oversight

Contract Management: Postal Service's National Office Supply Contract Has Not Been Effectively Implemented

Published by the Government Accountability Office on 2003-01-17.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

               United States General Accounting Office

GAO            Report to the Chairman and Ranking
               Member, Committee on Small Business,
               House of Representatives


January 2003
               CONTRACT
               MANAGEMENT

               Postal Service’s
               National Office Supply
               Contract Has Not
               Been Effectively
               Implemented




GAO-03-230
                                               January 2003


                                               CONTRACT MANAGEMENT

                                               Postal Service’s National Office
Highlights of GAO-03-230, a report to          Supply Contract Has Not Been
the Chairman and Ranking Member,
Committee on Small Business,                   Effectively Implemented
House of Representatives




Over the past 2 years, the                     The Postal Service has not been successful in implementing its national-level
Postal Service has experienced                 contract to purchase most office supplies from Boise. Although the national
growing financial difficulties.                contract was intended to be a mandatory source of office supplies, the
In an effort to transform the                  Postal Service purchased less than 40 percent of its office supplies from
organization to reduce costs and               Boise in 2001. GAO found that the Postal Service did not perform as planned
increase productivity, the Postal
Service awarded a national-level
                                               under the contract because it did not take sufficient actions to ensure that
office supply contract to Boise                the contract would be used. As a result, the Postal Service has not been able
Corporation. In addition, the Postal           to realize its estimated annual savings of $28 million. In fact, it was only able
Service required Boise to submit a             to provide documentation for $1 million in savings for 2001.
subcontracting plan, which outlines
how small, minority-, and woman-               Boise and the Postal Service have not paid sufficient attention to the
owned businesses will be reached               subcontracting plan. The plan contains obvious ambiguities, and, in fact,
through the contract. GAO was                  Postal Service and Boise officials disagree on its goals. The Postal Service
asked to assess the status of the              maintains that the goal is 30 percent of Boise’s annual revenue from the
Postal Service’s implementation of             contract. Boise has fallen far short of this goal, reporting that only
the Boise contract and Boise’s                 2.6 percent of subcontracting dollars were awarded to small, minority-,
achievement of its subcontracting
plan. GAO also reviewed the
                                               and woman-owned businesses in fiscal year 2001. Postal Service and Boise
extent to which the Postal Service             officials recognize that the performance on the subcontracting plan is not
is buying office supplies directly             satisfactory and are taking a number of steps to achieve the plan’s goals.
from small, minority-, and                     Nevertheless, it is highly unlikely that the current subcontracting goals will
woman-owned businesses.                        be met.

                                               The Postal Service reported that its small, minority-, and woman-owned
                                               business achievements have declined from fiscal years 1999 to 2001.
GAO is recommending that                       Despite the Postal Service’s reported statistics, we could not determine the
the Postal Service reexamine                   extent to which it is buying directly from these businesses because the data
the national office supply contract            are unreliable.
to determine why it is not being
used and whether it is an effective
tool to achieve savings. If the                Total Office Supply Purchases for Fiscal Year 2001
contract is found to be beneficial,
the Postal Service should track
its employees’ use of the contract.
GAO also recommends the
Postal Service revise its national
contract to reflect realistic
goals for small, minority-, and
woman-owned businesses.
The Postal Service agreed with
GAO’s recommendations.



www.gao.gov/cgi-bin/getrpt?GAO-03-230.

To view the full report, including the scope
and methodology, click on the link above.
For more information, contact David Cooper
at (202) 512-4841 or cooperd@gao.gov.
Contents


Letter                                                                                 1
              Results in Brief                                                         2
              Background                                                               3
              National-Level Office Supply Contract Has Not Been
                Fully Implemented                                                      6
              Boise Is Not Achieving Subcontracting Plan Goals                        11
              Reports Indicate a Drop in Small Business Dollars, but Data Are
                Unreliable                                                            15
              Conclusions                                                             18
              Recommendations                                                         18
              Agency Comments                                                         19
              Scope and Methodology                                                   20

Appendix I    Comments from the U.S. Postal Service                                   23



Appendix II   Comments from Boise Office Solutions                                    25



Tables
              Table 1: Boise’s Reported Fiscal Year 2001 Subcontracting
                       Achievements                                                   12
              Table 2: Reported Office Supplies Purchased from SMW
                       Businesses                                                     16
              Table 3: Reported Office Supplies Purchased through Contracts           16
              Table 4: Reported Office Supplies Purchased Using Purchase Card         17


Figures
              Figure 1: Total Office Supply Spending for Fiscal Year 2001              6
              Figure 2: Office Supply Spending (Fiscal Years 1999 to 2001)             7
              Figure 3: Postal Service Office Supply Spending with Contract
                       Vendors (Fiscal Years 1999 to 2001)                             8


              Abbreviations

              JWOD          Javits-Wagner-O’Day Act
              SMW           small, minority-owned, and woman-owned



              Page i                                      GAO-03-230 Contract Management
United States General Accounting Office
Washington, DC 20548




                                   January 17, 2003

                                   The Honorable Donald A. Manzullo
                                   Chairman
                                   The Honorable Nydia M. Velázquez
                                   Ranking Democratic Member
                                   Committee on Small Business
                                   House of Representatives

                                   Over the past two years, the United States Postal Service experienced
                                   growing financial difficulties and struggled to fulfill its mission of
                                   providing affordable, high-quality universal service, while remaining
                                   self-supporting. Consequently, GAO reported that the Postal Service’s
                                   current business model was at risk and placed its transformation and
                                   long-term outlook on our high-risk list in April 2001.1 To transform the
                                   organization, reduce costs, and increase productivity, the Postal Service
                                   is, among other things, redesigning purchasing and material management
                                   functions to capture potential savings through a supply chain management
                                   initiative. The supply chain encompasses marketing, distribution, planning,
                                   manufacturing, and purchasing. One area of focus for this initiative is
                                   office supplies, on which the Postal Service spent $125 million in fiscal
                                   year 2001.2 To implement supply chain management for office supplies, the
                                   Postal Service awarded a national office supply contract to Boise Office
                                   Solutions (Boise) in January 2000.3 Under the terms of the contract, Postal
                                   Service buyers are required, with a few exceptions, to purchase all office
                                   supplies from this contract. The Postal Service estimated that this contract
                                   would enable it to save up to $28 million annually.



