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GAO: Report to Congressional Committees: May 2002: Customs Service Modernization: Mangement Improvements Needed on High-Risk Automated Commercial Environment Project: GAO-02-545: May 2002: GAO Highlights: United States General Accounting Office: CUSTOMS SERVICE MODERNIZATION: Management Improvements Needed on High-Risk Automated Commercial Environment Project: Why GAO Did This Study: The U.S. Customs Service is in the early stages of a multiyear, multibillion-dollar project: the Automated Commercial Environment (ACE), a new import processing system that is to support effective and efficient movement of goods into the United States. By congressional mandate, Customs’ spending plans for ACE must meet certain conditions, including being reviewed by GAO. In this study, GAO addresses whether Customs’ latest plan satisfies congressional conditions and is consistent with open GAO recommendations, and it identifies opportunities for strengthening project management. What GAO Found: Customs’ February 2002 ACE spending plan is the second in a series of legislatively required plans. This plan covers certain project management tasks as well as the definition, design, and development of the first ACE increment. GAO found that the plan meets the legislative conditions that Congress imposed on Customs and is consistent with GAO’s open recommendations. Nevertheless, investment in ACE is a high- risk endeavor for several reasons: * The system’s size, performance parameters, and organizational impact make it technically and managerially complex. For example, the estimated cost for acquisition alone is about $1.5 billion, the system is to operate around-the-clock, and it is to drive fundamental business process reform not only within Customs, but also within numerous other federal agencies and countless private sector importers. * Customs fell far short of key commitments made in its first spending plan because it severely underestimated costs. This track record casts doubt on Customs’ ability to meet future commitments. * Despite progress, Customs still lacks important acquisition management controls. For example, it needs to update its enterprise architecture (its agencywide modernization blueprint) to support system design and development, and it needs to advance its acquisition office’s human capital and software management processes. * Customs has recently decided to compress its time frame for delivering the system from 5 to 4 years. This exacerbates the level of project risk by introducing more overlap among incremental system releases. Because of the system’s national importance, Customs is taking a schedule-driven approach to acquiring ACE. However, without the management capacity to effectively acquire such a large and complex system, particularly in light of Customs’ performance to date and the accelerated acquisition and deployment schedule, this approach could backfire. Full system capabilities may take longer and cost more to acquire, deploy, and make operational, because the system delivered under the accelerated schedule could require considerable rework. What GAO Recommends: To increase the chances of delivering needed system capabilities on time and within budget, GAO is making recommendations to the commissioner aimed at improving Customs’ management of ACE, including strengthening system alignment with Customs’ enterprise architecture, cost estimating, human capital capacity, software process maturity, and sequencing of incremental releases. Customs concurred with GAO’s recommendations and described specific actions that it is taking to respond to each. Figure: ACE Is High Risk for Several Reasons: [See PDF for image] [End of figure] This is a test for developing highlights for a GAO report. The full report, including GAO’s objectives, scope, methodology, and analysis is available at www.gao.gov/cgi-bin/getrpt?GAO-02-545. For additional information about the report, contact Randolph C. Hite (202-512-3439). To provide comments on this test highlights, contact Keith Fultz (202- 512-3200) or E-mail HighlightsTest@gao.gov. Highlights of GAO-02-545, a report to the Subcommittee on Treasury and General Government, Senate Committee on Appropriations, and the Subcommittee on Treasury, Postal Service, and General Government, House Committee on Appropriations. May 13, 2002: The Honorable Byron L. Dorgan Chairman The Honorable Ben Nighthorse Campbell Ranking Minority Member Subcommittee on Treasury and General Government Committee on Appropriations United States Senate: The Honorable Ernest J. Istook, Jr. Chairman The Honorable Steny H. Hoyer Ranking Minority Member Subcommittee on Treasury, Postal Service, and General Government Committee on Appropriations House of Representatives: Pursuant to the U.S. Customs Service’s fiscal year 2002 appropriation, [Footnote 1] Customs submitted to Congress in February 2002 its second expenditure plan, requesting $206.9 million for its Automated Commercial Environment (ACE) project. ACE is intended to be Customs’ new import processing system and the first project under the Customs Modernization Program. As required by the act, we reviewed