oversight

Best Practices: Improved Knowledge of DOD Service Contracts Could Reveal Significant Savings

Published by the Government Accountability Office on 2003-06-09.

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

             United States General Accounting Office

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

June 2003
             BEST PRACTICES

             Improved Knowledge
             of DOD Service
             Contracts Could
             Reveal Significant
             Savings




GAO-03-661
                                               June 2003


                                               BEST PRACTICES

                                               Improved Knowledge of DOD Service
Highlights of GAO-03-661, a report to          Contracts Could Reveal Significant
Subcommittee on Readiness and
Management Support, Committee on               Savings
Armed Services, U.S. Senate




Department of Defense (DOD)                    The leading commercial companies GAO studied reported achieving and
spending on service contracts                  expecting to achieve billions of dollars in savings by developing companywde
approaches $100 billion annually,              spend analysis programs and service-contracting strategies. Spend analysis
but DOD’s management of services               answers basic questions about how much is being spent for what services, who
procurement is inefficient and
                                               are the suppliers, and where are the opportunities for leveraged buying to save
ineffective and the dollars are not
always well spent. Recent                      money and improve performance. To obtain these answers, companies extract
legislation requires DOD to                    internal financial data, supplement this data with external data, organize the
improve procurement practices to               data into categories of services and suppliers, and have the data analyzed by
achieve savings.                               managers or cross-functional teams to plan and schedule what services will be
                                               bought on a company wide basis. The results of spend analysis are also used for
Many private companies changed                 broader strategic purposes—to develop reports for top management, to track
management practices based on                  financial and other benefits achieved by the company, and to further improve
analyzing spending patterns and                and centralize corporate procurement processes.
coordinating procurement in order
to achieve major savings. This                 DOD is in the early stages of a spend analysis pilot. Although DOD is moving in
report evaluates five companies’
                                               the right direction, it has not yet adopted best practices to the same extent as the
best practices and their conduct
and use of “spend analysis” and the            companies we studied. Whether DOD can adopt these practices depends on its
extent that DOD can pursue similar             ability to make long-term changes necessary to implement a more strategic
practices.                                     approach to contracting. DOD also cites a number of challenges, such as its
                                               large and complex need for a range of services, the fragmentation of spending
                                               data across multiple information systems, and contracting goals for small
                                               businesses that may constrain its ability to consolidate smaller requirements into
To achieve savings, DOD should                 larger contracts. Challenges such as these are difficult and deep-rooted, but
adopt the spend analysis best                  companies also faced them. For DOD to change management practices for the
practices of leading companies.                contracting of services will require sustained executive leadership at DOD as
DOD’s approach should provide for              well as the involvement and support of Congress.
an agencywide view of service
contract spending and promote
collaboration to leverage buying
power across multiple
organizations. DOD should also                 Companies’ Reported 2001 Procurement Spending and Savings
submit a plan and a schedule to                 Company                2001 procurement spend     Procurement cost savings
                                                                                                  Focuses on delivering competitive
Congress for timely changes in
                                                                                                  advantage year after year; reported saving
management structure and service-               IBM                    $42.4 billion              hundreds of millions of dollars since 1994.
contracting business processes.                                                                   Targeted savings of $300 million a year by
                                                                                                  2003. After 2005, targeted savings of $1.3
DOD concurred with the                          ChevronTexaco          $16 billion-$18 billion    billion a year.
recommendation to adopt spend                                                                     Saved a reported $20 million a year from
                                                                                                  1998 to 2001; reduced suppliers from
analysis best practices but not with            Bausch & Lomb          $900 million               20,000 to 13,500.
submitting a plan for management                                                                  Reported saving over $200 million in
and business process changes.                   Delta Air Lines        $7 billion (approximate)   procurement costs since 2000.
                                                                                                  Set goal to save 20% from its general
                                                                                                  procurement budget of $3 billion to $4
                                                Dell                   $26 billion                billion.
www.gao.gov/cgi-bin/getrpt?GAO-03-661.
                                               Source: GAO analysis.

To view the full report, including the scope
and methodology, click on the link above.
For more information, contact David Cooper
(202) 512-4125, CooperD@gao.gov.
Contents


Letter                                                                                                1
           Results in Brief                                                                          3
           Background                                                                                4
           Leading Companies Have Developed Formal Spend Analysis
             Programs to Improve Services Procurement                                                11
           DOD Launches a Pilot Spend Analysis with an Eye toward
             Developing a More Strategic Approach                                                    30
           Conclusions                                                                               37
           Recommendations for Executive Action                                                      38
           Agency Comments                                                                           38
           Scope and Methodology                                                                     40

Appendix   Comments from the Department of Defense                                                   43



Tables
           Table 1: Leading Companies We Studied and Their Reliance on
                    Buying Services                                                                   8
           Table 2: Companies’ Reported 2001 Procurement Spending and
                    Savings                                                                          10
           Table 3: Comparison of DOD’s Spend Analysis with Leading
                    Company Practices                                                                31


Figure
           Figure 1: DOD Contract Dollars for Goods and Services                                     5


           Abbreviations

           DOD               Department of Defense
           IBM               International Business Machines


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           Page i                                                         GAO-03-661 Best Practices
United States General Accounting Office
Washington, DC 20548




                                   June 9, 2003

                                   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

                                   The Department of Defense (DOD) faces critical challenges in deciding
                                   how best to obtain the services it needs to achieve its mission. Within the
                                   federal government, DOD is the dominant buyer of services in terms of
                                   contracting dollars spent, accounting for $79 billion in 2001, more than
                                   half the $140 billion spent by the entire federal government.1 DOD spends
                                   more on services than it does on supplies and equipment, and that
                                   spending is increasing year after year. In spite of this, our work as well as
                                   that of DOD’s Office of Inspector General has found that DOD’s spending
                                   on services is not well managed—the current process is decentralized,
                                   insufficiently rigorous, and unreliable. Although DOD is taking actions to
                                   address these problems, it has a long way to go.

                                   Like the federal government, private companies increasingly rely on
                                   services and also struggle with methods to better manage their purchasing.
                                   Last year we reported that to reduce costs, improve productivity, and
                                   more effectively procure services, many companies have adopted a
                                   strategic approach—centralizing and reorganizing their operations to get
                                   the best value for the company as a whole—that is based on the
                                   implementation of a variety of best practices.2 These range from learning
                                   much more about their service spending to buying services on an
                                   enterprisewide rather than business unit basis. Pursuing such an approach


                                   1
                                    DOD-reported data for service contracting dollars, Defense Contract Action Data System.
                                   Governmentwide-reported 2001 data for service contracting dollars, Federal Procurement
                                   Data System. Excludes contracts valued at $25,000 or less. Fiscal year 2001 is the last year
                                   for which complete governmentwide data is available. For related information for 1997
                                   through 2001, see U.S. General Accounting Office, Federal Procurement: Spending and
                                   Workforce Trends, GAO-03-443 (Washington, D.C.: Apr. 30, 2003).
                                   2
                                    U.S. General Accounting Office, Best Practices: Taking a Strategic Approach Could
                                   Improve DOD’s Acquisition of Services, GAO-02-230 (Washington, D.C.: Jan. 18, 2002).



                                   Page 1                                                          GAO-03-661 Best Practices
clearly pays off. One recent survey of 147 companies in 22 industries
indicated a strategic approach to procurement had resulted in savings of
more than $13 billion in one year.3 The very same practices employed by
the private sector could serve as a foundation for improving the
acquisition of services in DOD.

When adopting a strategic, best-practices approach for changing
procurement business processes, companies begin with a “spend analysis”
to examine purchasing patterns to see who is buying what from whom. By
arming themselves with this knowledge, companies can leverage their
buying power, reduce purchasing costs, and better manage their suppliers.
In essence, spend analysis is the road map to procurement cost-savings
and performance improvements.

To follow up on our earlier work, you asked us to further evaluate (1) the
best practices of leading companies as they relate to conducting and using
spend analysis, and (2) the extent to which DOD can pursue similar
practices.

To conduct this work, we reviewed the spend analysis practices of
five leading companies that take a strategic approach to managing services
acquisitions: International Business Machines (IBM), ChevronTexaco,
Bausch & Lomb, Delta Air Lines, and Dell Computer. They reported a
combined spending for goods and services between $92 billion and
$94 billion in 2001. We selected these companies for review on the basis of
extensive research and because they have been recognized by their peers
for highly effective procurement and spend analysis processes. However,
we did not verify the accuracy of the procurement costs and benefits
reported to us by the companies. More information is presented in our
Scope and Methodology section beginning on page 40 of this report.




3
    A.T. Kearney, Inc., Assessment of Excellence in Procurement 2002 (Chicago, Ill.: 2002).




Page 2                                                            GAO-03-661 Best Practices
                   The leading commercial companies we studied report achieving—and
Results in Brief   expecting to achieve—billions of dollars in savings by developing
                   companywide spend analysis programs and services contracting
                   strategies. These companies’ spend analysis programs answer some basic
                   questions—how much is being spent for what services, who are the
                   suppliers, and where are the opportunities for leveraged buying to save
                   money and improve performance. To obtain the answers, these companies
                   extract internal financial data, supplement that data with external data,
                   organize the data into categories of services and suppliers, and analyze
                   it. To obtain this information quickly, spend analysis programs use
                   automated systems that consolidate accounts payable data, and
                   supplement it when necessary with purchase card data and additional
                   information on suppliers’ status and services purchased. Once organized,
                   the data are analyzed by managers or cross-functional teams to plan,
                   prioritize, and centrally source what services will be bought from what
                   specific suppliers. At this stage, spend analysis helps companies make the
                   proper adjustments to achieve expected savings. Spend analysis is also
                   used to develop reports for top management to establish quarterly and
                   annual savings goals, to track financial and other benefits achieved, and to
                   reorganize corporate procurement processes under a more centrally led
                   management structure.

