing multiple tiers of the supplier base; and
     o workforce skills development and culture change.

Convening discussions on these issues is just one step toward
understanding the challenges faced by the supplier community and
identifying areas where constructive action may be taken. While GAO and
others have reported in the past on a number of issues raised by the
participants, the purpose of this report is to set forth issues that
participants identified during the forum and the actions they proposed to
improve management of the supplier base, as well as to increase the body
of knowledge available on these issues.

The letter provides highlights of the most significant challenges
discussed by the participants, as well as subsequent comments we received
from them on a draft summary of the discussion. Appendix I describes the
scope and methodology used for the forum, appendix II provides a list of
the forum participants, and appendix III provides the forum agenda.
Appendix IV contains a set of slides presented by GAO at the beginning of
the forum. This presentation was designed to provide background
information to spur the discussion among forum participants. Appendix V
summarizes remarks made by Eileen Giglio of the Defense Acquisition
Performance Assessment task force, who was the forum's lunch speaker.
Appendix VI contains recent GAO reports and products related to the forum
subject matter.

Participants used a consensus-building tool called Nominal Group Technique
to identify the top five challenges as an aggregation of the group's
judgment.

Page 2 GAO-06-533SP Supplier Base Forum

For more information about this report, please contact Ann Calvaresi-Barr,
Director, at 202-512-4841 or [email protected]. Other key
contributors to this report were John Neumann, William Russell, Terry
Richardson and Karen Sloan.

Katherine Schinasi, Managing Director Acquisition and Sourcing Management

In advance of the forum, GAO provided prospective participants the
following list of trends to provide context for the forum and to
illuminate thoughts on the top challenges.

  Changing Acquisition Continuing DOD transformation from a platform centric
  acquisition strategy to a more capabilities based, net-centric

Environment

  approach.

     o DOD is shifting policy and acquisition approaches to develop systems
       that are network centric-interdependent components that work together
       in the field- with system architecture needs that are defined early in
       programs. These systems are integrated through information systems,
       relying on software for functionality. New DOD capabilities are often
       required to be interoperable across military services and use software
       solutions such as open architectures that increase company challenges
       to maintain proprietary data and knowledge of software.
     o DOD is experimenting with different ways of managing the acquisition
       of network centric warfare. Missile defense programs employ a
       "national team" approach to define the overall architecture. The
       Future Combat System program represents another approach where the
       lead systems integrator is managing the architecture and the systems
       that feed into it. In still other cases, DOD uses a systems integrator
       to define the architecture but manages the acquisition and integration
       of individual systems into this architecture.

  DOD use of and access to commercial products and technologies for systems and
  programs.

     o DOD has access to more nontraditional suppliers using other
       transactions authority to carry out prototype projects directly
       relevant to weapons or weapon systems, intended to address challenges
       of a shrinking industrial base and new threats.
     o Commercial sector leads innovation in telecommunications, software,
       and information systems, increasing the need for DOD to find means to
       access this technology.
     o Commercial firms must consider issues of intellectual property, cost
       data, and complex acquisition rules when providing products and
       services to DOD.

  Shift to purchasing more services for mission performance rather than spending
  on military equipment, supplies, and weapon systems.

o  Over the last decade, DOD has outsourced functions performed by
military and civilian personnel to commercial services contractors,
creating new challenges to establish effective oversight of contractor
performance.

  Changes in the budget environment.

     o DOD has increased utilization of international cooperative programs to
       develop next generation systems given limited resources.
     o U.S. government funding priorities, such as missile defense programs,
       guide where suppliers can compete for new contracts.
     o Mounting costs for the war on terrorism and military pay and benefits
       force cuts in weapon systems and services contract spending for key
       programs and missions.
     o Striking an affordable balance between current and future needs will
       be an ongoing challenge, particularly with the federal government's
       current and projected fiscal imbalance.

  Changing global threats require new capabilities, technologies, and
  communications as well as different tactics.

     o Global War on Terror is asymmetric in nature and creating demand for
       different systems such as non-lethal weapons that may be based on
       existing commercial products and technologies.
     o Current operations are creating the need to translate technologies
       into fielded systems rapidly.
     o DOD is expanding technology demonstration products and exploring
       alternate approaches for rapidly developing products based on
       commercial technologies.

  Supplier base consolidation.

     o As the defense supplier base has consolidated into a few prime
       contractors, competition has been reduced. As a result, cost
       containment is more difficult.
     o Single source suppliers are more common for components and subsystems.
     o Key contractors are selling off defense divisions or exiting the
       market altogether.
     o It is becoming more common to end production of a system before DOD is
       ready to acquire the follow-on system. When this happens, component
       and subsystem suppliers disappear from the defense supplier base.

Balancing Acquisition Risks and Rewards

  Globalization of suppliers in the defense industrial base.

     o Intensified debate over the use of domestic vs. foreign suppliers.
     o Challenges and debate related to technology transfer policy,
       procedures, and protections.
     o Uncertainty over ability of the United States to maintain military
       superiority in critical technology areas.
     o Lack of DOD transparency into the supplier base and issues of security
       of supply.

  Forum Discussion

The forum was convened as a springboard to enhance constructive
discussions among the supplier community. Our goal in sponsoring the
symposium was to have participants discuss the full range of challenges
facing the supplier base and come to consensus on the top challenges that
need to be addressed collaboratively and to offer actions to address them.

