oversight

Veterans' Administration Justification of Costs and Benefits of Proposed Computer System (Target)

Published by the Government Accountability Office on 1977-07-20.

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

                           DOCUMENT   ESUME             7-17
02815 - [A2073168]   Us-srirtj-

Veterans' Administration Justification of Costs and Benefits of
Proposed Computer System (Target). HRD-77-98; B-114859. Jujy 20,
1977. 51 pp. * 4 appendices (24 pp.).
Report to Rep. John E. Moss; Rep. Charles Rose; by Elmer B.
Staats, Comptroller General.
Issue Area: Facilities and Material Management (700).
Contact: Human Resources Div.
Budget Function: Miscellaneous: Automatic Data Processing
    (1001); Miscellaneous: Financial Management and Information
    Systems (1002).
Organization Concerned: Veterans Administration.
Congressional Relevance: Rep. John E. Moss; Rep. Charles Rose.
         The Veterans' Administration's (VA's) proposed computer
system, the Target System, is intended to modernize benefit
claims processing and to improve service to veterans. The VA
estimates that the system will cost over $100 million to develop
and over $12 million each year to operate.
Findings/Conclusions: The VA has proceeded with the development
of the Target System without economic analyses of the proposed
system or of alternative ways of meeting its benefit claims
processing needs. The VA had not established measurable goals or
standards for improved service to veterans, and, therefore, it
had no basis for comparing alternative approaches or for
determining whether systems less complex and expensive than
Target could do the job. Although major cost savings are
possible, Target's costs could exceed monetary benefits as
compared with the current benefit claims processing system.
Recommendations: The Administrator of Veterans Affairs should
establish, in measurable terms, goals and standards for
improving benefit claims services to veteians. The Congress
should not permit the VA to award a contract for the Target
Sistem until it has set up the measurable goals and standards so
that the most cost-effective way of processing benefit claims
can be determined. If Congress determines that the VA has
satisfactorily resolved these issues, the VA should not be
allowed to award a contract until it has resolved the
uncertainties about progress of development and the cost and
implementation schedule of the system. The VA needs a definitive
and complete implementation plaD to accomplish this. (Author/SC)
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     ' ....   z     REPORT OF THE        -
                    COMPTROLLER GENERAL                                                i
a        ,i<,.
            .,'     OF THE UNITED STATES



                   Veterans Administration
                   Justification Of Costs
                   And Benefits Of Proposed
                   Computer System (Target)
                   The Veterans Administration's proposed com-
                   puter system, thu Target System, is intended
                   to modernize benefit claims processing and
                   improve service to veterans. VA estimates that
                   the system will cost over $00 million to de-
                   velop and over $12 million each year to
                   operate.

                   VA needs to convincingly demonstrate that
                   the Target System is the most cost-effective
                   system, before awarding a contract to procure
                   the system's equipment.




                   HRD-77-98                                              JULY 20, 1977
               COMPTROLLER GENERAL OF THE UNITED STATES
                          W   HINGTOt4, D.C. 1A14




B-114859


The Hnorable John E. Moss
The Honorable Charles Rose
House of Representatives

     Your December 4, 1975, letter requested an investigation
of the cost-benefit justification of the Target System, a new
computer system being developed by the Veterans Administration
to modernize the agency's benefit claims processing and im-
prove service to veterans.

     This report contains our findings concerning the cost-
benefit justification for this proposed system and our recom-
mendations to the Congress on page 49.

     The report also contains a recommendation to the Adminis-
trator of Veterans Affairs on page 49. As you know, section
236 of the Legislative Reorganization Act of 1970 requires
the head of a Federal agency to submit a written statement
on actions taken on our recommendations to the House Committee
on Government Operations and the Senate Committee on Govern-
mental Affairs not later than 60 days after the date of the
report and to the House and Senate Committees on Appropria-
tions with the agency's first request for appropriations made
more than 60 days after the date of the report.

     As you are aware, the Subcommittees on UD-Independent
Agencies, House and Senate Committees on Appropriations, and
the House and Senate Committees on Veterans' Affairs would
like to receive copies of this report. We also believe that
the Offii:e of Management and Budget and the General Services
Administration should receive copies. We will be in touch
with your office in the near future to arrange for release of
the report so that the requirements of section 236 can be set
in motion.




                                          Comptroller General
                                          of the United States
REPORT OF THE                           VETERANS ADMINISTRATION
COMPTROLLER GENERAL                     JUSTIFICATION OF COSTS
OF THE UNITED STATES                    AND BENEFITS OF PROPOSED
                                        COMPUTER SYSTEM (TARGET)


            DIGEST

            The Veterans Administration (VA) is developing
            a computer system, the Target System, to
            modernize VA's benefit claims processing and
            improve service to veterans. VA estimates
            that the system will cost $100.9 million to
            develop and $12.5 million to operate each
            year.

            The costs and benefits of the proposed system
            and alternatives to it were not thoroughly
            evaluated. They should be.

            VA has proceeded with development of the Tar-
            get System without economic analyres of alter-
             sative ways of meeting its bnefit claims-
            processing needs.   (See ch. 2.)

            Proponents of the Target System argue that the
            benefit claims system is inefficient and that
            service to veterans is suffering. Yet, VA had
            not established measurable goals or standards
            for improved service.  In other words, VA had
            no basis for comparing alternative approaches
            and for determining whether systems less com-
            plex and less expensive than Target could
            do the job.  (See ch. 2.)

            VA cost-benefit analyses comparing the current
            system to the Target System have not conclu-
            sively demonstrated that Target will result in
            major savings, compared to current processing
            methods, or that Target is the most cost-
            effective way to process benefit claims.
            (See ch. 3.)

            Target is still a risky venture. Although
            major cost savings are possible, Target's
            costs could exceed monetary benefits, com-
            pared with current benefit claims-processing
            methods.  (See ch. 3.)


'oarh o.   Upon   nmoval, the report
Cow date should b noted hereon.i                       HRD-77-98
RECOMMENDATIONS

The Administrator of Veterans Affairs should
establish, in measurable terms, goal; and
Atandards for improving benefit claims serv-
ices to veterans.

The Congress should not permit VA to award a
contract for the Target System until VA has
set up the measurable gals and standards, so
the most cost-effective way of processing
benefit claims can be determined.

If the Congress determines that VA has satis-
factorily resolved the above ssues, VA should
not be allowed to award a contract until it
has resolved the uncertainties about progress
of development and the cost and implementation
schedule of the system. VA needs a definitive
and cumplete implementation plan to accomplish
this,

AGENCY- COMMENTS

VA, in commenting on the report, cited recent
actions to assess the system. These include
a modified implementation schedule for Target
and an updated cost-benefit analysis. The
Administrator of Veterans Affairs believes
that these actions should resolve any un-
certainty about the progress of development,
costs, and implementation.  (See ch. 5.)
However, GAO believes that the progress of
Target's development, the cost estimates,
and the feasibility of VA's plan and schedule
for putting the system into peration are
still uncertain. VA needs a complete plan
for getting Target working.  (See chs. 3
and 5.)




                     ii
                        Contents

                                                         Page
DIGEST                                                     i
CHAPTER

   1      INTRODU"CTION                                    1
              Compensation, pension, and education
                 system
              Target System                                2
              Economic analysis and cost-benefit/
                cost-effectivenesi methodology             6
  2       VA HAS PROCEEDED WITH DEVELOPMENT OF THE
            TARGET SYSTEM WITHOUT ECONOMIC ANALYSES
            OF ALTERNATIVE APPROACHES                     8
              Need to improve the CP&E benefit claims
                system                                    9
              VA designs the Target System               12
  3       VA HAS NOT CONCLUSIVELY DEMONSTRATED THAT
            THE TARGET SYSTEM IS ECONOMICALLY
            JUSTIFIED                                    14
              VA's recognition of need to improve
                cost-benefit methodology                 14
              Results of aggregate analysis of ex-
                pected cost savings from Target System   16
              July 1974 cost-benefit analysis            17
              February and September 1976 cost-benefit
                analyses                                 20
              February 1977 cost-benefit analysis        28
              GAO sensitivity analysis                   33
              Developments since the February 1977
                cost-benefit analysis cast more uncer-
                tainty on the cost effectiveness of
                Target                                   33
  4       STATUS OF THE CURRENT CP&E SYSTEM              37
  5       CONCLUSIONS, AGENCY COMMENTS AND OUR EVALUA-
            TION, AND RECOMMENDATIONS                    38
              Conclusions                                38
              VA comments and our evaluation             39
              Recommendation to the Administrator of
                Veterans Affairs                         49
              Recommendations to the Congress            49
                                                            Page
CF-PTER

      6    SCOPE OF REVIEW                                   51

APPENDIX

      I    Letter dated November 23, 1976, from
             the Administrator of Veterans Affairs           52

     II    GAO sensitivity analysis of VA's February
             1977 cost-benefit study                         66

 III       Letter dated May 19, 1977, from the
             Administrator of Veterans Affairs               71

     IV    Principal VA officials responsible for
             administering activities discussed in
             this report                                     75


                         ABBREVIATIONS

BIRLS      Beneficiary Identification and Records Locator
             System

CP&E       Compensation, pension, and education

DDM        Department of Data Management

GAO        General Accounting Office

TMI        Technology Management, Incorporated

VA         Veterans Administration
                             CHAPTER 1

                        INTRODUCTION
     In response to a request from Congressmen John E. Moss
and Charles Rose in December 1975, we reviewed the Veterans
Administration's (VA's) proposed Target System--a computer
system intended to modernize VA's benefit claims-processing
system. One facet of this effort, dealt with in this report,
is a review of the cost-benefit justification for the system.

     In addition to the above-mentioned request, the House
Committee on Appropriations expressed a specific interest in
the Target System's potential costs and benefits in its re-
port 1/ on the fiscal year 1977 Housing and Urban Development
and Independent Agencies appropriation b       -he Committee
said that Target should b justified principally on a emon-
stration that it would measurably improve VA's internal effi-
ciency over the best performance obtainable under the current
system. The Committee emphasized that Target must be measur-
ably cost effective compared to an efficient manual system.

     The Chairman of the Subcommittee on HUD-Independent
Agencies reiterated the Committee's position in a January 24,
1977, letter to the Administrator of Veterans Affairs, stat-
ing the need for VA to insure that the Target System must be
measurably cost effective compared to an efficient manual or
evolutionary-developed system.

COMPENSATION, PENSION, AND
EDUCATION SYSTEM

     VA's Department of Veterans Benefits administers non-
medical benefits and services through 59 major field stations
(58 regional offices and a records processing center) within
and outside the continental United States. These benefits
and services include compensation for service-connected
disabilities; pensions for aged, needy, and unemployable
veterans; vocational rehabilitation, education, and training
assistance; and information and assistance through personal
contact.   In fiscal year 1977, VA will pay about $9 billion
in compensation and pension benefits to 4.9 million veterans
and survivors, and about $4.3 billion in education and train-
ing benefits to 2.2 million veterans.


l/"Report Together With Supplemental, Separate, and Dissent-
  ing Views on Department of Housing and Urban Development-
  Independent Agencies Appropriation Bill, 1977" (HR 14233)
  94-1220, June 8 1976, page 40.


                                1
     The present compensation, pension, and education (CP&E)
delivery system was designed and installed in the late 1950s.
It is primarily a manual system; only the claims payment
process is automated. Claims processing and financial activi-
ties are performed in all regional offices. These activities
include awarding or disallowing claims for benefits; int-ract-
ing with veterans and beneficiaries; and maintaining veterans'
and beneficiaries' claim folders. The regional offices pre-
pare input for a computer center in Hines, Illinois, on vari-
ous devices; accumulate the input into batches; and send it
to the computer center, generally by mail. At the computer
center these transactions are written on magnetic tape and
processed sequentially through a series of computer cycles
to (1) update the CP&E master files, (2) generate payment
notices to the Treasury Department, which prints benefits
checks, (3) generate various operational and management re-
ports, and (4) perform various accounting functions.

     VA characterizes the system as technically limited,
labor intensive, and paper bound and has proposed a new sys-
tem to improve efficiency and take advantage of new automatic
data processing technology.

TARGET SYSTEM

     The new computer system being developed by VA is called
the Target System. It is intended to modernize VA's benefit
claims-processing system and improve services to veterans.

     Benefits expected by VA from the new system include much
faster development of claims, more timely delivery of initial
benefit :hecks to veterans, faster responses to veterans' in-
quiries, and major savings from workload reductions in the
regional offices as a result of more efficient procedures and
workflow.

     According to April 1977 VA estimates, total one-time
development costs of the Target System, including the acauisi-
tion of data processing and telecommunications equipment, will
be about $100.9 million. Recurring annual operating costs of
the system are estimated at $12.5 million.

      In January 1976 the General Services Administration
 issued a request for proposal to prospective vendors for
 (1) automatic data processing systems for the Target System
 computer centers, (2) terminal systems for VA regional
voffices, and (3) related software and services.

     After inquiries by the House Appropriations Committee
about the justification for the number of computer centers
selected for the system, the request for proposal was


                               2
suspended. On June 15, 1976, the General Services.Administra-
tion issued an amended request for proposal prescribing fewer
computer centers.
     In response to the request for proposal, prospective
vendors submitted proposals on December 1, 1976, and VA anti-
cipates awarding the contract in July 1977.

Operational fatures

     The Target System will use computers in three regional
computer centers to _vide
                     i      data entry and automated claims-
processing capabilities to the VA regional offices. The
system will have a central computer facility--Target Central
System--for maintenance of master records, centralized re-
porting and accounting functions, and generation of payment
notices to the Treasurv Department, which prints the benefit
checks. The stated k , operational feacures of the Target
System rare:

     -- Computerized processing and control of claims in the
        regional offices, including automatic calculation of
        benefit awards, control of pending claims, and work-
        load reporting.

     -- Immediate response to veteran inquiries concerning
        (1) status of claims in process, (2) satus and
        amounts of award checks, and (3) information in the
        master record.

     -- Automated printing of awards, acknowledgements, and
        other routine letters.

     -- Ready access to information for reporting.

     Terminals, installed in 56 of the 58 regional offices and
the records processing center, will be connected to the three
regional computers by telecommunications lines.  Input data
will be transmitted from the regional offices to the regional
computers, each of which will maintain on-line work-in-process
control files on pending claims within its region. These
files will be updated automatically as a byproduct of claims
processing. The regional offices will be able to obtain
(1) information concerning pending claims from the regional
computer files and (2) information from the master files at
the central computer facility through the regional computers.
In addition, the regional computers will link the regional
offices to a claimant locator system at Austin, Texas.

     The following charts depicit the operational features of
the current CP&E system and the Target System.


                              3
           THE PRESENT CP&E SYSTEM

                                  IHN,      LIOIls
        REGIONAL                    EO                     REPORT TO
         OFFICE        M              YMCENTRAL.
                                         MASTER                 OFFICE




                           AUN,               PAYMENT
                                              ORDOERS

             REGIO    EI




                            OFFICE(58             REGIONAL OFFICES)




            WLsfl 1           i TREA"UP'                CECKS    TO


                   AUSTN, TEXAS


1   BIRLS (BENEFICIARY IDENTIFICATION AND RECORDS
          LOCATOR SYSTEM) IS A COMPUTERIZED CLAIMANT
          LOCATOR SYSTEM




                                     4
                      THE TARGET SYSTEM


HINES, ILLINOIS

  CENTRAL
  COMPUTER                                                    FILE
  CENTER




                                                 REGIONAL
                                                 COMPUTER
                  RANDOM                         CENTER
                  MASTER
                  FILE

                                    BIRLS
                                    INDEX




             * 3 REGIONAL COMPUTER CENTERS

              * EACH REGIONAL COMPUTER CENTER SUPPORTS UP TO
                  20 REGIONAL OFFICES AND IS LINKED TO THE
                  REGIONAL OFFICES, BIRLS INDEX. AND CENTRAL
                  COMPUTER CENTER e6Y TELECOMMUNICATIONS LINES.