                   In response to recent legislation requiring management and cost-saving
                   improvements in service contracts, DOD is in the beginning stages of a
                   spend analysis pilot. DOD leadership agrees that viewing spending from a
                   DOD-wide perspective will help identify large-scale savings opportunities
                   and other efficiencies over the current decentralized procurement
                   environment. Although moving in the right direction, DOD has not yet
                   adopted private sector best practices to the same extent as the companies
                   we reviewed. Whether DOD can adopt these practices depends on the
                   ability to make long-term changes that are necessary when organizations
                   decide to implement a more strategic approach to service contracts. DOD
                   also cites a number of challenges that may hamper adoption of these
                   practices. These include the size and complexity of DOD’s need for
                   services, the fragmentation of the services’ spending data across multiple
                   financial and procurement systems, and socioeconomic goals for
                   contracting with small and diversely owned businesses. Contract
                   management challenges such as these are difficult and deep-rooted and
                   will require sustained executive leadership at DOD as well as the
                   Congress’s continued involvement and support.

                   This report includes recommendations intended to help DOD adopt spend
                   analysis best practices and to use the resulting information to implement a


                   Page 3                                               GAO-03-661 Best Practices
             more strategic approach to planning and managing the acquisition of
             services.

             DOD commented on a draft of this report. DOD concurred with the
             recommendation to adopt the spend analysis processes employed by
             leading companies—and now intends to automate the process of data
             collection and analysis to make it repeatable, rather than a one-time effort.
             However, DOD did not concur with the recommendation to develop a plan
             to institute changes in management structure and services contracting
             business processes and to do so as part of its 2005 budget submission. In
             response to the portion of DOD’s comment that such a timeframe would
             be premature, we modified the recommendation to allow more time for
             DOD to complete the spend analysis pilot and use the results to develop a
             plan. The DOD comments can be found in appendix I.


             DOD is historically the federal government’s largest purchaser of services.
Background   Between 2001 and 2002, DOD’s reported spending for services contracting
             jumped almost 18 percent to about $93 billion.4 In addition to the sizeable
             sum of dollars involved, DOD contracts for a wide and complex range of
             services, such as professional, administrative, and management support;
             construction, repair, and maintenance; information technology services;
             research and development; medical services; operation of government-
             owned facilities; and transportation, travel, and relocation. In each of the
             past five years, DOD has spent more on services than it has on supply and
             equipment goods (that includes contracting for ships, aircraft, and other
             military items) (see figure 1).




             4
              GAO analysis of data extracted from the Defense Contract Action Data System, adjusted
             to represent constant fiscal year 2002 dollars. Includes actions categorized as research,
             development, test, and evaluation activities, and excludes actions $25,000 or less and
             purchase card use.




             Page 4                                                         GAO-03-661 Best Practices
Figure 1: DOD Contract Dollars for Goods and Services




Note: Data extracted from the Defense Contract Action Data System for 1998–2002. Figure is in
constant 2002 dollars and includes actions categorized as research, development, test, and
evaluation activities. Figure excludes actions of $25,000 or less and purchase card spending.




Page 5                                                              GAO-03-661 Best Practices
Despite this huge investment in buying services, our work—and the work
of the DOD Inspector General—has found that DOD’s spending on
services is inefficient and not being managed effectively. In fact, we have
identified overall DOD contract management as a high-risk area, most
recently in our Performance and Accountability Series issued this past
January.5 Responsibility for acquiring services is spread among individual
military commands, weapon system program offices, or functional units
in various defense organizations, with limited visibility or control at the
DOD or military-department level. Too often, requirements are not clearly
defined; competition is not adequately pursued; rigorous price analyses
are not performed; and contractors’ performance is not sufficiently
overseen.6 Information systems that provide reliable data and are capable
of being used as management tools are lacking, and DOD has established
few enterprisewide contracting-related performance metrics. Further,
DOD lacks a strategic plan to identify and prioritize future service
contracting-related efforts for better management.

Seeking longer-term remedies to bring about sorely needed reform, the
Congress has passed legislation to direct DOD to adopt best practices used
by leading companies and to achieve significant savings through improved
management approaches for services contracts. The National Defense
Authorization Act for Fiscal Year 2002 directs DOD to improve its
management structure and oversight process for acquisition of services.7
One of the law’s aims is to prompt DOD to undertake a comprehensive
spend analysis of its services contracts. This analysis is intended to
provide DOD the basis for expanding its use of cross-functional
commodity8 teams to leverage its buying power, improve the performance
of its services contractors, organize its supplier base, and ensure that its
dollars are well spent. Moreover, expecting that DOD could achieve
significant savings without any reduction in services, the legislation also



5
 U.S. General Accounting Office, Major Management Challenges and Program Risks:
Department of Defense, GAO-03-98 (Washington, D.C.: Jan. 2003).
6
 Although DOD is taking actions to address these issues, most of these actions are in the
early stages of implementation. It is uncertain whether the corrective actions can be fully
and successfully implemented in the near term. See GAO-03-98.
7
    Sec. 801, Pub. L. No. 107-107, Dec. 28, 2001.
8
 A commodity is a category of products or services segmented by commonality of
materials or service type. The term does not imply an expendable or non-complex item.
This grouping will allow volume and technical leveraging of organizational spending and
the establishing of a network of commodity experts.




Page 6                                                           GAO-03-661 Best Practices
                          establishes savings goals that DOD should achieve by employing
                          commercial best practices and effective management.9 In addition,
                          Congress reduced the amounts appropriated to DOD in fiscal years 2002
                          and 2003 by a total of $2.5 billion to reflect savings from business process
                          reforms in the procurement of services.10


Private Sector’s Use of   Increasingly, private sector companies have been purchasing a wide range
Spend Analysis Bolsters   of services from outside suppliers at a cost rising at an average of
Strategic Approach        3.5 percent a year.11 The leading companies we interviewed—IBM,
                          ChevronTexaco, Bausch & Lomb, Delta Air Lines, and Dell—reported
                          between $92 billion and $94 billion in combined annual procurement
                          spending for goods and services in 2001, and they use a large part of their
                          purchasing dollars to buy services (see table 1).




                          9
                            Section 802 of the 2002 Authorization Act established savings goals of 3 percent in
                          fiscal year 2002, 4 percent in fiscal year 2003, 5 percent in fiscal year 2004, and 10 percent
                          in fiscal year 2011. The following year, because DOD had been unable to develop a method
                          for measuring savings achieved through the improved management of services contracts,
                          these goals were modified to instead focus on increasing the number of services contracts
                          that are competitive- and performance-based. Bob Stump National Defense Authorization
                          Act for Fiscal Year 2003, Sec. 805, Pub. L. No. 107-314, Dec. 2, 2002.
                          10
                             Sec. 8123, Pub. L. No. 107-117, Jan. 10, 2002, and Sec. 8100, Pub. L. No. 107-248,
                          Oct. 23, 2002.
                          11
                            Elance, Inc. and CAPS Research, “Narrative Summary: Defining and Determining the
                          ‘Services Spend’ in Today’s Services Economy” (Tempe, Ariz.: Aug. 2002)
                          http://www.capsresearch.org/benchmarking/spreports.htm (downloaded Feb. 25, 2003).




                          Page 7                                                             GAO-03-661 Best Practices
Table 1: Leading Companies We Studied and Their Reliance on Buying Services

                                                                            Reported 2001
                                                                            procurement
 Company                Function                                            (in billions)       Reliance on buying services
 IBM                    A global leader in business services and            $42.4               IBM’s diversification from strictly computer
                        computer hardware and software; 2002 revenue                            hardware and software manufacturing to a
                        of $81.2 billion.                                                       broader business model of consulting,
                                                                                                information technology, and financing
                                                                                                services has expanded its procurement
                                                                                                scope to include services as well as
                                                                                                material goods needed for production.
                                                                                                About 52 percent of IBM’s annual spending
                                                                                                is for general services procurement
                                                                                                including complementary workforce,
                                                                                                advertising, telecommunications, and
                                                                                                facilities management.
 ChevronTexaco          A leader in the oil and gas industry, with 2001     $16 - $18           An estimated 60 percent of
                        sales and operating revenues of $104.4 billion.                         ChevronTexaco’s annual spending pays for
                        Involved in exploration and production, refining,                       contracted services that support the
                        marketing and transportation, chemical                                  company’s worldwide oil and gas
                        manufacturing and sales, and power generation.                          extraction, refining, and distribution;
                                                                                                construction and maintenance of facilities
                                                                                                (such as retail gas stations); and corporate
                                                                                                operations, including consulting and
                                                                                                professional services.
 Bausch & Lomb          A global vision care manufacturer of contact        $0.9                About half of Bausch & Lomb’s $535 million
                        lenses, lens care products, surgical equipment,                         in purchases from U.S. suppliers was for
                        and pharmaceuticals, netting more than                                  various services to support marketing and
                        $1.7 billion in 2001 sales revenue.                                     advertising, corporate business operations,
                                                                                                and research, development, and
                                                                                                engineering activities. In 2001, Bausch &
                                                                                                Lomb’s largest spending category was
                                                                                                management, business, professional, and
                                                                                                administrative services.
 Delta Air Lines        A leader in air transportation for passengers and   $7 (approximate)    About 60 percent of Delta’s annual
                        freight throughout the United States and around                         procurement spending is accounted for by
                        the world; 2001 revenue was $13.9 billion.                              service suppliers. Delta contracts with
                                                                                                private vendors to perform various
                                                                                                functions, including fueling and cleaning
                                                                                                planes and handling baggage.
 Dell                   A worldwide manufacturer of home and business $26                       Although the bulk of Dell’s $26 billion
                        computer systems and servers and provider of                            procurement spending goes toward
                        computer support services, with net 2001 sales                          purchasing materials and component parts
                        revenue of $31.9 billion.                                               to manufacture its computer hardware
                                                                                                products, between $3 billion and $4 billion
                                                                                                per year is spent on general services. The
                                                                                                services include consulting, facility
                                                                                                management, financial operations, training,
                                                                                                logistics, marketing, installation and future
                                                                                                product support, and travel.
Source: GAO analysis.

