oversight

Small Business Administration: Progress Made, but Transformation Could Benefit from Practices Emphasizing Transparency and Communication

Published by the Government Accountability Office on 2003-10-31.

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

               United States General Accounting Office

GAO            Report to Congressional Requesters




October 2003
               SMALL BUSINESS
               ADMINISTRATION
               Progress Made, but
               Transformation Could
               Benefit from Practices
               Emphasizing
               Transparency and
               Communication




GAO-04-76
               a
                                                October 2003


                                                SMALL BUSINESS ADMINISTRATION

                                                Progress Made, but Transformation
Highlights of GAO-04-76, a report to            Could Benefit from Practices
congressional requesters
                                                Emphasizing Transparency and
                                                Communication


The Small Business Administration               SBA has made some progress in transforming its organization, although
(SBA) has recognized that it needs              efforts could be impeded by budgetary and staffing challenges. SBA started
to realign its current organizational           three district office pilots to test marketing and outreach techniques and two
structure and processes to improve              pilots to centralize loan processes. However, SBA officials told us that their
its ability to fulfill its primary              plans for expanding the pilots and implementing additional initiatives have
mission—supporting the nation’s
small businesses. In July 2002, SBA
                                                changed because the agency did not receive any funding for transformation
announced that it was initiating a              in fiscal year 2003 and may not receive any in fiscal year 2004. GAO found
transformation effort to increase               that SBA did not provide consistent, clear budget requests with a detailed
the public’s awareness of SBA’s                 plan for transformation results. The challenge of staffing its centralization
services and products and make its              initiatives, including relocating employees and avoiding undue disruptions to
processes more efficient. GAO                   operations, could further complicate SBA’s progress.
evaluated SBA’s progress in
implementing its transformation                 When SBA initially planned and began implementing transformation, it gave
initiatives and challenges that have            some attention to practices important to successful organizational change.
impeded or could impede                         SBA drafted a plan and created an implementation team to manage the
implementation and whether SBA’s                transformation. However, significant weaknesses in implementation could
transformation incorporates
practices GAO has identified in
                                                impede further progress and exacerbate the challenges noted above. The
previous work that are important                transformation could fail if practices and implementation steps focusing on
to successful organizational                    transparency and communication are not given more attention.
change.
                                                Key Practices and Examples of Weaknesses in SBA’s Actions and Plans

                                                 Practice                         Weaknesses in SBA’s actions and plans
SBA should (1) ensure that                       Ensure top leadership drives     SBA’s leadership and implementation team has experienced
implementation leadership is                     the transformation and           changes, but those changes were not made evident to employees
clearly identified to employees and              dedicate an implementation       and stakeholders.
stakeholders, (2) finalize its                   team.
                                                 Set implementation goals and     SBA created a transformation plan with implementation goals and a
transformation plan and share it                 a timeline to build momentum     timeline, but the plan remained in draft and was never shared with
with employees and stakeholders,                 and show progress from day       employees and stakeholders.
(3) develop performance goals, (4)               one.
use the performance management                   Establish a coherent mission     SBA needs to develop and link performance goals to support SBA’s
system to define responsibility, (5)             and integrated strategic goals   strategic goals for transformation, such as expanding outreach to
                                                 to guide the transformation.     small businesses.
develop a communication strategy
                                                 Use the performance              SBA’s new performance management system is at risk if
that promotes two-way                            management system to define      employees’ understanding of performance goals and individual
communication, and (6) solicit                   responsibility.                  responsibility remains unclear.
ideas of employees and the union                 Establish a communication        SBA communicated through managers and a newsletter, but did not
and ensure that their concerns are               strategy to create shared        allow for two-way communication to obtain feedback from
considered. SBA said it would                    expectations and report          employees and stakeholders.
                                                 related progress.
consider our recommendations but                 Involve employees to obtain      SBA did not benefit from employee perspectives or gain employee
disagreed with some of our                       their ideas and gain their       support because employee and union involvement was limited.
findings related to its budget                   ownership for the
requests and employee                            transformation.
communication and involvement.                  Source: GAO.


www.gao.gov/cgi-bin/getrpt?GAO-04-76.

To view the full product, including the scope
and methodology, click on the link above.
For more information, contact Davi D'Agostino
at (202) 512-8678 or d'agostinod@gao.gov.
Contents



Letter                                                                                                 1
                         Results in Brief                                                              3
                         Background                                                                    5
                         SBA Has Made Some Progress in Implementing Transformation, but
                           Budget Constraints and Staffing Challenges Could Continue to
                           Impede Progress                                                             8
                         SBA Applied Some but Not Many Aspects of Practices and
                           Implementation Steps Important to Successful
                           Transformation                                                             21
                         Conclusions                                                                  33
                         Recommendations for Agency Action                                            34
                         Agency Comments                                                              35
                         Objectives, Scope, and Methodology                                           37


Appendix
           Appendix I:   Comments from the Small Business Administration                              40


Table                    Table 1: Key Practices and Implementation Steps for
                                  Organizational Transformations                                      22


Figures                  Figure 1: Timeline of Major Organizational and Operational
                                   Changes by Fiscal Year                                              7
                         Figure 2: Phoenix, Arizona, District Office Organizational
                                   Structure “Before and After” Transformation                        12
                         Figure 3: SBA’s Available Operating Funds Have Declined Since
                                   Fiscal Year 2001                                                   16
                         Figure 4: Comparison of SBA’s Fiscal Years 2003 and 2004 Budget
                                   Requests for Transformation                                        18




                         Page i                    GAO-04-76 Small Business Administration Transformation
Contents




Abbreviations

IRS          Internal Revenue Service
SBA          Small Business Administration
SCORE        Service Corps of Retired Executives

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Page ii                          GAO-04-76 Small Business Administration Transformation
A
United States General Accounting Office
Washington, D.C. 20548



                                    October 31, 2003                                                                         Leter




                                    The Honorable Olympia J. Snowe
                                    Chair, Committee on Small Business
                                     and Entrepreneurship
                                    United States Senate

                                    The Honorable Donald A. Manzullo
                                    Chairman, Committee on Small Business
                                    House of Representatives

                                    The Honorable Christopher S. Bond
                                    Member, Committee on Small Business
                                     and Entrepreneurship
                                    United States Senate

                                    Like many federal agencies, the Small Business Administration (SBA) has
                                    recognized it needs to realign its current organizational structure and
                                    processes. In doing so, SBA aims to improve its ability to fulfill its primary
                                    mission—supporting the nation’s small businesses and protecting their
                                    interests—by increasing the public’s awareness of SBA’s services and
                                    products and making its business and loan processes more efficient. For
                                    over a decade, SBA has been centralizing some functions of its many
                                    district offices to improve efficiency and has been moving more toward
                                    partnering with outside entities such as private sector lenders to provide
                                    direct services. SBA’s district offices were initially created to be the local
                                    delivery system for SBA’s programs, but as SBA has centralized functions
                                    and placed more responsibilities on its lending partners, the district offices’
                                    responsibilities have also changed. In a previous report, we found that past
                                    realignment efforts during the 1990s had changed SBA’s organization but
                                    had also left parts of the previous structure intact, contributing to
                                    complicated organizational relationships and a field structure that was not
                                    consistently matched with mission requirements.1 For example, we found
                                    confusion over the mission of the district offices, with SBA headquarters
                                    officials believing the district office’s key customer was small businesses
                                    and district office staff believing that their key customer was the lender
                                    who makes the loans to small businesses.



                                    1
                                     U.S. General Accounting Office, Small Business Administration: Current Structure
                                    Presents Challenges for Service Delivery, GAO-02-17 (Washington, D.C.: Oct. 26, 2001).




                                    Page 1                           GAO-04-76 Small Business Administration Transformation
SBA transformation efforts have not been a reaction to any change in SBA’s
mission. Rather, SBA’s intent has been to transform the agency so that it
can more effectively and efficiently achieve its mission. In its current
transformation effort, SBA intends to expand centralization to additional
loan functions and some of its other small business programs to improve
efficiency. As centralization frees up employees in the district offices, SBA
intends to better define the district office role to focus on marketing and
outreach to small businesses and managing SBA’s relationships with
lenders and other resource partners.2

Following SBA’s testimony in July 2002,3 which stated that SBA was
initiating a 5-year workforce transformation plan, you requested that we (1)
review SBA’s progress in implementing its transformation initiatives and
discuss any challenges that have impeded or could impede implementation
and (2) determine whether SBA’s transformation incorporates practices
that are important to successful organizational change and effective human
capital management in the federal government. This report contains the
results of our review of SBA’s implementation of the first phase—
approximately 6 months—of the transformation effort. As part of phase
one, SBA planned to implement pilot initiatives to test a new marketing
focus for its district offices and centralize some of its loan functions.

To conduct this review, we analyzed planning, budget, and implementation
documents related to SBA’s transformation and interviewed key officials at
SBA headquarters. We also conducted site visits at each of the pilot offices
involved in the first phase—three district office pilots in Phoenix, Arizona;
Miami, Florida; and Charlotte, North Carolina; and two center pilots in
Santa Ana and Sacramento, California. At these locations, we interviewed
all employees who were directly affected by the pilot. To ensure open
communication, we met with directors, supervisors, and employees
separately. We compared SBA’s implementation process for
transformation with practices important to successful transformations,
using practices we identified in literature and our previous work on

2
 SBA’s resource partners include organizations such as Small Business Development
Centers and Women’s Business Centers that provide management and technical assistance
and the Service Corps of Retired Executives (SCORE) chapters in which volunteer business
executives counsel small businesses and potential entrepreneurs.
3
 House Committee on Small Business, Subcommittee on Workforce, Empowerment, and
Government Programs, Maximizing Organization and Leadership in a Federal Agency to
Fulfill Its Statutory Mission: Restructuring of the Small Business Administration, 107th
Cong., 2nd sess., 2002.




Page 2                           GAO-04-76 Small Business Administration Transformation
                   reorganizations, organizational change, and human capital management.4
                   We performed our review from February through September 2003 in
                   accordance with generally accepted government auditing standards.



