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entitled 'Best Practices: Improved Knowledge of DOD Service Contracts 
Could Reveal Significant Savings' which was released on June 09, 2003.

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

United States General Accounting Office:

GAO:

June 2003:

Best Practices:

Improved Knowledge of DOD Service Contracts Could Reveal Significant 
Savings:

GAO-03-661:

GAO Highlights:

Highlights of GAO-03-661, a report to Subcommittee on Readiness and 
Management Support, Committee on Armed Services, U.S. Senate 

Why GAO Did This Study:

Department of Defense (DOD) spending on service contracts approaches 
$100 billion annually, but DOD’s management of services procurement is 
inefficient and ineffective and the dollars are not always well spent. 
Recent legislation requires DOD to improve procurement practices to 
achieve savings.    

Many private companies changed management practices based on analyzing 
spending patterns and coordinating procurement in order to achieve 
major savings.  This report evaluates five companies’ best practices 
and their conduct and use of “spend analysis” and the extent that DOD 
can pursue similar practices.  

what GAO Found:

The leading commercial companies GAO studied reported achieving and 
expecting to achieve billions of dollars in savings by developing 
companywde spend analysis programs and service-contracting strategies. 
Spend analysis answers basic questions about how much is being spent
for what services, who are the suppliers, and where are the 
opportunities for leveraged buying to save money and improve 
performance.  To obtain these answers, companies extract internal 
financial data, supplement this data with external data, organize the 
data into categories of services and suppliers, and have the data 
analyzed by managers or cross-functional teams to plan and schedule 
what services will be bought on a company wide basis.  The results of 
spend analysis are also used for broader strategic purposes—to develop 
reports for top management, to track financial and other benefits 
achieved by the company, and to further improve and centralize 
corporate procurement processes.

DOD is in the early stages of a spend analysis pilot.  Although DOD is 
moving in the right direction, it has not yet adopted best practices 
to the same extent as the companies we studied.  Whether DOD can adopt 
these practices depends on its ability to make long-term changes 
necessary to implement a more strategic approach to contracting.  
DOD also cites a number of challenges, such as its large and complex 
need for a range of services, the fragmentation of spending data 
across multiple information systems, and contracting goals for small 
businesses that may constrain its ability to consolidate smaller 
requirements into larger contracts.  Challenges such as these are 
difficult and deep-rooted, but companies also faced them.  For DOD to 
change management practices for the contracting of services will 
require sustained executive leadership at DOD as well as the 
involvement and support of Congress.

What GAO Recommends:

To achieve savings, DOD should adopt the spend analysis best practices 
of leading companies.  DOD’s approach should provide for an agencywide 
view of service contract spending and promote collaboration to 
leverage buying power across multiple organizations.  DOD should also 
submit a plan and a schedule to Congress for timely changes in 
management structure and service-contracting business processes.

DOD concurred with the recommendation to adopt spend analysis best 
practices but not with submitting a plan for management and business 
process changes.  

www.gao.gov/cgi-bin/getrpt?GAO-03-661.

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

[End of section]

Contents:

Letter:

Results in Brief:

Background:

Leading Companies Have Developed Formal Spend Analysis Programs to 
Improve Services Procurement:

DOD Launches a Pilot Spend Analysis with an Eye toward Developing a 
More Strategic Approach:

Conclusions:

Recommendations for Executive Action:

Agency Comments:

Scope and Methodology:

Appendix: Comments from the Department of Defense:

Tables:

Table 1: Leading Companies We Studied and Their Reliance on Buying 
Services:

Table 2: Companies' Reported 2001 Procurement Spending and Savings:

Table 3: Comparison of DOD's Spend Analysis with Leading Company 
Practices:

Figure:

Figure 1: DOD Contract Dollars for Goods and Services:

Abbreviations:

DOD: Department of Defense:

IBM: International Business Machines:

United States General Accounting Office:

Washington, DC 20548:

June 9, 2003:

The Honorable John Ensign Chairman The Honorable Daniel K. Akaka 
Ranking Minority Member Subcommittee on Readiness and Management 
Support Committee on Armed Services United States Senate:

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

Like the federal government, private companies increasingly rely on 
services and also struggle with methods to better manage their 
purchasing. Last year we reported that to reduce costs, improve 
productivity, and more effectively procure services, many companies 
have adopted a strategic approach--centralizing and reorganizing their 
operations to get the best value for the company as a whole--that is 
based on the implementation of a variety of best practices.[Footnote 2] 
These range from learning much more about their service spending to 
buying services on an enterprisewide rather than business unit basis. 
Pursuing such an approach clearly pays off. One recent survey of 147 
companies in 22 industries indicated a strategic approach to 
procurement had resulted in savings of more than $13 billion in one 
year.[Footnote 3] The very same practices employed by the private 
sector could serve as a foundation for improving the acquisition of 
services in DOD.