                                                 Note: GAO analyzed information from IBM, ChevronTexaco, Bausch & Lomb, Delta Air Lines, and
                                                 Dell. Reported 2001 procurement for goods and services.



                                                 Page 8                                                            GAO-03-661 Best Practices
As service acquisition costs have increased, companies have sought to
reduce them by taking a strategic approach, starting with the use of spend
analysis processes to provide the necessary data. A strategic approach
pulls together participants from a variety of places within an organization
who recommend changes to a company’s personnel, processes, structure,
and culture that can constrain rising acquisition costs. These changes
(often referred to as “strategic sourcing”) can include adjustments to
procurement and other processes such as instituting enterprisewide
purchasing of specific services; reshaping a decentralized process to
follow a more center-led, strategic approach; and increasing the
involvement of the corporate procurement organization, including
working across business units to help identify service needs, select
providers, and manage contractor performance.

A critical component of an effective strategic approach is a comprehensive
spend analysis program. An initial spend analysis permits company
executives to review the total dollars spent by a company each year to see
how much is spent, what was bought, from whom it was bought, and who
is purchasing it. This analysis thus identifies where numerous suppliers
are providing similar services—and at varying prices—and where
purchasing costs can be reduced and performance improved by better
leveraging buying power with the right number of suppliers to meet the
company’s needs.

Overall, spend analysis permits companies to define the magnitude
and characteristics of their spending, track emerging market spending,
understand their internal clients and supply chain, and monitor spending
with diverse suppliers for socioeconomic business goals. Spend analysis is
an important driver of strategic planning and execution, and it allows for
the creation of lower-cost consolidated contracts at the local, regional, or
global level. At the same time, as part of a strategic sourcing effort, spend
analysis allows companies to monitor trends in small and minority-owned
business supplier participation in order to address the proper balance with
equally important corporate supplier diversity goals.

Studies have reported significant cost savings in the private sector, with
some companies achieving reported savings of 10 percent to 20 percent of
their total procurement costs through the use of a strategic approach to
buying goods and services. A recent Purchasing Magazine poll finds that
companies employing procurement best practices—including employing




Page 9                                               GAO-03-661 Best Practices
effective spend analysis processes—are routinely delivering a 3 percent
to 7 percent savings from their procurement costs.12 Research by
A.T. Kearney, Inc., suggests that, if all companies using procurement
best practices to some extent matched the savings rates of the leading
companies, total savings could reach as much as 41 percent more than
the $13.5 billion achieved in 2000.13 The leading commercial companies we
studied report achieving and expecting to achieve billions of dollars in
savings by developing companywide spend analysis programs and services
contracting strategies, as shown in table 2.

Table 2: Companies’ Reported 2001 Procurement Spending and Savings

                        2001 procurement
 Company                spend                       Procurement cost savings
 IBM                    $42.4 billion               Focuses on delivering competitive
                                                    advantage year after year; reported
                                                    saving hundreds of millions of dollars
                                                    since 1994.
 ChevronTexaco          $16 billion-$18 billion     Reported targeted savings of
                                                    $300 million a year by 2003. After 2005,
                                                    targeted savings of $1.3 billion a year.
 Bausch & Lomb          $900 million                Saved a reported $20 million a year from
                                                    1998 to 2001; reduced suppliers from
                                                    20,000 to 13,500.
 Delta Air Lines        $7 billion (approximate)    Reported saving more than $200 million
                                                    in procurement costs since 2000.
 Dell                   $26 billion                 Set goal to save 20% from its general
                                                    procurement budget of $3 billion to
                                                    $4 billion.
Source: GAO analysis.

Note: GAO analyzed information from IBM, ChevronTexaco, Bausch & Lomb, Delta Air Lines, and
Dell.




12
     Anne Millen Porter, “Spend a Little, Save a Lot!”, Purchasing Magazine, Apr. 4, 2002.
13
     A.T. Kearney, Inc., Assessment of Excellence in Procurement 2002.




Page 10                                                            GAO-03-661 Best Practices
                       Although the financial and other results of spend analysis clearly are
Leading Companies      worth the effort, initially setting up these programs can be challenging,
Have Developed         according to research organizations and our interviews with company
                       executives. Companies have experienced problems accumulating
Formal Spend           sufficient data from internal financial systems that do not capture all of
Analysis Programs to   what a company buys or are being used by different parts of the company
                       but are not connected. Because simplified data may not exist or be
Improve Services       available, companies have frequently been unsure who their buyers are
Procurement            and have had to contend with databases that include listings of items and
                       suppliers that in reality are identical to each other but which are all stored
                       under different names. Companies also found that existing databases have
                       not captured anywhere near enough details on the services for which
                       vendors are being paid.

                       Despite these challenges, companies that developed formal, centralized
                       spend analysis programs found that they have been able to resolve their
                       problems over time and go on to engage in effective spend analysis on
                       a continuous basis through the use of five key processes, according to our
                       review of research organizations’ findings and interviews with company
                       executives.14 The processes involve automating, extracting, supplementing,
                       organizing, and analyzing data.




                       14
                         Research organizations’ studies on effective spend analysis processes we reviewed
                       included Aberdeen Group (Boston, Mass.), AMR Research (Boston, Mass.), RAND (Santa
                       Monica, Calif.), and The Yankee Group (Boston, Mass.).




                       Page 11                                                    GAO-03-661 Best Practices
Building the foundation for a thorough spend analysis involves creating an
automated information system for compiling spending data. The system
routinely extracts vendor payment and related procurement data from
financial and other information systems within the company. The data
are then automatically compiled into a central data warehouse or a
spreadsheet application, which is continually updated. Most of the
automated spend analysis systems currently in use were developed in
house, although some companies have hired third-party companies for
expertise and technology.

The data are primarily extracted from accounts payable financial systems
and reviewed for completeness. Accounts payable data can be voluminous
and very detailed. Companies process large numbers of vendor invoices
for payment each year, and each of those must be examined by their
spend analysis systems. When necessary, the accounts payable data
are supplemented with other sources, such as more detailed purchase
card data obtained from external bank-card vendors’ systems or other
information, such as suppliers’ financial status and performance
information. Companies must obtain as much information as possible
from both internal and external sources to gain a complete understanding
of their spending for services contracts.

Data files must be accurate, complete, and consistent. The data are
subjected to an extensive review for accuracy and consistency, and steps
are then taken to standardize the data in the same format, which involves
the creation of uniform purchasing codes. The data are typically organized
into comprehensive categories of suppliers and commodities that cover all
of the organization’s purchases. Simultaneously, commodity managers,
councils, or teams are established to access and analyze the information
on a ongoing basis, using standard reporting and analytical tools. Each
group is responsible for one or more commodities, which may also include
responsibility for a number of sub-categories. Once the spending data have
been organized and reviewed, companies use the data as the foundation
for a variety of ongoing strategic efforts.

The following company profiles illustrate significant aspects of the spend
analysis and strategic-sourcing processes. Each profile begins with a
description of the savings targets the company has set, achieved, and
expects to achieve in the future. This is followed by a discussion of the
difficulties the company experienced before implementing spend analysis;
the components of its spend analysis system—including how it extracts,
supplements, organizes, and analyzes its data; an example drawn from



Page 12                                             GAO-03-661 Best Practices
company practice of a successful application of spend analysis; and how
the company expects to keep improving its system over time.

Despite the uniformity of this framework, these companies are not
identical in the manner that they implement spend analysis or strategic
sourcing. Some have more mature systems than do others, while some
have strengths or creativity demonstrated in specific aspects of the
process. Each, however, has been cited by procurement and industry
specialists as a role model for procurement and spend analysis, and our
interviews and subsequent analysis have borne that out.




Page 13                                            GAO-03-661 Best Practices
                  Note: IBM is a registered trademark and used by permission of the International Business
                  Machines Corporation.


Company Profile   Year after year, IBM’s global procurement organization focuses on
                  delivering a sustained competitive advantage across its entire portfolio
                  of purchases, which totaled $42 billion in 2001. IBM’s procurement
                  transformation began in 1994 and continues to evolve. As a result, IBM
                  reports having achieved significant efficiencies and globally leveraged its
                  spending through strategic sourcing to reduce the number of suppliers and
                  save hundreds of millions of dollars.

                  In the beginning of its transformation, IBM lacked sufficient knowledge on
                  what it was spending across the enterprise. Company buyers were calling
                  the same items and suppliers by different names and being charged
                  different prices for the same product or service. The company had
                  disparate accounts payable systems, and the procurement organization
                  was unable to gather easily a consolidated view of spending with IBM
                  suppliers. Aggregated data were unavailable, and the linkage between
                  procurement and accounts payable was inadequate for leveraging the
                  company’s buying power. To launch a comprehensive spend analysis,
                  IBM had to address four major challenges: (1) linking its disjointed legacy
                  systems, (2) investing in a single-enterprise resource-planning system,
                  (3) establishing uniform naming conventions for suppliers, goods, and
                  services, and (4) creating a single procurement management system to
                  support a global process.




                  Page 14                                                              GAO-03-661 Best Practices
To address these challenges, IBM developed an extensive “end-to-end”
procurement system, which includes a paperless process for requisitions
and purchase orders, electronic linkages to suppliers, a worldwide
accounts payable system that receives and processes all suppliers’
invoices, and a centralized spend analysis program built around an
automated business data warehouse for efficiently extracting accounts
payable and other enterprise spending data in a common format. Initially,
IBM’s data management system did not support aggregating all of the
accounts payable and other data to support management decision making.
Recognizing this situation, IBM quickly responded by implementing a
centralized global business data warehouse to facilitate decision making
based on accounts payable and other data covering the entirety of
IBM’s purchases.