the expenditure plan. Our objectives were to (1) determine whether the second plan satisfied the legislative conditions specified in the act, (2) determine whether the plan is consistent with our open ACE recommendations, and (3) provide observations about the second plan and Customs’ management of ACE. On March 8 and 11, 2002, we briefed your offices on the results of this review. This report officially transmits to you the results of our work and the recommendations we made to the commissioner of Customs. The full briefing, including our scope and methodology, is reprinted as appendix I. In brief, we determined that Customs’ expenditure plan satisfies the legislative conditions specified in the appropriations act. The plan provides for (1) meeting the Office of Management and Budget’s (OMB) capital planning and investment control review requirements; (2) complying with Customs’ enterprise architecture; [Footnote 2] and (3) complying with federal acquisition rules, requirements, guidelines, and systems acquisition management practices. Further, it was reviewed and approved by Customs’ Investment Review Board, [Footnote 3] the Department of the Treasury, and OMB. Regarding the second objective, activities described in the plan are consistent with our open recommendations for Customs to (1) justify and make investment decisions incrementally; (2) strengthen ACE software acquisition management; (3) immediately transfer responsibility and accountability for the International Trade Data System [Footnote 4] (ITDS) pilot to the ACE modernization program manager; (4) include any plans for further investing in the ITDS pilot, including cost, benefit, and risk justification, in the next ACE expenditure plan; and (5) clarify the roles and responsibilities of the ACE modernization independent verification and validation [Footnote 5] (IV&V) agent to ensure that independence is not compromised. Finally, we made the following observations: * ACE is technically and managerially complex and challenging. Planned ACE functional and performance parameters are demanding, and the system is estimated to cost at least $1.5 billion just to put in place, not including operation and maintenance. Also, ACE aims to fundamentally change Customs’ and many other organizations’ business processes through the introduction of new system capabilities. Further, the system is to be available around-the-clock to provide critical information and support important commercial and enforcement systems. * Customs did not meet key commitments made in its first ACE expenditure plan because of a significant underestimation of funding requirements (actual requirements were about 90 percent higher than estimated). This history casts uncertainty on Customs’ ability to reliably estimate costs and meet future commitments. * Despite progress, Customs does not yet have important ACE management controls in place in the following four areas: 1. Enterprise architecture: Customs’ enterprise architecture has not yet been updated and extended to support ACE engineering tasks; consequently, Customs risks having an enterprise architecture that is not sufficiently complete to support ACE design activities. As a result, near-term system design and development decisions could later necessitate system rework to align ACE with the agency’s operating vision, embodied in the updated enterprise architecture. If such rework is necessary, promised system capabilities are unlikely to be delivered on time and within budget. 2. Human capital: ACE is being managed by the Customs Modernization Office (CMO). However, this office does not have the people in place to perform critical system acquisition functions. Moreover, the CMO does not have an effective strategy for meeting its human capital needs. This also increases the risk that promised system capabilities will not be delivered on time and within budget. 3. Software acquisition management: Customs has yet to establish software acquisition process controls that are recognized as best management practices. [Footnote 6] In particular, Customs has not begun to establish process controls for determining whether acquired software products and services satisfy contract requirements before acceptance, nor to establish related controls for effective and efficient transfer of acquired software products to the support organization responsible for maintenance. These control weaknesses further reduce the level of assurance that ACE capabilities will be delivered on time and within budget. 4. Cost estimation: Customs has not validated its ACE expenditure plan cost estimates, and its estimates of management reserve costs are not justified. As a result, its plan does not provide Congress with credible cost information needed for overseeing the project. 