Defense Acquisitions: Tailored Approach Needed to Improve Service
Acquisition Outcomes (09-NOV-06, GAO-07-20).			 
                                                                 
Department of Defense (DOD) obligations for service contracts	 
rose from $82.3 billion in fiscal year 1996 to $141.2 billion in 
fiscal year 2005. DOD is becoming increasingly more reliant on	 
the private sector to provide a wide range of services, including
those for critical information technology and mission support.	 
DOD must maximize its return on investment and provide the	 
warfighter with needed capabilities and support at the best value
for the taxpayer. GAO examined DOD's approach to managing	 
services in order to (1) identify the key factors DOD should	 
emphasize to improve its management of services and (2) assess	 
the extent to which DOD's current approach exhibited these	 
factors.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-20						        
    ACCNO:   A63265						        
  TITLE:     Defense Acquisitions: Tailored Approach Needed to Improve
Service Acquisition Outcomes					 
     DATE:   11/09/2006 
  SUBJECT:   Contract administration				 
	     Cost analysis					 
	     Data collection					 
	     Data integrity					 
	     Defense procurement				 
	     Department of Defense contractors			 
	     Performance management				 
	     Performance measures				 
	     Policy evaluation					 
	     Procurement policy 				 
	     Procurement practices				 
	     Requirements definition				 
	     Service contracts					 
	     Strategic planning 				 
	     Program goals or objectives			 

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GAO-07-20

   

     * [1]Results in Brief
     * [2]Background
     * [3]Managing Service Acquisition Requires Both a Strategic and a

          * [4]Strategic Focus: Knowing Where Service Acquisition Is Today

               * [5]Leadership Must Establish Vision and Goals
               * [6]Vision and Goals Must Be Communicated and Used to Measure
                 Pr
               * [7]Structures and Processes Must Be Defined to Facilitate
                 Servi
               * [8]Knowledge on Spending and Workforce Vital to Managing
                 Servic

          * [9]Transactional Focus: Buying the Right Individual Service the

               * [10]Good Outcomes Begin with Sound Requirements
               * [11]Appropriate Business Arrangements Provide Right Way to
                 Buy S
               * [12]Actual Performance Must Be Managed and Assessed

     * [13]DOD Service Acquisition Approach Does Not Fully Address Key

          * [14]DOD's Strategic Level Approach Missing Key Elements

               * [15]Normative Position of Service Acquisition Not Yet
                 Establishe
               * [16]DOD Has Not Communicated Its Vision for Managing Service
                 Acq
               * [17]Changes to Supporting Structures, Processes, and Roles
                 Have
               * [18]Knowledge on Spending and Workforce Is Not Readily
                 Available

          * [19]DOD Transactional Approach Focuses Principally on Business A

               * [20]Communication Challenges Hinder Establishment of Good
                 Requir
               * [21]Business Arrangements Receive Majority of Management
                 Attenti
               * [22]Limited Capability to Assess Service Acquisitions

          * [23]Attention to Strategic and Transactional Elements Has Improv

     * [24]Conclusions
     * [25]Recommendations for Executive Action
     * [26]Agency Comments and Our Evaluation
     * [27]GAO Contact
     * [28]Acknowledgements
     * [29]GAO's Mission
     * [30]Obtaining Copies of GAO Reports and Testimony

          * [31]Order by Mail or Phone

     * [32]To Report Fraud, Waste, and Abuse in Federal Programs
     * [33]Congressional Relations
     * [34]Public Affairs

Report to the Subcommittee on Readiness and Management Support, Committee
on Armed Services, U.S. Senate

United States Government Accountability Office

GAO

November 2006

DEFENSE ACQUISITIONS

Tailored Approach Needed to Improve Service Acquisition Outcomes

GAO-07-20

Contents

Letter 1

Results in Brief 3
Background 4
Managing Service Acquisition Requires Both a Strategic and a Transactional
Focus 8
DOD Service Acquisition Approach Does Not Fully Address Key Elements at
the Strategic or Transactional Levels 20
Conclusions 33
Recommendations for Executive Action 34
Agency Comments and Our Evaluation 35
Appendix I Scope and Methodology 38
Appendix II Comments from the Department of Defense 41
Appendix III GAO Contact and Staff Acknowledgements 48

Tables

Table 1: Changes in DOD's Use of Service Contract Obligations, Fiscal
Years 1996 to 2005 5
Table 2: Service Acquisitions Reviewed under DOD and Military Department
Review Structure 24

Figures

Figure 1: Key Strategic and Transactional Factors for Service Acquisition
9
Figure 2: Key Factors in Achieving a Strategic Approach to Service
Acquisition 10
Figure 3: Key Factors for Managing Service Acquisitions at a Transactional
Level 15

Abbreviations

DAU Defense Acquisition University DOD Department of Defense NETC Naval
Education and Training Command

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separately.

United States Government Accountability Office

Washington, DC 20548

November 9, 2006

The Honorable John Ensign Chairman The Honorable Daniel K. Akaka Ranking
Minority Member Subcommittee on Readiness and Management Support Committee
on Armed Services United States Senate

In fiscal year 2005, the Department of Defense (DOD) obligated more than
$141 billion on service contracts, a 72-percent increase since fiscal year
1996. DOD is increasingly relying on the private sector to provide a wide
range of services, including consulting and administrative support,
information technology services, and weapon system and base operations
support. As the largest buyer of services in the federal government, and
operating in an environment in which the nation's large and growing
structural deficit will require difficult resource decisions, DOD must
maximize its return on investment and provide the warfighter with needed
capabilities at the best value for the taxpayer.

Our work and that of others has highlighted examples of long-standing
concerns in planning, executing, and overseeing service acquisition. For
example, GAO has identified DOD contract management to be at high risk of
vulnerabilities to fraud, waste, abuse, and mismanagement for more than a
decade. In our 2005 high-risk report update, we noted that with regard to
service acquisition, DOD had not yet fully implemented a strategic
approach to buying services; did not have a comprehensive plan to ensure
it had the right skills and capabilities in its acquisition workforce; and
did not always make sound use of the tools, such as performance-based
service contracting, to acquire the services it needed.1

To ensure that DOD acquires services by means that are in the best
interest of the government and managed in compliance with applicable
statutory requirements, sections 801 and 802 of the National Defense
Authorization Act for Fiscal Year 2002 required DOD to establish a service
acquisition management approach, including developing a structure for
reviewing individual service transactions based on dollar thresholds and
other criteria.2 Further, in January 2006, additional requirements were
established pertaining to DOD's service contracting management structure
and oversight processes.3 This report assesses DOD's overall approach to
managing service acquisition. Specifically, we (1) identified the key
factors necessary for DOD to emphasize to improve its management of
services and (2) assessed the extent to which DOD's approach, including
its current management structure, exhibited these factors.

1GAO, High-Risk Series: An Update, [35]GAO-05-207 (Washington, D.C.:
January 2005).

To perform our review, we made extensive use of our prior work in this and
other related areas, including our January 2002 report that identified how
leading commercial companies took a strategic approach to acquiring
services.4 For the transactional level, we used our prior work and that of
others on issues related to individual service contract transactions and
held detailed discussions with relevant contracting experts to confirm and
validate key factors. In total, the results of these efforts proffer a
model to improve results in service acquisition management. To assess the
extent to which DOD's current approach exhibited these characteristics, we
collected and reviewed relevant DOD guidance and policies, including those
that established its current management structure and review processes. We
interviewed officials responsible for implementing the management
structure in the Office of the Secretary of Defense, as well as each of
the cognizant offices within the military departments. We also obtained
information on the types of activities and reviews conducted by these
offices. We visited 20 commands and buying activities to understand the
processes by which these organizations acquire services. We reviewed
various contract files and process documentation for selected service
acquisitions and discussed challenges faced in acquiring services and
efforts to improve service acquisition with policy and contracting
personnel at each of these locations. See appendix I for additional
details on scope and methodology. We conducted our review from August 2005
to September 2006 in accordance with generally accepted government
auditing standards.

2Pub. L. No. 107-107, S 801-802, (2001). Sec. 801 added new sections 2330
and 2330a to title 10, U.S. Code.

3Pub. L. No. 109-163, S 812, (2006). Sec. 812 amended 10 U.S.C. S 2330.

4GAO, Best Practices: Taking A Strategic Approach Could Improve DOD's
Acquisition of Services, [36]GAO-02-230 (Washington, D.C.: Jan. 18, 2002).

Results in Brief

Achieving good service acquisition outcomes--that is, obtaining the right
service, at the right price, in the right manner--requires management
attention at both a strategic and a transactional level. The strategic
level requires the leadership, processes, and information necessary for
mitigating risks, leveraging buying power, and managing outcomes across
the enterprise. At this level, we identified four key factors for
improving outcomes: strong corporate leadership and vision,
results-oriented goals and metrics, defined responsibilities and support
structures, and improved knowledge of spending. The strategic level also
sets the context for the transactional level, where individual service
acquisitions are executed. Key factors for good outcomes at the
transactional level include clearly defined requirements, sound business
arrangements, and appropriate contract management and oversight processes.
At both levels, risks exist that can impair an organization's ability to
get desired service acquisition outcomes. A comprehensive management
approach tailors the strategic and transactional factors to address these
risks. For example, by knowing where its service acquisitions are and
setting a course for where they ought to be, an organization provides the
context for making decisions on individual transactions.

DOD's current approach to managing service acquisition has tended to be
reactive and has not fully addressed the key factors for success at either
the strategic or the transactional level. At the strategic level, DOD has
not developed a normative position for gauging whether ongoing and planned
efforts can best achieve intended results. Further, good information on
the volume and composition of service acquisitions is still wanting,
perpetuating the circumstance in which the acquisition of services tends
to happen to DOD, rather than being proactively managed. For example,
despite implementing a review structure aimed at increasing insight into
service transactions, DOD is not able to determine which or how many
transactions have been reviewed. The military departments have only
slightly better visibility, having reviewed proposed acquisitions
accounting for less than 3 percent of dollars obligated for services in
fiscal year 2005. At the transactional level, DOD tends to focus primarily
on those elements associated with awarding contracts, with much less
attention paid to formulation of service acquisition requirements and to
assessment of the actual delivery of contracted services. Moreover, the
results of individual acquisitions are generally not used to inform or
adjust strategic direction. As a result, DOD is not in a position to
determine whether investments in services are achieving their desired
outcomes.