Results in Brief   SBA has made some progress in implementing the first phase of its
                   transformation, but further progress could be hampered by budget and
                   staff realignment challenges. To meet its objectives for phase one, SBA (1)
                   implemented a pilot initiative at three district offices to test a new
                   marketing focus and (2) centralized a number of loan functions from these
                   offices to two centers to assess ways to improve the efficiency and
                   consistency of its loan functions. SBA is currently nearing completion of
                   phase one, and to prepare for its new marketing focus, it has provided
                   marketing-related training to staff at the three district offices and also
                   conducted an analysis to identify staffs' developmental needs in marketing.
                   In addition, SBA transferred most of the loan processing and liquidation
                   cases from the three district office pilots to the two centralization pilots.
                   However, SBA officials told us that they delayed the start-up of the district
                   office and centralization pilots in phase one due to the requirement in their
                   appropriations that they notify the appropriations committees prior to
                   going forward with any organizational restructuring, the government’s
                   fiscal year 2003 continuing resolution, and a shrinking operating budget.
                   As of our report date, phase two has not yet begun; however, SBA officials
                   told us that plans for this phase have been scaled back because the agency
                   did not receive any of the funds specifically requested for the
                   transformation in its fiscal year 2003 budget, and officials believe that SBA
                   may not receive any requested transformation funds in its fiscal year 2004
                   budget request. Thus, SBA would have to rely on any available operating
                   funds to carry out the transformation. Given the current situation, officials
                   said the focus is now on creating a new center for centralizing all of its loan
                   liquidation and loan guaranty purchase activities. While SBA’s
                   implementation efforts have been and could continue to be impeded by
                   budget constraints, we found that the agency’s budget requests for
                   transformation were inconsistent and lacked a detailed plan that showed
                   priorities and linked resources to desired results. SBA’s centralization
                   efforts could also be impeded by the challenge of realigning staff from


                   4
                    The main document we relied on in identifying key practices was our recent report, U.S.
                   General Accounting Office, Results Oriented Cultures: Implementation Steps to Assist
                   Mergers and Organizational Transformations, GAO-03-669 (Washington, D.C.: July 2,
                   2003).




                   Page 3                           GAO-04-76 Small Business Administration Transformation
multiple field offices so that SBA can operate its central locations with
experienced employees.

When SBA initially planned and implemented its transformation it gave
some attention to practices important to successful organizational
transformation. However, over time SBA began to overlook key aspects of
these practices involving leadership, setting implementation goals and a
timeline, establishing an integrated mission and strategic goals, using the
performance management system, communication, and employee
involvement that are important to successful organizational change. SBA’s
top leadership, the Administrator and Deputy Administrator, has
demonstrated support for the transformation. However, after SBA’s Chief
Operating Officer left the agency shortly after initiating the pilots, it was
not evident to employees and stakeholders who was responsible for
implementing the transformation. Although SBA had developed a sound
draft transformation plan explaining the purpose, implementation goals
and a timeline, it did not make the draft plan public or provide the reasons
for upcoming steps. As a result, it appeared to many district office
employees and stakeholders that headquarters lacked a plan and direction.
In its fiscal year 2004 performance plan, SBA reported strategic goals to
guide the transformation, but it has not linked transformation to existing
performance goals or developed new goals against which to measure its
marketing and outreach efforts. In addition, in the human capital area,
although SBA has taken steps toward creating a performance management
system that would define responsibility and set expectations for
employees, it too is at risk because the agency has not yet created a clear
and defined linkage between the employees’ roles and the goals of the
transformation. Also, SBA has not established an effective strategy for
communicating with employees and stakeholders to engage them in the
transformation process, encourage two-way communication, and
communicate early and often to build trust. Many district office employees
and stakeholders told us that they generally heard about transformation-
related actions through rumors. Finally, district office employees and
union officials told us that they have not been actively involved in planning
or implementing the transformation.

This report includes recommendations to SBA’s Administrator. To improve
implementation of its transformation, we are recommending that SBA (1)
ensure that implementation leadership is clearly identified to employees
and stakeholders, (2) finalize its draft transformation plan and share it with
employees and stakeholders, (3) develop and link performance goals to its
strategic goals, (4) use the new performance management system to define



Page 4                       GAO-04-76 Small Business Administration Transformation
             responsibility, (5) develop a communication strategy that promotes two-
             way communication, and (6) involve employees and the union to solicit
             ideas and ensure that their concerns are considered.

             We obtained written comments on a draft of this report from SBA’s Chief
             Financial Officer. SBA’s comments and our response are discussed near
             the end of this report, and SBA’s letter is reprinted in appendix I. In
             commenting on the draft, SBA did not state whether it concurred with our
             recommendations but said it would consider them as it continues to plan
             for and implement its transformation efforts. SBA specifically noted that it
             had already addressed recommendations related to developing
             performance goals and using the performance management system to
             define responsibility as a result of a new strategic plan issued after the
             completion of our audit work and implementing its new performance
             management system for employees on October 1, 2003. SBA disagreed
             with our finding that its budget requests for transformation were unclear.
             SBA also disagreed with our characterization of the extent to which it had
             communicated with and involved employees.



Background   In pursuing its mission of aiding small businesses, SBA provides small
             businesses with access to credit, primarily by guaranteeing loans through
             its 7(a) and other loan programs, and provides entrepreneurial assistance
             through partnerships with private entities that offer small business
             counseling and technical assistance. SBA also administers various small
             business procurement programs, which are designed to assist small and
             small disadvantaged businesses in obtaining federal contracts and
             subcontracts. In addition, SBA makes loans to businesses and individuals
             trying to recover from a disaster.

             As figure 1 shows, SBA has experienced many organizational changes over
             the past 20 years partly due to changing the way it delivers its services and
             partly due to budget cuts. Perhaps the largest change to SBA’s service
             delivery has occurred in its lending programs, where the agency went from
             making loans directly to guaranteeing loans made by commercial lenders.
             SBA provides small businesses with access to credit, primarily by
             guaranteeing loans through its 7(a) and 504 programs. For the 7(a)
             program, SBA can guarantee up to 85 percent of the loan amount made by
             private lenders to small businesses. Within the 7(a) program, for smaller
             loans, SBA offers SBA Express as an option to lenders who will use their
             own applications and underwriting procedures by agreeing to a lower
             guaranty of 50 percent. Within the 7(a) program, there are three



             Page 5                      GAO-04-76 Small Business Administration Transformation
classifications of lenders—regular, certified, and preferred lenders—that
illustrate the various range of responsibilities handed over to lenders. SBA
continues to provide final approval of loans made by its regular lenders
through the district offices. Certified lenders have the authority to process,
close, service, and may liquidate SBA guaranteed loans, and SBA provides
expedited loan processing and servicing. Preferred lenders are given full
authority to make loans without prior SBA approval. However, these
lender-approved preferred loans are submitted to SBA’s Sacramento
Processing Center, which, among other things, verifies that the lender has
documented eligibility requirements, issues a loan number, and processes
the loan guaranty. Under the 504 program, SBA provides its guaranty
through certified development companies—private nonprofit
corporations—that sell debentures that are fully guaranteed by SBA to
private investors and lend the proceeds to qualified small businesses for
acquiring real estate, machinery, and equipment, and for building or
improving facilities. When a 7(a) or 504 loan defaults, SBA reviews the
lender’s request for SBA to purchase the guaranty, and if the lender met
SBA’s program requirements, SBA pays the claim. SBA usually relies on the
lender to recover as much as it can by liquidating collateral or SBA takes
over the loan servicing and liquidation.5




5
 Liquidation is the act of enforcing collection on a debt that has defaulted by selling
underlying securities that the borrower has pledged as collateral. If collateral proceeds are
insufficient to cover the outstanding balance, lenders may pursue personal guarantees or
obligations provided by business owners or others in support of the loan.




Page 6                            GAO-04-76 Small Business Administration Transformation
Figure 1: Timeline of Major Organizational and Operational Changes by Fiscal Year
                                                 Reduced headquarters and regional staff
                                                                                             Consolidated five regional personnel
                                                                                             offices into one center in Denver
                                                           Created liquidation center in
                 Centralized Preferred Lender        Santa Ana, CA, due to increased
                      Program loan processing    workload from 1994 Northridge Quake           Centralized government contracting
                in a center in Sacramento, CA                                                  field staff in six area offices
                                                  Reduced             Created second                                                                         Began district
           Created commercial                     headquarters        commercial loan                         Created two LowDoc loan                        office and
          loan servicing center                   and regional        servicing center                        processing centers in Hazard,                  centralization
                 in Fresno, CA                    office staffing     in Little Rock, AR                      KY, and Sacramento, CA                         pilots




       1983                 1988                1994                1995              1996             1997              1998                 2000            2003




          Preferred Lender                                           Funding ended for                                                   Created Lender
          Program established                                        7(a) direct loans                                                   Oversight Program

                                                                                                                            Required that lenders
                                                                                                                            service and liquidate
                                                                                                                            7(a) loans

Source: GAO.



                                                            SBA’s loan programs have also been the focus of a major organizational
                                                            change with the creation of centers to process and service the majority of
                                                            SBA’s loans—work once handled largely by district office staff. (See fig. 1.)
                                                            About 92 percent of the processing and servicing of SBA-guaranteed loans
                                                            are handled in centers instead of district offices. Among other things, these
                                                            centers process the loan guaranty and review servicing requests submitted
                                                            by lenders and borrowers.

                                                            In response to budget reductions, SBA streamlined its field structure
                                                            during the 1990s, downsizing the 10 regional offices, moving the workload
                                                            to either district offices or headquarters offices, and eliminating most of
                                                            the regions’ role as an intermediate management layer between
                                                            headquarters and the field. SBA created the Office of Field Operations to
                                                            take over the role of intermediary. SBA’s overall workforce has decreased
                                                            by over 20 percent since 1992 and as of 2002 includes about 4,075
                                                            employees, including 956 for the Office of Disaster Assistance and 102
                                                            employees for the Office of the Inspector General.

