NSIAD-98-128 State Department: Options for Reducing ... · find a residence and typically use one...

United States General Accounting Office

GAO Report to Congressional Committees

July 1998 STATE DEPARTMENT

Options for ReducingOverseas Housing andFurniture Costs

GAO/NSIAD-98-128

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

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July 31, 1998

Congressional Committees:

The Department of State and other U.S. government agencies operatingoverseas spend over $200 million annually to provide leased housing andfurniture for their employees and their families. In light of the continuingneed to control the costs of overseas operations, we undertook a review todetermine if any practices of the private sector and other foreigngovernments offer the potential to reduce costs and provide qualityservices for State and other agencies. This work supports State’s efforts toreengineer and improve its operations, and to develop innovativeapproaches to reducing costs and providing quality services overseas.

Background State is authorized to provide leased housing to its employees and those ofother agencies overseas. Several thousand State and other U.S. agencyemployees are assigned to new duty stations at more than 250 diplomaticposts each year. The process is complicated. The majority of employeehousing overseas is provided by State through short-term leasearrangements with local landlords. Other employees either receivehousing allowances and enter into private lease arrangements or occupygovernment-owned housing. Most of State’s overseas posts are “furnishedposts,” meaning that government-owned residential furniture is providedfor State employees and those of other agencies participating in posts’furniture programs. Furniture is typically procured in the United Statesand shipped to overseas posts. However, at about 25 posts, employees’household effects are shipped to meet most furniture requirements.Employees are also authorized limited shipments of their householdeffects to furnished posts.

The residential leased housing and furniture process is also costly. Forexample, State’s direct costs include about $120 million annually forresidential leases and about $36 million annually to ship employees’household effects. In addition, State and other agencies spent about$12 million in fiscal year 1996 to purchase government residentialfurniture and according to 1997 data, spent more than $10 million annuallyto rent warehouses used to store residential furniture and othergovernment property. The support costs associated with the process aremore difficult to quantify, but according to State documents they total wellover $30 million annually for a variety of overseas support andadministrative functions. In addition, State and other agencies maintain

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more than 300 overseas warehouses to store furniture and other items, andthe value of State’s furniture inventory alone has been estimated to exceed$100 million. While State is reengineering its logistics process to reducecosts and eliminate inefficiencies, it has not initiated actions to streamlineits employee relocation process. However, State and other agenciesoperating overseas are now implementing the new InternationalCooperative Administrative Support Services (ICASS) system, which offersfor the first time the opportunity for agencies to document the total costsof their current support processes and develop less costly and innovativealternatives.

Many U.S. companies also have substantial investments in overseasoperations and spend considerable sums to support their overseasexpatriate employees. According to a study by a private consulting firm,corporations have about 250,000 U.S.-based expatriate employeesoverseas. Similar to State, these companies each share a common goal ofproviding employees and their families with safe and suitable housing at areasonable price. To improve the efficiency of their operations and reducecosts, U.S. corporations are focusing on core business processes andincreasingly contracting with outside service providers to help employeesfind a residence and typically use one instead of many commercialforwarders to ship employees’ household effects.

Results in Brief Our examination of practices in the private sector suggests that severaloptions may exist to reduce State’s overseas residential housing andfurniture costs. The adoption of one or more of these practices at anumber of State’s overseas posts could potentially save millions of dollars.Specific practices that we found prevalent and that State should consideradopting or expanding include

• using relocation companies and similar service providers to search forhousing and negotiate leases to reduce in-house support costs, and shiftsome property preparation and related maintenance expenses tolandlords;

• providing employees with housing allowances to select their own homesrather than managing and maintaining a housing pool of governmentleases and preassigning residences; and

• shipping employees’ household effects and/or acquiring furniture overseasas an alternative to operating an extensive government-buying andinventory program.


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Our analysis of State’s processes shows that State has not based itscurrent approach to providing overseas residential housing and furnitureon a comparative cost analysis. Based on our analysis of selected posts,State could potentially reduce its costs by adopting some or all of thesepractices. For example, our analysis of practices in Brussels and Londonshowed that State’s internal housing support costs are several hundredthousand dollars greater than the costs that would be incurred ifhomefinding services were outsourced to a relocation company. Suchpractices are potentially applicable for a large number of the annualrelocations that State and other agencies conduct. Over one-half of thetotal U.S. direct hires living overseas are located in 24 posts serviced by atleast one relocation company. Expanding housing allowance programsconsistent with practices of the private sector could also result inrecurring savings, primarily by minimizing in-house support requirements.Employees would also be given a greater choice in selecting theirresidences.