To put DOD in a position to proactively manage service acquisition
outcomes, we are making six recommendations to assist DOD in identifying
specific solutions at the strategic and transactional levels. In written
comments on a draft of this report, DOD concurred with our recommendations
and agreed that a more coordinated, integrated, and strategic approach for
acquiring services is needed. DOD noted that it is developing an
integrated assessment of how best to acquire services and expects this
assessment will result in a comprehensive, departmentwide architecture.
DOD expects its assessment will be completed in early 2007. Our
discussions with DOD officials indicate that this architecture may hold
the potential for making fundamental changes at the strategic and
transactional levels. The extent to which DOD successfully integrates the
key factors we identified as it develops and implements its architecture
will be essential to fostering the appropriate attention and action needed
to make service acquisitions a managed outcome. The full text of DOD's
comments may be found in appendix II.

Background

Over the past decade, DOD has increasingly relied on private sector
contractors to provide a range of services, including management and
information technology support. For example, DOD's obligations on service
contracts rose from $82.3 billion in fiscal year 1996 to $141.2 billion in
fiscal year 2005 (see table 1). DOD committed 20 percent of its total
service obligations in fiscal year 2005 for professional, administrative,
and management support contracts. Overall, according to DOD, the amount
obligated on service contracts exceeded the amount the department spent on
supplies and equipment, including major weapon systems.

Table 1: Changes in DOD's Use of Service Contract Obligations, Fiscal
Years 1996 to 2005 (fiscal year 2005 dollars in billions)

                              Service                              Percentage
                            obligations  Percentage of service change, fiscal
                            Fiscal year    obligations, fiscal  years 1996 to
Service category           1996 2005              year 2005           2005
Professional,             $10.8                          $28.3   20.0  161 
administrative, and                                                        
management support                                                         
Construction of             7.3                           11.7    8.3   62 
facilities                                                                 
Maintenance and repair      6.6                           11.4    8.1   74 
of equipment                                                               
Information technology      4.9                           10.3    7.3  110 
Medical services            1.6                            8.0    5.6  412 
Housekeeping services       2.4                            4.8    3.4   98 
Transportation, travel,     2.4                            6.2    4.4  154 
and relocation                                                             
All other services,        22.7                           23.6   16.7    4 
excluding research and                                                     
developmenta                                                               
All services excluding    $58.6                         $104.2   73.8   78 
research and development                                                   
Research and development   23.7                           37.0   26.2   56 
Total, all service        $82.3                         $141.2  100.0   72 
contracts                                                                  

Source: DOD's DD350 database for all actions exceeding $25,000 (data); GAO
(analysis).

aOther services include photographic, mapping, and printing; education and
training; and social services, among others.

The growth in service acquisition spending results, in part, from recent
trends and changes within DOD's acquisition environment, including the
increased use of contracted services. For example, while spending on
services has increased, DOD's civilian workforce shrank by about 38
percent between fiscal years 1989 and 2002. DOD performed this downsizing
without proactively shaping the civilian workforce to ensure that it had
the specific skills and competencies needed to accomplish future DOD
missions. In June 2006, DOD issued a human capital strategy that
acknowledged that DOD's civilian workforce is not balanced by age or
experience. DOD further noted that a proposed reduction of an additional
55,000 personnel through fiscal year 2007, continuing increases in the
number of retirement age employees, and the loss of experienced personnel
and institutional knowledge could make it difficult to mentor its
developing workforce. DOD's strategy identified a number of steps planned
over the next 2 years to more fully develop a long-term approach to
managing its acquisition workforce.

The increased use of service contracts is also partly attributable to DOD
acquiring capabilities through different acquisition approaches, as well
as needing to meet new requirements and demands. For example, DOD
historically bought space launch vehicles, such as the Delta and Titan
rockets as products. Now, under the Evolved Expendable Launch Vehicle
program, the Air Force purchases launch services using contractor-owned
launch vehicles. Similarly, after the terrorist attacks on September 11,
2001, increased security requirements and the deployment of active duty
and reserve personnel resulted in DOD having fewer military personnel to
protect domestic installations. Consequently, the U.S. Army awarded
contracts worth nearly $733 million to acquire contract guards at 57
installations.

DOD has traditionally approached the acquisition of services differently
than the acquisition of products. DOD and military department officials we
interviewed noted that DOD generally views service acquisition as less
risky than the acquisition of weapon systems, in part because many
services are not tied directly to mission accomplishment and tend to be
composed of far more numerous and lower dollar value contracts. DOD has
long focused its attention, policies, and procedures on managing major
weapon systems and typically does so using the cost of the weapon system
as a proxy for risk. For example, DOD classifies its acquisition programs,
including research and development efforts related to weapon systems and
major automated information systems, in categories based upon estimated
dollar value or designation as a special interest.5 The largest programs
generally fall under the responsibility of the Under Secretary of Defense
(Acquisition, Technology, and Logistics), while less complex and risky
programs are overseen by the service or component acquisition executive.
Overall, more than 25 percent of DOD's annual budget is managed under this
framework. For example, as of December 2005, DOD managed 85 major defense
acquisition programs currently estimated to cost about $1.6 trillion
combined over their program life.

Conversely, we previously reported that DOD's approach to buying services
is largely fragmented and uncoordinated, as responsibility for acquiring
services is spread among individual military commands, weapon system
program offices, or functional units on military bases, with little
visibility or control at the DOD or military department level.6 For
example, we noted that

5The policies and practices for these types of acquisitions are reflected
in DOD Directive 5000.1 and Instruction 5000.2.

6 [37]GAO-02-230 .

           o DOD's information systems could provide data on the amount spent
           on services, but the reliability of the information was
           questionable and the system itself was seldom used as a tool to
           manage or identify opportunities for managing DOD's supplier base.
           o Procurement processes within DOD were not always carried out
           efficiently and effectively.
           o There were few service contracting-related enterprisewide annual
           performance metrics, none of which measured the cost-effectiveness
           or quality of services obtained.

Services differ from products in several aspects and can also be
challenging when attempting to define requirements, establish measurable
and performance-based outcomes, and assess contractor performance. For
example, it can easily take over 10 years to define requirements and
develop a product like a weapon system before it can actually be delivered
for field use. Individual service acquisitions generally proceed through
requirements, solution, and delivery more rapidly. Further, delivery of
services generally begins immediately or very shortly after the contract
is finalized.

In response to the National Defense Authorization Act for Fiscal Year
2002, DOD and the military departments established a service acquisition
management structure, including processes at the headquarters level for
reviewing individual, high-dollar acquisitions. In September 2003, we
reported that this approach did not provide a departmentwide assessment of
how spending for services could be more effective and recommended that DOD
give greater attention to promoting a strategic orientation by setting
performance goals for improvements and ensuring accountability for
achieving those results.7 In its response, DOD concurred in principle and
agreed that additional actions could strengthen the management structure
as implemented, but also identified challenges for doing so based on
organizational size, complexity, and acquisition environment.

In January 2006, Congress again enacted legislation with specific
requirements for managing the acquisition of services.8 Among other
things, the legislation required DOD to

7GAO, Contract Management: High-Level Attention Needed to Transform DOD
Services Acquisition, [38]GAO-03-935 (Washington, D.C.: Sept. 10, 2003).

8Pub. L. No. 109-163, S 812.

           o identify the critical skills and competencies needed to carry
           out the procurement of services;
           o develop a comprehensive strategy for recruitment, training, and
           deploying employees to meet the requirements for skills and
           competencies;
           o establish contract services acquisition categories, based on
           dollar thresholds, for the purpose of establishing the level of
           review, decision authority, and applicable procedures;
           o dedicate full-time commodity managers to coordinate the
           procurement of key categories of services;
           o ensure that contract services are procured by means of
           procurement actions that are in the best interests of DOD and
           entered into and managed in compliance with applicable laws,
           regulations, directives, and requirements;
           o ensure that competitive procedures and performance-based
           contracting are used to the maximum extent practicable; and
           o monitor data and periodically collect spend analyses to ensure
           that funds allotted for the procurement of services are expended
           in the most rational and economical manner practicable.

The requirements pertaining to establishing contract service acquisition
categories were to be phased in over a period of 3 years, with the first
categories, for acquisitions with an estimated value of $250 million or
more, to be established by October 2006. At the conclusion of our review,
DOD issued a policy memorandum aimed at strengthening service acquisition
management in response to the legislation. DOD is to report on its
implementation by January 2007.

Managing Service Acquisition Requires Both a Strategic and a Transactional Focus

Several key factors are necessary to improve DOD's service acquisition
outcomes--that is, obtaining the right service, at the right price, in the
right manner. Our work found that to do this, an organization must
understand the volume, sources, portfolios, and trends related to what it
is buying, then ensure that requirements are valid and understood,
services are purchased properly, and performance delivered with minimum
risk and maximum efficiency. Success factors to achieve these goals can be
defined at both the strategic and the transactional level, as shown in
figure 1.

Figure 1: Key Strategic and Transactional Factors for Service Acquisition

The strategic level is where the enterprise sets the direction or vision
for what it needs, captures the knowledge to enable more informed
management decisions, ensures deparmentwide goals and objectives are
achieved, determines how to go about meeting those needs, and assesses the
resources it has to achieve desired outcomes. The strategic level also
sets the context for the transactional level, where the focus is on making
sound decisions on individual transactions. Our work found that officials
need to ensure that individual service transactions have valid and
well-defined requirements, have appropriate business arrangements, and
that performance is being managed--again, while minimizing related risks
and maximizing efficiency. A comprehensive approach would use the
strategic and transactional factors in a complementary manner to tailor
management activity to ensure preferred outcomes. Without this management
attention, risks exist within each level that can impair an organization's
ability to get desired service acquisition outcomes.