IBM’s global procurement organization has used spend analysis to
establish a substantial level of control by the company’s 31 “commodity
councils”.15 The councils analyze the spending data in order to meet the
needs of IBM groups worldwide and to enter into deals with suppliers by
leveraging IBM’s total buying power to gain proper volume discounts.
Before 1995, IBM’s decentralized buyers controlled only 45 percent of the
company’s purchasing; centralized councils now control almost
100 percent. Although IBM business units initially found it difficult to give
up decentralized control over buying to the global procurement
organization, IBM’s global procurement organization used spend analysis
presentations to demonstrate the savings that were possible and to
achieve buy-in to the new purchasing process while being responsive to
business units’ needs.

IBM’s spend analysis approach also supplements information from internal
accounts payable with business intelligence data on suppliers’ businesses
and market status from an outside party. This information is part of the
spend analysis process used to create up-to-date profiles on IBM’s top
suppliers. IBM spend analysis also integrates external information on
average prices paid in the market in order to measure the company’s
strategic-sourcing performance in achieving a competitive advantage



15
  Since 1994, commodity councils have been a central feature of the single procurement
management system established by IBM. The term commodity council describes a
cross-functional sourcing group charged with formulating a centralized purchasing strategy
and establishing centralized contracts for enterprisewide requirements for a selected
commodity grouping. Following the council’s sourcing actions, decentralized units then
execute tactical ordering against those pre-established business agreements.




Page 15                                                        GAO-03-661 Best Practices
through its procurement processes. IBM works with third-party
consultants to obtain credible market intelligence in order to determine
the “best in class” price for a given commodity and whether or not IBM is
obtaining the lowest market prices from its suppliers.

IBM’s global procurement organization created uniform purchasing
codes and upgraded data entry processes for accounts payable in order
to organize the spend analysis categories of products and services
commodities that could be leveraged for strategic-sourcing purposes.
For example, IBM’s procurement data, which include related accounts
payable data, are organized under 31 broad categories that correspond
with the commodity councils. Each category encompasses a number of
subcommodities that cover the company’s production-related services and
general procurement.16 For example, one high-level services procurement
grouping is temporary technical services—a multi-billion dollar annual
spending category for IBM—which includes eight sub-commodities, such
temporary services as programmers, systems engineers, technical writing,
and systems help-desk support.

Currently, the councils use spend analysis to support their negotiations
with suppliers and to work with internal business units in order to bring
the best value to bear. For example, the technical services commodity
council relied on spend analysis to carry out a strategic-sourcing effort.
The council’s analysis revealed that the company was spending billions
annually for temporary technical services, that its hiring process was
taking 10 days on average, and that multiple suppliers were sending in
candidate resumes. As a result of the council’s effort, a centralized
Web-based hiring system was developed internally for sourcing external
technical services. Requesters can go online and select candidates from a
database, conduct interviews, and submit requisitions, while reducing the
process of hiring to less than 3 days. Costs were reduced by a reported
$40 million in 2001 as a result of the commodity council’s prenegotiating
various skill payment rates with two-thirds fewer suppliers.

In summary, IBM has implemented a number of strategic enhancements
to its global purchasing approach. Ongoing enhancements, including


16
   “Production” procurement covers components parts, materials, and other items bought
by a company to directly support the manufacturing of its own products. “General”
procurement covers products and services bought by a company for other business
operation purposes that are indirectly related to its manufacturing operation, but directly
related to services provided to internal and external customers.




Page 16                                                          GAO-03-661 Best Practices
corporate spend analysis capabilities, will focus on deeper integration of
the procurement process into the company’s supply chain management
aimed towards a new level of global buying effectiveness. IBM is making
changes to exploit greater electronic procurement capabilities and to
consolidate purchase order processing and procurement support services
in centralized locations around the world. Such changes are intended to
remove administrative workload from the commodity councils, allowing
them to focus on management of suppliers, internal customers, and
IBM costs.




Page 17                                             GAO-03-661 Best Practices
                  Note: ChevronTexaco’s word mark is used by permission.


Company Profile   ChevronTexaco’s phased approach to the strategic sourcing of its
                  entire procurement spending is expected to result in savings of at
                  least $300 million a year by 2003 and $1.3 billion a year after 2005.
                  The company’s annual spending on procurement is currently between
                  $16 billion and $18 billion. The company’s procurement savings goals,
                  established after the two historically decentralized companies merged
                  in 2001, are based on spend analysis.

                  Before the merger, each separate company had difficulty understanding
                  its own spending practices. Chevron had a limited number of personnel
                  working on the task—its purchasing unit had only a few analysts who
                  laboriously collected, reviewed, and organized all the accounts payable
                  data after issuing data calls to various business units. The information
                  collected was consolidated in large spreadsheet binders, but these did not
                  capture all company spending or details on suppliers’ diversity of interest
                  to corporate leaders. Chevron lacked the data to negotiate effectively with
                  suppliers, who knew more about what was being spent and what business
                  they had with Chevron. Texaco also had difficulty understanding its
                  supplier base and what it was buying because its accounts payable data
                  were stored in 14 systems, suppliers’ names were not standardized in
                  those systems, and not enough details were captured on the goods or
                  services for which vendors were being paid.




                  Page 18                                                  GAO-03-661 Best Practices
Once the companies merged, ChevronTexaco adopted, as its global
procurement focus, the development of accurate, detailed information on
spending. ChevronTexaco’s spend analysis system now automatically
extracts accounts payable data on most purchased goods and services
from these systems. For greater precision, ChevronTexaco supplements
the accounts payable data with external information and internal expertise
to obtain more detailed insight into the products and services being
bought and the vendors that supply them. The data are organized into
three dozen broad categories, including 250 products and services, which
cover most of the company’s annual spending.

ChevronTexaco’s global procurement leadership and several decision
support staff (who work with a few dozen cross-functional commodity
teams) analyze the spending data. These teams link the procurement
organization, strategic-sourcing processes, and business units by
collaboratively using the spending data to identify, plan, and recommend
sourcing projects for goods and services, including capital projects. For
example, three consulting and professional services commodity teams
are responsible for analyzing data related to spending for temporary
accounting staff, financial and information technology management, and
legal and technical services.

An initial commodity team analysis of the consulting and professional
services’ spending data showed close to $600 million spent on consulting
services and many subcategories that needed to be identified. Further
spend analysis showed that the company was using 1,600 suppliers,
that buying was highly fragmented with little standardization, and that
consultant contracting was not sufficiently competitive. The spend
analysis identified five consulting services’ supply markets for separate
consideration—financial, information technology, general management,
legal, and technical. The team discovered that most of the five were ripe
for competition, that some were reducing staff and seeking larger client
bases, and that some were laying off employees and going through a
slump. After taking into account internal business unit readiness for
supplier consolidation, the team finally recommended separate strategic-
sourcing projects in information technology, legal, and general
management consulting. ChevronTexaco estimates net savings to be
between 8 percent and 10 percent of the company’s total spending on
those 3 consulting and professional services’ subcategories.




Page 19                                             GAO-03-661 Best Practices
ChevronTexaco uses spend analysis to document and report direct savings
that result from negotiated price reductions, volume discounts, and
leveraged discounts.17 Spend analysis supports ChevronTexaco’s active
supplier diversity program by permitting strategic-sourcing teams to track
the company’s spending with small and diversely-owned businesses and
identify opportunities to attract competitive offers from such suppliers.
Analysis of the spending data has also been used to meet a wide range of
the company’s strategic goals, including identifying the right stakeholders
for participation in a global procurement organization coordinating key
business areas. To win support, procurement executives used spend
analysis to promote internally the need for procurement reengineering to
help business units reduce costs without sacrificing operations, safety, and
services. Spend analysis also underpins the development of performance
measures used throughout the company’s standardized procurement
processes.

ChevronTexaco plans further improvements to its spend analysis system.
The company is investing in a third party’s suite of electronic procurement
applications. One of the applications is an automated spend analysis tool
that will more quickly extract even more detailed data from the company’s
financial system.




17
  Volume discounts are gained in return for purchasing more units from individual
suppliers. Leveraged discounts are gained in return for buying more than one type of
product or service from a single supplier.




Page 20                                                        GAO-03-661 Best Practices
                  Note: Bausch & Lomb’s logo is used by permission.



Company Profile   Bausch & Lomb’s strategic sourcing effort saved the company a
                  reported $20 million a year from 1998 through 2001, and is anticipated
                  to save an additional $11 million in each year through 2005. These
                  savings were generated through a one-third reduction in the number of
                  Bausch & Lomb’s suppliers from 20,000 to 13,500 and negotiation of
                  discounts on the volume of business with the remaining suppliers.

                  In 1997, Bausch & Lomb was having difficulty coordinating information
                  from multiple internal information systems as it attempted to understand
                  what it was spending. To overcome this problem, the company contracted
                  with a consultant during the first 2 years of its effort to create and
                  automate master vendor files through a central database and directly
                  provide spend analysis support. Bausch & Lomb’s spend analysis—which
                  focused on developing a comprehensive database and targeting categories
                  with the most suppliers and the most spending—became the foundation of
                  its strategic sourcing effort.

                  To perform its spend analysis, Bausch & Lomb extracted accounts
                  payable data from more than 50 internal systems and sent the data to the
                  consultant to review and correct the records to eliminate duplication and
                  identify “families” of suppliers connected through corporate ownership
                  that could be used to negotiate better terms. The consultant also used its
                  technology tool to compile and automate the analysis of Bausch & Lomb’s
                  spending data. Spending data were standardized by using two publicly


                  Page 21                                             GAO-03-661 Best Practices
available classification systems, allowing for comparisons to be made
between vendor identifiers and the affiliated commodity codes. These
internally available data were supplemented with other information from
the consultant’s business intelligence database that addressed suppliers’
risk18 and status as minority or women-owned businesses and with
purchase card expenditure data.