After introductory remarks, a lengthy discussion ensued of the key
challenges facing the supplier base. At the close of this discussion,
participants identified the top supplier challenges that need to be
addressed. The results are as follows:

Top Five Supplier Base Challenges Identified by Forum Participants

     o Balancing Acquisition Risks and Rewards
     o Difficulty Managing U.S. Government Policies in an International
       Business Environment
     o Defining a Strategic Supplier Management Policy
     o Managing Multiple Tiers of the Supplier Base
     o Workforce Skills Development and Culture Change

According to forum participants, major actors in the defense supplier
base-including prime and lower tier contractors-behave according to
perceived risks of contracting with the government. These risks stem from
fixed profit margins, uncertain government funding over time, and the
potentially high costs for navigating the complex federal acquisition
environment. Participants noted that current DOD acquisition policy does
not adequately align rewards with market maturity, which can discourage
suppliers-especially small innovative businesses--- from adopting risks
associated with emerging technology markets. Participants also cited

Little Distinction in Rewards for Emerging and Mature Markets, Despite Differing
Levels of Risk

challenges to ensuring accountability in the acquisition system, which can limit
      the government's ability to balance risks and rewards for suppliers.

Participants were concerned that the design of the current acquisition
system creates an imbalance between risks and rewards, regardless of the
risk level. They described DOD policy as "one size" that does not fit all
markets given varying levels of maturity within the defense environment.
Participants provided research as an example, suggesting that more reward
is needed to support the research marketplace because more risk occurs at
the leading edge of research. In the past, contractors accepted
single-digit profits in research and development in exchange for
doubledigit profits in production. However, the relative increase in the
cost of research and development has depressed the profit margin. Despite
the growth in research and development costs, government procurement
policies and strategies have not been adjusted to reflect the increase.
And while federal acquisition regulations acknowledge greater risks for
research and development, participants felt that this acknowledgement is
lost during program implementation. If risks outweigh rewards, suppliers
may be discouraged from participating in DOD and related agency contracts.

According to participants, second and third-tier contractors significantly
strengthen the supplier base market and provide supplier competition.
However, the cumulative effect of insufficient profit margins and the
challenge of operating in accordance with complex federal acquisition
regulations discourage small and innovative businesses from partnering
with the government in emerging markets. As an example, participants cited
the obstacles DOD and the Department of Homeland Security are encountering
in their efforts to partner with the biotech industry for biodefense.
Biotech companies are finding it difficult to adopt profit margin limits,
cost accounting standards, and other requirements that traditional prime
contractors follow.

Participants noted that the current acquisition environment has distorted
normal economic incentives. Pervasive fear of failure has discouraged
government procurement employees from taking the risks necessary to
maximize quality and minimize cost and has created a mindset that
considers not failing a measure of success. As an example, participants
pointed to the considerable press and oversight scrutiny procurement staff
face if they fail to prevent high supplier profits. This emphasis on
limiting supplier profit could ultimately result in higher costs to the
taxpayer if the supplier lacks the incentives to deliver the highest
quality product or service at the lowest cost.

Lack of Transparency and Accountability in Current Acquisition Environment Could
Undermine Efforts to Balance Risks and Rewards

Participants also found suppliers have distorted economic incentives that
contribute to acquisition risks. For example, suppliers tend to
intentionally underbid for contracts knowing once a program is established
the government is not likely to terminate it in response to cost overruns
because of political considerations.

Participants were also concerned that as markets develop, late comers and
smaller companies are forced out in favor of larger, more established
firms. In addition, participants found that DOD was not effectively
providing companies with opportunities to compete for contracts once
programs had started. They suggested methods such as spiral development,1
which seek to keep a platform technologically and operationally up to date
while it's being built, to increase competition opportunities, reduce
risk, remove barriers to competition and innovation, and ultimately
provide the government with better acquisition options.

Although participants agreed that the existing acquisition system creates
an imbalance between risks and rewards, they noted that a lack of
accountability could thwart efforts to reform the system. Participants
have observed that accountability for DOD's acquisitions occurs at the
higher levels of the organization and is too diffuse to easily hold people
accountable. The accountability chain from the executive level to the
program manager is also blurry, and responsibility cannot be adequately
determined.

According to participants, the accountability chain becomes clearer at the
program management level, but participants warned that focusing
accountability at this level can be risky. Program managers often lack
complete authority over the project, are under funded, or encounter
unstable program funding and must accept bad acquisition choices from
officials throughout the organization. High turnover rates of DOD program
managers can also undermine accountability because a manager's actions
cannot be readily linked to program performance.

1

A spiral development program is defined in section 803 of the Defense
Authorization Act for Fiscal Year 2003 as a research and development
program conducted in discrete phases or blocks, each of which will result
in the development of fieldable prototypes and will not proceed into
acquisition until specific performance parameters, including measurable
exit criteria, have been met.

Page 8 GAO-06-533SP Supplier Base Forum

Participants were also concerned that the federal government may be
outsourcing program management and other inherently governmental functions
without oversight. For example, DOD and related agencies have provided
contractors with more authority to achieve program goals through the lead
system integrator process. However, participants noted it is unclear how
oversight and accountability concepts are incorporated to the contractor's
expanded role.

