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entitled 'U.S. Postal Service: Purchasing Changes Seem Promising, but 
Ombudsman Revisions and Continued Oversight Are Needed' which was 
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Report to the Chairman, Committee on Homeland Security and Governmental 
Affairs, U.S. Senate: 

December 2005: 

U.S. Postal Service: 

Purchasing Changes Seem Promising, but Ombudsman Revisions and 
Continued Oversight Are Needed: 

GAO-06-190: 

GAO Highlights: 

Highlights of GAO-06-190, a report to the Chairman, Committee on 
Homeland Security and Governmental Affairs, U. S. Senate: 

Why GAO Did This Study: 

Purchasing makes up a significant portion of annual expenses for the U. 
S. Postal Service (USPS). USPS has recently made significant changes to 
its purchasing regulations which, according to USPS, will result in a 
more businesslike purchasing process. Some stakeholders, including 
smaller suppliers who stated they rely on USPS for the majority of 
their business, have raised concerns about these changes. GAO was asked 
to (1) describe these changes, stakeholder views, and USPS’s rationale 
for the changes and (2) assess how these changes reflect the principles 
of postal reform and practices of leading organizations and identify 
areas, if any, for continued oversight. 

What GAO Found: 

USPS has recently taken actions to streamline its purchasing 
regulations. The three main changes are (1) revoking and superseding 
its former purchasing regulations, handbooks, circulars, manuals, and 
guidelines and replacing them with streamlined regulations and interim 
internal guidance; (2) establishing new provisions for entering into 
business relationships with suppliers, including the process for 
declining to accept or consider proposals; and (3) creating a new 
process for resolving disputes, disagreements, or arguments between 
USPS and suppliers/potential suppliers, including the establishment of 
an ombudsman. Some postal stakeholders stated these were positive 
changes, while others raised concerns about the need or justification 
for such major changes; potential limitations on suppliers’ ability to 
appeal USPS decisions; and how USPS officials would be held accountable 
for the fairness of purchasing decisions and its results (i. e. , 
ability to achieve cost savings) given this additional flexibility and 
discretion. USPS stated these changes would result in a more flexible, 
efficient, businesslike purchasing system. 

GAO assessed USPS’s new postal purchasing regulations and draft 
internal guidance against key principles of postal reform—flexibility, 
efficiency, accountability, and social responsibility—and the 
purchasing practices of leading organizations. GAO found that USPS’s 
changes are generally consistent with these principles and practices of 
leading organizations, except for USPS’s new ombudsman position (see 
table below). 

How USPS’s Changes Reflect Key Principles and Leading Practices: 

Reflect: 

* Flexibility: Provides more flexibility when updating its policies and 
procedures to respond to changes in market condition. 

* Efficiency: Emphasizes efficiency, including leveraging its buying 
power. 

* Social responsibility: Promotes the use of a diverse supplier base 
and ethical behavior. 

Accountability: Plans to establish goals and methods for measurement. 

Do Not Reflect: 

* Ombudsman: Its role, structure, and decision-making authority are not 
consistent with leading ombudsman practices of independence and 
impartiality. Inconsistencies include the reporting relationship 
(reports to head of USPS purchasing organization) and decision-making 
authority (issues binding decisions rather than recommendations). 

Source: GAO. 

In addition to the ombudsman inconsistencies, concerns remain about how 
USPS’s purchasing changes will be implemented. These concerns relate to 
the delayed issuance of USPS’s final guidance, the potential impact on 
suppliers and USPS’s ability to track and monitor its performance, and 
USPS’s ability to achieve efficiencies under these new flexibilities 
while ensuring the fair and consistent treatment of suppliers. These 
inconsistencies and concerns will require continued oversight. 

What GAO Recommends: 

To address inconsistencies in USPS’s ombudsman, GAO is recommending 
that the Postmaster General revisit the intended purpose for its 
ombudsman, consult with experts to determine other options, and make 
the necessary changes in its regulations and guidance to conform with 
leading principles and practices. GAO provided a draft of this report 
to USPS for its review and comment. USPS generally agreed with our 
findings and recommendations and stated that it will reassess its 
ombudsman’s role and reporting relationship. 

www.gao.gov/cgi-bin/getrpt?GAO-06-190. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Katherine Siggerud at 
(202) 512-2834 or siggerudk@gao.gov. 

[End of section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

USPS Actions to Improve its Purchasing Process, Rationale for Changes, 
and Stakeholder Views of These Changes: 

USPS's Purchasing Changes Are Generally Consistent with Key Reform 
Principles and Practices, Except Those Related to the Ombudsman: 

USPS's Purchasing Changes Are Generally Consistent with Principles and 
Practices of Leading Organizations: 

USPS's Ombudsman Regulatory Provisions and Guidance Are Not Consistent 
with Leading Ombudsman Principles and Practices: 

Continued Oversight of USPS's Implementation of Its New Regulations Is 
Needed: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendixes: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Selected Federal Laws Applicable to USPS Purchasing: 

Appendix III: USPS Revised Purchasing Regulations--Provisions Governing 
the Acquisition of Goods and Services: 

Appendix IV: Comments from the U.S. Postal Service: 

Appendix V: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: USPS Procurement and Purchasing Developments: 

Table 2: Provisions of USPS's Revised Purchasing Regulations: 

Table 3: USPS Prime Contract Commitments with Small, Minority-, and 
Women-Owned Businesses, Fiscal Years 2000-2004: 

Table 4: USPS Compilation of Selected Federal Laws That Apply to USPS 
Purchasing: 

Figures: 

Figure 1: USPS Purchasing Spending for Fiscal Year 2004

Figure 2: USPS's Changes to Its Purchasing Regulations and Guidance: 

Abbreviations: 

ABA: American Bar Association: 

ADR: Alternative Dispute Resolution: 

ADRA: Administrative Dispute Resolution Act: 

FAA: Federal Aviation Administration: 

FAR: Federal Acquisition Regulation: 

NASA: National Aeronautics and Space Administration: 

OMB: Office of Management and Budget: 

USPS: United States Postal Service: 

Letter December 15, 2005: 

The Honorable Susan M. Collins: 
Chairman, 
Committee on Homeland Security and Governmental Affairs: 
United States Senate: 

Dear Chairman Collins: 

The U.S. Postal Service (USPS) has one of the largest procurement, also 
referred to as purchasing, functions in the federal government. In 
fiscal year 2004, it purchased nearly $11.5 billion in goods and 
services. USPS has a nationwide network of over 21,000 suppliers that 
include large, small, minority-, and women-owned businesses that 
provide goods and services such as mail sorting and scanning equipment, 
airmail transportation, and mail delivery. Some of the smaller 
suppliers have stated that they rely on USPS exclusively for their 
business. 

In recent years we have reported and testified on the significant 
financial and operational challenges facing USPS and, in 2001, we 
placed its transformation and long-term outlook on our high-risk 
list.[Footnote 1] The President and Congress have also recognized these 
challenges. In 2002, the President established a commission to examine 
the future of USPS, and the commission's 2003 report included a 
recommendation that USPS revise its purchasing regulations to maximize 
flexibility and to reflect commercial best practices.[Footnote 2] 
Recent legislation has been proposed to modernize and reform the postal 
laws of the United States. Included in postal reform legislation 
introduced during 2005 are provisions expressing the sense of Congress 
that the USPS's purchasing policies should ensure the fair and 
consistent treatment of suppliers and contractors while implementing 
commercial best practices to achieve greater efficiency and cost 
savings, and directing that Congress be provided a report on the number 
and value of contracts and subcontracts that USPS has with small, 
minority-, and women-owned businesses. 

A key component of postal reform is increasing USPS's flexibility to 
operate in a more efficient, businesslike manner, while providing 
appropriate accountability and oversight to ensure fair and transparent 
operations. In 1970, Congress passed legislation that gave USPS a 
unique status as an independent establishment of the federal 
government, authorized USPS to operate more like a business, and 
exempted it from specific categories of laws that are generally 
applicable to other federal agencies including "Federal law[s] dealing 
with public or Federal contracts, property, [or] works, . . ." (39 
U.S.C. §410(a)). As a result, USPS has not been subject to most federal 
laws and regulations applicable to most federal purchasing, including 
the Competition in Contracting Act and the Federal Acquisition 
Regulation (FAR).[Footnote 3] Congress, however, has applied certain 
purchasing-related requirements to USPS that apply to other federal 
government contracts but are not applicable to private entities. For 
example, USPS is required to follow both the Service Contract Act, 
which requires that service employees be paid no less than prevailing 
wages in the locality, as well as the Davis-Bacon Act, which requires 
payment to employees of contractors on the site of federal government 
construction projects to be paid no less than prevailing wages in the 
locality. This uniqueness has sometimes generated tension in the 
expectations of postal stakeholders as to whether USPS should be 
required to follow more traditional federal agency procurement 
practices or those of private companies. In a number of respects, the 
differences in the procurement practices of leading public and private 
organizations are diminishing as both strive to create more efficient 
procurement systems by taking advantage of best business practices to 
lower costs and maximize service and value, while also holding 
management accountable for its performance and ensuring that 
contracting decisions are made in a socially responsible, ethical 
manner. 

For almost two decades, USPS has focused on changing its purchasing 
processes to become more businesslike, most recently by incorporating 
what are called "supply chain management" principles and practices to 
obtain the best value for property, goods, and services to meet USPS's 
needs at a fair and reasonable price. Supply chain management is a 
process used to integrate the flow of goods and services from suppliers 
to the end customer and has helped successful private-sector companies 
leverage their buying power and identify more efficient ways to procure 
goods and services. 

In March of 2004, USPS issued a proposed rule and requested public 
comment on changes to its purchasing regulations. USPS's goal was to 
streamline its purchasing regulations to make them more efficient and 
businesslike. USPS's final rule, which became effective in May 2005, 
revised some provisions contained in the proposed rule but retained the 
focus of the proposed rule. The final rule revoked hundreds of pages of 
legally-binding regulations contained in its Purchasing Manual and 
replaced them with nine pages of legally-binding regulations codified 
at 39 C.F.R. Part 600 and accompanying nonbinding internal guidance. 
USPS plans to replace the interim guidance with its new Supplying 
Principles and Practices early in calendar year 2006. Concerns have 
been raised about these revisions by some postal stakeholder groups and 
suppliers, particularly about whether such a significant overhaul of 
the previous regulations was needed and the potential effects on 
efficiency, accountability, and fairness. As such, you asked us to (1) 
describe the changes USPS made to its purchasing regulations, 
stakeholders' views of the changes, and USPS's rationale for the 
changes and (2) assess how its purchasing changes (both its new 
regulations and draft guidance) reflect the principles of postal reform 
and the purchasing practices of leading organizations and identify 
areas, if any, for continued oversight. 

To describe the major changes to USPS's purchasing regulations, 
stakeholders' views of the changes, and USPS's rationale for the 
changes, we reviewed various documents, including the proposed and 
final regulations published in the Federal Register; USPS's Purchasing 
Manual and other procurement handbooks, instructions, and circulars; 
laws and legislative history of postal reform; and stakeholder comments 
on the proposed changes to USPS's purchasing regulations. We also 
interviewed USPS officials to gather information on their rationale 
behind the changes and other selected stakeholders and suppliers, some 
of whom submitted formal comments on USPS's proposed rule. To assess 
how these changes reflect the principles of postal and procurement 
reform, we identified key principles of efficiency, flexibility, 
accountability, and social responsibility based on various information 
we analyzed, including our past GAO reports on postal and procurement 
reform; the report of the President's Commission on the United States 
Postal Service (Commission) report; proposed postal reform legislation; 
and interviews and documents from organizations with expertise in 
purchasing reform and the ombudsman process. We compared USPS's changes 
in the Final Rule, along with its draft Supplying Principles and 
Practices guidance, with the practices of leading public and private 
organizations. We determined that USPS's data on contract spending were 
sufficiently reliable for the purposes of our review. We requested 
comments on a draft of this report from USPS, and its comments, which 
are reproduced in appendix IV, are discussed later in the report. Our 
work was conducted from April 2005 to December 2005 in accordance with 
generally accepted government auditing standards. 

Results in Brief: 

USPS made changes to its purchasing regulations to create a more 
efficient businesslike approach to its purchasing, which have raised 
concerns from some stakeholders about these actions. The three main 
areas of change in USPS's new purchasing regulations are (1) revoking 
and superseding its former purchasing regulations, procurement 
handbooks, circulars, and instructions, and replacing them with 
streamlined regulations and interim internal guidance; (2) establishing 
new provisions for entering into business relationships with suppliers, 
including the process for declining to accept or consider proposals; 
and (3) creating a new process for resolving disagreements, disputes, 
or protests between USPS and suppliers/potential suppliers, including 
the establishment of an ombudsman. While many postal stakeholders 
recognize the need to promote an efficient procurement process, some 
suppliers, including smaller suppliers who stated they rely on USPS for 
the majority of their business, have raised concerns about these 
changes. In particular, concerns included the justification for such a 
significant change (e.g., revoking most of USPS's purchasing 
regulations and replacing them with nonbinding guidance, which could 
reduce suppliers' basis for appeal of USPS decisions) and whether such 
a regulatory change was needed to achieve further cost reductions. 
Stakeholders also raised concerns about how USPS contracting practices 
would change under the new regulations since USPS had not completed its 
final guidance detailing the principles and practices to be followed at 
the time the new regulations were implemented. Stakeholders stated that 
the subjectivity and lack of detail associated with USPS's new 
regulations would make it difficult to hold USPS purchasing officials 
accountable for their decisions. Further, while some stakeholders 
acknowledged that the ombudsman may be a more efficient way of 
resolving disagreements, some raised concerns about how independence 
and impartiality would be maintained in this process. According to USPS 
officials, the regulatory changes would create a more flexible, 
businesslike approach to purchasing; implement the acquisition portions 
of its Transformation Plan and the Commission's report; and help it to 
lower costs and improve customer service. USPS officials told us that 
under its prior purchasing rules, contracting officers were restricted 
in their decision-making abilities due to cumbersome and inflexible 
rules. 