                                    5
Pilot program

     In September 1974 VA began a pilot test of the Target
System processing concepts in Philadelphia and Baltimore.
Terminals in selected units of the Philadelphia and Baltimore
regional offices were linked with a data processing center
in Philadelphia, which serves as a regional computer center.
The Philadelphia center was also linked with the computerized
claimant locator system in Austin and the centralized master
files of the benefit claims system at Hines.  In the summer
of 1975 the pilot test was expanded to three other regional
offices--in New York, Washington, and Los Angeles. In Novem-
ber 1976 the pilot test was again expanded to place the entire
Philadelphia regional office operation under pilot operating
conditions.

ECONOMIC ANALYSIS AND
COST-BENEFIT/COST-EFFECTIVENESS
METHODOLOGY

     Economic analysis concerns the basic problem of economic
choice (value received for value invested). The general for-
mat for an economic analysis involves determining the cost
and benefit of each future course of action. Through a cost-
benefit or cost-effectiveness analysis, the decisionmaker can
use a set of facts and figures to select a preferred means of
achieving certain goals. The cost-benefit approach focuses on
maximizing dollar benefits minus cost; the cost-effectiveness
approach focuses on achieving a given performance objective
at a minimum cost.

     The most important step in economic analysis is defining
the objective of the program or system being analyzed. The
objective must be some fixed standard of accomplishment.
Once the objective has been established, all feasible means
or ways of meeting the objective are determined. All feasible
alternatives should be studied so that management can be pre-
sented with those alternatives that are most cost effective.
The assumptions and constraints surrounding the alternatives
selected for comparison should be explicitly stated so that
management can evaluate them.

     Once the costs and benefits of relevant alternatives
have been determined, they should be ranked according to one
of the following general criteria:  (1) least cost for a given
level of performance, (2) bst performance for a given cost
level, or (3) largest ratio of benefits to cost. Since most
important decisions involve elements of uncertainty, the typi-
cal economic analysis should address those elements to test


                              6
whether the ranking of alternatives is sensitive to variations
in any of the elements used to measure costs and benefits.
This testing of the effects of uncertainty might help to as-
sure management that one alternative is clearly preferable;
however, it might also indicate that an alternative that
seems preferable might prove a poor choice if some basic
assumptions leading to its selection prove unreasonable.




                              7
                          CHAPTER-2
             VA HAS PROCEEDED WITH DEVELOPMENT OF

              THE TARGET SYSTEMWITHOUT ECONOMIC

              ANALYSES-OF ALTERNATIVE APPROACHES

     VA has proceeded with development of the Target System
without economic analyses of alternative system approaches
for meeting its CP&E processing needs.

     Since the inception of the Target System approach in
1972, VA has cited the deficiencies of the existing CP&E
system, which have resulted in poor service to the veterans,
as a principal argument suppcrting development of Target.
This argument implies that veterans were being so poorly
served by the current system that it should be replaced by
Target. Yet an April 1972 VA Task Force report, which served
as the primary basis for specifically adopting the Target
System as an agency policy goal, acknowledged that the exist-
ing CP&E automatic data processing system serviced 95 percent
of the veterans satisfactorily.

     In addition, VA has not established quantifiable goals
or standards for improved service by either the present sys-
tem or Target against which to consider the extent of system
improvement or redesign necessary to improve service to
veterans determined to be poorly served by the current sys-
tem. Without quantifiable goals or standards, VA had no
basis to compare alternative approaches or to determine
whether systems less complex and less expensive than Target
could effectively meet its CP&E processing needs.

     Since VA did not make economic analyses of alternative
approaches--a major element in cost-benefit/cost-effectiveness
methodology--its economic justification for Target can address
only the cost effectiveness of the system compared to current
processing proced ves.

     VA established the Target System as a policy goal
although total ystem costs were not addressed. Accordingly,
VA proceeded witl the design and development of the system
without giving itself the flexibility of considering viable
alternative approaches should the cost of the system not
justiiy the benefits received.
NEED-TO IMPROVE-THE
CP&E-BENEFIT CLAIM SYSTEM

     In May 1971. VA contracted with Technology Mana9gment,
Incorporated (TMI), to investigate the efficiency and effec-
tiveness of VA data processing. In October 1971, TMI re-
ported on the status of data processing in VA and presented
recommendations for improvement.

     With regard to the CP&E benefits delivery system, TMI
concluded that the system had provided VA with significant
cost and service benefits. However, the data processing
functions were not adequately integrated with the manual
efforts they supported; as a result, service to veterans was
suffering. TMI recommended that a special task force be
established at the Administrator's level to analyze and re-
design the CP&E system.

     At the time of the TMI study, VA's Department of Data
Management (DDM) had Fplans which called for

     -- edesign and recoding of major computer processing
        operations of the CP&E system to take advantage of
        advanced computer technology,

     -- placement of tape   iles on faster access devices, and

     -- ultimate conversion of the system to a operation
        permitting transactions to be processed when recorded
        rather than be accumulated into batches for processing
        and permitting direct access to each record on the
        computer file.

DDM recommended a ph&sed schedule, or a gradual approach, for
design, development, and implementation. This would allow
VA to (1) concentrate on the most beneficial areas, (2) more
easily manage development, and (3) eliminate the need for
concurrent old ad new systems.

     One phase of the DDM plan considered inputting transac-
tions from regional offices by optical scanning devices to a
central data processing center, which would process transac-
tions and provide master record inquiry capability to regional
offices.

     The D   study, dated September 1971, partially addressed
manual operations in the VA regional offices, but TMI pointed
out that both the data processing and manual functions of the
CP&E delivery system were complex and had to be studied to

                                9
allow them to be adequately integrated. Accordingly, TMI
recommended that the redesign of the CP&E system be studied
and that emphasis be placed on integrating the two functions.

VA's decision-to develop-and
implement the-TargetSstem

     On February 2, 1972, the Administrator of Veterans Af-
fairs designated a task force to (1) determine the feasibility
and merit of a comprehensive versus a gradual approach to re-
designing the system, (2) prepare a detailed plan and time
schedule for the total system redesign, if appropriate, with
rough estimates of cost, and (3) specify cost evaluation
criteria for the new system.

     In March 1972 the task force submitted an interim report
proposing short-range solutions to the CP&E processing prob-
lems. In April the task force submitted to the Administrator
its final report, which discussed long-range objectives re-
garding the CP&E system.

      This task force report said that about 95 percent of the
CPE claimants and beneficiaries were serviced satisfactorily
by the existing CP&E system. However, the report noted that
the small percentage of cases not effectively serviced by the
compuiter system disproportionately impaired the system image.
     The task force concluded that service to veterans was
being impeded by file folder control poblems, slow access
to status information on claimants, error rates and repeat
processing of cases, and delays in obtaining data from
sources outside VA. The task force devised and recommended
an "ideal" or "target" system, which could serve as a design
goal for VA. The system was intended to reduce or minimize
costs of providing CP&E services, improve service to benefi-
ciaries, and have the flexibility to incorporate system
changes and advances in computer technology.

     The task force envisioned the use of terminals with
cathode ray tube display for inquiry and data input at the
VA regional offices. The task force also recommended organi-
zational changes in the regional offices; minicomputers to
edit input at the field level before large-scale processing;
and immediate processing of transactions to completion by a
central or combination regional/central computer system. In
addition, the task force recommended that a comprehensive re-
design study team be designated to complete a comprehensive
system redesign within 18 months. This study would seek to

                               10
automate all work processes except those requiring human
judgment or intervention; send claims folders to storage for
historical purposes; and generate all possible reports as a
byproduct of computer processing.
     The task force considered a DDM feasibility study com-
pleted in November 1971 for the use of optical scanning
devices for inputting CP&E transactions--one phase of DDM's
plan to improve the CP&E system.  (See p. 9.)  In separate
appraisals made in April 1972, both the task force and TMI
concluded that optical scanning device technology was way
behind that of key entry processing methods and did not
provide for an incremental growth to a future on-line
data-base-oriented system. The task force also criticized
the methodology used to prepare the cost justification in
the optical scanning device feasibility study. (See ch. 3.)
     The task force also concluded that, if the Target System
concept were adopted by VA, interim changes to the CP&E system
should be carefully evaluated in terms of their consistency
with Target unless they provided overwhelming short-term
advantages.

     Although the task force recommended a comprehensive re-
design of the CP&E system, it did not say why this approach,
instead of a gradual redesign approach, was chosen.

     The task force did not estimate the total cost of this
system. It said that the total cost could not be determined
without a feasibility study of the system's full potential
impact on existing operations.

VA Administrator-establishes-Target System
as agency policy goal

     In flay 1972 te Administrator solicited comments from
the Director of Veterans Benefits, the Chief Data Management
Director, the Controller, and the Assistant Administrator for
Planning and Evaluation about the task force recommendations.
These officials generally agreed with the task force recom-
mendations to establish the Target System as a policy goal.

     The Chief Data Managt:ment Director did not agree that
optical scanning input devices should be excluded from tb
Target System for input where an overnight response, rather
than immediate processing of transactions, was adequate. He
also commented that the task force's and TMI's appraisal of
the optical scanning device feasibility study erroneously
treated the proposal as if it were the only action planned

                             11
to improve service or reduce costs, rather than only one of
several steps eventually leading to an on-line direct access
system for CP&E processing.

     The Controller and the Assistant Administrator for Plan-
ning and Evaluation concurred in the task force recommenda-
tions but cautioned that careful justification was needed.
The Controller suggested that VA undertake an indepth cost-
benefit feasibility study before the proposal was adopted
even as a policy oal.

     After evaluating the task force's report and the agency
officials' comments, the Administrator in July 1972 adopted
the Target System as a policy goal and designated a design
team to complete a comprehensive system redesign by Decem-
ber 31, 1973. The Ad:ainistrator said that the Target System
would remain the agency policy goal until full implementation
was achieved, unless factors emerging from design or cost/
performance studies revealed the need for modification or a
different approach.

VA DESIGNS THE TARGET SYSTEM

     In October 1973 the VA study team, with substantial tech-
nical assistance from TMI, completed its conceptual design of
the Target System. The effort was originally to be completed
in December 1973 but was accelerated at the request of the
Office of Management and Budget. The design study addressed
the objectives of the system, the field organizational en-
vironment in which it would operate, the operation and limita-
tions of the current CP&E system, the flow of work processes
in the field offices, general equipment and programing re-
quirements, and a schedule for system development and imple-
mentation.

     The proposed design fit in with VA's plan to reorganize
activities at the VA regional offices and establish Federal
Regional Centers, in which certain field activities would be
centralized and which would link VA's central office and
regional offices.

     The design study team envisioned placing computers in
each Federal Regional Center to interact with the computers
at Hines and provide support to terminals in VA regional
offices and Federal Regional Centers.

     The desiin also included specifications and an implemen-
tation schedule for a pilot test of the Target System. The
major objectives of the pilot test, to begin in September 1974,


                               12
were (1) to test the feasibility of man-machine interaction
in claims handling and other support areas, (2) to test and
evaluate the responsiveness, timeliness, and accuracy of
benefits derived through automation of the processing and
control of claims in the field, (3) to provide, as a test
vehicle, the basis for the ultimate procurement of equipment
and supporting programs to satisfy local computer processing
requirements in support of the Federal Regional Center con--
cept, and (4) to provide the means for assessing the impact
of the Target System on the Hines and Austin data processing
centers.

     The study team defined numerous specific objectives for
the Target System, including (1) reducing the duplication of
effort in data input generation and output report production
which existed in field operations, (2) enhancing control over
claims and other work in process, (3) providing immediate
access to master records to support veteran inquiries and
adjudicative actions, thus reducing the need to obtain infor-
mation from veterans' claims folders in the regional office
files, (4) reducing the overall processing cycle of claims,
(5) developing a flexible system design to be responsive to
VA's efforts to reorganize field operations, (6) increasing
the amount of automatic letter preparation, (7) providing
for an improved nonstandard reporting capability, and
(8) improving the control of claim folder movement within
VA regional offices.

     The design study report did not address alternative
approaches to achieving these objectives, other than the
system that it proposed.

     The design study team assumed that the computer systems
at the Hines Data Processing Center (two International Busi-
ness Machines 360/65 computers), with certain equipment im-
provements and additions, were sufficient to accommodate the
Target System workload. However, the study team cautioned
that this assumption would have to be validated by further
analysis.

     It should be noted that the Target System objectives
were generally stated in the task force and the design study
reports. Many of the objectives focus on faster processing
of claims, reduction of errors, and improved services, but
they were not expressed in quantifiable terms. Accordingly,
without quantifiable goals VA had no basis for comparing
alternative approaches which might have improved service and
speeded up processing within reasonable ranges with a smaller
capital investment.


                             13
                          CHAPTER-3

             VA HAS NOT CONCLUSIVELY DEMONSTRATED

                    THAT THE TARGET SYSTEM

                  IS ECONOMICALLY-JUSTIFIED

      After VA established the Target System as a policy goal,
an aggregate analysis 1/ of gross cost savings expected to
result from the Target System and four detailed cost-benefit
analyses were made. These analyses 'nmpared only the Target
System with the current CP&E system.    he validity of the
results of the aggregate analysis a    the first cost-benefit
study, both of which showed that Target would result in major
cost savings, were questioned by the VA Controller's office.
Later escalation of cost estimates cast further doubt on
whether savings would be achieved.    ater VA studies showed
areas of uncertainty which suggest that VA has not conclusively
demonstrated that the Target System will result in major cost
savings over current CP&E processing methods or that it is
the most cost-effective approach to meeting its CP&E processing
needs. Our analysis o Vis cost--benefit study completed
in February 1977 shows that major cost savings might be real-
ized.   However, Target is a risky venture and its cost could
exceed its monetary benefits.

     Further uncertainty is indicated oy the fact that VA
has yet to develop a total implementation plan identifying
specifically tasks to be accomplished and their schedule, an:.
associated resource requirements and costs.

VA'S RECOGNITION OF-NEED-TO IMPROVE
COST-BENEFIT METHODOLOGY
     When TMI made its 1971 study of the effectiveness and ef-
ficiency of VA's data processing (see p. 9), it criticized
VA's use of cost-benefit studies of automatic data processing
proposals. TMI said these studies suffered from a lack of
credibility. TMI found that such studies frequently overstated
projected savings, understated projected costs, and failed to


1/An aggregate analysis deals with gross costs of the present
  and proposed systems to provide management with a reasonable
  basis for comparison.  It does not deal with specific
  information as to where these costs will accrue.




                             14
explore alternative systems. TMI noted that in many cases the
studies tended to be perfunctory exercises, while in other
cases they were used as sales devices by proponents of the
system. Accordingly, TMI recommended that VA develop suitable
cost-benefit criteria for assessing automatic data processing
system proposals.

     In 1972 the CP&E redesign task force (see p. 10) confirmed
TKI's findings that VA cost-benefit studies were deficient and
lacked cred.ility, and cited the need for VA to establish
suitable cost-evaluation criteria for assessing all systems
proposals. This finding was based on the task force's review
of a cost-benefit analysis of a January 1972 DDM feasibility
study proposing the expanded use of optical scanning devices
to replace outmoded flexowriter equipment 1/ for inputting
CP&E transactions. The task force considered this study to
be typical of VA cost-benefit analyses at that time and
cited such deficiencies as overstated savings, understated
costs, failure to independently verify costs, and failure to
explore and compare alternatives. As a result, the task force
recommended that future cost-benefit analyses

     -- be completed independently of any organization having
        a vested interest in the proposed system;

     -- be made by teams supplied with the expertise needed
        to independently and objectively evaluate and compute
        basic data;

     -- seek alternatives which will identify maximum results
        at minimum cost;

     -- start from the present level of staff, equipment, and
        other resources to properly compare present and pro-
        posed systems; and

     -- identify the effect of proposed systems upon pre-
        determined objectives.

     The extent to which these guidelines were followed
by TMI and VA in their cost-benefit analyses of the Target
System are discussed below.


l/Flexowriter equipment produces paper tape for inputting
  transactions to the CP&E system. Until recently, paper
  tape was the primary input medium for the system.