Strategic Focus: Knowing Where Service Acquisition Is Today and Where It Should
Be Tomorrow

Our prior work with leading commercial firms found that a successful
organization proactively identifies and manages outcomes of the services
it acquires at a strategic, or enterprisewide, level. Effective service
acquisition requires the leadership, processes, and information necessary
for mitigating risks, leveraging buying power, and managing outcomes.
Several factors are needed to implement a strategic approach, including
(1) strong leadership to define and articulate a corporate vision,
including specific goals and outcomes; (2) results-oriented communication
and metrics; (3) defined responsibilities and associated support
structures; and (4) increased knowledge and focus on spending data and
trends. See figure 2 for key factors to achieve a strategic approach to
acquiring services.

Figure 2: Key Factors in Achieving a Strategic Approach to Service
Acquisition

  Leadership Must Establish Vision and Goals

Our work found that organizations seeking to significantly improve service
acquisition outcomes must begin with an established vision and commitment
from senior management. This can come in various ways, ranging from
restructuring the corporate procurement function, providing greater
insight into and authority over the company's service spending, or
signaling support for a new way of doing business. With an articulated
vision, leaders then have a basis for making commitments to factors
important for realizing the desired end state, such as practices,
procedures, structures, information, and human capital planning. Our work
has shown that when corporate goals and expected outcomes are not defined,
employees becomes less likely to accept new roles or understand the
importance of upcoming changes that are necessary to reduce risks in
service acquisition. These include allowing the sum total of individual
transactions to define the strategy and not providing a context within
which managers of individual transactions can make sound judgments about
the risk and sensitivity of a particular service acquisition.

Being able to define a strategic vision presupposes that leaders can
determine and articulate a normative position for the future. A normative
position would entail defining what end state or goals they want to
achieve at a specified time. This position can then be translated into
specifics, both in the aggregate and by type, such as

           o the current volume, type, location, and trends of service
           acquisitions;

           o the results the organization wants to achieve in a specified
           time frame;

           o the definition of a good service acquisition outcome; and

           o the characteristics of a service acquisition that make it
           desirable, undesirable, or sensitive.

Critical to establishing a normative position is knowledge of current
service acquisition expenditures, management priorities, and expected
outcomes. The vision could also dictate which services represent risks to
the organization. For example, acquisitions could be deemed low risk based
on minimal cost exposure, high availability of service providers, or
limited criticality for meeting mission requirements. Conversely,
high-risk acquisitions may be those of higher dollar value,
mission-critical requirements, services that are new or being acquired
using a different approach, or any other services determined to need
additional corporate-level involvement or oversight based on management
priorities.

  Vision and Goals Must Be Communicated and Used to Measure Progress

Once a vision and desired end state for service acquisition have been
defined, senior management must be both active and persistent in
supporting ongoing efforts, adjusting the strategy to reflect new
information, and moving toward the established normative position.
Communication and metrics are important management ingredients in terms of
overcoming resistance, cultural barriers, and other impediments to
achieving identified goals. Senior leaders also have the responsibility to
communicate and demonstrate a commitment to sound practices deemed
acceptable for the acquisition function. We have previously reported that
DOD faces vulnerabilities in aspects of its senior leadership because of
certain disconnects, including senior positions that have remained
unfilled for long periods of time, the acquisition culture fostered by
management's tone at the top, and the management approach used in new
industry partnering relationships.9

We have also noted the importance of leadership by senior agency officials
to successfully transform other aspects of DOD's business operations and
those of other federal agencies. For example, our prior work has shown
that DOD's substantial financial and business management weaknesses
adversely affect not only its ability to produce auditable financial
information, but also its ability to provide accurate, complete, and
timely information for DOD management and Congress to use in making
informed decisions. We indicated that overcoming these weaknesses required
sustained leadership at the highest level and a strategic and integrated
plan.10

9GAO, Contract Management: DOD Vulnerabilities to Contracting Fraud,
Waste, and Abuse, [39]GAO-06-838R (Washington, D.C.: July 7, 2006).

Metrics defining specified outcomes are vital to increasing the likelihood
that changes to practices will successfully contribute to the
organizational vision. While they can differ in nature and be used to
varying degrees, metrics can be used to (1) evaluate and understand
performance levels, (2) identify critical processes that require
attention, (3) document results over time, and (4) report information to
senior officials for decision-making purposes. To illustrate this, DOD
spends 20 percent of its service dollars on professional and
administrative management support contracts. If senior DOD officials
believe that such volume poses risks, then it can use this information to
establish targets to control and monitor the use of these services. For
example, in March 2006 the Secretary of the Air Force issued a memorandum
directing increased visibility and management of contract services in
support of command functions, in an attempt to save over $6 billion that
would then be used for other transformation initiatives. If the Air Force
follows up by collecting timely data on the individual service
transactions made in this area, it can see whether it is making progress
toward its desired end state. For DOD, risks of not doing this at a
strategic level entail losing momentum and failing to sustain positive
change, and such failures can then be manifested in quick fixes, fire
drills, or changes in policy statements that do not have a material effect
on actual operations.

  Structures and Processes Must Be Defined to Facilitate Service Management
  Direction

Successful service acquisition management also requires attention to the
organization's ability to move from a fragmented manner of doing business
to one that is more coordinated and strategically oriented. Primarily,
this involves changing how services are acquired in terms of business
processes, organizational structures, and roles and responsibilities. Our
work with leading commercial firms found that typical changes in this area
include

           o restructuring acquisition organizations and elevating the
           procurement function to improve coordination with other internal
           organizations and optimize available resources;

           o establishing new processes for routine tasks and using
           cross-functional teams made up of individuals with various skills
           to ensure the right mix of knowledge, technical expertise, and
           credibility; and

           o establishing full-time, dedicated commodity managers to provide
           more effective management over key services.

10GAO, DOD Business Transformation: Sustained Leadership Needed to Address
Long-standing Financial and Business Management Problems, [40]GAO-05-723T
(Washington, D.C.: June 8, 2005).

We reported in March 2005 that the Department of Homeland Security was
pursuing similar approaches as it attempted to integrate the various
acquisition functions it inherited upon its establishment in 2003. For
example, the department designated a Chief Procurement Officer with broad
responsibility for its acquisition function and established commodity
councils composed of representatives from across the department that were
assigned responsibility for assessing future purchasing strategies. We
noted, however, that senior agency leadership needed to address a number
of challenges before fully integrating its procurement function, such as
clearly defining the roles and responsibilities of key offices, and
establishing a structure to ensure continued support for commodity
councils--such as appointing full-time commodity managers.11

In essence, this move toward a more strategic orientation can be compared
to a franchise model of business versus that of individually owned stores
or units. While franchises, like individually owned businesses, operate at
the local level and adapt to the specific needs and demands of a
community, they still must adhere to the consistent set of standards and
processes of the parent organization. For service acquisition, this
translates into recognition that while unique local requirements need to
be understood and met, individual acquisitions should also be viewed in
the context of organizational goals, objectives, and strategies. In this
regard, company officials indicated they can tailor delivery of services
to meet local needs while helping to achieve organizational cost savings
or quality improvement objectives. Risks here are twofold. First, if a
single, monolithic process is used for every service acquisition
regardless of size, sensitivity, or type, it could be overkill for some
transactions and insufficient for others. Second, allowing local buying
activities to operate independent of organizational standards and
processes would impair or defeat an organization's ability to achieve
desired aggregate goals or outcomes.

11GAO, Homeland Security: Successes and Challenges in DHS's Efforts to
Create an Effective Acquisition Organization, [41]GAO-05-179 (Washington,
D.C.: Mar. 29, 2005).

  Knowledge on Spending and Workforce Vital to Managing Services

Organizations also need basic, reliable data on how service dollars are
being spent and the capabilities of the workforce in place to acquire and
manage those services. Company officials who were successful with
improving service acquisition management informed us it was critical to
define the relevant types of information that were required and then
develop the appropriate data systems to collect and provide reliable
spending data. Such data enable senior managers to know not only the
current state of service acquisition, but how far it is from the desired
end state. While the type of information may vary depending on the
organization and the types of services acquired, basic spend analysis data
should include information and trends related to

           o the type of services being acquired;

           o the number of suppliers for a specific service the organization
           is using;

           o the amount the organization is spending for that service, in
           total and with each supplier; and

           o the units in the organization that are acquiring the services.

We have previously reported that several civilian agencies have used this
approach to leverage their buying power, reduce costs, and better manage
suppliers of goods and services. For example, we reported in September
2004 that the Departments of Agriculture and Veterans Affairs, among
others, had launched or expanded spend analysis efforts and in turn
realized savings ranging from $1.8 million to $394 million on related
acquisitions.12 Similarly, we noted in 2005 that the Department of
Homeland Security identified 15 commodity areas as having the potential to
leverage the department's buying power. In fiscal year 2004, four
commodity councils reported approximately $14.1 million in cost savings
and avoidances.13 Some councils encountered difficulties due to a shortage
of comprehensive data upon which to draw an accurate and detailed picture
of what was being spent on certain commodities over time, thereby
preventing them from taking full advantage of their strategic sourcing and
spend analysis efforts.

12GAO, Best Practices: Using Spend Analysis to Help Agencies Take a More
Strategic Approach to Procurement, [42]GAO-04-870 (Washington, D.C.: Sept.
16, 2004).

13 [43]GAO-05-179 .