                                                            When SBA embarked on this current transformation effort, it planned its
                                                            implementation in three phases. The key pilot initiatives SBA undertook in



                                                            Page 7                                    GAO-04-76 Small Business Administration Transformation
                                phase 1 that began on March 10, 2003, focuses on (1) transforming the role
                                of the district office to focus on outreach to small businesses about SBA’s
                                products and services and linking these businesses to the appropriate
                                resources, including lenders and (2) centralizing its loan functions to
                                improve efficiency and consistency of its loan approval, servicing, and
                                liquidation processes. Later phases will include expanding these pilots to
                                the remaining district offices. As SBA proceeds in transforming the district
                                offices and centralizing many of its processes, it will analyze its business
                                processes to identify opportunities for improvement and reduce its office
                                space to achieve some cost savings. Finally, SBA’s plan included initiatives
                                to apply technology and use the Internet to reach out to more small
                                businesses.



SBA Has Made Some               As part of the first phase of SBA’s transformation, the agency began
                                implementing pilot initiatives to test a new marketing focus for its district
Progress in                     offices and centralizing some of its loan functions. As the first phase nears
Implementing                    completion, SBA has made some progress in implementing the pilot
                                initiatives at three district offices and two centers. While SBA’s
Transformation, but             implementation efforts have been and could continue to be impeded by
Budget Constraints and          budget constraints, we found that the agency did not always clearly
Staffing Challenges             communicate its budget requirements. SBA’s centralization efforts could
                                also be impeded by the challenge of realigning staff from multiple field
Could Continue to               offices so that it can operate its central locations with experienced
Impede Progress                 employees.



SBA Made Progress in            SBA’s purpose for transformation is to realign its organization, operations,
Implementing Initial District   and workforce to better serve its small business customers. Based on SBA
                                transformation documents and agency officials, the agency planned to
Office and Centralization
                                approach its transformation in phases to allow it to test a number of
Pilots                          initiatives and to make refinements before implementing the initiatives
                                agencywide. In our July 2002 testimony on SBA’s workforce
                                transformation plan, we noted that SBA had started to develop a sound
                                implementation plan for its transformation.6 As part of phase one, SBA
                                intended to test a new marketing and outreach initiative for its district
                                offices that would refocus their efforts on becoming more responsible and


                                6
                                 U.S. General Accounting Office, Small Business Administration: Workforce
                                Transformation Plan Is Evolving, GAO-02-931T (Washington, D.C.: July 16, 2002).




                                Page 8                          GAO-04-76 Small Business Administration Transformation
accountable for promoting small business growth and development as well
as on providing better oversight and management of its lenders and
resource partners. Additionally, SBA planned to centralize a number of the
offices’ loan functions to (1) free up district office staff to reach and
respond to the needs of local businesses and to do more lender and partner
management and oversight and (2) improve the efficiency and consistency
of its loan processing, servicing, and liquidation functions. To accomplish
these initiatives, in March 2003, SBA began its initial pilot initiative at three
district offices and two centers and based on its initial transformation plan,
it expected to run the pilots for 6 months before moving to the second
phase of its transformation. As of our report date, SBA is nearing the
completion of phase one of its district office and centralization pilots and
plans to expand the results of phase one to all of its other district offices.
Based on our site visits to the pilot offices and discussions with SBA
headquarters officials, we identified a number of transformation-related
activities that SBA has made progress in since implementing its initial pilot
initiative. Specifically, for its district office initiative to

• prepare staff in carrying out their new marketing and outreach roles,
  during March through June 2003, SBA provided training at the three
  district office pilots on topics such as marketing and outreach,
  presentation skills, and customer/partner relationships;

• develop the competencies necessary for staff to carry out their new
  roles and to evaluate gaps in the existing skill sets of its staff, SBA has
  hired a contractor to conduct a skills analysis. In July 2003, the
  contractor completed the analysis for the three pilot district offices and
  according to SBA officials, district office management will use the
  results to identify its employees’ developmental needs in the marketing
  and outreach areas;

• update and clarify the specific duties that SBA expects its district office
  staff to perform in their new marketing roles, the agency developed new
  job descriptions for its marketing and outreach specialist positions at
  the district office level; and

• allow staff at the three pilot district offices more time to conduct
  marketing and outreach functions, in March 2003, these offices had
  stopped processing any new 7(a) liquidations and guaranty purchase
  cases and 504 loan origination applications. In addition, the offices had
  also transferred most of their outstanding 7(a) liquidation cases to SBA’s
  liquidation center in Santa Ana, California.



Page 9                        GAO-04-76 Small Business Administration Transformation
Additionally, a key component of SBA’s transformation is to make
fundamental changes over the next 5 years at its district office level to
reflect the change in the agency’s vision for its district offices from making
and servicing loans to primarily reaching out to new markets and
overseeing its private-sector partners. Based on our site visits to the three
pilot district offices, we found that the offices have begun to move toward
SBA’s new vision for its district offices. Specifically, SBA’s Phoenix,
Arizona, office has officially changed its organization structure to allow its
staff to focus mainly on marketing and outreach-related activities. As
shown in figure 2, the office has replaced its portfolio management division
with divisions for lender development and marketing and outreach, and it
also moved some staff formerly in portfolio management to its business
development division. The Miami and Charlotte district pilots have also
started to expand their marketing and outreach efforts. For example, a
Charlotte official told us that it plans to use “SBA Days” as a way to reach
out to small businesses in its district. SBA Days are events conducted at
local chambers of commerce around the district’s state where SBA staff
along with chamber members and other firms in the area conduct one-on-
one counseling sessions with business owners and potential entrepreneurs.
To reach small businesses in the Miami area, officials told us that the office
is using one of its resource partners to work with a national chain of office
supply stores to provide on-site counseling to small business customers
when they are in the stores.

SBA headquarters officials provided us with briefing slides that show that
the three district office pilots have submitted proposals for establishing
alternative customer service sites so that SBA employees can provide
direct customer service in areas outside the physical location of the district
offices. For example, the Phoenix district office already has one marketing
specialist located in Tucson and is proposing two additional positions to
support lender relations. Officials also told us they are working with local
governments and resource partners to identify free office space for these
new sites, but in some cases there may be some rental expenses.




Page 10                      GAO-04-76 Small Business Administration Transformation
[This page intentionally left blank]




Page 11                      GAO-04-76 Small Business Administration Transformation
Figure 2: Phoenix, Arizona, District Office Organizational Structure “Before and After” Transformation


                                                                                                                            Before
                                                          District Director



                                                                        Information
                                                                    Technology Specialist




                                                         Capital Access/
                                                         Entrepreneurial                      Portfolio             Business
    Administrative Division     Legal Division
                                                          Development                        Management         Development - 8(a)
                                                            Division


       Public Affairs             Attorney                Assistant D.D.                     Team Leader          Team Leader
       Specialist and                                      Economic
    Administrative Officer                                Development
                                  Attorney                                                    Economic        Business Opportunity
     Administrative Clerk                                                                    Development           Specialist
                                                          Team Leader                         Assistant
       (receptionist)
                               Legal Assistant
        Administrative                                   Loan Processing                    Loan Servicing
       Support Assistant                                    Assistant                         Assistant


        Administrative                                   Loan Specialist                    Loan Specialist
       Support Assistant
                                                           Economic                         Loan Specialist
                                                          Development
                                                           Specialist
                                                                                            Loan Specialist
                                                           Economic
                                                          Development
                                                           Specialist


Source: GAO.




                                             Page 12                          GAO-04-76 Small Business Administration Transformation
   After
                                                                       District Director



                                                                                         Deputy
                                                                                    District Director

                                                                                     Information
                                                                                 Technology Specialist




                                                Marketing
                                                                        Lender                  Business                Government
   Administrative             Legal               and                                                                                         Tucson
                                                                      Development           Development - 8(a)          Procurement
                                                Outreach



   Public Affairs        General Attorney      Team Leader            Team Leader              Team Leader          Procurement Center   Lead Marketing and
   Specialist and                                                                                                     Representative     Outreach Specialist
Administrative Officer
                                              Marketing and          Loan Specialist       Business Opportunity
Administrative Clerk                        Outreach Specialist                                 Specialist
  (receptionist)
                                              Marketing and          Loan Specialist         Marketing and
  Administrative                            Outreach Specialist                            Outreach Specialist
 Support Assistant                                                   Loan Servicing
                                              Marketing and            Assistant              Marketing and
  Administrative                            Outreach Assistant                              Outreach Assistant
 Support Assistant


                                                             Changes made to district office organizational structure




                                                    Page 13                                    GAO-04-76 Small Business Administration Transformation
Finally, as part of its centralization initiative to improve the efficiency and
consistency of its loan approval, servicing, and liquidation processes, in
March 2003, SBA’s two pilot centers assumed their new roles and
responsibilities. The liquidation center in Santa Ana, California, began
processing new 7(a) liquidations and guaranty purchase cases from the
three pilot district offices, and the loan processing center in Sacramento,
California started processing new 504 loan origination applications from
these offices. In May 2003, the Santa Ana center also started working on
1,275 outstanding 7(a) liquidation cases from the three pilot district offices.
Based on SBA’s benchmark reporting data for its centralization pilot, as of
October 2003, the Santa Ana center had processed 185 of 227 new 7(a)
guaranty purchase cases it had received and closed 55 of 450 7(a)
liquidation cases. The Sacramento center had processed 582 new 504
applications that it had received since beginning the pilot initiative.