Private sector practices indicate that two options should be considered forreducing costs associated with residential furniture. First, State could shipemployees’ household effects as its primary means of furnishingresidences. Actual shipping data shows that State often ships nearly thesame amount of employees’ household effects to posts offeringgovernment furniture as it does to its unfurnished posts. Thus, anexpansion in the number of unfurnished posts could occur with relativelyminor increases in shipping costs for household effects and avoid theoften significant procurement, storage, and handling costs associated withthe government-furniture program. The second option is to give overseasposts the alternative of acquiring furniture on the local market. Stateofficials at several posts, including New Delhi, San Jose, Panama City, andBogota, believed that cost savings could be realized through localpurchases of furniture without sacrificing quality. Cost savings wouldpotentially result from lower furniture prices and reduced shipping, inlandtransportation, and inventory costs.

State’s Processes AreCumbersome andInefficient

State’s leased housing and furniture processes are very cumbersome andinefficient and result in unnecessarily high costs due to a combination offactors. State performs most housing support functions in-house involvingseveral layers of management and oversight to monitor and enforcecompliance with housing standards and numerous regulations. The systemfor furnishing housing is equally complicated and costly because of its


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long-cycle times, several handoffs, substantial inventories, and largenumbers of in-house support staff requirements. State and other agenciesoperate different housing and furniture program configurations, furtheradding to the complexity of the process. These configurations include over150 posts largely operating government short-term residential leasing andfurniture programs, about 28 posts having one or more State employeesunder private leased arrangements, and about 25 unfurnished posts. Inaddition, significant variations occur at the same post. For example, someagencies elect not to provide government-owned furniture.

Residential LeasingRequires SubstantialIn-House Support

The key objective of State’s program for leasing overseas residences is toprovide safe and secure housing adequate to meet the personal andprofessional needs of employees at a cost most advantageous to the U.S.government. State’s approach to providing residential housing focuses onperforming nearly all management and support functions in-house andminimizes the degree of responsibility placed on relocating employees forfinding a residence. It is costly, staff and time intensive, and we found thatemployees are sometimes not satisfied with their residences.

Residential leasing is a multi-step process. Typically, in-house staff searchthe rental market; negotiate and sign leases; and arrange for and provideinspections, property preparation and maintenance, and minor repairs.Each residence must meet State’s worldwide space standards, which arebased on the employee’s position and family size, and on location. Mostoverseas posts also have an inter-agency housing board, comprised ofrepresentatives from the different agencies at post. Housing boards arechartered to control rental costs and ensure fair and equitable treatment ofemployees in applying housing standards and in assigning housing toemployees. We found that boards meet regularly throughout the year toassign housing, inspect and approve residential units, and address appealsfrom dissatisfied employees. In addition, according to State Departmentprocedures, each post must receive the Office of Foreign BuildingsOperation’s (FBO) approval to lease any property that exceeds applicablespace standards or any property costing more than $25,000 annually inrent, with few exceptions.1 In fiscal year 1996, FBO processed more than900 requests for cost waivers, approving most of them. The systemtypically requires a separate telegram from the post for each waiverrequest, a review of each request by FBO, and a telegram from FBO notifying

1State Department requirements are more restrictive than the law, 22 U.S.C. section 301, whichrequires high-level approval of leases in excess of $50,000 annually.


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the post of its decision. Figure 1 illustrates State’s government leasingprocess at a typical overseas post.


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Figure 1: Typical Steps in State’sGovernment Leasing Process

Post begins process of identifying potential housing using housing profile

Post notified of employee assignment

New housing is sought outside existing poolExisting short-term leases Government-owned properties

Identified housing viewed by housing office officials

Board member and/or agency representative inspects

Post negotiates and signs lease with landlord

Housing office selects unit and makes offer subject to housing board & FBO approval

Maintenance & security inspection by embassy staff or outsourced

If housing exceeds costs and/or space standards, embassy cables FBO

Employee arrives at post andmoves into residence

Government furniture obtained frompost warehouse or other residence

Employee's household effectsdelivered to residence

Housing office reviews rental ads and/or contacts local realtors to identify potential housing

Make-ready repairs if necessary

Maintenance conducts final inspection

Contracted cleaners clean

No

No

Yes

Yes

FBO cablespost of its waiver

decision

Housing board approves selection

Note: Embassy London is used as an example.