Actions to Address Better 
Balance between Acquisition Risks and Rewards

To encourage innovation, spur competition, and
provide the government with better acquisition options, forum participants
recommended the
 following actions: 

     o Develop a flexible acquisition strategy for innovative products and
       services. This policy should differentiate between emerging and mature
       markets and provide rewards that incentivize companies engaging in
       research and development efforts to take more risks. Since profit is
       the prime motivation for companies, participants suggested that DOD
       set up incentives that meet the best interests of industry based on
       the maturity of the market and government based on the need for the
       technology and best value for cost. For example, the government could
       allow higher profits to companies that pursue technologies in emerging
       markets that require more risk to develop. In the participants' view,
       this would provide more incentives for companies to conduct basic
       research. One participant suggested that research and development
       should be a stand-alone business that is profitable for companies.
       Some participants suggested that the Department of Homeland Security
       might offer a good environment for experimentation and reform of old
       government acquisition strategies and practices.
     o Use market maturity to guide expectations regarding competition. For
       instance, in mature markets, a small number of suppliers is typical
       because of obstacles to overcome barriers to entry, such as the
       significant cost required to establish business infrastructure. By
       contrast, in emerging markets DOD and related agencies should expect
       multiple competitors and align incentives to best achieve market
       competition.
          * Target investments into needed emerging technologies and maintain
            open and honest dialogues with companies that produce such
            technologies. An industry participant offered that DOD and other
            stakeholders could target investment in areas of needed
            technology and may consider competing technology to provide
            incentives to the supplier base. One participant offered that
            partnerships between government and industry can help balance
            risks and rewards. Contractors, congressional staff, and program
            officials need to seek stakeholder agreement. One participant
            added that a non-partisan
          * committee comprised of defense experts would be helpful to
            identify critical technology areas to pursue or preserve.
     o Develop a small business strategy to provide funds for small
       businesses rather than prime contractors. These investments should be
       targeted where technologies are needed. Participants stressed that a
       key to this strategy is monitoring the actual dollars that go to small
       businesses rather than percentages of individual contracts set aside
       for small businesses. Participants explained that by taking a
       different approach to monitoring small business funds, DOD and related
       agencies can adjust strategies to attract innovative companies and
       positively influence company make or buy decisions.
     o Tailor government strategies for acquisition. Participants suggested
       policies to get small innovative companies to join the defense
       industrial base that correspond with acquisition cycle milestones. For
       instance, DOD could improve use of spiral development, which allows
       suppliers entry into existing programs by incorporating new
       technologies into platforms once designed or in production. Spiral
       development could help to minimize risk and establish relationships
       with new innovative small businesses. One participant explained that,
       while past contractor performance needs to be relevant, it should not
       be a barrier to compete for defense contracts. However, some
       participants expressed a personal frustration with using cost as a
       primary driver for selecting contracts. Instead, participates
       suggested that the government should use past performance as the
       primary selection criterion to help ensure that poor performing
       suppliers are not re-employed simply by underbidding other suppliers.
       As a result, if a supplier fails to perform well, it should have to
       pay some price to enable it to compete in the future.
     o Calibrate the acquisition system to accommodate the mutual interest of
       both the government and industry through the use of multiyear funding.
       Participants explained that under multiyear contracts, contractors
       share risk with the government. For example, when the C17 and F-18
       programs converted to multiyear funding, each contractor received
       money in advance and shared risk with the government. These efforts
       contribute to agreement between parties in the beginning of the
       acquisition process to reduce unexpected outcomes.
     o Consider contractor capabilities to maintain multiple sources. As part
       of the acquisition framework, the government could identify
       opportunities and use tools to cultivate suppliers and consider
       partnering opportunities to develop flexible capabilities. Components
       of a framework might include greater use of competitive sourcing and
       other measures such as best practices to increase innovation,
       efficiency, and effectiveness. It may also be useful to broaden the
       system to allow each military department to look beyond its individual

programs to identify suppliers in other military service programs

capable of providing similar capabilities in order to maintain multiple

sources.

To improve accountability and oversight, participants recommended that the
following actions be taken:

     o Establish clear lines of authority.
     o Provide more transparency over the outsourcing of inherently
       governmental functions. Greater transparency is needed in program
       management, accountability, and oversight responsibilities.
     o Provide for timely oversight.
     o Balance oversight with mechanisms to achieve government goals. Create
       acquisition strategies that increase accountability in the supplier
       base while enabling the government to develop mutually beneficial
       partnerships with contractors to produce higher quality products and
       lower costs. For example, industry associations could create common
       government and industry accountability processes.
     o Establish metrics that assess capabilities delivered and management of
       cost, schedule, and performance issues. While earned value management
       techniques are valuable, other techniques are needed to assess program
       progress. Additional metrics would help DOD and related agencies to
       better evaluate contractor performance when considering the award of
       new contracts.

According to forum participants, the U.S. government has not struck an
appropriate balance between the globalizing U.S. supplier base and
protecting U.S.-based companies and technologies. Participants explained
that DOD and other agencies have not clearly identified industries and
technologies to protect. In addition, participants noted that DOD has not
determined the effectiveness of existing protectionist legislation in
maintaining the industrial base. Moreover, participants noted that the
United States may overly restrict technology transfers to allies and
discourage global suppliers from participating in the U.S. supplier base.