                                   1
                                    The high risk list identifies a federal program or operation that is highly vulnerable to
                                   waste, fraud, abuse, and mismanagement or that requires urgent attention to ensure that
                                   our national government functions in the most economical, efficient, and effective
                                   manner possible. U.S. General Accounting Office, U.S. Postal Service: Major
                                   Management Challenges and Program Risks, GAO-01-262 (Washington, D.C.:
                                   January 2001); U.S. General Accounting Office, U.S. Postal Service: Deteriorating
                                   Financial Outlook Increases Need for Transformation, GAO-02-355 (Washington, D.C.:
                                   Feb. 28, 2002); U.S. General Accounting Office, U.S. Postal Service: Moving Forward
                                   on Financial and Transformation Challenges, GAO-02-694T (Washington, D.C.:
                                   May 13, 2002).
                                   2
                                    In this report, “fiscal years” are Postal Service fiscal years, which from 1999 through 2001
                                   began in early- to mid-September.
                                   3
                                       The awardee was formerly known as Boise Cascade Office Products.



                                   Page 1                                                   GAO-03-230 Contract Management
                   The Postal Service, which is not subject to the Small Business Act,4 is
                   not required to establish goals for contract awards to small businesses.
                   However, the Postal Service has established a supplier diversity program
                   and tracks dollars awarded to small, minority-owned, and woman-owned
                   (SMW) businesses (minority- and woman-owned businesses can be large
                   or small). One of the ways the Postal Service expects to increase the
                   dollars going to these businesses is through SMW subcontracting. For
                   example, Boise was required to submit a subcontracting plan to reach
                   SMW businesses. In light of the potential impact of the Boise contract on
                   small business vendors, you asked us to assess (1) the status of the Postal
                   Service’s implementation of its national contract with Boise, (2) Boise’s
                   achievement of its SMW subcontracting plan goals, and (3) the extent
                   to which the Postal Service is buying office supplies directly from
                   SMW businesses.


                   The Postal Service has not yet been successful in implementing its
Results in Brief   national office supply contract. Although the contract was intended, with
                   a few exceptions, to be a mandatory source of supply, in fiscal year 2001
                   the Postal Service spent over 60 percent of its office supply dollars on
                   items purchased outside the Boise contract through purchase cards, other
                   contracts, money orders, or cash. The lack of success was due in part to
                   insufficient actions taken by the Postal Service to ensure that office
                   supplies are purchased from the Boise contract. The Postal Service was
                   unaware of the extent to which the contract was not being used because
                   it has not adequately tracked or monitored its employees’ office supply
                   purchases. For fiscal year 2001, the Postal Service can document only
                   $1 million in savings from the use of the contract—though it had projected
                   savings of up to $28 million.

                   Boise and the Postal Service have not paid sufficient attention to
                   subcontracting goals. The subcontracting plan was carelessly constructed
                   and contains ambiguities that should have been resolved prior to the
                   contract award. However, to date, Boise and the Postal Service have not
                   taken actions to revise the plan. For example, the categories of SMW
                   businesses in the plan are inconsistent with the way Boise has been
                   reporting its achievements and with the way the Postal Service categorizes
                   its diversity goals. Moreover, Boise and Postal Service officials do not
                   agree on the goals. According to Postal Service officials, the overall goal


                   4
                       15 U.S.C. Sect. 637c(2).




                   Page 2                                        GAO-03-230 Contract Management
             is 30 percent of annual revenue for the contract—a figure confirmed in a
             preaward email from Boise. According to a Boise official, the goal is both
             a percentage of annual revenue for the contract as well as a fixed dollar
             value. Boise has fallen far short of the 30 percent goal. In fiscal year 2001,
             Boise reported that only 2.6 percent of its revenue was subcontracted to
             SMW businesses. Both Boise and the Postal Service now acknowledge that
             the 30 percent goal may have been unreasonable. Recently, Boise has
             begun to take actions to improve its performance. Nevertheless, it is highly
             unlikely that Boise will achieve its subcontracting goal.

             The extent to which the Postal Service is buying office supplies
             directly from SMW vendors is unclear. From fiscal years 1999 through
             2001, Postal Service data show that office supply purchases from SMW
             businesses through contracts and purchase cards decreased from
             50 percent to 18 percent. However, the data are unreliable. The Postal
             Service has not tracked SMW business participation in other purchasing
             mechanisms, such as money orders and cash, and, like other agencies,
             its information on purchase card merchants contains numerous errors.

             We are making recommendations to the Postmaster General of the
             United States concerning the need to re-assess the Postal Service’s
             national office supply strategy and estimated savings and to revise
             Boise’s subcontracting plan to accurately and clearly reflect realistic
             goals. In written comments on a draft of this report, the Postal Service
             agreed with our recommendations. Boise also provided written comments,
             offering its perspective on some of the information in the report.


             The Postal Service, an independent establishment of the executive branch
Background   of the U.S. government,5 is the largest federal civilian agency, consisting
             of more than 38,000 post offices, branches, and stations and 350 major
             mail-processing and distribution facilities. As part of its strategy for better
             managing its procurement of goods and services, the Postal Service has
             centralized the procurement of commodities that were previously
             decentralized. For example, all office supply procurements are now
             managed by the Office Products and Utilities Category Management
             Center in Windsor, Connecticut, which is responsible for administering
             the national contract. Previously, office supply procurement was
             decentralized, with each area managing its own procurements.



             5
                 39 USC Sec. 201.



             Page 3                                          GAO-03-230 Contract Management
    To demonstrate its commitment to reaching SMW businesses, the
    Postal Service has developed a 5-year supplier diversity plan. The
    plan focuses on maintaining a strong supplier base that includes
    SMW businesses. While it does not set specific dollar goals, the plan is
    intended to ensure that the Postal Service spends an increasing amount
    of its procurement dollars on goods and services from diverse businesses
    through fiscal year 2003. To monitor its progress, the Postal Service
    measures its prime and subcontracting spending achievements with
    SMW businesses.