                             15
RESULTS OF AGGREGATE ANALYSIS OF EXPECTED
COST SAVINGS FROM TARGET SYSTEM

     In conjunction with the Target design study mentioned in
chapter 2, in July 1973 TMI prepared an aggregate analysis  analysis
of cost savings expected from the Target System. This
focused on gross comparisons of  the  costs of  the  CP&E  system
                                                              save
and the Target System to estimate how much Target might
                                over  current  processing   pro-
in annual CPSE operating costs
cedures. TMI estimated that tne Target System would involve
                                                    might save
a capital investment of $41 million and that it estimated
                             annually,   with  an              pay-
a net of about $16.7 million
back period of about 2.5 years.   The  results  of  the  aggregate
analysis were presented in the Target design study report. was
The report cautioned that a more detailed cost comparison costs
necessary to ascertain more specific information on where
                                                              scope
will accrue and that, for a system of the magnitude and
                                                    cost  had  to
of Target, expected operational performance and
be continually reexamined.
                        u
VA Controller's office q estioned
validity of aggregate analysis
                                                         of-
     The Director of Budget Service, in the Controller's
                                                   his staff's
fice, reported to the Control'er on the results of
review of TMI's aggregate cost analysis of the Target System
            1973.  Based on its review, the Budget Service
in November
                                                         TMI
staff listed major Target System costs not considered by
                                     used as the basis for
and certain questionable assumptions
savings estimates.

     The Budget Service's findings suggested that the expected
                                                         higher
Target System capital investment would be $5.2 million as
than indicated by TMI, annual savings  might be as  much
                                                          would
$10.4 million lower, and TMI's estimated payback period
be extended from 2.5 to 7.3 years.  In  addition,  the Budget
Service Director noted that TMI had failed to apply guidelines
required by Office of Management and Budget Circular A-94,
which prescribe that costs and/or benefits should be dis-
                                                          value
counted 1/ to their present value to recognize the time

                                                          that
 l/The purpose of discounting is to account for the fact
                                                     at  the
   future costs and benefits become less significant
   present time the further into the future that such costs
   and benefits are projected. Therefore, money the Government to
   expends now or in the immediate future is of more concern
   the taxpayer than money which is to be spent several  years
   from now.

                                16
                 I
of money in its overall evaluation. The Budget Service Dir-
ector said that applying such present value techniques would
probably push Target's payback period further beyond the
Service's revised estimate of 7.3 years.

     The Budget Service Director added that, since his staif's
findings could reduce the net savings estimate for the Target
System, it would be helpful if part of the justification for
Target were based upon solid improvements in service to
veterans. He advised that quantified measurements of such
improvements be properly documented and used t help sell the
Target System.

JULY 1974 COST-BENEFIT-ANALYSIS

     In July 1974, TMI completed the first detailed cost-
benefit analysis of the Target System. TMI determined and
compared projected Target costs and savings for fiscal years
1974-84 in order to evaluate the economic impact of the sys-
tem's development and implementation. Although TMI corcluded
that substantial savings above the current CP&E processing
would accrue over the life of the Target System, it did not
consistently measure costs and benefits over the projected
life of the system. As a result, the VA Controller questioned
whether significant savings would occur.

Methodology- and- findings

     TMI analyzed costs and benefits of four different regional
computer center configurations of the basic Target System
design in order to establish the fundamental cost relation-
ships among the system's various site, communications, and
hardware capacity configurations. The Target System config-
urations analyzed by TMI were made up of one, two, four, and
eight regional computer centers. The TMI study did not address
alternative approaches to automating the functions in VA's
field offices.

     TMI determined that projected savings from the Target
System would accrue primarily from reductions in personnel
resulting from revised and eliminated operations associated
with VA's CP&E field operations. All personnel savings would
be achieved by (1) a decreased need for certain categories
of staff and (2) personnel attrition over a period of 2 to
5 years after Target implementation.

      TMT calculated total one-time Target System investment
costs for the four configurations, but made no specific
recommencation about the preferred Target System configura-
tion.


                             17
     Since costs and benefits would be timephased over the
life of the Target System, TMI considered the time value of
money associated with each possible investment decision. TMI
broke out the costs and benefits associated with each Target
configuration and the current CP&E system on a year-by-year
basis for fiscal years 1974-84 and applied a discount factor
to these projections to translate expected costs and benefits
into their present value.

     TMI's analysis for four configurations of regional
computer centers is shown below:

                     1         2          4         8
                   center   centers    centers   centers
                                 -(millions)
One-time invest-
  ment cost         $40.6    $42.4      $50.3    $62.4
Net present
  value benefit
  or deficit (-)     19.0     17.5        6.2     -8.0
Inconsistent treatment
of costs and benefits

      In estimating present value net benefits from the Target
System, TMI assumed that wage rates would increase at an
average rate of 6.5 percent per year over the period covered
by the analysis. Using this assumption, TMI estimated unit
and hourly costs for fiscal years 1976 and 1980 wh_ ' were
applied to the volume and staff-hours for those years to de-
velop total costs. The costs for those 2 years were used to
establish a trend line, from which cost estimates for other
years were determined. Consequently, the figures for present
value net benefits in the TMI analysis include a factor for
inflation in the costs of CP&E operations that Target would
eliminate. This could be a legitimate approach to calculating
benefits only if the Target System costs were also inflated
before making any comparisons. However, TMI did not apply any-
inflation factor in calculating Target costs and thus
significantly distorted the benefit-cost ratios for the Target
System. This distortion is important because over 50 percent
of the savings TMI calculated were directly attributed to in-
flation factors rather than operational changes or improvements
expected to result from the Target System.




                            18
     Tn August 1974 the VA Controller brought TMI's incon-
sistent treatment of costs and benefits to the attention of
the General Manager, Target System Project Management Office.
The Controller noted that the savings from CP&E costs to be
eliminated by Target were inflated at a 6.5-percent annual rate
to reflect salary increases, but that annual Target System costs
through fiscal year 1984 wre estimated in constant dollars with
no adjustments for inflation. The Controller had determined
that consistent measurement of costs and benefits for a
two regional center Target System configuration and inclusion
of more recent estimates of telecommunications costs would have
shown a present value net deficit of $19.9 million over the
planned period of Target development and operation. The de-
ficit for configurations of four and eight regional centers
would have been even greater.

      In August 1974 the General Manager, Target System Project
Management Office, responded that his office had revised the
TMI cost-benefit analysis to bring it more in line with accepted
practice regarding present value net benefits. The costs were
also revised to resolve questions regarding expected telecom-
iounications costs and to reflect early purchase of all Target
hardware rather than long-term rental, which had been included
in the initial TMI analysis.

     As a result of these modifications of the TMI analysis
agreed upon by the Controller's office and the Target System
Project Management Office, the TMI present value net benefits
for a two regional computer center configuration were reduced
from $17.5 million to $2.3 million for the period covered
by -he analysis. This resulted in a benefit-cost ratio of
1.04_ to 1, barely over the break-even point. Thus, with just
two regional centers, it became apparent that the expected
present value net benefits resulting from implementation of
the Target System would not be great and that any later escala-
tion of projected Target costs might eliminate the readjusted
Target savings.

Significant escalation-of
projected Target System costs

     In January 1975 the Federal Computer Performance
Evaluation and Simulation Center, under an interagency agree-
ment with VA, completed a computer sizing study 1/ as a basis


1/A sizing study uses computer programs that compare simulated
  processing requirements against models of selected computers.
  These models contain hardware and software characteristics
  of available vendors' equipment.

                                19
for estimating the size and cost of systems available from
various vencors to handle the volume and type of processing
required by the Target System. The sizing study indicated
that more powerful equipmernt than tha assumed by the design
study team would be required to proce3i the Target workload.
Based on the results of the Simulation Center sizing study
and more current data on projected CP&E workload require-
ments, VA decided that Target should consist of four regional
comp:lter centers and a central computer facility, designated
as the Target Central System. As a result, in about March
1975 VA reestimated the cost of a four regional computer
center configuration at $94.9 million, which represented
almost a 90-percent escalation of one-time investment costs
from the July 1974 TMI estimate of $50.3 million.

     The VA Controller's office reviewed these escalated
Target System costs and analyzed their impact on projected
savings expected from Target. The res' lts of this analysis
were documented in an April 4, 1975, memorandum from the Con-
troller to VA's Associate Deputy Administrator.  The Con-
troller's office had recomputed the projected Target System
net benefits by applying the TMI cost-benefit model to a four
regional computer center configuration and incorporated the
March 1975 escalated Target cost estimates. This resulted
in a present value net deficit of $39.7 million over the -
projected period of system development and operation. The
Controller concluded that (1) justification for further de-
velopment of Target should be tied to expected service im-
provements rather than a favorable benefit-cost ratio and (2)
if the viability of Target was questionable, cost-effective
alternatives must be developed for improving the present
CP&E system.
     As a result of the Controller's memorandum, an executive
review committee responsible for overseeing the Target System
development discussed whether the system would produce a sav-
ings or a deficit. As a result of this concern, it was decided
in April 1975 that VA's Office of Planning and Evaluation would
make a cost-effectiveness study analyzing the partially opera-
tional pilot system to validate and firm up expected Target
savings.

FEBRUARY AND SEPTEMBER 1976
COST-BENEFIT ANALYSES

     In February 1976 the Management Engineering Service of
VA's Office of Planning and Evaluation completed a cost-
benefit analysis of a Target System configuration of four
regional computer centers. VA had established that four centers


                              20
was the optimum configuration primarily because (1) more vendors
would be able to compete for he system and (2) four centers
would supply superior reliability, which would result in the
lowest overall cost.

     In July 1976 we reported to the Chairman, Subcommittee
on HUD-Independent Agencies, House Committee on Appropria-
tions, / that VA did not have a sufficient basis for con-
cluding that four regional computer centers was the most
cost-effective configuration. In June 1976 the Target System
request for proposal was amended to provide for three regional
computer centers. In September the Engineering Service updated
the February study to reflect revisions in costs resulting
from the reduction of regional centers from four to three and
a 6-month delay in operation of the system. The Engineering
Service reported the following cost-savings elements:

                       February 1976        September 1976
                        (4 regional            (3 regional
                     computer-centers)     computer centers)
One-time develop-
  ment cost             $81,691,000           $77,336,000
Gross annual
  savings               $32,554,841           $33,097,310
Present value
  net benefit           $42,685,225           $41,448,470
Benefit-cost
  ratio                    1.45                      1.47
     In making these studies the Engineering Service was
hindered by time constraints, the limited number of opera-
tional applications in the pilot system, and the limited in-
formation available at the time of the studies. As a result,
the Service had to base much of its analysis on assumptions,
technical estimates, and limited measurements of pilot opera-
tions.

     Assumptions, technical estimates, and limited   measurements
are typical constraints that cost-benefit analyses   must contend
with. Because such analyses are subject to error,    the effect
of these potential errors should be tested through   such

1/"VA Justification for Establishing Four Regional Computer
  Centers for its Proposed Tr.rget System" (HRD-76-145,
  July 13, 1976).



                             21
techniques as sensitivity analysis (see p. 26) to determine
their impact on decisions reached. The potential effect of
such errors was never addressed by the Engineering Service
in the February and September 1976 studies.

     Our analysis of these studies showed several limitations
that indicated considerable uncertainty as to the cost-benefit
posture of the Target System.

Measurements-between-Target-and-the
current- CP&E -system were- not -comparable

     In measuring cost savings attributed to Target, the
Engineering Service used various estimating techniques,
including actual measurements of pilot operations in Phila-
delphia and Baltimore. About 30 percent of the estimated
annual Target savings were based on the measurements obtained
from the pilot operation; the other savings were based on
technical estimates.

     When the Engineering Service did make actual measure-
ments, it compared its measurements to CP&E work rate staziards
for regional offices reorganized to process claims in   unitized
or team approach in the current system, and calculated cst
savings for those tasks where pilot improved operations. How--
ever, the Engineering Service's measurements of pilot operations
did not encompass all elements used to develop the work rate
standards for reorganized regional offices. A consistent
measurement comparing a current work rate standard for claims
processing against the pilot operation of that processing
would require that the current standard and the pilot measure-
ment cover the same work elements. Since this was not the
case, either the current standard or the pilot measurement
should have been adjusted to allow a valid comparison. Such
an adjustment would reduce the reported Target cost savings.

     For example, almost 30 percent of the current work rate
standard for education claims processing pro ides for such
activities as (1) reviews and cosignatures of adjudicators'
disposition of cases by senior adjudicators and (2) miscel-
laneous claims actions and correspondence actions associated
with claims processing. The Engineering Service measured only
one specific type of claim under pilot--original education
claims involving institutions of higher learning--and these
claims neither required reviews by senior adjudicators nor
included the variety of miscellaneous claims actions
or correspondence actions provided for in the current work
rate standard for education claims processing.



                                22
     The Engineering Service assumed that Target would
eliminate most miscellaneous claims and correspondence
actions because they would be automated and that the time
involved to handle those items not eliminated would be
inconsequential. Considering the volume of claims that
will be processed under Target, comparing current standards
for processing, which include all those items, with pilot
measurements not adjusted for even a small percentage of
these itelis would overstate estimated savings.

Measurements were-based
on-limited-observations

     About 30 percent of the estimated annual savings for
Target were based on measurements of the pilot operation.
The measurements, however, were based on such a limited
number of observations that their representation of the ef-
fects of the Target System was questionable.

     For example, the Engineering Service based its estimates
of time to process original education claims in pilot on only
five measurements of one operator in Baltimore and one measure-
ment of a hypothetical case constructed for one operator in
Philadelphia. Such a small sample was hardly sufficient to
provide enough insight into the broad range of claims actions
that the Target System will face. However, even these few
observations, together with a self-maintained log kept by
one operator in Baltimore for about 8 months, indicated that
the actual time it would take to process a claim under the
Target System would vary greatly, even when only one operator
was being measured. There would undoubtedly be even greater
variability if more than one operator were measured.  Further,
the measurements also indicated that the processing times
under the Target System could actually exceed the times the
Engineering Service used in its analysis. Three of the five
actual observations and the overall average time developed
from the self-maintained log exceeded the average time the
Service used in its analysis.

     Also of concern to us was the manner in which savings
were determined for claims other than education claims.
Although only one type of education claim was measured,
the Engineering Service study team assumed that the Target
System would achieve the same savings for all 21 categories
of CP&E claims.  In addition, the team calculated savings for
machine processing of calculations now performed manually.
To the extent that processing procedures for other claims
differ from the one type of education claim measured by the



                             23
Service, the calculated savings for these claims would be
erroneous. This was in fact the case, because in a cost-
benefit analysis of Target completed in February 1977, 15 of
the 21 categories of CP&E claims were sufficiently developed
in pilot to provide a substantially broadened base for the
Service to measure claims processing. In 9 of the 15 categor-
ies of claims measured, the actual processing times exceed
those assumed in the February and September 1976 studies.

Costs-were not-independently
verified or-analyzed

     One pitfall to avoid in making cost-benefit studies is
allowing some organizational bias to enter into the procedures
used to estimate the costs of alternative systems. The Engin-
eering Service was not careful enough in this respect, for
it accepted, without independent verification, cost estimates
prepared by the Target development staff and did not make any
independent analyses.

     In the February and September 1976 studies by the
Engineering Service, one-time costs for the Target System were
presented as follows:

                               February 1976    September 1976

Personal service               $18,867,600       $16,076,000
Travel                           1,362,000           935,300
Contractual service              2,172,000         2,574,000
Communications                  12,200,000         6,827,000
Site preparation                 3,203,000         3,878,000
Computer rental                 10,365,000         8,921,000
Computer purchases              32,717,000        37,505,000
All other             '           -805,000         - 620,000
                               $81,691,000       $77;336,000

     A particular concern was with one-time costs associated
with the categories of personal service, travel, and contractual
services, which totaled $22.4 million and $19.6 million,
respectively, in the February and September reports. These
costs included tasks associated with system design, programing,
testing, installation, and training necessary to familiarize
employees with Target operations. Costs associated with such
tasks can be expressed as software costs. Department of Vete-
rans Benefits officials did not provide an itemized breakdown
of these costs and explained that they were developed on the
basis of past experience with systems development. We could



                               24
not address the various elements that make up these software
costs, but our experience and that of other Government agen-
cies in systems development indicated that these costs may
have been substantially understated.