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

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

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

Results in Brief:

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

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

This report includes recommendations intended to help DOD adopt spend 
analysis best practices and to use the resulting information to 
implement a more strategic approach to planning and managing the 
acquisition of services.

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

Background:

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

Figure 1: DOD Contract Dollars for Goods and Services:

[See PDF for image]

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

[End of figure]

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

Seeking longer-term remedies to bring about sorely needed reform, the 
Congress has passed legislation to direct DOD to adopt best practices 
used by leading companies and to achieve significant savings through 
improved management approaches for services contracts. The National 
Defense Authorization Act for Fiscal Year 2002 directs DOD to improve 
its management structure and oversight process for acquisition of 
services.[Footnote 7] One of the law's aims is to prompt DOD to 
undertake a comprehensive spend analysis of its services contracts. 
This analysis is intended to provide DOD the basis for expanding its 
use of cross-functional commodity[Footnote 8] teams to leverage its 
buying power, improve the performance of its services contractors, 
organize its supplier base, and ensure that its dollars are well spent. 
Moreover, expecting that DOD could achieve significant savings without 
any reduction in services, the legislation also establishes savings 
goals that DOD should achieve by employing commercial best practices 
and effective management.[Footnote 9] In addition, Congress reduced the 
amounts appropriated to DOD in fiscal years 2002 and 2003 by a total of 
$2.5 billion to reflect savings from business process reforms in the 
procurement of services.[Footnote 10]

Private Sector's Use of Spend Analysis Bolsters Strategic Approach:

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

Table 1: Leading Companies We Studied and Their Reliance on Buying 
Services:

Company: IBM; Function: A global leader in business services and 
computer hardware and software; 2002 revenue of $81.2 billion; 
Reported 2001 procurement (in billions): $42.4; Reliance on buying 
services: IBM's diversification from strictly computer hardware and 
software manufacturing to a broader business model of consulting, 
information technology, and financing services has expanded its 
procurement scope to include services as well as material goods needed 
for production. About 52 percent of IBM's annual spending is for 
general services procurement including complementary workforce, 
advertising, telecommunications, and facilities management.

Company: ChevronTexaco; Function: A leader in the oil and gas industry, 
with 2001 sales and operating revenues of $104.4 billion. Involved in 
exploration and production, refining, marketing and transportation, 
chemical manufacturing and sales, and power generation; Reported 2001 
procurement (in billions): $16 - $18; Reliance on buying services: An 
estimated 60 percent of ChevronTexaco's annual spending pays for 
contracted services that support the company's worldwide oil and gas 
extraction, refining, and distribution; construction and maintenance of 
facilities (such as retail gas stations); and corporate operations, 
including consulting and professional services.

Company: Bausch & Lomb; Function: A global vision care manufacturer of 
contact lenses, lens care products, surgical equipment, and 
pharmaceuticals, netting more than $1.7 billion in 2001 sales revenue; 
Reported 2001 procurement (in billions): $0.9; Reliance on buying 
services: About half of Bausch & Lomb's $535 million in purchases from 
U.S. suppliers was for various services to support marketing and 
advertising, corporate business operations, and research, development, 
and engineering activities. In 2001, Bausch & Lomb's largest spending 
category was management, business, professional, and administrative 
services.

Company: Delta Air Lines; Function: A leader in air transportation for 
passengers and freight throughout the United States and around the 
world; 2001 revenue was $13.9 billion; Reported 2001 procurement 
(in billions): $7 (approximate); Reliance on buying services: About 
60 percent of Delta's annual procurement spending is accounted for by 
service suppliers. Delta contracts with private vendors to perform 
various functions, including fueling and cleaning planes and handling 
baggage.

Company: Dell; Function: A worldwide manufacturer of home and business 
computer systems and servers and provider of computer support services, 
with net 2001 sales revenue of $31.9 billion; Reported 2001 
procurement (in billions): $26; Reliance on buying services: Although 
the bulk of Dell's $26 billion procurement spending goes toward 
purchasing materials and component parts to manufacture its computer 
hardware products, between $3 billion and $4 billion per year is spent 
on general services. The services include consulting, facility 
management, financial operations, training, logistics, marketing, 
installation and future product support, and travel.

Source: GAO analysis.