    During fiscal years 1999 through 2001, Postal Service procurement of
    goods and services (which includes office supplies) decreased from
    $3.5 billion to $2.6 billion. For the same time period, office supply
    procurement grew from $107 million to $125 million. Postal Service
    officials explained that this increase does not necessarily indicate
    an actual increase in office supply spending, but rather it reflects
    improvements in the procurement system’s ability to track spending.
    The officials indicated that the data provided, while not perfect, are
    the best available information.

    In October 1999, the Postal Service issued a solicitation for a national-level
    office supply contract. Four vendors submitted proposals. The solicitation
    provided that the award would be made to the vendor that offered the
    best overall value to the government, considering nonprice and price
    factors. The proposals were evaluated based on several factors, including
    the vendors’ demonstrated understanding of the solicitation’s (1) technical
    requirements, including the ability to implement and maintain a
    Web-based procurement system, and (2) business requirements. As part
    of their business plan, vendors were required to demonstrate their ability
    to deliver items within 24 hours of receiving an order, which is considered
    industry standard. Other factors on which the proposals were evaluated,
    in descending order of importance, were

•   the inclusion of a subcontracting plan demonstrating the vendor’s
    commitment to use SMW businesses,
•   the ability to address environmental and energy conservation efforts.
•   An explanation of the price discounts on items offered to the
    Postal Service,
•   the ability to provide financial and purchasing reports that are integrated
    with the Postal Service’s system, and
•   the ability to provide Postal Service items, other than office supplies, that
    are used in an office setting.



    Page 4                                         GAO-03-230 Contract Management
Additional evaluation factors included past performance and
Javits-Wagner-O’Day Act (JWOD)6 compliance.

The Postal Service awarded the contract to Boise with a start date
of April 3, 2000. The contract is a firm, fixed-price modified requirements
contract for a 3-year base period, with up to three 2-year options. The
contract requires, with a few exceptions, that the Postal Service order
from Boise all of the approximately 13,000 items in Boise’s Postal Service
office supply catalog. Exceptions to the mandatory requirement are
where (1) the item can be found at a lower price (and it is not a JWOD
item) or (2) the requirement is urgent and the supplier cannot meet the
required delivery date. The Postal Service has since exercised the first
2-year option.7

The JWOD Act requires the Postal Service to comply with its
requirements.8 According to Postal Service and Boise officials, Boise
has ensured through its ordering process that this compliance occurs.
When Postal Service employees place an order with Boise for an item
that is also on the JWOD procurement list, Boise substitutes the ordered
item with a JWOD item that is essentially the same.




6
  The Javits-Wagner-O’Day Act established a Committee for Purchase from People who are
Blind or Severely Disabled, which maintains a procurement list of commodities or services
that the government must procure from designated nonprofit agencies. These agencies are
represented by central nonprofit agencies called the National Industries for the Blind and
the National Industries for the Severely Handicapped (41 CFR ch. 51).
7
  The new option period expires on January 6, 2005. According to the contracting officer,
it was necessary to exercise the option in January 2003, rather than April 2003, to prevent
the contract from lapsing.
8
    41 U.S.C. sec. 48b(7).




Page 5                                                  GAO-03-230 Contract Management
                        The Postal Service has not been successful in implementing its
National-Level Office   national-level contract to purchase most office supplies from Boise.
Supply Contract         As shown in figure 1, during fiscal year 2001 less than 40 percent of
                        the $125 million in office supplies was purchased from the contract.
Has Not Been
Fully Implemented       Figure 1: Total Office Supply Spending for Fiscal Year 2001




                        Note: “Other” is local buys paid by cash, money orders, and district invoices.


                        The Postal Service has not taken sufficient actions to ensure that the
                        contract would be used as anticipated. While fiscal year 2001 data show
                        an improvement over the 6 months that the contract was used in fiscal
                        year 2000, when about 75 percent of office supplies were purchased
                        outside the contract, the Postal Service is concerned that its employees
                        continue to spend a significant percentage of office supply dollars outside
                        the contract. Anticipated savings were based on the assumption that
                        almost all supplies would be purchased from the national contract. The
                        fact that this has not occurred, together with the absence of a benchmark
                        against which to measure savings, has contributed to the Postal Service’s
                        failure to realize estimated savings from its supply chain initiative.




                        Page 6                                                         GAO-03-230 Contract Management
Postal Service Did Not    Although the Postal Service conducted market research that supported
Take Sufficient Actions   the implementation of a national-level contract for office supplies, it did
to Ensure Contract        not take sufficient actions to ensure that the contract would be used as
                          anticipated. Figure 2 shows that Postal Service employees buy office
Would Be Used             supplies through three mechanisms: contracts (including Boise and
                          non-Boise contracts), purchase cards, and other methods such as cash and
                          money orders.

                          Figure 2: Office Supply Spending (Fiscal Years 1999 to 2001)




                          Postal Service officials stated that the increase in contract dollars from
                          fiscal year 1999 to 2001 indicates that the national contract is being used
                          more extensively. However, they have not determined why employees
                          continue to buy their supplies outside the contract. Postal Service officials
                          did not expect immediate compliance with the contract; they anticipated
                          that some purchasing would occur outside the national contract during the
                          implementation period because the cultural environment of the



                          Page 7                                            GAO-03-230 Contract Management
Postal Service has allowed local buyers to make purchases independently.
However, they were unaware of the extent to which the contract is not
being used because they did not sufficiently plan its implementation, nor
have they adequately tracked and monitored office supply purchases.

There are several indications that the Postal Service did not take sufficient
action to ensure that the contract was properly implemented. First, the
Postal Service continues to maintain a number of non-Boise office supply
contracts. Although the number of vendors on these other contracts
declined from 49 to 33 from fiscal years 1999 through 2001, the dollar value
of supplies bought from these contracts has grown, as shown in figure 3.

Figure 3: Postal Service Office Supply Spending with Contract Vendors
(Fiscal Years 1999 to 2001)




Note: Boise spending in fiscal year 1999 represents business from its existing contract with the
Postal Service, prior to the national contract award.