Bausch & Lomb then organized the data into 50 broad categories of
products and services, each of which was subdivided into 4 to 12
commodities. Responsibility for the categories was divided among several
headquarters commodity managers—including those specializing in
information technology, pharmaceuticals, and business processes. The
commodity managers analyzed the spending data and sought input from
business units to develop strategic sourcing strategies and business plans
for each of the commodities to combine the company’s total buying power
and rationalize the supplier base. The commodity managers now oversee
the corporate procurement of specific goods and services across all the
business units.

For example, when the business process commodity manager applied
spend analysis to Bausch & Lomb’s use of temporary personnel services,
the outcomes included the opportunity to reduce the number of suppliers,
lower costs, and achieve other streamlining benefits. Business units had
been using purchase orders to obtain temporary services, and the spend
analysis revealed that although 60 suppliers were being used, one national
company was the top temporary services provider. This knowledge
enabled Bausch & Lomb to negotiate a 17 percent reduction with that
company for temporary services by consolidating the supplier base from
60 companies to 1. The remaining temporary services company agreed to
this reduced rate because it was guaranteed a greater volume of individual
purchase orders and because Bausch & Lomb’s business units were
required to use that preferred company unless they had a need that it
could not meet. Bausch & Lomb’s ongoing spend analysis of this
$13 million commodity also enables it to monitor business unit compliance
with the contract to use the preferred company and achievement of
savings targets.



18
  Managing supplier risk is important to companies to avoid supply chain disruptions and
performance problems that could jeopardize business operations. A number of financial
measures are used to assess risk of a supplier, including business experience, financial
condition, ability to pay bills, suits, liens, and judgments.




Page 22                                                       GAO-03-661 Best Practices
Bausch & Lomb’s procurement organization now performs and regularly
updates the spend analysis with support from the consultant. Each year,
Bausch & Lomb refreshes its spend analysis data with new supplier
information obtained from the consultant. The annual spend analysis
examines how much its divisions are spending on specific commodities to
determine its potential bargaining power with its suppliers and to review
the risks of existing suppliers. Its commodity managers identify which
strategic sourcing projects to tackle based on the dollar amount spent, the
number of suppliers, the potential cost savings, and opportunity to
consolidate suppliers. The company’s annual updating of the spending
data gives enough information to focus strategic efforts in the right
direction. To enhance their spend analysis, Bausch & Lomb is also
working with its consultant to start extracting more detailed data from its
general ledger systems.




Page 23                                             GAO-03-661 Best Practices
                  Note: Delta Air Lines’ logo is used by permission.



Company Profile   Spend analysis has been a key element in Delta’s transformation of its
                  more than $7 billion19 procurement operation and its adoption of a
                  strategic sourcing process. Since 2000, the company’s reported payback
                  has been rapid—more than $200 million saved through strategic sourcing
                  projects and other supply-chain management transformation efforts.

                  Almost 3 years ago, Delta’s supply chain management organization faced
                  challenges in its ability to aggregate purchasing data due to the presence
                  of multiple legacy systems and a lack of data integrity. In July 2000, those
                  legacy systems were replaced with a new core financial system, which was
                  also useful when the supply chain management organization decided to
                  launch its current spend analysis program.

                  Delta’s spend analysis program is based on the automated extraction of
                  accounts payable records from its core financial system. The extracted
                  data are placed in a data warehouse and then compiled in an integrated,
                  off-the-shelf software tool (accessible through the company’s intranet)
                  that is used to develop spend analysis reports. All company managers and
                  supply chain management staff can access the company’s spend analysis
                  reporting tool. The internal financial data are supplemented with



                  19
                       Figure is Delta Air Lines’ reported procurement spending in calendar year 2001.




                  Page 24                                                           GAO-03-661 Best Practices
purchase card spending data, totaling about $75 million per year, from
the company’s bank card vendor. In addition, Delta worked with a
third party to validate the information received from small, minority, and
woman-owned businesses in order that supplier diversity information
was accurately coded in its core financial system.

Delta organized its spending data to correspond with its six broad
purchasing areas: fuel and airport services, corporate operations (such as
finance and human resources), technical operations (such as aircraft
maintenance), marketing and in-flight services, corporate real estate, and
fleet planning and acquisitions. Those 6 purchasing areas are responsible
for purchasing goods and services in more than 270 commodities, such as
consultants, legal, and temporary services. Delta’s supply chain
management organization worked with a team to create the commodity
codes following a review of the goods and services the company buys.
These codes have made it possible to organize accounts payable and other
data by commodity to support the company’s initial spend analysis, a key
part of the first two steps in its strategic-sourcing process.

Beginning in September 2000, Delta’s supply chain management
organization took steps to realize the value that a transformation could
bring. Key elements of this transformation included the implementation of
a strategic sourcing process; establishment of cross-functional teams; and
expansion of the supply chain management organization’s scope of
involvement in company spending. Commodity teams began analyzing the
spending data to obtain an upfront understanding of the supplier base, the
company’s buying power, and the estimated savings from consolidated
buying. In mid-2002, commodity teams across Delta’s purchasing areas
were actively managing 58 cost-saving projects developed through spend
analysis and reported operating savings of $82.2 million from projects
already completed that year. Delta’s supply chain management
organization also uses spend analysis to track and report the company’s
spending with small business and minority- and women-owned businesses
in order to measure the outcome of the teams’ strategic-sourcing projects
in terms of the company’s supplier diversity goals.

An example of Delta’s successful outcomes with spend analysis is its
information technology commodity team’s strategic sourcing effort in
2001. The team’s analysis revealed the company was using more than
60 different information technology contract services suppliers and
purchasing approximately $16 million in external services. The requisition
processes varied within each of the business units; limited formal metrics



Page 25                                              GAO-03-661 Best Practices
were in place for managing supplier performance; and the existing
contracts’ pricing structures did not facilitate cost reduction efforts.

An external industry analysis indicated that Delta could benefit by
bidding information technology contract services given that the supplier
market was hard hit by the downturn in the economy and that a surplus of
high quality information technology service suppliers existed. Using this
knowledge, the commodity team, which included representatives from the
company’s human resources and technology business units, developed a
new consolidated-proposal request for external services and used an on-
line reverse auction20 to complete the sourcing effort. The new contracts
resulted in reported annual savings of $3 million and reduced the
number of suppliers from 60 to 6 companies—3 of which qualified as
diverse-owned businesses.

Despite Delta’s accomplishments in spend analysis, challenges
remain in obtaining reliable and complete data, and its supply chain
management organization is working to improve financial system data
integrity and automated reporting to provide the information needed for
real-time business decisions. Last year a team was formed to improve the
quality of information on suppliers, commodity codes, and buyers.
Recommendations on process improvements will be made in 2003,
followed by an effort to clean up Delta’s purchase order and contract files.
A related team is working to improve the availability of automated
reporting from Delta’s off-the-shelf spend analysis reporting tool. The
company expects increased accuracy in its spending information will
provide greater visibility into buying patterns and enhance strategic
sourcing decision making and results.




20
   According to industry sources on electronic commerce applications, reverse auctioning
is where suppliers bid, online and in real time, for product and service contracts as defined
by detailed request for quotes. Each supplier can see the competing bids as they are made,
but bidders are kept unidentified. Through a prequalification process, all issues are
generally settled between the procuring organization and potential suppliers before the
time of the bidding event. The buying organization may not necessarily choose the lowest
bidder, but rather may use reverse auctioning as a negotiating tool. FreeMarkets, Inc., The
Strategic Need for Real-Time Competitive Bidding in the Public Sector Procurement
Process (Pittsburgh, Pa.: 2002).




Page 26                                                          GAO-03-661 Best Practices
                  Note: The Dell logo is a trademark and used by permission of the Dell Computer Corporation.


Company Profile   Dell’s earlier success in using spend analysis and strategic sourcing
                  in its manufacturing procurement operations prompted the company to
                  establish a new procurement savings goal of 20 percent from the $3 billion
                  to $4 billion it spends in purchasing of nonmanufacturing services
                  and products.

                  Before 2000, Dell’s spend analysis and strategic-sourcing focused only
                  on production procurement to support its manufacturing operations. The
                  company had no spend analysis program to track general procurement of
                  goods and services needed to support the company’s nonmanufacturing
                  operations. However, once the company decided that general procurement
                  merited the same strategic approach as production procurement, the
                  procurement organization quickly developed a second spend analysis
                  program.

                  Since 2000, Dell’s procurement and finance organizations have worked
                  together on its internally developed spend analysis system, which provides
                  automated on-line reporting and cost analysis of the company’s general
                  procurement purchasing.21 Every month, the system extracts accounts


                  21
                    Since 1992, Dell has used a different automated system that it developed to extract and
                  automate production procurement spend analysis to support strategic sourcing of direct
                  materials for manufacturing.




                  Page 27                                                              GAO-03-661 Best Practices
payable records from one of the company’s two financial systems for
consolidation into the data warehouse used for spend analysis. The
consolidated spend analysis reports are supplemented with supplier
diversity, business intelligence, and purchase card information obtained
from external sources. For example, Dell obtains business intelligence
information from an outside party about its suppliers’ financial health and
utilizes that independent information to determine percent of revenue
based on sales to Dell. The company also obtains detailed vendor data for
purchases obtained under the corporate purchase card program. However,
the supplemental business intelligence and purchase card information
must be separately analyzed vendor by vendor, item by item, and
compared with the consolidated reports from the accounts payable
information.