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

[End of table]

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

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

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

Studies have reported significant cost savings in the private sector, 
with some companies achieving reported savings of 10 percent to 
20 percent of their total procurement costs through the use of a 
strategic approach to buying goods and services. A recent Purchasing 
Magazine poll finds that companies employing procurement best 
practices--including employing effective spend analysis processes--are 
routinely delivering a 3 percent to 7 percent savings from their 
procurement costs.[Footnote 12] Research by A.T. Kearney, Inc., 
suggests that, if all companies using procurement best practices to 
some extent matched the savings rates of the leading companies, total 
savings could reach as much as 41 percent more than the $13.5 billion 
achieved in 2000.[Footnote 13] The leading commercial companies we 
studied report achieving and expecting to achieve billions of dollars 
in savings by developing companywide spend analysis programs and 
services contracting strategies, as shown in table 2.

Table 2: Companies' Reported 2001 Procurement Spending and Savings:

Company: IBM; 2001 procurement spend: $42.4 billion; Procurement cost 
savings: Focuses on delivering competitive advantage year after year; 
reported saving hundreds of millions of dollars since 1994.

Company: ChevronTexaco; 2001 procurement spend: $16 billion-
$18 billion; Procurement cost savings: Reported targeted savings of 
$300 million a year by 2003. After 2005, targeted savings of 
$1.3 billion a year.

Company: Bausch & Lomb; 2001 procurement spend: $900 million; 
Procurement cost savings: Saved a reported $20 million a year from 1998 
to 2001; reduced suppliers from 20,000 to 13,500.

Company: Delta Air Lines; 2001 procurement spend: $7 billion 
(approximate); Procurement cost savings: Reported saving more than 
$200 million in procurement costs since 2000.

Company: Dell; 2001 procurement spend: $26 billion; Procurement cost 
savings: Set goal to save 20% from its general procurement budget of 
$3 billion to $4 billion.

Source: GAO analysis.

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

[End of table]

Leading Companies Have Developed Formal Spend Analysis Programs to 
Improve Services Procurement:

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

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

[See PDF for figure]

[End of figure]

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

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

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

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

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

[See PDF for figure]

Note: IBM is a registered trademark and used by permission of the 
International Business Machines Corporation.

[End of figure]

Company Profile:

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

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

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

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

IBM's spend analysis approach also supplements information from 
internal accounts payable with business intelligence data on suppliers' 
businesses and market status from an outside party. This information is 
part of the spend analysis process used to create up-to-date profiles 
on IBM's top suppliers. IBM spend analysis also integrates external 
information on average prices paid in the market in order to measure 
the company's strategic-sourcing performance in achieving a competitive 
advantage through its procurement processes. IBM works with third-party 
consultants to obtain credible market intelligence in order to 
determine the "best in class" price for a given commodity and whether 
or not IBM is obtaining the lowest market prices from its suppliers.

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

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

In summary, IBM has implemented a number of strategic enhancements 
to its global purchasing approach. Ongoing enhancements, including 
corporate spend analysis capabilities, will focus on deeper integration 
of the procurement process into the company's supply chain management 
aimed towards a new level of global buying effectiveness. IBM is making 
changes to exploit greater electronic procurement capabilities and to 
consolidate purchase order processing and procurement support services 
in centralized locations around the world. Such changes are intended to 
remove administrative workload from the commodity councils, allowing 
them to focus on management of suppliers, internal customers, and 
IBM costs.

[See PDF for image]

Note: ChevronTexaco's word mark is used by permission.

[End of figure]

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

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

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

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

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

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

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

[See PDF for image]

Note: Bausch & Lomb's logo is used by permission.

[End of figure]

Company Profile:

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

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

To perform its spend analysis, Bausch & Lomb extracted accounts 
payable data from more than 50 internal systems and sent the data to 
the consultant to review and correct the records to eliminate 
duplication and identify "families" of suppliers connected through 
corporate ownership that could be used to negotiate better terms. The 
consultant also used its technology tool to compile and automate the 
analysis of Bausch & Lomb's spending data. Spending data were 
standardized by using two publicly available classification systems, 
allowing for comparisons to be made between vendor identifiers and the 
affiliated commodity codes. These internally available data were 
supplemented with other information from the consultant's business 
intelligence database that addressed suppliers' risk[Footnote 18] and 
status as minority or women-owned businesses and with purchase card 
expenditure data.

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

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

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

[See PDF for image]

Note: Delta Air Lines' logo is used by permission.

[End of figure]

Company Profile:

Spend analysis has been a key element in Delta's transformation of its 
more than $7 billion[Footnote 19] procurement operation and its 
adoption of a strategic sourcing process. Since 2000, the company's 
reported payback has been rapid--more than $200 million saved through 
strategic sourcing projects and other supply-chain management 
transformation efforts.