Page 8                                                        GAO-03-230 Contract Management
The Postal Service did not undertake a systematic review of all office
supply contracts when it implemented the national contract. Such an
assessment would have provided an indication of which non-Boise
contracts should have been continued and which phased out. In fact,
some of the items purchased under non-Boise contracts in fiscal year
2001—such as binders, paper, and measuring tape—should have been
purchased from Boise, according to the terms of the national contract.
According to Postal Service officials, other items—such as printed
envelopes and some types of rubber bands—are purchased under separate
contracts because the items are not part of the Boise catalog or they are
unique and purchased in volume. Postal Service officials told us that the
improved oversight they expect as a result of centralized office supply
procurement will allow them to phase out some of the existing office
supply contracts.

Second, Postal Service employees continue to use purchase cards to buy
office supplies outside the contract. Because the purchase card cannot be
used to order from the Boise contract, none of the $16.8 million spent on
office supplies through purchase cards in fiscal year 2001 was spent under
the contract. Postal Service officials have not tracked or monitored
purchase card procurements to determine why these employees are not
using the contract. Postal Service managers indicated that they are
able to use quarterly purchase card spending reports to identify errant
purchases—office supplies that should have been purchased from the
national contract. However, they acknowledge that these reports are not
used consistently to monitor employee purchases of office supplies.

Finally, Postal Service employees continue to use cash and money orders
to buy supplies from local vendors. As with the purchase cards, cash and
money orders cannot be used to buy supplies from the Boise contract.
Because the Postal Service has limited information about cash and money
order purchases, it was unaware that 33 percent of office supply spending
in fiscal year 2001 occurred through these methods. Postal Service
officials remarked that they are encouraged by the decrease (from about
$66 million in fiscal year 1999 to $41 million in fiscal year 2001) in office
supply purchasing using cash and money orders. However, until the Postal
Service is able to better track and monitor local office spending, it will
lack the information it needs to ensure that the national contract is being
used as intended.

Postal Service officials explained that their ability to track office supply
spending—enabling them to better target those employees who are not
using the contract—should improve as Boise contract use increases


Page 9                                          GAO-03-230 Contract Management
                           because the contract requires Postal Service employees to use a
                           Web-based purchasing system referred to as e-buy.9 The Postal
                           Service’s expectation is that information about e-buy purchases will
                           be systematically and consistently collected. However, use of the
                           contract is not being enforced, and employees continue to use other
                           methods—such as contracts outside the national contract, purchase
                           cards, cash, and money orders—to buy office supplies.


Postal Service is Unable   The Postal Service’s decision to award a national-level contract to a
to Document Estimated      single supplier was based, in part, on an expectation of saving up to
Savings                    $28 million annually. These savings would result from (1) purchasing a
                           large quantity of items from a single supplier, thereby reducing item costs,
                           and (2) implementing the e-buy purchasing process, which would reduce
                           overall transaction costs. To realize the maximum benefits and cost
                           savings under the Postal Service’s acquisition strategy, almost all office
                           supplies must be purchased from Boise. However, the fact that employees
                           continue to buy supplies outside the contract, combined with the lack of
                           an established benchmark to measure savings, prevents the Postal Service
                           from determining whether it is achieving its savings goals.

                           The Postal Service’s reported savings are calculated using a formula
                           established in 1999. The formula is based on market research, Postal
                           Service Annual Report data from 1998, and spending on an office supply
                           contract in existence at that time. This methodology predicted transaction
                           cost savings of up to 70 percent and item price savings of up to 10 percent
                           on a $50 million contract. The Postal Service claimed savings of up to
                           $28 million for fiscal year 2001 using these estimates. However, when we
                           asked for evidence of actual savings to date, the Postal Service could
                           provide documentation for only about $1 million. This amount reflects
                           rebates that Boise agreed to give the Postal Service on all new business
                           and reduced prices negotiated as part of the contract.




                           9
                            E-buy requires use of the intranet for placing orders. In the event of a telephone or fax
                           order, a Boise customer service representative inputs the order.




                           Page 10                                                  GAO-03-230 Contract Management
                           Boise and the Postal Service have not paid sufficient attention to the
Boise Is Not               subcontracting goals under the national office supply contract. The
Achieving                  subcontracting plan was carelessly constructed, and it contains obvious
                           ambiguities. In fact, Postal Service and Boise officials do not agree on the
Subcontracting             basic subcontracting goals. Notwithstanding this disagreement, for the
Plan Goals                 purposes of this report we have used the Postal Service’s position that the
                           goal is to award 30 percent of annual revenues to SMW businesses.

                           Boise has fallen far short of achieving the 30 percent goal. In fiscal year
                           2001, Boise reported achievements of only 2.6 percent. Boise has also
                           fallen short of its specific goals for minority and woman-owned
                           businesses. Boise and the Postal Service provided several reasons why
                           Boise is not achieving the subcontracting goals and they have identified
                           actions that they believe will improve performance. However, these
                           actions will not be sufficient to enable Boise to reach its subcontracting
                           plan goals.

                           When Boise initially submitted its proposal, its subcontracting goal
                           was to provide 12 percent of its Postal Service business to SMW
                           subcontractors. This proposed subcontracting plan included 4 percent
                           goals for minority- and woman-owned businesses. However, after Boise
                           was selected as the intended awardee—but before the contract was
                           awarded—the goal for SMW businesses was increased to 30 percent based
                           on negotiations with the Postal Service. At the same time, Boise increased
                           its goals for minority- and woman-owned business from 4 to 6 percent.


Subcontracting Plan        The subcontracting plan contains obvious ambiguities that should have
Contains Inconsistencies   been addressed prior to contract award. For example, because the plan
                           is not clearly written, Postal Service and Boise officials disagree on the
                           overall SMW subcontracting goal. Postal Service officials maintain that the
                           goal is 30 percent of overall revenue for the contract, a figure confirmed
                           in a preaward email from Boise. A Boise official, however, asserts that
                           there is both an overall 30 percent goal and a fixed dollar value goal of
                           $3,300,000. Despite this disagreement, neither Boise nor Postal Service
                           officials have taken steps to revise the plan.