The need to organize the accounts payable and purchase card data for
spend-analysis and strategic-sourcing purposes required the procurement
organization to identify 15 high-level categories, each encompassing many
products and services commodities. This involved research with business
units familiar with Dell’s vendors in order to “tag” each vendor according
to the commodity being supplied. Consulting is one example of a high level
category, and it encompasses consultant services such as information
technology, electronic commerce, financial, legal, and Dell technology.
New suppliers are similarly tagged to keep the spend analysis system
updated. One current limitation to Dell’s tagging methodology is that some
vendors do not fit neatly under a single commodity. Dell’s system
organizes purchase data for those vendors under a miscellaneous
category, and the staff regularly analyze the data to later sort spending
with those suppliers into the appropriate commodity.

Dell’s procurement organization has four senior managers who are
responsible for several commodity teams in the areas of marketing and
communications, corporate services, and operations. In these teams,
commodity managers partner with the primary business owners to manage
strategic sourcing and other procurement activities in specific spending
areas. Each commodity team uses spend analysis to identify, prioritize,
and leverage the company’s combined buying power with suppliers in
order to reduce costs and improve supplier performance.




Page 28                                             GAO-03-661 Best Practices
As an example of a successful outcome using spend analysis, one of
the senior managers worked with the customer services team on a
strategic-sourcing project to staff support call centers and provide
certified technicians and related on-site services for Dell computer
hardware repair. The spend analysis revealed that Dell’s business units
were spending more than $200 million annually on an ad-hoc basis with 8
suppliers for the same services. The team discovered that it was difficult
to manage eight suppliers and expensive to have each provide the entire
scope of services on a worldwide basis. The new sourcing strategy cut the
number to four suppliers and provided a volume price discount,
efficiencies in supplier management, and capacity to support Dell’s
growing sales in the U.S. and overseas. Dell required two of those
suppliers to provide a global array of services and two to work only in
the U.S. In taking this action, Dell also successfully met its supplier
diversity objectives by awarding two of the new contracts to diversely-
owned companies.

Dell procurement officials plan continued improvements to the spend
analysis program, such as automating the production of analytic reports
and generating reports that focus on detecting corporate relationships
among suppliers. Enhanced analysis and reporting of relationships can be
used to leverage Dell’s buying power for additional savings with related
suppliers.




Page 29                                             GAO-03-661 Best Practices
                       DOD is in the very early stages of setting up a spend analysis program. The
DOD Launches a Pilot   agency’s leaders have made a commitment to improve how DOD acquires
Spend Analysis with    services and to adopt best commercial practices. Although these are the
                       right first steps, the agency has yet to emulate the best practices of spend
an Eye toward          analysis to the same extent as the private sector. DOD also has not yet
Developing a More      pursued more strategic approaches like reorganizing its procurement
                       processes under a more centrally led management structure.
Strategic Approach
                       DOD’s initial actions include issuing new policy in May 2002—in response
                       to our work and the 2002 national defense authorization legislation—to
                       elevate major purchases of services to the same level of importance as
                       the purchase of major weapon systems. In February 2003, the Deputy
                       Secretary of Defense tasked a new team to complete, by September 2003,
                       a pilot spend analysis of services acquisition data across DOD and to
                       determine if larger scale efficiencies and savings could be achieved over
                       its current decentralized procurement environment.22 DOD requested
                       proposals from interested vendors with commercial spend analysis
                       experience to provide contract support to the DOD team. Pilot projects
                       associated with the spend analysis will be completed by September 2004.

                       Information we obtained during preproposal discussions with prospective
                       vendors suggest that the DOD pilot project may not engage the full range
                       of spend analysis best practices as have the private sector companies we
                       interviewed. (See table 3.)




                       22
                          DOD’s Spend Analysis Integrated Process Team is led by the Defense Procurement and
                       Acquisition Policy office (in the Under Secretary of Defense for Acquisition, Technology,
                       and Logistics organization) and includes senior representatives from each of the military
                       departments, the Comptroller’s and General Counsel’s offices, and offices responsible for
                       defense logistics, missile defense, and small business issues.




                       Page 30                                                        GAO-03-661 Best Practices
Table 3: Comparison of DOD’s Spend Analysis with Leading Company Practices

 Spend analysis
 process                              Leading company practice                DOD practice
 Automation                           Data automatically compiled to          DOD furnishes the data to the vendor, which may employ
                                      expedite and repeat the spend           commercially available automation tools to compile the data to
                                      analysis process.                       expedite the spend analysis. However, this is a one-time
                                                                              requirement. The vendor will not develop an automation tool to
                                                                              consistently repeat the spend analysis process.
 Extraction                           Essential data extracted from           DOD wants the pilot spend analysis to cover all its acquisition of
                                      accounts payable and other internal     services “as best possible”. DOD will furnish only data extracted
                                      systems.                                from two databases for services contract actions, but is excluding
                                                                              analysis of research and development services, and the databases
                                                                              do not include contracts for $25,000 or less. DOD acknowledges
                                                                              this data may be insufficient, but also says that data that could be
                                                                              derived from better sources such as accounts payable or other
                                                                              internal systems may be neither available nor feasible to
                                                                              incorporate within the project’s time frame.
 Supplemental                         Additional data sought from internal    The vendor may ask for DOD’s help in getting supplemental data
 information                          and external sources, such as           for the spend analysis from DOD, other government agencies, and
                                      supplier performance and purchase       commercial sources, such as purchase card and logistics data.
                                      card data.                              While DOD will help, it cannot guarantee it can provide the data
                                                                              requested.
 Organization                         Ensure accuracy and completeness        The vendor will cleanse and validate data DOD has furnished
                                      of data; organize data into logical,    based on its spend analysis experience and knowledge. DOD
                                      comprehensive categories of             allows the vendor’s discretionary use of external databases to
                                      commodities and suppliers.              help organize the spend analysis database. The vendor may
                                                                              also propose classification systems to organize categories of
                                                                              commodities and suppliers, to meet DOD’s requirement to identify
                                                                              the top ten service categories to target for strategic sourcing.
 Analysis and strategic               Using standard reporting and            Within 60 days of contract award, the vendor must provide the key
 goals                                analytical tools, data analyzed on a    metrics for reviewing DOD’s spend analysis database. Within
                                      continual basis to support decisions in 90 days, the vendor must analyze DOD’s spend data, identify the
                                      strategic sourcing and procurement      top ten services contract areas with the largest dollar savings, and
                                      management to help cut costs,           prepare business cases and strategic sourcing strategies for the
                                      streamline operations, reduce number top ten services in light of DOD’s requirements to fulfill
                                      of suppliers, achieve supplier          socioeconomic and establish savings goals. In the second phase,
                                      diversity, etc. Scope generally covers the vendor may have to supply special analyses to support the
                                      entire procurement spending.            DOD team’s review of the ten business cases and development of
                                                                              strategic sourcing procurement strategies for at least five pilot
                                                                              service categories.
Source: GAO analysis of DOD information.



                                                       Although DOD does seek to include basic elements of the key private
                                                       sector spend analysis best practices in the prospective pilot, its efforts fall
                                                       short of the private sector standard. Its efforts at automation involve only
                                                       a one-time requirement, not the repeatable process found in private
                                                       companies. Efforts to extract data are restricted to those taken from two
                                                       centrally available databases on services contract actions (excluding




                                                       Page 31                                                         GAO-03-661 Best Practices
research and development23) in excess of $25,000, a limitation due to the
agency’s self-imposed 90-day time frame for completing the spend
analysis.24 Although superior data—obtained by the vendor from other
internal and external sources with DOD’s help—may be used to
supplement what has been extracted, DOD cannot guarantee that it will be
able to provide what the vendor may request.25 The scope of the pilot is
also relatively limited, compared to the more expansive private sector
programs. Ten service category business cases are being considered, and
procurement savings strategies will be tested for at least five categories. If
time permits, DOD’s pilot manager told us that more than five categories
could be tested.

While DOD expects to learn from this pilot spend analysis, only a small
number of procurement actions will result from it. As DOD moves forward
to adopt commercial best practices for service acquisitions on the basis of
its pilot, the scope of its strategic approach may be limited to smaller
organizational units, rather than a major more centralized reorganization
of DOD’s procurement processes. To justify its “wait and see” approach
with a pilot, DOD cites several factors that set it apart from commercial
companies. These include its much larger and more complex services
supplier base, decentralized acquisition environment with many
procurement offices spread across the military services and defense
agencies, and no single financial data system relative to procurements.
According to DOD, it must also fulfill numerous socioeconomic goals for
contracting with small and diversely-owned suppliers and has more
regulatory and budgetary constraints around the acquisition process. In
citing these factors in advance of the pilot, DOD is being cautious about
viewing procurement as a strategic (i.e., DOD-wide) process that simplifies



23
   In fiscal year 2002, DOD reported a total of 33,440 contract actions of more than
$25,000 for research, development, test, and evaluation services, totaling about
$26.9 billion.
24
  DOD will furnish the contractor a few dozen data field elements extracted from the
Defense Contract Action Data System (for fiscal years 2000 through 2002) and the Federal
Procurement Data System (for fiscal years 2001 and 2002). In fiscal year 2002, DOD
reported more than 254,000 contract actions in excess of $25,000 for non-research and
development services, totaling about $66 billion.
25
   A sizeable sum of DOD spending is through other procurement methods and not
captured in the data DOD is furnishing to the spend analysis vendor on contract actions for
more than $25,000. For example, in fiscal year 2002, DOD reported almost 5 million
contract actions for goods and services of $25,000 or less, totaling about $9.8 billion. In
fiscal year 2001, DOD purchase card spending for goods and services totaled $6.1 billion.




Page 32                                                          GAO-03-661 Best Practices
                           acquisitions, saves money, and increases the quality of purchased services,
                           compared to its current tactical process of numerous individual contract
                           actions.

