COMPARISON OF OWNING EDP SYSTEMS WITH LEASING

Mr. RHODES. Mr. Staats, would you also furnish for the record a brief statement as to the relative economies in the Government owning ADP systems as against leasing them. Would that be feasible?

Mr. STAATS. Yes, it would be.

(The information follows:)

Relative Economies in the Government
Owning Rather Than Leasing Automatic
Data Processing Systems

During the period 1962-1965 the General Accounting Office examined extensively into the question of whether it is to the Government's advantage to own rather than lease automatic data processing equipment. We covered situations in which equipment was being leased directly by agencies as well as by contractors in the performance of Government contracts. In a series of 53 reports we identified a total of $78 million of unnecessary costs being incurred through leasing or potential savings which could be realized through buying.

As a result of that work we concluded that generally it was to the Government's advantage financially to purchase rather than lease ADP equipment.

More recently, however, a number of different acquisition techniques can be used, which greatly expand the options available to the agencies. Where limited use is expected (a one-shift operation) over a relatively short term (less than five years), a short term lease arrangement may be the best alternative. Where more extensive use is anticipated, but funds available for purchase are limited, a multi-year lease may be advantageous because discounts are frequently available in such cases. Lease with an option to buy may be the best solution when it is determined that some actual operating experience is needed to prove the system design, or where substantial changes to the system are expected. Installment purchase is another technique which can be used to conserve limited procurement funds.

It has become evident, therefore, that decisions on what acquisition method to use must be made on a case by case basis in the light of particular circumstances, and after a careful analysis of all pertinent elements of cost.

The Office of Management and Budget has prescribed policies in its Circular A-54 for observance by executive agencies in the selection and acquisition of ADP equipment. In addition, many large agencies have issued directives for internal guidance within their agencies.

Mr. STAATS. We have done a number of studies in this field going back over several years. Here we have a total number of 60 assignments that involve automatic data processing in one way or another ongoing in our 6-month work program. Nineteen of these are in the civil agencies, 24 in defense, one in international, and 16 which are more generalized assignments.

That gives you some indication that we are giving it high priority. Mr. RHODES. The progress in the state of the art in automatic data processing systems has really been so explosive in the last several years that I for one have wondered if it really was economical to have the Government buy systems when perhaps by leasing them they could over a shorter period of time update their equipment by leasing newer equipment, whereas if they owned the equipment themselves, they might find their feet in concrete and not be able to take advantage of newer technology.

Mr. STAATS. I guess the general answer that I would give is that it is difficult to generalize. It depends on what type of computer equipment you are talking about and how much the state of the art is likely to change.

We are of the view that one of the greatest areas of possible saving here to the Government would be to put more effort in trying to standardize the software and get greater compatibility among the different systems. We have been pushing both the Office of Management and Budget and the National Bureau of Standards very hard to do more work in this field. There is some good work now underway designed to do this.

This is particularly important with the decision of the IBM to what they call "unbundle", that is, to require buyers to pay separately for hardware and software. In this way you get the possibility opened up of a lot more competition in the software area. We have done some studies in this field which show that with greater standardization of the equipment you could use different companies' equipment together and save a lot of money. We did a study on this last year. Mr. RHODES. Computer capability has been a subject of study for quite some time. I was of the opinion that computer compatibility was pretty far down the road, so that one computer could actually speak to another. There is still work to be done on this?

Mr. STAATS. There is still a lot to be done.

Mr. RHODES. Thank you, Mr. Chairman.
Mr. CASEY. We will adjourn until 2 o'clock.

STUDY OF DEFENSE INDUSTRY PROFITS

Mr. ANDREWS. The committee will come to order.
Mr. Evans.

Mr. EVANS. Thank you, Mr. Chairman.

Mr. Comptroller, the publicity that has been mentioned earlier with regard to the defense industry profit study, I know your concern about it, and we are concerned about it because your reputation for integrity is very meaningful to you and important to us in terms of the confidence we have.

With that in mind I will ask a few questions to at least clear the

situation in my mind and in the record if it hasn't already been done. If it has, I hope you will excuse me for going over it again.

I think it might be helpful in view of the criticism in the press if you could for the record explain to us the difference in the purpose you had in mind in the two areas that were studied.

You had one group of 146 contracts which you reviewed, and then you had another inquiry conducted by questionnaire.