5. Customs has compressed its ACE acquisition plans from 5 to 4 years. This compression increases the degree of overlap of program increments, which in turn further increases the risk that ACE capabilities will not be delivered on time and within budget. Recommendations for Executive Action: To improve Customs’ ACE modernization management, we recommend that the Customs Service commissioner direct the chief information officer, as the designated modernization executive, to take the following actions: * Before building each ACE release (i.e., beginning detailed design and development), certify to Customs’ House and Senate appropriations subcommittees that the enterprise architecture has been sufficiently extended to provide the requisite enterprise design content and has been updated to ensure consistency and integration across business areas. * Immediately develop and implement a CMO human capital management strategy that provides both near- and long-term solutions to the CMO’s human capital capacity limitations, including defining the office’s skill and capability needs in terms that will allow Customs to attract qualified individuals and that will provide sufficient rewards and training, linked to performance, to promote their retention. * Develop and implement process controls for the SEI SA-CMM level 2 key process areas and the level 3 acquisition risk management key process area. * By September 30, 2002, conduct and report to Customs’ House and Senate appropriations subcommittees on the results of an internal assessment of the CMO’s maturity against the SEI SA-CMM level 2 key process areas and the level 3 acquisition risk management key process area. * Develop and implement a rigorous and analytically verifiable cost estimating program that embodies the tenets of effective estimating as defined in SEI’s institutional and project-specific estimating models. * Limit future expenditure plan requests for management reserve funds to 10 percent of the total funds requested for the program or adequately justify any management reserve requests in excess of 10 percent. * Address the risks associated with the accelerated ACE acquisition strategy, including (1) immediately analyzing the risks associated with the degree of design, development, and testing concurrency across ACE increments that is inherent in Customs’ 4-year, schedule-driven acquisition strategy; (2) reconsidering the merits of this accelerated strategy; and (3) within 90 days of the date of this briefing, reporting to Customs’ House and Senate appropriations subcommittees on the agency’s strategy for going forward and its plans for mitigating the inherent risks associated with this strategy. Agency Comments: In written comments on a draft of this report, the director, Office of Planning, U.S. Customs Service, concurred with our recommendations and described specific actions that are being taken to respond to each. The director’s comments are reprinted in appendix II. We are sending copies of this report to the chairmen and ranking minority members of other Senate and House committees and subcommittees that have authorization and oversight responsibilities for the Customs Service. We are also sending copies to the secretary of the treasury, the commissioner of the Customs Service, and the director of OMB. Should you or your staff have any questions on matters discussed in this report, please contact me at (202) 512-3439. I can also be reached by e-mail at HiteR@gao.gov . Key contributors to this report were Mark Bird, Barbara Collier, Tamra Goldstein, Randolph Tekeley, Scott Pettis, and Aaron Thorne. Randolph C. Hite Director, Information Technology Architecture and Systems Issues: Signed by Randolph C. Hite: [End of section] Appendix I: Customs’ Service Automated Commercial Environment (ACE) Expenditure Plan: [See PDF for image] [End of Section] Appendix II: Comments from the U.S. Customs Service: U.S. Customs Service Memorandum. DATE: April 24, 2002. FILE: AUD-I-OP MD. MEMORANDUM FOR RANDOLPH C. HITE, U.S. GENERAL ACCOUNTING OFFICE FROM: Director Office of Planning. SUBJECT: Draft Audit Report on the United States Customs Service’s Second Automated Commercial Environment (ACE) Expenditure Plan. Thank you for providing us with a copy of your draft report entitled “Customs Service Modernization: Management Improvements Needed on High-Risk Automated Commercial Environment Project” and the opportunity to discuss the issues in this report. We agree with GAO’s overall observations that the Customs Modernization program is large, complex and important, and thus represents considerable risk. We have taken, and will continue to take prudent steps to address the risks associated with the Modernization program. Key actions are highlighted below: While we believe that the Customs Modernization Office (CMO) was appropriately staffed and structured for the early phases of the program, our early experiences also led to recognition that a new structure and additional resources were required to oversee application development and deployment. A new, expanded organizational structure has been approved doubling the size of the CMO. These positions are being filled now. We have taken a number of steps to improve our cost estimating capability including use of an independent government cost estimator TRADITION and implementation of software tools that allow for a reliable cost estimation process. These efforts will be reflected in future Expenditure Plans. Although the original cost estimate differed from the actual cost, this is not representative of Customs current cost estimating