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

Delta's spend analysis program is based on the automated extraction of 
accounts payable records from its core financial system. The extracted 
data are placed in a data warehouse and then compiled in an integrated, 
off-the-shelf software tool (accessible through the company's intranet) 
that is used to develop spend analysis reports. All company managers 
and supply chain management staff can access the company's spend 
analysis reporting tool. The internal financial data are supplemented 
with purchase card spending data, totaling about $75 million per year, 
from the company's bank card vendor. In addition, Delta worked with a 
third party to validate the information received from small, minority, 
and woman-owned businesses in order that supplier diversity information 
was accurately coded in its core financial system.

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

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

An example of Delta's successful outcomes with spend analysis is its 
information technology commodity team's strategic sourcing effort in 
2001. The team's analysis revealed the company was using more than 
60 different information technology contract services suppliers and 
purchasing approximately $16 million in external services. The 
requisition processes varied within each of the business units; limited 
formal metrics were in place for managing supplier performance; and the 
existing contracts' pricing structures did not facilitate cost 
reduction efforts.

An external industry analysis indicated that Delta could benefit by 
bidding information technology contract services given that the 
supplier market was hard hit by the downturn in the economy and that a 
surplus of high quality information technology service suppliers 
existed. Using this knowledge, the commodity team, which included 
representatives from the company's human resources and technology 
business units, developed a new consolidated-proposal request for 
external services and used an on-line reverse auction[Footnote 20] to 
complete the sourcing effort. The new contracts resulted in reported 
annual savings of $3 million and reduced the number of suppliers from 
60 to 6 companies--3 of which qualified as diverse-owned businesses.

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

[See PDF for image]

Note: The Dell logo is a trademark and used by permission of the Dell 
Computer Corporation.

[end of figure]

Company Profile:

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

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

Since 2000, Dell's procurement and finance organizations have worked 
together on its internally developed spend analysis system, which 
provides automated on-line reporting and cost analysis of the company's 
general procurement purchasing.[Footnote 21] Every month, the system 
extracts accounts payable records from one of the company's two 
financial systems for consolidation into the data warehouse used for 
spend analysis. The consolidated spend analysis reports are 
supplemented with supplier diversity, business intelligence, and 
purchase card information obtained from external sources. For example, 
Dell obtains business intelligence information from an outside party 
about its suppliers' financial health and utilizes that independent 
information to determine percent of revenue based on sales to Dell. The 
company also obtains detailed vendor data for purchases obtained under 
the corporate purchase card program. However, the supplemental business 
intelligence and purchase card information must be separately analyzed 
vendor by vendor, item by item, and compared with the consolidated 
reports from the accounts payable information.

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

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

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

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

DOD Launches a Pilot Spend Analysis with an Eye toward Developing a 
More Strategic Approach:

DOD is in the very early stages of setting up a spend analysis program. 
The agency's leaders have made a commitment to improve how DOD acquires 
services and to adopt best commercial practices. Although these are the 
right first steps, the agency has yet to emulate the best practices of 
spend analysis to the same extent as the private sector. DOD also has 
not yet pursued more strategic approaches like reorganizing its 
procurement processes under a more centrally led management structure.

DOD's initial actions include issuing new policy in May 2002--in 
response to our work and the 2002 national defense authorization 
legislation--to elevate major purchases of services to the same level 
of importance as the purchase of major weapon systems. In February 
2003, the Deputy Secretary of Defense tasked a new team to complete, by 
September 2003, a pilot spend analysis of services acquisition data 
across DOD and to determine if larger scale efficiencies and savings 
could be achieved over its current decentralized procurement 
environment.[Footnote 22] DOD requested proposals from interested 
vendors with commercial spend analysis experience to provide contract 
support to the DOD team. Pilot projects associated with the spend 
analysis will be completed by September 2004.

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

Table 3: Comparison of DOD's Spend Analysis with Leading Company 
Practices:

Spend analysis process: Automation; Leading company practice: Data 
automatically compiled to expedite and repeat the spend analysis 
process; DOD practice: DOD furnishes the data to the vendor, which may 
employ commercially available automation tools to compile the data to 
expedite the spend analysis. However, this is a one-time requirement. 
The vendor will not develop an automation tool to consistently repeat 
the spend analysis process.

Spend analysis process: Extraction; Leading company practice: Essential 
data extracted from accounts payable and other internal systems; DOD 
practice: DOD wants the pilot spend analysis to cover all its 
acquisition of services "as best possible". DOD will furnish only data 
extracted from two databases for services contract actions, but is 
excluding analysis of research and development services, and the 
databases do not include contracts for $25,000 or less. DOD 
acknowledges this data may be insufficient, but also says that data 
that could be derived from better sources such as accounts payable or 
other internal systems may be neither available nor feasible to 
incorporate within the project's time frame.