In relation to the 146 contracts, what was your purpose in reviewing these contracts?

Mr. STAATS. First, I appreciate your giving me the chance to respond. As you may know we had hearings before the House Government Operations Committee last Friday which, we hope, enabled us to clarify the situation to some degree.

Mr. EVANS. In that regard I might say I have had a chance to read the statements made by my colleague, Mr. Eckhardt. I haven't read the hearing, I don't know if you had a chance to respond to him or not. If not, I thought this would be an opportunity to review some of these points.

Mr. STAATS. You are quite correct. There are two separate analyses involved here. One is our analysis of contractor profits, profits pertaining to the contractor's total business for the 4-year period, 1966 through 1969. This was accomplished by obtaining answers to a questionnaire which was prepared by our office.

We attempted to validate the questionnaire by checking it out with a certain number of companies to see if it could be filled out.

We went out in many cases and explained the questionnaire to the contractors to enable them to fill it out. In some cases we actually helped them fill it out if they had difficulty with it.

A part of our reason for doing this was we wanted to get as high a response as we could because we had initially been concerned whether contractors would in fact respond, and indeed they were under no obligation to respond with respect to their commercial business.

We felt by working with the contractors we could get a higher response and we ended up getting responses from everyone except two who went out of business.

Mr. EVANS. These were defense contractors who also had commercial work?

Mr. STAATS. Yes.

Mr. EVANS. And you were reviewing both experiences?

Mr. STAATS. Yes, because part of the objective of the whole study was to see whether their profit from their commercial business was higher or lower than the profit from the defense business.

Mr. EVANS. These companies you selected were, you felt, a representative sampling of the people who do contract for defense business?

Mr. STAATS. We had 74 of the 80 top volume defense contractors who represented 60 percent of all of the defense procurement in this 4-year period. This amounted to about $125 billion.

We also covered NASA in the study because they also procure under the Armed Services Procurement Regulation and the law specifies they should be covered, as was the Coast Guard and AEC procurement in behalf of the Defense Department. So we were covering four different agencies in the process.

When we talk about individual contracts, the total business for the 4-year period represents something like 180,000 individual contracts. This includes all kinds of contract forms; cost-plus fixed fee, costplus incentive fee, advertised procurement, negotiated fixed price, all types of procurement.

Of course, you have large firms and medium-sized firms, and you have work that was being commenced and terminated all in this 4-year period.

We gave some consideration in the beginning as to whether there was a basis for getting a statistically valid sample of profits realized on individual contracts rather than just taking a 4-year span of time. We gave this up. We just couldn't do it.

So we regarded the questionnaire as the best way of meeting the statutory directive to make a comparison of commercial and defense work.

In the course of the hearing before the Joint Economic Committee, there was considerable discussion as to the issue of whether the profit objectives on negotiated contracts should be based more heavily in terms of the return on investment of the contractor. That has been a longstanding issue within the Department of Defense.

During the course of that hearing Robert Anthony, who at that time was Comptroller of the Defense Department, was arguing that more emphasis should be given to return on investment. Rickover had testified along the same lines and several others had as well.

So on our own-and this was not a part of the response to the statutory directive-we decided while we were making the study on the defense contractor profits that we would also make a study to determine whether it was feasible to make a projection of the return on investment at the time you entered into a negotiated contract.

We were interested in comparing the negotiated profit objective as against what the contractor realized, whether it was higher or lower than what he realized. We were interested in the question of whether this could or could not be related to return on investment on a contract by contract basis.

So we selected 146 contracts and we did it in the following way: We started out trying to divide up the workload among our regional offices. We have, as you probably recall 15 regional offices. I believe we had 10 regional offices involved in this analysis.

We divided up the workload of the 37 contractors among our regional offices, and they selected one contract at each location to get the work started. Later the regional offices were instructed which contracts should be looked at based on a list of completed contracts our Washington staff was able to obtain. The selections were made without knowledge as to whether or not the contracts were profitable but we did try to get an appropriate mix of contract types and commodities. We were not interested in trying to use this data for any kind of analysis of overall profit levels but rather to get at this issue of capital investment.

This might have been a separate report. On a hindsight basis, now that the confusion has developed in the press on the question, it would probably have been better to have had it as a separate report.

But in the draft report which we prepared for circulation, this analy