USPS's revised regulations and draft guidance are generally consistent 
with principles and practices of leading organizations, except for 
USPS's new ombudsman provision, which is inconsistent with key 
principles of independence and impartiality, and raises issues about 
the credibility of USPS's disagreement resolution process. USPS's 
actions to address this inconsistency, as well as other areas of 
concern, warrant continued oversight. We assessed USPS's new postal 
purchasing regulations and draft guidance against key principles of 
postal reform--flexibility, efficiency, social responsibility, and 
accountability--and the purchasing practices of leading organizations. 
USPS's changes to its regulations provide flexibility that should 
enhance the discretion of contracting officers when making decisions. 
The revised regulations may also provide opportunities for USPS to 
achieve cost reductions when adhering to leading practices, such as 
leveraging the organization's buying power to find more efficient ways 
of purchasing goods and services. USPS's draft guidance also includes 
key principles related to social responsibility such as avoiding 
conflicts of interest, promoting positive supplier relationships, 
encouraging support for small, minority-, and women-owned businesses, 
and ensuring transparency in financial dealings. USPS's draft guidance 
states that USPS will establish goals and metrics to hold its 
professionals accountable that will be specific, measurable, and 
results-oriented and will be used to assess and reward performance. 
USPS's Vice President of Supply Management also stated that goals and 
measures have been established related to expected cost savings and 
cost avoidances for each major purchasing category. We are concerned, 
however, about USPS's regulatory change related to its new ombudsman, 
because its role, decision-making authority, and structure are not 
consistent with key principles or practices of independence and 
impartiality embodied by leading ombudsman organizations. Specifically, 
the inconsistencies include the role of USPS's ombudsman as a final 
decision maker, which is different from other public and private sector 
ombudsman who generally make recommendations, and the reporting 
relationship of USPS's ombudsman--USPS's ombudsman is internal to the 
Supply Management organization and reports to the head of USPS's Supply 
Management organization. This type of relationship is not consistent 
with the principles of independence and impartiality and raises the 
potential for conflicts of interest. In addition to these 
inconsistencies, other concerns remain regarding the implementation of 
these purchasing changes. These concerns relate to uncertainty 
associated with the delayed issuance of USPS's final guidance, the 
potential impact of these changes on the number of suppliers and USPS's 
ability to track and monitor performance in this area, and USPS's 
ability to effectively balance key principles of postal reform of 
increasing flexibility and efficiency in its purchasing practices while 
ensuring fair and consistent treatment of suppliers. These 
inconsistencies and concerns will require continued oversight as USPS 
implements its new purchasing regulations. 

As such, we recommend that USPS needs to revisit and revise the 
ombudsman provisions in the regulations to better reflect key 
principles and practices of leading organizations. We provided a draft 
of this report to USPS for its review and comment. USPS generally 
agreed with our findings and recommendations and stated that it will 
reassess its ombudsman's role and reporting relationship. 

Background: 

Prior to 1970, USPS's purchasing policies adhered to federal practices 
prevailing at the time. The Postal Reorganization Act of 1970 
established USPS as an independent entity of the executive branch and 
provided it with flexibilities to operate in a businesslike manner and 
be self-supporting from postal revenues. The 1970 act attempted to 
eliminate legislative, budgetary, and financial policies that were 
inconsistent with efficient modern management and business practices. 
The act exempted USPS from many federal laws and regulations. In 
particular, USPS was generally exempted from key procurement laws and 
regulations, such as the FAR. Although exempt from many federal laws 
and regulations, USPS contracts are still subject to certain federal 
laws including the Contract Disputes Act, and USPS's Supply Management 
program activities, like other postal program activities, are subject 
to program plans pursuant to the Government: 

Performance and Results Act.[Footnote 4] See appendix II for examples 
of these laws as identified by USPS. 

Since the passage of the Postal Reorganization Act, USPS officials 
stated that USPS's purchasing policies have gone through many changes 
and iterations in an effort to follow procurement developments in the 
private sector, streamline the acquisition process, and reduce 
purchasing costs. Table 1 shows a time line of these changes. 

Table 1: USPS Procurement and Purchasing Developments: 

Date: Pre-1970; 
Event: Post Office Department-Purchasing policy was controlled by the 
Federal Procurement Regulation, the precursor of the FAR. 

Date: 1970; 
Event: Postal Reorganization Act-Established USPS, provided it with 
flexibility in its purchasing practices, and exempted it from key 
federal procurement laws. 

Date: 1971; 
Event: Postal Contracting Manual-Incorporated by reference into the 
Code of Federal Regulations. 

Date: 1987; 
Event: Procurement Manual-Developed to simplify policy with the goal of 
combining advantageous aspects of public and private sector 
procurement. USPS decentralized purchasing authority to provide 
contracting officers more flexibility in making procurement decisions. 

Date: 1988; 
Event: Procurement and Supply Department's Plan for Improvement-Evolved 
from five studies addressing practices and performance of procurement 
and supply operations. This plan focused on enhanced customer service, 
shorter customer response time, and lower total cost. 

Date: 1990; 
Event: Phase I of Plan for Improvement-Concentrated on projects to 
upgrade the professionalism of the procurement and supply workforce and 
enhance the efficiency and effectiveness of policies, systems, 
processes, and structure. 

Date: 1992; 
Event: Phase II of Plan for Improvement-Focused on projects to enhance 
customer satisfaction by emphasizing fast response, quality service, 
and adding value to the buying process. 

Date: 1995; 
Event: Consolidation of all purchasing responsibilities in purchasing, 
facilities, and transportation areas-Placed purchasing and supplying 
responsibilities in the Purchasing and Materials organization and gave 
the Vice President of the Purchasing and Materials organization 
responsibility for all purchasing policies. Established qualification 
standards for contracting officers and made contracting officer and 
purchasing specialist full-time positions. 

Date: 1995; 
Event: Procurement Manual revised and reissued as Procurement Manual 
Transmittal Letter 8-Established uniform contracting officer 
qualifications, training requirements, and professional development 
standards. This letter focused on empowering contracting officers with 
greater decision-making authority and responsibility. 

Date: 1996; 
Event: Purchasing and Materials Organization strategic plan 
-Developed strategy to integrate supply chain management aimed at 
focusing on improving policies, procedures, and information systems to 
meet business and competitive needs. 

Date: Jan. 1997; 
Event: Purchasing Manual, Issue 1 (successor to Procurement Manual)-
Effective and transition begins. The manual empowered purchasing 
professionals with discretion to team with internal business partners 
so that each purchase meets the business and competitive objectives of 
USPS. 

Date: 1998-2001; 
Event: Purchasing and Materials Organization-Identified 23 core 
competencies needed to ensure USPS had skilled supply chain management 
professionals. 

Date: Jan. 2000; 
Event: Purchasing Manual, Issue 1-Transition period ends. 

Date: 2001; 
Event: e-Business Strategy for USPS Supply Chain Management, 2002-2010-
Assessed current business and developed options to align supply chain 
management e-business strategy with corporate and functional 
strategies. 

Date: Jan. 2002; 
Event: Purchasing Manual update, Issue 2-Added a section on the supply 
chain management philosophy and its importance to USPS purchasing. 

Date: July 2002; 
Event: Purchasing and Materials organization becomes Supply Management-
USPS restructured its purchasing organization to better align the 
organization with supply chain management best practices. 

Date: Dec. 2003; 
Event: Purchasing Manual update, Issue 3-Became effective. The manual 
contained numerous new and significant changes in purchasing policy. 

Date: March 2004; 
Event: Proposed rule to amend USPS purchasing regulations-Proposed 
revision to implement the acquisition portions of its Transformation 
Plan (April 2002) and President's Commission report (July 2003)-USPS 
received 20 comments from various suppliers. 

Date: April 2005; 
Event: Final Rule revising purchasing regulations-Revoked all former 
purchasing policies and rules and replaced them with streamlined 
regulations and nonbinding internal guidance. 

Date: May 2005; 
Event: Final Rule-Became effective. 

Source: USPS. 

[End of table] 

In the last decade, USPS has been implementing supply chain management 
initiatives that, according to USPS officials, are consistent with 
leading practices of the private sector. In 1997, USPS significantly 
revised its purchasing policies to emphasize cross-functional purchase 
teams that were given more discretion to form effective partnerships 
with suppliers. The goal was to use process management, data analysis, 
and other business practices to help implement supply chain management 
throughout USPS purchasing and material management. USPS also 
restructured its Purchasing and Materials organization to better align 
it with supply chain management best practices. This organization 
established five commodity-based teams (facilities, mail equipment, 
services, supplies, and transportation) with the goal of assembling and 
centralizing commodity-specific expertise and leveraging USPS's buying 
volume to decrease costs. In addition, USPS began emphasizing 
professional development to facilitate the transition to supply chain 
management best practices. This included changing training to focus 
more on the private sector and certifying its employees in either 
purchasing or materials management disciplines. 

In its 2002 Transformation Plan, USPS described its strategy for supply 
chain management and modernizing purchasing procedures as focusing 
resources on lowering overall cost and furthering competitive and 
business objectives. The Transformation Plan described how USPS planned 
to implement leading strategies in this area including: process and 
demand management, data analysis, and business practices that focus on 
strategic sourcing. USPS officials said that they then met with various 
leading procurement organizations, both in the public and private 
sector, to support the implementation of its supply chain management 
strategy. In 2003, USPS asked IBM to analyze the effectiveness of its 
supply chain management policies and practices by comparing them with 
commercial best practices and to make suggestions as to the 
improvements needed.[Footnote 5] IBM's December 2003 report suggested 
that a significant revision of USPS's policies and practices was needed 
and that USPS should identify the philosophies, values, and core 
procedures it deemed important enough to make mandatory and elevate 
those to the policy level and determine what practices are important 
but do not meet the "policy" criteria. USPS responded by reforming its 
purchasing policies and making this distinction--its regulatory changes 
would streamline its purchasing regulations and its guidance related to 
its purchasing principles and practices would be nonbinding. USPS also 
made improvements in the areas of benchmarking, training, manuals and 
instructions, and organizational structure as a result of these 
external reviews. USPS has reported over $1.4 billion in cost 
reductions and cost avoidance from its purchasing activities in fiscal 
years 2000 through fiscal year 2004. 

Postal purchasing activities continue to consume a substantial portion 
of postal spending. In fiscal year 2004, USPS spent approximately $11.5 
billion on its purchasing, which included transportation, supplies, 
services, facilities, and mail equipment. These expenses accounted for 
nearly 20 percent of USPS's total operating expenses. Figure 1 shows 
that in fiscal year 2004, USPS spent approximately $5 billion on 
transportation, $2.4 billion for services, $1.3 billion on facilities, 
$1 billion on supplies, and almost $600 million on capital equipment. 

Figure 1: USPS Purchasing Spending for Fiscal Year 2004: 

[See PDF for image] 

Note: "Other" includes rent, training, and other miscellaneous 
expenses. 

[End of figure] 

USPS Actions to Improve its Purchasing Process, Rationale for Changes, 
and Stakeholder Views of These Changes: 

USPS has recently taken actions to streamline its purchasing 
regulations including (1) revoking and superseding its former 
purchasing regulations, handbooks, circulars, and instructions and 
replacing them with streamlined regulations and interim internal 
guidance; (2) establishing new provisions for entering into business 
relationships with suppliers; and (3) creating a new process for 
resolving disputes and disagreements between USPS and 
suppliers/potential suppliers arising in connection with its purchasing 
process (with the exception of claims that arise under the Contract 
Disputes Act or with respect to disputes about debarment, suspension, 
or ineligibility from government contracting), including the 
establishment of an ombudsman. While many postal stakeholders recognize 
the need to promote an efficient procurement process, some stakeholders 
have raised concerns about how the regulations would be interpreted and 
implemented by USPS officials and whether these changes would have a 
negative impact on fairness, consistency, and equal treatment of 
suppliers. According to USPS officials, these changes would streamline 
its purchasing process and create a more flexible, efficient, 
businesslike approach to purchasing. 

In March of 2004, USPS published a proposed rule in the Federal 
Register that described its plan to amend its purchasing regulations 
and invited comments from interested parties. USPS received 20 
responses, some from various sized suppliers, as well as membership 
associations or organizations that represent numerous suppliers. In May 
2005, USPS implemented its revised purchasing regulations (the Final 
Rule), which completely revoked and superseded all of its former 
purchasing regulations. USPS also issued its Interim Internal 
Purchasing Guidelines, which was to be used by USPS contracting 
officials when making purchasing decisions until USPS completes its 
final guidance, called the Supplying Principles and Practices. At that 
time, USPS Supply Management officials told us that the Supplying 
Principles and Practices would be issued in November or December of 
2005. USPS in September 2005 then revised its estimate and stated that 
the final guidance would be issued in January 2006. Currently, the 
final guidance is being projected by USPS to be issued early in 
calendar year 2006. 

Table 2 lists the relevant sections of the Final Rule that were 
included in the Code of Federal Regulations (C.F.R.), and a more 
detailed explanation of each section is provided in appendix III. 

Table 2: Provisions of USPS's Revised Purchasing Regulations: 

Citations in the C.F.R.: 

601.100 – Purchasing policy; 
601.101 – Effective date; 
601.102 – Revocation of prior purchasing regulations; 
601.103 – Applicability and coverage; 
601.104 – Postal purchasing authority; 
601.105 – Business relationships; 
601.106 – Declining to accept or consider proposals; 
601.107 – Initial disagreement resolution; 
601.108 – Ombudsman disagreement resolution; 
601.109 – Contract claims and disputes; 
601.110 – Payment of claims; 
601.111 – Interest on claim amounts; 
601.112 – Review of adverse decisions; 
601.113 – Debarment, suspension and ineligibility. 

Source: 39 C.F.R. Part 601. 

[End of table] 

We reviewed the changes in each section and determined that some 
changes were likely to have greater impact than the others. For 
example, section 601.111-Interest on Claim Amounts simply restates a 
provision that existed in the now defunct Purchasing Manual. These 
changes are very similar to what USPS included in the preamble to the 
Final Rule as the three main categories of comments from stakeholders. 
We determined that there were the following three main areas of change, 
which we will discuss in greater detail:[Footnote 6] 

* revoking and superseding all former USPS purchasing regulations, 
handbooks, circulars, and instructions and replacing them with 
streamlined regulations and internal nonbinding guidance (section 
601.102); 

* establishing new provisions that specify how USPS enters into 
business relationships with suppliers, including USPS's process for 
declining to accept or consider proposals (sections 601.105 and 106); 
and: 

* creating a new process for resolving disputes, disagreements, or 
protests between USPS and suppliers/potential suppliers, including the 
establishment of an ombudsman (sections 601.107 and 108). 

USPS Has Revoked, Superseded, and Replaced All of Its Former Purchasing 
Regulations: 

Prior to the Final Rule, USPS's purchasing decisions were guided by its 
Purchasing Manual; which was incorporated by reference in the C.F.R., 
and its other procedural guidelines, which included Management 
Instructions and handbooks. The Purchasing Manual contained hundreds of 
pages of detailed provisions describing the processes for: purchasing 
planning, supplier diversity, contract pricing, contract administration 
and supplier relations, among other provisions. Since the Purchasing 
Manual was incorporated by reference in the C.F.R., its provisions were 
legally binding and carried the full force and effect of law. Suppliers 
were able to contest a USPS contract award to USPS's General Counsel 
and/or a federal court having jurisdiction over such challenges based 
on the policies and procedures contained in USPS's Purchasing Manual. 
Figure 2 shows that under the Final Rule, the regulations were revised, 
and the Purchasing Manual was revoked (except as to existing 
contracts), and was replaced with internal guidance which does not have 
the force and effect of law. As a result, the basis for suppliers to 
challenge USPS award decisions is more limited when compared with the 
previous regulations. 

