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GAO-02-554R: 

United States General Accounting Office: 
Washington, DC 20548: 

April 29, 2002: 

The Honorable Richard J. Durbin: 
Chairman: 
The Honorable Robert F. Bennett: 
Ranking Minority Member: 
Subcommittee on the Legislative Branch: 
Committee on Appropriations:
United States Senate: 

The Honorable Vernon J. Ehlers: 
Chairman:
The Honorable Christopher J. Dodd: 
Vice Chairman:
Joint Committee on the Library of Congress: 

Subject: Library of Congress: Status of Retail Activities: 

The Senate Committee on Appropriations directed us to evaluate the 
viability of using profits from the Library of Congress' retail 
activities to support other Library activities.[Footnote 1] 
Specifically, we were asked to evaluate the (1) potential for 
generating profits from Library retail activities and (2) policies and 
procedures for the control of products, licensing agreements, and use 
of the Library's logo. Also, we were asked to work in consultation 
with the Library to evaluate options and alternatives for generating 
profits from retail activities. 

During the preliminary stages of our study, we determined that the 
Library's planning activities were in a very preliminary state. 
Therefore, we agreed with your staff on the following objectives for 
our work: (1) determine the status of the Library's plans to achieve 
the goal of operating these retail activities for profit, including 
whether it has developed business plans, implemented accounting 
procedures, conducted marketing studies, and developed pricing 
policies for its retail operations, (2) identify the Library's current 
policies and procedures for the control of products, licensing 
agreements, and use of the Library's logo, and (3) analyze past 
financial performance of Library retail activities for profit potential.
In February and March, 2002, we briefed staff of the Subcommittee on 
the Legislative Branch, Senate Committee on Appropriations, and the 
Joint Committee on the Library of Congress on the results of our 
review. This letter transmits our final briefing document, which is 
presented as enclosure I, and the Library comments which are reprinted 
in enclosure II. 

Based on our review, we determined that the Library (1) has not yet 
developed an overall plan, specific business plans, pricing policies, 
or the accounting procedures that it would need to achieve the goal of 
generating profits to support other Library activities and (2) while 
it has policies and procedures to control the use of its logo, the 
Library has not yet developed policies and procedures covering the 
scope and mission of the retailing functions, control of products, or 
licensing agreements. 

Over the past 5 years, the Library's three major retail activities, 
the Photoduplication Service, the Gift Shop, and the Audio Video 
Laboratory, have not consistently generated profits or covered all 
costs. In each case, the activity's total expenses for the 5-year 
period, exceeded its total revenues for the period. 

We concluded that the Library lacks the basic business plans and 
accounting procedures for evaluating its current retail operations and 
measuring costs and profitability. Such information would serve as the 
basis for developing the Library's plans for identifying opportunities 
and alternatives for how it would achieve the goal of generating 
profits to support other activities. Because of the above factors, the 
Library is not yet in a position to conduct a study to evaluate the 
viability of generating profits from the Library's retail activities 
to support other Library activities or evaluate options. 

In order to develop the information and tools needed for evolving from 
its current retail operations to one that will generate profits to 
support other Library activities, we recommend that the Librarian of 
Congress: 

* develop an overall plan for generating profits from retail 
activities to support other Library activities, 

* develop business plans for the operations of its current and future 
retail activities, 

* develop accounting procedures to measure cost and profitability for 
its retail activities, 

* establish pricing policies, 

* develop overall policies defining the scope and mission of the its 
retail activities, and, 

* conduct marketing studies or analyses to identify markets and 
products that will help it achieve the goal of generating profits from 
its retail sales to support other Library activities. 

We provided the Associate Librarian for Library Services a draft of 
our briefing document for review and comment. The Associate Librarian, 
in his written comments on the draft (see enclosure II) concurred with 
our recommendations, which he characterized as needed to enhance the 
business foundation of the Library's retail operations prior to 
embarking on a program of growth in the its retail operations. The 
Associate Librarian also expressed concern that our report did not 
give more attention to the actions that the Library has taken to date 
to set the stage for the development of its retail enterprises. He 
listed the following six actions the Library has taken to date: 

* realigning the expense base to secure a sound financial footing for 
the Photoduplication Service and Retail (Gift) Shop by eliminating 34 
positions within the past 9 months, 

* completing the first draft of a business planning and marketing 
strategy for the Photoduplication Service, 

* establishing a full-time position of Marketing Services Coordinator, 

* dedicating two senior staff members and designating five transition 
working groups to the process of business planning and transition, 

* beginning discussions with an outside consultant experienced in 
launching e-commerce enterprises, and, 

* developing a preliminary e-commerce strategy including initiating a 
relationship with Treasury in order to establish a sound mechanism for 
on-line payments. 