     Recent computer industry studies and the experiences of
other Government agencies indicate that the cost to develop
software exceeds the cost of computer equipment. One study
shows that equipment costs represent less than 25 percent of
the total costs of designing, developing, and operating a
new system. A Rand Corporation study indicates that by 1985
equipment costs will represent less than 5 percent of total
system development costs. In addition, the General Services
Administration's Automatic Data Processing Strategy Study--
completed in March 1975 by ncisions and Designs Incorporated--
indicates (1) that developing application software has become
the largest cost item of automated data processing and (2)
that if trends continue, software is expected to account for
90 percent of all costs by 1980.

     Further, a 1974 study of all Department of Defense data
processing costs by the Institute of Defense Analysis indicates
an average software to equipment cost ratio of 1.7 to 1. The
results of these studies are borne out by our experience with
other Federal agencies. The experience of some agencies shows
that the ratio of software costs to equipment costs ranges
from 1.7 to 1 to 3.5 to 1. The VA estimates were about 0.5
to 1 in both studies, based on estimated automated data pro-
cessing equipment purchase costs of $41.7 million and $42.8
million, 1/ respectively.

     We recognize that the circumstances of Target development
may differ from general experience. However, March 1977 VA
estimates show that the software costs were substantially
understated in the 1976 studies.


l/The purchase costs shown in the February and September cost-
  benefit analyses were $32.7 million and $37.5 million,
  respectively. These costs represent purchase prices less
  a 50-percent rental credit on the equipment VA plans to lease
  for awhile before purchase. The other 50 percent of the
  rentals are shown in equipment rental costs. Thus, total
  cash outlays will be the same as expected purchase
  prices.




                            25
Lack-of-sensitivity-analysis

     Sin    ost important decisions involve elements of uncer-
tainty, cosL-benefit analyses should explicitly address this
uncertainty. One method of addressing uncertainty is sensi-
tivity analysis, wherein the analyst tests the effect of
changes in values of key uncertain factors on the ranking of
alternatives. Several savings elements in the cost-benefit
analysis were based on technical estimates and were therefore
subject to measurement error and management bias. Where
measurement samples of pilot operations were taken to deter-
mine estimated savings, problems of sample representation and
sampling error existed. As previously discussed, there also
was some uncertainty about the cost of the proposed system.
These uncertain elements should have been subjected to sensi-
tivity tests to determine whether Target's apparent cost-benefit
was solidly based.

     We raised our concern about sensitivity analysis with
the Engineering Service study team. The team members said
that the February and September 1976 studies did not include
any sensitivity analysis because they believed that their
estimates of Target savings were very conservative. Therefore,
they saw no need to subject their results to sensitivity tests.
However, the need for sensitivity analysis has since been borne
out by the results of the Service's third cost-benefit analysis
in February 1977 and later events which have shown several
shifts in VA's pro'     ,ns of Target costs and savings.

     In its February i    cost-benefit analysis, the Engineering
Service included a sensitivity analysis to acknowledge uncer-
tainty in projected Target costs and savings based on estimates.
However, as discussed on p. 31, we found this sensitivity
analysis to be incomplete because it did not fully probe all
major areas of uncertainty that might substantially affect
the estimate of Target costs and savings.



     COn October 28, 1976, we met with the Administrator of
Veterans Affairs and several other VA officials to discuss
our observations on the cost-benefit justification of the
Target System. We noted that:

     -- VA did not fully explore alternatives to Target
        for improving or redesigning the current CP&E
        system from a cost-benefit point of view.




                               26
     -- VA needed to define in quantifiably measurable terms
        its objective of improving service to the veteran and
        to examine alternative approaches for accomplishing
        this objective.

     -- Our analyses of VA cost-benefit studies cast doubt on
        the cost effectiveness of the Target System.

     The Administrator and the other VA officials present did
not agree with our observations and reiterated the agency's
commitment to proceed with Target System procurement with-
out delay.

     In a letter dated November 23, 1976 (see app. I), the
Administrator of Veterans Affairs responded to our findings
as follows:

     -- VA has considered systems alternatives both before and
        after it adopted the Target System as an agency policy
        goal.

     -- VA will be able to extensively improve service to the
        veteran through Target.

     -- VA's cost-benefit analysis is fully supported by a valid
        set of assumptions and remains the agency's clear posi-
        tion until it is updated in the future.

     To emphasize the agency's position, the Administrator
enclosed documents to refute our observations about VA's failure
to study alternatives and the need for VA to define in quantifi-
ably measurable terms its objective of improving service to
veterans and to explore and examine alternative means of accom-
plishing this objective.

     A VA document entitled "Target System Alternative Con-
siderations" (see app. I), cited numerous items as alterna-
tives considered since 1971. Three of the items have been
discussed--a September 1971 paper on redesign of the CP&E
system (see p. 9), consideration of a Target System con-
figuration composed of eight regional computer centers (see
p. 17), and reduction of the configuration from four to three
centers (see p. 21).

     A fourth item, mentioned on page 59, does address another
approach for processing CP&E benefits in VA. This approach,
presented orally by a vendor to the VA pilot/target project
management staff in April 1975, envisioned placing terminal
controllers in each VA regional office with an inquiry


                             27
capability to a central data base. VA ruled out this approach,
concluding that (1) the terminal controllers ere for a special
purpose and would have no value after the regional offices
were closed each day and (2) it needed larger, general-purpose
computers in its various data processing centers to replace
obsolete equipment. This argument implies that the Target
System computer will be used for functions other than CP&E
benefits claims processing. However, VA's cost-benefit
justification and the request for proposal address only the
CP&E system, and VA does not have any definitive plans for
other processing functions for Target.

     The other items cited by VA on pages 55 to 60 as system
alternatives do not directly address our findings that VA did
not fully explore alternatives to the Target System for improv-
ing or redesigning the current CP&E system from a cost-benefit
point of view. None of the items are substantive CP&E system
alternatives to Target, and VA apparently made no cost-
effectiveness analyses for any of these items.
     Another VA document, "Non-Monetary Savings from the
Target System" (see app. I), that the Administrator enclosed
provides a summary of the material contained in the February
1976 Management Engineering Service cost-benefit analysis.
This document cited nonmonetary benefits to veterans, VA, and
others as a result of what VA terms improvements in service
expected through the Target System. However, VA has not stated
which of the service improvements and other nonmonetary benefits
cited are exclusive to Target and which might be provided by
other approaches and at what comparative cost to the taxpayer.
This document does not directly address our finding that VA
needs to define in quantifiably measurable terms its objective
of improving service to the veteran.

FEBRUARY- 1977 COST-BENEFITANALYSIS

     In February 1977 the Engineering Service reported the
results of its third cost-benefit analysis of Target based
on data collected in January 1977. The Service reported the
following cost savings.




                             28
One-time development cost                $ 81,941,000
Net recurring savings over total
  system life                          a/$211,619,000
Present value net benefit                $ 55,93.4,599
Benefit-cost ratio                            1.46

a/These savings represent estimated recurring savings, once
  Target is implemented, less recurring operating costs. One-
  time system development costs were not reflected in this
  figure. The present value net benefit and the benefit-cost
  ratio do include consideration of the one-time development
  costs expected to be incurred after October 1i,1976. COne-
  time costs of $12,407,000, incurred before October 1, 1976,
  were considered sunk costs and were not included in either
  analysis.

      As in the February and September 1976 studies, the
Engineering Service operated under tight time constraints.
Because of this, the estimates of expected savings to be
achieved from Target are ased largely on 1 week's data
collection efforts, including work sampling at Philadelphia's
pilot operation and the collection and analysis of cost data
at VA regional offices in Chicago and Philadelphia and a com-
puter center in Hines, Illinois. Costs and manpower savings
associated with regional office operations in Target were
calculated for seven areas of activity: authorization, rat-
ing, input, files, finance, veterans service, and administra-
tion.

     We made a sensitivity analysis that addressed only the
February 1977 report. After the release of the February
report, VA made changes in its estimates of costs and
benefits which acknowledged some of the observations of our
sensitivity analysis. Because VA was still assessing Target
costs and implementation schedules, we did not redo our
analysis.

Target^is-still-a-risky-venture
in-terms-oftcoat-effectiveness

     Our analysis of the February 1977 study disclosed limi-
tations which show that there is considerable uncertainty
about the costs and benefits of the Target System and that
it is still a risky venture in terms of cost effectiveness.
This uncertainty is based on the following:

     -- The Engineering Service's work sampling of pilot opera-
        tions did not include an allowance for nonwork actions
        (personal, fatigue, and delay time) on some of the

                             29
       activities. These activities were so numerous that the
       exclusion of this allowance greatly overstated the
       savings projected for the area of authorization. The
       Service acknowledged this error and amended its savings
       estimates.  (See p. 34.)

     -- A large part of the manpower savings attributable to
        Target was based on work sampling measurements of one
        adjudication unit in Philadelphia whose personnel did
        superior quality work. Accordingly, this unit's
        claims-processing times may not be representative of
        similar units in Philadelphia or in other VA regional
        offices.  (See below.)

     -- The projected savings could be overstated because of
        errors inherent in the sampling procedures and technical
        estimates used to determine savings and costs. These
        errors were not fully considered by the Service's
        sensitivity tests.  (See p. 31.)
     -- One time costs shown in the report were substantially
        understated.  (See p. 32.)
     -- The personnel savings projected for the early years
        of Target did not consider the VA policy on computer
        installations, which provides that personnel will not
        be terminated because their jobs are automated.  Since
        personnel savings are more likely to be attained pri-
        marily through attrition, the Service's estimates of
        savings in the early years of Target were questionable.
        In March 1977 the savings projected for fiscal years
        1979 and 1980 were adjusted by the Service to reflect
        that policy.  (See p. 34.)
     Basis-for-a-large-part-of
     savings may-not-be-representative

     The Engineering Service did work sampling and made other
technical measurements of the pilot operations in Philadelphia
to estimate projected savings from the Target System. About
$60 million of the projected net savings of $211 million were
based on measurements of one adjudication unit processing
claims under pilot. According to Philadelphia regional office
officials, personnel of this unit, one of nine adjudication
units in Philadelphia, did higher quality work than personnel
in the other units. Accordingly, the claims-processing ef-
ficiency of this unit is not representative of all units in
the Philadelphia regional office and may not be typical of
other adjudication units throughout the country.


                             30
     The Engineering Service team claimed that the sampling
of this superior unit is compensated for by the fact that the
pilot system was not operating efficiently during the time of
measurements. Therefore, the system's performance did not
approach the expected minimum level of performance for Target.
Thus, they believed that pilot represents a "worse case" Target
situation.

     The pilot operation has been functioning since September
1974, yet after more than 2 years VA is clearly still having
trouble demonstrating the achievement o the level of re-
sponsiveness it expects from the Target System. Accordingly
the validity of the Service's assumption will depend on the
ability of the winning vendor to demonstrate that Target
will be as responsive as expected.

     Estimating-errors inherent -in
     proected-savings - not fully
     considered -by Engineering
     Service-sensitivity- analysis

     The greatest proportion of the savings projected by the
Engineering Service to be achievable from Target were based on
work sampling and technical estimates. Since no estimating
procedures can precisely estimate savings to be achieved from
a project like Target, errors are inevitable. Although the
Service included a sensitivity analysis in the February 1977
study to acknowledge the impact of estimating errors, it did
not show the possible negative impact on savings in all cases
in which sampling and technical estimates were used. The
negative impact of estimating errors should be addressed to
fully assess the degree of risk in basing decisions on uncer-
tain values.

     The sensitivity analysis did not acknowledge the possible
negative effect of inherent errors in work sampling. The work
sampling was done for 15 different types of claims processing
in the authorization area. The size of the samples of many
types of claims was not sufficient to provide precise estimates;
therefore, the range of sampling error is extremely broad.

     Other parts of the Engineering Service analysis involving
sampling erro':s are the wage rates used to measure cost savings
in the authorization and files areas in the VA regional offices.
The Engineering Service used average wage rates to compute
the estimated staff-years saved. Implicit in this approach
is the assumption that staff-years saved will be distributed
pro rata throughout the various grade levels of the total work



                             31
force affected. However, Target development personnel told
us that savings would be concentrated in lower grade positions.

     Finally, the Engineering Service sensitivity analysis
did not show the impact of potential error on the present
value of proceeding with the Target System. Since the benefit-
cost ratio of 1.46 was calculated from the present values of
costs and benefits, the effects of uncertainties should have
been treated on the same basis to provide the decisionmaker
with a consistent basis for comparing values affecting his
decision.

     One-time- costs-of-Target-were
     substantially- nderstated

      The Engineering Service reported one-time development
costs of Target at $81.9 million. As in the 1976 cost-benefit
studies, our particular concern was with personal services,
travel, and contractual services associated with system design,
programing, testing, installation, and training necessary to
familiarize employees with Target operations (software costs).
These costs totaled $24.3 million. Omitted from these costs
were costs of programers involved with redesigning the cur-
rent CP&E system, which will serve as an interim Target Cen-
tral System until the redesign is completed. The Service
classified these costs as recurring costs over the 10-year
life of the system because plans were incomplete and the dura-
tion of the effort was undetermined. These costs totaled
about $15.4 million. Considering that VA has acknowledged
the current CP&E system to be cumbersome and difficult to
maintain, we questioned the openendedness of the redesign ef-
fort.

     VA advised us in March 1977 that the redesign costs had
been reclassified from recurring costs to the more appropriate
category of one-time development costs. As a result the
one-time costs estimated by VA in March 1977 were increased
to $97.3 million.

     The classification of redesign costs as one-time develop-
ment costs does affect Target's cost-benefit posture from an
investment decision poirt of view, in which the time value
of money is considered. bnowing these costs early in the sys-
tem life would have a greater impact on present value costs,
because the earlier these costs are incurred, the less they
are discounted.




                              32
GAOSENSITIVITY -ANALYSIS

     We made a sensitivity analysis to test the effects of
the uncertainties resulting from the limitations of the
Engineering Service cost-benefit analysis.  (See app. II.)
Our analysis was directed at determining pessimistic
estimates of costs and savings associated with the uncertain-
ties of the Target System. This was done to show the degree
of risk being undertaken by VA in proceeding with Target.

     We found that, because of the uncertainties, as much as
$47.7 million in present value savings could be questioned
and additional present value costs of as much as $8.9 million
could be incurred.

     The Engineering Service study showed a Target S =em
present value net bnefit of $55.9 million, with a benefit-
cost ratio of 1.46. Our sensitivity analysis showed that
these uncertain savings and costs could result in a present
value net deficit of as much as $700,000. Our analysis
did not consider possible slippages in implementation. If
implementation schedules are not met, development costs will
escalate further and place Target in an even worse benefit-
cost posture.

     We recognize that the net savings from Target could fall
between our pessimistic estimate and a level even greater
than that shown by the Engineering Service study. There is
no way of knowing the probability of the savings falling at
a given point in this range. However, later VA revisions
to the February 1977 study (see pp. 34 and 43) already sug-
gest that savings will be less than projected by the Engin-
eering Service and these revisions address only some of the
savings we are questioning.

     VA may disagree with our estimates of the potential effect
of uncertainties--because we also made assumptions. Our anal-
ysis was made merely to show that there is considerable uncer-
tainty about the cost effectiveness of the Target System.
DEVELOPMENTS-SINCE-THE-FEBRUARY 1977
COST-BENEFIT-ANALYSIS- CAST-MORE UNCERTAINTY
ON THE - COST-EFFECTIVENESS - OF - TARGET

     After the February study, the Engineering Service
amended its report in March 1977 to correct a work sampling
measurement error and to present a more gradual initiation
of savings in the early system life. The result has been a



                             33
significant reduction in Target's benefit-cost ratio.
Further VA was still uncertain about the progress of Target
development, cost estimates, and the feasibility of the plan
and schedule for implementing Target. After we raised ques-
tions on VA's plan for converting to Target, VA made an as-
sessment of the above matters in April 1977. The VA assess-
ment resulted in a revised implementation schedule for Target
and a related update to the cost-benefit analysis. The up-
dated cost-benefit analysis further reduced Target's benefit-
cost ratio. Despite VA's efforts to revise its implementation
schedule and related cost-benefit analysis, uncertainty still
remains.