Figure 2: USPS's Changes to Its Purchasing Regulations and Guidance: 

[See PDF for image] 

Note: According to USPS, the Supplying Principles and Practices will be 
released early in calendar year 2006. Until that time, the Interim 
Internal Purchasing Guidelines will be used. 

[End of figure] 

The stakeholder comments described below do not apply to the final 
guidance because USPS has not yet issued it. USPS states that this 
guidance will contain information on the supply chain management 
principles and practices that will drive its procurement activities, 
the use of competition and sourcing strategies, the evaluation of 
proposals, feedback on the rationale used to award contracts, and 
guidance on the avoidance of conflicts of interest. 

Comments on USPS's proposed regulations came primarily from some of 
USPS's largest suppliers, as well as organizations representing both 
large and small suppliers. Some of the commenting stakeholders, such as 
Boise Office Solutions, Lockheed Martin, and Northrop Grumman, stated 
that they support and encourage USPS's desire to operate more 
effectively and implement best business practices of the commercial 
sector. One of these suppliers said that streamlining USPS's 
acquisition regulations could be appropriate and fundamental to 
realizing the full benefits of postal reform and could result in 
greater efficiencies. According to another of these suppliers, the 
streamlining would accomplish this by facilitating more flexible 
contract relationships and permitting faster acquisition times, which 
would benefit both the suppliers and USPS. 

Other stakeholders who commented, such as Mail Contractors of America, 
Inc., and the Association for Postal Commerce, expressed concerns about 
whether USPS's rationale for making such major changes has merit, since 
USPS had ample flexibility under its existing legal authority and its 
Purchasing Manual to incorporate best practices. Further, some 
stakeholders were concerned that the lack of defined purchasing 
policies and procedures might create an environment of uncertainty for 
suppliers, as well as potentially lead to inconsistent and 
contradictory practices and contracting decisions. These stakeholders 
noted that the previous regulatory structure provided consistent and 
transparent procurement policies and procedures. For example, suppliers 
stated that prior to the Final Rule, they knew USPS's policies 
regarding soliciting proposals, contract administration, supplier 
diversity, and how competition and/or sole sourcing would be used in 
procurement actions. In USPS's proposed rule, it had not yet completed 
or released information on how it would conduct these functions under 
its new regulations. As such, some of the suppliers stated that this 
uncertainty would make it difficult for them to know how USPS is making 
purchasing decisions and how USPS officials could be held accountable 
for their decisions. These suppliers stated that this uncertainty may 
threaten supplier confidence, particularly related to a fair and 
consistent procurement process. 

USPS purchasing officials stated that these purchasing rule changes 
would promote an efficient, businesslike purchasing system that would 
allow its contracting officers and USPS the flexibility to make 
business decisions in a more expedited manner. USPS officials told us 
that under its prior purchasing rules, contracting officers were 
restricted in their decision-making abilities due to cumbersome and 
inflexible rules. According to USPS officials, it will be able to 
update its nonbinding guidance more expeditiously compared to its 
previous regulations. To respond to stakeholder concerns related to 
subjectivity and accountability, USPS said that oversight of USPS would 
not be diminished, as those charged now with such functions will 
continue to do so. They also stated that the new principles and 
guidance will be publicly available on USPS's Web site and thus 
transparent. USPS has also added an ombudsman that would among other 
things, review contract award disagreements to determine whether USPS 
received best value. Also, regarding supplier diversity, USPS stated in 
its draft guidance that it will strive, as a strategic business 
initiative, to establish and maintain a strong competitive supplier 
base that reflects the diversity of the supplier community and provides 
suppliers with equal access to purchasing opportunities. 

USPS Has Added New Provisions Regarding Its Business Relationships with 
Suppliers and Its Right to Decline to Accept or Consider Proposals from 
Potential Suppliers: 

Another major change under USPS's Final Rule is a new provision that 
allows USPS to refuse to accept or consider proposals from a person or 
organization who fails to meet reasonable business expectations. This 
regulation includes a new provision where the time limit on the 
duration of a USPS decision to not accept or consider proposals may be 
limited to a specified length of time or may extend indefinitely. The 
supplier also has the right to contest the matter with the ombudsman or 
seek other disagreement resolution procedures. This change establishes 
reasons for USPS to decline to accept or consider proposals if a person 
or organization does not meet "reasonable business expectations." These 
reasons are as follows: 

* marginal or dilatory contract performance; 

* failure to deliver on promises made in the course of dealings with 
USPS; 

* providing false and misleading information as to financial condition, 
ability to perform, or other material matters, including any aspect of 
contract performance; and: 

* engaging in other questionable or unprofessional conduct or business 
practices. 

Some suppliers supported USPS changes in this area, particularly 
because they said the changes better reflect the practices of private-
sector organizations. For example, one of these suppliers stated that 
the private sector has the ability to do business with a supplier or 
choose not to, and private-sector organizations are not required to 
debrief or provide explanations to rejected suppliers as is generally 
required for federal executive branch agencies under the FAR. 

A number of concerns, however, were voiced by other suppliers about the 
changes in this area. These stakeholders were concerned with how 
fairness, consistency, and equal treatment of suppliers would be 
ensured under these more flexible regulations. First, some who had 
comments on the proposed rule were concerned that USPS's criteria for 
entering into business relationships would involve factors other than 
contract performance.[Footnote 7] For example, one supplier suggested 
that USPS could refuse a proposal from a supplier who had submitted a 
bid protest or disputed a contracting decision in the past. Second, 
another supplier stated that there would be a limited right to contest 
USPS decisions related to business relationships. Specifically, the 
supplier noted that USPS already has a formalized debarment and 
suspension process for excluding entities, in certain circumstances, 
from contracting with USPS that incorporates formal due process 
protections.[Footnote 8] Stakeholders also noted that there are not 
similar due process protections accompanying USPS's ability to refuse a 
proposal from a supplier. For example, there is no definite length of 
time mentioned in the rule in which USPS can opt not to do business 
with an entity; it may be limited to a specified length of time or may 
extend indefinitely. As such, stakeholders raised concerns in their 
comments on the proposed rule about the uncertainty associated with 
this new provision. 

USPS purchasing officials stated that these changes would promote a 
system of establishing business relationships similar to that of 
private-sector organizations. USPS stated in the preamble to the Final 
Rule that it is not in the best interest of USPS's customers, the 
supplier community, or general public for USPS to acquire property, 
goods, or services from companies that do not perform adequately. 
According to USPS purchasing officials, this procedure would allow 
discussions about a supplier's past performance to be addressed before 
a potential supplier would spend time and money preparing a proposal. 
This procedure thus allows USPS the ability to inform suppliers in an 
efficient manner that their past poor performance would result in their 
proposal not being considered or selected. According to USPS, this new 
ability to decline to accept proposals may prove less bureaucratic and 
more effective in encouraging suppliers to improve their performance. 
Also, USPS purchasing officials stated that the new regulations provide 
appropriate safeguards that would give aggrieved suppliers written 
notice of the reason(s) why their bids would no longer be considered, 
and an opportunity to provide countervailing evidence, justification, 
or other reasons that the problem has been corrected. USPS purchasing 
officials stated that they expect there to be few occurrences where 
USPS would decline to accept proposals, and the decision would be made 
only after careful analysis of the basis for the action. Moreover, USPS 
said that only the Vice President of Supply Management would have the 
authority to make these decisions and would be held accountable for 
these decisions. These officials also stated that the difference 
between this procedure and debarment is that debarment arises from 
serious and severe conduct, either unethical or criminal, while 
declining to accept proposals arises from the erosion of the business 
relationship as a result of poor performance. Furthermore, the head of 
USPS's purchasing organization stated that debarment for poor 
performance is used rarely and that there was only one such USPS case 
that he was aware of. 

USPS Has Revised Its Regulations Regarding Purchasing Disagreements and 
Added an Ombudsman to Resolve Disagreements: 

Under its Final Rule, USPS provides that all disagreements, disputes, 
protests and claims against USPS arising in connection with its 
purchasing process (with the exception of claims that arise under the 
Contract Disputes Act or with respect to disputes about debarment, 
suspension, or ineligibility from government contracting) must be 
lodged with the responsible contracting officer within 10 days of the 
date of the disagreement.[Footnote 9] If the disagreement is not 
resolved within 10 days following the lodging of the dispute with the 
contracting officer, the disagreement can be lodged with a newly 
created ombudsman.[Footnote 10] This ombudsman was appointed by USPS, 
reports to USPS's Vice President of Supply Management, and is to make 
decisions based on "best value" determinations. The decisions of the 
ombudsman are final and binding, and under the new regulations cannot 
be appealed to a federal court of jurisdiction except for cases where 
the decision was (1) procured by fraud or other criminal misconduct or 
(2) obtained in violation of the regulations contained in the Final 
Rule or an applicable public law enacted by Congress. The Final Rule 
also includes a statement that encourages the use of alternative 
dispute resolution (ADR) to resolve disagreements and 
conflicts.[Footnote 11] A person or organization disagreeing with a 
USPS decision and the contracting officer are encouraged to consider 
ADR methods to resolve a dispute before pursuing the ombudsman process. 

These changes differ from the manner in which disagreements were 
resolved under the previous regulations. First, under the Purchasing 
Manual, a protest could be filed with either the contracting officer or 
directly with USPS's General Counsel. If a protest was filed with the 
contracting officer but was not resolved, it could be referred to 
USPS's General Counsel for review. The General Counsel would either (1) 
review the decision of the contracting officer or (2) review the 
protest that was filed directly with the General Counsel. Appeals of 
contracting officer and/or General Counsel decisions could be made to a 
federal court of jurisdiction. Under the Final Rule, the General 
Counsel is not an official decision maker in the bid protest process. 
Furthermore, the Final Rule restricts the reasons why a protestor can 
appeal a decision of the ombudsman and limits a supplier to an appeal 
from the ombudsman's decision based only on the grounds listed above. 

A number of stakeholders commented that the use of ADR and the 
ombudsman are good steps in achieving a more efficient dispute 
resolution process. These stakeholders also stated that the ombudsman 
process is a promising idea and step in the right direction toward 
having a streamlined and fair resolution process. Some stakeholders, 
however, stated that uncertainties and a lack of independence pose 
serious threats to having a fair ombudsman process. These uncertainties 
included how the ombudsman would be appointed and to whom the ombudsman 
would report, both of which were not included in the proposed or Final 
Rule but may have implications on the independence of the ombudsman. 
Some of the stakeholders said that they preferred the ombudsman to be 
independent of USPS, or at least report to someone outside of USPS's 
purchasing organization. Furthermore, these stakeholders also believed 
that the ombudsman should have the authority to impose corrective and 
remedial action, and questioned the final and binding nature of the 
ombudsman decision making.[Footnote 12] Some stakeholders also noted 
that federal court jurisdiction should not be limited to those cases 
identified by USPS.[Footnote 13] Some stakeholders stated that federal 
courts have supported the right of a protester to appeal a bid protest 
decision of USPS to a federal court for review. 

USPS officials told us that one of the purposes of these changes is to 
ensure that most disagreements arising between suppliers or potential 
suppliers and USPS regarding all aspects of solicitations, awards, and 
related matters, are resolved in an efficient manner at the management 
or contracting officer level. In an effort to avoid costly litigation 
and disputes, and mirror leading private and public-sector 
organizations, USPS revised its protest procedures to emphasize using 
ADR processes or its new ombudsman. USPS has noted that, in the past, 
it has been involved with litigation which is lengthy and costly for 
both parties and which could have potentially been resolved in a more 
informal and efficient way. From calendar year 2000 through 2004, on 
average each year, 21 contract bid protests/disputes were filed with 
USPS's General Counsel, and 2 cases were filed in federal court. USPS's 
Vice President of Supply Management also stated that the new provisions 
related to restricting appeals of ombudsman decisions are intended to 
streamline the appeals process and that, ultimately, the courts will 
decide what cases can be appealed. 

USPS officials also told us that by placing added emphasis on ADR 
processes, they hoped to better resolve disagreements that arise 
between USPS and its suppliers and potential suppliers. USPS's Final 
Rule stated that USPS supports and encourages the use of ADR as an 
effective way to understand, address, and resolve business 
disagreements and conflicts with suppliers. Further, the Final Rule 
states that, in order to better serve its suppliers, USPS appointed an 
ombudsman who is to focus on best-value considerations for USPS and 
business decisions made by the contracting officer to determine which 
supplier should be awarded a contract. According to USPS, this will 
ensure that the right business decision for USPS has been made by the 
contracting officer. USPS has appointed a person as ombudsman who is 
from within the supply management organization, stating that the 
ombudsman needed to come from within the organization and be someone 
who understands supply management, knows the postal culture, and has 
knowledge of postal operations. USPS has said that it wants an 
ombudsman who is familiar with the business, which it said would ensure 
that a prompt result is more likely and less expensive in the long run 
than hiring someone from outside of the agency. 

Diversity of Comments and Differing Expectations Reflect USPS's Unique 
Status: 

The diversity of comments on the proposed regulations reflect the 
differences in expectations that postal stakeholders have often debated 
as part of postal reform. This tension is inherent in USPS's unique 
status as a federal agency with a government monopoly that is operating 
in a more competitive marketplace than when Congress changed USPS's 
status in 1970 and removed the application of many federal laws to USPS 
so that it could act more like a business. We talked to several postal 
stakeholders who commented on USPS's proposed regulatory changes to 
obtain their views on whether USPS addressed their concerns in the 
Final Rule and the potential impact of the Final Rule.[Footnote 14] 
Some association representatives that we spoke with felt that USPS had 
not addressed their concerns in the Final Rule. For example, although 
USPS made a substantive change in the Final Rule (it revised the basis 
for cancelling business relationships and dropped three criteria that 
were criticized in the comments as being too subjective), these 
representatives remain concerned about USPS's additional flexibilities 
in this area. Other stakeholders had similar concerns that USPS has 
more flexibility and discretion than most other federal agencies. They 
also noted that USPS has an advantage over private-sector organizations 
in that USPS has the right to terminate contracts for convenience, 
which private-sector organizations do not.[Footnote 15] However, we 
note that this is not new authority granted under the new regulations 
since USPS could terminate contracts for convenience under previous 
regulations. 

Although it is too early to assess the impact of these changes because 
USPS has not issued its final guidance, and the regulations have only 
been in place for 7 months, the next challenge for USPS will be whether 
its implementation of these revised regulations will raise the 
confidence of its supplier community so that it can achieve the desired 
benefits. We further explored this area by focusing on the key 
purchasing reform principles and practices of leading public and 
private-sector organizations. 