Although the above actions on the part of the Library of Congress are 
related to its retail activities, in our opinion, they represent 
preliminary efforts involving specific aspects of those activities. 
The Associate Librarian agrees that the Library still needs to develop 
the fundamental business plans; policies and procedures, including 
accounting procedures; and marketing studies described in our 
recommendations to provide the basis it needs for identifying and 
evaluating alternatives and options as well as operating its 
activities to generate profits that could be used to support other 
library activities. 

In conducting our study, we interviewed Library officials responsible 
for each of the Library's three major retail activities and officials 
from Library Services, the Library's Office of General Counsel, and 
the Library's Financial Management Services, and we reviewed related 
documents, including agency memorandums, financial data, business 
planning documentation and studies, Library policies and procedures, 
and Library inspector general audit reports. We conducted our study in 
accordance with generally accepted government auditing standards. 

We are sending copies of this letter to the chairmen and ranking 
minority members of the House Committee on Government Reform, the 
Senate Committee on Governmental Affairs, and the Subcommittee on 
Legislative, House Committee on Appropriations. We are also sending it 
to the Librarian of Congress. This letter will also be available on 
GAO's home page at [hyperlink, http://www.gao.gov]. 

If you or your staff have any questions concerning this letter or the 
briefing, please contact me at (202) 512-9471, or by e-mail at 
franzelj@gao.gov, or Ben Smith, Project Manager at (202) 512-9196 or 
by e-mail at smithbw@gao.gov. Key contributors to this report were 
Robert P. Preshlock Jr. and Jacquelyn N. Hamilton. 

Signed by: 

Jeanette M. Franzel: 
Acting Director: 
Financial Management and Assurance: 

Enclosures: 

[End of section] 

Enclosure I: Briefing for the Subcommittee on the Legislative Branch, 
Senate Committee on Appropriations, and the Joint Committee on the 
Library of Congress: 

Financial Management and Assurance Team: 

Library of Congress: Status of Retail Activities: 

Briefing for the Subcommittee on the Legislative Branch, Senate 
Committee on Appropriations, and the Joint Committee on the Library of 
Congress: 

Briefing Overview: 
* Background: 
* Objectives: 
* Scope and Methodology: 
* Results in Brief: 
* Results: 
* Conclusions: 
* Recommendations: 
* Agency Comments: 

Background: 

The Library of Congress operates its three major retail activities as 
revolving funds, which generate revenue, in part, by selling goods and 
services to the public. 

According to Library officials the Photoduplication Service, the Gift 
Shop, and the Audio Video Laboratory are the Library's three major 
retail revolving fund activities. 

The Photoduplication Service provides microfilming, photographic, 
photocopy, and digital services and products for the Library and the 
general public. 
	
The Gift Shop purchases and develops products that are related to the 
Library or its collections and sells these products through its 
store(s) to patrons of the Library. 

The Audio Video Laboratory assists in the replication and conservation 
of recorded sound and moving images for the Library and the public.
	
For these activities: 

* fees charged for goods and services are deposited into their 
respective revolving funds, 

* receipts must be used for the purposes for which the funds were 
established, and, 

* each revolving fund is expected to break even over time, meaning it 
could have profits or losses in any given year, but is expected to 
break even in the long run. 

The Library has in the past requested authority to use profits from 
its retail activities for other Library activities. 

The use of profits from retail sales for other Library activities 
could require new legislative authority. 

The Senate Committee on Appropriations directed us to evaluate the 
viability of using profits from the Library's retail sales activities 
to support other Library activities. (See Senate Report 107-37 
accompanying Public Law 107-68, Legislative Branch Appropriations Act, 
2002.) 

[End of Background] 

Objectives: 

Specifically, in the Senate report, GAO was directed to: 

* evaluate the potential for generating profits from Library retail 
activities; 

* evaluate the policies and procedures for the control of products, 
licensing agreements, and use of the Library's logo; and; 

* work in consultation with the Librarian of Congress in evaluating 
options and alternatives. 