Results-of-amendments-to
the February977-study

     In March 1977 the Engineering Service amended its
February 1977 cost-benefit analysis to correct a measurement
error in its work sampling of pilot operations that w had
noted.  (See p. 29.)   The report was also amended to reflect
the impact on savings of a more gradual phasing in of regional
offices to Target operations than that assumed in the February
report. VA's analysis now provides for gradual personnel
reductions attained primarily through attrition and recognizes
that not all regional offices serviced by each regional computer
center can become fully operational simultaneously, as was
assumed in the Engineering Service's February 1977 study. In
March the Service reported the following cost savings.

One-time development cost               $81,941,000
Present value net benefit               $25,571,816
Benefit-cost ratio                          1.21

Events-leading-to VA's April-1977
assessment of-the-Target-situation
     In its February 1977 study, the Engineering Service
projected costs and savings based on equipment installation
dates and schedules contained in a Target Central System
conversion plan that VA provided to the House Committee on
Appropriations in NovemDer 1976. The Service cautioned in
its report that the installation and operational dates shown
in the plan were critical and that any slippages would affect
total costs and savings.

     The objective of the conversion plan was to provide
VA regional offices with all the claims-processing functions
that have been implemented and demonstrated by the pilot


                             34
system as early as possible. The plan presented staffing
requirements, cost estimates, and schedules associated with
(1) translating programs of the current CP&E system so that
they can be used on the equipment of the winning Target vendor
and serve as an interim Target Central System until a new cen-
tral system is developed and (2) continuing development of
pilot programs and converting these programs so they can be
used on the new equipment in the regional computer centers.

     The plan also addressed the effort that would be required
to redesign the interim Target Central System, although no
schedule was set up for its completion. The redesign would
provide for more efficient operation of the Target Central
System, allow for easier and cheaper maintenance, and permit
direct access to any record in the system.

     We found the conversion plan to be incomplete in many
respects. We advised VA that a more comprehensive and de-
finitive identification of conversion tasks and associated
resources was needed to give VA a basis for realistically
estimating conversion and development costs and to provide
assurance that the schedule was realistic. Also, the plan
did not address how and by whom the conversion would be man-
aged. Adequate monitoring and control of the implementation
of a system as complex as Target is essential to insure that
schedules will be met, that costs will not escalate substan-
tially, and that savings expected from Target can be initiated
when desired.

     We briefed VA and various congressional offices on our
observations about this plan in March 1977. VA acknowledged
that further work was needed and said that two contracts
had been awarded to address incomplete elements of the plan.
After we briefed VA, the Administrator of Veterans Affairs
instructed the Chief Benefits Director and the Chief Data
Management Director to formulate a plan by April 1 for trans-
ferring responsibility for Target development from the Depart-
ment of Veterans Benefits to the Department of Data Management.
A Target Implementation Planning Team was formed, composed
primarily of Department of Data Management personnel from the
various VA computer centers and including Target user represen-
tatives from the Department of Veterans Benefits. The team's
mission was to assess the Target implementation plan to deter-
mine what has been accomplished and what needs to be done,
potential problem areas, cost estimates, schedule feasibility,
and milestones to be used for management control.  The team's
work was completed in April 1977 when the team reported its
findings to VA management.



                            35
     The team concluded that, in view of the status of the
development of Target, VA's implementation plan posed sub-
stantial risk to both data processing and regional office
operations. The team developed a revised implementation
schedule which will reduce the benefit-cost rat p of Target
further to 1.18 but is a less demanding schedule aimed at
reducing the risks of disruption of regional office and data
processing operations. A detailed discussion of the revised
implementation schedule and related cost-benefit analysis
is contained in chapter 5.

     To date, VA has still not developed a comprehensive
plan addressing specifically the tasks to be accomplished
in implementation, their schedule, and associated resources
and costs.

     Accordingly, uncertainty still remains regarding costs,
progress of development, and the feasibility of VA's schedule
for implementation of the system.




                            36
                          CHAPTER 4

              STATUS OF THE CURRENT CP&E SYSTEM

     As VA noted (see app. I), when the Target System was
conceived, the computer systems at Hines were overtaxed.
The situation grew progressively worse as a result of vari-
ous factors, such as increasing workload and failure to make
needed system improvements for more efficient equipment
operation.

     In May 1976 VA installed a large-scale computer system
which has greatly alleviated the problems at Hines. VA
reported to various congressional parties in November 1976
that, as a result of the installation of this computer, bene-
fit payment cycles have increased to 8 to 10 per month for
Compensation and Pension and 7 for Education; in January 1976
the Compensation and Pension payment cycles were down to 4.
Further, VA said that the Hines Data Processing Center had
reassumed responsibility for computer processing which it had
earlier been forced to contract for with private vendors.

     Other improvements have been made in the CP&E system.
From November 1974 to February 1976, a firm under contract
to VA (1) translated several major CP&E programs to a pro-
graming language compatible with the equipment's technology
to facilitate maintenance of the programs and (2) improved
these programs to increase their efficiency.

     The flexowriter machines used for input to the CP&E
system presented increasingly serious maintenance problems.
These machines were no longer being manufactured and parts
were difficult to obtain. They are being replaced by more
modern input equipment, which should reduce errors in the
input process and alleviate problems caused by malfunction-
ing equipment.

     In addition, VA budget projections indicate that the
CP&E workload has leveled off and will decrease in the future,
primarily because of the expiration of a 10-year delimiting
period for education benefits for nearly 3.7 million veterans.

     These changes suggest that the Hines Data Processing
Center is no longer in the crisis situation it was in up
to 1976. As a result, Hines apparently has the capability
to process the CP&E workloads should Target implementation
be delayed until the uncertainties regarding its cos t effec-
tiveness compared to viable alternatives are resolve



                             37
                          CHAPTER 5

              CONCLUSIONS; AGENCY COMMENTS AND
              OUR EVALUATION, AND RECOMMENDATIONS

CONCLUSIONS

     VA has proceeded with the development of the Target
System without cost-effectiveness studies of alternative
approaches for making improvements to meet its CP&E system
processing needs.

     Throughout Target's development, the system's proponents
have argued that the CP&E system is inefficient and that serv-
ice to the veterans is suffering.  However, VA had not estab-
lished quantifiable goals or standards for improved service.

     Without such goals or standards, VA had no basis for
comparing alternative approaches and for determining whether
there were systems less complex and less expensive than Target
that could effectively meet its CP&E processing needs.

     Since VA has not made economic analyses of alternative
approaches--a major element in cost-benefit/cost-effectiveness
methodology--its economic justification for Target can address
the cost effectiveness of the system only in relation to cur-
rent processing procedures.

     VA established the Target System as a policy goal
although its total system costs were not addressed. Thus,
VA has proceeded with the design and development of the
system without giving itself the flexibility of considering
viable alternative approaches should the cost not justify
the benefits received.

     Several cost-benefit analyses and related updates of the
Target System were made. Our review of these analyses shows
that VA has not conclusively demonstrated that the Target
System will result in major cost savings over current CP&E
processing methods or that Target is the most cost-effective
approach to meeting CP&E processing needs. As a result, VA
cannot assure the Subcommittee on HUD-Independent Agencies
that t- system will be measurably cost effective compared
to an efficient manual or evolutionary-developed system.

     Target is a risky venture in terms of cost effectiveness.
Our sensitivity analysis of VA's February 1977 cost-benefit
study shows considerable uncertainty, which could result in
Target's cost exceeding its monetary benefits.


                             38
      There is still uncertainty about the progress of develop-
 ment, cost estimates, and the feasibility of VA's plan and
 schedule for implementing Target. A definitive and complete
 implementation plan is needed to resolve these uncertainties.

     The contract for Target's data processing equipment,
currently scheduled to be awarded in July 1977, should not
be awarded until these matters are resolved.

VA COMMENTS AND OUR-EVALUATION

     By letter dated May 19, 1977, the Administrator sent us
VA's comments on our report. The comments consisted of a
c ver letter, a revised implementation schedule and support-
iri documentation, statements of VA positions relating to
various parts of our report, and minor editorial suggestions.
The documentation accompanying the Administrator's letter
totaled some 70 pages. Much of this material is detailed and
extraneous information not germane to the issues discussed
in our report. All pertinent information has been appropri-
ately considered and incorporated in this report. Accord-
ingly, we have included as appendix III only the Administra-
tor's cover letter and have summarized the pertinent contents
of VA's revised implementation schedule and related cost-
benefit analysis, and the relevant parts of the statements
of VA positions.

Cover-letter
     The Administrator stated that he concurred in our pro-
posal to establish, in measurable terms, goals and standards
for improving benefit claims services to veterans. He said
he will identify goals, objectives, and performance standards
for the Target System which will be quantified before in-
stallation and against which the system benefit improvements
will be evaluated.
      We believe that the Administrator's action is a necessary
step to gage the system's success if Target is to be imple-
mented, but it is not the action that we were proposing VA
take.

     What we suggested, and have been suggesting
is that VA establish, in measurable terms, goals all along,
                                                 and standards
for improving benefit claims services to veterans before it
can adequately determine what type of system it ne-edsto meet
those goals and standards at the least cost. As noted on
page 8, VA has never adequately defined, in measurable terms,
goals or standards for improved service for either the present


                             39
system or Target against which to consider the extent of
system improvement or redesign necessary to meet its proc-
essing needs.
     The Administrator also said that, in his judgment, the
outstanding questions regarding Target have been satisfac-
torily resolved and that VA should proceed immediately to
make Target a reality as soon as possible. He said that,
since he became Administrator on March 2, 1977, he and key
VA officials have given top priority to a thorough study of
the Target System. He stated that this involved a detailed
examination of all aspects of the Target implementation sched-
ule, the projected cost benefits, and all unresolved manage-
ment questions raised by the Subcommittee on HUD-Independent
Agencies, House Committee on Appropriations. 1/

     The Administrator said that VA officials presented to
the Subcommittee staff on April 25, 1977, a revised Target
implementation schedule and supporting documentation for its
information and analysis. We discuss the revised schedule on
page 41 and the related cost-benefit analysis on page 43.

     The Administrator claimed that the revised schedule is
achievable with very low risk of disrupted service to the
veteran population and that VA's analysis of the schedule
demonstrates conclusively that Target will be cost beneficial.
He stated further that the revised schedule and related cbst-
benefit analysis should resolve any uncertainties about the
progress of development, costs, and implementation cited in
our report.

     We do not believe that these uncertainties or the un-
certainty about the cost effectiveness of Target cited in our


l/On January 24, 1977, the Subcommittee Chairman wrote to the
  Administrator raising several questions concerning Target.
  Points that the Chairman said had to be resolved by VA
  before awarding a contract for Target included (1) the need
  to insure that Target is measurably cost effective compared
  to an efficient manual or evolutionary-developed system and
  to develop a sound practical program to achieve the savings
  claimed, (2) the need for a comprehensive list of quantifi-
  able service improvements that will be made possible by
  Target and based to the extent possible on VA's experience
  with the pilot program, and (3) the need for a complete
  conversion plan for Target, including the redesign of the
  current CP&E system, related cost estimates, and a
  comprehensive time-phased schedule.


                            40
report are resolved. Our reasons are set forth in the
following sections dealing with the revised implementation
schedule and related cost-benefit analysis, and the state-
ments of VA's positions on the matters discussed in this
report.

Revised target-implementation schedule

     As part of its reponse, VA provided a modified implemen-
tation schedule and a cost-benefit analysis associated with
this schedule. The pertinent updated cost and benefit esti-
mates included with this revised schedule have been in-
corporated in this report.

     This implementation schedule does not directly address
the primary focus of our report, which questions the economic
justification for the proposed Target System. Instead, this
schedule presents a general strategy for Target implementation
and the costs associated with that strategy.

     The schedule contains a lot of material about the general
strategy for the Target implementation and lists the various
steps to be performed and the projected dates for their accom-
plishment. Since most of this material is irrelevant to the
subject of our report, we are summarizing only the pertinent
parts.

     Basically the schedule calls for installation of the
three regional computer cnt rs and the interim Target
Central System in fiscal year 1978. Operations would begin
in the Target Central System and the first regional center
in April 1978, in the second regional center in June 1978,
and in the third in July 1978. VA will implement basically
an inquiry capability, which will allow regional offices to
access the CP&E master files and the records locator system
file through the terminals installed in those offices. Cer-
tain other functions which are primarily parts of other Target
subsystems will also be implemented. Other Target subsystems
will be implemented in phases through fiscal year 1979 after
prototype testing at the Philadelphia pilot station. The
current CP&E system will serve as an interim Target Central
System until a new central system is developed.  (See p. 35.)
     The previous schedule called for implementation of all
developed Target functions at the first regional computer
center in April 1978. The Implementation Planning Team con-
cluded in April 1977 that, in view of the status of system
development, this approach posed substantial risk to both data
processing and regional office operations. The team said that


                             41
regional office operations could be disrupted by implementing
all functions simultaneously without adequate leadtime for
training and organizational preparation. Additional risk
would be incurred by installing in those regional offices not
familiar with the system, functions that were not fully field
tested in the prototype regional office.
     The Administrator pointed out that he was convinced that
the new implementation schedule was achievable with very low
risk of disrupted service to veterans.
     We agree that the revised schedule is less demanding han
the original schedule and is directed at reducing the risks
of disruption of regional office and data processing opera-
tions during Target implementation. We cannot assess the
feasibility of this implementation schedule because, at the
time the report went to printing, VA had not developed a total
implementation plan containing a detailed identification of
project tasks, the scheduling of these tasks, and associated
resource requirements and costs.

     Further, VA acknowledged that a contractor was still
working to estimate more accurately the amount of work re-
quired to develop, convert, and redesign the Target System.
     We believe that, in the absence of a total implementation
plan, uncertainty still remains with regard to the cost and
status of Target development and implementation.

Statements of-VA positions
     A VA document entitled "Statements of VA Positions,"
attached to the Administrator's May 19 letter, contained
23 pages of statements of VA position~ on 11 major .reas of
VA concern about matters discussed ir our report. Some of
the material was not responsive to the points we raised.
Thus, rather than include all the documentation, we have
summarized and commented below only on VA statements per-
tinent to the issues we raised.

     Cost-benefit analysis

     On page 14 we stated that VA has not conclusively demon-
strated that the Target System will result in major cost
savings.

     VA responded that no cost-benefit study can "conclusively
demonstrate" what the savings will be and that such is not the
purpose of a cost-benefit study. Rather, it is an analysis of
whether savings to be achieved justify the costs.


                             42
     Although we agree'that a cost-benefit analysis cannot
conclusively provide a precise projection of savings, we
believe that it can conclusively demonstrate through adequate
sensitivity analysis that in the most pessimistic case the
system will be cost beneficial within a range of magnitude.

     Our sensitivity analysis of VA's February 1977 cost-
benefit study shows a degree of uncertainty about the savings
to be achieved and that Target might well result in a deficit.

     Revised cost and benefit estimates developed by the
Engineering Service in April 1977 in accord with the new
implementation schedule were as follows:

     One-time development cost             $100,875,970
     Net recurring savings over total
       system life                       a/$173,506,609
     Present value net benefit              $21,613,933
     Benefit-cost ratio                        1.18

a/These savings represent estimated recurring savings, once
  Target is implemented, less recurring operating costs.
  One-time system development costs were not reflected in
  this figure. The present value ..et benefit and the benefit-
  cost ratio do include consideration of one-time development
  costs expected to be incurred after March 1, 1977. One-time
  costs of $14,626,76) incurred before March 1, 1977, were
  considered sunk costs and were not included in either
  analysis.

     VA maintains that its April 1977 update demonstrates as
conclusively as any cost-benefit study can that Target will
be cost beneficial. VA provided a sensitivity analysis of
its April 1977 update, but this analysis had the same short-
comings as the February 1977 study in that it showed neither
the possible negative impact on savings in all cases where
sampling and technical estimates were used nor the impact of
potential error on the present value of the option of proceed-
ing with Target.