Spend analysis process: Supplemental information; Leading company 
practice: Additional data sought from internal and external sources, 
such as supplier performance and purchase card data; DOD practice: The 
vendor may ask for DOD's help in getting supplemental data for the 
spend analysis from DOD, other government agencies, and commercial 
sources, such as purchase card and logistics data. While DOD will help, 
it cannot guarantee it can provide the data requested.

Spend analysis process: Organization; Leading company practice: Ensure 
accuracy and completeness of data; organize data into logical, 
comprehensive categories of commodities and suppliers; DOD practice: 
The vendor will cleanse and validate data DOD has furnished based on 
its spend analysis experience and knowledge. DOD allows the vendor's 
discretionary use of external databases to help organize the spend 
analysis database. The vendor may also propose classification systems 
to organize categories of commodities and suppliers, to meet DOD's 
requirement to identify the top ten service categories to target for 
strategic sourcing.

Spend analysis process: Analysis and strategic goals; Leading company 
practice: Using standard reporting and analytical tools, data analyzed 
on a continual basis to support decisions in strategic sourcing and 
procurement management to help cut costs, streamline operations, reduce 
number of suppliers, achieve supplier diversity, etc. Scope generally 
covers entire procurement spending; DOD practice: Within 60 days of 
contract award, the vendor must provide the key metrics for reviewing 
DOD's spend analysis database. Within 90 days, the vendor must analyze 
DOD's spend data, identify the top ten services contract areas with the 
largest dollar savings, and prepare business cases and strategic 
sourcing strategies for the top ten services in light of DOD's 
requirements to fulfill socioeconomic and establish savings goals. In 
the second phase, the vendor may have to supply special analyses to 
support the DOD team's review of the ten business cases and development 
of strategic sourcing procurement strategies for at least five pilot 
service categories.

Source: GAO analysis of DOD information.

[End of table]

Although DOD does seek to include basic elements of the key private 
sector spend analysis best practices in the prospective pilot, its 
efforts fall short of the private sector standard. Its efforts at 
automation involve only a one-time requirement, not the repeatable 
process found in private companies. Efforts to extract data are 
restricted to those taken from two centrally available databases on 
services contract actions (excluding research and development[Footnote 
23]) in excess of $25,000, a limitation due to the agency's self-
imposed 90-day time frame for completing the spend analysis.[Footnote 
24] Although superior data--obtained by the vendor from other internal 
and external sources with DOD's help--may be used to supplement what 
has been extracted, DOD cannot guarantee that it will be able to 
provide what the vendor may request.[Footnote 25] The scope of the 
pilot is also relatively limited, compared to the more expansive 
private sector programs. Ten service category business cases are being 
considered, and procurement savings strategies will be tested for at 
least five categories. If time permits, DOD's pilot manager told us 
that more than five categories could be tested.

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

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

Spend Analysis Could Guide Development of a Strategic Approach to Meet 
DOD's Diverse Needs:

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

As DOD attempts to reengineer its approach to purchasing services, it 
faces challenges similar to those faced by private sector 
organizations. For example, DOD is subject to statutory and regulatory 
goals for contracting with small businesses and other socioeconomic 
categories, such as woman-owned small businesses and small 
disadvantaged businesses, that may constrain it from consolidating 
numerous smaller contracts into larger ones.[Footnote 27] This is an 
approach often taken by the companies we studied. Those constraints 
must be considered in the business cases to be developed by the spend 
analysis vendor. The experience of private sector companies--which also 
are keenly aware of the importance of small and diversely-owned 
business participation as suppliers--may offer DOD valuable insights 
into addressing this challenge.

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

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

Although DOD will need to consider how existing problems in its 
financial management systems[Footnote 29] could affect spend analysis 
and services-contracting initiatives, we believe a more businesslike 
approach is possible. The companies we interviewed faced similar 
challenges in accumulating accounts payable and other internal data 
that were highly fragmented across multiple financial and management 
systems and not easily accessible. However, the companies automated the 
extraction of accounts payable and other internal data and made the 
spend analysis process repeatable and more efficient.[Footnote 30] To 
see if DOD could engage in similar actions, we discussed this matter 
with DOD sources and others knowledgeable about DOD and commercial 
vendor payment systems.[Footnote 31] Based on these discussions, DOD's 
systems could provide the type of accounts payable data that companies 
use and thus could be a data-rich source for DOD spend analysis. In 
fact, vendor payment data from multiple processing locations are 
already centrally collected by the Defense Manpower Data Center for 
auditing and other financial management purposes. Use of this data 
could reduce DOD's need to extract and organize data for spend analysis 
efforts by providing a "one-stop shop.":

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

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

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

Conclusions:

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

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

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

* achieve a total-spending perspective across DOD,

* make the business case for collaboration in joint purchasing rather 
than fragmented purchasing,

* organize an effective management structure to assign accountability 
and exercise oversight,

* identify potentially billions of dollars in procurement savings 
opportunities by leveraging buying power, and:

* identify opportunities to achieve other procurement efficiencies such 
as reducing duplication in purchasing, supporting supplier diversity, 
and improving supplier performance.