According to SBA and representatives from two lender trade associations,
the centralization pilot has resulted in a more efficient and consistent
processing of SBA’s 7(a) liquidation and guaranty purchases and 504 loan
approvals. SBA headquarters officials told us that the agency would be
able to perform these functions with far fewer resources than it has to date.
According to the officials, based on results from a workload analysis SBA
did of the Santa Ana centralization initiative, it found that the 7(a)
liquidation and purchase guaranty process could be done by 40 employees
in a center, as opposed to the 266 employees that now process the cases in
its district offices. SBA officials also told us that centralization results in
faster processing times. SBA data indicate that the average turnaround
time for processing 7(a) guaranty purchases has decreased from 129 days
to 32 days and, for 504 applications, it has gone from about 14 days on
average to about 2 days. We reviewed about 450 cases of the 504
application approvals from the pilot and found that most applications were
processed and returned to the certified development companies in about 2
days. We did not review data for any of the other measures. When we
visited the two centers participating in the pilots, center officials showed
us documentation they were using to make the process more efficient and
consistent. For example, for the 504 pilot, the Sacramento center
developed standardized letters to send to certified development companies
in situations where the center receives an incomplete application package
from a company. According to a center official, some district offices spend
a lot of time making telephone calls to the development companies
requesting the necessary data to complete the processing. However, by
using the letters, the official said the center is saving time because it stops
processing the application until it receives the needed information, and in



Page 14                      GAO-04-76 Small Business Administration Transformation
                           the meantime it can continue processing applications that are complete.
                           One official representing certified development companies told us that the
                           companies participating in the pilot initiative for SBA’s 504 program are
                           pleased with the results of the pilot. Officials representing 7(a) lenders
                           said that some lenders might not be in favor of centralization because they
                           have good working relationships with the local SBA district office and
                           would prefer to continue working directly with them.



Budget Uncertainties and   SBA transformation efforts have been impeded and could continue to be
Constraints Affected       impeded by budget uncertainties and constraints. SBA officials stated that
                           due to inflation and increases in employee compensation and benefits,
Transformation, but SBA
                           available operating funds had been declining since 2001 as shown in figure
Needs to Better            3. Therefore, SBA requested specific funding for its transformation.
Communicate Budget         According to SBA officials, the agency expected to start its pilot initiative
Requirements               in July 2002 with funds from its 2002 operating budget and then expand the
                           initiative in phase two of its transformation, 6 months later, with funds
                           specifically requested for transformation in its 2003 budget. But SBA
                           delayed the start of the pilot until March 2003 due to a number of
                           uncertainties about its budget. SBA officials explained that language in its
                           appropriations bills requires that SBA notify the appropriations committees
                           15 days prior to reprogramming its funds for relocating an office or
                           employees, or reorganizing offices.7 In the summer of 2002, SBA notified
                           the appropriations committees about its intent to go forward with the
                           pilots. However, SBA was told that it should first negotiate with its union
                           before moving forward. Although SBA reached agreement with its union,
                           starting the initiative still remained an issue for SBA because, according to
                           officials, it was too late to use 2002 operating funds as it initially planned.
                           While SBA then planned to use 2003 operating funds to start the pilot
                           initiative, officials said that the government’s 2003 continuing resolution8
                           further delayed the start because without an approved operating budget,



                           7
                            Consolidated Appropriations Resolution FY 2003, (H.J. Res. 2) Pub. L. 108-7, Div. B, Title VI,
                           § 605 (2003).
                           8
                            If Congress has not enacted an annual appropriations for an agency by the beginning of a
                           fiscal year the agency must begin an orderly shutdown of most of its activities and
                           operations due to the funding gap, unless Congress passes a continuing resolution. A
                           continuing resolution is a temporary appropriations authorizing an agency to incur
                           obligations during an interim period at a fixed rate until Congress enacts the annual
                           appropriations for the agency.




                           Page 15                            GAO-04-76 Small Business Administration Transformation
SBA did not know the portion of its operating budget that would be
available for transformation.



Figure 3: SBA’s Available Operating Funds Have Declined Since Fiscal Year 2001
Dollars in thousands

350,000

                                              Salaries and Expenses budget
300,000


250,000


200,000


150,000


100,000


 50,000
            53,175
                        43,396                Available operating funds
                                     36,225
       0
           FY2001      FY2002        FY2003


                     Compensation & benefits

                     Agencywide costs ("fixed" costs, such as rent, telecommunications, etc.)
                     Available operating funds
                     (includes travel, operating funds for district offices, training, office supplies, IT support, etc.)
Source: GAO depiction of SBA data.




For its 2003 budget, Congress did not approve any of the $15 million that
SBA specifically requested for transformation activities planned for phase
two, and SBA officials told us they do not believe the agency will receive
any of the $21.1 million for transformation in its 2004 budget request.
According to officials, SBA has had to change its transformation plans and
the level of funding associated with these plans because of its shrinking
operating budget and the lack of specific appropriations for
transformation. Specifically, officials stated that SBA actually spent $96,000
in 2003 operating funds on the first phase of its transformation for activities
associated with its pilot initiative, including shipping files, training, travel,
and pilot office evaluations. Officials could not tell us how much money
SBA initially planned to spend in phase one when it was going to use 2002



Page 16                                        GAO-04-76 Small Business Administration Transformation
operating funds or whether any of the activities associated with this phase
had to be cut back due to the lack of funds. However, many employees in
the district offices we visited told us that they had not received the level of
funding needed to support marketing and outreach functions including
money for travel, laptops, and cell phones that would allow them to cover a
wider geographic area in the districts and to test telecommuting and
alternative work sites.

Although SBA struggled with budget uncertainties and constraints as it
began implementation of its transformation, SBA could have provided
better information about its budget requirements. Based on our analysis of
SBA budget request data for fiscal years 2003 and 2004, SBA has not clearly
defined its budgetary needs for transformation. As shown in figure 4, the
labeling of specific transformation initiatives varies between SBA’s fiscal
years 2003 and 2004 Budget Request and Performance Plans, making it
difficult to compare and align its transformation activities from year to
year. Also, as shown in figure 4, in its fiscal year 2004 budget request, SBA
requested $21.1 million for a number of investment initiatives, of which
$8.8 million was for transformation. The $8.8 million figure was also the
amount cited by SBA’s Administrator during two congressional hearings.9
When we met with SBA headquarters officials to discuss the variances in its
budget request data, the officials told us that SBA’s 2004 budget request for
transformation is the entire $21.1 million, and not the $8.8 million. In
response to our questions about the budget data inconsistencies, SBA
officials attributed the differences to the agency’s changing environment.
However, the inconsistencies we found in SBA budget request data and the
lack of a detailed plan make it difficult for outsiders, including
congressional stakeholders, to understand the direction SBA wants to take
with transformation and the resources it needs to achieve results.




9
 During his statements on June 4 and February 26, 2003, regarding SBA’s fiscal year 2004
budget request, before the Senate Committee on Small Business & Entrepreneurship and
the House Committee on Small Business, SBA’s Administrator, Hector V. Barreto, indicated
that its budget request included $8.8 million for its transformation effort in fiscal year 2004.




Page 17                             GAO-04-76 Small Business Administration Transformation
Figure 4: Comparison of SBA’s Fiscal Years 2003 and 2004 Budget Requests for Transformation

Dollars in millions
                  Presidential Initiatives                                                Investment Initiatives
               FY 2003 SBA Budget Request                                             FY 2004 SBA Budget Request
                  and Performance Plan                                                   and Performance Plan
                      March 12, 2002                                                         February 3, 2003

        Presidential initiatives                   Request                     Investment initiatives                    Request

        SBA's 50th Anniversary                   $1,500,000                A   Transformation                                           A   Transformation line items
        E-Government Initiatives                  5,000,000                    Human Capital Planning                                       and dollar requests cannot
                                                                                                                                            be compared between
        Native American Business Needs            1,000,000                    Training and Development of Workforce $1,325,500             requests


   B    Program Evaluation                          850,000                    Pilot programs                            600,000        B   Program evaluation is
                                    Subtotal      8,350,000                                                                                 listed under
                                                                                                                                            "Transformation" in the
                                                                               Improving Business Processes
                                                                                                                                            FY 2004 budget request,
                                                                               Modernize and streamline processes       2,300,000           but was not listed there
   A    Transformation                                                                                                                      in the FY 2003
        Increased use of technology               2,000,000                    IT support for new processes and pilots 1,720,000            budget request
        Reconfiguration and movement                                           Space Restructuring                     2,000,000
                           of office locations    2,500,000
        Files                                     1,000,000                B   Program Evaluation                         850,000
        Personnel                                 5,000,000                                               Subtotal      8,795,000   C   C   Both FY 2004 figures have
        Skills training                           2,000,000                                                                                 been referred to as the
        Contracting out of                                                     Assisting Business Compliance                                budget request for
                        commercial activities     2,500,000                           with Government Regulations       5,000,000           SBA's "Transformation"
                                     Subtotal    15,000,000
                                                                               Information Technology Security          4,300,000
                                                                               Electronic Grants System                   600,000
        Infrastructure support                                                 Competitive Sourcing                       500,000
                       and computer security      3,550,000                    E-Tran Gateway for Loan Applications       330,000
                                  Subtotal        3,550,000                    E-Business Institute                       260,000
                                                                               8(a) Business Development Program
                                                                                                Internet Application      200,000
                                                                                                          Subtotal     11,530,000

                                       Total $26,900,000                                                    Total $21,075,000 C


Source: GAO.



                                                              Note: In SBA’s fiscal year 2004 budget request for transformation, SBA listed $2,000,000 for space
                                                              restructuring. This amount should have been $2,750,000, which SBA had listed in another location of
                                                              the document.




                                                              Page 18                                GAO-04-76 Small Business Administration Transformation
Staffing Challenges Could   To staff its centralization initiatives, SBA will have to relocate employees
Impact Centralization       from its 68 district offices scattered throughout the country.10 Realigning
                            staff from multiple field offices to central locations is and will be an
Efforts                     ongoing challenge for SBA. Relocations could not only prove potentially
                            disruptive for employees but can also have an effect on SBA’s operations by
                            negatively impacting morale and productivity. As part of phase one of its
                            transformation, SBA centralized a number of loan functions from the three
                            pilot district offices to two of its existing loan processing and servicing
                            centers. In phases two and three of its transformation, SBA had planned to
                            expand its centralization initiative until all of its loan functions performed
                            by its remaining 65 district offices were centralized. In addition, SBA had
                            planned to have fewer centers by consolidating some of its existing ones.