Equally important and necessary is for an organization to have a workforce
that is manned at the appropriate levels and equipped with the right
skills and abilities. To do this, a comprehensive, data-driven workforce
analysis must be performed in conjunction with establishing the corporate
vision and goals. An organization cannot fully understand what skills and
staffing commitments are necessary at each organizational level to meet
service acquisition requirements until it understands where it wants to go
and how it plans to get there. Once information on spending and workforce
capabilities is known and understood, organizations can be more strategic
in planning and managing service acquisition. The absence of such data
creates several risks, including not knowing how and where money is being
spent on service acquisition or not having the appropriate workforce
skills or staffing levels to ensure it is using sound buying practices.

Transactional Focus: Buying the Right Individual Service the Right Way

While the strategic level defines the direction and manner in which an
organization pursues improvements in service acquisition, it is through
individual service transactions that the strategy is implemented. Key
factors at this transactional level include (1) clearly defined and valid
requirements; (2) appropriate business arrangements; and (3) effective
contractor management and oversight. In short, an organization needs to
assure itself that on individual service transactions it is buying the
right thing in the right way and that doing so results in the desired
outcome. See figure 3 for key factors for effectively managing service
acquisitions at the transaction level.

Figure 3: Key Factors for Managing Service Acquisitions at a Transactional
Level

  Good Outcomes Begin with Sound Requirements

Establishing a valid need and translating that into a service acquisition
requirement is essential for obtaining the right outcome. Without this, an
organization increases the risk that it will pay too much for the services
provided, acquire services that do not meet its needs, or enter too
quickly into a sensitive arrangement that exposes the organization to
financial, performance, or other risks. Moreover, to establish accurate
requirements, the customer organization would benefit by involving
stakeholders that have knowledge about past transactions, current market
capabilities and the potential supplier base, and budgetary and financial
management issues. The makeup of stakeholders may vary across different
transactions depending on the nature, complexity, and risks. In the end,
the purpose of stakeholders with varied knowledge and skills is to ensure
at the earliest point possible that all aspects of the acquisition are
necessary, executable, and tailored to the level of risk commensurate with
the individual transaction. We have found that when DOD uses similar
teaming concepts to develop and deliver products, the results have
included superior outcomes within predicted time frames and budgets. For
example, we reported in April 2001 that the Advanced Amphibious Assault
Vehicle program used teams to reduce the time needed to make a design
decision from 6 months to about a week.14

Because the nature of service contracts can vary, they naturally require
different approaches in describing requirements. For example, the time,
discipline, and sophistication of a team developing a requirement for
repetitive building maintenance would be considerably less than that of a
team developing a requirement for the first purchase of a space launch
service. Observing these factors, tailored to the individual requirement
at hand, can help to ensure that risks associated with a requirement for a
service acquisition are fully considered before entering into a business
arrangement. This is especially important for service acquisitions,
because once requirements are developed, most transactions move very
quickly into the business arrangement and contracting stages.

  Appropriate Business Arrangements Provide Right Way to Buy Services

Once a requirement has been validated and defined, it becomes necessary to
develop an appropriate business arrangement to meet that need while
protecting the government's interests. Of course, without a sound
requirement, the business arrangement could be relegated to buying the
wrong service the right way. At a basic level, this includes defining a
clear scope of expected contractor performance, developing an objective
means to assess the contractor's performance, ensuring effective
contractor selection based on competition and sound pricing, and selecting
an appropriate contracting vehicle. Here again, while these are performed
with respect to the individual transaction, they must be done in the
context of the organization's strategic vision.

14GAO, Best Practices: DOD Teaming Practices Not Achieving Potential
Results, [44]GAO-01-510 (Washington, D.C.: Apr. 10, 2001).

As an organization undergoes the process for selecting those contractors
that will provide services, there should be clearly established
relationships among what tasks the contractor is expected to perform, the
contract terms and conditions, and performance evaluation factors and
incentives. This is especially true as federal agencies makes adjustments
to their acquisition practices. For example, in recent years, federal
agencies have made a major shift in the way they buy services, turning
increasingly to interagency contracts as a way to streamline the
procurement process. In these cases, an agency can use an existing
contract that has already been awarded by another agency, or turn to
another agency to issue and administer task orders on its behalf, often
for a fee.15 Requirements, roles, and responsibilities need to be clear to
reduce risks. For example, we reported in July 2005 that DOD customers did
not provide the awarding agency with detailed information about their
needs.16 Without this information, these agencies did not translate DOD's
needs into well-defined contract requirements that contained criteria to
determine whether the contractor had performed successfully. In the
absence of well-defined outcomes, DOD and the agencies lacked criteria to
provide effective contractor oversight.

Similarly, competition during the acquisition process is also important in
getting reasonable prices, as offerors put forth their best bid and
solution to meeting the proposed requirements and the government receives
the benefit of market forces on pricing. We have noted, however, that DOD
has, at times, sacrificed the benefits of competition for expediency. For
example, we noted in April 2006 that DOD awarded contracts for security
guard services supporting 57 domestic bases, 46 of which were done on an
authorized, sole-source basis. The sole-source contracts supporting the
last 37 installations were awarded by DOD despite recognizing it was
paying about 25 percent more than previously paid for contracts awarded
competitively.17

15Task orders are placed against established contracts that provide for
the issuance of orders for the performance of tasks during the period of
the contract.

16GAO, Interagency Contracting: Franchise Funds Provide Convenience, but
Value to DOD is Not Demonstrated, [45]GAO-05-456 (Washington, D.C.: July
29, 2005). GAO designated the management of interagency contracting a
high-risk area in January 2005.

When proper management controls are not in place, particularly in an
interagency fee-for-service contracting environment, too much emphasis can
be placed on customer satisfaction and revenue generation rather than on
compliance with sound contracting policy and required procedures, such as
competition. Significant problems in the way contracting offices carry out
responsibilities in issuing the orders for services may not be detected or
addressed by management. For example, in April 2005 we reported that a
lack of effective management controls--in particular insufficient
management oversight and a lack of adequate training--led to the
breakdowns in the issuance and administration of task orders for
interrogation and other services in Iraq, including:

           o issuing 10 out of 11 task orders that were beyond the scope of
           underlying contracts, in violation of competition rules;
           o not complying with additional DOD competition requirements when
           issuing task orders for services on existing contracts;
           o not properly justifying the decision to use interagency
           contracting;
           o not complying with ordering procedures meant to ensure best
           value for the government; and
           o inadequate monitoring of contractor performance.18

Without appropriate attention, there is an increased risk that the
government will pay too much for the purchased service, will be limited in
its access to new and innovative alternatives, or will not be in the
proper position to effectively manage the contractor after an arrangement
is established.

  Actual Performance Must Be Managed and Assessed

At the transactional level it is also important to implement a
post-contract award process to effectively manage and assess contractor
performance to ensure that the business arrangement is properly executed.
Managing and assessing post-award performance entails various activities
performed by government officials to ensure that the delivery of services
meets the terms of the contract, including adequate surveillance
resources, proper incentives, and a capable workforce for overseeing
contractor activities. Each of these requires metrics and tools to
encourage contractors to provide superior performance and to manage and
document that the contractor's performance was acceptable. For example,
one important element of this phase is having a plan for assessing
performance that outlines how services will be delivered. In addition, the
plan should provide a mechanism for capturing and documenting performance
information so it can serve as past performance information on future
contracts. Effective use of such a plan can allow the government to
evaluate the contractor's success in meeting the specified contract
requirements. Further, organizations can use monetary incentives, such as
those provided through award and incentive fee contracts, to promote
desired acquisition outcomes. Finally, quality assurance
surveillance--oversight of the services being performed by the
contractor--is important to ensure that contractors are providing timely
and high-quality services and to help mitigate any contractor performance
problems.

17GAO, Contract Security Guards: Army's Guard Program Requires Greater
Oversight and Reassessment of Acquisition Approach, [46]GAO-06-284
(Washington, D.C.: Apr. 3, 2006).

18GAO, Interagency Contracting: Problems with DOD's and Interior's Orders
to Support Military Operations, [47]GAO-05-201 (Washington, D.C.: Apr. 29,
2005).

In an environment that demands increased interaction between DOD and the
contractor to ensure expected outcomes, acquisition personnel must be
adequately trained to understand each of these elements and have the
skills to manage service contractors accordingly. Without appropriate
attention through contract completion, we have found that risks exist that
could result in poor contractor performance, services not being delivered
as expected, or payment to contractors for more than the value of the
services they performed. For example, our March 2005 review of 90
contracts showed wide variance in the level of surveillance, including 15
contracts that had no personnel assigned at all for these
responsibilities.19 According to DOD officials, this condition existed
because surveillance was not as important to contracting officials as
awarding contracts and contracting oversight personnel were not properly
assigned, evaluated on the performance of their duties, or provided enough
time to complete surveillance tasks. In the same way that the development
of requirements for services must be different from the development of
requirements for products, so is the case for overseeing contractor
performance. Given that performance thresholds may vary greatly,
management and oversight of individual service acquisitions may need to be
tailored to meet specific requirements. In some cases, dollar value may
not be a good proxy for determining risk. For example, some high dollar
contracts could pose relatively little risk to achieving the agency's
mission. Conversely, certain lower dollar contracts, such as those used to
obtain interrogation services in Iraq, may pose higher risk and,
therefore, require greater management attention.

19GAO, Contract Management: Opportunities to Improve Surveillance on
Department of Defense Service Contracts, [48]GAO-05-274 (Washington, D.C.:
Mar. 17, 2005).

DOD Service Acquisition Approach Does Not Fully Address Key Elements at the
Strategic or Transactional Levels

DOD and the military departments have not yet fully addressed the key
elements for managing service acquisition at a strategic or a
transactional level. At the strategic level, DOD has not formed a
normative position of where service acquisition needs to be and does not
have the data necessary to know the state of service acquisition today. As
a result, DOD is not in a position to determine whether investments in
services are achieving their desired outcomes. These are precursors to
defining and promoting improved outcomes. At the transactional level, most
of DOD's efforts have been aimed at improving business arrangements,
without commensurate focus on how requirements are established and
communicated or how service contracts are executed. Despite the
implementation of a senior-level review process, buying commands and
activities have not made significant changes to how they manage individual
service acquisitions.