As we began our work, we discovered that the Library's planning 
activities for generating profits from its retail activities were in a 
very preliminary state. Therefore, we agreed with the committee staff 
on the following objectives for our work: 

* determine the status of the Library's plans to achieve the goal of 
generating profits from its retail activities to support other Library 
activities, including whether the Library has developed business 
plans, implemented cost accounting procedures, conducted marketing 
studies, and developed pricing policies for its retail operations; 

* identify current policies and procedures for the control of 
products, licensing agreements, and use of the Library's logo; and; 

* analyze the financial performance of selected Library retail 
activities to determine if, in the past, they have demonstrated a 
potential for profit. 

[End of Objectives] 

Scope and Methodology: 

In conducting our study, we: 

* interviewed Library officials responsible for each of the Library's 
three major retail activities and officials from Library Services, the 
Library's Office of General Counsel, and the Library's Financial 
Management Services and; 

* reviewed related documents, including agency memorandums, financial 
data, business planning documentation and studies, Library policies 
and procedures, and Library inspector general audit reports. 

We conducted our work from October 2001 through March 2002 in 
accordance with generally accepted government auditing standards. 

[End of Scope and Methodology] 

Results in Brief: 

Status of Library's Plans: The Library has not yet developed an 
overall plan, specific business plans, pricing policies, or the 
business tools it needs to achieve the goal of generating profits to 
support other Library activities. 

Policies and Procedures: The Library has not developed policies and 
procedures covering the scope and mission of the retailing functions, 
control of products, or licensing agreements. The Library does have 
policies and procedures to control the use of its logo. 

Financial Performance: Over the past 5 years, the three major retail 
activities we reviewed have not consistently generated profits or 
covered all costs over time. 

Recommendations: We are making recommendations to help ensure that the 
Library develops the information and tools needed to (1) evaluate 
current retail operations and (2) plan for generating profits from 
these operations to support other Library activities. 

Agency comments: The Associate Librarian for Library Services, in 
responding to a draft of our briefing document: 

* stated that he concurred with our recommendations, which he 
characterized as needed to enhance the foundation of the Library's 
retail operations prior to embarking on a program of growth for its 
retail activities, and; 

* expressed concern that we did not give more attention in our 
briefing to actions taken to date to set the stage for the development 
of the Library's retail enterprises. 

In our view, the Library's actions taken to date represent preliminary 
efforts involving specific aspects of its retailing. The Associate 
Librarian agreed that the Library still needs to develop the 
fundamental policies, procedures, and plans for developing its retail 
operations. 

Results: Status of Library Plans: 

The Library has not fully developed a plan for achieving the goal of 
generating profits from its retail activities to support other Library 
activities. For example, Library management has not determined (1) the 
range of products that potentially could be sold, (2) whether such 
retail activities would sell products at no profit or even at a loss 
for purposes of promoting certain Library events or activities, and 
(3) if greater emphasis would be placed on the most profitable 
products or expanding product lines and markets. 

The Library has not prepared basic business plans for its current and 
future retail operations. 

The Library has not fully developed accounting procedures to collect 
and analyze cost and profitability information for the retail 
activities in our study. 

The Library has not conducted marketing studies to identify markets 
and products to help achieve the above goal. 

The Library has not developed pricing policies that consider expanded 
markets for specific products and services and their associated costs. 

Also, the Library, in considering the use of e-commerce to expand its 
retail sales operations, identified similar challenges, such as the 
need for mission realignment of its revenue-generating activities and 
the lack of a shared accounting system, and the need for marketing 
studies. 

Results: Policies and Procedures: 

Current retail operations lack overall policy guidance defining the 
scope and mission of the Library's retailing functions. 

The Library has not fully developed policies and procedures for the 
control of products. 

The Library does not have overall policies or procedures governing 
licensing agreements. According to the Library, such agreements are
contractual and specific to given vendor relationships. All contracts 
are reviewed by the Library's general counsel. 

The Library has developed policies and procedures for the use of its 
logo. 

Results: Financial Performance: 

As noted in figures 1 through 3, over the last 5 years, the financial 
performance of the Library's retail activities has been mixed and has 
not demonstrated the potential for generating profits or covering 
costs on a consistent basis over time. 