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

Recommendations for Executive Action:

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

* using technology to centrally automate the spend analysis process to 
make it repeatable,

* using accounts payable and other internal financial and procurement 
data to gain a comprehensive and reliable view of spending,

* supplementing internal data with external information such as 
purchase card expenditures and business intelligence to gain a more 
complete picture of DOD spending and to refine analysis,

* reviewing purchase data for accuracy and consistency, organizing the 
data by commodity and supplier categories in order to identify 
opportunities to leverage buying power,

* promoting enterprise collaboration aimed at gaining the best value, 
including the establishment of cross-functional teams to continue 
developing strategic-sourcing projects, and:

* presenting relevant spending reports to appropriate decision makers 
to establish strategic savings and performance goals, assign 
accountability, and measure results.

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

Agency Comments:

In commenting on a draft of this report, DOD agreed with our findings 
and conclusions that the commercial best practice of spend analysis is 
important to the design of a strategic approach to acquisitions and can 
be used by DOD to achieve substantial savings comparable to those in 
the private sector. Moreover, DOD concurred with the recommendation to 
adopt the effective spend analysis processes employed by leading 
companies--and now intends to automate the process of data collection 
and analysis to make it repeatable, rather than a one-time effort.

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

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

In response to DOD's concern, we modified the recommendation to 
allow time for DOD to complete its current spend analysis pilot and use 
the results to develop a plan. Although we are encouraged by DOD's 
commitment to undertake the pilot, we firmly believe that once the 
pilot is complete, DOD needs to make long-term changes to bolster the 
current organizational structure and processes to foster a more 
strategic approach to acquiring services.

The DOD comments can be found in appendix I.

Scope and Methodology:

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

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

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

* Bausch & Lomb, Rochester, New York;

* ChevronTexaco Corporation, San Ramon, California;

* Dell Computer Corporation, Round Rock, Texas;

* Delta Air Lines, Atlanta, Georgia; and:

* International Business Machines Corporation, Somers, New York.

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

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

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

We are sending copies of this report to other interested congressional 
committees; the Secretary of Defense; the Deputy Secretary of Defense; 
the Secretaries of the Army, Navy, and Air Force; the Under Secretaries 
of Defense (Acquisition, Technology, and Logistics) and (Comptroller); 
the Director, Office of Management and Budget; and the Administrator, 
Office of Federal Procurement Policy. We will also provide copies to 
others on request. In addition, the report will be available at no 
charge on the GAO Web site at http://www.gao.gov.

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

Jack L. Brock, Jr. 

Managing Director Acquisition and Sourcing Management:

Signed by Jack L. Brock, Jr.:

[End of section]

Appendix I: Comments from the Department of Defense:

ACQUISITION, TECHNOLOGY AND LOGISTICS:

DPAP/P:

OFFICE OF THE UNDER SECRETARY OF DEFENSE:

3000 DEFENSE PENTAGON WASHINGTON, DC 20301-3000:

Mr. Jack L. Brock, Jr., 
Managing Director 
Acquisition and Sourcing Management 
United States General Accounting Office 
441 G. Street N.W.
Washington, DC 20548:

Dear Mr. Brock:

This memorandum is in response to your May 6, 2003, request for DoD 
comments to the GAO draft report, `BEST PRACTICES: Improved Knowledge 
of DoD Service Contracts Could Reveal Significant Savings,' dated May 
2, 2003 (GAO Code 120133/GAO-03-661).

The Department concurs with the first recommendation to perform a 
commercial type spend analysis but does not concur with the second 
recommendation to develop a plan to institute changes in the management 
structure and services contracting business processes. With 
transformation efforts underway, DoD is pursuing strategic business 
solutions utilizing commercial best practices wherever possible. As you 
cite in your report, the commercial best practice of spend analysis is 
important to the design of viable, strategic acquisition solutions and 
has allowed for substantial savings in the commercial sector. We share 
your optimism that this type of analysis will allow us to obtain 
similar results. We are committed to developing this functionality 
within the Department and will pursue its usefulness to the maximum 
extent practicable.