USPS's Purchasing Changes Are Generally Consistent with Key Reform 
Principles and Practices, Except Those Related to the Ombudsman: 

We analyzed the provisions of USPS's purchasing changes, the revised 
purchasing regulations and draft guidance, in terms of key principles 
incorporated in postal reform legislation and the purchasing practices 
of leading public and private-sector organizations. The following 
summarizes these key principles: 

* flexibility--utilize flexibility to implement leading practices, 
effectively respond to changing market conditions and competition, and 
revise policies and processes to reflect evolving changes; 

* efficiency--promote efficient and effective operations; 

* social responsibility--conduct operations in a manner that avoids 
conflicts of interest, promotes positive supplier relationships through 
courtesy and impartiality, encourages support for small, minority-, and 
women-owned businesses, ensures financial transparency in financial 
dealings, and treats people with dignity and respect; and, 

* accountability--promote appropriate accountability by holding 
leadership accountable for the performance of the organization, as well 
as promote transparent operations by tracking, monitoring, evaluating, 
and reporting results. 

For the most part, we found that USPS's changes are consistent with the 
key reform principles and purchasing practices of leading public and 
private-sector organizations. Leading purchasing organizations aim to 
develop an efficient purchasing system that takes advantage of 
available flexibilities to limit costs and maximize service and value 
and promote socially responsible behavior. However, we have concerns 
about inconsistencies between USPS's regulatory change related to its 
ombudsman and key practices and principles. Specifically, we believe 
the role, structure, and decision-making authority of USPS's ombudsman 
are not consistent with key principles or practices of independence and 
impartiality applied by leading ombudsman organizations. Based on these 
inconsistencies and uncertainties related to whether USPS's 
implementation of its new regulations will effectively balance the key 
principles, continued oversight of this area will be needed. 

USPS Draft Guidance: The Supplying Principles and Practices: 

As we described earlier, the preamble to USPS's regulatory changes 
refer to new guidance that, according to USPS, will provide the 
principles and practices to guide USPS's contracting personnel in 
making purchasing decisions. This guidance, the Supplying Principles 
and Practices, has not yet been publicly released and was not part of 
the regulatory comment process. However, USPS provided us with a draft 
copy for the purposes of this review, and the references to guidance in 
this section reflect the draft guidance. 

In order to compare USPS's principles and practices with those of 
leading organizations, we reviewed the eight key principles that were 
included in USPS's draft guidance. These draft principles are as 
follows: 

* Authority and structure: The Postal Reorganization Act provides 
purchasing authority to the Postmaster General. That authority has been 
delegated to the Vice President of Supply Management. Only individuals 
that have delegated contracting authority from the Vice President or 
from other authorized individuals may award, modify, and terminate 
contracts for the purchase of goods and services. Individuals with 
delegated contracting authority must ensure that their contractual 
actions, including contract awards, modifications, and terminations, 
are within the scope of the authority delegated to them before taking 
those actions. 

* Best value: USPS's supply management decisions are to be based on 
best value, which is defined as the outcome that provides the optimal 
combination of elements such as lowest total life cycle cost, 
technology, innovation and efficiency, assurance of supply, and quality 
relative to USPS's needs. In the sourcing area, best value is 
generally, but not always, achieved through competition, which brings 
market forces to bear and allows the direct comparison of proposals and 
life cycle costs. USPS's supply management teams are provided broad 
flexibility in (1) deciding which elements of value will be sought by 
USPS and expressed in solicitation evaluation factors and their 
weightings and (2) determining the best supply management method. 

* Ethics and social responsibility: USPS's supply management 
professionals should conduct themselves with integrity and must adhere 
to the "Standards of Ethical Conduct for Employees of the Executive 
Branch," (5 C.F.R. 2635) and the "Supplemental Standards of Ethical 
Conduct for Postal Employees," (5 C.F.R. Part 7001). In addition, 
USPS's supply management activities are guided by the Institute of 
Supply Management's "Principles of Social Responsibility." 

* People and culture: USPS requires supply management personnel to have 
baccalaureate or postgraduate degrees so that they will have 
appropriate competencies, such as the ability to perform detailed 
pricing, market, and item analyses. Supply Management personnel are 
encouraged to take prudent risks to achieve desired goals. These goals 
will be aligned with Supply Management's organization goals, and goals 
will be the basis for metrics used to assess and reward the performance 
of supply management professionals. 

* Planning and strategies: USPS will adopt proven supply management 
tools and techniques to meet its financial goals. USPS is committed to 
continually analyzing and improving its supplying practices to enhance 
its competitive advantage, efficiency, and effectiveness. USPS will use 
a variety of means, including benchmarking and other market research; 
participation in professional organizations; strategic planning; 
leveraging spend by centralizing spend categories and standardizing 
products to reduce total cost, including transaction costs; and improve 
quality and performance. 

* Statutory and regulatory requirements: USPS will comply with its 
statutory and regulatory obligations contained in the C.F.R. 

* Supplier relations: USPS will foster strong, mutually beneficial 
relations with its suppliers based upon sound business practices and 
mutual trust in which both parties work toward a common goal. USPS will 
continuously measure, analyze, and enhance supplier performance 
relative to contractual requirements and the best practices of leading 
supply organizations. USPS will establish a strong, competitive 
supplier base that reflects the diversity of the supplier community. 
Additionally, USPS suppliers will be encouraged to use small, minority-
, and women-owned businesses as subcontractors to the maximum extent 
consistent with effective contract performance. 

* Technology: One of USPS's goals is to have an integrated electronic 
business solution for all supply processes so that USPS suppliers will 
become capable of conducting business electronically. USPS will attempt 
to automate routine transactions to reduce processing time, improve 
quality through better record keeping and fewer errors in data, reduce 
inventory through faster and more accurate filling of orders, and 
provide management with improved decision-making tools through near 
real-time access to business information. 

The draft guidance also contains the general practices to be used by 
USPS employees when making purchasing decisions. These practices 
include Identify Key Stakeholders, Select Contract Type, and Provide 
Feedback and fall into the following six general areas: 

1. identifying needs, 

2. evaluating sources, 

3. selecting suppliers, 

4. delivering and receiving products and services, 

5. measuring and managing supply, and: 

6. disposing of assets (end of life). 

The guidance also identifies tools and techniques, roles and 
responsibilities, and key questions that need to be addressed by USPS 
contracting officials when making purchasing decisions. 

Key Principles and Practices Applied by Leading Organizations: 

We also reviewed numerous documents from organizations involved in 
postal and procurement reform efforts and discussed leading procurement 
reform practices with experts in this area who consult with both public 
and private-sector organizations to determine the key principles that 
they follow when making reforms. Based on this information (which is 
described below), we identified the key principles of flexibility, 
efficiency, social responsibility, and accountability, as well as the 
practices applied by leading organizations in this area. 

Proposed postal reform legislation: During the past 10 years, Congress 
has looked at ways to increase flexibility and authority for USPS so 
that it can better adapt to the changing marketplace and remain viable 
as a self-financing public institution. These legislative efforts have 
included provisions that would reform selected purchasing and 
contracting activities. The most recent postal reform legislation 
introduced in 2005--S. 662 and H.R. 22--would provide USPS additional 
flexibilities to operate in a more efficient manner but couple this 
additional flexibility with both accountability and oversight 
mechanisms to ensure fairness and consistency.[Footnote 16] 
Specifically, S. 662, states that USPS should (1) ensure the fair and 
consistent treatment of suppliers and contractors through the use of 
mechanisms such as competitive contract award procedures, effective 
dispute resolution mechanisms, and socioeconomic programs and (2) 
implement commercial best practices in its purchasing policies to 
achieve greater efficiency and cost savings. Further, H.R. 22 included 
a provision that would have required USPS to report to the President 
and Congress on the number and value of contracts and subcontracts that 
USPS has entered into with small, minority-, and women-owned 
businesses. 

President's Commission report: The Commission's 2003 report called for 
USPS to take advantage of certain corporate best practices to improve 
overall efficiencies and stated that, in instances where USPS is 
granted additional flexibility, mechanisms are needed to promote 
accountability and oversight of USPS's operations.[Footnote 17] The 
report said that USPS could save hundreds of millions of dollars by 
adopting purchasing practices that have substantially lowered costs for 
private-sector companies. The report also noted that although the 1970 
act granted USPS flexibility in its procurement process, USPS officials 
have elected not to take advantage of those flexibilities and instead 
have abided by standards in line with those applicable to other federal 
agencies under the FAR. As such, the Commission recommended that USPS 
"take full advantage of the flexibility it is granted under the current 
law and that Congress strongly support its aggressive procurement 
reforms in acknowledgement of its substantial benefits to all 
ratepayers." 

OMB Strategic Sourcing Guidance: Although they do not apply to USPS, we 
also reviewed the Office of Management and Budget's (OMB) guidance to 
federal agencies on implementing its strategic sourcing initiative so 
that agencies leverage their spending to the maximum extent possible. 
OMB describes strategic sourcing as a collaborative and structured 
process of critically analyzing an organization's spending and using 
this information to make business decisions about acquiring commodities 
and services more effectively and efficiently. This process helps 
agencies optimize performance, minimize price, increase achievement of 
socioeconomic acquisition goals, evaluate total life cycle management 
costs, improve vendor access to business opportunities, and otherwise 
increase the value of each dollar spent. Some of the practices included 
in OMB's guidance include the following: 

* Strategic sourcing governance--A charter should be developed 
outlining the members, roles, responsibilities, and operations of an 
agencywide Strategic Sourcing Council and any commodity councils to be 
formed. 

* Strategic sourcing goals and objectives--The Strategic Sourcing 
Council should establish annual strategic sourcing goals and 
objectives, by fiscal year. These goals and objectives should include 
existing strategic sourcing efforts, as well as prioritizing new 
initiatives. In addition to cost and performance goals, any strategic 
sourcing plan must be balanced with socioeconomic goals for small 
businesses, small disadvantaged businesses, women-owned small 
businesses, veteran-owned businesses, service-disabled veteran-owned 
businesses, and others, as appropriate. 

* Performance measures--The Strategic Sourcing Council should establish 
agencywide performance measures and reporting requirements in order to 
enhance accountability by monitoring and continuously improving the 
strategic sourcing program. 

* Communications strategy--The Strategic Sourcing Plan should also 
include a communication strategy that clearly conveys senior 
management's commitment to the effort, describes the scope of the 
effort, and identifies any organizational changes. The communications 
strategy should also include steps to make agency employees aware of 
awarded strategic sourcing contracts and how they are to be used. 

* Training strategy--The plan should identify actions necessary to 
educate agency personnel to support effective and efficient strategic 
sourcing implementation and management. 

GAO reports and testimonies: We have testified and reported on multiple 
occasions that we support postal reforms that would provide USPS 
additional flexibility to act in a more efficient, businesslike manner 
along with appropriate accountability mechanisms to ensure 
fairness.[Footnote 18] In September 2005, we established a framework 
for assessing the acquisition function at federal agencies, which 
highlighted the importance of promoting an efficient, effective, and 
accountable acquisition process.[Footnote 19] In particular, this 
framework identified how the consistent implementation of clear and 
transparent policies and processes will assist in effectively managing 
the acquisition process and promoting successful outcomes. We also have 
issued reports examining the savings that leading private-sector 
companies, including ChevronTexaco, Dell Computer, and IBM, have 
achieved by using a strategic approach to procurement and spend 
analysis and concluded that this approach can be effective for federal 
agencies as well.[Footnote 20] These reports identified that the 
Departments of Defense, Veterans Affairs, Health and Human Services, 
and Agriculture have made progress in also have issued reports that 
focused directly on contracting activities at USPS. In these reports, 
we noted that although USPS was using supply chain management--a 
process that has helped private-sector companies leverage their buying 
power and identify more efficient ways to procure goods and services--
USPS has had mixed success in implementing some of its initiatives in 
this area.[Footnote 21] These shortcomings will be discussed in more 
detail later in this report. 

Private-sector purchasing experts: In addition to our previous work in 
the procurement area, we spoke to officials from organizations that are 
considered experts in the area of purchasing reform and who also 
consulted with USPS about changes needed in its purchasing practices. 
These included officials from IBM, the Center for Strategic Supply 
Research, and the Institute for Supply Management. These officials 
stated that leading organizations in this area continually look for 
opportunities to increase efficiency and "best value" in this area. 
Based upon our past work in this area, as well as discussions with 
these experts, we identified some of the leading practices that are 
related to implementing a strategic sourcing approach include the 
following: 

* take an enterprise wide approach to buying goods and services; 

* provide clear and strong leadership, including establishing goals and 
prioritizing initiatives to enhance accountability for performance; 

* utilize supply chain management to leverage the organization's buying 
power and identify more efficient ways to procure goods and services; 

* develop information systems--i.e., a spend analysis system--to 
identify how much is being spent with which supplier for what goods or 
services; 

* create commodity-specific experts and provide these experts the 
flexibility and discretion to make market-based decisions; 

* demonstrate value and credibility of new processes through the use of 
cost and performance metrics and reporting to monitor and make 
continuous improvements; and: 

* establish proactive business relationships, particularly with high-
quality suppliers, such as utilizing prequalified supplier lists. 

These experts also noted other leading practices that private-sector 
companies incorporate in their purchasing processes. These include 
efforts to: 

* resolve disputes in an efficient manner, including alternative 
dispute resolution; 

* promote socially responsible contracting that incorporates a diverse 
supplier base and ensures that contracting officials act in an ethical, 
professional manner; and: 

* establish flexible policies and procedures that can be updated in an 
expeditious manner to effectively respond to market changes. 

USPS's Purchasing Changes Are Generally Consistent with Principles and 
Practices of Leading Organizations: 

For the most part, USPS's changes to its purchasing policies--its new 
regulations and its draft guidance--reflect leading practices aimed at 
increasing the flexibility, efficiency, social responsibility and 
accountability in its purchasing system. One area of USPS's regulatory 
changes that we do not believe is consistent with leading practices, 
its ombudsman, will be discussed in the next section of this report. 

USPS's Purchasing Changes Are Consistent with the Leading Principle of 
Flexibility: 

We found that USPS's regulatory changes and guidance include leading 
practices related to flexibility. Leading organizations in both the 
public and private sector need to have the flexibility to take 
advantage of leading practices, such as reengineering their purchasing 
processes to incorporate supply management initiatives and strategic 
sourcing. USPS's new regulations state that they are designed to permit 
flexibility so that USPS may respond to market conditions in acquiring 
the best property goods and service to meet its needs at a fair and 
reasonable price. According to USPS officials, it will be able to 
update its non-binding guidance more expeditiously compared to its 
previous regulations. This allows for more timely and responsive 
reactions to changes in the marketplace. Also, USPS's new regulations 
provide flexibilities similar to those for leading private-sector 
organizations in terms of how they enter into business relationships 
and decline to accept or consider proposals. Further, USPS's new 
guidance enhances the discretion of contracting officers when making 
decisions. 