In total, for the 5 years ending September 30, 2001, the 
Photoduplication Service reported losses of about $2.2 million, the 
Gift Shop reported losses of about $200,000, and the Audio Video 
Laboratory reported losses of about $120,000. 

Also, during this period only the Gift Shop included an allocation for 
the Library's administrative overhead costs in its operating costs. 

Photoduplication Service: 

* Although the Photoduplication Service reported revenues in excess of 
expenses for 1997 and 1998, it has reported losses over the last 3 years
as the Library has used contractors to meet its internal microfilming 
needs. (See figure 1.) These reported losses do not include an 
allocation of the Library's overhead costs. 

Figure 1: Photoduplication Service Revenue and Expenses: 

[Refer to PDF for image: multiple line graph] 

On the graph Revenue and Expenses are plotted in millions of dollars 
for the fiscal years 1997 though 2001. 

Source: Library of Congress unaudited financial data.	 

[End of figure] 

The Gift Shop: 

* Although the Gift Shop reported that it broke even in 1997 and had 
revenue in excess of expenses in 1998, it also reported that it failed 
to break even over the last 3 years and has had to close one of its
stores in an effort to reduce expenses following the events of 
September 11, 2001. (See figure 2.)
									
Figure 2: Gift Shop Revenues and Expenses: 

[Refer to PDF for image: multiple line graph] 

On the graph Revenue and Expenses are plotted in millions of dollars 
for the fiscal years 1997 though 2001. 

Source: Library of Congress unaudited financial data. 

[End of figure] 

The Audio Video Laboratory: 

* Although the Audio Video Laboratory reported that its has broken 
even in 2 of the last 5 years, overall it has reported losses of about 
$120,000 over the 5-year period. (See figure 3.) 

Figure 3: Audio Video Laboratory Revenues and Expenses: 

[Refer to PDF for image: multiple line graph] 

On the graph Revenue and Expenses are plotted in millions of dollars 
for the fiscal years 1997 though 2001. 

Source: Library of Congress unaudited financial data. 

[End of figure] 

[End of Results] 

Conclusions: 

The Library lacks the basic business plans and accounting procedures 
for evaluating its current retail operations and measuring costs and 
profitability. Such information would serve as a basis for developing 
the Library's plans for identifying opportunities and alternatives for 
how it would achieve the goal of generating profits to support other 
Library activities. 

Due to the above factors, the plans and related information are not 
available at this time to conduct a study to evaluate the viability of 
generating profits from the Library's retail activities to support 
other Library activities or to evaluate options. 

[End of Conclusions] 

Recommendations: 
	
Until the Library develops the information and business tools needed 
for evolving its current retail operations that are based on a break-
even assumption into one that will generate profits to support other 
Library activities, the viability of generating profits will remain 
uncertain. Therefore, if the Librarian of Congress decides to pursue 
this objective, he should first do the following: 

* develop an overall plan for generating profits from retail 
activities to support other Library activities, 

* develop business plans for the operations of its current and future 
retail activities, 

* develop accounting procedures to measure cost and profitability for 
its retail activities, 

* establish pricing policies, 

* develop overall policies defining the scope and mission of its 
retail activities, and, 

* conduct marketing studies or analyses to identify markets and 
products that will help the Library achieve the goal of generating 
profits from its retail sales to support other Library activities. 

[End of Recommendations] 

Agency Comments: 

We provided the Associate Librarian for Library Services a draft copy 
of our briefing document for comment. His comments and our response are
discussed below. 

The Associate Librarian concurred with our recommendations, which he 
characterized as needed to enhance the business foundation of the 
Library's retail operations prior to embarking on a program of growth 
in its retail operations. 

However, the Associate Librarian also expressed concern that our 
report did not give more attention to the actions the Library had 
taken to date to set the stage for the development of retail 
enterprises. 

The Associate Librarian identified the following six actions the 
Library has taken to date: 

* realigning the expense base to secure a sound financial footing for 
the Photoduplication Service and Retail (Gift) Shop by eliminating 34
positions within the past 9 months, 

* completing the first draft of a business planning and marketing 
strategy for the Photoduplication Service, 

* establishing of a full-time position of Marketing Services 
Coordinator, 

* dedicating two senior staff members and designating five transition 
working groups to the process of business planning and transition, 

* beginning discussions with an outside consultant experienced in the 
launching e-commerce enterprises, and, 

* developing a preliminary e-commerce strategy, including initiating a 
relationship with Treasury in order to establish a sound mechanism for 
online payments. 