DOD's Strategic Level Approach Missing Key Elements

DOD's overall approach to managing service acquisition suffers from the
absence of several key elements. DOD has not developed a strategic vision
and lacks sustained commitment to manage service acquisition risks and
foster more efficient outcomes. As a result, DOD is not in a position to
communicate to its workforce how it intends to improve its acquisition of
services; determine needed changes to structures and processes to better
identify and prioritize risks; or understand the current state of service
spending and the skills of its current workforce. While DOD's current
approach to managing service acquisition at the strategic level provides
some additional insight into high-dollar value service acquisitions, it
lacks an overall road map for managing risk and integrating key service
acquisition initiatives.

  Normative Position of Service Acquisition Not Yet Established

DOD has not yet identified the types and quantities of services it
purchases; the outcomes needed in service acquisition so that necessary
changes can be understood and evaluated; or metrics that can be used to
assess whether those changes have actually achieved the expected outcomes.
DOD and military department officials have acknowledged that DOD has not
developed a comprehensive plan that targets areas needing improvements,
coordinates ongoing and planned initiatives, and provides an overall road
map to improve DOD's management of services. In the absence of such a
vision, DOD's strategic level efforts do not position the department to
proactively manage service acquisition outcomes, but rather relegate DOD
to a reactive role in which the billions of dollars spent acquiring
services simply reflects the sum total of individual actions.

Further, DOD's efforts to transform its enterprisewide business operations
may not translate into improved knowledge on how services are acquired.
For example, DOD established the Business Transformation Agency in October
2005 to lead and coordinate business transformation efforts across the
department. The Business Transformation Agency is tasked primarily with
modernizing key information technology systems and business processes
intended to make reliable data more readily available while at the same
time consolidating the overall number of information technology systems
and ensure consistency across the department. However, the Business
Transformation Agency has few ongoing activities directly related to the
acquisition of services.

In addition, DOD has pursued few opportunities to leverage its buying
power to acquire services through the use of strategic sourcing concepts.
While DOD has undertaken a number of pilot efforts, only a limited number
of these focused specifically on services. In 2006, DOD appointed the
Assistant Deputy Under Secretary of Defense for Strategic Sourcing and
Acquisition Processes to coordinate efforts and assist other DOD
components, including the military departments and the Defense Acquisition
University (DAU), as they develop strategic sourcing plans and training
processes. The Assistant Deputy Under Secretary stated that initial
efforts were focused on developing a concept of operations to facilitate
this requirement, but so far had been limited by a lack of staff and
resources. Further, he acknowledged that his office does not play a role
in DOD's service acquisition review process. In September 2006, a senior
DOD official indicated that DOD was considering transferring this
responsibility to the Office of the Director, Defense Procurement and
Acquisition Policy. It is uncertain how this change, if implemented, would
affect the roles and responsibilities previously assigned to the office.

  DOD Has Not Communicated Its Vision for Managing Service Acquisition

Because it lacks a strategic vision, DOD is not in a position to
communicate how it intends to improve its approach to service acquisition.
DOD's primary policy for managing service acquisition came in the form of
a memorandum issued in response to sections 801 and 802 of the Fiscal Year
2002 National Defense Authorization Act. That memorandum, issued in May
2002, noted DOD's intent to move to a more strategic and integrated
approach to the acquisition of services and the need to treat this area as
seriously as it does that of hardware.20 Similarly, DOD and senior
military department officials have testified on the need to improve
service acquisition management within their departments. Nevertheless, our
discussions with command and buying activity officials found that while
recognizing this need, without specific guidance from DOD, their
acquisition practices remain unchanged. As a result, senior DOD
leadership's call for change has had limited impact on acquisition
practices at lower levels within the department.

Further, one of the biggest obstacles to a more strategic approach to
service acquisition is breaking down cultural barriers at different levels
and across various functions of the acquisition process. In that regard,
officials noted that the acquisition and contracting communities often do
not have a shared vision for improving service acquisition or of their
role in such a vision. For example, DOD has acknowledged that the use of
performance-based service contracting techniques is generally perceived as
a "contracting" initiative, with the rest of the acquisition community
generally not fully participating or embracing the initiative.
Consequently, DOD and military department officials indicate that without
senior leadership and commitment, it is difficult to get support for
changes in business practices within the acquisition community.

  Changes to Supporting Structures, Processes, and Roles Have Had Limited Effect

As part of its May 2002 policy, DOD required the development of a review
process for individual service acquisitions, established oversight
thresholds, and specified which service acquisitions are to be reviewed.
In addition, it required the military departments to establish a similar
management review process. DOD officials noted in 2003 that this approach,
combined with several other initiatives, was expected to have significant
impact on the acquisition of services. The new management structure DOD
implemented to address identified deficiencies associated with the
management of services established three levels: (1) review by the Under
Secretary of Defense (Acquisition, Technology, and Logistics) for services
acquisitions valued over $2 billion; (2) review by the component or
designated acquisition executive for service acquisitions valued between
$500 million and $2 billion; and (3) review by a component-designated
official for the acquisition of services valued at less than $500 million.
In response to this guidance, the Air Force, Army, and Navy each developed
individual service acquisition review processes and authorities to support
the DOD review requirements and identified respective decision authorities
responsible for conducting execution reviews to assess progress against
metrics.

20This policy memorandum was formalized on May 12, 2003.

DOD and military department officials with whom we spoke indicated that
the review structure has provided the reviewing office with additional
insight on high-dollar value service acquisitions. However, the Office of
the Under Secretary of Defense (Acquisition, Technology, and Logistics)
lacked complete information on the number and scope of acquisitions of
which it was notified and therefore could not give us a definitive
response as to how many transactions were formally reviewed. Officials
from that office provided a list of 19 service acquisitions that had been
notified for review--9 Army and 2 Air Force acquisitions, in addition to 8
acquisitions from the Office of the Assistant Secretary of Defense
(Networks and Information Integration), which are subject to review under
the guidance for major automated information systems--but provided no
additional information on the results of those reviews.

Data provided by officials at the military department level indicated that
through September 2005, 69 acquisitions--representing just under 3 percent
of service obligations--had been reviewed by the Air Force, Army, and Navy
under the new process (see table 2).

Table 2: Service Acquisitions Reviewed under DOD and Military Department
Review Structure (dollars in millions)

                                   Number Fiscal year       Total  Percentage 
                                       of        2005 fiscal year          of 
                                 proposed obligations        2005 obligations 
                                 contract        from obligations        from 
Review                         actions    reviewed         for    reviewed 
level/office   Criteriaa      reviewed    actionsb    services     actions 
Under          Proposed        Unknown                                     
Secretary of   service                                                     
Defense        actions valued                                              
(Acquisition,  at $2 billion                                               
Technology,    or more.                                                    
and Logistics)                                                             
Army           Proposed             16        $326     $40,267        <1.0 
                  service                                                     
Assistant      acquisitions                                                
Secretary of   exceeding $500                                              
the Army       million                                                     
(Acquisition,                                                              
Logistics, and                                                             
Technology)                                                                
                                                                              
Deputy                                                                     
Assistant                                                                  
Secretary of                                                               
the Army                                                                   
(Policy and                                                                
Procurement)                                                               
Navy           Proposed              9        $353     $23,123         1.5 
                  actions                                                     
Assistant      exceeding $1                                                
Secretary of   billion                                                     
the Navy                                                                   
(Research,     Proposed                                                    
Development,   service                                                     
and            acquisitions                                                
Acquisition)   with a value                                                
                  between $500                                                
Deputy         million and $1                                              
Assistant      billion                                                     
Secretary of                                                               
the Navy                                                                   
(Acquisition                                                               
Management)                                                                
Air Force      Proposed            44c      $1,735     $21,896         7.9 
                  service                                                     
Program        acquisitions                                                
Executive      exceeding $100                                              
Officer for    million or 300                                              
Combat and     or more                                                     
Mission        full-time                                                   
Support        equivalents                                                 
                  for A-76                                                    
                  requirements.                                               
Total                               69      $2,414     $85,286         2.8 

Source: DOD (data); GAO (analysis).

aDOD and the military departments can also review any service acquisition
below established thresholds, but otherwise determined to be of special
interest.

bFigures in this column may include obligations for contracts or orders
that included products and research and development-related services.

cDoes not include one classified acquisition that underwent review.

While the DOD reviews to date under this process have provided some
additional visibility over high-dollar value service acquisitions, the
reviews tend to focus more on ensuring compliance with applicable
statutes, regulations, and other requirements, rather than on imparting a
vision or tailored method for strategically managing service acquisition.
Senior DOD and military department officials noted that the process is
generally not intended to review program or customer decisions made at
lower levels within the department as to the need for the particular
services or to have a post-contract award follow-up assessment to ensure
expected outcomes. Also, the reviews have not positioned DOD to regularly
identify opportunities to leverage buying power. Further, they noted that
the reviews are largely perceived as a function and responsibility of the
DOD contracting organization, rather than a shared responsibility of the
entire acquisition community, to include the program office and other
customers for services.

Moreover, DOD's policy does not require the Under Secretary of Defense
(Acquisition, Technology, and Logistics) to actually review those
acquisitions that exceed the $2 billion threshold. Service acquisitions
that meet this threshold are first reviewed and approved at the military
department level. In turn, the military departments notify the Under
Secretary that a service acquisition exceeding the threshold is available
for review. If there is no response within 10 days, the acquisition is
allowed to proceed without further review. Additionally, at the military
department level, most of the service acquisitions reviewed to date have
been indefinite delivery/indefinite quantity contracts.21 There is no
requirement to review individual task orders that are subsequently issued
even if the value of the task order exceeds the review thresholds.