USPS's Purchasing Changes Are Consistent with the Leading Principle of 
Efficiency: 

We also found that USPS's changes are consistent with leading practices 
related to increasing efficiencies. Leading organizations continually 
look for opportunities to improve the efficiency of their procurement 
systems and use a variety of practices to achieve these efficiencies 
including: 

* incorporating supply chain management, 

* conducting spend analysis, 

* creating commodity-specific experts, 

* establishing proactive business relationships with suppliers, and: 

* determining efficient ways to resolve disputes and disagreements. 

USPS's draft guidance incorporates specific leading practices to 
implement supply chain management, conduct spend analysis, establish 
commodity-specific experts, have effective and expeditious dispute 
resolution processes, promote positive business relationships, improve 
management structure and oversight, prequalify suppliers, and 
effectively use technology. This guidance states that it expects that 
efficiencies will be gained by leveraging its nationwide network. For 
example, instead of purchasing gas from various suppliers, USPS intends 
to take advantage of volume discounts and consolidate its buys with 
fewer suppliers. These actions should allow USPS to reduce the number 
of transactions that occur and take advantage of volume discounts. 

USPS's Purchasing Changes Are Consistent with the Leading Principle of 
Social Responsibility: 

USPS's new regulations include some specific factors that are 
consistent with leading supply management principles and practices 
related to social responsibility. These principles state that leading 
public and private organizations should conduct their operations in a 
socially responsible, professional manner by avoiding conflicts of 
interest, promoting positive supplier relationships through courtesy 
and impartiality, encouraging support for small, minority-, and women-
owned businesses, ensuring financial transparency in financial 
dealings, and treating people with dignity and respect.[Footnote 22] 
The process and policies by which these results are achieved, however, 
can vary between public and private organizations. For example, a 
couple of USPS suppliers stated that they do not consider fairness to 
be a key component of their procurement policies and procedures, but 
that principles of socially responsible behavior, such as incorporating 
integrity, ethical behavior, and supplier diversity, are critical to 
their success. One of the key differences between public and private 
sector purchasing is that purchasing regulations for public sector 
entities that fall under the FAR include specific references or 
objectives related to fairness. For example, the FAR emphasizes 
conducting business with integrity and fairness, such as requiring open 
communication with stakeholders and developing a trained, qualified 
procurement workforce. These actions are aimed at maintaining the 
public's trust in the federal procurement system. 

USPS's ethics and social responsibility principle in its draft guidance 
calls for USPS's supply management professionals to act with the 
highest standards of conduct, ethics, and integrity, and these 
professionals also will be guided by the key principles of social 
responsibility identified by the Institute of Supply Management. This 
guidance specifies that contracting officials must maintain necessary 
professional proficiencies. Furthermore, under the principle titled 
"supplier relations," the guidance states that USPS will attempt to 
establish and maintain a strong competitive supplier base that reflects 
the diversity of the supplier community and provides suppliers with 
equal access to purchasing opportunities. Although it is specifically 
excluded from the operation of the Small Business Act by 15 U.S.C. 
637c, USPS stated that it continues to be a leader in this area. For 
example, USPS reported that. on average over the past 5 years, it has 
distributed 4.1 percent of its prime contract commitments to minority-
owned businesses, 6.4 percent to women-owned businesses, and 42.3 
percent overall to small businesses (see table 3). In comparison, the 
Small Business Administration's governmentwide aggregate goals in 
fiscal year 2004 were 5 percent for women-owned businesses and 23 
percent for small businesses.[Footnote 23] USPS reported that in fiscal 
year 2004 it had contract commitments worth about $344 million with 
minority-owned businesses, $577 million with women-owned businesses, 
and over $3.4 billion with small businesses. 

Table 3: USPS Prime Contract Commitments with Small, Minority-, and 
Women-Owned Businesses, Fiscal Years 2000-2004: 

Dollars in millions. 

Fiscal year: 2000; 
Minority-owned businesses: Contract commitments: $336.8; 
Minority-owned businesses: Percentage of overall contract 
commitments[A]: 4.7%; 
Women-owned businesses: Contract commitments: $488.7; 
Women-owned businesses: Percentage of overall contract commitments: 
6.8%; 
Small businesses: Contract commitments: $3,564.9; 
Small businesses: Percentage of overall contract commitments: 49.6%. 

Fiscal year: 2001; 
Minority-owned businesses: Contract commitments: $313.9; 
Minority-owned businesses: Percentage of overall contract 
commitments[A]: 2.3%; 
Women-owned businesses: Contract commitments: $569.5; 
Women-owned businesses: Percentage of overall contract commitments: 
4.1%; 
Small businesses: Contract commitments: $3,807.6; 
Small businesses: Percentage of overall contract commitments: 27.6%. 

Fiscal year: 2002; 
Minority-owned businesses: Contract commitments: $272.5; 
Minority-owned businesses: Percentage of overall contract 
commitments[A]: 4.5%; 
Women-owned businesses: Contract commitments: $361.3; 
Women-owned businesses: Percentage of overall contract commitments: 
6.0%; 
Small businesses: Contract commitments: $2.463.1; 
Small businesses: Percentage of overall contract commitments: 41.1%. 

Fiscal year: 2003; 
Minority-owned businesses: Contract commitments: $334.0; 
Minority-owned businesses: Percentage of overall contract 
commitments[A]: 3.8%; 
Women-owned businesses: Contract commitments: $590.4; 
Women-owned businesses: Percentage of overall contract commitments: 
6.6%; 
Small businesses: Contract commitments: $3,863.9; 
Small businesses: Percentage of overall contract commitments: 43.4%. 

Fiscal year: 2004; 
Minority-owned businesses: Contract commitments: $344.8; 
Minority-owned businesses: Percentage of overall contract 
commitments[A]: 5.0%; 
Women-owned businesses: Contract commitments: $577.3; 
Women-owned businesses: Percentage of overall contract commitments: 
8.4%; 
Small businesses: Contract commitments: $3,429.1; 
Small businesses: Percentage of overall contract commitments: 49.7%. 

Average; 
Minority-owned businesses: Contract commitments: $320.4; 
Minority-owned businesses: Percentage of overall contract 
commitments[A]: 4.1%; 
Women-owned businesses: Contract commitments: $517.4; 
Women-owned businesses: Percentage of overall contract commitments: 
6.4%; 
Small businesses: Contract commitments: $3,425.7; 
Small businesses: Percentage of overall contract commitments: 42.3%. 

Source: USPS. 

[A] Overall contract commitments exclude instances where small, 
minority-, and women-owned businesses are not offered contracting 
opportunities. Such instances include contracts for mandatory sources, 
foreign contracts, utilities, or educational institutions. 

[End of table] 

Although the social responsibility principles included in the draft 
guidance are consistent with key principles and practices and USPS's 
past performance in this area exceeds the governmentwide averages, some 
small business suppliers are concerned that they may be negatively 
impacted as USPS implements its revised regulations and strives to 
become more efficient. We and USPS's Inspector General have previously 
reported on USPS's difficulties in incorporating small, minority-, and 
women-owned businesses into some of its supply chain management 
initiatives. These reports raised concerns about USPS not proactively 
exploring options for keeping small businesses involved; not setting 
targets for contracting with small businesses; and having incomplete 
and unreliable contracting data for small, minority-, and women-owned 
businesses.[Footnote 24] Furthermore, members of the mailers' Small 
Business Procurement Coalition told us about their concerns regarding 
the extent to which small, minority-, and women-owned businesses are 
limited to subcontracts, rather than being awarded the primary contract 
where they would have greater authority. As we will later discuss, 
establishing targets and effectively tracking performance, particularly 
for small, minority-, and women-owned businesses, will be important to 
ensuring appropriate accountability. 

USPS's Purchasing Changes Are Consistent with the Leading Principle of 
Accountability: 

We believe that USPS's draft guidance includes performance mechanisms 
that are consistent with leading accountability practices. For example, 
it states that USPS will use goals and metrics to hold its 
professionals accountable and allow USPS to assess and reward 
performance. Leading procurement experts in both the public and private 
sectors have recognized the importance of accountability throughout the 
organization for results. For example, OMB's guidance to all federal 
Chief Acquisition Officers stressed the need for establishing 
performance goals and measures and for monitoring, reporting, and 
evaluating the results. We have also reported on the purchasing 
practices that leading private-sector companies, such as ChevronTexaco, 
Dell Computer, and IBM use to promote accountability. These companies 
have developed formal spend analysis programs that monitor, track, and 
analyze spending to improve their procurement processes.[Footnote 25] 
Spend analysis programs help to identify areas for savings, as well as 
develop reports for top management to establish quarterly and annual 
savings goals and track financial and other benefits achieved. 

USPS's changes identify accountability principles and practices that 
reflect those of leading organizations. For example, to enhance 
transparency, USPS guidance will be publicly available on USPS's Web 
site. USPS's guidance states that USPS plans to have goals that will be 
used to assess the performance of its purchasing professionals and 
metrics to be used in contract management that will be results-
oriented, specific, measurable and achievable. The guidance also notes 
that USPS will use spend analysis to assist it in tracking spending and 
identifying potential savings. This process will help to determine 
whether to renew contract(s) with an existing supplier or switch to a 
new one and evaluate whether purchased products or services met 
specific USPS needs. These goals and measures can also address concerns 
raised by some stakeholders about whether USPS will achieve its 
projected efficiency goals under these regulatory changes. 

USPS's Ombudsman Regulatory Provisions and Guidance Are Not Consistent 
with Leading Ombudsman Principles and Practices: 

USPS's ombudsman, as it is currently structured, is not consistent with 
the core principles of independence, impartiality, and confidentiality 
related to the role of the ombudsman as identified by leading 
organizations. USPS's ombudsman is not independent of the Supply 
Management organization--the ombudsman reports to the head of Supply 
Management--raising issues of conflict of interest or that its 
decisions may not be viewed as impartial. Furthermore, the decisions of 
USPS's ombudsman are final and binding; typically ombudsman decisions 
are recommendations. Concerns remain about USPS's intended purpose for 
its ombudsman position and the independence and impartiality of this 
process as it is currently structured. 

Leading Principles and Practices for an Ombudsman: 

Leading organizations have established core principles and practices 
for developing and implementing an effective and credible ombudsman 
process. The American Bar Association (ABA) adopted a resolution in 
February 2004 that applies to the establishment of an ombudsman for 
both government and private-sector entities. The Coalition of Federal 
Ombudsmen has incorporated these ABA principles into its draft 
supplement to the ABA standards. In our past work, we have also 
reviewed the professional standards of practices related to 
ombudsman.[Footnote 26] The core principles endorsed by these 
organizations include having an ombudsman who is independent, 
impartial/neutral, and protects confidentiality. According to leading 
experts in this area, these principles can apply to ombudsman in the 
private or public sector, and are as follows: 

* Independent: An ombudsman should be free from interference or control 
by an official of the appointing entity or by a person who may be the 
subject of a complaint or inquiry. Furthermore, standards for the 
ombudsman state that an ombudsman should function independently of line 
management. This could include having the ombudsman report directly to 
the highest agency official, report directly to the official governing 
body of the organization, or having the ombudsman appointed by someone 
not a subject of a complaint or inquiry. 

* Impartial/neutral: An ombudsman should be free from initial bias and 
conflicts of interest when conducting inquiries and investigations. The 
ombudsman should not represent complainants or the organization and 
should conduct investigations in an impartial manner. Furthermore, 
leading organizations state that typically, ombudsman decisions are 
"recommendations" rather than legally-binding decisions and emphasize 
that periodic reports should be issued regarding the rulings of the 
ombudsman. 

* Protect confidentiality: An ombudsman should not be required to 
disclose any information provided in confidence or reveal the identity 
of a complainant without the complainant's express consent to prevent 
the risk of reprisal. 

These leading organizations also stated that typically an ombudsman has 
played a more informal mediation role as a neutral third party by 
assisting in negotiations to resolve disputes. According to our past 
work, the ombudsman is a dispute resolution practitioner who uses a 
variety of techniques, including ADR processes, to deal with 
complaints, concerns, and questions. The ombudsman is an informal 
alternative to more formal processes that an organization has in place 
to deal with conflict resolution. Both the ABA's rule and the Coalition 
of Federal Ombudsman's supplement provide that an ombudsman should not 
make binding decisions or determine rights but instead make 
recommendations to management. 

Inconsistencies in USPS's Ombudsman Provisions and Guidance: 

We have concerns related to USPS's ombudsman provision and the 
ombudsman's ability to fairly resolve business disagreements because 
its role, structure, and authority are not consistent with key 
principles of impartiality and independence embodied by leading 
organizations. These uncertainties may have a negative effect on 
supplier confidence and perceptions of fairness, which could severely 
hinder USPS's credibility and its ability to achieve successful 
supplier relationships. Furthermore, leading ombudsman organizations 
raised concerns about inconsistencies between the role and structure of 
USPS's ombudsman and the key principles endorsed by these 
organizations, which could contribute to confusion in their efforts to 
develop a common understanding of the role and responsibilities of an 
ombudsman in both public and private-sector organizations. 

USPS stated that its ombudsman process was established based on the 
structure and role of an ombudsman at leading organizations, including 
IBM and National Aeronautics and Space Administration (NASA). Further, 
USPS officials told us that one of their key objectives in revising 
their purchasing regulations was to ensure that responsibility and 
accountability for purchasing decisions was clearly within the supply 
management organization. Also, they explained that when they considered 
the establishment of the ombudsman provision, they wanted a process 
that would resolve disagreements with aggrieved suppliers/potential 
suppliers in an expedited manner, both inexpensively and with finality, 
and that decisions would be made based on best value determinations for 
USPS. Although it is not explicitly stated in the regulation or 
guidance, USPS preferred appointing as ombudsman a person from within 
USPS's Supply Management organization, who understands supply 
management, knows the postal culture, and has knowledge of postal 
operations. According to USPS officials, this knowledge would help the 
person who serves as the ombudsman ensure that disagreements are 
resolved in an efficient and prompt manner. 

USPS's draft guidance specifies that USPS would prefer to resolve 
disputes prior to their reaching the ombudsman by encouraging the 
contracting officer and supplier to come to mutual agreement, whenever 
possible, and encourages the use of negotiation to resolve differences 
before turning to formal ADR processes.[Footnote 27] The guidance 
encourages the use of ADR techniques such as mediation, conciliation, 
neutral evaluation, expert determination, adjudication, and arbitration 
prior to pursuing the ombudsman process. USPS's guidance describes the 
process that the ombudsman will use when making its final and binding 
decisions and states that litigation should be considered as a method 
of last resort. 