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We estimate that hundreds of staff and related resources are dedicated tothis program both overseas and at State headquarters. At a substantialportion of State’s posts, personnel spend varying amounts of theirworkday managing and supporting the short-term lease program. Thesepersonnel can include the embassy’s administrative officer, generalservices officer,2 assistant general services officer, housing specialists,maintenance and work order personnel, procurement staff, and financialmanagement staff. In addition, most posts maintain housing boards with asmany as 13 voting members and other nonvoting members who oftenspend several hours each month addressing housing issues. In posts thatprovide government furniture for leased housing, additional support costsfor warehousing and inventory management services are incurred.

The support costs associated with this type of program can be verysignificant at certain posts. For example, at the mission in Brussels and theembassy in London, we obtained information on the number of peoplewho spent all or part of their time on residential short-term lease activities.We multiplied the time each person spent by their compensation level toarrive at the salary cost allocated to short-term lease activities. Postreports in Brussels showed that 42 staff (10 housing and 32 maintenance)spent a portion of their time managing or supporting 250 short-term leasesin fiscal year 1996. Salary expenses that were allocated for short-termlease activities were estimated to be about $1.4 million, which averagedabout $5,400 per lease. In London, at least 13 staff (4 housing and 9 maintenance) spent varying amounts of time on the embassy’sshort-term lease program; their salary expenses for these activities were$375,000, or about $3,150 per lease for 119 units.3 FBO’s review andapproval of proposed leases exceeding cost ceilings and/or spacestandards has resulted in additional indirect costs to the government.These costs result from the staff requirements in FBO to review andapprove waiver requests and costs associated with cabling posts on waiverdecisions. In addition, the indirect costs of interagency housing boardswere also significant, amounting to more than $90,000 annually inBrussels, $70,000 in London, and at least several thousand dollars inCaracas. In addition to being costly, a recent audit report by State’s

2For example, the General Services Officer in Caracas estimated that as much as 60 percent of his timewas spent supporting/managing the short-term lease program.

3The total support costs can be much greater if other cost elements are considered. For example,State’s new ICASS system identifies several additional costs that should be included in determining theleasing and building expense support costs that should be shared by agencies at overseas posts. Inaddition to salaries and compensation, such ICASS cost elements include motor vehicle charges,electricity, and miscellaneous supplies. If all ICASS and property preparation costs are included, theannual support budget for the short-term residential leasing program in London totals over $700,000for fiscal year 1998.


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Inspector General found that interagency housing boards typically havenot been effective in controlling property rental costs. Housing boards didnot use comparative cost as a factor in selecting residences, as called forin housing policy.

The interagency housing boards have also been criticized for frequentlynot selecting housing that meets employees’ expectations. A cornerstoneof State’s program is its policy of preassignment, which states that to themaximum extent possible, interagency housing boards should assign allnew employees to appropriate housing prior to their arrival at post. This isintended to avoid temporary housing costs and employee morale problemsthat foreign service officers often attribute to the inconvenience anddifficulties associated with finding suitable residences in foreign countries.Despite State’s substantial investment in resources to locate suitablehousing, we identified instances in which the employees were not satisfiedwith the housing selected for them. For example, at the post in Brussels,employees have frequently been dissatisfied with the residences selectedfor them by the interagency housing board. The board processed appealsfor almost one-fourth (54) of the new residences for employees fromJanuary 1994 through December 1996. The reasons for the appeals variedbut most were approved. In some cases, where employees weredissatisfied with their apartments, the housing board placed the employeesin other available housing units but continued to pay rent for theunoccupied units. FBO officials believed that such actions represented poorpost management and did not necessarily reflect a weakness in theshort-term lease program. We note, however, that other posts haveencountered related difficulties, suggesting a broader-based problem inthe process. For example, the preassignment component of the processhas been linked to problems at other posts, including several LatinAmerican and Caribbean countries. A 1996 State document notes thatsome posts in that region have allowed employees to search for housingthemselves and repeatedly appeal housing board decisions.