     VA noted our sensitivity analysis of the February 1977
cost-benefit study and said that the probability that our
most pessimistic estimate will become a reality is one
chance in 1024.   But further discussion with VA personnel
disclosed that this statement is misleading. The computed
factor of 1024 represents the probability that Target's cost-
benefit position will be worse than the pessimistic case



                             43
postulated by our sensitivity analysis. As we stated on
page 33, we acknowledged that the net savings from Target
could range between our pessimistic estimate to a level even
greater than that shown by the February 1977 study but said
that the probability of the savings falling at any given point
in this range cannot be determined.

    - It should be noted that in two later updates of this
study VA has greatly reduced the estimated present value net
benefit for the system from $55.9 million in February 1977
to $21.6 million in April 1977.

     VA cited several categories of possible additional Target
savings not addressed in the February 1977 study and later
updates. These additional savings are not quantified and are
not supported by any indepth VA analysis. Further, VA does
not say which of these additional savings are unique to Target
or which could be achieved by alternative approaches.

     Alternative approaches

     On page 8 we said that VA did not make economic analyses
of alternative system approaches to Target for meeting its
CP&E processing needs.

     In response, VA cited three alternative schedules for
Target implementation which it deemed of sufficient merit to
prepare separate cost-benefit analyses. However, VA's eco-
nomic analysis of implementation schedules does not directly
address our point that VA did not study and make economic
analyses of alternative system approaches for improving or
redesigning the current CP&E system.

     VA contends that the Target approach is cost effective
and that any alternative which changes the basic nature of
the Target approach would never offset Target sunk costs and
the ensuing years of delay.

     Because VA has not made economic analyses of alternative
approaches, it has no way of knowing to what extent Target
sunk costs might be recoverable through an alternative system
approach.  In March 28, 1977, testimony before the Subcommit-
tee on HUD-Independent Agencies, House Committee on Appropria-
tions, VA officials said that VA has not determined how much
of the sunk costs would be applicable if it are to develop
alternative approaches.




                              44
     Standards-and definitions
     On page 8 we said that V has not defined, in measurable
terms, goals and standards for improving benefit claims serv-
ices to veterans.

     VA responded that standards for measuring both processing
timeliness and pending workloads for the current system have
been in effect for over 10 years and that a well-defined work
measurement system has also been operating. VA then provided
five pages of information on its standards for its existing
mode of processing CP&E benefit claims.

     Our report does not dispute the existence or use of
standards for the current CP&E system. Our report simply
points out that standards and goals for improved services
that VA seeks to attain were not established to provide a
basis for determining the most cost-efective improvements
to the current system.

     In fact, VA acknowledges in its statements on this
point that overall timeliness goals, which VA considered to
be important for Target, have not been established.

     Target-versus-efficient
     manual system

     On page 1 we cited the position of the House Committee
on Appropriations that Target should be justified principally
on a demonstration that i would measurably improve VA's
internal efficiency over the best performance obtainable
under the current system.

     VA, in response, cited a comparative study of its Roanoke
regional office operation and the Philadelphia prototype Tar-
get regional office. Based on its observations VA concluded
in this study that certain nonmonetary benefits would be
achieved from Target (for example, under Target CP&E benefi-
ciaries would receive initial payments and adjustments to
their awards faster and faster responses to their inquiries
about their claims).

     It should be noted that the Roanoke regional office is
only a part of the current total P&E claims-processing
system, which encompasses both manual operations at the re-
gional offices and their interaction with and reliance on the
computer operations at Hines. In separate statements regard-
ing computer support of its current CP&E system, VA acknowl-
edges that the computer operations at Hines use computer


                               45
programs and operational techniques conceived largely in 1959
and 1960, and cites weaknesses of the current computer system
that can be associated with this 18-year-old design. We
stated on pace 37 that the difficulties at Hines were caused
in part by VA's failure to make needed system improvements
for more efficient operation of the equipment.

     In view of this, we question that the operation of the
Roanoke regional office, which relies on the support of the
Hines cputer system, represents the best-performance
obtainable under he current system.

     Existing-CP&E system service

     VA made note of our statement on page 10 that an April
1972 task force report, which served as the primary basis
for specifically adopting the Target System as a policy goal,
acknowledged that the exi ting CP&E automatic data processing
system serviced 95 percent of the veterans satisfactorily.

     In response VA stated that, even though 95 percent of
the claimants were being serviced satisfactorily under
standards effective at that time, VA data processing prob-
lems were becoming severe and service was deteriorating.

     VA cited an increase in compensation workloads and a
dramatic increase in education workload which peaked in
fiscal year 1976. We acknowledged on page 20 that workload
projections changed and that this contributed to VA's deter-
mination in 1975 that more powerful equipment would be re-
quired to process the Target workload.

     Target-cost-escalation

     In responding to a statement on page 20 of our report,
VA noted t.iat in March 1975 Target's one-time development
costs were estimated at $94.9 million for a four regional
center configuration and have escalated only $5.9 million in
2 years. VA stated that, considering inflation and changes
in the implementation plan, the escalation is reasonable and
attests to the relative accuracy of the present cost esti-
mates of $100.9 million. VA seeks to convey a picture of
stability in cost estimating, but in fact cost estimates have
fluctuated considerably over the past 2 years.

     In Febru:ry 1976 VA estimated one-time costs for a four
regional center cnfiguration at $81.7 million. This esti-
mate was reduced in September 1976 to $77.3 million, reflect-
ing a three regional center configuration. VA reestimated


                              46
its one-time costs in March 1977 at $97.3 million and again
in April 1977 at $100.9 million. Thus, VA's one-time cost
estimates have fluctuated dramatically over the 2-year period.

     VA Controller's cost statement

     On pages 19 and 20 we discuss the VA Controller's
office findings relating to TMI's cost-benefit analysis of
the Target System completed in July 1974.

     VA responded that after the TMI study the scope of
Target was greatly increased and that in March 1975 cost
estimates were developed reflecting that increased scope.
VA said that, since there were no benefit figures reflecting
the increased scope, the Controller used the benefits reported
in the TMI study when it considered the escalated costs of
Target in April 1975 and concluded that Target would result
in a deficit. Thus, a February 1976 study by VA's Engineering
Service reflecting the increased scope of Target showed sub-
stantial savings.

     We discussed this statement of position with VA person-
nel, who advised us that the scope of Target was not increased
other than the equipment expansion required partly because of
increased workload which we described on page 20. Rather
than the scope of Target being changed, the methodology em-
ployed in the later cost-benefit analysis differed from that
used in the TMI analysis.

     Regional data processing
     center configaration

     We said on page 21 that VA had established that four
regional centers was the optimum configuration for Target
but that VA did not have sufficient basis for concluding
that this was the most cost-effective configuration.

     VA replied that in early 1976 it began experiencing a
declining workload for CP&E claims. This decline allowed VA
to reduce the workload projections for Target, and studies
made reflecting the reduced workload verified the feasibility
of reducing the number of regional computer centers from four
to three. Accordingly, the Target request for proposal was
modified to reflect the reduced number of centers.

     The additional studies referred to by VA were made after
inquiries by the House Committee on Appropriations regarding
VA's justification for establishing the four regional computer
center configuration for Target. Further, the studies referred


                                47
to by VA as reflecting the decreased workload and verifying
the feasibility of three regional centers did not in fact
reflect the decreased workload. In our report on VA's jus-
tification for establishing four regional computer centers
for Target (see p. 21), we questioned the workload projec-
tions used in these studies and recommended in July 1976
VA reappraise its workload requirements. VA agreed with that
                                                          the
recommendation.

     Other processing functions
     for the Target System
     On page 28 we stated that VA rled out a possible alter-
native system approach to Target presented orally by a vendor
in April 1975 because the type of equipment the vendor sug-
gested was special-purpose equipment that had no value to VA
for applications other than CP&E benefit claims processing.
We pointed out that VA has no definitive plans for other
processing functions for the Target System. VA repeated our
statement that the request for proposal and cost-benefit
justification do not include any processing requirements
other than for CP&E benefit claims and alluded to fiscal
year 1977 House Appropriations Committee hearings, at which
maximizing equipment use was discussed.

     VA did not refute our statement that it lacks any defini-
tive plans for other processing functions for the Target
System.

     Distribution of personnel savings

     We state on page 3 that, on the basis of our sensitivity
analysis, wage rates associated with cost savings in the au-
thorization and files areas in the VA regional offices were
subject to sampling error because they were based on the as-
sumption that staff-years saved will be distributed pro rata
throughout the various grade levels of the total work force
affected. VA contended that its assumptions are valid but
acknowledges tnat a precise average wage can be determined
only after a job reclassification. We state that such a dis-
tribution was not likely to occur because we were told by
Target development personnel that savings would be concen-
trated in lower grade positions.  If, in fact, staff reduc-
tions do occur at the lower grade levels, VA cost savings
based on average annual salaries could be overstated.




                            48
     Status of the current CP&E system

     VA agreed that the crisis situation at Hines has been
contained.  (See p. 37.)  VA pointed out, however, that the
underlying causes of its past problems at Hines have not been
corrected. It cited the awkwardness of the current computer
system that resists changes and deficiencies related to com-
puter controls as two of the problems VA must contend with.

     VA said that service delays experienced by the current
system because of its slow responsiveness to inquiries and
correction of rejected transactions will be shortened con-
siderably by Target.

     We acknowledge that Target will cut down response times
between the VA regional offices and the central system at
Hines. However, we must also point out that for several
years operations will rely on the interim Target Central
System, which will basically be the current Hines computer
system operating on different equipment. Many design prob-
lems which VA acknowledges result in an awkward system resis-
tant to change will remain until the Target Central System is
redesigned and installed, a task presently scheduled for com-
pletion in September 1983.
     VA contends that Target should not be delayed because
there is no apparent pending disaster. We are not suggesting
that this is the only issue involved. What we are suggesting
is that VA is in a position to buy time until the uncertain-
ties cited in our report are resolved.

RECOMMENDATION TO THE ADMINISTRATOR
OF VETERANS AFFAIRS

     We recommend that the Administrator establish, in
measurable terms, goals and standards for improving benefit
claim services to veterans.

RECOMMENDATIONS TO THE CONGRESS

     We recommend that the Congress not permit VA to award
a contract for the Target System until VA has established,
in measurable terms, goals and standards for improving bene-
fit claims services to veterans as a basis for determining
the most cost-effective approach for meeting benefit claims
processing needs.




                             49
     If the Congress determines that VA has satisfactorily
resolved the above issue, we further recommend that VA not
be allowed to award a contract until it has resolved the un-
certainties about progress of development and the cost ana
implementation schedule of the system. To resolve these un-
certainties VA needs a definitive and complete implementa-
tion plan, which it did not have at the time this report
went to printing.




                            50
                         CHAPTER 6

                      SCOPE OF REVIEW

     Our review was limited to examining VA actions to
explore alternatives to the Target System and analyzing the
adequacy of cost-benefit studies to justify the system.
     In meeting these objectives, we reviewed Office of Man-
agement and Budget, General Services Administration, Depart-
ment of Defense, and VA documents concerning the nature and
conduct of cost-benefit analyses; the design, development,
implementation, and operation of automatic data processing
systems; and the acquisition of automated data processing
and related equipment. We concentrated on VA policies and
procedures regarding the design of the Target System.

     We interviewed various officials and staff members with
responsibility for the design and development of the Target
System and cost-benefit justification for the system. We
reviewed pertinent VA documentation for the cost-benefit
analyses of Target made by VA and Technology Management,
Incorporated.




                             51
APPENDIX I                                                             APPENDIX I




                         VETERANS ADMINISTRATION
                               r
                     OFFInc   o TH ADMINISTRATOr   OF VTRANs AFFAIRS
                              WASHINGTON, D.C.         204                   .
                                   November 23,       1976


   Mr. Gregory J. Ahart
   Director of Human Resources
    Division
   U.S. General Accounting Office
   441 G Street, N.W., Room 6864
   Washington, D.C. 20548

   Dear Mr. Ahart:

             Several days ago, during the course of your briefing
   about the TARGET System, I promised you that I would provide
   you with a response to two of the key points contained in your
   briefing. Enclosed are three documenus which I believe should
   have a great bearing on the content and context of your forth-
   coming report.

              I.   A paper "TARGET SYSTEM ALTERNATIVE CONSIDERATIONS"
                   summarizes material illustrating that serious
                   and significant effort has been expended to
                   consider systems alternatives prior to the
                   adoption of the TARGET System as an agency
                   policy goal. Subsequent to the adoption of
                   the goal, other alternatives have also been
                   considered.

             II.   A paper "NON-MONETARY SAVINGS FROM THE TARGET
                   SYSTEM" provides an executive summary of the
                   material contained in the February 1976 Cost/
                   Benefit Analysis, Chapter V. It also contains
                   other more recent observations which indicate
                   that VA will be able to improve service exten-
                   sively through the installation of the TARGET
                   System. Especially noteworthy is our assumption
                   that overpayments can be reduced through the
                   faster interaction of employees with the master
                   records. We expect to be able to interrupt
                   benefits quicker when schooling is dropped or
                   questions arise.




                                             52
APPENDIX I                                                      APPENDIX I




            III.   The COST/BENEFIT ANALYSIS (Feb. 1976) has
                   often been referred to in our conversations.
                   I ask that you refer specifically to Chapter
                   V. Note on page 54 the lapsed time savings
                   for various claims processing circumstances.

         Incidentally, I want to reiterate that the
entire Cost/Benefit Analysis is fully supported by a very
valid set of assumptions. It remains the clear position of
the agency until it is updated at some future time.

         Upon reviewing this material I am sure you will
conclude, as I have, that the TARGET System will save the
agency hard dollars as well as provide an improved level
of service.

                                         Sincere                a   X

                         &IIoate Da~miy AdmjiiWa

                                         RICHARD L.   UDEBUSH
                                         Administrator

Enclosure




                                               53
APPENDIX I                                                  APPENDIX I




                     TARGET        SYSTEM

       ALTERNATIVE               CONSIDERATIONS




     The question of the consideration of alternatives to the
 VA TARGET SYSTEM has been raised on many occasions. Recently
 we have had a briefing by GAO (10-28-76) which indicated to
 the Administrator and his Staff that a GAO Report would soon
 be released indicating that alternatives to the TARGET SYSTEM
 have not been considered in the light of emerging factors. A
 significant part of the monologue is concerned with challeng-
 ing past cost-benefit studies.
      In order to set the stage for consideration of the issue of
  alternatives there needs to be a review made of the Agency
  relative to benefit delivery throughout the period of the past
  several years. This period has been characterized by:
         A.   The Viet   Nam Era G.I. Bill   (1966)
         B.   Expanded   VN Era G.I. Bill    (1967)
         C.   Expanded   Compensation Programs  (1967-76)
         D.   Expanded   Pension Programs    (1956-76)

      The period was also marked by increasingly difficult legis-
  lation, requiring additional computer capacity. The pension
  programs were characterized by the need for incremental benefit
  adjustments based on changed income reports; new classes and
  rates of burial benefits have been provided; clothing allowances
  have been authorized. The G.I. Bill Education programs were
  revised markedly in 1972 to provide for prepayment of benefits
  and for advanced payments at the beginning of each term.
  Reporting fees for institutions were added and were subsequently
  modified; additional classes of eligibles have been added to the
  G.I. Bill Education program. Entitlement periods for G.I. Bill
  benefits were extended several times.
      Until this year, FY (1977), workloads have generally increased
  markedly as well, creating an environment of much more work with
  the work being generally more difficult to administer.
      During the period the workforces have been increased as well.
  In 1973 a whole new group of employees was created to handle the
  G.I. Bill problems on the college campuses. These Veterans




                                    54
APPENDIX I                                                APPENDIX I



 Representatives on Campus have performed a liaison function
 at the schools, advising veterans of their rights and serving
 to assist the veterans with any problems they have concerning
 their G.I. Benefits. About 1200 of these positions are now
 in existence. Other employees have been added throughout the
 regional offices to handle the lerger workloads.
     In the ADP   environment, the Education Programs were imple-
 mented without   significant equipment enhancements (1966). Not
 until the turn   of the decade was a serious effort undertaken to
 make a general   systems improvement for the Benefit Delivery
 Systems.
     In March 1971, an analysis was published of the prospects
 for a distributed system using OCR processes and local printers.
 Later, in November 1971, the feasibility study was completed
 with the recommendation that the Administrator approve the use
 of remote OCR terminals which would completely change the
 input structure as well as provide other changes which would
 result in major changes in ADP in support of the CP and E
 programs.
     Concurrently with the OCR studies, a review was conducted
 resulting in a published statement dated September 21, 1971,
 providing for proposed changes to the CP&E systems which would
 (1) combine all files, (2) accelerate communications from
 regional offices to the Hines DPC, (3) migrate master files to
 direct access storage and (4) control pending issues and mnage-
 ment reporting. This alternative plan was not implemented since
 consultant advice was accepted to use state-of-the-art technology.
     The CP and E systems were greatly overtaxed during the
 1969-70-71 period. A Task Force was appointed to study the
 problem and make recommendations for solution. Their March 1972
 report recommended significant staffing increases at Hines DPC
 as well as the addition of another large scale computer. The
 processing equipment at Hines after the addition of the newly
 authorized one was:
     one IBM 7080 computer
     two IBM 360/65 computers
  It was understood that the IBM 7080 system would be phased out
  since it was generally agreed that it had reached obsolescence.
     In July 1972, the Administrator formally disapproved the
 OCR System proposed in 1971. It was suggested that an interim
 CRT-type system for input should replace our old flexowriter
 system. This has been done, with a Sycor process, competitively
 procured, having been adopted in the past several months.