capabilities. The cost estimates from the first ACE expenditure plan pre-dated the contract award and did not include task order changes recommended by eCP and approved by the CMO. Once the scope changes were approved, Task Orders 1-3 have come in on time, on budget, and without modification. Customs believes that now that the task statements are being developed collaboratively with eCP, and with the cost estimation improvements that CMO has implemented, the issue of large cost variances will pass. Customs and eCP recognize the risks associated with pursuing a 4-year application rollout. We have identified the inherent risks of this 4- year approach, analyzed the potential impacts, and briefed the Modernization Executive Steering Committee. The CMO and eCP are employing risk management procedures that conform to Systems Engineering Institute standards to mitigate risks associated with the entire Modernization program, including the first ACE release. Prior to receiving authorization to proceed in each of the subsequent 6 releases, we commit to re-assessing the risk environment and developing mitigation strategies to meet cost and quality targets. At any point, if risks cannot be credibly mitigated Customs and its Integration Contractor will recommend schedule adjustments. Customs has tasked eCP to update and extend the existing enterprise architecture in concert with ACE requirements, planning and engineering work to provide the requisite design content, and consistency and integration across the full scope of the Customs business areas. We will do this in an incremental and logical fashion to minimize risks of subsequent re-work. We believe we can accomplish this objective by completing the basic enterprise architecture frameworks prior to beginning detailed design for each increment. Thus, the enterprise architecture frameworks and relevant derivative artifacts pertinent to the specific ACE increment content will be sufficiently complete prior to beginning detailed design for each increment. The CMO is proceeding with implementation of software acquisition controls that comply with the Software Engineering Institute’s Software Acquisition Capability Maturity Model and is 75 percent complete. The CMO continues to focus on the most critical plans, processes and procedures first across all KPAs as we proceed through the Modernization effort. The attachment to this memorandum details the specific actions that are being taken to respond to the recommendations. If you have any questions regarding these comments, please contact Ms. Michele Donahue at (202) 927-0957. William F. Riley. Signed by William F. Riley. Attachment. Attachment: U.S. CUSTOMS SERVICE. GAO Review of Second Automated Commercial Environment Expenditure Plan. Recommendation 1: Before building each ACE release (i.e., beginning detailed design and development), certify to Customs’ House and Senate appropriation subcommittees that the enterprise architecture has been sufficiently extended to provide the requisite enterprise design content and has been updated to ensure consistency and integration across business areas. Response: Customs recognizes and supports the imperative to establish and incrementally enhance the enterprise architecture to effectively guide and constrain large system development or acquisition projects such as ACE. Customs has tasked eCP to update and extend the existing enterprise architecture in concert with ACE requirements, planning and engineering work in order to provide the requisite design content, and consistency and integration across the full scope of the Customs business areas. The tasking and schedules are specifically designed to ensure the necessary enterprise architecture framework is in place to adequately guide and constrain each release of the ACE system, while also reflecting any resulting changes in the strategic business direction of the enterprise. Customs agrees with the GAO recommendation to certify that extensions to the enterprise architecture provide sufficient context to effectively design the system prior to building each ACE release and reflect any necessary strategic business updates required to ensure consistency and integration across all business areas. eCP has recommended tailoring of Customs System Development Life Cycle (SDLC) to include a Preliminary Design Review (PDR) which will include an enterprise and ACE system architecture assessment component. This review occurs prior to beginning detailed design and development, and therefore is the proper point in the lifecycle to demonstrate the necessary architectural framework and content exists to proceed. The results of this review will provide the objective evidence necessary to provide certification of the enterprise architecture to the House and Senate appropriation subcommittees. Customs expects to demonstrate compliance with this recommendation prior to the start of Task Order 4 detailed design work in June 2002. Target Date: June 30,2002 Responsible Executive: Charles Armstrong. Recommendation 2: Immediately develop and implement a CMO human capital management strategy that provides both near-term and long-term solutions to the CMO’s human