                           Further, the subcontracting plan misstates two of the three reporting
                           categories for which there is a contractual goal. The language in the
                           plan includes goals for “small, disadvantaged businesses” and “small,
                           woman-owned businesses.” In practice, however, the Postal Service and
                           Boise report achievements for “minority” and “woman-owned” firms,
                           which may be small or large. There is no clear linkage between the


                           Page 11                                        GAO-03-230 Contract Management
                                        categories of SMW businesses as stated in the plan and the way Boise
                                        is reporting its achievements. A Boise official explained that the
                                        subcontracting plan reflects the categories the firm typically uses when
                                        contracting with federal agencies, and it did not revise the reporting
                                        categories to reflect the Postal Service’s supplier diversity categories. In
                                        responding to our questions, the Postal Service officials acknowledged
                                        that the plan is inconsistent with the way Boise’s achievements are
                                        measured and that it needs to be revised.


Boise’s Reported                        Despite its disagreement with the Postal Service about the subcontracting
Achievements                            goals, Boise reports the dollars and percentages that went to SMW
                                        businesses based on the annual total revenues under the contract. Table 1
                                        reflects reported achievements for fiscal year 2001.

Table 1: Boise’s Reported Fiscal Year 2001 Subcontracting Achievements

                                                               Percent of                                  Percent of
                        Percent of   Total dollars to           dollars to       Total dollars to           dollars to        Total dollars to
                   dollars to SMW               SMW              minority               minority        woman-owned           woman-owned
                       businesses       businesses            businesses            businesses            businesses             businesses
Reported                      2.6%       $1,245,161                  0.7%               $345,556                 1.9%                $899,625
achievements
                                        Source: Boise.

                                        Note: Boise’s total sales to the Postal Service on the national contract for fiscal year 2001 were
                                        $47 million.


                                        Postal Service and Boise officials stated that 30 percent was a stretch goal
                                        to demonstrate the Postal Service’s commitment to supplier diversity. A
                                        Boise representative stated that Boise agreed to the 30 percent goal
                                        because Boise understood the goal to be negotiable. Even though the
                                        Postal Service has no plans to renegotiate the goal before the end of the
                                        initial contract performance period of 3 years, Boise and the Postal
                                        Service have started discussions to renegotiate the subcontracting goal in
                                        the event that the Postal Service decides to exercise an option to extend
                                        the contract. Postal Service officials noted that they realize, in hindsight,
                                        that the 30 percent goal may have been unreasonable.




                                        Page 12                                                        GAO-03-230 Contract Management
Several Reasons          Boise and Postal Service officials provided several reasons why the
Offered for Failure to   subcontracting goals have not been achieved. First, a Boise official said
Meet the Goals           that Boise agreed to the 30 percent goal based on its earlier achievements
                         under the General Services Administration’s Federal Supply Schedules
                         program.10 In fiscal years 1999 and 2000, Boise awarded small businesses
                         24.6 percent of its Schedules program sales. In retrospect, Boise and
                         Postal Service officials explained that the Schedules program was not
                         a reliable source for an estimate because Boise’s contract under the
                         Schedules program included 1,800 items, compared to about 13,000 items
                         in the Postal Service contract. Moreover, the total dollar sales in Boise’s
                         Schedules contract—$14.3 million in fiscal year 2000—were considerably
                         lower than the total sales on the Postal Service contract—$47 million in
                         fiscal year 2001.

                         Second, while Boise has a corporate supplier diversity strategy, a Boise
                         official stated that the company’s ability to achieve the subcontracting
                         plan goals has been hampered by the fact that the Postal Service does not
                         require its employees to target SMW businesses when ordering from the
                         catalog. In fact, officials at one district we visited had the impression
                         that by simply purchasing from the contract they were complying with
                         the Postal Service’s SMW business initiatives. At another district we
                         visited, employees were not aware that the Postal Service had SMW
                         subcontracting goals in the contract. All of the district officials we spoke
                         with stated that they base their purchasing decisions on the lowest
                         available price and do not search the catalog for SMW businesses.

                         Third, one of the primary reasons Boise and Postal Service officials
                         offered for the low subcontracting achievements was that compliance
                         with the JWOD Act is taking away dollars from small businesses.
                         However, Boise records show that of the 47 Boise vendors whose items
                         were replaced with JWOD items in fiscal year 2001, only 7 were small
                         businesses. These 7 vendors supply 26 out of the 404 Postal Service
                         office supply items that are subject to the automatic JWOD replacement.
                         Moreover, financial data from Boise show that in calendar year 2000, while
                         total sales on JWOD items were just over $3 million, the impact of
                         JWOD compliance on these 7 vendors was relatively small. These vendors
                         potentially lost $167,629 in business due to the automatic substitution of



                         10
                            The Schedules program provides federal agencies with a simplified process for
                         obtaining commonly used commercial supplies and services, ranging from office
                         supplies to information technology services, at prices associated with volume buying.




                         Page 13                                                GAO-03-230 Contract Management
                         JWOD items for their items. In calendar year 2001 (representing one full
                         year of contract sales), these 7 vendors potentially lost $297,036 of sales,
                         while the total sales on JWOD items for the year doubled to almost
                         $6 million. This trend continued in the first 6 months of 2002.

                         Finally, Postal Service officials also explained that Boise could not reach
                         its goal because it had planned to subcontract with a woman-owned
                         enterprise that provided cash register tapes, a technology that the Postal
                         Service decided to phase out. They stated that although Boise had relied
                         on this business to reach its subcontracting goal, a change in technology
                         resulted in significantly less business with this vendor than was expected.
                         However, neither Postal Service nor Boise officials could provide us with
                         specific estimates of expected sales. In fact, sales to this woman-owned
                         firm increased in 2001 and 2002. Boise records show a growth in sales of
                         the cash register tapes from this business of approximately $283,000 in
                         2000 to $455,000 in 2001. Sales for the first half of 2002 indicate a dollar
                         amount in sales similar to the total sales in 2001. Moreover, Boise was
                         notified of the changes to the new technology as far back as 1998;
                         therefore, this was not new information received during the negotiations
                         regarding the subcontracting goals.


Actions to Improve       The Postal Service and Boise recognize that the performance on the
Subcontracting           subcontracting plan is not satisfactory and have started to take some
Performance              actions to improve Boise’s achievements under the current contract. While
                         Boise is responsible for its contract performance, the coordinated actions
                         of the Postal Service and Boise can assist Boise’s ability to achieve the
                         subcontracting plan goals. Although the following steps are being taken to
                         improve performance, it is highly unlikely that these actions will enable
                         Boise to reach its 30 percent subcontracting goal.