Living Quarters Allowance In a limited number of locations, State operates a Living QuartersAllowance (LQA) program that allows employees to choose their residence.4

It provides an allowance to employees based on rank and family size, andemployees typically work with real estate agents to locate and select aresidence. The employee is also responsible for signing the lease. As aresult, posts having LQA programs often incur relatively minor support

4LQA programs often need only one person for in-house support requirements—for example, the U.S.mission in Geneva, Switzerland, which has about 70 employees under LQA, needs only one foreignnational employee to support the program.


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costs for short-term residential leasing. For example, three posts currentlyunder LQA (Geneva, Guatemala City, and Quito) have a combined ICASS

budget of about $150,000 for leasing and short-term residential leasingbuilding operation expense support in fiscal year 1998, compared to theover $1.5 million allocated for the post in Brussels.

State has substantially reduced its participation in the LQA program overthe years even though its own internal analysis has on occasion indicatedthat allowance programs could have substantial benefits, including beingless costly than government leasing programs.5 The reduction hasoccurred due to several factors, including complaints from employeesabout the adequacy of allowance rates and the inconveniences associatedwith homefinding and temporary lodging in foreign countries. Accordingto 1996 data, State had one or more employees under LQA at 28 posts;employees of other agencies, principally the Department of Defense, wereunder LQA arrangements at a significantly larger number of posts.

Process for ProvidingResidential Furniture IsCumbersome and Costly

State’s process for meeting residential furniture requirements iscumbersome and costly because of its numerous handoffs and long-cycletimes. State meets most of its requirements by buying furniture in theUnited States under a central contract and shipping and storing it overseasuntil needed. Furniture for some posts is first shipped to a State facility inAntwerp, Belgium, where it is distributed to the receiving posts. The valueof State’s inventory has been estimated to exceed $100 million. State andother agencies also spend about $10 million annually to lease over 200warehouses worldwide to store furniture and other property. In Brusselsalone, warehouse lease, utilities, and personnel costs for fiscal year 1996totaled about $628,000, or $2,500 per furnished unit. In addition, State andother agencies own 95 warehouses worldwide and have spent over$35 million to purchase or build these warehouses. State also ships up to7,200 pounds of employees’ household effects to supplement the furnitureprovided by the government, or allows employees to ship up to 18,000pounds to unfurnished posts.

5For example, analysis by FBO in the late 1980s identified several pros and cons associated withgovernment leasing and allowances. However, the analysis noted that one statement could be madewith confidence—in terms of cost-effectiveness, LQA with minimal in-house support wasdemonstrably cheaper than full service government leasing. Analysis by the U.S. embassy in Singaporein 1994 concluded that LQA programs could save over $3,000 annually per rental unit at that post. Costreductions were projected to result primarily from reduced in-house staff requirements andmaintenance costs. More recently, post officers participating in State’s Bureau of Inter-AmericanAffair’s 1997 Administrative Officers’ Conference concluded that allowance programs could benefit theDepartment by giving employees a choice in their residence and reducing staff time and costsassociated with maintenance.


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Little attempt has been made to determine the total cost of the furnitureprocess or the cost-effectiveness of providing a furnished or unfurnishedpost. In addition, furniture decisions at individual posts may not reflect allcost considerations because funding responsibilities for program segmentsare spread among various State bureaus.6 State documents indicate thatdecisions in the early 1990s concerning requests by certain posts to changetheir designation from partial to full-shipment posts were based largely onthe availability of funds in one Bureau to fund shipping costs. Analysis byState was insufficient to determine if such changes would result in overallsavings or additional costs for the Department.

Figure 2 illustrates State’s process for meeting overseas furniturerequirements.

6For example, according to a State budget official, State’s regional bureaus allocate funds to the postsfor property preparation, procurement and shipping of residential furniture, and inland transportationof furniture. On the other hand, funding of household effects shipments is the responsibility of theBureau of Personnel.