                            Based on our discussions with SBA staff in the pilot offices, the staffing of
                            any centralization initiative with experienced staff could be potentially
                            challenging for SBA. Specifically, some staff believed that the two pilot
                            centers would not have a sufficient number of staff to handle the increased
                            workloads when SBA expands its centralization initiative to include more
                            district offices. According to one district office employee, unless the two
                            pilot centers or any other center have enough staff with the right skill mix,
                            they will be unable to adequately respond to lenders, which the employee
                            believed could potentially affect relationships between SBA and the
                            lending community. One center official characterized the problem as
                            fundamental because in his view staff are not all equally adept and SBA is
                            faced with matching jobs with people who do not have the skills to do the
                            work. An official representing one of SBA’s lender trade associations also
                            expressed concern that if SBA forced employees to move, that the
                            centralization initiatives will be staffed with employees with low morale
                            that could hurt productivity.

                            SBA’s first attempt to realign staff with one of its centralization initiatives
                            was to establish a new 7(a) liquidation and guaranty purchase center near
                            Washington, D.C., beginning in early October 2003 and operate it with 40
                            liquidation staff relocated to the center from its district offices. Based on
                            SBA transformation documents, SBA plans to relocate those staff with the
                            greatest experience into the center to take advantage of their expertise.


                            10
                             Prior to February 2003, SBA had 70 district offices. In February 2003, SBA notified
                            Congress of its intent to designate two of its district offices--Spokane, Washington; and
                            Cedar Rapids, Iowa—as branch offices and this change was formally made in September
                            2003.




                            Page 19                           GAO-04-76 Small Business Administration Transformation
According to SBA officials, to identify experienced staff the agency used
results from a cost allocation survey that provided information on the
amount of time district office staff spend on loan liquidation functions. On
September 10, 2003, SBA sent notification letters to certain district office
employees identified as having worked on liquidations, informing them that
they were eligible for a monetary buy-out if they separated from federal
service not later than September 30, 2003. While the letter also states that
the employee has 7 calendar days to accept the buy-out offer, it is unclear
how SBA would handle reassigning those staff who do not accept the buy-
out offer. Specifically, the letter does not mention where staff are being
assigned, or what relocation costs SBA would pay.

According to the memorandum of understanding between SBA and its
employees’ union signed September 9, 2003, the two parties agreed that
current district office staff at the GS-9 level and above who reported
spending at least 25 percent of their time performing liquidations on SBA’s
most recent cost allocation study would be directly reassigned to the new
liquidation center in the Washington, D.C., metropolitan area, or to one of
the six most severely understaffed SBA district offices in New York, New
York; Newark, New Jersey; Atlanta, Georgia; Chicago, Illinois; and San
Francisco and Los Angeles, California. The memorandum indicates that
SBA identified the six offices based on staffing levels for those district
offices with the lowest ratio of SBA staff to small businesses in their
service area, as of August 1, 2003. Also, the memorandum states that SBA
plans to begin relocating staff 30 days from the time it notifies them about
their reassignment to the center and that it will pay all of an employee’s
relocation cost in accordance with the law. While SBA has indicated that it
will make reassignments as minimally disruptive for its employees as
possible, depending on where the 40 staff being reassigned to the center
currently work, logistical factors associated with moving, such as finding a
new home, could pose a challenge for these staff. As of our review date,
SBA had not informed us about when it expects to begin the reassignments
or the number of and office locations for the employees that it intends to
relocate.




Page 20                     GAO-04-76 Small Business Administration Transformation
SBA Applied Some but        We compared SBA’s implementation process to practices that have been
                            identified in major private and public sector organizational transformations
Not Many Aspects of         as key for a successful transformation. Building on lessons learned from
Practices and               the experiences of large private and public sector organizations, these
                            practices can help agencies successfully transform their cultures so that
Implementation Steps        they can be more results oriented, customer focused, and collaborative.
Important to                While SBA applied some key practices, such as involving top leadership,
Successful                  dedicating an implementation team and developing an implementation
                            plan, it also overlooked key aspects that emphasize transparency and
Transformation              communication. For example, although it developed a draft transformation
                            plan with implementation goals and a timeline, it did not share the plan
                            with employees and stakeholders. SBA developed strategic goals for
                            transformation but still needs to link those goals with performance goals
                            and its performance management system. Finally, a lack of communication
                            and employee involvement in SBA’s communication approach did not
                            encourage two-way communication to obtain feedback from employees
                            and stakeholders and involve employees to obtain their ideas and gain their
                            ownership for the transformation.



Practices Important to      According to key transformation practices, people are at the center of any
Successful Transformation   change management initiative—people define the organization’s culture,
                            drive its performance, and embody its knowledge base. Experience shows
                            that failure to adequately address—and often even consider—a wide
                            variety of people and cultural issues are at the heart of unsuccessful
                            transformations. Recognizing the “people” element in these initiatives and
                            implementing strategies to help individuals maximize their full potential in
                            the new organization, while simultaneously managing the risk of reduced
                            productivity and effectiveness that often occurs as a result of the changes,
                            is the key to a successful transformation. Thus, transformations that
                            incorporate strategic human capital management approaches will help to
                            sustain agency efforts to improve efficiency, effectiveness, and
                            accountability in the federal government.




                            Page 21                     GAO-04-76 Small Business Administration Transformation
We convened a forum on September 24, 2002, to identify and discuss useful
practices and lessons learned from major private and public sector
mergers, acquisitions, and transformations.11 The invited participants were
a cross section of leaders who have had experience managing large-scale
organizational mergers, acquisitions, and transformations, as well as
academics and others who have studied these efforts. The forum neither
sought nor achieved consensus on all of the issues identified through the
discussion. Nevertheless, there was general agreement on a number of key
practices that have consistently been found at the center of successful
mergers, acquisitions, and transformations. In a follow-up report issued on
July 2, 2003, we identified specific implementation steps for these key
practices.12 These practices and implementation steps are shown in table 1.



Table 1: Key Practices and Implementation Steps for Organizational
Transformations

Practice                                    Implementation step
Ensure top leadership drives the            • Define and articulate a succinct and
transformation.                               compelling reason for change.
                                            • Balance continued delivery of services with
                                              merger and transformation activities.


Establish a coherent mission and            • Adopt leading practices for results-oriented
integrated strategic goals to guide the       strategic planning and reporting.
transformation.
Focus on a key set of principles and        • Embed core values in every aspect of the
priorities at the outset of the               organization to reinforce the new culture.
transformation.




11
 U.S. General Accounting Office, Highlights of a GAO Forum: Mergers and
Transformation: Lessons Learned for a Department of Homeland Security and Other
Federal Agencies, GAO-03-293SP (Washington, D.C.: Nov. 14, 2002).
12
 U.S. General Accounting Office, Results-Oriented Cultures: Implementation Steps to
Assist Mergers and Organizational Transformations, GAO-03-669 (Washington, D.C.: July
2, 2003).




Page 22                            GAO-04-76 Small Business Administration Transformation
                               (Continued From Previous Page)
                               Practice                                     Implementation step
                               Set implementation goals and a timeline to • Make public implementation goals and
                               build momentum and show progress from        timeline.
                               day one.                                   • Seek and monitor employee attitudes and
                                                                            take appropriate follow-up actions.
                                                                          • Identify cultural features of merging
                                                                            organizations to increase understanding of
                                                                            former work environments.
                                                                          • Attract and retain key talent.
                                                                          • Establish an organizationwide knowledge
                                                                            and skills inventory to exchange knowledge
                                                                            among merging organizations.
                               Dedicate an implementation team to           • Establish networks to support
                               manage the transformation process.             implementation team.
                                                                            • Select high-performing team members.

                               Use the performance management system • Adopt leading practices to implement
                               to define the responsibility and assure effective performance management
                               accountability for change.              systems with adequate safeguards.

                               Establish a communication strategy to        •   Communicate early and often to build trust.
                               create shared expectations and report        •   Ensure consistency of message.
                               related progress.                            •   Encourage two-way communication.
                                                                            •   Provide information to meet specific needs
                                                                                of employees.


                               Involve employees to obtain their ideas    • Use employee teams.
                               and gain ownership for the transformation. • Involve employees in planning and sharing
                                                                            performance information.
                                                                          • Incorporate employee feedback into new
                                                                            policies and procedures.
                                                                          • Delegate authority to appropriate
                                                                            organizational levels.

                               Build a world-class organization.            • Adopt leading practices to build a world-
                                                                              class organization.

                               Source: GAO.




SBA Transformation Has         One of the key practices important to a successful transformation is for the
Top Leadership Support and     agency to ensure that top leadership drives the transformation. SBA has
                               followed this practice, with both the Administrator and the Deputy
a Designated
                               Administrator demonstrating support for the transformation. The SBA
Implementation Team, but       Administrator has provided a rationale behind the purpose of the agency
Senior Officials’ Roles Were   and the goals of the transformation by addressing district directors and
Not Always Transparent         visiting field offices to discuss the importance and goals of




                               Page 23                             GAO-04-76 Small Business Administration Transformation
transformation—to increase awareness of SBA’s services and to make SBA
a better trained, better equipped, and more efficient organization. SBA
officials told us that the Deputy Administrator has also visited many field
offices to discuss the transformation.

Designating a strong and stable implementation team that will be
responsible for the transformation’s day-to-day management is also
important to ensuring that transformation receives the focused, full-time
attention needed to be sustained and successful. SBA has dedicated an
implementation team to manage the transformation process, but it has
experienced leadership changes that were not made apparent to employees
and stakeholders. The composition of the team is important because of
the visual sign it communicates regarding which organizational
components are dominant and subordinate or whether the transformation
team involves a team of equals. Prior to the Deputy Administrator
assuming the lead for implementing the transformation, the Chief
Operating Officer was responsible. The Chief Operating Officer, along with
SBA’s Associate Administrator for the Office of Field Operations, visited
the pilot district offices during the kick off to promote the transformation
and to address questions and concerns of the pilot district office staff.
However, the Chief Operating Officer left SBA shortly after the first pilot
phase was initiated.13 Similarly, the person who was initially the Associate
Administrator for the Office of Field Operations, who was responsible for
overseeing the district office pilots, was no longer involved in the
transformation shortly after implementation. SBA officials told us that it
was not productive for its Chief Operating Officer to be in charge of the
transformation because the Chief Operating Officer position was equal in
terms of authority to the other key positions on the implementation team.
Since the Chief Operating Officer left the agency, SBA has not publicly
designated a day-to-day manager for the transformation effort. Based on
our discussions with stakeholders and field and union officials, the
Counselor to the Administrator appeared to be the manager. However, SBA
has not issued any announcement or otherwise clarified the leadership or
implementation team to employees and stakeholders. SBA officials told us
that the person now serving as the Associate Administrator for the Office of
Field Operations leads the weekly conference calls with the district and
center directors involved in the pilots and is the person most involved in
the day-to-day management of the transformation.