                     •   Boise is working with the Postal Service to include additional SMW
                         businesses as subcontractors. For example, Boise continues to work with
                         the Postal Service to identify small business suppliers of recycled toner
                         cartridges, who in many cases provide their products at half the price
                         of new toner cartridges. District officials received a listing of small
                         businesses supplying recycled toner cartridges in October 2001. However,
                         neither the Postal Service nor Boise has determined the extent to which
                         this information will increase Boise’s subcontracting achievements.
                     •   Boise is working with the Postal Service to reflect indirect services
                         provided to Boise by small businesses in its reporting of subcontracting
                         plan achievements, as it is allowed to do under the Postal Service contract.
                         Indirect services include data entry and information management services,


                         Page 14                                        GAO-03-230 Contract Management
                            such as invoicing and tracking sales information. However, Boise
                            estimates that including indirect services provided by SMW businesses will
                            have minimal impact on subcontracting plan achievements. Currently,
                            there is no time frame for implementing this change in Boise’s reporting of
                            its subcontracting achievements.
                        •   In October 2001, the Postal Service and Boise teamed up to design a
                            quarterly report that tracks SMW business purchases at the Postal Service
                            districts. The Postal Service expects to finalize and distribute these reports
                            in January 2003.
                        •   The Postal Service and Boise are expanding the education of Postal
                            Service employees on the benefits of seeking out SMW suppliers when
                            they order office supplies from the national contract. Since initial office
                            supply contract training was provided in the fall of 2000, Postal Service
                            efforts to educate employees about SMW suppliers have been through
                            informal channels, such as e-mail. Boise’s educational efforts focus on
                            providing more information to the Boise sales representatives that work
                            with the Postal Service. While Boise expects some improvements in its
                            subcontracting achievements as a result of the educational efforts, their
                            impact is unknown.


                            Postal Service data show that office supply purchases made directly from
Reports Indicate            SMW businesses—using contracts and purchase cards—decreased from
a Drop in Small             about 50 to 18 percent from fiscal year 1999 through 2001. However, the
                            extent to which the Postal Service is buying office supplies from SMW
Business Dollars, but       businesses is unclear because its purchase card information is unreliable
Data Are Unreliable         and because the Postal Service has not tracked purchases by employees
                            using mechanisms such as money orders and cash. Our review, as well as
                            a report by the Postal Service Inspector General,11 found that incomplete
                            and unreliable diversity statistics on suppliers resulted in the Postal
                            Service overstating or incorrectly classifying dollars awarded to SMW
                            businesses. The Inspector General’s report made nine recommendations to
                            correct the reporting of diversity statistics.12




                            11
                              Office of Inspector General, U.S. Postal Service, Supplier Diversity Program
                            for Supplies, Services, and Equipment Purchases, CA-AR-01-005 (Arlington, VA:
                            Sept. 6, 2001).
                            12
                              The Postal Service has addressed only one of these recommendations, noting in its
                            April 2002 Purchasing Assessment Report that fiscal year 1999 and 2000 data contained
                            errors in SMW data.




                            Page 15                                               GAO-03-230 Contract Management
                                         Table 2 shows the decline in the percentage of SMW purchases from fiscal
                                         years 1999 through 2001, based on Postal Service data.

Table 2: Reported Office Supplies Purchased from SMW Businesses

Office supplies                                                                        1999                  2000                  2001
Total purchases                                                               $ 107,181,787         $ 107,392,563         $ 125,047,235
SMW purchases                                                                  $ 20,207,461          $ 16,939,654          $ 15,002,143
SMW purchases as percent of total purchases                                            19%                   16%                   12%
Total purchases using contracts and purchase cards only                         $41,211,956           $49,714,964           $83,748,545
SMW as percent of total purchases using contracts and purchase cards                   49%                   34%                   18%
                                         Source: GAO analysis of U.S. Postal Service data.

                                         Note: “Total purchases” reflects contracts, purchase cards and other purchasing mechanisms such as
                                         money orders and cash.


                                         During the same 3-year period, SMW business participation has decreased
                                         as a percentage of contract spending (excluding spending through
                                         purchase cards, cash, and money orders), while the overall dollar value of
                                         office supplies purchased through contracts increased from $14.5 million
                                         to almost $67 million. In addition, the number of SMW vendors selling
                                         office supplies to the Postal Service decreased during this period. Postal
                                         Service district officials told us that they are no longer attempting
                                         outreach to local SMW businesses—such as participating in small business
                                         conferences or trade shows to attract new vendors—because of the
                                         emphasis on buying office supplies only through the Boise contract.
                                         Table 3 shows the decline in contract activity with small businesses from
                                         fiscal years 1999 through 2001.

Table 3: Reported Office Supplies Purchased through Contracts

                                                                           1999                        2000                        2001
Purchase of office supplies using contracts                        $ 14,500,475                $ 25,148,837                $ 66,930,690
Contract purchases from SMW businesses                              $ 5,440,943                 $ 9,150,457                 $ 9,938,844
SMW businesses as percent of total contract spending                       38%                         36%                         15%
SMW vendors                                                                  27                          29                          17
                                         Source: GAO analysis of U.S. Postal Service data.




                                         Page 16                                                    GAO-03-230 Contract Management
                                         Similarly, the Postal Service reports that office supply procurements
                                         from SMW businesses through purchase cards decreased from fiscal years
                                         1999 through 2001. Table 4 shows the decline in the percentage of
                                         purchases from SMW businesses using purchase cards from fiscal year
                                         1999 through 2001.

Table 4: Reported Office Supplies Purchased Using Purchase Card

                                                                                1999                2000                2001
Total purchase card spending                                             $26,711,481         $24,566,126         $16,817,855
Purchase card purchases from SMW businesses                              $14,766,518          $7,789,198          $5,063,299
SMW businesses as percent of total purchase card spending                       55%                 32%                 30%
                                         Source: GAO analysis of U.S. Postal Service data.