Thank you for giving the DoD this opportunity to comment on the draft 
report. My point of contact is Mr. David Boyd at (703) 697-6710 or via 
e-mail at david.boyd@osd.mil:

Sincerely

Deidre A. Lee:

Director, Defense Procurement & Acquisition Policy:

Signed for Deidre A. Lee:

Attachment: As stated:

MAY 21 2003:

GAO DRAFT REPORT - DATED MAY 2, 2003 GAO CODE 120133/GAO-03-661:

"BEST PRACTICES: Improved Knowledge of DoD Service Contracts Could 
Reveal Significant Savings":

DEPARTMENT OF DEFENSE COMMENTS TO THE RECOMMENDATIONS:

RECOMMENDATION 1: To achieve significant improvements across the range 
of services DoD purchases, the GAO recommended that the Secretary of 
Defense direct the Under Secretary of Defense (Acquisition, Technology 
and Logistics) to work with the Military Departments and other DoD 
organizations involved in the pilot to adopt the effective spend 
analysis processes employed by leading companies. Key elements of DoD's 
approach should address:

1. Using technology to centrally automate the spend analysis process to 
make it repeatable;

2. Using accounts payable and other internal financial and procurement 
data to gain a comprehensive and reliable view of spending;

3. Supplementing internal data with external information such as 
purchase card expenditures and business intelligence to gain a more 
complete picture of spending and to refine analysis;

4. Reviewing purchase data for accuracy and consistency, and organizing 
the data by commodity and supplier categories in order to identify 
opportunities to leverage buying power;

5. Promoting enterprise collaboration aimed at gaining the best value 
which would include the establishment of cross-functional teams to 
continue developing strategic sourcing projects; and:

6. Presenting relevant spending reports to appropriate decision makers 
to establish strategic savings and performance goals, assign 
accountability, and measure results. (pgs. 34-35/GAO Draft Report):

DOD RESPONSE: Concur in general. The Department and the Military 
Departments have taken a number of steps to improve the acquisition of 
services. We currently have a spend analysis initiative underway which 
will provide a foundation for future work in this area. While our 
initiative does not exactly mirror the methodologies followed by the 
commercial firms discussed in your draft report, it does contain the 
essential elements necessary to conduct a spend analysis replete with 
commercial data enhancement and the formation of commodity teams to 
develop acquisition strategies for pilot programs. The joint Integrated 
Process Team responsible for overseeing the effort consists of members 
from all facets of the acquisition business process. We are
contracting with a commercial firm experienced in this area to employ 
commercial spend 
analysis techniques. Your report recognizes our time constraints that 
affect the amount of data and number of projects that can be completed. 
The Department will utilize the results of this effort to see how best 
to incorporate spend analysis and strategic sourcing into our business 
practices. The Department does not intend the current spend analysis to 
be a one-time effort but intends to automate the process of data 
collection and analysis as much as possible to facilitate future 
decision-making regarding the acquisition of services.

RECOMMENDATION 2: To ensure that DoD moves forward in a timely manner 
on its commitment for taking a more strategic approach to the 
acquisition of services, the GAO recommended that the Secretary of 
Defense direct the Under Secretary of Defense (Acquisition, Technology 
and Logistics) to develop a plan and a schedule for accomplishing 
changes in management structure and services contracting business 
processes and submit those to the congressional defense committees for 
consultation and approval as part of the fiscal year 2005 budget 
submission and justification process.

(p. 35/GAO Draft Report):

DOD RESPONSE: Non-Concur. The Department does not believe that a 
separate acquisition business process re-engineering effort should be 
performed as an integral part of the spend analysis initiative. The 
Department is already pursuing internal changes through the President's 
Management Agenda as well as other business process initiatives that we 
anticipate will allow us to support enhanced data collection and 
analysis.

As part of our current efforts to perform a spend analysis and develop 
Department-wide acquisition strategies for pilot programs, we will 
identify any deficiencies in our management structure or business 
processes. To develop a plan and schedule for making changes in 
management structure and business processes before completing our 
current efforts, therefore, would be premature. Further, the pilot 
programs may indicate that such changes are neither needed nor 
beneficial.

No single commercial firm compares in size or volume to the Department 
of Defense. Any major changes in management structure and acquisition 
business processes must be carefully developed, coordinated and 
implemented in consonance with all other business process change 
efforts. The Department is committed to seeking improved, more 
efficient methods of acquiring services and will change our acquisition 
business processes accordingly to support them.

[End of section]


FOOTNOTES

[1] DOD-reported data for service contracting dollars, Defense Contract 
Action Data System. Governmentwide-reported 2001 data for service 
contracting dollars, Federal Procurement Data System. Excludes 
contracts valued at $25,000 or less. Fiscal year 2001 is the last year 
for which complete governmentwide data is available. For related 
information for 1997 through 2001, see U.S. General Accounting Office, 
Federal Procurement: Spending and Workforce Trends, GAO-03-443 
(Washington, D.C.: Apr. 30, 2003).