                           Once the pilot spend analysis is complete, DOD faces the challenge
                           of making the best use of the results. It needs to decide what long-term
                           changes are required to bolster the current organizational structure and
                           processes to foster a more strategic approach to acquiring services.
                           The extent to which DOD makes these changes will determine its
                           success in meeting congressional expectations for major management
                           reform of—and substantial savings from—the procurement of services.


Spend Analysis Could       As we reported last year,26 DOD’s size and complex service needs may lead
Guide Development of a     it to pursue different approaches within the defense agencies, military
Strategic Approach to      departments, and individual commands. In this regard, private sector
                           experience suggests that DOD must start with spend analysis to identify
Meet DOD’s Diverse Needs   and prioritize specific contracted services and then follow through with
                           organizational and process changes, such as the establishment of full-time
                           dedicated cross-functional teams or commodity managers, to improve the
                           coordination and management of key services.

                           As DOD attempts to reengineer its approach to purchasing services, it
                           faces challenges similar to those faced by private sector organizations.
                           For example, DOD is subject to statutory and regulatory goals for
                           contracting with small businesses and other socioeconomic categories,
                           such as woman-owned small businesses and small disadvantaged
                           businesses, that may constrain it from consolidating numerous smaller
                           contracts into larger ones.27 This is an approach often taken by the
                           companies we studied. Those constraints must be considered in the


                           26
                                GAO-02-230.
                           27
                             Contracts that combine requirements to such an extent that they present a barrier to
                           small businesses’ ability to compete are considered to be “bundled contracts.” The
                           Small Business Reauthorization Act of 1997 defines contract bundling as “consolidating
                           two or more procurement requirements for goods or services previously provided or
                           performed under separate, smaller contracts into a solicitation for offers for a single
                           contract that is unlikely to be suitable for award to a small business concern.”
                           15 U.S.C. Section 632 (O) (2). For more information regarding measures and information
                           that will be used to monitor agencies’ progress in eliminating unnecessary contract
                           bundling and mitigating the effects of necessary bundling, see U.S. General Accounting
                           Office, Small Business Contracting: Concerns about the Administration’s Plan to
                           Address Contract Bundling Issues, GAO-03-559T (Washington, D.C.: Mar. 18, 2003).




                           Page 33                                                       GAO-03-661 Best Practices
business cases to be developed by the spend analysis vendor. The
experience of private sector companies—which also are keenly aware of
the importance of small and diversely-owned business participation as
suppliers—may offer DOD valuable insights into addressing this challenge.

Companies we studied use spend analysis to carefully and successfully
balance supplier consolidation and cost-savings strategies with corporate
supplier diversity goals of equally high priority. Companies’ commodity
teams often include supplier diversity specialists, who propose concrete
steps for considering small, minority-, and woman-owned businesses
throughout the strategic-sourcing process.28 Like the companies, DOD can
use spend analysis to understand its current level of supplier diversity on a
commodity-by-commodity basis and to balance cost-saving strategies and
socioeconomic goals. Spend analysis can also support DOD’s efforts to
comply with small business requirements to review potential bundling of
procurement requirements in order to determine if the bundling is
necessary and justified.

DOD cites its lack of a single financial data system relative to
procurements as another challenge. Because of the pilot’s 90-day time
frame for completing the initial spend analysis, DOD acknowledges that
the data it will use may be less complete than what is used by business,
but it cannot guarantee that it will be able to provide data from other
sources that its vendor may request to perform the first DOD-wide spend
analysis. DOD is instead asking the vendor to make a recommendation on
the feasibility of using other DOD financial systems—such as systems used
to process invoices and pay commercial vendors for goods and services
bought by DOD organizations—that might be considered for use in
the future.

Although DOD will need to consider how existing problems in its
financial management systems29 could affect spend analysis and services-


28
  Examples of concrete steps to improve supplier diversity outcomes during the strategic
sourcing process are determining baseline spend with diverse suppliers; including diverse
suppliers in requests for information and following up if initial response rate is low;
developing selection criteria to enable inclusion of diverse suppliers; considering the use of
regional or multiple requests for proposals; seeking creative solutions from suppliers such
as partnerships; and encouraging and negotiating aggressively with diverse suppliers.
29
  For example, DOD continues to confront pervasive weaknesses in its financial
management systems, hindering its ability to produce timely and accurate financial
information needed to make sound business decisions and ensure accurate vendor
payment for goods and services. See GAO-03-98.




Page 34                                                          GAO-03-661 Best Practices
contracting initiatives, we believe a more businesslike approach is
possible. The companies we interviewed faced similar challenges in
accumulating accounts payable and other internal data that were highly
fragmented across multiple financial and management systems and not
easily accessible. However, the companies automated the extraction of
accounts payable and other internal data and made the spend analysis
process repeatable and more efficient.30 To see if DOD could engage in
similar actions, we discussed this matter with DOD sources and others
knowledgeable about DOD and commercial vendor payment systems.31
Based on these discussions, DOD’s systems could provide the type of
accounts payable data that companies use and thus could be a data-rich
source for DOD spend analysis. In fact, vendor payment data from
multiple processing locations are already centrally collected by the
Defense Manpower Data Center for auditing and other financial
management purposes. Use of this data could reduce DOD’s need to
extract and organize data for spend analysis efforts by providing a “one-
stop shop.”

DOD is also likely to face resistance to giving up decentralized buying
authority, cultural barriers, and other impediments to implementing broad-
based management reforms.32 The companies we studied found several
ingredients critical to overcoming such challenges. For example, senior
management must provide continued support for common services
acquisitions processes beyond the initial impetus, since the companies are
engaging in long-term efforts. Second, communication has to be seen as
vital in educating and keeping staff on board with changes. To achieve
buy-in, companies used spend analysis to make a compelling case to
business units that reengineering would enhance service delivery and
reduce costs. Companies also involved the business units in a new center-



30
  Once companies consolidated spending data from various sources, the companies also
subjected the data to an extensive review to make corrections and ensure that the data
were sufficiently accurate, complete, and consistent for supporting informed strategic
sourcing and procurement management decisions.
31
  The Defense Finance and Accounting Service operates about 14 systems at several sites
to process invoices and disburse payments to vendors for goods and services sold to Army,
Navy, Air Force, and other DOD organizations.
32
  Our reports have highlighted a number of underlying causes impeding past reform
efforts at DOD. For example, cultural resistance to change and autonomous operations
have hindered DOD’s ability to implement broad-based reforms because stakeholders were
not able to put aside their particular military services’ or agencies’ interests to focus on
DOD-wide approaches. See GAO-03-98.




Page 35                                                         GAO-03-661 Best Practices
led approach by making extensive use of cross-functional commodity
teams to make sure they had the right mix of knowledge, technical
expertise, and credibility.

To cut across traditional organizational boundaries that contributed to the
fragmented approach to acquiring services, companies restructured their
procurement organizations, assigning them greater responsibility and
authority for strategic planning and oversight of the companies’ service
spending. Also, companies extensively used metrics—based on spend
analysis—to measure total savings and other financial and non-financial
benefits, to set realistic goals for improvement, and to document results
over time. DOD recently developed new management structures in
response to the 2002 national defense authorization requirements to
improve practices for the acquisition of services, but the changes are not
as far-reaching as those adopted by companies we studied. For example,
although the Under Secretary of Defense (Acquisition, Technology, and
Logistics) and each of the military departments now has a process for
reviewing particular large-dollar or sensitive acquisitions for adherence
to competition and other contracting requirements, the reviews are
piecemeal and focused on approving individual acquisitions rather than
achieving a coordinated approach for managing services’ contracts. DOD
could use spend analysis as a basis for tailoring how the new management
structures can adopt the type of organizational tools and metrics employed
in the private sector to foster an enterprisewide strategic approach that
would meet DOD’s unique requirements.

To implement best practices and manage services effectively, DOD must
have the right skills and capabilities in its acquisition workforce. This is a
challenge given decreased staffing levels, increased workloads, and the
need for new skill sets. DOD is engaging in a long-term strategic planning
effort to identify the competencies needed for its future workforce.
Private sector experience indicates that taking a strategic, integrated,
enterprisewide approach can also help DOD address its acquisition
workforce challenges. In our study, companies’ efforts to reengineer their
procurement operations have often been accompanied by acquisition-
staffing reductions. The experience has been that using spend analysis and
coordinated sourcing processes allows for more efficient use of
procurement personnel resources by streamlining the number of
contracting tasks. Reducing duplication and fragmentation in contracting
activities also helps free up limited acquisition workforce resources to
perform more strategic business functions, such as acquiring and using
knowledge of market conditions and industry trends to better manage
fewer suppliers and contracts.


Page 36                                               GAO-03-661 Best Practices
                  While seemingly daunting, each of the challenges to be faced by DOD
Conclusions       has been faced and overcome by the private sector companies. Careful
                  observation and analysis of their practices will help the agency to adapt
                  variations and even to create new approaches through which it will be
                  able to reach its savings and strategic targets.

                  Without effective spend analysis, organizations are limited in their ability
                  to understand buying patterns; maximize purchasing power; carry out
                  informed acquisition and contracting decisions; measure the impact of
                  changes in purchasing costs and supplier diversity; and carry out other
                  planning and management functions for the acquisition of services.

                  Given that DOD’s spending on services’ contracts is approaching
                  $100 billion annually, the potential benefits of overcoming the challenges
                  and using best practices to establish an effective spend analysis program
                  are significant and can

              •   achieve a total-spending perspective across DOD,
              •   make the business case for collaboration in joint purchasing rather than
                  fragmented purchasing,
              •   organize an effective management structure to assign accountability and
                  exercise oversight,
              •   identify potentially billions of dollars in procurement savings
                  opportunities by leveraging buying power, and
              •   identify opportunities to achieve other procurement efficiencies such as
                  reducing duplication in purchasing, supporting supplier diversity, and
                  improving supplier performance.