                                         Despite the Postal Service’s reported statistics, we could not determine
                                         the extent to which the Postal Service is buying from SMW businesses.
                                         First, because the Postal Service does not track or report socioeconomic
                                         data when payments are made to vendors using cash or money orders, it is
                                         not possible to assess SMW business achievements when those payment
                                         methods are used.

                                         Second, the Postal Service, like other federal agencies, relies on reports
                                         from banks for annual purchase card transaction and vendor information.
                                         This information is ambiguous and contains numerous errors because
                                         socioeconomic categories are often inaccurate. For example, the Postal
                                         Service’s purchase card data for fiscal years 1999 through 2001 included
                                         over $40 million dollars in office supply purchases from businesses that
                                         were identified as both small and large.

                                         The Postal Service is aware of the problems with the purchase card
                                         transaction information and has been working with Visa Corporation to
                                         improve the data. Because banks and payment card associations, such as
                                         Visa, control the transaction databases, the Postal Service must rely on the
                                         information provided by these institutions. We recently reported on the
                                         issue of unreliable and incomplete socioeconomic data on purchase card
                                         merchants.13




                                         13
                                           U.S. General Accounting Office, Contract Management: Government Faces
                                         Challenges in Gathering Socioeconomic Data on Purchase Card Merchants, GAO-03-56
                                         (Washington, D.C.: Dec. 13, 2002).




                                         Page 17                                              GAO-03-230 Contract Management
                      The Postal Service has not achieved its goal of using a single supplier for
Conclusions           office supplies and, as a result, has not achieved its anticipated savings.
                      Because the Postal Service has not analyzed how its employees buy office
                      supplies, it does not know why the national contract is not being used as
                      extensively as planned. In fact, the Postal Service has no assurance that
                      the national strategy is effective because it has not adequately tracked its
                      employees’ office supply purchases.

                      Implementing a national-level office supply contract through a single
                      supplier makes the realistic development and measurement of Boise’s
                      subcontracting goals and achievements critical to the Postal Service’s
                      efforts to achieve its supplier diversity objectives. The failure to
                      establish an effective subcontracting plan and the lack of oversight and
                      enforcement has created an environment where participation by SMW
                      businesses is minimal. The fact that the Postal Service and Boise cannot
                      agree on the levels of SMW participation established in the contract is
                      evidence of the lack of attention Boise and the Postal Service have paid to
                      this issue. While Boise and the Postal Service have taken some actions to
                      address SMW achievement, it is highly unlikely that Boise will be able to
                      reach its subcontracting goal.


                      We recommend that the Postmaster General of the United States
Recommendations
                  •   determine why the national contract is not being used as a mandatory
                      source of office supplies;
                  •   reassess the cost effectiveness of a national office supply contract and
                      measure actual savings from using the contract rather than applying the
                      outdated estimating formulas initially established;
                  •   develop mechanisms to track employees’ compliance with the mandatory
                      use of the contract, if analysis indicates that the national-level contract is
                      beneficial; and
                  •   direct that the contract be modified to include a revised subcontracting
                      plan that accurately and clearly reflects realistic goals for small, minority,
                      and woman-owned businesses, consistent with the Postal Service’s
                      supplier diversity program.




                      Page 18                                         GAO-03-230 Contract Management
                  In written comments on a draft of this report, the Postal Service agreed
Agency Comments   with our recommendations and indicated that our report will help it
                  develop and enforce policies aimed at improving performance under the
                  national office supply contract. Recognizing that the success of a contract
                  such as this requires continuous management, the Postal Service has
                  established a new supply management organization that will use our
                  findings and recommendations to determine why the contract is not being
                  used as fully as anticipated. The Postal Service indicated that it will
                  continue to seek cost-effective ways to expand its oversight efforts and
                  expects that increased use of the Web-based purchasing system will assist
                  in these efforts. Regarding the savings from the contract, the Postal
                  Service stated that its internal analysis has validated $5.3 million in cost
                  reductions during fiscal year 2002. This analysis was not shared with us
                  during our review. Finally, the Postal Service stated that it has corrected
                  the ambiguities in the subcontracting plan and is working with Boise to
                  establish more realistic subcontracting goals. The Postal Service’s letter
                  appears in appendix I.

                  We also received a written statement from Boise expressing its opinion
                  on federal subcontracting involving SMW businesses and offering several
                  comments on our findings. Boise stated that actual sales under the
                  contract (approximately $50 million) far exceeded its expected contract
                  amount of $11 million. Boise uses this information as a rationale for its
                  failure to achieve its subcontracting goals, which it asserts were based on
                  the $11 million expected contract amount. However, the contract did not
                  guarantee a minimum or maximum level of sales to Boise and, as noted in
                  our report, a 30 percent goal was confirmed by Boise in a pre-award
                  e-mail. Further, the Postal Service based its projected savings on an
                  estimated contract amount of $50 million. Boise also noted that sales to
                  SMW businesses with the Postal Service increased from fiscal year 1999 to
                  fiscal year 2001. However, Boise’s analysis relies on a comparison of sales
                  data from a previously existing Postal Service office supply contract, for
                  200 high-use items, to the sales data from the current contract, which
                  covers almost 13,000 items. Because Boise is comparing sales data from
                  two different contracts, we do not believe that this is a legitimate
                  comparison. Boise indicated that it is working with the Postal Service to
                  correct the inconsistencies we noted in the subcontracting plan.

                  In addition, Boise believes that JWOD items block sales to SMW
                  businesses; however, Boise did not provide sufficient evidence to
                  support this claim. As noted in our report, the potential lost sales to
                  SMW businesses due to JWOD item replacements were relatively small.



                  Page 19                                       GAO-03-230 Contract Management
              Boise also commented that because sales of a cash register tape made by a
              woman-owned business did not increase at the expected rate, its SMW
              achievements were affected. However, as discussed in our report, neither
              Boise nor the Postal Service could provide us with documentation on the
              expected sales of the IRT tapes.

              Finally, Boise was concerned about our selection of field sites because it
              was not based on a random sample. We targeted locations that, according
              to Boise’s data, were low users of the contract. The objective of our field
              visits was not to identify overall awareness of the contract. Rather, our
              intent was to gain an understanding of why certain locations were not
              using the contract as a mandatory source of office supplies. Boise’s letter
              appears in appendix II.