capital capacity limitations, including defining the office’s skill and capability needs in terms that will allow Customs to attract qualified individuals and that will provide sufficient rewards and training, linked to Performance, that promote their retention. Response: Customs believes it did apply appropriate program management resources to the initial phases of the Modernization program. However, Customs concurs with GAO that additional resources are required to manage the expanding complexity of the project. To that end, the CMO has defined a new organizational structure for managing the developmental phases of the Modernization program that more than doubles the government positions from 11 to 23. Knowledge and skills required to perform each role have already been identified. Customs is proceeding to staff the new organizational structure now, and by May 1, 2002, the CMO will have filled a number of positions with full-time, Customs- experienced individuals leading the efforts in executive support, program management, workforce transition, integration, ACE requirements development, and ACE Increments 1 and 2 implementation. New CMO members will be quickly oriented to the Modernization Program and provided necessary training as defined in the Modernization Training Plan for Fiscal Year 2002. Customs will continue an aggressive recruiting program both within and external to Customs to fully staff the CMO. Further, the CMO will work with appropriate other Customs Offices to develop a human resources strategy by September 30, 2002 that will focus on defining core competencies to support recruiting, retention and training efforts; tying performance and reward programs to Modernization goals; and developing a succession plan to enable Customs to effectively adapt to personnel changes. Target Date: September 30,2002 Responsible Executive: Charles Armstrong. Recommendation 3: Develop and implement process controls for the SEI SA-CMM level 2 key process areas and the level 3 acquisition risk management key process area. Response: The CMO’s comprehensive SA-CMM process development effort is 75 percent complete and spans all of SEl’s SA-CMM Level 2 Key Process Areas (KPAs)--including the Evaluation and Transition to Support KPAs-and to the Level 3 KPA, Acquisition Risk Management (ARM). As originally noted in the CMO’s briefing to GAO on February 26, 2001, the CMO continues to focus on the most critical plans, processes and procedures first across all KPAs as we proceed through the modernization effort. As the processes are completed, they are immediately released to the organization for use in an institutionalization effort. Process institutionalization will continue after the last plan, process and procedure is approved and will end when all SA-CMM process artifacts are in systematic use within the CMO. The CMO anticipates that the process development activities will culminate in an internal self-assessment that will be completed by September 2002, and the CMO will use the September internal self- assessment to baseline the process institutionalization activities as well. The capstone of the institutionalization effort will be a SA-CMM external pre-assessment at the end of December 2002. The results of the external pre-assessment will be used to schedule the full SEI assessment in 2003. Target Date: September 30,2002 Responsible Executive: Charles Armstrong. Recommendation 4: By September 30, 2002, conduct and report to Customs’ House and Senate appropriation subcommittees on the results of an internal assessment of the CMO’s maturity against the SEI SA- CMM level 2 key process areas, and the level 3 acquisition risk management key process area. Response: The CMO’s current Process Improvement schedule supports the GAO’s recommendation to conduct and report to Customs’ House and Senate appropriation subcommittees on the results of an internal assessment of the CMO’s maturity against SA-CMM Level 2 KPAs and the Level 3 acquisition risk management KPA. Customs will report the results of its internal self-assessment by September 30, 2002. Target Date: September 30,2002 Responsible Executive: Charles Armstrong. Recommendation 5: Develop and implement a rigorous and analytically verifiable cost estimating program that embodies the tenets of effective estimating as defined in SEl’s institutional and project-specific estimating models. Response: Customs agrees with the GAO recommendation that a rigorous and analytically verifiable cost-estimating program is essential to the success of ACE. Customs has taken measures that have proven successful in providing a solid foundation on which the program has effectively contracted for three large Task Orders with no cost over-runs. While there was a variance from the original cost estimates for Task Orders 1 and 2, that delta was due to a two-year old estimate, and a significant change in scope. To remedy the situation, Customs employed an independent contractor, MCRI to develop Independent Government Cost Estimates (IGCEs) in line with SEl’s estimating checklist. When the IGCEs were delivered and the subsequent contract negotiations took place, Customs was able to issue Task Orders 1-3 