                                   55
APPENDIX I                                                             APPENDIX I



     The level of dissatisfaction with service to VA benefi-
 ciaries was very pronounced. The Task Force, assembled from a
 cross section of the Agency, and utilizing consulting services
 as well,   ade three long range recommendations:
     1.   A Dt           i   interactive on-line terminal target
             '.,l        a      policy goal.
     2.       .       ~r: a d:- .gn team represented by all elements
          i       t     Ager,    '.

     3.   Comptete              redesign study in 18 months.
     These missions were carried out as planned resulting in a
 comprehensive set of published .design documents in October 1973.
 The documents were submitted to he Administrator who approved
 the Target System as conceptualized. Briefings were immediately
 conducted for OMB, for Congressional Committees and for veteran
 organizations.
     The Agency utilized consultant services (TMI) in the develop-
 ment of the TARGET plan.
     Concurrently with the TARGET SYSTEM planning, the Agency
 was involved with an internal evaluation of the Department of
 veterans Benefits, especially the methodology of and organization
 for delivery of benefits. Internal plans were made to reorganize
 several of the ROs along a functional, less compartmentalized
 basis. The test reorganization began in late fall, 1972.
     The Hay Associates, a well-regarded consultant service
 company, was retained to review the test work which had been
 done and to perform an independent "Organization Study of the
 Regional Office Structure."  Their study in 1973 confirmed the
 advisability of restructuring the regional office organization
 to a unitized or team approach. Their report also recommended
 a long-term attention to integrate new technology into the
 benefit delivery process, and further emphasis be placed on
 factors which would prepare the regional offices for the
 Target System.
     During this period, workloads were steadily increasing and
 dissatisfaction with ADP performance and service also increased.
 In an effort to ameliorate the difficulties with punched paper
 tape input, interim alternative approaches were either imple-
 mented or tried:
     1.   OCR input processes were expanded, especially for
          the Education System. The experience was not good.




                                            56
APPENDIX I                                                APPENDIX I




         2.   Electronic transmission of paper tape data was
              tried. It failed in a test environment although a
              modicum of advantage was gained when the paper-tape
              reader test equipment at Hines DPC proved to be
              better than the ones previously in use.
         3.   Electronic transmission of reject messages was
              attempted, but failed primarily because of volume
              and the difficulty of separating priority messages
              produced by the systems.
     [It should be noted that the Pilot System has performed
 very well in achieving the results sought in paragraphs (2) and
 (3) above.]
     Workloads continued to grow faster than budget forecasts
 indicated they would.
     During the time the Target System Design Study was under
 development much conceptual material was considered in the
 process and alternatives were constantly considered, although
 certainly the policy had been established and the direction was
 clear. Distributed mini-computer systems were frequently dis-
 cussed but were rejected as being largely unprogrammable and
 unavailable for other general purposes of the agency. In shot.,
 the computer resource would have been so fragmented as to have
 little residual value (after 5 P.M. and on weekends) for the
 Agency.
     At this point in time, the Agency included the Target System
 as a key policy goal in its array of Presidential Manageme c
 Objectives. It was approved.
      As part of the Agency's process of providing ADP long
  range plans, an alternative was proposed which would have altered
  the course of development of the entire ADP process and organi-
  zation in the VA. A long range plan was proposed which would
  have resulted in the primary ADP applications: PAID, AMIS,
  LOAN GUARANTY, Compensation and Pension, Education, etc.,
  being distributed to the several regional DP facilities in a
  decentralized mode. This alternative to the conceptual Target
  System was rejected because it was seen as being fragmentary and
  pushing the state of the art then emerging regarding distributed
  data bases.
      As part of the Design Study Team proposal, the inclusion of
  a prototype Target System appeared for the first time. The
  purpose of the prototype, which we called the PILOT TEST System,
  was (1) to test VA employee reaction to an on-line ADP System,




                                  57
APPENDIX I                                               APPENDIX I




(2) test the claims processing concept, (3) to provide a better
basis for procurement. This pilot system itself provided for
testing alternatives and design modifications. Ten months after
approval, the PILOT System (September 1974) was operating in an
Inquiry Mode exclusively in Philadelphia VAC and in Baltimore RO.
See Attachment 1 for the continuing historical growth of the
Pilot System functions which has been leading to a fully function-
ing regional data processing support function.
    The Pilot System at first was planned for an IBM 360/40
Computer application.   ther alternatives had to be considered
when the VA-owned 360/40 was not made available. Alternatives
considered were a leased 360/40, leased 360/50, leased370/145,
and a VA-owned Honeywell H-250 computer installed in the
Los Angeles DPC. The alternative chosen was the 370/145.
Alternative PILOT sites were also considered: Boston, New York,
Philadelphia, and Atlanta. Philadelphia was selected.
     The Inquiry System performed so well, and the workload and
 service-to-veterans problem was so severe, that the alternative
 was pursued to add 7 more regional offices to the Inquiry facility
 of the PILOT System. The seven offices considered were: New
 York, Washington, D.C., Cleveland, St. Petersburg, Los Angeles,
 San Francisco and San Diego. It was decided to provide inquiry
 processing for New York, Washington, and Los Angeles. This was
 accomplished in July/August 1975.
     In the Hay Report referenced earlier in this paper, there
 were recommendations, which were not adopted, intended to
 reorganize the DVB field activities into Federal Regional Center
 groupings. These large FRCs would have had significant concen-
 trated workloads, mostly clerical and/or routine in nature, that
 would have modified the Target System concept had the recommenda-
 tions been followed. In the early planning for an on-line inter-
 active system the alternatives of having ten (or eight) data
 processing facilities (RDPCs) were carefully considered.
     The number of RDPCs were reduced to four by the VA after
 third-party studies were conducted. This also provided for a
 consistent service/management approach since the benefits programs
 are administered in a four area geographical partition. Further
 alternatives were considered much later (January 1976) when the
 COMTEN Studies (Consultant Contractor) were performed indicating
 three RDPCs could handle the workload; sizing studies for a
 configuration of 2 RDPCs were also pursued.
     In 1973, our design assumptions provided for a full
 data base management systems support structure. There was a
 simulation test performed in 1974, which indicated multi-
 computers of the class of IBM MP 370/168 would be required in
 the regional data processing centers. Alternatives were
 immediately reviewed which led to the restructuring of the
 design assumption to provide for a mid-level DBM structure only;




                                  58
APPENDIX I                                                 APPENDIX I




this resulted in a change in computer class requiremen.s   from
370/168 MP to 370/158 MP, with a resultant reduction in
estimated cost of 10-12 million dollars.
    During this time ADP service to the CP&E programs continued
to be unreliable even with the operation of the additional
360/65 computer system. The equipment enhancement process to
provide an interim capacity for CP&E work was not adequate.
    Concurrently with the installation - the second IBM 360/o5
computer at Hines DPC the initial Target System planning assumption
was formed that dual 60/6; systems could handle the workloa of
the Target System, provided further significant enhancement of the
hardware was made. An inter-agency working agreement had been
established with FEDSIM early in the total Target effort.
Sizing studies performed by FEDSIM indicated the Target System
would require more power than dual 360/65 computers could provide.
An alternative had to be developed which, when developed, indicated
computers of the MP 370/168 class would be required.
    In April 1974, Control Data Representatives had proposed
placing the entire VA file on random access files with an inquiry
facility in all regional offices. The level of support for both
hardware and especially software was so conditional that it was
decided not to pursue this alternative.
    In late Spring 1974, the initial PILOT work indicated that
inquiry capability would be brought on-line at Philadelphia and
Baltimore about Septemb r 1974. IBM performed contractual
services for the VA in order to assist us in getting the PILOT
System demonstrated. IBM was paid to train and advise the
programming staff on the techniques of top down structured
programming and related documentation aids. IBM proposed to
the VA that an inquiry network, using CRT input-output termin a..,
be established to serve mary large regional offices with critical
Educational System workloads. In discussions with IBM, their
analysts would not commit themselves to an implementation
schedule not later than October 1, 1974, so this alternative was
not pursued.
     The agency has also met with several time-sharing and
 facilities management vendors in the past couple of years.
 Although we have expressed interest in such possible future
 arrangements, without definite commitments on the part of the
 VA, these possible suppliers do not closely pursue such prospects.
    In pril 1975, IBM proposed another alternative which provided
for the regional office workloads tu be processed individually
in each regional office using IBM 3790 technology. This proposal
would have placed mini-computers in each regional office with an
inquiry capability to a central data base. Although the proposal
had some merit and was widely considered in the VA, it was
rejected for two basic reasons:




                                  59
APPENDIT   I                                            APPENDIX I



      1. The mini-computers were special purpose, with the
         resource greatly fragmented so that such equipment
         had little or no value to the VA after 5 P.M.
      2. This alternative did nothing to resolve the
         recognized problem of a longer-range computer
         replacement program; we have obsolete operating
         equipmert in Philadelphia and equipment approaching
         obsolescence in other locations.




                                60
APPENDIX I                                                   APPENDIX I




                      Pilot Processing Installation

     Function                                               Date
     Inquiry
          Master Record (CP&E)                        Sept 1974
          BIRLS                                       Sept 1974
          Pending Issue                               Apr   1975
          Status                                      July 1976
          BIRLS Delayed Responses                     July 1976
     Change of Address                                Jan   1975
     Change of Name                                   Jan   1975
     Change of Fiduciary                              Jan   1975
     Education Special Payments                       Mar   1975
     Original Education Awards
          Institutions Higher Learning                Apr   1975
          Non-College Degree                          Apr   1975
          Apprenticeship                              Apr 1975
          On-Job Training                             Apr   1975
          Fliglat                                     Dec   1975
          Correspondence                              Dec   1975
     Stop Payment (CP&E)                              Apt   1975
     Suspend Payment (CP&E)                           Apr   1975
     Resume Payment (CP&E)                            Apr   1Y75
     Nottce of Death                                  Sept 1975




                                    61
APPENDIX I                                        APPENDIX I



   Function                                        Date

   Burial     wards                         Oct    1975
   Work-In-Process
        Establish Pending Issue             Apr    1975
        Cancel Pending Issue                June 1975
        Timeliness Reports                  Feb    1976
        Over Standard Listings              Feb    1976
        Clear Pending Issue                 Apr    1976
        Change Pending Issue                Apr    1976
        Diaries                             June 1976
        Statistical Quality Review          Jan    1977*
        Reject Selection Reports/Listings   Feb    1977*
   Letter Writing
        Acknowledgement                     Apr    1975
        Development                         May    1975
        Education Award                     May    1975
        Compensation Award                  Feb    1976
        Pension       ward                  June 1976
        Disallowance                        June 1976
   Original C&P Awards
        Compensation                        Feb    1976
        Pension                             June 1976
   Disallowances
        C&P                                 June 1976
        Education                            Ju.se 1976
        Burial                               Oct 1975




                                  62
APPENDIX I                                           APPENDIX I




    Function                                             Date
    Security
         Command Authority                        Sept 1974

         Jurisdictional Rastriction               July 1975

         Sensitive File Access                    Sept 1974

         Violations Logging                       Feb    1976
         Dynamic PLssword Generation              Sept 1974
         Review and Disclosure
               Corrections to C&P Personal Data   Dec    1976*

               Corrections to Ed. Personal Data   Dec    1976*

               Corrections to BIRLS Data          June 1976
    Supplemental       wards
         Compensation & Pension
               Rating                             Mar    1977*
               Income                             Mar    1977*

               Dependency                         Mar    1977*

               Other                              Nov    1976*

         Education                                Nov    1976*

    Reject Tran-.ission                           Apr     1975

    Miscellaneous Claims Processing
         Record Folder Receipt                    May     1975

          Interim Disposition                      Apr    1975

         Evidence Review                           Apr    1976

     Veterans Assistance Letters                   June 1977*



     *Tentative Installation Dates




                                   63
APPENDIX I                                                  APPENDIX I




    N 0 N - M O NE T A R Y        S A V I N G S   F RO M   T HE

                        TARGET          SYSTEM



       In February 1976 a Cost-Benefit Analysis of the Target
  System was released by the VA Office of Planning and Evaluation.
  The analysis/report was distributed very widely throughout the
  VA as well as throughout the government. In FY 1977 Budget
                                                          it was
  Hearings (March 1976) the report was discussed broadly;
  introduced into the Senate record. The primary thrust of the
  analysis was in the area of hard dollar savings.
       However, a significant portion of the study, Chapter V,
  Non-Monetary Benefit nalysis, describes the following benefits:
       A. Benefits to the Veteran
             1. Faster Processing of Claims.
             2. Faster Response to status inquiries.
             3. Faster payment of retroactive benefits.
             4. Decreased waiting time and duration of interviews.
             5.   Expedited Change of Address.
       B.    Benefits to the VA
             1.   Improved public image because of better service;
                  reduced potential fcr error.

             2.   Reduction in complaints and related complaint
                  processing.

             3.   Elimination of reject processing.
       C.    Benefits to Others
             1.   Service Organizations also share in the ability
                  to provide improved service.

             2.   Treasury Department should have fewer returned
                  checks.




                                      64
APPENDIX I                                                    APPENDIX




             3.   Equipment requirements (office furniture,
                  machinery) will be reduced.
           4.     Value to Congress, especially in the reduction
                  of complaints regarding service.
       Currently, we have been adversely impacted by a large
  number of overpayments, especially in the Educational Program.
  It is believed that quicker interaction, promised by Target
  System, offers a good opportunity for reducing potential over-
  payments. In the case of a veteran who is overpaid for one
  month, faster system interaction can intercept additional pay-
  ments which may now be paid because of slower transmission of
  the interruption notice.
       Additionally, we see other improved service characteristics
  of the Target System:
             1.   Elimination of the need for mailing data to and
                  from the Hines DPC.
             2.   Reduction in the number of checks (and other
                  correspondence) returned or delayed because of
                  forwarding.
             3.   A management information system for claims pro-
                  cessing which is more responsive than the current
                  system and which includes daily updating thus
                  permitting earlier detection and resolution of
                  problem areas.
             4.   A method of self-training (Computer Assisted In-
                  struction) with computer controlled graduation.
                  CAI permits greater standardization of training
                  while permitting each student to progress at his
                  or her own pace. CAI also provides faster re-
                  sponses to students' answers thus improving the
                  efficiency of the training.
             5.   Employees will be face to face with the computer.
                  They will manipulate it and engage it in two-way
                  exchange of information. The computer will be-
                  come more of a tool and less of a tyrant.