We spoke to many officials at buying activities that had proposed service
acquisitions for review under this process. For the most part, they did
not believe the review significantly improved those acquisitions and noted
very few examples of occasions when, as a result of review feedback,
acquisition strategies were changed in a meaningful way. For example, the
reviews tended to focus on compliance with applicable laws, regulations,
and socioeconomic goals, such as small business participation or, in other
words, that the business arrangements are proper--all of which are covered
in the development of the acquisition strategy prior to the review. These
officials indicated that the timing of the review process--which generally
occurs well into the planning cycle--is too late to provide opportunities
to influence the acquisition strategy. These officials told us that the
reviews would be more beneficial if they were conducted earlier in the
process, in conjunction with the program office or customer, and in the
context of a more strategic approach to how best to meet the requirement,
rather than simply from a secondary or tertiary review of the contract and
in an area where they have considerable experience and expertise. In
addition, contracting officials at one buying command stated that
reviewing officials often lack the resources or technical expertise to
provide useful and valuable feedback.

21Indefinite-delivery/indefinite-quantity contracts establish basic terms
in advance, enabling agency personnel to issue subsequent task or delivery
orders for specific services or goods expeditiously. Orders must be within
the contract's scope, issued within the period of performance, and be
within the contract's maximum value. Federal Acquisition Regulation (FAR)
Subpart 16.5 (2006).

  Knowledge on Spending and Workforce Is Not Readily Available

DOD's ability to effectively manage service acquisition at either the
strategic or the transactional level is hindered by the absence of
reliable data on which to make informed decisions. DOD and military
department officials acknowledge that the DOD contracting information
systems available to the locations we visited do not provide information
on forecasted demands for services; current and reliable information on
what services are currently being procured; or data to assess whether
these services are being acquired in line with cost, schedule and
performance goals, or otherwise meeting customer needs.

For its part, DOD has not identified the specific data it needs to better
manage service acquisition outcomes or developed appropriate data systems
that are essential for providing the information necessary for improving
results. According to DOD documentation, there are thousands of individual
information systems that have been implemented over decades to meet
various mission needs, and rather than providing usable information, these
systems can hinder collecting information needed by decision makers.
Because these systems were developed independently--often not designed to
be interoperable with other such systems--it is a challenge to share data
with other locations or higher organizational levels in support of broader
planning and decision making. Even collecting basic information on
high-dollar services often proves time-consuming. For example, in April
2005, DOD initiated a formal review of its service acquisition policy.
According to DOD officials, after determining that its data systems were
inadequate to identify and assess the status of service acquisition policy
compliance, the department initiated a data call to each of the military
components asking for a status review of the top 20 service acquisitions
in each military department since inception of the policy. This data call
took more than 6 months to collect, review, and report basic contracting
data. Further, the results did not provide the types of knowledge DOD had
expected.

Finally, DOD has acknowledged that it faces significant workforce
challenges that if not effectively addressed could impair the
responsiveness and quality of acquisition outcomes. In response, DOD is in
the process of identifying the current skill sets and gaps of the
acquisition workforce that routinely are engaged in acquiring services.
For example, DOD's 2006 Human Capital Strategic Plan noted there are
currently efforts to develop a comprehensive competency model for each
functional career field including the technical tasks, knowledge, skills,
abilities, and personal characteristics required of the acquisition
workforce. Similarly, DAU officials noted that they are revising the
training curriculum for acquisition personnel, in part to provide an
increased emphasis on service acquisition. For example, DAU has an ongoing
effort to identify the critical competencies for service acquisition,
determine which of these competencies require further workforce training,
and develop the appropriate training. DAU officials stated the new courses
will be initially targeted for contracting personnel. In addition, DOD
officials stated that these courses will be made available to
noncontracting acquisition personnel only as time and resources permit.

DOD Transactional Approach Focuses Principally on Business Arrangement

Our work found that at the transactional level, buying commands and
activities have not significantly adjusted their acquisition practices
since DOD implemented its new review structure. The current
transactional-level approach does not always take the necessary steps to
ensure customer needs are translated into well-defined contract
requirements or that post-contract award activities result in expected
outcomes. Instead, DOD service acquisition management activities focus
primarily on awarding the contract. Without clearly defined requirements
and attention after the contract is awarded, DOD cannot be sure it is
buying the right service or using an appropriate means to assess
contractor performance. As a result, DOD is potentially exposed to a
variety of risks, including buying things that do not fully meet customer
needs or that should be provided in a different manner or with better
results.

  Communication Challenges Hinder Establishment of Good Requirements

DOD and military department officials consistently identified poor
communication and the lack of timely interaction between the acquisition
and contracting personnel as key challenges to developing good
requirements. These officials noted that developing well-defined and
clearly articulated requirements in outcome-based performance measures is
difficult in and of itself, but the challenges can be reduced if both
communities work together early in the process. Several officials
identified actions they have initiated to improve working relationships,
but acknowledged that results have not been uniformly achieved. In part,
these issues arise from cultural differences between the contracting and
acquisition communities concerning their roles in managing various service
acquisition elements.

Generally the intended customer of a service, such as a program office,
has the responsibility to identify what type of service it requires, the
level of performance or quality needed, the period of performance, and the
available budget. To avoid problems with the later stages of the
acquisition process, and depending on the complexity of the services
needed, early involvement of the contracting and other functional
communities is important. However, contracting officers we spoke with
frequently commented that the initial statements of work prepared by the
customer were often insufficient, unclear, or not expressed in
performance-based terms, requiring considerable rework. In addition,
officials told us it is important that contracting officers fully
understand exactly what the customer needs in order to get the best
business arrangement for the government. However, contracting officers did
not always have the necessary knowledge or expertise to understand the
requirement, such as translating specific requirements into the statement
of work. According to contracting officials, the resulting frustrations
are heightened when customers identify the need to award a contract for
the services in a short time period.

Similarly, because services are generally funded on an annual basis,
contracting officers are often faced with many pressures at the end of
each fiscal year. For example, officials at the Navy Fleet Industrial
Supply Center in Philadelphia noted the impact of DOD's recent policy
requiring contracting officers to approve task orders with a value of
$100,000 or more if they are issued against a non-DOD contract.22 While
this does provide greater visibility in an area of previous concerns, the
officials we spoke to indicated that the policy was issued without first
assessing the impact on the contracting workforce or whether the customer
was fully aware of the new process requirements. Consequently, contracting
personnel were faced with a significant increase in workload, much of it
at the end of the fiscal year. As many of these contracting officials had
not been involved with the original negotiation or award of the contract,
and because of the short time frames needed to issue the orders, they felt
pressured to review and approve task orders without being able to fully
assess whether the overall approach was the most effective or efficient.

22DOD established this requirement in response to concerns about the
improper use of interagency contracts.

The lack of technical knowledge and training was raised as an issue at
several commands we visited. For example, at many locations, officials
commented on the lack of contracting knowledge on the part of the
customer. One contracting manager told us he would be willing to pay for
contracting-related training for customers, so that they could better
understand how to prepare various contract documents, such as a
performance-based statement of work or an award fee evaluation plan.
Contracting officials told us that such documents can be difficult to
prepare without sufficient planning and input from customers who are
familiar with what needs to be accomplished. Similarly, contracting
officers at one location told us that they sometimes have to alter
acquisition approaches because it is too difficult to develop evaluation
plans that can be used by customers to effectively evaluate contractor
performance. Program officials also commented on the lack of technical
knowledge on the part of the contracting community. One Air Force program
official told us that he is required to use the general base contracting
office to procure advanced medical services, even though the contracting
officers usually do not have related technical knowledge and sometimes
have difficulty understanding the requirement. Shared knowledge and
communication are therefore important for ensuring that customers and
contracting personnel are placed in the best position to achieve expected
outcomes.

Officials at some locations reported that better acquisition outcomes can
result from establishing effective working partnerships. For example, Air
Force Space Command officials noted that one of their major service
acquisitions involves support for base operations in Thule, Greenland. The
Air Force has relied on contractors to provide these services for more
than four decades and believed their experience on the program illustrates
key aspects needed to promote a successful acquisition. These officials
noted that the service is a high priority and receives considerable
attention from senior management. Additionally, the command employs a
team-based approach to the acquisition, which means that personnel from
both the customer and contracting communities are assigned and remain on
the acquisition team throughout the development of the requirements,
associated acquisition strategy, and contracting approach. Further, to
help develop the requirements, the team receives considerable input from
program personnel and the contracting officer's technical representative
as to the contractor's performance, and makes use of monthly reports that
measure key performance parameters. By including personnel from all stages
of the acquisition process--program managers, contracting officers, and
quality assurance personnel--Space Command officials believed they were
able to make adjustments to their requirements that allowed the contract
to be priced in a manner that reduced cost risk to the government. Command
officials and those involved in the Thule service acquisition acknowledge,
however, that they have not been able to consistently replicate this
success on all other acquisitions.

Because of the recognized need to improve communication and share
knowledge between customers and the acquisition workforce, some of the
buying commands we visited have taken actions to promote communication and
timely interaction. For example, the Army's Communications and Electronics
Command colocated senior contracting officers with customers to promote
better communication and more cooperation between the two communities.
These staff members, referred to as customer service representatives,
establish early lines of communication by participating in management
meetings with the customers to identify future acquisition needs. The
representatives use this knowledge to help senior management in the
contracting organization identify resources and approaches to meet
customer needs.

  Business Arrangements Receive Majority of Management Attention, but Pressures
  to Meet Customer Needs Cited as Concerns

Buying commands and activities we visited focused the majority of their
attention on structuring business arrangements to ensure compliance with
applicable laws and regulations. As a result, command officials generally
indicated that their previous practices were already in line with
requirements established under DOD's review process and therefore remain
largely unchanged. In some cases, the commands have established additional
procedures to review specific areas of interest, such as the proposed use
of an interagency contract or to ensure that task orders under multiple
award contracts comply with competition requirements.