USPS's ombudsman, as it is currently structured, is not consistent with 
the core principles of independence, impartiality, confidentiality, or 
the role of the ombudsman as identified by leading ombudsman 
organizations. The inconsistencies include the following: 

* USPS's ombudsman is not independent of, or impartial from, the Supply 
Management organization. The appointed ombudsman holds a position in 
USPS's Supply Management organization, is appointed by the Vice 
President of Supply Management, reports to the Vice President of Supply 
Management, and continues to have other responsibilities within the 
Supply Management organization. Furthermore, the Vice President of 
Supply Management is the official who may make decisions to decline to 
accept or consider proposals. In contrast, both IBM's and NASA's 
ombudsmen, who handle purchasing-related disputes, report to someone 
outside of the procurement organization. 

* USPS's ombudsman makes final, binding decisions, which is 
inconsistent with the authority of an ombudsman in leading 
organizations. Officials from leading professional organizations stated 
that an ombudsman typically makes "recommendations" and works to 
facilitate negotiations and resolve issues and complaints. These 
officials stated that USPS's current structure is more consistent with 
that of an arbitrator. One key difference between USPS's and NASA's 
ombudsman is that the decisions of NASA's ombudsman are 
recommendations, while those of USPS's are binding. 

* USPS's ombudsman process does not promote confidentiality of the 
parties raising the dispute against USPS. Although the Final Rule 
provides that the ombudsman will protect confidential or privileged 
material, it does not protect the identity of the complainant. The 
Final Rule specifies that the ombudsman provides a copy of the 
disagreement to the contracting officer (the person who may make 
contract award decisions from which the dispute arises). Officials from 
leading professional organizations stated that ombudsman investigations 
should be conducted in a confidential manner to protect the identity of 
the person making the complaint against the decision-making contracting 
official to limit any future retribution. 

The inconsistencies in USPS's ombudsman from the principles and 
practices of leading organizations may have several consequences. For 
example, based on comments from experts and stakeholders we spoke with 
(1) suppliers may potentially feel reluctant to spend the resources to 
go through the ombudsman process or raise complaints against USPS; (2) 
suppliers may add additional costs into their initial bid submissions 
to cover the potential costs and risk associated with the ombudsman 
process, particularly because USPS has set its ombudsman method up as a 
formal, binding process; and/or (3) suppliers may lose confidence in 
the fairness and credibility of the process and eventually stop 
contracting with USPS, which could erode the supplier base. Officials 
from leading ombudsman organizations also voiced concerns about how the 
current structure and role of USPS's ombudsman may create confusion and 
impede their organizations' attempts to ensure consistent, professional 
ombudsman's standards across both public and private-sector entities. 

To address these inconsistencies, there are several options that USPS 
could consider. The first option is to revise its ombudsman regulations 
so that they comport with the leading principles and practices. USPS 
could change its regulatory provision so that the ombudsman would make 
recommendations rather than binding decisions. The recommendations of 
the ombudsman could then be reported to someone outside the purchasing 
organization who would make a final, binding agency decision. Under 
this option, USPS would also then need to revisit the regulatory 
provisions related to the basis for appeals of ombudsman decisions 
because the ombudsman would no longer be making the final agency 
decision. USPS could also consult with leading ombudsman organizations, 
such as the Coalition of Federal Ombudsman, to determine appropriate 
structure, standards, and training qualifications. 

Another option would be for USPS to eliminate its current ombudsman 
position, determine who would make the final, binding agency decision, 
and make corresponding changes in its regulations and appeals 
provisions. USPS could also determine whether it wants to establish or 
continue to use other formal or informal dispute resolution mechanisms 
to reach its goal of handling disagreements in an expedited manner with 
finality. For example, Federal Aviation Administration (FAA) does not 
have an ombudsman as part of its dispute resolution process, but has 
instead established the Office of Dispute Resolution for Acquisition. 
This office encourages parties to mutually agree to the use of ADR 
mechanisms as the primary means of resolving bid protests and assigns 
an officer to facilitate these discussions.[Footnote 28] The head of 
this office also stated that he prefers more informal mechanisms such 
as neutral evaluation and mediation as opposed to more formal 
mechanisms such as binding arbitration because they are faster, less 
costly, and parties have more control of the outcome. This official 
also serves as the Chair of the Interagency Alternative Dispute 
Resolution Working Group and suggested that this working group would be 
available to assist USPS and other federal entities in developing their 
dispute resolution processes.[Footnote 29] 

Continued Oversight of USPS's Implementation of Its New Regulations Is 
Needed: 

Continued oversight of USPS's changes in the purchasing area is needed 
not just based on the ombudsman inconsistencies identified above but 
also due to other factors such as the uncertainty related to the 
issuance of USPS's final guidance, the potential impact on suppliers, 
and USPS's ability to achieve efficiencies under these new 
flexibilities while ensuring fair and consistent treatment of 
suppliers. As we previously discussed, we have concerns related to the 
credibility of USPS's ombudsman and how its role and structure is 
inconsistent with the principles and practices of leading 
organizations. Leading organizations favor the use of an ombudsman as a 
neutral, third-party facilitator, while USPS's is a final agency 
decision maker that focuses on best value decisions for USPS. We also 
have concerns related to the uncertainty surrounding the final 
guidance. USPS continues to delay the issuance of its final guidance, 
which we were told would be available in the fall 2005 and was later 
changed to early in calendar year 2006. Considering that the final 
guidance was not yet completed when the final rule was implemented, and 
that there have been additional delays since, uncertainties remain for 
both the supplier community and other interested stakeholders about the 
principles and practices that will guide future USPS purchasing 
decisions. 

This relatively short implementation period of these regulatory 
changes--they have only been in place 7 months--creates additional 
uncertainties regarding the potential impact of these changes on USPS's 
suppliers and the sufficiency of USPS's accountability mechanisms for 
tracking and monitoring its performance in this area. USPS officials 
have acknowledged that the changes in USPS's purchasing regulations 
could result in a decrease in the number of USPS suppliers and that the 
number of small, minority-, or women-owned businesses could be impacted 
by these changes. These officials also stated, however, that USPS's 
contracting with small, minority-, and women-owned businesses have 
continually exceeded that of other federal agencies and that USPS's 
draft guidance promotes supplier diversity and encourages the use of 
these businesses when issuing certain contracts. Although we recognize 
USPS efforts in this area, our past reports have raised concerns about 
the sufficiency of USPS's accountability mechanisms in this area. In 
2004, we reported that USPS had difficulties in achieving its desired 
efficiencies for its bulk fuel program initiative, had unreliable data 
on the dollar amounts of small business contracts, and no longer 
included targets for contract dollars awarded to these 
businesses.[Footnote 30] We recommended that USPS focus attention on 
small business concerns in carrying out its supply chain management 
initiatives and develop targets to promote accountability in its small 
business contracting. At that time, USPS generally agreed with our 
recommendation but stated that it did not plan to establish small 
business targets at that time but would consider reestablishing targets 
for small business contracts if its achievements slipped. In 2003, we 
also reported that USPS did not meet its savings targets related to its 
office supply contract, and it was not accurately tracking small, 
minority-, and women-owned business participation.[Footnote 31] We 
recommended that USPS develop a plan that accurately and clearly 
reflects realistic contracting goals for small, women-, and minority-
owned businesses. We recently discussed these reports with USPS 
officials who stated that USPS has made significant progress in 
achieving efficiencies in its supply chain initiatives since these 
reports were issued, particularly in tracking small, minority-, and 
women-owned participation, but they continue to disagree with our 
recommendation to establish targets because of their positive 
performance in this area and the difficulty in developing useful 
targets. We continue to believe that targets are necessary because 
without establishing targets and providing reliable information on 
performance goals and results related to USPS's purchasing activities, 
including its contracts with small, minority-, and women-owned 
businesses, it will be difficult for stakeholders to hold USPS decision 
makers accountable for their actions or ensure that USPS (1) maintains 
a diversified supplier base, (2) achieves its desired efficiencies, and 
(3) implements its revised regulations in a manner consistent with the 
principles of postal and procurement reform. 

Concerns also remain about the use of ADR mechanisms in the purchasing 
area, given that they were available under the previous regulations by 
rarely used. Although USPS encourages the use of ADR as an effective 
way to understand, address, and resolve disagreements, the head of 
Supply Management has stated that past USPS efforts in this area did 
not gain much traction. Considering the increased focus on ADR under 
the new rule--the rule stated that any party disagreeing with a USPS 
decision must consider the use of ADR to resolve particular 
disagreement regardless of the nature of the disagreement or when it 
occurs during the purchasing process--it will be important for these 
ADR mechanisms to be effectively implemented to have a credible dispute 
resolution process. 

Proposed legislation and oversight mechanisms by Congress have also 
identified issues related to how USPS can achieve efficiencies by 
taking advantage of increased flexibility, while at the same time 
ensuring fair and consistent treatment of suppliers. In the legislative 
arena, we have mentioned that pending postal reform bills include 
provisions related to USPS's purchasing activities. Specifically, the 
Senate's bill, S. 662, states that USPS should implement commercial 
best practices to achieve greater efficiency and cost savings in a 
manner that is compatible with the fair and consistent treatment of 
suppliers and contractors. Further, H.R. 22, the House postal reform 
bill, includes a requirement that USPS's Board of Governors submit a 
report to the President and the Congress concerning the number and 
value of contracts and subcontracts USPS has entered into with women, 
minorities, and small businesses. Congress' oversight mechanisms 
include annual reports from USPS, such as its annual operations report, 
the Comprehensive Statement on Postal Operations, which provide 
information related to USPS's supply management activities. The 2004 
Comprehensive Statement reported that USPS's supply management 
activities had achieved $1.4 billion in cost savings, reductions, 
avoidances, and revenue since fiscal year 2000, discussed how cost 
efficiencies were achieved, described key initiatives in this area, and 
discussed its supplier diversity achievements and contract commitments. 
USPS is also required to report to the Senate Committee on Homeland 
Security and Governmental Affairs and the House Committee on Government 
Reform on the actions it plans to take to respond to our 
recommendations within 60 days of the issuance. Finally, as another 
oversight mechanism, Congress has asked us to report on USPS's 
activities in this area as indicated by this report and other reports 
previously mentioned. 

Continued oversight will be needed to ensure that USPS successfully 
implements the recent changes to it purchasing regulations. The areas 
for oversight include: 

* how USPS has addressed the inconsistencies in its ombudsman 
regulatory provisions to better reflect the principles and practices of 
leading organizations; 

* when USPS will issue its final guidance, which details how it plans 
to implement the changes to its purchasing regulations; 

* how USPS intends on ensuring accountability and supplier diversity by 
effectively tracking, monitoring, and reporting its contracting 
performance, including the impacts on small, minority-, and women-owned 
businesses; 

* the extent to which USPS is utilizing ADR methods for resolving bid 
protests; and: 

* whether USPS has taken advantage of its increased flexibility and 
achieved greater efficiency while ensuring fair and consistent 
treatment of suppliers. 

Conclusions: 

USPS continues to face financial and operational challenges, and its 
procurement program represents a key part of its annual expenses. USPS 
has recognized opportunities to increase efficiencies in this area by 
making major changes to its purchasing regulations. Generally, USPS's 
recent changes to its procurement regulations and draft guidance are 
consistent with the principles of postal and procurement reform and the 
leading practices in this area. However, the regulatory provision 
related to USPS's new ombudsman process is not consistent with core 
principles related to independence and impartiality that were 
identified by various ombudsman authorities. Specifically, the 
reporting relationship is inconsistent because the ombudsman reports to 
the Vice President of Supply Management, the head of the purchasing 
organization, and the ombudsman's decisions are final and binding, 
rather than recommendations. These inconsistencies may lead to a loss 
of supplier confidence in the fairness or credibility of USPS's dispute 
resolution process. Also, the ombudsman organizations were concerned 
that the inconsistencies in USPS's ombudsman regulatory provision would 
create confusion about the role of an ombudsman as an independent 
neutral facilitator. There are several options that USPS could consider 
to address the inconsistencies of its ombudsman provision. 

Recommendations for Executive Action: 

We recommend that the Postmaster General take actions to address the 
inconsistencies in USPS's ombudsman with the leading principles and 
practices related to independence and impartiality. USPS should consult 
with expert ombudsman and dispute resolution organizations to explore 
options related to its intended purpose for the ombudsman position and 
alternatives for changing this position to conform to leading 
principles and practices. If USPS wants to retain the ombudsman 
position, it should revise (1) the ombudsman's reporting relationship 
to the purchasing organization so that it is independent and neutral; 
(2) the ombudsman's role so that it makes recommendations rather than 
final, binding decisions; and (3) the appeals provision so that it 
applies to the final, binding agency decision rather than the 
ombudsman's recommendation. Another alternative is that USPS could 
eliminate the ombudsman position and use other dispute resolution 
mechanisms, such as ADR. USPS could then designate another agency 
official to make the final, binding decision. For either alternative, 
USPS would need to change its regulations and guidance accordingly. 

Agency Comments and Our Evaluation: 

We provided a draft of this report to USPS for its review and comment. 
USPS provided its comments in a letter from the Vice President, Supply 
Management, dated December 5, 2005. These comments are summarized below 
and included in appendix IV. USPS concurred with our finding that its 
regulatory changes, including its draft internal guidance, are 
generally consistent with key reform principles and practices of 
leading public and private-sector organizations. In its comments, USPS 
also reiterated that its new Supplying Principles and Practices will be 
issued early next year. Regarding our recommendations related to its 
new supplier ombudsman, USPS stated that it understood our concerns, 
and in keeping with our recommendations, would consult with appropriate 
ombudsman and dispute resolution organizations and reassess its 
ombudsman's role and reporting relationship. Further, USPS stated that 
it would keep us informed of its progress and decisions related to its 
ombudsman. Changes to the ombudsman will help to ensure independence 
and impartiality in USPS's dispute resolution process, and we will 
continue to monitor USPS's actions related to this issue. 

We are sending copies of this report to the Chairman and Ranking 
Minority Member of the House Committee on Government Reform, Ranking 
Minority Member of the Senate Committee on Homeland Security and 
Governmental Affairs, Senator Thomas R. Carper, the Postmaster General, 
and other interested parties. We also will provide copies to others on 
request. In addition, the report will be available at no charge on the 
GAO Web site at [Hyperlink, http://www.gao.gov]. 

If you or your staff have any questions regarding this report, please 
contact me at [Hyperlink, siggerudk@gao.gov] or by telephone at (202) 
512-2834. Contact points for our Offices of Congressional Relations and 
Public Affairs may be found on the last page of this report. GAO staff 
who made major contributions to this report are listed in appendix V. 