13
     This position was still vacant as of October 23, 2003.




Page 24                               GAO-04-76 Small Business Administration Transformation
                             The Deputy Administrator, who can direct the other members of the
                             implementation team, leads the current team, which comprises senior
                             executives of the key program areas affected by the transformation such as
                             the Associate Deputy Administrator for Capital Access, the Associate
                             Administrator for the Office of Field Operations, Chief Human Capital
                             Officer, and the three pilot district office directors. The team also includes
                             the Counselor to the Administrator and two Regional Administrators.
                             Officials on the implementation team told us that they meet on a weekly
                             basis with the Deputy Administrator and sometimes the Administrator to
                             discuss the status and concerns related to the pilot’s implementation. SBA
                             officials also emphasized that the implementation team includes a mix of
                             political appointees and senior career officials. For example, the Associate
                             Deputy Administrator for Capital Access and the Associate Administrator
                             for Office of Field Operations are political appointees. The Chief Human
                             Capital Officer and the Counselor to the Administrator are career officials.



Lack of a Transparent Plan   A key practice in organizational transformations is to set implementation
and Changing Focus Made      goals and a timeline to build momentum and show progress from day one.
                             Although SBA had developed a transformation plan that contains goals,
SBA’s Implementation Goals   anticipated results, and an implementation strategy, it never made the plan
and Progress Reports         public. SBA headquarters officials told us that all of its plans provided to
Confusing                    us were “preliminary” documents because of changes made to the plan;
                             therefore, it had not been shared with employees or stakeholders. Making
                             the implementation goals and timeline public is important for transparency
                             and accountability in a transformation and because employees and
                             stakeholders are not only concerned with what results are to be achieved,
                             but also how to achieve those results. According to SBA’s draft
                             transformation plan, SBA intended to keep its employees apprised of the
                             current status of activities, and continuously inform its employees on what
                             the agency intended to do. However, SBA has not made much information
                             available to its employees and stakeholders regarding the details of
                             upcoming steps, measures for success, and reasons for decisions. As a
                             result, it appeared to many district office employees and stakeholders that
                             headquarters lacked a plan and direction. Stakeholders, including
                             representatives from lender trade associations, informed us that SBA has
                             not been forthcoming in discussing its transformation plans with them.
                             Generally, district office employees told us they thought SBA had no clear
                             plan and lacked direction. Specifically, two district office employees told
                             us that despite any planning that SBA had done for the transformation,
                             headquarters officials kept adding to the plan, and changing goals during




                             Page 25                      GAO-04-76 Small Business Administration Transformation
mid-year, which left employees in the district office uncertain about what
to expect.

SBA officials told us that internal and external factors, such as budget
uncertainties, caused SBA to alter aspects of the draft transformation plan.
Initially, phases two and three of its transformation were to expand its
district office and centralization pilot initiatives to additional district
offices. SBA had also planned a number of other initiatives as part of the
later phases, including analyzing its business processes to identify
opportunities for improvement, restructuring its surety bond program, and
expanding its technology systems. According to a revised plan dated
August 1, 2003, and discussions with SBA officials, the focus of SBA’s
transformation is now on creating a new center for centralizing all of its
7(a) loan liquidation and loan guaranty cases. Also, the plan and other
documentation describing SBA’s new centralization initiative indicate that
SBA’s reason for the initiative is to allow it to correct staffing imbalances at
its district offices nationwide and will allow these districts to increase the
number of people in the field offices who are providing direct assistance to
small businesses, including providing assistance in areas that have not had
access to SBA services. While SBA officials told us the focus of the
transformation had changed, we had difficulty in determining the extent of
changes to the specific initiatives in its initial transformation plan,
including to what extent SBA would test new marketing and outreach
approaches, centralize other functions, and improve business processes.
According to a senior SBA official, although there has not been a formal
announcement about creating the liquidation center, he expected that staff
would be aware that SBA was moving toward centralizing loan-related
functions based on the new marketing and outreach focus in the pilot
district offices, and because the union had been informed.

Similarly, although SBA planned for evaluating the progress of its pilot
initiatives, the SBA evaluations provided to us have been limited to
measuring the results of its centralization pilots and not the results of the
district office pilots or lessons learned from the implementation process.
As a result, employees and stakeholders are uncertain about the results of
the district office pilots. According to key transformation practices, it is
essential to establish and track implementation goals to pinpoint
performance shortfalls and suggest midcourse corrections. According to
SBA transformation documents and officials, follow-up evaluations of its
pilot initiatives were to take place after kick off—every 90 days for the
district office pilots and every 30 days for the center pilots—to evaluate the
progress of the pilots, and to monitor and validate the information SBA



Page 26                       GAO-04-76 Small Business Administration Transformation
                            received. In addition, these reviews were intended to identify any
                            problems related to the transformation process, as well as best practices,
                            which would be documented and shared with the others in the pilot to
                            improve efficiency and effectiveness. For its centralization initiative, SBA
                            has established some evaluation standards—such as measuring average
                            turnaround and processing time for the centers, and has generated a
                            benchmark report reflecting the results of these measures. While SBA
                            gathered benchmark measurements to monitor progress in the district
                            office pilots as part of its quality service reviews conducted in January
                            2003, SBA did not provide an evaluation of the results of SBA’s district
                            office initiative. As of our report date, it is unclear to us whether SBA has
                            completed or begun district office evaluations. SBA officials told us that
                            they are working on developing a way to evaluate the impact of the district
                            office pilots and to link their marketing and outreach focus with their
                            existing performance goals, such as loan volume, so that they would have a
                            road map on lessons learned to use when adding more district offices to the
                            pilot.



SBA Has Developed           Establishing a coherent mission and integrated strategic goals is another
Strategic Goals for Its     key practice in organizational transformations. Although SBA has
                            developed strategic goals to guide its transformation and included these
Transformation, but Needs
                            goals in its fiscal year 2004 performance plan, SBA has not linked them
to Link Performance Goals   with measurable performance goals that demonstrate the success of the
to Its Marketing and        agency’s expanded focus on marketing and outreach. According to the
Outreach Focus              Government Performance and Results Act, agencies are required to
                            develop annual performance plans that use performance measurement to
                            reinforce the connection between the long-term strategic goals outlined in
                            their strategic plans and the day-to-day activities of their staff, and include
                            performance indicators that will be used to measure performance and how
                            the performance information will be verified. District office employees we
                            interviewed generally indicated an understanding of the strategic goals and
                            the purpose of the transformation, and had a sense of what the
                            transformation intends to accomplish. However, some district office
                            employees told us that they did not know what the measures would be for
                            determining whether the new marketing and outreach focus was
                            successful, while others told us that they were unclear on how the district
                            office staff should conduct marketing and outreach. SBA officials told us
                            that the agency was still struggling with how to link its marketing and
                            outreach focus with its existing performance goals, such as number of
                            loans made by lending partners.




                            Page 27                      GAO-04-76 Small Business Administration Transformation
                            SBA currently uses quantitative measures, such as the number of jobs
                            created, number of loans made, and dollar volume of loans to determine
                            how well it is achieving its strategic goals. SBA officials told us that SBA
                            uses an Execution Scorecard, which is an Intranet-based system, as the
                            internal management tool to track data on each district offices’
                            performance goals, for monthly progress reviews with the Deputy
                            Administrator on key initiatives, including transformation. According to an
                            SBA official, the scorecard shows that the loan volume in two of the three
                            pilot district offices has increased more than in nonpilot district offices
                            when compared to last year’s volume. However, we identified other factors
                            that could have contributed to an increase in loan volume. For instance,
                            the policy changes made to its SBA Express program, which allows the
                            lender to use its own documentation and applications, also most likely
                            contributed to an increase in loan volume. In fact, other district offices not
                            in the pilot have also seen an increase in loan volume. As a result, the
                            scorecard may be limited in measuring success that could be directly
                            attributed to the pilot efforts for marketing and outreach.



Lack of Clear Performance   Using the performance management system to define responsibility and
Goals Puts New              assure accountability for change is a key practice in organizational
                            transformations. SBA has taken steps toward creating a performance
Performance Management
                            management system that would define responsibility and set expectations
System At Risk              for the individuals’ role in the transformed SBA. However, since SBA is still
                            struggling with how to define measurable outcomes for the new marketing
                            and outreach focus, its performance management system may also send a
                            confusing or ambiguous message to employees. We previously reported
                            that as agencies continued to shift towards a greater focus on results, they
                            would need to make progress connecting employee performance with
                            agency success.14 An explicit alignment of daily activities with broader
                            results helps individuals see the connection between their daily activities
                            and organizational goals. According to SBA headquarters officials, SBA’s
                            performance management system, modeled after IBM’s, would focus more
                            on results and not on activity. SBA officials told us that SBA implemented
                            its performance management system for senior executives and supervisory
                            staff in fiscal year 2003. SBA is implementing the system for its
                            nonsupervisory staff beginning in fiscal year 2004. SBA officials provided
                            us with documentation of the new position descriptions for the marketing

                            14
                               U.S. General Accounting Office, Managing for Results: Emerging Benefits from Selected
                            Agencies’ Use of Performance Agreements, GAO-01-115 (Washington, D.C.: Oct. 30, 2000).




                            Page 28                          GAO-04-76 Small Business Administration Transformation
                            and outreach positions that explained the duties and expectations.
                            However, at the time of our review SBA was still developing the
                            performance standards and had not yet implemented them for
                            nonsupervisory staff. SBA recognized that it would need to provide training
                            to help employees make the transition from their former areas of expertise
                            to a new, broader, and in some respects, more complex job.

