DOD Information Services:

Improved Pricing and Financial Management Practices Needed for Business Area

AIMD-98-182: Published: Sep 15, 1998. Publicly Released: Sep 15, 1998.

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Pursuant to a congressional request, GAO provided information on the Defense Information Systems Agency's (DISA) price-setting process, focusing on: (1) whether DISA is being reimbursed for the services provided; and (2) the accuracy of DISA's financial management information.

GAO noted that: (1) DISA has difficulty: (a) setting prices for information technology services that result in the recovery of the full cost of doing business; (b) getting reimbursed for the services it provides; and (c) producing reliable financial information on the Defense Information Services business area; (2) these weaknesses impair the business area's ability to focus management attention on the full costs of carrying out operations and managing those costs effectively; (3) DISA is embarking upon a major effort to consolidate its Defense megacenters (DMC) and increase their efficiency by allowing them to specialize in mainframe processing and thereby lower their prices; (4) by consolidating the mainframe processing from the current 16 DMC sites to 6 and optimizing mainframe operations, DISA anticipates that planned savings will be passed on to its customers through reduced prices; (5) however, the reported cost of doing business varies considerably from computer center to computer center; (6) an analysis of the cost differences would provide management the opportunity to understand the cases of the differences and thereby help identify inefficiencies and make improvements in the services provided; (7) the DMCs have difficulty estimating future workload; in fiscal year 1997, the Department of Defense's (DOD) records showed that the estimated versus actual workload varied from 15 percent to 174 percent for individual centers; (8) because the DMCs underestimated the amount of work they would perform in fiscal year 1997 for IBM and UNISYS mainframe services, they reported a net profit of $90 million, which is 13 percent of the reported fiscal year 1997 revenue of approximately $682 million; (9) in setting prices for telecommunications services, the Communications Information Services Activity did not incorporate about $137 million of costs related to transitioning independent networks to DISA's new common-user network, prior-year losses, and overhead expenses; (10) because these costs were not included, the prices charged for services were not based on the full costs incurred; (11) since business area costs were offset by appropriations, its prices were further understated; (12) as of January 1998, DISA reports showed that 31 percent of the business area's receivables, or about $173 million, had been outstanding for more than 60 days; and (13) weaknesses within DISA's internal control and accounting systems have hindered the development of accurate financial reports.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In its response to the report, DOD concurred with the recommendation. An official with the Office of the Under Secretary of Defense (Comptroller) stated that throughout the course of the fiscal year all working capital fund activities may not be reimbursed in a timely manner for all services provided. However, at the end of the fiscal year, virtually all activities are being reimbursed for the services provided. According to the DOD official, this issue is discussed with each working capital fund activity as part of the budget review process.

    Recommendation: The Under Secretary of Defense should direct DOD activities to reimburse DISA for the full amount of services provided.

    Agency Affected: Department of Defense: Under Secretary of Defense (Comptroller)

  2. Status: Closed - Implemented

    Comments: In its response to the report, DOD concurred with the recommendation. An official with the Office of the Under Secretary of Defense (Comptroller) stated that although the policy is clearly stated within the DOD Financial Management Regulation, this continues to be a problem within the working capital funds activities. This problem is not unique to DISA. The DOD official stated that the Comptroller's office is unable to prevent this practice from occurring. At best, all it can do is continually stress the need to have funding documents in advance of doing any work as part of the budget review process with each working capital fund activity.

    Recommendation: The Under Secretary of Defense (Comptroller) should direct DOD activities to follow existing DOD "Financial Management Regulation" by providing funding documents to DISA for the amount of services being requested before DISA begins work.

    Agency Affected: Department of Defense: Under Secretary of Defense (Comptroller)

  3. Status: Closed - Not Implemented

    Comments: In its response to the report, DOD did not concur with this recommendation. However, the Department of Defense Appropriation Bill, 1999, dated June 22, 1998, directed DOD to provide a report to the congressional Defense committees by February 15, 1999, on what parts of the DISA budget should be moved into the Working Capital Fund. As of September 2000, DOD still had not provided the congressional Defense committees with the requested report.

    Recommendation: The Director of DISA should, as part of DISA's fiscal year 2000 budget, identify all appropriations used in support of WCF activities and the specific reasons the appropriated funds are being used to support the activities of the WCF.