Despite these reviews, however, we have identified examples of potentially
poor contracting practices and the pressure to meet customer demands. For
example,

           o On one acquisition, an Army contracting officer issued a task
           order for a product that the contracting officer knew was outside
           the scope of the service contract. The contracting officer noted
           in an e-mail to the requestor that this deviation was allowed only
           because the customer needed the product quickly and cautioned that
           no such allowances would be granted in the future.

           o The Navy has established Seaport-enhanced, a centralized
           electronic ordering system that competes and issues task orders
           for multiple customers for program management support contracts.
           The Navy instructed buying activities within its virtual system
           command structure to use Seaport-enhanced as the "mandatory method
           of choice" for these services. However, officials at one Navy
           buying command told us they plan to submit waivers to avoid using
           Seaport-enhanced to meet their customer's preference for using
           particular contractors and to use time- and-materials contracts,
           neither of which would be possible using Seaport-enhanced.

           o An Air Force contracting official noted that his office intended
           to award a number of contracts to local firms so that the firms,
           in turn, could have increased opportunities to provide services to
           other civilian and military organizations in the region, through
           marketing themselves as having been awarded a federal contract.

While these cases are anecdotal, they indicate that some contracting
officers feel pressured to meet their customers' needs and had, or were
considering, options that may not be in the bests interests of the
government.

  Limited Capability to Assess Service Acquisitions

Command and buying activities we reviewed generally had limited
capabilities to assess the degree to which their service acquisitions were
successful. For example, few of the commands or activities could provide
us reliable or current information on the number of service acquisitions
they managed, and others had not developed a means to consistently monitor
or assess, at a command level, whether such acquisitions were meeting the
performance objectives established in the contracts. Many command
officials noted the difficulties in doing so, since service acquisitions
involve a wide range of activities that necessitate different measures of
quality or performance from each other or from acquisitions involving
products or major weapon systems. Often, these officials noted that their
measure of success is reflected in terms of customer satisfaction or the
number of complaints received from the customers.

Command officials noted that cost, delivery, or schedule performance
measures may not be as effective on service contracts as for products or
weapon systems. In this regard, the officials noted that services are
often 1-year efforts in which schedule performance provides limited
insights. Similarly, these officials noted that many of their service
contracts, which are often cost reimbursable or time-and-materials in
nature, are funded on a quarterly basis and are limited by the amount of
funds made available. In these cases, program officials noted that if more
funds are made available than expected, the customer may increase the
number of staff or labor hours to be provided; conversely, funding
reductions will be reflected in commensurate reductions in the number of
staff or labor hours. In either case, measuring changes in cost or hours
is more reflective of the availability of funding, rather than an
indication of contractor performance. Command officials noted that their
information systems generally do not provide a capability to assess
service acquisition outcomes.

Additionally, the ability to conduct oversight within DOD's management
structure is often constrained by resources and workforce availability.
For example, Air Force documentation suggests that 90 percent of planning
activity is focused on getting the contract awarded, leaving very little
for contract administration and oversight. Further, DOD officials noted
that organizations like the Defense Contract Management Agency do not
perform the same level of surveillance functions for services as they do
for products. The Defense Contract Management Agency generally assembles
integrated program support teams to deliver support at prime contractor
facilities, which in turn supply business and technical support and
furnish program managers with insight into program execution at the prime
contract level, as well as the major and critical subcontract tiers.
Senior DOD officials told us that because services tend not to rise to the
level of a program, the Defense Contract Management Agency does not always
provide the resources to support those acquisitions. Rather, the contract
administration task is often assigned to a local contracting officer
technical representative.

Attention to Strategic and Transactional Elements Has Improved Some Service
Acquisition Outcomes

Just as commercial firms have reported positives changes after
implementing management approaches that include strategic and
transactional elements, there are also examples where DOD has had similar
success. DOD officials who report success stated that this can be achieved
by paying attention to and addressing the risks inherent in each of the
key elements in the service acquisition process--at both the strategic and
the transactional levels. For example, the Air Force, in conjunction with
the Army, developed a strategic approach to acquiring wireless services
and generated projected savings of 30 percent annually for just one of its
service providers. According to Air Force officials, the combination of
sustained leadership support, good data, a supporting structure, and
communication with and among customers mitigated risks and set the context
for the transactional level to achieve good acquisition outcomes. The Air
Force's Chief Information Officer and the Deputy Assistant Secretary for
Contracting actively participated in establishing and supporting the
development of the Information Technology Commodity Council, which is
responsible for managing information technology-related strategic sourcing
initiatives. Clear roles and responsibilities were established within the
supporting structure of the council, including appointing a single
individual to lead the initiative; identifying stakeholders who were
responsible for developing the requirements; and establishing a team to
perform market research and obtain other necessary data.

The team responsible for obtaining the data upon which to base its
acquisition decisions consisted of Army and Navy officials. These
officials worked together to perform a market analysis to understand the
marketplace, develop a spend analysis to understand current expenditures,
and forecast future demand to understand the needs of the military
departments individually, and of DOD as a whole. As a result of the team's
efforts, data are now available to help any agency within DOD save money
when it acquires wireless services.

Conclusions

Over the past 10 years, DOD has seen large growth in the acquisition of
services, to the point where the value of these acquisitions exceeds the
value of major weapon systems. To a large extent, this growth has not been
a managed outcome. Congress, concerned over these rapid increases, has
directed DOD to take several actions to promote more oversight and
discipline in service acquisition. DOD has taken action, but action has
not necessarily equated to progress. At this point, DOD is not in a good
position to say where service acquisition is today in terms of outcomes,
where it wants service acquisition to be in the next few years, or how to
get there. This makes it difficult to set the context within which
individual organizations can make informed judgments on service
acquisition transactions. Without this context, DOD will not be in a
position to determine

           o the current volume, type, location, and trends of service
           acquisition;

           o the results DOD wants to achieve in the next 3 to 5 years in
           each of these areas;

           o the definition of a good service acquisition outcome;

           o the characteristics of a service acquisition that make it
           desirable, undesirable, or sensitive;
           o the risks that need to be managed at each stage of a
           transaction; and

           o the conditions under which a transaction should be referred for
           review.

Given the diverse nature of services that DOD acquires, multiple sources
of risk, and wide variety of organizations that are involved in individual
acquisitions, until this basic information is available and understood, it
may not be to possible to develop an ideal departmentwide review process
or organizational structure. For example, while setting dollar thresholds
as a basis for reviewing an individual service acquisition is an
improvement over no review, dollars are not always a good proxy for risk.
Moreover, when a service acquisition reaches the review stage, the
requirement and proposed business arrangement are set and expediency
becomes an issue as the contract is ready to be awarded. Ultimately, the
majority of individual service acquisition decisions will be made by
organizations at the local level. The people making these decisions will
have to make judgments regarding the risks and soundness of requirements,
sources, competition, contract types, and execution follow-up. Their
decisions will also trigger which acquisitions receive higher level
review. Of primary importance now is to provide a context for these
organizations in which they can make tailored decisions and
recommendations that remain consistent with DOD's overarching views of
risk, desirable outcomes, and direction for service acquisition. That
context does not yet exist.

The strategic and transactional elements presented in this report can
ultimately provide such a context. While not new, these elements, when
considered together, offer the prospect of a cohesive approach--a
necessary precursor to developing specific solutions to improve service
acquisition outcomes. DOD will then be able to evaluate outcomes against
expected results, provide the basis for making course corrections, and
ultimately make service acquisitions a managed outcome.

Recommendations for Executive Action

We recommend the Secretary of Defense adopt a proactive approach to
managing service acquisition that leverages strategic and transactional
elements. Specifically, we recommend that the Secretary of Defense take
the following six actions:

           o establish a normative position of how and where service
           acquisition dollars are currently and will be spent (including
           volume, type, and trends);

           o determine areas of specific risk that are inherent in acquiring
           services and that should be managed with greater attention
           (including those areas considered sensitive or undesirable in
           terms of quantity or performance);

           o on the basis of the above, clearly identify and communicate what
           service acquisition management improvements are necessary and the
           goals and timelines for completion;

           o ensure that decisions on individual transactions are consistent
           with DOD's strategic goals and objectives;

           o ensure that requirements for individual service transactions are
           based on input from key stakeholders; and

           o provide a capability to determine whether service acquisitions
           are meeting their cost, schedule, and performance objectives.

Agency Comments and Our Evaluation

DOD provided written comments on a draft of this report. DOD concurred
with each of our recommendations and identified actions it has taken or
plans to take to address them. These comments are reprinted in appendix
II. As part of its comments, DOD provided its October 2006 policy
memorandum that implements Section 812 of the National Defense
Authorization Act for Fiscal Year 2006. We did not reprint the policy as
it is publicly available through DOD's acquisition website (
[49]www.acq.osd.mil/dpap/ ). DOD also provided technical comments, which
we have incorporated as appropriate.

DOD agreed that a more coordinated, integrated and strategic approach for
acquiring services is needed. In particular, DOD noted that it is
reassessing its strategic approach to acquiring services, including
examining the types and kinds of services it acquires and developing an
integrated assessment of how best to acquire such services. DOD expects
this assessment will result in a comprehensive, departmentwide
architecture for acquiring services that will, among other improvements,
help refine the process to develop requirements, ensure that individual
transactions are consistent with DOD's strategic goals and initiatives,
and provide a capability to assess whether service acquisitions are
meeting their cost, schedule and performance objectives. DOD expects its
assessment will be completed in early 2007.

DOD also noted that it has taken a number of initiatives to improve
specific issues associated with acquiring services. For example, DOD noted
that its October 2006 policy will modify certain aspects of the current
management structure, including providing lower dollar thresholds for
reviewing proposed services acquisitions and requiring senior DOD
officials to annually review whether service contracts were meeting
established cost, schedule and performance objectives. Further, DOD noted
that it had made organizational changes to improve its strategic sourcing
efforts; it is assessing the skills and competencies needed by its
workforce to acquire services; and the military departments and defense
agencies are currently conducting self-assessments intended to address
contract management issues we identified in our January 2005 high-risk
report.