Sincerely yours, 

Signed by: 

Katherine Siggerud: 
Director, Physical Infrastructure Issues: 

[End of section] 

Appendixes: 

Appendix I: Objectives, Scope, and Methodology: 

To describe the major changes to the U.S. Postal Service's (USPS) 
purchasing regulations, we reviewed the Final Rule in the Federal 
Register that was issued on April 19, 2005, as well as USPS's proposed 
rule that was issued on March 24, 2004. To describe the stakeholder 
views of those changes, we reviewed all of the comments that were filed 
in response to the proposed rule, which included such suppliers as 
Northwest Airlines; Hewlett-Packard; Siemans Dematic Postal Automation, 
L.P; and the National Star Route Mail Contractors' Association. We also 
followed up with selected parties to discuss with them the comments 
their organizations provided on the proposed rule, including both large 
and small suppliers, as well as other legal representatives such as 
Wickwire, Gavin P.C., the American Bar Association, and Thompson Coburn 
LLP. We also spoke with selected stakeholders who did not directly 
provide formal comments, including various representatives of small 
business associations such as the National Small Business Association 
and the Association for Procurement Technical Assistance Centers. To 
describe USPS's rationale for making these changes, we met with USPS 
officials and reviewed USPS's purchasing manuals, circulars, and 
instructions, the preambles and regulatory case files for the proposed 
and Final Rule, USPS's Comprehensive Statement on Postal Operations, 
and USPS's purchasing information. We assessed the reliability of USPS 
data on contract spending for inconsistencies. In those cases where we 
found discrepancies, we worked with USPS to address those problems. We 
determined that the data were sufficiently reliable for our review. 

In order to conduct an assessment of USPS's purchasing changes, we 
needed to determine what information would be contained in USPS's 
internal guidance, the Supplying Principles and Practices. As such, we 
requested a draft copy of this document from USPS, which provided it to 
us for use in our analysis. Then, to assess how USPS's regulatory 
changes and its draft guidance reflect the principles of postal and 
procurement reform, we developed key principles of efficiency, 
flexibility, accountability, and fairness or social responsibility 
based on reviewing information from a variety of sources. These 
included our past work on postal reform and on procurement leading 
practices, which included reviewing the spend analysis purchasing 
efforts at various federal agencies (Departments of Defense, Veterans 
Affairs, Health and Human Services, Agriculture, Justice, and 
Transportation) as well as leading private organizations that were 
recognized for their acquisition services (IBM, ChevronTexaco, Bausch & 
Lomb, Delta Air Lines, and Dell). We also met with officials from the 
Institute for Supply Chain Management and Center for Strategic Supply 
Research, which are two leading procurement organizations. We also 
reviewed USPS's Transformation Plan and its respective updates; USPS's 
Supply Management 5-Year Strategic Plan; the President's Commission's 
report; OMB's sourcing guidance, "Implementing Strategic Sourcing"; and 
proposed postal reform legislation. We also talked to various ombudsman 
experts from organizations such as the Coalition of Federal Ombudsman, 
the United States Ombudsman Association, the International Ombudsman 
Association, and the Interagency Alternative Dispute Resolution Working 
Group. Key members of these organizations serve as the ombudsman for 
various federal and state organizations including the National 
Institutes of Health, the State of Iowa, and the State of Hawaii. 
Representatives from these groups also provided the names of Coca-Cola 
and United Technologies Corporation as leading organizations that use 
ombudsman, with whom we also followed up. These experts also 
recommended that we consult the American Bar Association's adopted 
resolution entitled "Standards for the Establishment and Operations of 
Ombuds Offices," for leading principles that should be considered when 
implementing an ombudsman, which we reviewed and discussed this 
document with these experts. Our work was conducted from April 2005 to 
December 2005 in accordance with generally accepted government auditing 
standards. 

[End of section] 

Appendix II: Selected Federal Laws Applicable to USPS Purchasing: 

In its draft Supplying Principles and Practices, the U.S. Postal 
Service (USPS) identified the following list of laws governing 
purchasing at USPS, which are either mandated in Title 39, as enacted 
or amended, or apply to USPS by their own terms (see table 4). The 
draft guidance states that the Supply Management organization must 
comply with these requirements in all activities. We did not conduct an 
independent assessment of USPS's list or other laws which may apply to 
USPS, which was not within the scope of this review. 

In addition, USPS provided in its draft Supplying Principles and 
Practices a list of additional laws and executive orders, which are 
applicable to it, and may affect USPS purchasing. These include: the 
National Environmental Policy Act, the Interstate Commerce Act, the 
Resource Conservation and Recovery Act, and the Program Fraud and Civil 
Remedies Act. USPS also included a listing of federal laws that do not 
apply to its purchasing processes, including the Competition in 
Contracting Act, the Federal Acquisition Streamlining Act, Truth in 
Negotiations Act, and the Procurement Integrity Act. 

Table 4: USPS Compilation of Selected Federal Laws That Apply to USPS 
Purchasing: 

Laws mandated in Title 39 either as enacted or since amended. 

Law, regulation, executive order, or policy: Randolph-Sheppard Act, 20 
U.S.C. 107 et esq., made applicable by 39 U.S.C. 410(b)(3); 
Description: Laws mandated in Title 39 either as enacted or since 
amended: Requires that licensed blind suppliers must be given priority 
for the operation of food vending services in USPS facilities. 

Law, regulation, executive order, or policy: Miller Act, 40 U.S.C. 270a-
270f, made applicable by 39 U.S.C. 410(b)(4)(B); 
Description: Laws mandated in Title 39 either as enacted or since 
amended: Requires contract surety bonds on federal construction; 
contractor must post a performance bond and a labor and material 
payment bond. 

Law, regulation, executive order, or policy: Davis-Bacon Act, 40 U.S.C. 
276a et seq., made applicable by 39 U.S.C. 410(b)(4)(C); 
Description: Laws mandated in Title 39 either as enacted or since 
amended: Requires that construction contracts over $2,000 contain a 
provision setting the minimum wages to be paid to all classes of 
laborers and mechanics working on the work site. Wage rates determined 
by Secretary of Labor. 

Law, regulation, executive order, or policy: Copeland Anti-Kickback 
Act, 18 U.S.C. 874 and 41 U.S.C. 276(c), made applicable by 39 U.S.C. 
410(b)(4)(D); 
Description: Laws mandated in Title 39 either as enacted or since 
amended: Applies to any construction contract over $2,000 (subject to 
the Davis Bacon Act) and makes it unlawful to force laborers or 
mechanics to give up any part of their compensation except for 
permissible deductions such as taxes and union dues. 

Law, regulation, executive order, or policy: Contract Work Hours and 
Safety Standards Act, 40 U.S.C. 327-333, made applicable by 39 U.S.C. 
410(b)(4)(E); 
Description: Laws mandated in Title 39 either as enacted or since 
amended: Requires that certain contracts contain a clause specifying 
that no laborer or mechanic doing any work under the contract may be 
required or permitted to work more than 40 hours per work week unless 
paid time and a half for all overtime hours. 

Law, regulation, executive order, or policy: Walsh Healey Public 
Contracts Act, 41 U.S.C. 35-45, made applicable by 39 U.S.C. 
410(b)(5)(A); 
Description: Laws mandated in Title 39 either as enacted or since 
amended: Applies to indefinite delivery contracts and ordering 
agreements if the aggregate amount of all orders is expected to exceed 
$10,000 during the year following award. Requires these contracts to 
incorporate certain requirements by reference. 

Law, regulation, executive order, or policy: Service Contract Act, Pub. 
L. No. 89-286, 41 U.S.C. 351 et seq., made applicable by 39 U.S.C. 
410(b)(5)(B); 
Description: Laws mandated in Title 39 either as enacted or since 
amended: Applies to any contract whose principal purpose is to provide 
services to be performed by service employees. Employees working under 
a service contract must be paid no less than the minimum wage specified 
by the Fair Labor Standards Act. 

Law, regulation, executive order, or policy: Prohibition on Convict 
Labor, 39 U.S.C. 2201; 
Description: Laws mandated in Title 39 either as enacted or since 
amended: Requires USPS not contract for supplies manufactured by 
convict labor except from Federal Prison Industries, Inc. 

Law, regulation, executive order, or policy: Architectural Barriers 
Act, 42 U.S.C. Chapter 51, made applicable by 39 U.S.C. 410(b)(8); 
Description: Laws mandated in Title 39 either as enacted or since 
amended: Requires that postal buildings are accessible to the 
physically handicapped. 

Law, regulation, executive order, or policy: Prompt Payment Act, 31 
U.S.C. Chapter 39, made applicable by 39 U.S.C. 410(b)(9); 
Description: Laws mandated in Title 39 either as enacted or since 
amended: Provides incentives for USPS to pay its bills on time to 
suppliers. Requires the head of an agency acquiring property or service 
who does not pay for each complete delivered item by the required 
payment date to pay an interest penalty on the amount of the payment 
due. 

Law, regulation, executive order, or policy: Freedom of Information 
Act, 5 U.S.C. 552 made applicable by 39 U.S.C. 410(b)(1); 
Description: Laws mandated in Title 39 either as enacted or since 
amended: Provides the public with a right to access to records 
maintained by federal agencies. 

Law, regulation, executive order, or policy: The Privacy Act of 1974, 5 
U.S.C. 552a made applicable by 39 U.S.C. 410(b)(1); 
Description: Laws mandated in Title 39 either as enacted or since 
amended: Provides privacy protections for personal information 
maintained by federal agencies. Provides that, when an agency maintains 
a system of records with such information, it must publish a notice 
describing that system in the Federal Register and must provide 
information on how that information is collected, used, disclosed, 
stored, and discarded. Includes how individuals can obtain access to 
and amend their personal information. 

Laws applied to USPS by their own terms. 

Law, regulation, executive order, or policy: Contract Disputes Act, 41 
U.S.C. 601 et seq; 
Description: Laws mandated in Title 39 either as enacted or since 
amended: Creates comprehensive system for resolving disputes between 
supplier and supply management relating to performance of most purchase 
contracts. The trigger point is the contracting officer's decision. 
Claims of the supplier and USPS must be the subject of a contract 
officer's decision. Supplier may appeal to appropriate agency board of 
contract appeals or file suit in U.S. Court of Federal Claims. Supplier 
and USPS can appeal a decision of a board of contract appeals or the 
federal court to the U.S. Court of Appeals for the Federal Circuit. 
Provisions of the Contract Disputes Act with regard to administrative 
resolution of disputes made by the Administrative Dispute Resolution 
Act (ADRA) are applicable to USPS, although other portions of the ADRA 
codified in 28 U.S.C. are not. 

Law, regulation, executive order, or policy: Administrative Dispute 
Resolution Act of 1996 (ADRA), 28 U.S.C. 1491(b); 
Description: Laws mandated in Title 39 either as enacted or since 
amended: Requires USPS to have policies that address the use of 
alternative dispute resolution (ADR) techniques and to appoint a 
Dispute Resolution Specialist. Requires USPS to examine use of ADR in 
connection with rulemakings, formal and informal adjudications, 
enforcement actions, issuing and revoking licenses or permits, contract 
administration, litigation, or other actions. 

Law, regulation, executive order, or policy: Vietnam Era Veterans 
Readjustment Assistance Act of 1972, 38 U.S.C. 4212; 
Description: Laws mandated in Title 39 either as enacted or since 
amended: Requires suppliers to take affirmative action to employ and 
advance in employment qualified special disabled veterans, veterans of 
the Vietnam era, and other eligible veterans without discrimination 
based on their disability or veterans' status, and list all employment 
openings with appropriate local employment services. 

Law, regulation, executive order, or policy: Javits-Wagner-O'Day Act, 
41 U.S.C. 46-48; 
Description: Laws mandated in Title 39 either as enacted or since 
amended: Requires that USPS and other federal agencies purchase certain 
supplies and services from qualified workshops which employ people who 
are blind or severely disabled. 

Law, regulation, executive order, or policy: Rehabilitation Act of 
1973, 29 U.S.C. 702 et seq. including Section 508; 
Description: Laws mandated in Title 39 either as enacted or since 
amended: Requires suppliers to take affirmative action to employ and 
advance qualified individuals without discrimination as to their 
physical or mental handicaps. 

Source: USPS. 

[End of table] 

[End of section] 

Appendix III: USPS Revised Purchasing Regulations--Provisions Governing 
the Acquisition of Goods and Services: 

Citation in the C.F.R. 601.100-Purchasing policy; 
Description and changes: Acquiring property and services in accordance 
with 39 U.S.C. 410 and all other applicable laws enacted by Congress; 
Previously, 601.100 incorporated, by reference, the provisions of the 
Purchasing Manual. 

Citation in the C.F.R. 601.101-Effective date; 
Description and changes: Regulations are effective May 19, 2005. 

Citation in the C.F.R. 601.102-Revocation of prior purchasing 
regulations; 
Description and changes: Revokes all previous purchasing regulations 
including the Purchasing Manual and procurement handbooks, circulars 
and instructions, and all are superseded by the regulations below. 

Citation in the C.F.R. 601.103-Applicability and coverage; 
Description and changes: Regulations in this part apply to all USPS 
procurements of property and services (except real property); 
Previously, this section set forth the contents of the Purchasing 
Manual, chapter by chapter. 

Citation in the C.F.R. 601.104-Postal purchasing authority; 
Description and changes: Lists who has the authority to bind USPS when 
entering into, modifying, or terminating contracts; Previously, this 
section addressed amendments to the Purchasing Manual, stating that 
they would be incorporated by reference into this part of the C.F.R. 

Citation in the C.F.R. 601.105-Business relationships; 
Description and changes: States USPS' expectation that it will be 
treated as a valued customer; Previously, there was no equivalent 
section in the C.F.R. However, in the Purchasing Manual, which had the 
force and effect of law, the regulations provided a reciprocal USPS 
commitment to fair treatment of its suppliers throughout the Purchasing 
Manual. 

Citation in the C.F.R. 601.106-Declining to accept or consider 
proposals; 
Description and changes: USPS has the right to decline to 
accept/consider proposals from entities failing to meet reasonable 
business expectations for a specific or indefinite time; Previously, 
there was no equivalent section in the C.F.R. or in the Purchasing 
Manual. 

Citation in the C.F.R. 601.107-Initial disagreement resolution; 
Description and changes: Provisions regarding alternative dispute 
resolution procedures, which are encouraged, but are not required, and 
are not mandatory of the supplier or the contracting officer. Protests 
can be lodged with contracting officer or with ombudsman if not 
resolved; Previously, was titled Protests under the Supplier Relations 
chapter in the Purchasing Manual, and under prior bid protest 
procedures, a protest could also be filed with USPS's General Counsel 
in lieu of the contracting officer. 

Citation in the C.F.R. 601.108-Ombudsman disagreement resolution; 
Description and changes: Establishes ombudsman procedure to resolve 
disagreements that cannot be resolved with contracting officers or 
management. The ombudsman will focus on best value considerations and 
business decisions made by the contracting officer to determine which 
supplier should be awarded a contract. Ombudsman decision is final and 
binding except in cases of fraud or misconduct; Previously, there was 
no equivalent section in either the C.F.R. or in the Purchasing Manual. 

Citation in the C.F.R. 601.109-Contract claims and disputes; 
Description and changes: Provisions for implementing the Contract 
Disputes Act; Previously, was titled Claims and Disputes under the 
Contract Administration chapter of the Purchasing Manual. 