Difficulty Managing

U.S. Government Policies in an International Business Environment

Balancing Globalization while Protecting U.S. Economic Interests

The concern among participants is that the government's protectionist
tendencies are preventing DOD and other agencies from taking advantage of
global suppliers that can yield greater quality items at lower costs than
domestic suppliers and, as a result, help strengthen the U.S. supplier
base. Foreign suppliers have an interest in participating in the U.S.
industrial base since the U.S. defense budget is by far the largest in the
world. However, some participants noted that by limiting access to foreign
suppliers, the U.S. government may be driving international suppliers

Challenges in Identifying Industries and Technologies to Protect

away and creating disincentives for foreign governments to use U.S.
suppliers. For example, one participant noted that U.S. foreign sales help
keep the industrial base viable by allowing companies to continue to sell
items once the U.S. military has completed its purchases-as is the case
with the F-16. Without foreign military sales, F-16 production lines would
have shut down. One participant asserted that defense spending for
economic reasons was put in place to maintain a viable domestic industrial
base, while others questioned whether such policies make sense today or
are best suited to develop markets for the supplier base.

Participants also noted that U.S. decisions and legislation on industries
to protect are not always based on the best research or on complete and
accurate information to understand the impact of actions. One participant
indicated that domestic source restrictions such as the Berry Amendment
have created additional barriers to DOD and related agencies use of
commercial firms. Second, evaluating the effectiveness of the government's
policies to protect industry is difficult as DOD has not been able to
articulate the causes and effects of these policies. Finally, current
policy makes it difficult to determine how to define a domestic company.
As an example, one participant pointed out that his company is
Americanowned, but a significant portion of the company's engineers are
located in foreign countries. In some cases, communications and operations
have been hampered by U.S. export controls, which place limits on the
types of information that can be shared between U.S.-based and
foreign-based engineers, regardless of whether they are employed by the
same company.

Participants focused on the negative effects of imposing national goals in
an international economy, citing two areas-technology transfers and
reliance on foreign industry. A key concern cited by participants is where
to draw the line between technologies that should be protected and
technologies that can be exported. One participant observed that the
United States restricts technology transfers even with our close allies,
which can hamper cooperation in coalition warfare and limit the
compatibility of military capabilities. In addition to technology transfer
concerns, participants agreed that the U.S. government must develop
policies to prevent it from becoming vulnerable to foreign governments.
However, they also believe that the government must accept a level of
dependency on foreign industry, given an increasingly global economy in
which the United States does not possess a competitive advantage on all
the goods and materials that it needs. Several participants suggested that
the U.S. government has not decided what its strategic national and
industry resources should be and that efforts to do so can be affected by
the political environment. As a result, the United States may lack

Actions to Encourage Globalization While Protecting Sensitive Technologies

information needed to inform decisions on which industries to protect and
what technology may be transferred.

To encourage globalization and expand the supplier base while protecting
sensitive technologies, forum participants recommended the following
actions:

     o Focus on keeping U.S. products competitive globally instead of
       maintaining and protecting the U.S. industrial base. By tapping into
       foreign suppliers, participants felt that the United States might open
       new avenues for domestic suppliers. One participant noted that many
       other countries have protected their industrial base, but have failed
       at keeping their products competitive in the global market. The key,
       participants thought, is to protect the dynamism of the system, not a
       particular product, company, or industry. One way would be to take a
       venture capitalist approach to invest in the industrial base and
       provide an environment in which companies can compete and access new
       markets. These efforts would need to be based in research to avoid
       unintended consequences and would require more dialogue to inform and
       educate decision makers, such as Congress, on restrictions pertaining
       to technology transfers.
     o Adjust the export control paradigm to reflect differing national
       security relationships. At a minimum, the structure should treat close
       allies differently, with greater dialogue between Congress and
       provider countries. There should be a system in place that capitalizes
       on the coordination and cooperation between trusted allies, enabling
       foreign suppliers from such nations to add a competitive dimension to
       the supplier base from which the government draws. One participant
       added that the United States can learn from the export control
       programs of other countries that have similar characteristics but
       different laws.
     o Better identify the risks of foreign dependency. Reliance on a foreign
       source does not necessarily result in vulnerability for the United
       States. The United States could balance risks by focusing on key
       allies that it could rely on under most conceivable circumstances.
     o Create a strategy that brings the defense community together to define
       and determine key technologies and capabilities to focus on and then
       collectively take action in those areas. This effort would include
       assessing risks and imposing technology transfer controls where
       necessary.
          * Change the acquisition culture to embrace a global export
            environment and approach the global marketplace more
            optimistically. A government participant stated that, if an
            ultimate goal is to expand the supplier base, the government and
            suppliers will need to tear down barriers and reach beyond their
            traditional domestic partners to access the global supplier
            market. Spend analyses could help identify where industry could
            achieve
          * more efficiencies by relying on a global industrial base,
            including Canada and the United Kingdom.
     o Adjust policies to reflect the ambiguous nationality of emerging
       multinational companies. One participant mentioned that BAE North
       America is a good example of a defense company that is United
       Kingdomowned but has major operations in the United States. Given the
       company's operations in both countries, efforts to comply with export
       control restrictions and other technology transfer issues can be
       burdensome and complicated.