While these efforts are steps in the right direction, they appear to be
primarily incremental improvements to DOD's current approach to acquiring
services. Our discussions with DOD officials indicate that the
architecture being developed may hold the potential for making the more
fundamental changes at the strategic and transactional level that we have
recommended. We have identified a number of elements that are needed at
each of these levels, such as clearly articulating where DOD wants service
acquisition to be in the next few years, setting the context for making
informed and tailored decisions at the transactional level, and assuring
that requirements are well-defined and consistent with DOD's strategic
objectives. The extent to which DOD successfully integrates these elements
as it develops and implements its new architecture will be the key to
fostering the appropriate attention and action needed to make service
acquisitions a managed outcome.

We are sending copies of this report to interested congressional
committees; the Secretary of Defense; the Secretaries of the Air Force,
Army, and Navy; the Commandant of the Marine Corps; and the Director,
Office of Management and Budget. We will provide copies to others on
request. This report will also be available at no charge on GAO's Web site
at [50]http:/www.gao.gov .

If you or your staff have any questions about this report or need
additional information, please contact me at (202) 512-4841 or
[email protected]. Contact points for our Offices of Congressional
Relations and Public Affairs may be found on the last page of this report.
Staff acknowledgments are listed in appendix III.

Paul Francis Director Acquisition and Sourcing Management

Appendix I: Scope and Methodology

To identify the key factors needed to improve service acquisition, we drew
heavily on our prior work in this and other areas. We primarily used our
January 2002 report that identified how leading commercial companies took
a strategic approach to acquiring services.1 In addition, we reviewed
previous GAO reports related to overall contract management and those
related to individual service contract transactions, specifically in areas
such as business transformation, interagency contracting, strategic
sourcing, and contract surveillance. To confirm and validate key factors,
we held detailed discussions with relevant defense contracting experts in
the Office of the Under Secretary of Defense (Acquisition, Technology, and
Logistics); the Office of the Assistant Secretary of Defense (Networks and
Information Integration); the Office of the Deputy Undersecretary of
Defense (Business Transformation); the Office of the Assistant Secretary
of Defense (Health Affairs); and the Defense Acquisition University. In
addition, we spoke with various offices within each of the military
departments, including the Air Force Program Executive Office (Combat and
Mission Support); the Deputy Assistant Secretary of the Army (Policy and
Procurement); the Assistant Secretary of the Navy (Research, Development,
and Acquisition); and the Air Force Information Technology Commodity
Council.

To assess the extent to which the Department of Defense (DOD) approach,
including its current management structure, exhibited these
characteristics, we reviewed relevant DOD guidance and policy memoranda,
including those that established its current management structure and
review processes. We interviewed officials responsible for implementing
the management structure within the Office of the Secretary of Defense, as
well as each of the offices mentioned above. Discussions with these
officials focused on DOD and military department service acquisition
approaches, including those in put in place in response to sections 801
and 802 of the National Defense Authorization Act for Fiscal Year 2002 and
other service contracting issues and initiatives. Data collected includes
the number of service contract management reviews that have occurred under
the newly implemented structure as well as the composition and purpose of
those review boards. We obtained information on the types of activities
and reviews conducted by these offices, including the number and value of
service acquisitions they reviewed.

1GAO, Best Practices: Taking A Strategic Approach Could Improve DOD's
Acquisition of Services, [51]GAO-02-230 (Washington, D.C.: Jan. 18, 2002).

To document and analyze the processes by which individual military
commands and buying activities acquired services, we visited 20 locations.
We selected these locations based both on recommendations from DOD
officials and from our own internal knowledge. While our selection of
locations cannot be generalized to the population of all DOD contracting
locations, those selected represented each of the military services and
represented a range of DOD service types. Locations visited include:

           o Air Force Space Command, Colorado Springs, Colorado;
           o Air Force 21st Space Wing, Peterson Air Force Base, Colorado
           Springs, Colorado;
           o Air Force 50th Space Wing, Schriever Air Force Base, Colorado
           Springs, Colorado;
           o Air Force 460th Space Wing, Buckley Air Force Base, Aurora,
           Colorado;
           o United States Air Force Academy, Colorado Springs, Colorado;
           o Army Contracting Center of Excellence, Arlington, Virginia;
           o Army Contracting Agency, Fort Carson, Colorado Springs,
           Colorado;
           o Army Communications and Electronics Command, Fort Monmouth, New
           Jersey;
           o Army Information Technology, E-Commerce and Commercial
           Contracting Center, Alexandria, Virginia;
           o Surface Deployment and Distribution Command, Alexandria,
           Virginia;
           o Naval Sea Systems Command, Washington Navy Yard, District of
           Columbia;
           o Naval Supply Systems Command, Mechanicsburg, Pennsylvania;
           o Navy Fleet and Industrial Supply Center, Philadelphia,
           Pennsylvania;
           o Navy Fleet and Industrial Supply Center, Norfolk, Virginia;
           o Navy Fleet and Industrial Supply Center, San Diego, California;
           o Naval Personnel Development Command, Norfolk, Virginia;
           o Navy Space and Warfare Command, San Diego, California;
           o Naval Education and Training Command (NETC), Pensacola Naval Air
           Station, Florida;
           o NETC Professional Development and Technology Center, Pensacola,
           Florida; and
           o TRICARE Management Activity, Acquisition Management and Support,
           Aurora, Colorado.

We conducted field observations at these locations and distributed a
structured set of questions to solicit information from contracting
officials designated to respond to our inquiry. Discussions with these
officials focused on the level and type of contracting activity and
service acquisition management approaches. These discussions centered on
topics such as service acquisition culture and relationships between
contracting personnel and customers (including program office and user
personnel), changes in policy and practice under the new review structure,
challenges faced in acquiring services, efforts to improve individual
service acquisitions; databases for capturing service contract data,
performance based contracting, strategic sourcing, and other service
acquisition initiatives. We discussed the review processes for selected
service acquisitions (as determined by buying activity officials);
including those that met criteria for review by either the Office of the
Secretary of Defense or the military departments and, for comparison,
those that were not subject to review at these levels. We reviewed
contract file documentation to examine standard processes, review
authority, requirements determination, and risk management activity.
Information collected included contract solicitations, acquisition
strategies, status reports, performance certifications; review and
approval checklists, and other contract specific documents.

Appendix II: Comments from the Department of Defense

Appendix III: GAO Contact and Staff Acknowledgements

GAO Contact

Paul Francis (202) 512-4841 or [email protected]

Acknowledgements

In addition to the contact above, Tim DiNapoli, Assistant Director; Brian
Mullins; Christina Cromley Bruner; Whitney Havens; Moshe Schwartz; Andrew
Redd; Julia Kennon; and John Krump made key contributions to this report.

(120415)

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www.gao.gov/cgi-bin/getrpt?GAO-07-20 .

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Highlights of [59]GAO-07-20 , a report to the Subcommittee on Readiness
and Management Support, Committee on Armed Services, U.S. Senate

November 2006

DEFENSE ACQUISITIONS

Tailored Approach Needed to Improve Service Acquisition Outcomes

Department of Defense (DOD) obligations for service contracts rose from
$82.3 billion in fiscal year 1996 to $141.2 billion in fiscal year 2005.
DOD is becoming increasingly more reliant on the private sector to provide
a wide range of services, including those for critical information
technology and mission support. DOD must maximize its return on investment
and provide the warfighter with needed capabilities and support at the
best value for the taxpayer.

GAO examined DOD's approach to managing services in order to (1) identify
the key factors DOD should emphasize to improve its management of services
and (2) assess the extent to which DOD's current approach exhibited these
factors.

[60]What GAO Recommends

GAO recommends that DOD take a proactive approach to managing strategic
and transactional level service acquisition elements. This includes
establishing a normative position of service spending, determining risk
areas for greater attention, and communicating these in a manner where
individual transactions can then be made to support strategic goals and
meet cost and performance objectives. DOD concurred with all of our
recommendations and noted several actions the department is taking or
plans to take to improve the acquisition of services.

Several key factors are necessary to improve DOD's service acquisition
outcomes--that is, obtaining the right service, at the right price, in the
right manner. These factors can be found at both the strategic and the
transactional levels and should be used together as a comprehensive, but
tailored approach to managing service acquisition outcomes. At the
strategic level, key success factors include (1) strong leadership that
defines a corporate vision and normative goals; (2) sustained,
results-oriented communication and metrics; (3) defined responsibilities
and associated support structures; and (4) increased knowledge and focus
on spending and data trends. The strategic level also sets the context for
the transactional level, where the focus is on making sound decisions on
individual transactions. Success factors at this level include having (1)
valid and well-defined requirements; (2) properly structured business
arrangements; and (3) proactively managed outcomes.

DOD's current approach to managing service acquisition has tended to be
reactive and has not fully addressed the key factors for success at either
the strategic or transactional level. At the strategic level, DOD has yet
to set the direction or vision for what it needs, determine how to go
about meeting those needs, capture the knowledge to enable more informed
decisions, or assess the resources it has to ensure departmentwide goals
and objectives are achieved. For example, despite implementing a review
structure aimed at increasing insight into service transactions, DOD is
not able to determine which or how many transactions have actually been
reviewed. The military departments, while having some increased
visibility, have only reviewed proposed acquisitions accounting for less
than 3 percent of dollars obligated for services in fiscal year 2005 and
are in a poor position to regularly identify opportunities to leverage
buying power or otherwise change existing practices. Actions at the
transactional level continue to focus primarily on awarding contracts and
do not always ensure that user needs are translated into well-defined
requirements or that post-contract award activities result in expected
performance.

Key Strategic and Transactional Factors for Service Acquisition

References

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