DOD Information Services: Improved Pricing and Financial Management Practices Needed for Business Area
AIMD-98-182
Published: Sep 15, 1998. Publicly Released: Sep 15, 1998.
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Highlights
Pursuant to a congressional request, GAO provided information on the Defense Information Systems Agency's (DISA) price-setting process, focusing on: (1) whether DISA is being reimbursed for the services provided; and (2) the accuracy of DISA's financial management information.
Recommendations
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Defense Information Systems Agency | The Director of DISA should analyze the cost differences in the estimated cost per central processing unit hour at the DMCs as part of the consolidation effort and identify improvements needed in how they conduct business. |
In its September 2, 1998, response to the report, DOD did not concur with this recommendation. DOD stated that a detailed study of the causes of cost differences among DMCs would not be relevant because their current operations are changing during the current consolidation effort. As discussed in the report, there were considerable differences in the reported cost of doing business between DMCs. DOD officials acknowledged that the cost differences had not been formally analyzed. Additionally, a DOD official acknowledged that DISA had not studied the differences in costs between DMCs providing the same or similar service.
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| Defense Information Systems Agency | The Director of DISA should compare forecasted workload estimates to actual work received and consider these trends in developing the workload estimates and prices to charge customers for the services provided. |
In its response to the report, DOD did not concur with this recommendation. DOD stated that given the changes brought on by the consolidation effort, it is difficult to develop accurate workload estimates. DOD also noted the process of developing workload starts 2 years before the prices go into effect. The report recognizes the efforts that DISA had undertaken to improve the accuracy and reliability of its workload estimates. However, the extent of the reported workload variance--from about 74 percent more than the projected workload at one DMC to about 19 percent less than the projected workload at another DMC--is much greater than would normally be expected. The DMCs reported a $90 million net profit for mainframe services in fiscal year 1997, primarily because workload volumes were higher than anticipated. Since the volume of workload is one factor in determining the hourly price, the accuracy and reliability of the workload estimate is critical in establishing this price.
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| Under Secretary of Defense (Comptroller) | As part of the price-setting process, the Under Secretary of Defense (Comptroller) should ensure the workload estimates in DISA and customer budgets agree. |
DOD concurred with the recommendation. Projecting workload accurately is a key element in setting prices to help a business area break even. As part of the fiscal year (FY) 2000 program budget review, the FY2000 prices for mainframe services were adjusted based on the workload estimate. For IBM services, the increased workload in fiscal year 1999 resulted in a reported net profit of approximately $28 million, and DOD acted to reduce the related costs of operations and the price charged. For UNISYS, the workload projections for FY1999 and 2000 did not reflect the decrease in workload that occurred in FY1998. Furthermore, the UNISYS FY2000 prices did not reflect the reported $26-million operating loss that occurred in FY1998. The customer's budgets were adjusted to recover the reported loss. The consideration of the workload and the adjustment to the costs and prices, based on estimated workload and related profit or loss, is in keeping with the working capital concept and meets the intent of the recommendation.
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| Defense Information Systems Agency | The Director of DISA should ensure that transition costs and revenues are considered when computing telecommunications prices, in accordance with the criteria set forth in DOD's "Financial Management Regulation." |
In its response to the report, DOD did not concur with this recommendation. DOD stated that transition costs and revenue are considered in the computation of telecommunication prices. However, GAO found that this was not the case. DISA excluded approximately $77 million in transition costs. DOD's Financial Management Regulation states that all estimated costs should be included in the prices charged customers and any realized gains should be used to offset the estimated costs in subsequent fiscal years. In addition, it is DOD policy to treat transition costs as operating expenses and, therefore, include them in the price charged customers. However, DISA did not adhere to the prescribed policy, thereby understating its full cost of operations.
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| Defense Information Systems Agency | The Director of DISA should, as part of DISA's fiscal year 2000 budget, identify all appropriations used in support of WCF activities and the specific reasons the appropriated funds are being used to support the activities of the WCF. |
In its response to the report, DOD did not concur with this recommendation. However, the Department of Defense Appropriation Bill, 1999, dated June 22, 1998, directed DOD to provide a report to the congressional Defense committees by February 15, 1999, on what parts of the DISA budget should be moved into the Working Capital Fund. As of September 2000, DOD still had not provided the congressional Defense committees with the requested report.
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| Under Secretary of Defense (Comptroller) | The Under Secretary of Defense (Comptroller) should direct DOD activities to follow existing DOD "Financial Management Regulation" by providing funding documents to DISA for the amount of services being requested before DISA begins work. |
In its response to the report, DOD concurred with the recommendation. An official with the Office of the Under Secretary of Defense (Comptroller) stated that although the policy is clearly stated within the DOD Financial Management Regulation, this continues to be a problem within the working capital funds activities. This problem is not unique to DISA. The DOD official stated that the Comptroller's office is unable to prevent this practice from occurring. At best, all it can do is continually stress the need to have funding documents in advance of doing any work as part of the budget review process with each working capital fund activity.
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| Under Secretary of Defense (Comptroller) | The Under Secretary of Defense should direct DOD activities to reimburse DISA for the full amount of services provided. |
In its response to the report, DOD concurred with the recommendation. An official with the Office of the Under Secretary of Defense (Comptroller) stated that throughout the course of the fiscal year all working capital fund activities may not be reimbursed in a timely manner for all services provided. However, at the end of the fiscal year, virtually all activities are being reimbursed for the services provided. According to the DOD official, this issue is discussed with each working capital fund activity as part of the budget review process.
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| Under Secretary of Defense (Comptroller) | The Under Secretary of Defense should direct DISA to record amounts it is owed for services provided in accordance with federal accounting standards. |
Although the department concurred with the recommendation, no action has been taken to implement the recommendation. Given that the department has an extensive effort underway to modernize its existing business systems, it is unlikely that corrective action will be taken in the near term. In the department September 1999 Biennial Financial Management Improvement Plan it was noted that it would be at least fiscal year 2003 before the new accounting system is implemented. To date, a new system has not been implemented and a firm date has not been established as to when a new system will be in place.
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