Defining a Strategic Supplier Management Policy

The third challenge identified by forum participants is the lack of a
strategic policy to manage suppliers. Participants characterized DOD's
current policy as a default position that is based on thousands of
individual contracts and, as such, lacks a comprehensive framework to
identify and achieve goals. In addition, participants explained that
current policy does not distinguish between purchasing goods and services.
Participants also noted DOD difficulties in encouraging companies to
conduct research and development and cited a lack of consensus on what
markets to develop. Additional challenges cited include providing clear
requirements to suppliers and maintaining competition in the supplier
base.

With its significant buying power-particularly in the aerospace and
defense markets-the U.S. government has the ability to shape markets based
on the way it spends money and awards contracts. Participants agreed that,
with this power, the government has a responsibility to define a supplier
management policy that provides suppliers with a roadmap for future needs.
As regulator, buyer, and financier for suppliers, the government needs to
set out a framework, but some participants noted that the often fragmented
U.S. policymaking and procurement processes challenge efforts to develop
an effective supplier policy. For example, one participant noted that the
government is too focused on restricting industry profit rather than
formulating innovative ways to expand the supplier base.

In discussing DOD and related agency supplier management policy,
participants were concerned that the current acquisition process is
primarily geared toward acquiring goods not services, despite the
differences between acquiring goods and services and the increase in
services contracting. One participant also noted that policymakers are not
providing coherent policy signals to reflect important trends, such as
increased buying of services and increased wartime spending. For example,
policymakers have emphasized buying commercial-off-the-shelf goods but
have not similarly addressed service trends.

A lack of consensus on what markets to develop creates challenges in
defining a coherent supplier management policy. According to participants,
Congress and DOD lack mechanisms to achieve consensus on what markets to
develop to best meet supplier needs. DOD policy fails to consider the
significant differences between mature technology markets and research and
development markets in managing suppliers. DOD and related agencies have
not focused on reducing the barriers that prevent lower-tier suppliers
from entering the defense supplier base, such as export controls, the cost
of federal acquisition regulation legal expertise, and government cost
accounting standards. As an example, one participant pointed to the
difficulty a large defense supplier had in complying with federal cost
accounting standards. Ultimately, the company divided its accounting
systems-one for its government clients and one for its private-sector
clients-to comply with federal standards. Participants were concerned that
the burden of such a restructuring could prevent small businesses from
entering the defense market. Even if small businesses could weather such
burdens, smaller companies tend to be edged out by larger, more
established firms as markets develop.

Changes in weapon program requirements also present another significant
barrier for suppliers. Participants noted that changing requirements
hamper the ability of small businesses to meet DOD needs. In addition,
without clear and stable requirements, DOD and related agencies may not
achieve commonalities across related systems.

Actions to Develop a    To develop a supplier management policy, forum     
                           participants                                       
Sound Supplier          recommended the following actions:                 
Management Policy       Develop a single, broad, goal-based supplier       
                        o  management policy. This                            
                           policy should: (1) clearly identify the            
                           investments the government wants to                
                           target and what is to be achieved; (2) include a   
                           vetting process to identify                        
                           key technologies to develop; and (3) address       
                           differences between                                
                           managing various types of markets, such as         
                           products versus services, and                      
                           mature technologies versus research and            
                           development. Participants                          
                           agreed that ensuring that the policy is broadly    
                           defined and goal-based is                          
                           imperative to avoid limiting options.              
                        o  Provide adequate incentives to experiment with     
                           policy alternatives. One                           
                           participant suggested that policymakers work       
                           through a range of relevant                        

agencies such as the Department of Homeland Security to develop supplier
management policy rather than forcing policy through DOD.

o  Instill discipline to DOD's requirements generation process to ensure
that requirements are properly defined so that contractors can execute
requirements. Participants observed that DOD's committee on jointness is
supposed to be rationalizing requirements, but suggested that the process
could be improved. One participant added that prime contractors could get
more involved in DOD's Small Business Innovative Research program to aid
in requirements definition and management.

Managing Multiple Tiers of the Supplier Base

The fourth challenge identified by forum participants is for DOD and
relevant agencies to better manage the multiple tiers of the supplier
base. Participants noted that the current lack of visibility into the
supply chain complicates efforts to maintain a strong supplier base.

Participants highlighted the need for greater visibility into the supply
chain to monitor lower tier suppliers-where most technological innovation
takes place. According to one participant, an estimated 280,000 companies
comprise the government's industrial base, but the focus of defense
acquisition policy is on a handful of prime contractors. Another
participant noted that a lack of data prevents prime contractors-a key
ally in managing the supplier chain-from diversifying and developing lower
tiers to maintain competition. Another participant suggested the need for
variability in the supply chain, however without more information on lower
tier suppliers, variability would be difficult to monitor.

Finally, participants discussed the importance of promoting competition in
managing multiple tiers of the supplier base. Participants noted that
competition drives quality and innovation. However, participants have
found that while the government acknowledges that the market should be as
competitive as possible, it has not established an overarching framework
that outlines competition goals making it difficult to achieve robust
competition. A significant problem arises in sole sourcing when there is
no viable alternative to compete and drive up innovation and quality, and
drive down cost. Other participants noted that joint ventures between
prime contractors can limit competition and increase risks that the
government will purchase redundant systems. While the government has taken
some action toward improving competition through legislative measures, it
has not devised a policy framework centered on supplier competition. For
instance, one participant questioned whether the government needs to
develop two missile defense systems to ensure competition or does it
simply need a better way to drive competition.