that IGCE have come in on-time, on-budget, and without modification. Using the eCP method estimates, to Customs provide independent validation has of recently contracted for two more Task Orders (4 and 5) that fell well within the acceptable range of the initial estimates from MCRI. Customs is always exploring ways to refine its cost estimating practices, and will implement improvements as they are identified. One such improvement that has Ball risk analysis software already been implemented is the use tool Crystal calculate levels of certainty around different estimating values. This software tool was used in formulating the Expenditure Plan that is currently undergoing Executive Branch review prior to submission to Congress. This software tool, employing elements of SEl’s cost estimation checklist, will be used to formulate all subsequent expenditure plans, elevating the estimating rigor, providing a greater level of confidence in the estimates, and allowing for better planning for known program risks. Target Date: Customs believes it has taken actions responsive to this recommendation. Responsible Executive: Charles Armstrong. Recommendation 6: Limit future expenditure plan requests for management reserve funds to I0 percent of the total funds requested for the program or adequately justify any management reserve requests in excess of 10 percent. Response: The CMO understands GAO concerns regarding management reserve. To better define risk and uncertainty, CMO is using Crystal Ball, a risk analysis tool. Consequently, Customs will have adequate justification for future expenditure plan requests for management reserve funds. Target Date: Customs believes it has taken actions responsive to this recommendation. Responsible Executive: Charles Armstrong. Recommendation 7: Address the risks associated with the accelerated ACE acquisition strategy, including (1) immediately analyzing the risks associated with the degree of design, development, and testing concurrency across ACE increments that is inherent in Customs 4-year, schedule-driven acquisition strategy, (2) reconsidering the merits of this accelerated strategy, and (3) within 90 days of the date of this briefing, reporting to Customs House and Senate appropriations subcommittees on the Agency’s strategy going forward and its plans for mitigating the inherent risks associated with this strategy. Response: Customs and its Integration Contractor have already identified the inherent risks of this 4-year approach, analyzed the potential impacts, and briefed the eCP are employing Modernization Executive Steering Committee. The CMO and risk management procedures that conform to Systems Engineering Institute standards to mitigate risks associated with the entire Modernization program, including the first ACE release. Prior to receiving authorization to proceed in each of the subsequent 6 releases, the risk environment will be re-assessed and mitigation strategies will be developed to meet cost and quality targets. At any point, if risks cannot be credibly mitigated, Customs and its Integration Contractor will recommend schedule adjustments. As suggested by the GAO, Customs will also provide a report to the House and Senate Appropriation Committees by April 30, 2002, outlining the risks identified and the corresponding mitigation plans. Within this same time period, Customs will also reconsider and analyze the merits of the current ACE program plan and include the findings in this report. Target Date: April 30,2002. Responsible Executive: Charles Armstrong. [End of Comments] Footnotes: [1] Public Law 107-67, dated Nov. 12, 2001. [2] An enterprise architecture is an institutional blueprint for guiding and constraining investments in business process change and systems. [3] Customs’ Investment Review Board makes information technology funding decisions on the basis of comparisons and trade-offs among competing project proposals. [4] ITDS is a component of the ACE project that is to support governmentwide collection, use, and dissemination of trade data. [5] The purpose of IV&V is to provide an independent review of system processes and products. The use of IV&V is a recognized best practice for large and complex systems development and acquisition projects. To be effective, IV&V should be performed by an entity that is independent of the processes and products that are being reviewed. [6] These best practices are described in the Software Acquisition Capability Maturity Model (SA-CMM), developed by the Software Engineering Institute (SEI). In this model, SEI has provided criteria for characterizing an organization’s software development and acquisition processes according to five levels of maturity, with level 2 providing the minimum level of acceptable effectiveness. The Capability Maturity Model is a service mark of Carnegie Mellon University, and CMM is registered in the U.S. Patent and Trademark Office. GAO’s Mission: The General Accounting Office, the investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO’s commitment to good government is reflected in its core values of accountability, integrity, and reliability. 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