    Agency Affected: Department of Defense: Defense Information Systems Agency

  4. Status: Closed - Not Implemented

    Comments: In its response to the report, DOD did not concur with this recommendation. DOD stated that transition costs and revenue are considered in the computation of telecommunication prices. However, GAO found that this was not the case. DISA excluded approximately $77 million in transition costs. DOD's Financial Management Regulation states that all estimated costs should be included in the prices charged customers and any realized gains should be used to offset the estimated costs in subsequent fiscal years. In addition, it is DOD policy to treat transition costs as operating expenses and, therefore, include them in the price charged customers. However, DISA did not adhere to the prescribed policy, thereby understating its full cost of operations.

    Recommendation: The Director of DISA should ensure that transition costs and revenues are considered when computing telecommunications prices, in accordance with the criteria set forth in DOD's "Financial Management Regulation."

    Agency Affected: Department of Defense: Defense Information Systems Agency

  5. Status: Closed - Implemented

    Comments: DOD concurred with the recommendation. Projecting workload accurately is a key element in setting prices to help a business area break even. As part of the fiscal year (FY) 2000 program budget review, the FY2000 prices for mainframe services were adjusted based on the workload estimate. For IBM services, the increased workload in fiscal year 1999 resulted in a reported net profit of approximately $28 million, and DOD acted to reduce the related costs of operations and the price charged. For UNISYS, the workload projections for FY1999 and 2000 did not reflect the decrease in workload that occurred in FY1998. Furthermore, the UNISYS FY2000 prices did not reflect the reported $26-million operating loss that occurred in FY1998. The customer's budgets were adjusted to recover the reported loss. The consideration of the workload and the adjustment to the costs and prices, based on estimated workload and related profit or loss, is in keeping with the working capital concept and meets the intent of the recommendation.

    Recommendation: As part of the price-setting process, the Under Secretary of Defense (Comptroller) should ensure the workload estimates in DISA and customer budgets agree.

    Agency Affected: Department of Defense: Under Secretary of Defense (Comptroller)

  6. Status: Closed - Not Implemented

    Comments: In its response to the report, DOD did not concur with this recommendation. DOD stated that given the changes brought on by the consolidation effort, it is difficult to develop accurate workload estimates. DOD also noted the process of developing workload starts 2 years before the prices go into effect. The report recognizes the efforts that DISA had undertaken to improve the accuracy and reliability of its workload estimates. However, the extent of the reported workload variance--from about 74 percent more than the projected workload at one DMC to about 19 percent less than the projected workload at another DMC--is much greater than would normally be expected. The DMCs reported a $90 million net profit for mainframe services in fiscal year 1997, primarily because workload volumes were higher than anticipated. Since the volume of workload is one factor in determining the hourly price, the accuracy and reliability of the workload estimate is critical in establishing this price.

    Recommendation: The Director of DISA should compare forecasted workload estimates to actual work received and consider these trends in developing the workload estimates and prices to charge customers for the services provided.

    Agency Affected: Department of Defense: Defense Information Systems Agency

  7. Status: Closed - Not Implemented

    Comments: In its September 2, 1998, response to the report, DOD did not concur with this recommendation. DOD stated that a detailed study of the causes of cost differences among DMCs would not be relevant because their current operations are changing during the current consolidation effort. As discussed in the report, there were considerable differences in the reported cost of doing business between DMCs. DOD officials acknowledged that the cost differences had not been formally analyzed. Additionally, a DOD official acknowledged that DISA had not studied the differences in costs between DMCs providing the same or similar service.

    Recommendation: The Director of DISA should analyze the cost differences in the estimated cost per central processing unit hour at the DMCs as part of the consolidation effort and identify improvements needed in how they conduct business.

    Agency Affected: Department of Defense: Defense Information Systems Agency

  8. Status: Closed - Not Implemented

    Comments: Although the department concurred with the recommendation, no action has been taken to implement the recommendation. Given that the department has an extensive effort underway to modernize its existing business systems, it is unlikely that corrective action will be taken in the near term. In the department September 1999 Biennial Financial Management Improvement Plan it was noted that it would be at least fiscal year 2003 before the new accounting system is implemented. To date, a new system has not been implemented and a firm date has not been established as to when a new system will be in place.

    Recommendation: The Under Secretary of Defense should direct DISA to record amounts it is owed for services provided in accordance with federal accounting standards.

    Agency Affected: Department of Defense: Under Secretary of Defense (Comptroller)

 

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