                            It was unclear what the linkage will be between these new job
                            responsibilities, performance standards, agency performance goals, and
                            the strategic goals for the transformation. District office employees who
                            have been conducting new marketing and outreach activities told us that
                            they were not sure how their performance will be measured because they
                            have not received information on their performance management
                            standards, and are unclear as to how their job responsibilities would
                            change, or how they would be rated. Specifically, one district office
                            employee told us that it was easy to measure loan specialist performance
                            prior to the pilot because the standards were clear and concise—he knew
                            from his own self-assessment where his performance stood—and that
                            under the new performance management system, it will be harder to
                            measure results because they are not tangible. In addition, another district
                            office employee told us that although many employees see benefits to the
                            transformation, they do not know how SBA will measure its progress
                            toward reaching more of the public since employees do not understand
                            what exactly they need to accomplish, such as number of clients the staff
                            should contact or how many marketing events staff should attend, to help
                            SBA reach its goals.



Communication Strategy Is   While establishing a communication strategy is a key practice in
Limited                     organizational transformations, SBA has not established an effective and
                            on-going communication strategy that would allow the agency to create
                            shared expectations and report related progress to its employees and
                            stakeholders. Organizations implementing transformations have found
                            that communicating information early and often helps build an
                            understanding of the purpose of planned changes and builds trust among
                            employees and stakeholders. In particular, SBA does not have an effective
                            communication strategy that reaches out to its employees and stakeholders
                            to engage them in the transformation process, encourages two-way
                            communication, and communicates early and often to build trust. A
                            comprehensive communication strategy that reaches out to employees and
                            stakeholders and seeks to genuinely engage them in the transformation
                            process is essential to implementing a transformation.



                            Page 29                     GAO-04-76 Small Business Administration Transformation
SBA officials acknowledged that it was important for headquarters to
communicate and address staffs’ concerns. However, when we reviewed
SBA’s current methods of communication and asked employees in the pilot
offices how they received information, we determined that communication
is one-way and through a chain of command model, newsletters, or rumors.
Communication is not about just “pushing the message out,” but also
involves facilitating an honest two-way exchange and allows for feedback
from employees and stakeholders. SBA officials told us that SBA
headquarters disseminated information to the employees through the
regional administrators and the district directors—and a newsletter—The
SBA Times. District office employees told us that they generally hear
about transformation-related events either through their district director or
their immediate supervisor, while other employees stated that they get
most of their information through rumors. In addition, stakeholders also
told us that they initially hear information through rumors. For instance, a
representative from a lender association informed us that they get
information through rumors because SBA did not provide any information
about the transformation to them. As we noted in an earlier report, it is
important for stakeholders to be involved because it helps to ensure that
resources are targeted at the highest priorities, and it creates a basic
understanding among the stakeholders of the competing demands that
confront most agencies, such as the limited resources available.15

It is also important to consider and use employee feedback and make any
appropriate changes to the implementation of a transformation. According
to union officials, SBA had set up an e-mail address in June 2002 to which
employees could send their questions regarding the transformation.
However, despite staff submitting questions, the district office staff told us
they have yet to see a list of the questions or SBA’s responses. According to
SBA officials, these emails were provided to senior management officials to
respond to questions in conference calls held with field staff. The draft
transformation plan we reviewed included a set of questions and answers
about the transformation, but they were never made public. SBA officials
told us that because all the transformation plans were preliminary, SBA has
not drafted a thorough list of questions and answers and therefore had not
made them available to employees.



15
 U.S. General Accounting Office, Executive Guide: Effectively Implementing the
Government Performance and Results Act, GAO/GGD-96-118 (Washington, D.C.: June
1996).




Page 30                        GAO-04-76 Small Business Administration Transformation
                         SBA did not communicate sufficiently with its employees. The information
                         on the transformation initiative found in SBA’s monthly newsletters from
                         June 2002 through March 2003 reported on the status of the transformation
                         effort, described the purpose of transformation, announced when the pilots
                         began, and described them. We reviewed all of the newsletters issued after
                         the kick off of the pilots in March 2003, to see what kind of information was
                         provided to SBA employees. With one exception, the newsletters had no
                         information about the transformation or the creation of the new 7(a)
                         Liquidation and Purchase Guaranty Center and SBA’s intention to reassign
                         staff from overstaffed district offices to understaffed offices. The topic
                         related to transformation included in one issue was a brief reference to the
                         district office pilot in Phoenix. None of the newsletters mentioned who
                         would replace two people who had been key leaders in the
                         transformation—the Chief Operating Officer who left the agency or the
                         Associate Administrator for Office of Field Operations who had moved to a
                         different position within SBA. SBA officials told us that no one has filled
                         the position of the Chief Operating Officer and the replacement for the
                         Associate Administrator for Office of Field Operations was announced in
                         an agencywide e-mail. However, as we stated earlier, after the Chief
                         Operating Officer left the agency, SBA had not clarified who was leading
                         the implementation team for transformation.



Transformation Has Not   Involving employees from the beginning to obtain their ideas and gain
Adequately Involved      ownership of the transformation is important to successful
                         transformations. It strengthens the process by including frontline
Employees                perspectives and experiences. In addition, a study conducted by the
                         National Academy of Public Administration indicates that agencies that
                         have effectively restructured have also worked with their unions to
                         implement changes. 16 The Academy reported that when Congress
                         mandated in 1998 that the Internal Revenue Service (IRS) restructure, IRS
                         management worked with the National Treasury Employees Union to
                         implement benchmarks and develop alternatives. As a result of this
                         collaboration, according to the Academy, IRS facilitated the process of
                         moving employees into new jobs and made the transition easier. Although
                         SBA officials told us that SBA has involved its union, the American
                         Federation of Government Employees, and signed memorandums of


                         16
                          National Academy of Public Administration, Equal Employment Opportunity Commission:
                         Organizing for the Future (February 2003). This report also includes the Academy’s
                         observations on the IRS restructuring.




                         Page 31                        GAO-04-76 Small Business Administration Transformation
understanding with the union on implementation of the pilot and on
establishing a liquidation center, union officials told us that they had very
little involvement. A union representative told us that SBA does not
involve them in any of the planning and only includes the union after it has
decided what it wants to accomplish. In addition, another union
representative told us that since signing the memorandum of
understanding for the first pilot phase in October 2002, SBA has not
included the union in aspects of the transformation, such as creating SBA’s
competency models, or following up on training courses. SBA made a
presentation to the union in July 2003 regarding the second phase of the
pilot—to create a new liquidation center in the Washington, D.C.,
metropolitan area—prior to signing the second memorandum of
understanding but did not give the union an opportunity for input on
planning for the second phase. In September 2003, SBA and the union
signed a memorandum of understanding on the creation of the new center
in which SBA agreed to offer an early retirement for all agency personnel
and a buyout option to those employees who performed the liquidation
function.

SBA’s transformation has not involved employees in the planning or
implementation stages. During our field visits, we found that because SBA
has not actively involved its employees in the transformation process, there
is often anxiety and apprehension, as well as low morale in the pilot district
offices. However, based on our field visit, we observed that the Arizona
District Office’s former Portfolio Management Team appeared to be less
anxious about the transformation than Portfolio Management teams in the
other district office pilots, mostly because the team leader and her staff
were involved early in the transformation by preparing the loan files for the
Santa Ana 7(a) center, and training the center staff. We found that because
of this early involvement, they had a better sense of their role and were
more optimistic about the transformation. An SBA headquarters official
told us that SBA intends to use its employee feedback from training
evaluations to modify its training curriculum for the next pilot phase, but
we were unable to identify any other examples where employee opinions
and perspectives were sought. During our field visits to the pilot offices,
we found that the employees had valuable input on lessons learned and on
ways that SBA could improve its implementation process. For example,
one employee suggested that SBA create a guidebook for its employees on
what to expect from the transformation, and that the three district office
pilots be a resource for the guidebook. In addition, one district office
employee suggested that SBA change the order of the training curriculum
so that the course on results management is offered first to help



Page 32                      GAO-04-76 Small Business Administration Transformation
              supervisors communicate with their staff regarding the transformation. We
              also observed that employees generally were not opposed to the
              transformation and saw benefits resulting from the transformation;
              however, a few employees expressed frustration with the way the process
              was implemented. If employees had a larger role in implementing and
              planning the transformation, such as through employee teams, they could
              help to facilitate the process by sharing their knowledge and expertise,
              particularly those employees who have had experience in the marketing
              and outreach area.



Conclusions   SBA has made some progress in implementing its transformation plan for
              phase one. However, continued success and progress in implementing its
              transformation may be impeded by budget uncertainties and constraints
              and the difficulties in realigning employees to staff centralization efforts.
              To some extent, SBA has compounded the budget challenge by not sharing
              its plan with a key stakeholder—Congress—and not providing clear,
              consistent budget requests with a detailed plan that show priorities and
              link resources to desired results. In addition, as SBA moves forward in
              centralizing its loan and other functions, realigning staff will likely present
              additional challenges, such as problems with employee morale and
              productivity.

              Transforming an organization is not an easy endeavor. It requires a
              comprehensive, strategic approach that takes leadership, time, and
              commitment. Although SBA may achieve progress in the short-term by
              establishing new centers to improve some of its business processes, its
              long-term success in defining and institutionalizing a new role for its
              district offices will take more time and commitment. The practices we
              have identified as being important to successful transformation are
              especially important as SBA moves forward with its transformation and
              could also help mitigate the challenges it faces with its budget and staff
              realignment. However, the weaknesses we identified in SBA’s
              implementation process could derail or negatively impact its
              transformation effort as the agency attempts to expand transformation and
              affect more of its operations and employees. SBA’s leadership changes,
              plans, and rationales for decisions have not been made public and
              therefore have created an environment of confusion about the leadership,
              specific goals, and timeline for transformation. SBA is in the infant stages
              of developing a link between its broad strategic objectives and measurable
              performance goals, which will be important for determining the success of
              transformation. The lack of frequent and two-way communication has



              Page 33                      GAO-04-76 Small Business Administration Transformation
                      exacerbated an environment of confusion, even though many employees
                      understand the goals of transformation. Finally, SBA is missing out on one
                      of its key strengths—its employees—by not adequately involving
                      employees in the transformation process. This lack of employee
                      involvement means that SBA does not receive information and
                      perspectives that could improve and facilitate the transformation and
                      promote employee buy-in.