[2] U.S. General Accounting Office, Best Practices: Taking a Strategic 
Approach Could Improve DOD's Acquisition of Services, GAO-02-230 
(Washington, D.C.: Jan. 18, 2002).

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

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

[5] U.S. General Accounting Office, Major Management Challenges and 
Program Risks: Department of Defense, GAO-03-98 (Washington, D.C.: Jan. 
2003).

[6] Although DOD is taking actions to address these issues, most of 
these actions are in the early stages of implementation. It is 
uncertain whether the corrective actions can be fully and successfully 
implemented in the near term. See GAO-03-98.

[7] Sec. 801, Pub. L. No. 107-107, Dec. 28, 2001.

[8] A commodity is a category of products or services segmented by 
commonality of materials or service type. The term does not imply an 
expendable or non-complex item. This grouping will allow volume and 
technical leveraging of organizational spending and the establishing of 
a network of commodity experts. 

[9] Section 802 of the 2002 Authorization Act established savings goals 
of 3 percent in fiscal year 2002, 4 percent in fiscal year 2003, 
5 percent in fiscal year 2004, and 10 percent in fiscal year 2011. The 
following year, because DOD had been unable to develop a method for 
measuring savings achieved through the improved management of services 
contracts, these goals were modified to instead focus on increasing the 
number of services contracts that are competitive-and performance-
based. Bob Stump National Defense Authorization Act for Fiscal Year 
2003, Sec. 805, Pub. L. No. 107-314, Dec. 2, 2002. 

[10] Sec. 8123, Pub. L. No. 107-117, Jan. 10, 2002, and Sec. 8100, Pub. 
L. No. 107-248, Oct. 23, 2002.

[11] Elance, Inc. and CAPS Research, "Narrative Summary: Defining and 
Determining the 'Services Spend' in Today's Services Economy" (Tempe, 
Ariz.: Aug. 2002) http://www.capsresearch.org/benchmarking/
spreports.htm (downloaded Feb. 25, 2003).

[12] Anne Millen Porter, "Spend a Little, Save a Lot!", Purchasing 
Magazine, Apr. 4, 2002. 

[13] A.T. Kearney, Inc., Assessment of Excellence in Procurement 2002. 

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

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

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

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


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

[19] Figure is Delta Air Lines' reported procurement spending in 
calendar year 2001.

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

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

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

[23] In fiscal year 2002, DOD reported a total of 33,440 contract 
actions of more than $25,000 for research, development, test, and 
evaluation services, totaling about $26.9 billion.

[24] DOD will furnish the contractor a few dozen data field elements 
extracted from the Defense Contract Action Data System (for fiscal 
years 2000 through 2002) and the Federal Procurement Data System (for 
fiscal years 2001 and 2002). In fiscal year 2002, DOD reported more 
than 254,000 contract actions in excess of $25,000 for non-research and 
development services, totaling about $66 billion. 

[25] A sizeable sum of DOD spending is through other procurement 
methods and not captured in the data DOD is furnishing to the spend 
analysis vendor on contract actions for more than $25,000. For example, 
in fiscal year 2002, DOD reported almost 5 million contract actions for 
goods and services of $25,000 or less, totaling about $9.8 billion. In 
fiscal year 2001, DOD purchase card spending for goods and services 
totaled $6.1 billion.

[26] GAO-02-230.

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

[28] Examples of concrete steps to improve supplier diversity outcomes 
during the strategic sourcing process are determining baseline spend 
with diverse suppliers; including diverse suppliers in requests for 
information and following up if initial response rate is low; 
developing selection criteria to enable inclusion of diverse suppliers; 
considering the use of regional or multiple requests for proposals; 
seeking creative solutions from suppliers such as partnerships; and 
encouraging and negotiating aggressively with diverse suppliers.

[29] For example, DOD continues to confront pervasive weaknesses in its 
financial management systems, hindering its ability to produce timely 
and accurate financial information needed to make sound business 
decisions and ensure accurate vendor payment for goods and services. 
See GAO-03-98. 

[30] Once companies consolidated spending data from various sources, 
the companies also subjected the data to an extensive review to make 
corrections and ensure that the data were sufficiently accurate, 
complete, and consistent for supporting informed strategic sourcing and 
procurement management decisions. 

[31] The Defense Finance and Accounting Service operates about 14 
systems at several sites to process invoices and disburse payments to 
vendors for goods and services sold to Army, Navy, Air Force, and other 
DOD organizations.

[32] Our reports have highlighted a number of underlying causes 
impeding past reform efforts at DOD. For example, cultural resistance 
to change and autonomous operations have hindered DOD's ability to 
implement broad-based reforms because stakeholders were not able to put 
aside their particular military services' or agencies' interests to 
focus on DOD-wide approaches. See GAO-03-98.

[33] GAO-02-230.

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