Actions to Better Manage To help small innovative businesses enter and
thrive in a multi-tier market the Multiple Tiers of the and stimulate
competition, forum participants recommended the following

Supplier Base actions:

     o Increase government visibility into lower tier suppliers-increase
       investment in them and decrease barriers to their participation in
       government contracts. Participants observed that a first step could be
       to identify the total number of companies in the defense industrial
       base. Participants suggested that DOD develop a reporting system for
       the multiple tiers of the supplier base. Other participants suggested
       the need for the Office of the Secretary of Defense to fund a study on
       the supplier base and provide seed money to small companies to
       innovate and join government procurement.
     o Pool federal and state funds for small businesses to invest in new
       technologies. This effort would provide a valuable source of
       technological innovation for the government and an opportunity for
       economic gains by small businesses.
     o Increase and maintain competition to keep companies viable. To
       increase competition, participants suggested the government compete
       different products that meet similar needs or compete shares of a
       project's total cost, such as logistics-which is a large portion of
       DOD's acquisition, technology, and logistics budget. To maintain
       competition, the government could provide a certain level of business
       to the competitors of the contract winner. Awards to losing suppliers
       could include research and development investments or a contract for
       another product. The government should also encourage prime
       contractors to diversify their suppliers and promote competition.

Workforce Skills Development and Culture Change

The fifth challenge identified by forum participants concerns the need to
further develop the skills of the acquisition workforce to address today's
acquisition challenges. Participants agreed that the acquisition workforce
is not equipped to manage in a new acquisition environment. Participants
cautioned, however, that implementing reforms would be difficult because
the acquisition workforce culture is resistant to change.

Workforce Not Equipped to Manage in New Acquisition Environment

The federal government is increasingly outsourcing the production of goods
and delivery of services to attempt to take advantage of the efficiency,
effectiveness, and innovation achieved by private companies competing in a
free market. As the government continues to rely on the private sector to
conduct its business, the federal acquisition workforce must be able to
make business judgments and apply critical thinking to each contract. The
acquisition workforce, however, has not been

Page 17 GAO-06-533SP Supplier Base Forum

Changing Current Workforce Culture Is Difficult

structured or trained to work in a business environment. To competently
negotiate contracts, the workforce must obtain an understanding of global
trends and greater business acumen to make business judgments rather than
relying on acquisition rules and regulations.

Participants have observed that the current federal acquisition workforce
significantly lacks the new business skills needed to act as contract
managers and not as contract processors. Until recently, DOD acquisition
professionals were not required to have an undergraduate degree.
Acquisition professionals who buy services suffer from an even greater
skill gap, due to the emphasis DOD has placed on training staff to
purchase major goods, such as weapons or vehicles, and the increasing
sophistication of the services that the government procures. One
participant described the government contractor of "old times" as someone
who worked on five different platforms and was highly skilled. Now, the
government wants someone with business acumen and who is adept at risk
management. One participant observed that we need to rethink who is put
into key leadership positions and what traits they need to have and
suggested these skills might be business-related. Other participants
stated that there needs to be a shift in talents and skills sought toward
partnering with and managing private-sector firms.

Given the rule-bound culture surrounding federal government acquisitions,
forum participants warned that reform would not be easy. According to
participants, the combination of penalties for acquisition failures along
with defining program success as not failing has contributed to a
riskaverse culture that is less focused on outcomes. The danger,
participants pointed out, is that risk aversion leads to distorted
economic reasoning, causing acquisition officials to seek the lowest
profit providers even if they do not provide the lowest cost commensurate
with quality. Participants added that with years of operating in a
risk-averse environment, program managers and government acquisition
officials do not feel empowered to take risks and are resistant to change.

Some participants suggested that DOD's risk-averse culture has been molded
by out-of-date acquisition training. Currently, acquisition officers and
enlisted personnel are taught to identify and avoid risk. Moreover,
acquisition workforce numbers have been reduced with a trade-off occurring
between technical and labor experts. Together, these factors create
significant challenges in creating an environment that encourages
innovation.

Actions to Develop To ensure the federal acquisition workforce has the
right skills to partner with the private sector and to bring about a
culture change, forum

Workforce Skills and

Effect Reforms participants recommended the following actions:

     o Devote attention to identifying and developing the capabilities of the
       acquisition workforce.
     o Rotate acquisition professionals from the private-sector into the
       public sector. Public-sector professionals working with private-sector
       professionals can learn more efficient buying practices and serve as
       change agents for the rest of the procurement workforce.
     o Employ acquisition strategies that promote innovation rather than
       riskaverse approaches currently used. Developing a better
       understanding of profit, the time value of money, and the interface of
       government and industry can help the acquisition workforce to manage
       programs rather than avoid failure. In addition, increasing pressure
       should be applied to acquisition staff to allow integration of new
       technologies into programs.

                       Appendix I: Scope and Methodology

We identified and invited 15 experts to participate in a day-long Supplier
Base Forum on October 17, 2005. Fourteen attended the meeting.