                                    65
APPENDIX II                                       APPENDIX II


               GAO SENSITIVITY ANALYSIS OF

          VA'S FEBRUARY 1977 COST-BENEFIT STUDY

     Since most important decisions like the proposed Target
procurement involve elements of uncertainty, cost-benefit
analysis of such procurements should address this uncertainty
explicitly. One method of addressing uncertainty is sensi-
tivity analysis, wherein the analyst tests several values
for key uncertain factors to see how sensitive the ranking
of alternatives is to variations in these factors. Several
savings and cost elements in the Engineering Service's
February 1977 cosC-benefit analysis were based either on as-
sumptions, sampling, or technical estimates and, consequently,
are uncertain. These elements should be tested to determine
their effect on the potential cost effectiveness of Target.
The Service did some sensitivity testing in its February
1977 study, but it neither tested all elements involving
sampling and technical estimates nor showed the effect of
its tests on the present value benefit-cost ratio.

     We made a sensitivity analysis to test the effect of
the uncertainties disclosed by our review of the February
1977 study. Our analysis was directed toward determining
pessimistic estimates of costs and savings to show the
degree of risk involved in basing estimates on uncertain
factors.

     Our analysis indicated that the estimated gross present
value savings in this study could be overstated by as much
as $47.7 million and that estimated present value costs
could, conservatively speaking, be understated by about
$8.9 million. Therefore, procurement of Target could re-
sult ir. a present value net deficit of as much as $700,000,
instead of the $55.9 million present value net benefit re-
ported by the Engineering Service in its February 1977 study.

     Further, if software development costs approach the
ratio of software to equipment costs experienced by some
other Government agencies, the Target System present value
net deficit could be even greater. We recognize that the
circumstances of Target development may differ from genezal
experience. Accordingly, our test of possible understatement
of software development costs is more subjective than tests
in the other areas.

     Our estimates of potential understatements of cct s and
overstatements of savings were based on the following  ssump-
tions:


                             66
APPENDIX II                                         APPENDIX II


     -- Y, areas where statistical samples were used, the
        ertremes of the confidence limits would give a
        reasonable worst case estimate of savings.
     -- In areas where technical estimates were used, a
        reasonable percentage of potential error would give
        a worst case estimate of savings and costs.

     -- In the area of software development cost, experience
        of other Government agencies indicates the possibility
        that software development costs could escalate beyond
        those currently estimated by VA, although this judgment
        is subjective.

     Details of our analyses are discussed below.

SAVINGS ESTIMATES   ASED ON SAMPLING PROCEDURES

     The Engineering Service based about $33 million of its
estimated present value savings from Target on work samples
in the authorization area.

     But the Service did not include in its work sampling
of some of the tasks measured in pilot operations an allow-
ance for nonwork actions. Accordingly, we tested for poten-
tial error in savings estimates or authorization that would
result from this omission.

     Also, our analysis showed that the Service's sampling
estiaates are not very precise and that the range of estimates
is extremely broad.  Because of the short time the Service
had to collect the data, the sample sizes of many elements
were too small to yield precise estimates, and the Service
did not test the potential overstatement of savings that
would result from this lack of precision in sam'ling.

       We calculated statistical confidence limits in each of
the elements measured. Using the lower limits of statistical
confidence, we made a worst case projection of the possible
impact of sampling error. We estimated that, because of the
Serv 4;e's omission of nonwork actions and the lack of preci-
sion in sampling, present value savings in authorization
could be overstated by as much as $34.8 million.

     We also tested the Service's assumption that staff-years
saved in the autbhrization and files areas would be distri-
buted pro rata through the various grade levels of the total
work force affected. Target personnel told us that savings
would be concentrated in lower grade positions. We calculated



                              67
APPENDIX II                                      APPENDIX II



sampling errors in wage rates from this pro rata distribution
and estimated that present value savings for Target could
be overstated by as much as $674,000 for authorization and
$122,006 for the functional area of files.

     It should be stressed that our estimates of potential
overstatement of savings from sampling errors are based on
the Engineering Service's assumption that the sample results
from one superior unit in Philadelphia can be extrapolated
to all VA regional offices. Since such an assumption is
probably not valid, our estimate of potential savings over-
statement in authorization could be conservative.
SAVINGS BASED ON TECHNICAL ESTIMATES

     The Engineering Service tested the uncertainty of
projected savings in three functional areas--input, files,
and administration--because they were based on technical
estimates. However, savings for a fourth area--veterans
services--were also derived from technical estimates, so we
estimated the potential effect of errors in that area.
Our estimates in these four areas reflected the potential
overstatement of present value savings as follows:
                                        Savings that may
Functional area                         not be realized
                                          (millions)

Files                                        $1.0
Administration                                1.5
Input                                         1.8
Veterans services                             1.9

    Total                                    $6.2

POTENTIAL SLIPPAGE OF BENEFITS

     Since VA policy does not permit displacing personnel
because of computer installations, such personnel savings
could be achieved only through normal attrition and reassign-
ment. The Engineering Service study assumed that personnel
savings would be achieved within 6 months after installa-
tion of the first regional computer center in regional of-
fices served by that center and within 3 months after the
installation of the second and third centers for regional
offices serviced by those centers.



                             68
APPENDIX II                                      APPENDIX II



     In March 1977 VA submitted a plan to the Subcommittee
on HUD-Independent Agencies, House Committee on Appropria-
tions, providing for steady personnel reductions primarily
through attrition. We used this plan to estimate the poten-
tial overstatement of personnel savings in the Service study.
Our analysis shows that, after the reported savings are re-
duced because of the effects of sampling errors previously
discussed, present value savings in fiscal year 1979 would
be further reduced by as much as $5.9 million through the
application of the attrition plan.

RECTL.SIFICATION AND SHIFT OF REDESIGN COSTS

     After the Engineering Service study, VA reclassified
$15,387,000 associated with redesign of the Target Central
System from operating costs to one-time development costs.
Since these costs are more likely to be incurred over the
system's early life than over the entire duration of the
system's life, as assumed by the Service, these costs would
not be as heavily discounted. We assumed that redesign costr
would be incurred in the first 5 years of the Target System':
life and estimated that, as a result, present value costs
would be increased by about $2,979,000.

POTENTIAL INCREASE IN RECURRING COSTS

     The Engineering Service study acknowledged that annual
recurring costs associated with computer center operations
could vary by as much as 10 percent. We reduced the recurring
costs of $11,487,000 shown in the cost-benefit study by
$1,538,000 to reflect the shift in Target Central System re-
design costs. We further assumed that if the remaining costs
could be understated by 10 percent, the present value costs
of Target could be understated by as much as $5.9 million.
POTENTIAL INCREASES IN SOFTWARE COSTS

     In the Service study one-time costs for the Target System
were stated as follows:

    Personal service                           $15,468,000
    Travel                                         935,000
    Contractual services                         7,865,000
    Communications                               6,758,000
    Site preparation                             4,062,000
    Automatic data processing rental             8,895,000
    Automatic data processing purchases         37,505,000
    All other                                      453,000
                                               $81,941,000

                             69
APPENDIX   I                               I      APPENDIX II

     Of particular concern to us were the costs associated
with personal services, travel, and contractual services,
which totaled about $24.3 million. These are the costs
associated with software development. In March 1977 VA
revised these costs by shifting $15,387,000 for redesign of
the Target Central System from recurring to one-time costs.
This adjustment brought the total one-time software develop-
ment costs estimate to about $39.7 million.

     These costs were further assessed by VA in April 1977.
In view of the March 1977 VA estimates, the ratio of software
costs to equipment costs became about 0.9 to 1.

     The March 1977 software development costs estimates
represent a 103-percent increase over those estimated in
the September 1976 cost-benefit study. If these costs should
escalate further and VA experiences the same ratio of software
development costs experienced by some other Government agencies,
the present value net deficit of Target would be even greater
than the $700,000 pessimistic estimate we made on page 66.

     The possible ratios and their impact on the total present
value cost of Target are as follows:

         Ratio of software             :ncrease in total
    to equipment costs (note a)       present value costs

                                           (millions)
               1.0 to 1                        $ 2.1
               1.1 to 1                          5.1
               1.25 to 1                         9.5
               1.7 to 1                         22.8
a/Based on estimated automated data processing equipment pur-
  chase costs of $42.8 million.  (See p. 25.)
      We recognize that the circumstances of Target development
may produce a software-equipment ratio different from the ratios
of 1.7 to 1 and 3.5 to 1 experienced by other Government agen-
cies.   (See p. 25.)  VA's most recent assessment of software
costs in April 1977 resulted in an estimate of $36.8 million,
but VA acknowledged that a contractor was still working to
estimate more accurately the magnitude of work required to
develop, convert, and redesign the Target System. At this
stage we are dealing with estimates which could change as
Target development progresses, and estimates by nature are
not precise. Accordingly, we are presenting the possible im-
pact on the benefit-cost ratio should development costs es-
calate.


                            70
APPENDIX III                                                           APPENDIX III




                        VETERANS ADMINISTRATION
                     OFFICE Or Tom ADMIIISTRATOR OF VtTE.ANS AFFAIRS
                           WASHINGTON. D.C.          20420                    ".e.
                              May 19, 1977


   Mr. Gregory J. Ahart
   Director, Human Resources Division
   U. S. General Accounting Office
   441 G Street, N.W., Room 6864
   Washington, D.C.   205S48

   Dear Mr. Ahart:

             Thank you for giving me the opportunity to comment
   on the GAO draft report to Congressmen Charles Rose and John
   E. Moss in regard to 'he Veterans Administration's Target
   System.

             Since I became Administrator on March 2, 1977, a
   thorough study and analysis of the VA Target System by myself
   and the key knowledgeable officials of the Agency has had a
   top priority.

             Before commenting in detail on the GAO draft report,
   let me state my firm conviction that the current implementation
   plan for the Target System is achievable with very low risk in
   service to our veteran population.

             I further believe the system will prove cost effec-
   tive, and that it will vastly improve VA service to millions
   of veterans and dependents.

             As you know, many questions regarding the Target
   System have been asked in recent years by your office and by
   committees and individual members of Congress.  In a venture
   of this magnitude and this importance to the veterans of our
   nation, I consider it not only proper but healthy that every
   possible question should be raised.

              Now, however, it is my best judgment that the
    outstanding questions have been satisfactorily resolved.   I
    believe the VA should proceed  immediately with the necessary
    steps to make the      er System a reality at the earliest
    possible date.

              On March 2, 1977, I expressed to the HUD-Indepen-
    dent Agencies Subcommittee on Appropriations, House of Repre-
    sentatives, my need for an additional period of time to
    evaluate the status of the project.  On April 1 the Target




                                          71
APPENDIX III                                           APPENDIX III



    System was reorganized to provide a centralized management
    organization charged with the responsibility of creating a
    total management plan by examining every aspect of the Target
    System and developing an appropriately controlled and well
    segmented project protocol and reporting system. I also
    formed an Executive Steering Group comprised of top level
    VA management to provide guidance and participate actively
    in the management and development of Target and a Target
    Implementation Planning Team comprised of leading A tech-
    nicians to assess the status of the effort and to provide
    me with a comprehensive report with recommendations. These
    groups were instructed to examine in detail all aspects of
    the implementation schedule, the projected cost benefits,
    and all unresolved Target management questions surfaced
    by the HUD-Independent Agencies Subcommittee.   his eval-
    uation resulted in the preparation of a modified implemen-
    tation schedule, attainable at low risk, which I consider
    realistic and achievable. Basically, the plan calls for
    the installation of the three Regional Data Processing
    Centers and the interim Target Central System in FY 1978,
    with the implementation of nationwide inquiry for the
    Compeisation, Pension and Education (CP&E) master record
    and the Beneficiary Identification and Records Locator
    files. Subsequent subsystems of Target will be implemented
    on a phased basis through FY 1979 to insure full prototype
    testing at the Philadelphia VA Center prior to implementa-
    tion at other Regional Offices. This phased implementation
    allows ample lead time for Regional Office training prior
    to implementation.
              On April 25, 1977, members of my staff met with
    members f the HUD-Independent Agencies Subcommittee Staff
    and presented to them a revised implementation schedule
    and supporting documentation for their information and
    analysis. It is recommended that the GAO report be modi-
    fied to reflect the contents of this documentation, revised
    schedules and related cost estimates.  (See Attachment A.)

               During the review of the GAO draft report, we
     isolated major areas of concern within the report for .iich
     we feel a statement of the VA's position is appropriate.
     These items are included in Attachment B. Attachment C
     presents a list of minor editorial changes which may be
     of assistance to you in the formulation of the final report.




                                 72
APPENDIX III                                           APPENDIX III



            The major thrust of the draft report is an examina-
  tion of the cost benefit and cost effectiveness methodologies
  used by the VA and the projected cost and benefits of the
  Target System. Considerable emphasis was placed on early
  efforts dating back to 1972.   Our most recent analysis of the
  revised implementation schedule demonstrates conclusively
  that the Target System will be cost beneficial.   It must be
  understood that a cost analysis of this magnitude will have
  certain assumptions that will be revised as more details are
  available. For example, once the award for the Target equip-
  ment is made, the cost will be revised to reflect the actual
  discount of the equipment rather than an estimated discount.
  Questions pertaining to the methodology of our cost analysis
  are addressed in Attachment B.

            I concur in and accept the recommendation to estab-
  lish, in measurable terms, goals and standards that the VA
  seeks to attain to improve benefits claims services to
  veterans.  We will identify goals, objectives and performance
  standards for the Target System which will be quantified
  before installation, against which the system benefit
  improvements will be evaluated.

            The revised implementation schedule and the related
  cost analysis which are included should satisfy any uncertainties
  abcut the progress of development, costs and implementation as
  cited in the GAO draft rport to Congress.   The GAO's draft
  report acknowledges that its own "pessimistic estimate" of
  the system's projected cost effectiveness is subjective and
  could be in error.  Since February 1977 the VA has updated
  and revalidated its cost analysis to reflect modifications
  resulting from detailed analysis and related planning.

            Based on an intensive scrutiny of the Target
  development status, I believe that the current implementation
  plan is achievable with minimum risk and that the system will
   e cost effective.  The Target System is essential if the VA
  is to provide improved services to veterans and dependents and
  is required for the reduction of administrative costs asso-




                                73
APPENDIX III                                           APPENDIX III



     ciated with benefits delivery. In my judgment, the out-
     standin S questions have been satisfactorily answered and.
     it is my desire to proceed with implementation of the
     system.

                              Sincerely,




                              MAX CLELAND
                              Administrator

     Enclosures




                                 74
APPENDIX IV                                          APPENDIX IV


              PRINCIPAL VA OFFICIALS RESPONSIBLE

                 FOR ADMINISTERING ACTIVITIES

                   DISCUSSED IN THIS REPORT

                                        Tenure of office
                                        From          To

ADMINISTRATOR OF VETERANS AFFAIRS:
    J. M. Cleland                    Mar.     1977    Present
    R. L. Roudebush                  Oct.     1974    Feb. 1977
    R. L. Roudebush (acting)         Sept.    1974    Oct. 1974
    D. E. Johnson                    June     1969    Sept. 1974

DEPUTY ADMINISTRATOR OF VETERANS
  AFFAIRS:
    R. H. Wilson                     Mar.     1977    Present
    Vacant                           Jan.     1977    Mar. 1977
    O. W. Vaughn                     Nov.     1974    Jan. 1977
    Vacant                           Oct.     1974    Nov. 1974
    R. L. Roudebush                  Jan.     1974    Oct. 1974
    F. B. ,Rhodes                    May      1969    Jan. 1974

CHIEF BENEvITS DIRECTOR:
    D. St buck                       May      1977    Present
    A. J. Bochicchio (acting)        Mar.     1977    May   1977
    R. H. Wilson                     Jan.     1975    Mar. 1977
    J. J. Mulone (acting)            Nov.     1974    Jan. 1975
    O. W. Vaughn                     Mar.     1973    Nov. 1974
    O. B. Oien                       Feb.     1970    Mar, 1973

CHIEF DATA MA1NAGEMENT DIRECTOR:
    W. R. Martin                     Oct.     1975    Present
    W. R. Martin (acting)            Aug.     1975    Oct. 1975
    R. T. Brown                      Aug.     1974    July 1975
    P. J. Budd                       July     1963    July 1974




                                75