DATE: March 22, 2000

FROM: Barry McVay, CPCM

SUBJECT: General Accounting Office; Trends, Reforms, and Challenges in Federal Acquisition

SOURCE: General Accounting Office (GAO) Testimony No. T-OCG-00-7, Delivered March 16, 2000

SYNOPSIS: In March 16, 2000, testimony of Henry L. Hinton, Jr., Assistant Comptroller General, before the House Committee on Government Reform, Subcommittee on Government Management, Information, and Technology, he described the changing acquisition environment, summarized recent reform efforts, and explored current and future challenges in federal acquisition.

EDITOR'S NOTE: GAO Testimony No. T-OCG-00-7 is available on the Internet at http://www.gao.gov, by calling 202-512-6000, or by faxing to 202-512-6061.

For more on a related report released by GAO on March 20, 2000, see today's FEDERAL CONTRACTS DISPATCH "General Accounting Office; Few Competing Proposals for Large Department of Defense (DOD) Information Technology (IT) Orders."

For more on a related DOD Inspector General report, see the March 15, 2000, FEDERAL CONTRACTS DISPATCH "Department of Defense; Contracts for Professional, Administrative, and Management Support Services."

SUPPLEMENTAL INFORMATION: Mr. Hinton began his testimony by noting that federal spending for goods and services has be streamlined in recent years by new contract vehicles and techniques that allow agencies to buy what they need much faster than in the past. "These efforts have focused largely on simplifying the process, particularly for buying commercial products and services, and on attempting to improve decisionmaking in acquiring information technology," said Mr. Hinton. "But despite recent reforms and the efforts of many dedicated people over the years, the government still does not have a world-class purchasing system. All too often, many of the products and services the government buys cost more than expected, are delivered late, or fail to perform as anticipated...Problems are particularly evident in the two areas where most of the dollars are spent: weapons and information technology systems. Significant improvements in these areas -- as well as in the skills of the acquisition workforce -- are needed in order to produce better outcomes."

Mr. Hinton said that the government's buying patterns have changed since the mid-1980s, from supplies and equipment (56% of government spending in fiscal year 1985) to services, construction, and research and development (43% of government spending in fiscal year 1999; supplies and equipment dropped to 35%). "In addition to changes in what the government buys, we also are seeing changes in how the government buys. Agencies are making greater use of contracts awarded by other agencies, as well as federal supply schedule contacts, awarded by the General Services Administration (GSA). Use of these types of vehicles can reduce acquisition time significantly. For example, a recent GSA study found that it takes only 15 days, on average, to issue an order under a schedule contract versus 268 days to award a contract using the traditional method. Use of GSA federal supply schedules has grown from $4.5 billion in 1993 to $10.5 billion in 1999. Most of the growth has been in the area of information technology.

"Taken together, the data tell us that the federal acquisition environment is now characterized by a greater reliance on services and information technology. In many ways, these trends in government procurement merely reflect changes in the overall global economy. Because the government is but one of many players in this services- and information-driven economy, it will have to become a smarter, more commercial-oriented buyer. At the same time, the government continues to spend enormous amounts in markets where it remains the only -- or at least the dominant -- buyer, such as procurements of unique defense and space systems. It is in these areas where vigorous oversight will continue to be needed because competition in these markets often is limited and the government frequently relies on contractor costs in the pricing of contracts."

Mr. Hinton then listed several trends to watch. "Contracting for services likely will continue to increase because of further downsizing and initiatives such as the Federal Activities Inventory Reform Act of 1998 (FAIR). This legislation requires agencies to identify functions that could be performed by the private sector. Agency spending on information technology-related goods and services, currently about $40 billion annually, likely will increase as agencies seek to modernize their equipment and continue to take advantage of the latest technologies. Also, recent budget projections indicate that spending on acquisitions of major defense equipment will likely increase. We should also expect that electronic commerce will become the preferred approach for accomplishing a variety of procurement tasks, ranging from conducting market research, to selecting suppliers, to placing orders, to making payments online...With the proliferation of Internet use throughout government, industry, and the public, agencies are seeking to capitalize on electronic commerce capabilities to improve efficiency and economy. At the same time, agencies must understand and manage the challenges and risks of using a global, public, electronic network. To avoid loss of public trust, agencies must strive for reliability, integrity, security, and privacy in all electronic commerce transactions."

Though agencies may be acquiring goods and services faster, "questions remain about whether these efficiencies have come at the expense of competition and good pricing. For example, we have found that DOD receives few competing proposals on large information technology orders. We also have reported that some contracting officials are having difficulty making the transition from pricing goods and services based on the costs incurred by contractors to a commercial model in which factors other than cost are the principal means used to establish prices. This sometimes resulted in significantly higher prices than previously paid. For example, a defense agency paid $453 per unit for wiring harnesses for the C-130 aircraft, even though it had paid only $91 per unit 2 years earlier. The buyer did not use this price history to try to negotiate a lower price."

Mr. Hinton said that GAO believes the most significant challenges to federal acquisition involve three key areas: improving the outcomes of defense systems acquisitions; acquiring and using information technology; and addressing acquisition workforce issues.

In conclusion, Mr. Hinton said, "Lasting improvements in federal procurement operations offer the potential to save billions of dollars, dramatically improve services to the American public, and strengthen confidence in the accountability and performance of our national government. However, much more needs to be done to achieve real and sustained improvements. It will take time to improve agency procurement operations because the problems we have identified are difficult ones and are deep-rooted in very large programs and organizations. There is much to be learned from the best practices of leading, high-performing private sector organizations. When use of commercial best practices is determined to be appropriate, government agencies should adopt such practices unless there is a compelling reason not to. To ensure that progress continues, sustained management attention and congressional oversight -- particularly involving weapons systems, information technology, and human capital issues -- will be necessary."

FOR FURTHER INFORMATION CONTACT: Barry McVay at 703-451-5953 or by e-mail to BarryMcVay@FedGovContracts.com.

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