Citation in the C.F.R. 601.110-Payment of claims; 
Description and changes: Claims determined in a final decision should 
be paid promptly to the supplier, and any board or court decisions 
favorable to the supplier must be implemented promptly; 
No change from prior regulations. 

Citation in the C.F.R. 601.111-Interest on claim amounts; 
Description and changes: Interest on amount due on a supplier's claim 
must be paid from the date the contracting officer received the claims, 
or from the date payment would otherwise be due, until the date of the 
payment; Previously, was titled Claims and Disputes under the Contract 
Administration chapter of the Purchasing Manual, and there were no 
changes other than deleting reference to a Purchasing Manual appendix. 

Citation in the C.F.R. 601.112-Review of adverse decisions; 
Description and changes: Any party can seek review of an adverse 
decision of the Board of Contract Appeals in the Court of Appeals for 
the Federal Circuit or any other appropriate forum; Previously, was 
titled Claims and Disputes under the Contract Administration chapter of 
the Purchasing Manual, and stated that USPS could seek review, if the 
Vice President of Supply Management with concurrence of USPS's General 
Counsel, decided to pursue the appeal. 

Citation in the C.F.R. 601.113-Debarment, suspension, and 
ineligibility; 
Description and changes: Provisions for causes for, mitigating factors 
of, and period of debarment and suspension; Previously, was titled 
Supplier Debarment, Suspension, and Ineligibility under the Supplier 
Relations chapter in the Purchasing Manual, and changes include: (1) 
requiring the vice president of Supply Management to concur with USPS's 
General Counsel before making a decision to debar a supplier, or before 
initiating a debarment proceeding, or deciding whether debarment is 
merited based on a conviction or civil judgment; (2) providing for 
procedures when the Vice President of Supply Management proposes a 
debarment when a supplier is already debarred by another government 
agency; (3) giving additional causes for debarment; and (4) period of 
suspension increased to 1 year from 6 months. 

Source: USPS. 

[End of table] 

[End of section] 

Appendix IV: Comments from the U.S. Postal Service: 

UNITED STATES POSTAL SERVICE: 
VICE PRESIDENT, SUPPLY MANAGEMENT: 

December 5, 2005: 

Ms. Katherine A. Siggerud: 
Director, Physical Infrastructure Issues: 
United States Government Accountability Office: 
Washington, DC 20548-0001: 

Dear Ms. Siggerud: 

Thank you for providing the Postal Service the opportunity to review 
and comment on the GAO draft report, U. S. Postal Service: Purchasing 
Changes Seem Promising, but Revisions to Ombudsman Position are Needed 
(GAO-06-190). 

As noted in your draft report, Postal Service purchasing has for some 
time undergone a number of improvements, and our latest changes are the 
result of a two-decade-long effort to fulfill Congress' intent that the 
Postal Service's purchasing function operate in as businesslike a 
manner as possible. By continually improving our policies and 
procedures, most recently by introducing supply chain management into 
our day-to-day purchasing operations, we have made real, measurable 
progress. As you also note, these changes are in full accord with the 
Postal Service's Strategic Transformation Plan and its goals of 
lowering overall costs and furthering the business and competitive 
goals of the Postal Service. We have realized more than $2.1 billion in 
cost reductions and cost avoidance since introducing supply chain 
management into our operations in 2000, and we expect to continue and 
enhance these bottom-line results. 

We are gratified to see that, with the exception of certain aspects of 
our new Supplier Ombudsman program, the report finds that our changes 
are consistent with key reform principles and practices of leading 
public and private-sector organizations. As you note, our changes 
reflect leading principles aimed at increasing the flexibility, 
efficiency, social responsibility, and accountability in our purchasing 
system. When issued early next year, our new Supplying Principles and 
Practices, in combination with the new purchasing regulations published 
last May, will further promote these objectives, and will add to them a 
comprehensive set of business practices that purchase teams will be 
able to use to even greater advantage. 

In regard to our new Supplier Ombudsman, we understand your concerns, 
and in keeping with your recommendation, we will consult with the 
appropriate ombudsman and dispute resolution organizations and reassess 
our Supplier Ombudsman's role and reporting relationship. If our 
research identifies particular changes that would enhance the 
ombudsman's effectiveness, we will thoroughly consider adopting those 
changes. We will keep you informed of our progress and decisions. 

We appreciate the efforts and professionalism of your review team and 
the support the report provides for the ambitious goals we have set for 
our supply chain management initiatives. If you or your staff would 
like to discuss any of these matters further, I am available at your 
convenience. 

Sincerely, 

Signed by: 

Keith Strange: 

475 L'ENFANT PLAZA SW: 
WASHINGTON DC 20260-6200: 
202-268-4040: 
FAX: 202-268-2755: 

[End of section] 

Appendix V: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Katherine Siggerud (202) 512-2834: 

Staff Acknowledgments: 

In addition to the individual named above, Teresa Anderson, Joshua 
Bartzen, Tonnye ConnerWhite, Micah McMillan, Edda Emmanuelli-Perez, 
Collin Fallon, Kathy Gilhooly, Brandon Haller, Carolyn Kirby, and 
Anthony Lofaro made key contributions to this report. 

(542053): 

FOOTNOTES 

[1] The high-risk list identifies federal programs or operations that 
are highly vulnerable to waste, fraud, abuse and mismanagement or that 
require urgent attention to ensure that the government functions in the 
most economical, efficient, and effective manner possible. GAO, U.S. 
Postal Service: Transformation Challenges Present Significant Risks, 
GAO-01-598T (Washington, D.C. Apr. 4, 2001) and GAO, U.S. Postal 
Service: Financial Outlook and Transformation Challenges, GAO-01-733T 
(Washington, D.C. May 15, 2001). 

[2] The President's Commission on the United States Postal Service, 
Embracing the Future: Making the Tough Choices to Preserve Universal 
Mail Service (Washington, D.C. July 31, 2003). 

[3] The Federal Acquisition Regulations system establishes the uniform 
set of policies and procedures for acquisition by all executive branch 
agencies. This system consists of the FAR, which is the primary 
document, and agency acquisition regulations that implement or 
supplement the FAR. The Competition in Contracting Act of 1984, Pub. L. 
No. 98-369, sect. 2701, establishes, among other things, the federal 
policy of "full and open competition" for most federal contracts. The 
USPS has adopted, instead of a policy of "full and open competition," a 
policy of "adequate competition," which the Procurement Manual defined 
as "the solicitation of a sufficient number of qualified suppliers to 
ensure that the required quality and quantity of goods and services is 
obtained when needed and that the price is fair and reasonable." This 
allowed postal contracting officials to limit competition to selected 
or prequalified bidders. 

[4] Provisions with regard to administrative resolution of disputes 
added to the Contract Disputes Act by the Administrative Dispute 
Resolution Act (ADRA) are applicable to USPS. 

[5] IBM officials told us that as part of their assessment, they spoke 
to officials from what they considered world-class supplying 
organizations about what has worked well related to their policies and 
practices to identify leading purchasing principles and practices. 
IBM's analysis included information from the following organizations: 
the Institute for Supply Management, the Center for Strategic Supply 
Research, Factiva, McKinsey, Purchasing Magazine, Procurement Strategy 
Council, Honeywell, Nestlé, and Hewlett-Packard. They also looked at 
what has worked well with other federal agencies that are not covered 
by the FAR, such as the U.S. Mint. 

[6] Selections were based upon the suppliers' and other organization's 
comments made in response to USPS's proposed rule; USPS's responses to 
the concerns raised in the comments; and our own analysis. In addition, 
the three areas selected represent the areas where stakeholders voiced 
the most concerns, and also reflect the three areas covered by USPS in 
its response and in its preamble to the Final Rule published in the 
Federal Register. 

[7] Before it published its Final Rule, USPS dropped three additional 
reasons for not entering into a business relationship that it had 
included in its proposed rule. Those reasons were: (1) spurious, 
frivolous, or bad-faith litigation and/or claims; (2) failure to 
respond promptly and completely to USPS inquiries and requests for 
information, without inadvertence or good reason; and (3) negotiating 
or dealing in bad faith with USPS, including engaging in uncooperative 
practices. 

[8] Debarment, suspension, and ineligibility are exclusions from 
contracting or subcontracting for cause, whereby agencies do not 
solicit offers from, award contracts to, or consent to subcontracts 
with these contractors. Examples of cause include conviction of certain 
criminal offenses, violation of contracts, or offenses indicating lack 
of business integrity or honesty. For additional information about the 
government suspension and debarment process under the FAR, see GAO, 
Federal Procurement: Additional Data Reporting Could Improve the 
Suspension and Debarment Process, GAO-05-479 (Washington, D.C. July 29, 
2005). 

[9] Claims that arise under the Contract Disputes Act are related to 
disagreements that arise only after a contract has been awarded. 

[10] According to our past work, an ombudsman, or ombuds, is a dispute 
resolution practitioner who (1) receives complaints, concerns, and 
questions from individuals; (2) works to resolve these issues, making 
recommendations on individual matters where appropriate; and (3) brings 
to an entity's attention chronic or systemic problems and makes 
recommendations for improvement. See GAO, Human Capital: The Role of 
Ombudsman in Dispute Resolution, GAO-01-466 (Washington, D.C. Apr. 13, 
2001). 

[11] ADR is a method for resolving disputes, usually involving 
intervention or facilitation by a neutral third party, as a means of 
avoiding more formal and costly dispute resolution processes. ADR may 
include such methods as mediation, dispute resolution boards, and 
arbitration. 

[12] In order to appeal a decision to a federal court, the decision 
must be final and binding. If the ombudsman makes a recommendation, the 
parties could not appeal until USPS made a final and binding decision. 

[13] As stated earlier, the final rule limits appeals of USPS ombudsman 
decisions to a federal court with jurisdiction over such claims only on 
the grounds that the decision was procured by fraud or other criminal 
misconduct or obtained in violation of the regulations contained in the 
Final Rule or an applicable public law enacted by Congress. 

[14] We spoke to several stakeholders about the comments provided by 
their organizations on USPS's proposed rule from the American Bar 
Association; Wickwire Gavin, a law firm with a postal contracting 
practice area that represents over 100 of USPS's suppliers and 
contractors; the National Star Route Mail Contractors Association, an 
association that represents small business men and women who contract 
with USPS for highway mail transportation, and Lockheed Martin. We also 
spoke with officials from IBM and members of the Small Business 
Procurement Coalition, which includes organizations representing small 
business interests. 

[15] The government can terminate contracts for convenience for the 
best interests of the government (not necessarily as a result of fault 
on the part of a contractor or for default for failure on the part of a 
contractor to live up to contractual obligations). Under termination 
for convenience, the government has the right to refuse to continue 
with contract performance--to stop the work and settle with the 
contractor at the point of termination. This procedure is unique to the 
federal government; private industry does not have comparable 
procedures. 

[16] S. 662, Title X, Section 1004 and H.R. 22, Title VII, Section 706. 

[17] The President's Commission on the United States Postal Service, 
Embracing the Future, Making the Tough Choices to Preserve Universal 
Mail Service (Washington, D.C. July 31, 2003). 

[18] GAO, International Mail Air Transportation: Proposed Changes to 
the Rate-setting Process, GAO-05-529R (Washington, D.C. Apr. 8, 2005); 
GAO, U.S. Postal Service: Key Reasons for Postal Reform, GAO-04-565T 
(Washington, D.C. Mar. 23, 2004); GAO, Need for Comprehensive Postal 
Reform, GAO-04-455R (Washington, D.C. Feb. 6, 2004); GAO, U.S. Postal 
Service: Key Elements of Comprehensive Postal Reform, GAO-04-397T 
(Washington, D.C. Jan. 28, 2004); GAO, U.S. Postal Service: Bold Action 
Needed to Continue Progress on Postal Transformation, GAO-04-108T 
(Washington, D.C. Nov. 5, 2003). 

[19] GAO, A Framework for Assessing the Acquisition Function at Federal 
Agencies, GAO-05-218G (Washington, D.C. September 2005). 

[20] GAO, Best Practices: Using Spend Analysis to Help Agencies Take a 
More Strategic Approach to Procurement, GAO-04-870 (Washington, D.C. 
Sept. 16, 2004); GAO, Best Practices: Improved Knowledge of DOD Service 
Contracts Could Reveal Significant Savings, GAO-03-661 (Washington, 
D.C. June 9, 2003); and GAO, Best Practices: Taking a Strategic 
Approach Could Improve DOD's Acquisition of Services, GAO-02-230 
(Washington, D.C. Jan. 18, 2002). 

[21] GAO, Postal Service: Progress in Implementing Supply Chain 
Management Initiatives, GAO-04-540 (Washington, D.C. May 17, 2004); and 
GAO, Contract Management: Postal Service's National Office Supply 
Contract Has Not Been Effectively Implemented, GAO-03-230 (Washington, 
D.C. Jan. 17, 2003). 

[22] Institute for Supply Management, Principles and Standards of 
Ethical Supply Management Conduct, January 2002, and Principles of 
Social Responsibility, April 2004. 

[23] While the statutory goals for representation in contracting by 
small businesses and women-owned small businesses are goals for the 
federal government overall, the Small Business Administration 
negotiates with each of the federal agencies individually to establish 
agency-specific goals so that the governmentwide goals are met in the 
aggregate. Since USPS is exempt from the Small Business Act, the Small 
Business Administration does not establish any goals for USPS. Also, we 
did not include a governmentwide goal for contracting with minority-
owned businesses because Small Business Administration does not have a 
comparable governmentwide goal, rather it has a goal of 5 percent for 
small, disadvantaged businesses. 

[24] GAO-04-540, GAO-03-230, and Office of Inspector General, U.S. 
Postal Service, Supplier Diversity Program for Supplies, Services, and 
Equipment Purchases, CA-AR-01-005 (Arlington, VA: Sept. 6, 2001). 

[25] GAO-03-661. 

[26] GAO-01-466, GAO, Environmental Protection: Issues for 
Consideration in the Reorganization of EPA's Ombudsman Function, GAO-02-
859T (Washington, D.C. June 25, 2002), and GAO, Hazardous Waste: EPA's 
National and Regional Ombudsman Do Not Have Sufficient Independence, 
GAO-01-813 (Washington, D.C. July 27, 2001). 

[27] The guidance states that informal negotiation, litigation, and the 
ombudsman procedures are not forms of ADR. 

[28] Parties also have the option to submit their protest to a default 
adjudicative process that would result in a final agency decision, 
which can then be appealed to the federal court of jurisdiction. 

[29] This interagency group was established by the President under the 
authority created by the Administrative Dispute Resolution Act of 1996 
to facilitate and encourage agency use of dispute resolution. Executive 
Order 12866; Administrative Dispute Resolution Act of 1996 (ADRA), Pub. 
L. No. 104-320. 

[30] GAO-04-540. 

[31] GAO-03-230. 

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