We conducted extensive literature and internet searches and attended
conferences of subject matter interest to identify potential experts to
participate in the forum. Based on these sources as well as meetings with
subject matter experts on defense supplier issues from GAO, we determined
that participants should be drawn from eight areas: prime defense
contractors, second and third tier suppliers, industry groups, nonprofit
organizations, academia, relevant government agencies, nontraditional
suppliers, and international defense suppliers. We generated a potential
participant list and considered types and levels of experience, as well as
whether the participant was recognized in the professional community or
had professional affiliations. We then examined the preliminary list of
potential participants and selected a number of experts with recognition
in the professional community, published work relevant to defense supplier
issues, current or past employment with a defense supplier, relevant
government agency, or commercial experience with a global supplier base.
We subsequently condensed our list and made final selections by giving
consideration to potential participants who had multiple areas of
expertise to contribute.

The overall purpose of this forum was to gain insight into key challenges
confronting DOD and related agencies to manage the supplier base and to
reach consensus among a diverse group of experts regarding the top
challenges and potential next steps to manage them.

A nominal group approach was used to identify and develop consensus on the
most important challenges. Time was allocated on the agenda for the group,
as a whole, to identify and discuss key supplier challenges in general
with no limit as to the number or types of challenges. More than 60 items
were discussed. Forum participants collapsed these items into eight
separate challenges. To identify and develop consensus about which were
the most important challenges, each participant individually ranked the
five most important challenges from this final list of eight.

Based on the rank order, each selection was weighted. Specifically, the
most important challenge received 5 points, the second most important
received 4 points, the third most important received 3 points, the fourth
most important received 2 points, and the fifth most important received 1
point.

Appendix I: Scope and Methodology

Points were summed, and through this consensus-building process the list
of eight challenges was numerically rank ordered from the most important
to the least important. A natural break occurred between the fourth and
fifth item. Members were given an opportunity to reflect on the final
outcome. All participants thought the final result captured the top
challenges.

                        Appendix II: Forum Participants

Jeff Bialos

Pierre Chao David Chesebrough

Alan Chvotkin Vice Adm. Joe Dyer (USN ret.) Daniel Else Hon. Jacques
Gansler Bob Gower John N. Hatch John Kraynak

Terry Little

Sydney Pope Al Sligh Jennifer Stewart

Partner, Sutherland, Asbill, and Brennan; Executive Director, Program on
Transatlantic Security and Industry at the Center for Transatlantic
Relations, School for Advanced International Studies, Johns-Hopkins
University

Senior Fellow, Director Defense Industrial Initiatives, Center for
Strategic and International Studies President, Association for Enterprise
Integration

Senior Vice President and Counsel, Professional Services Council Executive
Vice President, General Manager, Government and Industry Division, iRobot

Analyst in National Defense, Foreign Affairs, Defense, and Trade Division,

Congressional Research Service Vice President Research, Director, Center
for Public Policy and Private Enterprise, University of Maryland

Vice President, Supplier Management Operations, Boeing Integrated

Defense Systems Corporate Vice President, Global Supply Chain Management,
Lockheed Martin

Director Strategic Sourcing, BAE Systems North America Executive Director,
Missile Defense Agency Industry Analyst, Office of Deputy Undersecretary
of Defense for

Industrial Policy Director Strategic Sourcing, Department of Homeland
Security Director General, Defense Procurement, Embassy of Canada

                           Appendix III-Forum Agenda

                             8:30am Check-In/Coffee

9:00am Welcome--Katherine Schinasi, Managing Director, Acquisition and
Sourcing Management Team

Introductions and Forum Ground Rules-Ann Calvaresi-Barr, Director ASM

9:30am Panel Discussion of Key Challenges-identify key supplier challenges

                                 10:45am Break

11:00am Panel Discussion-discussion continued, refinement of issues, reach
consensus of top challenges (voting)

12:15pm Lunch, Guest Speaker: Ms. Eileen Giglio, Deputy Director, Defense  
           Acquisition Performance Assessment Project, Department of Defense  
1:30pm  Panel Discussion--results of top challenges and identification of  
           next steps                                                         
           ASM Directors join panel                                           
3:00pm  Adjournment                                                        

              Appendix IV: Supplier Base Forum Slide Presentation

Appendix IV: Supplier Base Forum Slide Presentation

Appendix IV: Supplier Base Forum Slide Presentation

Appendix IV: Supplier Base Forum Slide Presentation

Appendix IV: Supplier Base Forum Slide Presentation

Appendix IV: Supplier Base Forum Slide Presentation

Appendix IV: Supplier Base Forum Slide Presentation

                             Supplier Environment?

     o Business of government increasingly performed by private sector
     o Smaller government workforce to manage and oversee government
       purchases
     o Shift to purchasing more services for mission performance rather than
       spending on equipment and supplies
          * National Security Dynamics
               o Global threats and global suppliers
               o Traditional supplier base consolidation
               o Relevance of commercial products and technologies

                  Appendix V: Summary of Lunch Speaker Remarks

Eileen Giglio, Deputy Director of the Defense Acquisition Performance
Assessment (DAPA) project, provided an overview of the challenges
identified in its work and began her comments by noting the similarity of
issues raised at the forum with findings identified in the DAPA effort.
She noted that acquisition processes have significant shortcomings leading
to loss of confidence by Congress and the defense community. She
summarized a few of the problems as: increased cost overruns, failure to
establish acquisition priorities and trade-offs, undefined operational
requirements and performance characteristics, untested and undetermined
technology risks, and a lack of centralized responsibility and empowered
authorities.