Although the above actions on the part of the Library are related to 
its retail activities, they represent preliminary efforts involving 
specific aspects of those activities. 

The Associate Librarian agrees that the Library still needs to develop 
the fundamental business plans; policies and procedures, including 
accounting procedures; and marketing studies described in our 
recommendations to provide the basis it needs for identifying and 
evaluating alternatives and options as well as operating its 
activities to generate profits that could be used to support other 
Library activities. 

[End of Agency Comments] 

[End of Enclosure I] 

Enclosure II: Comments from the Library of Congress: 

The Library Of Congress: 
Office Of The Associate Librarian For Library Services: 
101 Independence Avenue, S.E. 
Washington, D.C. 20540-4000: 

Ms. Jeanette M. Franzel: 
Acting Director, Financial Management and Assurance: 
United States General Accounting Office: 
Washington, DC 20548: 

March 25, 2002: 

Dear Ms. Franzel: 

I appreciate the opportunity to comment on your draft briefing 
document, Library of Congress Retail Activities, and to have worked 
with you and your staff over the course of this highly collegial 
effort. 

For more than a decade, the Library of Congress has sought 
authorization to provide better support for and development of our fee-
service activities in order to achieve the goal shared by Sen. Durbin 
and the Library of making our collections better known and used, by 
generating revenue for support of those collections through expanded 
retail marketing operations. 

However, it was not until this fiscal year (2002) that we were at last 
authorized to establish new statutory revolving funds to support 
achievement of this goal. This was a critical first step toward 
finally achieving the goal shared by Sen. Durbin and the Library of 
developing fee activities that may generate revenues to supplement the 
Library's traditional resource base. 

We see significant potential for these revolving funds, which the 
Library has put in place this year, to increase the Library's 
capabilities to serve Congress and continue building comprehensive 
research collections. We welcome the intent of the Senate to encourage 
and reinforce this direction. 

I very much regret that the draft report pays scant attention to the 
energetic efforts the Library has undertaken since the Senate first 
authorized the Library to move in this direction less than a year ago. 
Nevertheless, my colleagues and I concur in your recommendation that 
the Library should enhance the business foundation of the retail 
operations before embarking on a program of growth by developing an 
overarching business strategy, scope, definition, business plans, more 
precise cost accounting and pricing parameters, and a marketing 
program. 

Our primary goal this year has been to complete the revolving fund 
transition, an effort now well underway. But, we also have initiated a 
number of actions to set the stage for the development of the retail 
enterprises, including: 

* realignment of the expense base to secure a sound financial footing 
for the Photoduplication Service and Retail Shop, two operations hit 
hard over the recent past by reduced market demand, by elimination of 
34 positions within the past nine months; 

* completion of the first draft of a business planning and marketing 
strategy for the Photoduplication Service; 

* establishment of a full-time position of Marketing Services 
Coordinator; 

* dedication of two senior staff members and designation of five 
transition working groups to the processes of business planning and 
transition; 

* commencement of discussions with an outside consultant experienced 
in the launch of e-commerce enterprises; and; 

* development of a preliminary e-Commerce strategy, including 
initiation of a Library of Congress relationship with the Department 
of Treasury's Pay.gov program for the establishment of a sound 
mechanism for online payments. 

The Library's revolving fund regulation requires that the retail 
divisions operate on a break-even basis. We intend to invest in these 
enterprises and expand their capabilities through a dynamic process 
that will take several years to implement prudently. To ensure 
success, we will need to develop the policies and business plans that 
you suggest. We will also likely need to consolidate our financial, 
marketing, and order processing operations to capitalize on the unique 
opportunities the Senate's interest offers for realizing mission-
consistent profit in our retail programs. 

My colleagues and I appreciate the work you and your team have done on 
our behalf since we first met in October. We look forward to working 
with you as well as our colleagues in the Congress as we continue to 
develop more robust and businesslike retail marketing operations while 
also performing our core functions in a highly effective manner. 

Sincerely, 

Signed by: 

Winston Tabb: 
Associate Librarian for Library Services: 

[End of Enclosure II] 

Footnote: 

[1] Senate Report 107-37, accompanying Public Law 107-68, Legislative 
Branch Appropriations Act, 2002.