The primary goal of the working capital fund is to focus management’s attention on the full costs of carrying out certain critical DOD business operations and the management of those costs. Background

The Defense Information Services business area consists of two components—the Defense megacenters (DMC) and the Communications Information Services Activity (CISA). This is a continuation of DOD efforts to consolidate its computer center operations. Objectives, Scope, and Methodology

The objectives of our review were to (1) evaluate DISA’s processes for establishing the prices DMCs and CISA charge for the services provided to customers of the Defense Information Services business area, (2) ascertain if DISA is being reimbursed for all services provided, and (3) ascertain the accuracy of DISA’s financial management information. In order to set prices that will enable the business area to operate on a break-even basis, it is extremely important that the business area accurately estimate the work it will perform and the cost of performing that work. Our review disclosed that the cost of doing business varied considerably from DMC to DMC. Analysis of the reported cost differences would be in accordance with this goal. This profit was approximately 13 percent of the DMCs’ reported revenue of about $682 million. In the case of the DMCs, the higher than anticipated workload in fiscal year 1997 was a primary reason the IBM and UNISYS mainframe services reported a net profit of $90 million in fiscal year 1997. Therefore, for fiscal year 1997, a more accurate workload estimate for the DMCs would have resulted in a lower CPU hourly price for IBM mainframe services and a higher hourly price for UNISYS mainframe service. Telecommunications Prices Do Not Reflect the Full Cost of Operations

In addition to the DMC pricing concerns discussed in chapter 2, our analysis of the Defense Information Services business area also disclosed that DISA was not recovering the full costs incurred in providing telecommunications services. Because the military departments pay for these components, they were not included in DISA’s prices. Yet, DISA has been excluding from its telecommunications prices millions of dollars related to transitioning independent networks to the new common-user network, prior-year losses, and overhead expenses. Using appropriated funds further understates DISA’s WCF prices and undermines business area managers’ abilities to focus on their operating costs and to make fundamental improvements in their operations. As of January 1998, 31 percent of the reported accounts receivable, or about $173 million, was reported outstanding for over 60 days. However, weaknesses within DISA’s internal control and accounting systems have hindered the development of accurate financial reports.
Why GAO Did This Study

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.

What GAO Found

GAO noted that: (1) DISA has difficulty: (a) setting prices for information technology services that result in the recovery of the full cost of doing business; (b) getting reimbursed for the services it provides; and (c) producing reliable financial information on the Defense Information Services business area; (2) these weaknesses impair the business area's ability to focus management attention on the full costs of carrying out operations and managing those costs effectively; (3) DISA is embarking upon a major effort to consolidate its Defense megacenters (DMC) and increase their efficiency by allowing them to specialize in mainframe processing and thereby lower their prices; (4) by consolidating the mainframe processing from the current 16 DMC sites to 6 and optimizing mainframe operations, DISA anticipates that planned savings will be passed on to its customers through reduced prices; (5) however, the reported cost of doing business varies considerably from computer center to computer center; (6) an analysis of the cost differences would provide management the opportunity to understand the cases of the differences and thereby help identify inefficiencies and make improvements in the services provided; (7) the DMCs have difficulty estimating future workload; in fiscal year 1997, the Department of Defense's (DOD) records showed that the estimated versus actual workload varied from 15 percent to 174 percent for individual centers; (8) because the DMCs underestimated the amount of work they would perform in fiscal year 1997 for IBM and UNISYS mainframe services, they reported a net profit of $90 million, which is 13 percent of the reported fiscal year 1997 revenue of approximately $682 million; (9) in setting prices for telecommunications services, the Communications Information Services Activity did not incorporate about $137 million of costs related to transitioning independent networks to DISA's new common-user network, prior-year losses, and overhead expenses; (10) because these costs were not included, the prices charged for services were not based on the full costs incurred; (11) since business area costs were offset by appropriations, its prices were further understated; (12) as of January 1998, DISA reports showed that 31 percent of the business area's receivables, or about $173 million, had been outstanding for more than 60 days; and (13) weaknesses within DISA's internal control and accounting systems have hindered the development of accurate financial reports.