Recommendations for   In order to improve and build on transformation efforts under way at SBA,
                      we recommend that the Administrator adopt key practices that have helped
Agency Action         other organizations succeed in transforming their organizations. Based on
                      our review of SBA’s initial implementation of phase one of its
                      transformation, we specifically recommend that the Administrator

                      • Clarify for employees, congressional, and other stakeholders the
                        leadership and implementation team members who are guiding
                        transformation.

                      • Finalize the draft transformation plan that clearly states SBA’s strategic
                        goals for transformation and includes implementation goals, timeline,
                        and resource requirements, and share the plan with stakeholders and
                        employees.

                      • Develop performance goals that reflect the strategic goals for
                        transformation and more clearly link the strategic goals of
                        transformation to existing performance goals. In addition, develop
                        budget requests that clearly link resource needs to achieving these
                        strategic and performance goals.

                      • Ensure that the new performance management system is clearly linked
                        to well-defined goals to help individuals see the connection of their daily
                        activities and organizational goals and encourage individuals to focus on
                        their roles and responsibilities to help achieve those goals.

                      • Develop a communication strategy that facilitates and promotes
                        frequent and two-way communication between senior managers and
                        employees and between the agency and its stakeholders, such as
                        Congress and SBA’s lenders. For example, SBA could electronically
                        post frequently asked questions and answers on its Intranet.




                      Page 34                     GAO-04-76 Small Business Administration Transformation
                  • Facilitate employees’ involvement by soliciting ideas and feedback from
                    its union and staff, ensuring that their concerns and ideas are
                    considered. For example, SBA could develop employee teams and
                    expand employee feedback mechanisms like those it employed in the
                    pilot training.



Agency Comments   We received written comments on a draft of this report from SBA’s Chief
                  Financial Officer, which are reprinted in appendix I. In commenting on the
                  draft, SBA did not state whether it concurred with our recommendations
                  but said it would consider them as it continues to plan for and implement
                  its transformation efforts. SBA specifically noted that it had already
                  addressed recommendations regarding developing performance goals and
                  using the performance management system to define responsibility as a
                  result of issuing a new strategic plan with revised performance goals and
                  implementing its new performance management system for employees on
                  October 1, 2003. SBA provided us with a draft strategic plan but then told
                  us that the plan was being revised significantly and that we should wait
                  until the revised plan was completed. Since this revised strategic plan was
                  issued after we had completed our work, we did not have time to determine
                  whether SBA had sufficiently addressed our recommendations related to
                  linking its transformation efforts to strategic and performance goals and
                  performance expectations for employees. Therefore, these
                  recommendations will remain in the report, and we will determine whether
                  SBA has implemented the recommendations as part of our
                  recommendation follow-up process.

                  SBA disagreed with our finding that its budget requests for transformation
                  were unclear. SBA stated that it clearly lays out its funding requests for
                  transformation in the Fiscal Year 2003 and Fiscal Year 2004 Budget Request
                  and Performance Plans. We used these documents to review SBA’s budget
                  requests for transformation and as the source for our analysis shown in
                  figure 4 of the report. In its comments, SBA said that it had made changes
                  to its budget format in fiscal year 2004 to bring it more in line with the
                  requirements of the Results Act by integrating budget with performance
                  goals. We clarified some language in the final report to better reflect the
                  issues we identified with SBA’s transformation budget requests. While the
                  fiscal year 2004 budget request may have at some level integrated its budget
                  request with performance goals for its programs, it did not make clear
                  linkages between its request for transformation funds and its performance
                  goals. The budget requests for transformation were not consistent in terms
                  of amounts requested or stated purposes nor were they accompanied by a



                  Page 35                     GAO-04-76 Small Business Administration Transformation
detailed plan that showed priorities and linked resources to desired
transformation results. Therefore, we still maintain that SBA could
improve its transformation budget request presentation to better ensure
that it links the request to transformation performance goals and
outcomes.

SBA also disagreed with our findings related to communication and
employee involvement. SBA stated that officials have traveled to the pilot
district offices to explain the agency’s transformation plans and solicited
comments from district directors in a May 2002 district director
conference. However, our draft report did not state that management was
not involved or was uninformed, but that employees below the district
director level in the pilot offices were not sufficiently involved and
informed. Furthermore, SBA cites its efforts to communicate prior to the
implementation of the pilots, which we recited in our draft report, but
employees told us that their level of involvement and the amount of
information they received was lacking after the pilot began. In its
comments, SBA also stated that it conducts weekly telephone calls with the
pilot district directors who in turn have regular meetings with their
employees. Our draft report acknowledged SBA’s use of conference calls
with the district directors and the expectation that directors would then
have meetings with their employees. However, we also found that
notwithstanding communications with district directors, district office
employees remained confused and lacked avenues for two-way
communication with headquarters about the transformation. SBA also
stated that it has worked with its union to gain agreement through
memorandums of understanding for different parts of the plan, and these
efforts were reflected in our draft report. However, in more than one
discussion with us, union officials expressed concerns that SBA had
approached them after having already decided what it was going to do and
had not adequately informed the union about new initiatives or changes to
the plan. We continue to maintain that SBA’s transformation efforts could
benefit from improved communication and employee involvement.

SBA also provided technical corrections, which we incorporated as
appropriate in this report.




Page 36                     GAO-04-76 Small Business Administration Transformation
Objectives, Scope, and   In preparing this report, we focused on the district office and centralization
                         pilots of phase one of SBA’s transformation effort because (1) they were
Methodology              initiatives that had begun at about the same time we began our review and,
                         therefore, we could observe the implementation process and (2) these pilot
                         initiatives, if expanded, would impact all 68 SBA district offices.

                         To determine SBA’s progress in implementing its transformation effort and
                         challenges that have or could impede progress, we analyzed planning,
                         budget, and implementation documents related to SBA’s transformation
                         and interviewed key officials at SBA headquarters involved in the
                         transformation planning and implementation processes. We also
                         conducted site visits at each of the pilot offices involved in the first phase—
                         three district office pilots in Phoenix, Arizona; Miami, Florida; and
                         Charlotte, North Carolina; and two center pilots in Santa Ana and
                         Sacramento, California. At the center locations, we reviewed documents
                         that were developed to make the process more efficient and consistent (for
                         example, checklists and standardized letters). We also reviewed measures
                         that SBA is using to assess the centralization pilots. From data SBA
                         headquarters uses to track the pilots, we reviewed about 450 approvals for
                         the 504 loan program pilot and calculated an average total response and
                         processing time using the dates that were included in the data. At each of
                         the pilot locations, we interviewed all employees who were directly
                         affected by the pilot—in the case of the district offices, we met with
                         virtually all employees.17 To ensure open communication, we met with
                         directors, supervisors, and employees separately. We asked them to
                         describe how their office, role, and job had changed; how information was
                         communicated to them about transformation; and whether they had been
                         provided training and resources to transition into new roles. We also asked
                         them to identify the top five or fewer challenges and benefits of
                         transformation and lessons learned from the initial implementation
                         process.




                         17
                           For employees that were not available at the time of our visits, we followed up through
                         telephone calls, in most cases.




                         Page 37                           GAO-04-76 Small Business Administration Transformation
To assess whether SBA applied practices that are important to
organizational change and human capital management in the federal
government, we reviewed the literature and our previous work on
reorganizations, organizational change, and human capital management to
identify key practices that have been recognized as contributing to
successful organizational transformation. The main document we relied on
in identifying key practices was our recent report Results Oriented
Cultures: Implementation Steps to Assist Mergers and Organizational
Transformations.18 We used these criteria as a basis to assess SBA’s
planning process for transformation, implementation process for the pilots
for phase one, leadership of the transformation, communication with
employees and key stakeholders, and level of employee involvement.
When interviewing SBA employees for objective one, we also asked
questions to determine their understanding of the transformation effort and
how they received information and communicated their questions or
concerns. In addition to talking with employees involved in the pilots, we
also interviewed representatives of SBA’s union and asked the extent to
which they were involved in the transformation process. To obtain
feedback from SBA stakeholders, we interviewed officials representing the
National Association of Government Guaranteed Lenders and the National
Association of Development Companies, whose members include SBA 7(a)
lenders and certified development companies that make 504 loans,
respectively. We also met with SBA’s congressional stakeholders who
expressed views about their role in SBA’s transformation process.

We conducted our work in Washington, D.C.; Phoenix, Arizona;
Sacramento and Santa Ana, California; Miami, Florida; and Charlotte,
North Carolina, between February and September 2003, in accordance with
generally accepted government auditing standards.


Unless you publicly announce its contents earlier, we plan no further
distribution until 30 days after the date of this report. At that time, we will
send copies of the report to the Ranking Minority Member of the Senate
Committee on Small Business and Entrepreneurship, the Ranking Minority
Member of the House Committee on Small Business, other interested
congressional committees, the Administrator of the Small Business
Administration, and the Director of the Office of Management and Budget.


18
     GAO-03-669, July 2003.




Page 38                       GAO-04-76 Small Business Administration Transformation
We will make copies available to others on request. This report will also be
available at no charge on the GAO Web site at http:/www.gao.gov.

Please contact me at (202) 512-8678, dagostinod@gao.gov or Katie Harris at
(202) 512-8415, harrism@gao.gov if you or your staff have any questions.
Major contributors to this report were Patty Hsieh, Kay Kuhlman, and Rose
Schuville.




Davi M. D’Agostino
Director, Financial Markets
 and Community Investment




Page 39                     GAO-04-76 Small Business Administration Transformation
Appendix I

Comments from the Small Business                                             Appendx
                                                                                   ies




Administration                                                                Append
                                                                                   x
                                                                                   Ii




              Page 40   GAO-04-76 Small Business Administration Transformation
           Appendix I
           Comments from the Small Business
           Administration




(250119)   Page 41                        GAO-04-76 Small Business Administration Transformation
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