                  With the federal government’s short- and long-term budget challenges, it is
                  more important than ever that DOD effectively transform its business
                  processes to ensure that it gets the most from every dollar spent. At the
                  same time, DOD’s management challenges related to contracting for
                  services will not be resolved overnight. Two common elements that
                  pervade discussions of ways to address DOD’s challenges are the need for
                  (1) sustained executive leadership and (2) a strategic, integrated, and
                  enterprisewide approach. In addition, ensuring that these efforts achieve
                  the intended results will require the Congress’s continued involvement and
                  support. Such support has already been demonstrated through the 2002
                  national defense authorization legislation requiring that DOD establish a
                  management structure to enhance the acquisition of services and to collect
                  data on the purchase of services. DOD could use this legislation—and its
                  first spend analysis effort—as the means for taking a more strategic




                  Page 37                                               GAO-03-661 Best Practices
                      approach to contracting for services and for identifying and achieving
                      substantial savings in the future.


                      To achieve significant improvements across the range of services DOD
Recommendations for   purchases, we recommend that the Secretary of Defense direct the Under
Executive Action      Secretary of Defense for Acquisition, Technology, and Logistics to work
                      with the military departments and other DOD organizations involved in the
                      spend analysis pilot to adopt the effective processes employed by leading
                      companies. Key elements of DOD’s approach should address

                  •   using technology to centrally automate the spend analysis process to make
                      it repeatable,
                  •   using accounts payable and other internal financial and procurement data
                      to gain a comprehensive and reliable view of spending,
                  •   supplementing internal data with external information such as purchase
                      card expenditures and business intelligence to gain a more complete
                      picture of DOD spending and to refine analysis,
                  •   reviewing purchase data for accuracy and consistency, organizing the data
                      by commodity and supplier categories in order to identify opportunities to
                      leverage buying power,
                  •   promoting enterprise collaboration aimed at gaining the best value,
                      including the establishment of cross-functional teams to continue
                      developing strategic-sourcing projects, and
                  •   presenting relevant spending reports to appropriate decision makers to
                      establish strategic savings and performance goals, assign accountability,
                      and measure results.

                      To ensure that DOD moves forward in a timely manner on its commitment
                      for taking a more strategic approach to the acquisition of services, we
                      recommend that the Secretary of Defense direct the Under Secretary of
                      Defense for Acquisition, Technology, and Logistics develop a plan and a
                      schedule for accomplishing changes in management structure and
                      business processes for contracting for services. The plan and schedule
                      should be based on the results of the spend analysis pilot and should be
                      submitted to the congressional defense committees for consultation and
                      approval as part of the fiscal year 2006 budget submission and justification
                      process.


                      In commenting on a draft of this report, DOD agreed with our findings
Agency Comments       and conclusions that the commercial best practice of spend analysis is
                      important to the design of a strategic approach to acquisitions and can be



                      Page 38                                              GAO-03-661 Best Practices
used by DOD to achieve substantial savings comparable to those in the
private sector. Moreover, DOD concurred with the recommendation to
adopt the effective spend analysis processes employed by leading
companies—and now intends to automate the process of data collection
and analysis to make it repeatable, rather than a one-time effort.

However, DOD did not concur with the recommendation to develop a
plan as part of its 2005 budget submission process (i.e., early in 2004)
to institute changes in management structure and business processes for
contracting for services. Rather, DOD contends that ongoing initiatives—
including follow-on sourcing projects it anticipates developing after the
current spend analysis—may make such changes unnecessary. In addition,
DOD answers that developing a plan and schedule for making changes in
management structure and business processes before completing the
current spend analysis pilot (expected by September 2004) would
be premature.

As we have recognized since our first report on this matter,33 DOD’s size
and complex service needs may lead it to pursue different approaches
within the defense agencies, military departments, and individual
commands. However, private sector experience suggests that DOD must
follow through on its initial spend analysis pilot with organizational and
process changes such as the establishment of full-time, dedicated cross-
functional teams or commodity managers to improve the coordination and
management of key services. The extent to which DOD makes these
changes will determine its success in meeting congressional expectations
for major management reform of—and substantial savings from—the
procurement of services. Moreover, for DOD to change management
structure and business processes for services-contracting will require
sustained leadership at DOD as well as the involvement and support of
Congress. Thus, for purposes of accountability and transparency in
support of such involvement and leadership, DOD needs to develop a plan
for timely changes necessary to implement a more strategic approach to
contracting.

In response to DOD’s concern, we modified the recommendation to
allow time for DOD to complete its current spend analysis pilot and use
the results to develop a plan. Although we are encouraged by DOD’s
commitment to undertake the pilot, we firmly believe that once the pilot is


33
     GAO-02-230.




Page 39                                             GAO-03-661 Best Practices
                  complete, DOD needs to make long-term changes to bolster the current
                  organizational structure and processes to foster a more strategic approach
                  to acquiring services.

                  The DOD comments can be found in appendix I.


                  The Chairman and the Ranking Minority Member, Subcommittee on
Scope and         Readiness and Management Support, Senate Committee on Armed
Methodology       Services, requested that we develop a body of work that examines the
                  practices of leading companies and identify best practices that could yield
                  benefits to DOD in the acquisition of services. This engagement focused on
                  (1) the best practices of leading companies as they relate to conducting
                  and using spend analysis, and (2) the extent to which DOD can pursue
                  similar practices.

                  To conduct our best practices work, we conducted literature searches,
                  reviewed studies related to spend analysis and best practices for services
                  contracting prepared by research and consulting organizations, attended
                  private sector seminars and conferences, and contacted experts in
                  purchasing practices. On the basis of these discussions and analyses, we
                  selected five leading companies that were recognized for their strategic
                  approach to managing services acquisitions. We provided a standard
                  agenda to each company prior to our interviews, and conducted interviews
                  to determine the companies’ motivation for undertaking a procurement
                  transformation; corporate strategic goals; the organization and role of the
                  purchasing function; the key processes used for collecting, analyzing, and
                  using spending data—including the use of technology—to be strategic in
                  planning and managing services acquisitions; and performance metrics
                  and accountability.

                  We also asked each company to discuss in more detail a specific service
                  buy that best exemplified the use of spend analysis for making strategic
                  acquisition decisions. In addition, we discussed potential challenges and
                  barriers to employing a spend analysis and subsequent strategic sourcing
                  efforts. After our visits, we provided a summary of the information
                  obtained to ensure that we had accurately recorded and understood the
                  information each company provided. We provided each company a copy of
                  our draft report for review and comment. The companies we visited were

              •   Bausch & Lomb, Rochester, New York;
              •   ChevronTexaco Corporation, San Ramon, California;
              •   Dell Computer Corporation, Round Rock, Texas;


                  Page 40                                             GAO-03-661 Best Practices
•   Delta Air Lines, Atlanta, Georgia; and
•   International Business Machines Corporation, Somers, New York.

    To assess current efforts underway by DOD to improve its enterprisewide
    knowledge of spending on services contracts, and how DOD can better
    emulate the best practices learned from these leading companies, we
    interviewed procurement policy and management officials in the Office of
    the Under Secretary of Defense (Acquisition, Technology, and Logistics)
    and the military departments. To assess the feasibility of using internal
    accounts payable data similar to the data used in leading companies’
    spend analysis programs, we interviewed Defense Finance and Accounting
    Service officials knowledgeable about DOD systems used to process
    invoices and pay commercial vendors for goods and services supplied to
    military and other DOD organizations. We also reviewed policy
    memorandums, guidance, and other documents pertaining to ongoing and
    planned initiatives that affected service contracting. We discussed with
    these officials our assessment of the leading companies’ approaches and
    obtained their views on their approaches’ similarities and differences. In
    addition, we discussed potential challenges and barriers to employing the
    best practices approaches we identified.

    Our report summarizes the key elements the companies employed
    to conduct spend analysis as one part of their strategic sourcing
    initiatives—in particular as they relate to services acquisitions. We did
    not verify the accuracy of the procurement costs and benefits the
    companies reported receiving from their strategic approaches and spend
    analysis outcomes. Our report is not intended to describe or suggest that
    we evaluated or endorse all business practices of the companies. Nor is
    this report intended to suggest that all companies have followed exactly
    the same approach in achieving similar results. Also, we were limited in
    our ability to obtain and present some relevant data that companies
    considered proprietary in nature.

    We conducted our review from March 2002 to May 2003 in accordance
    with generally accepted government auditing standards.


    We are sending copies of this report to other interested congressional
    committees; the Secretary of Defense; the Deputy Secretary of Defense;
    the Secretaries of the Army, Navy, and Air Force; the Under Secretaries of
    Defense (Acquisition, Technology, and Logistics) and (Comptroller); the
    Director, Office of Management and Budget; and the Administrator, Office
    of Federal Procurement Policy. We will also provide copies to others on


    Page 41                                             GAO-03-661 Best Practices
request. In addition, the report will be available at no charge on the
GAO Web site at http://www.gao.gov.

If you have any questions about this report or need additional information,
please call me at (202) 512-4841, or David Cooper at (202) 512-4125. Major
contributors to this report were Lily Chin, Ralph Dawn, Carolyn Kirby,
Nicole Shivers, Shannon Simpson, Cordell Smith, Bob Swierczek,
Ralph White, and Dorothy Yee.




Jack L. Brock, Jr.
Managing Director
Acquisition and Sourcing Management




Page 42                                               GAO-03-661 Best Practices
                   Appendix: Comments from the Department of
Appendix: Comments from the Department
                   Defense



of Defense




         Page 43                                               GAO-03-661 Best Practices
          Appendix: Comments from the Department of
          Defense




Page 44                                               GAO-03-661 Best Practices
                     Appendix: Comments from the Department of
                     Defense




(120133)
           Page 45                                               GAO-03-661 Best Practices
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