Based on the work to date of the DAPA project, she outlined where
constructive actions may be taken to address acquisition problems. First,
she highlighted the budget process and asked what can be done differently
to make the process more lean and simple. In terms of requirements, she
noted that DOD needs to recover stability and focus on realistic
capabilities and expectations in step with technological developments. Her
last point centered on the acquisition process and suggested the need for
reforms that will resolve cost and schedule overruns and achieve
transparency and predictability in the process. She also suggested that
DOD apply lessons learned from past acquisition reviews to adapt to
changing environments and adjust its acquisition organization. Other
points included:

     o Workforce - Recover workforce expertise and establish accountability.
     o Industry - Enhance the relationship between the Department and
       Industry partners to build trust and reduce risk.
     o Leadership - Simplify the lines of authority, incentivize performance
       and require accountability across the acquisition community.

Ms. Giglio concluded her remarks by noting that effective change will only
result from an ongoing cooperative effort between the government,
industry, and Congress.

                        Appendix VI-Related GAO Products

Joint Strike Fighter: Management of the Technology Transfer Process.

GAO-06-364. Washington D.C.: March 14, 2006.

Defense Acquisitions: DOD Has Paid Billions in Award and Incentive Fees
Regardless of Acquisition Outcomes. GAO-06-66. Washington, D.C.: December
19, 2005.

Defense Procurement: Air Force Did Not Fully Evaluate Options in Waiving
Berry Amendment for Selected Aircraft. GAO-05-957. Washington D.C.:
September 23, 2005.

Defense Ammunition: DOD Meeting Small and Medium Caliber Ammunition Needs,
but Additional Actions Are Necessary. GAO-05-687. Washington D.C.: July
27, 2005.

Industrial Security: DOD Cannot Ensure Its Oversight of Contractors under
Foreign Influence Is Sufficient. GAO-05-681. Washington D.C.: July 15,
2005.

Defense Microelectronics: DOD-Funded Facilities Involved in Research
Prototyping or Production. GAO-05-278. Washington D.C.: March 11, 2005.

Defense Trade: Arms Export Control System in the Post-9/11 Environment.
GAO-05-234. Washington D.C.: February 16, 2005.

Federal Procurement: International Agreements Result in Waivers of Some
U.S. Domestic Source Restrictions. GAO-05-188. Washington D.C.: January
26, 2005.

Industrial Security: DOD Cannot Provide Adequate Assurances That Its
Oversight Ensures the Protection of Classified Information. GAO-04-332.
Washington D.C.: March 3, 2004.

Joint Strike Fighter Acquisition: Cooperative Program Needs Greater
Oversight to Ensure Goals Are Met. GAO-03-775. Washington D.C.: July 21,
2003.

Best Practices: Setting Requirements Differently Could Reduce Weapon
Systems' Total Ownership Costs. GAO-03-57. Washington, D.C.: February 11,
2003.

Appendix VI-Related GAO Products

Defense Acquisitions: DOD Has Implemented Section 845 Recommendations but
Reporting Can Be Enhanced. GAO-03-150. Washington D.C.: October 9, 2002.

Export Controls: Processes for Determining Proper Control of
Defense-Related Items Need Improvement. GAO-02-996. Washington D.C.:
September 20, 2002.

Defense Trade: Mitigating National Security Concerns under Exon-Florio
Could Be Improved. GAO-02-736. Washington D.C.: September 12, 2002.

Best Practices: Capturing Design and Manufacturing Knowledge Early
Improves Acquisition Outcomes. GAO-02-701. Washington, D.C.: July 15,
2002.

Defense Acquisitions: DOD Faces Challenges in Implementing Best Practices.
GAO-02-469T. Washington, D.C.: February 27, 2002.

Best Practices: Better Matching of Needs and Resources Will Lead to Better
Weapon System Outcomes. GAO-01-288. Washington, D.C.: March 8, 2001.

Best Practices: A More Constructive Test Approach Is Key to Better Weapon
System Outcomes. GAO/NSIAD-00-199. Washington, D.C.: July 31, 2000.

Defense Acquisition: Employing Best Practices Can Shape Better Weapon
System Decisions. GAO/T-NSIAD-00-137. Washington, D.C.: April 26, 2000.

Best Practices: DOD Training Can Do More to Help Weapon System Program
Implement Best Practices. GAO/NSIAD-99-206. Washington, D.C.: August 16,
1999.

Best Practices: Better Management of Technology Development Can Improve
Weapon System Outcomes. GAO/NSIAD-99-162. Washington, D.C.: July 30, 1999.

Defense Acquisitions: Best Commercial Practices Can Improve Program
Outcomes. GAO/T-NSIAD-99-116. Washington, D.C.: March 17, 1999.

Appendix VI-Related GAO Products

Defense Acquisition: Improved Program Outcomes Are Possible.
GAO/T-NSIAD-98-123. Washington, D.C.: March 17, 1998.

Best Practices: DOD Can Help Suppliers Contribute More to Weapon System
Programs. GAO/NSIAD-98-87. Washington, D.C.: March 17, 1998.

Defense Trade: Weaknesses Exist in DOD Foreign Subcontract Data.

GAO/NSIAD-99-8. Washington D.C.: November 13, 1998.

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