              To meet our objectives, we reviewed the Postal Service’s office supply
Scope and     spending and the related SMW achievements during fiscal years 1999
Methodology   through 2001.

              To examine the status of the Postal Service’s implementation of its
              national office supply contract with Boise, we reviewed the acquisition
              planning, contract formation, and contract administration documentation,
              including market research results, the solicitation, and the contract.
              Total office supply spending was identified using information from the
              Postal Service purchasing and materials data warehouse. We determined
              office supply spending for fiscal years 1999 through 2001 by using the
              same account codes that the Postal Service used to conduct its market
              research to justify the national office supply contract. We reviewed
              the Postal Service’s total office supply spending details for all
              contract, purchase card, money order, and cash transactions. We did
              not independently verify the accuracy of the reported spending. We
              interviewed and obtained information from the Postal Service’s
              contracting officer and contract administrator. In addition, we interviewed
              and obtained information from three area offices and three district offices
              based on data that indicated these locations were not using the national
              office supply contract. We interviewed purchasing specialists,
              administrative services managers, financial system coordinators, and
              administrative personnel with office supply purchasing responsibility.
              We also held discussions with and acquired information from Boise’s
              federal business manager.

              To determine Boise’s achievement of its SMW subcontracting plan, we
              reviewed the contract’s subcontracting plan and Boise’s quarterly


              Page 20                                       GAO-03-230 Contract Management
reports on its SMW achievements. We interviewed and obtained
information from the Postal Service’s contracting officer, area finance
officials, and district finance and purchasing officials. We also held
discussions with and acquired information from Boise’s federal business
manager, its minority- and woman-owned business development and
supplier diversity manager, and two minority-owned subcontractors.

To assess the extent to which the Postal Service is buying office supplies
directly from SMW businesses, we reviewed Postal Service supplier
diversity policy and guidance. We examined the Postal Service’s reported
socioeconomic statistics, including the dollar amount and type of vendor
for fiscal years 1999 through 2001. We interviewed and obtained
information from Postal Service officials in the offices of supplier
development and diversity, purchasing and materials, and the Postal
Service Inspector General. We determined that the reported purchase card
data were unreliable; however, we did not attempt to correct the errors in
the data provided.

Additionally, we met with representatives from the National Office
Products Association and a small, woman-owned business to gain a better
understanding of their views with regard to the national contract.

We conducted our review from March 2002 to November 2002 in
accordance with generally accepted government auditing standards.


We are sending copies of this report to other interested congressional
committees; the Postmaster General of the United States; and the Senior
Vice President and Federal Business Manager, Boise Office Solutions.
We will also make copies available to others upon request. In addition,
the report will be available at no charge on the GAO Web site at
http://www.gao.gov.




Page 21                                      GAO-03-230 Contract Management
Please contact me at (202) 512-4841 or Michele Mackin at (202) 512-4309
if you have any questions regarding this report. Other major contributors
to this report were Penny Berrier, Art L. James Jr., Judy T. Lasley,
Sylvia Schatz, and Tatiana Winger.




David E. Cooper
Director, Acquisition and
 Sourcing Management




Page 22                                      GAO-03-230 Contract Management
              Appendix I: Comments from the U.S. Postal
Appendix I: Comments from the U.S. Postal
              Service



Service




              Page 23                                     GAO-03-230 Contract Management
Appendix I: Comments from the U.S. Postal
Service




Page 24                                     GAO-03-230 Contract Management
              Appendix II: Comments from Boise Office
Appendix II: Comments from Boise Office
              Solutions



Solutions




              Page 25                                   GAO-03-230 Contract Management
Appendix II: Comments from Boise Office
Solutions




Page 26                                   GAO-03-230 Contract Management
Appendix II: Comments from Boise Office
Solutions




Page 27                                   GAO-03-230 Contract Management
Appendix II: Comments from Boise Office
Solutions




Page 28                                   GAO-03-230 Contract Management
Appendix II: Comments from Boise Office
Solutions




Page 29                                   GAO-03-230 Contract Management
           Appendix II: Comments from Boise Office
           Solutions




(120129)
           Page 30                                   GAO-03-230 Contract Management
                         The General Accounting Office, the investigative arm of Congress, exists to
GAO’s Mission            support Congress in meeting its constitutional responsibilities and to help
                         improve the performance and accountability of the federal government for the
                         American people. GAO examines the use of public funds; evaluates federal
                         programs and policies; and provides analyses, recommendations, and other
                         assistance to help Congress make informed oversight, policy, and funding
                         decisions. GAO’s commitment to good government is reflected in its core values
                         of accountability, integrity, and reliability.


                         The fastest and easiest way to obtain copies of GAO documents at no cost is
Obtaining Copies of      through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and full-
GAO Reports and          text files of current reports and testimony and an expanding archive of older
                         products. The Web site features a search engine to help you locate documents
Testimony                using key words and phrases. You can print these documents in their entirety,
                         including charts and other graphics.
                         Each day, GAO issues a list of newly released reports, testimony, and
                         correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site
                         daily. The list contains links to the full-text document files. To have GAO e-mail
                         this list to you every afternoon, go to www.gao.gov and select “Subscribe to daily
                         E-mail alert for newly released products” under the GAO Reports heading.


Order by Mail or Phone   The first copy of each printed report is free. Additional copies are $2 each. A
                         check or money order should be made out to the Superintendent of Documents.
                         GAO also accepts VISA and Mastercard. Orders for 100 or more copies mailed to a
                         single address are discounted 25 percent. Orders should be sent to:
                         U.S. General Accounting Office
                         441 G Street NW, Room LM
                         Washington, D.C. 20548
                         To order by Phone:    Voice:     (202) 512-6000
                                               TDD:       (202) 512-2537
                                               Fax:       (202) 512-6061


                         Contact:
To Report Fraud,
                         Web site: www.gao.gov/fraudnet/fraudnet.htm
Waste, and Abuse in      E-mail: fraudnet@gao.gov
Federal Programs         Automated answering system: (800) 424-5454 or (202) 512-7470


                         Jeff Nelligan, managing director, NelliganJ@gao.gov (202) 512-4800
Public Affairs           U.S. General Accounting Office, 441 G Street NW, Room 7149
                         Washington, D.C. 20548