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Figure 2: State’s Process for ProvidingResidential Furniture at Posts

Post submits order to Office of Acquisitions

State contracts for eachsegment of move

Household effects packedand crated

Household effects truckedto port

Effects consolidated withother shipments

Shipment transportedto destination

Consolidated shipmentsseparated at port

Trucked to localcontractor for delivery

Acquisition sends orderto vendor

Vendor delivers orderto consolidator

Consolidator sends fullshipment to dispatcher

Furniture shippedoverseas

Shipment routedto posts

Furniture stored inState warehouse

Furniture and householdeffects delivered to residence

Procurement process Shipment of household effects

3-6 months

30 days

90 days

5 days


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Practices of OtherOrganizations CouldSave Money andProvide QualityService

We studied the practices of six major U.S. companies and three othergovernments that have large international operations to learn how theyprovided housing for their overseas employees and met residentialfurniture requirements. We chose these organizations because theyoperate in many of the same locations as State, support large numbers ofoverseas employees, and have adopted various best practices to improveexpatriate management. For example, Ford Motor Company is representedin 50 locations throughout Europe, Asia, the Middle East, Latin America,and Africa and supports about 2,500 expatriate employees. Citibanksupports more than 1,000 expatriates, including 136 in London, its topoverseas destination, and 101 employees in Singapore. The majority of theexpatriates employed by most of these companies are professional,mid-level employees.

We found that the prevalent private sector process for providing housingand furniture includes contracting with a relocation company or otherservice provider to identify available housing from which the employeescan make a choice, giving an allowance to the employee to pay for rent,and using a contractor to ship employees’ household effects to furnish theresidence.7 Another option the British government uses is acquiringfurniture overseas. The primary benefits of these practices, if applied toState, include minimizing investments in support staff, reducingadministrative and warehousing requirements, giving employees a choicein selecting their residence, and/or procuring furniture from sourcesoffering the best price and quickest delivery time. The potentialapplicability of one or more of these practices to State is widespread andwould not diminish State’s ability to provide secure housing or high-qualityfurniture.

Figure 3 shows the housing and furnishing processes typically used by theprivate sector companies whose practices we reviewed.

7Outsourcing is a practice that private sector companies are using with greater frequency. A study of30 corporations by a private consulting firm noted that companies are basing the decisions tooutsource on a comparison of (1) the price of the outside service with the cost of developing the samelevel of expertise and administering the program internally, (2) the level of service that can beprovided, and (3) the value that can be added by performing the service in-house versus through anoutside source.


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Figure 3: Typical Housing andFurnishing Processes Used by PrivateSector Companies

Human resource representative contacts moving company

regarding shipment of household effects

Moves into selected housingusing household effects or

temporary furnishings

Lives in temporary accommodations until household

effects arrive

Human resource representativecontacts local relocation

company regarding new arrival

Employee arrives in country.Relocation agent shows

prescreened unitFreight forwarder handles-- packing/crating-- trucking-- ocean/air transport-- receiving-- delivery and unpacking

Employee selects housing.Relocation agent handles

administrative details (i.e., leasenegotiation, utility connections)

Household effects arriveat post

Housing Furnishing

Note: Some companies allow a homefinding visit prior to relocation. Private sector companies inLondon were used as examples.

Outsourcing Homefindingand Related Services

During our benchmarking exercise, we found that many leading U.S.companies and at least one other government embassy have outsourcedhomefinding and destination services to professional internationalrelocation companies. Relocation companies assist the employee infinding suitable housing and handle all settling-in activities.8 Ourbenchmarking efforts indicate the private sector’s use of relocationcompanies has provided quality services that meet employees’ needs forsecure, safe, suitable, and affordable housing. Our analysis at two postsindicates that using a relocation company could result in potential savingsof several hundred thousand dollars annually. Further, the increasing

8Relocation companies’ approach to finding suitable housing for employees include prescreening andidentifying viable units, escorting the employee to visit potential housing, negotiating/signing the lease,connecting utilities, and ensuring maintenance needs are met. The relocation company works directlywith the employees to identify their specific housing needs and offers a number of choices within aspecified cost range established by the company.


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availability of relocation services throughout the world makes outsourcinghomefinding services an option that State should consider.

Corporate officials cited two key benefits of outsourcing the homefindingfunction—increased employee satisfaction and reduced in-house supportrequirements. High levels of employee satisfaction were generallyattributed to (1) working with a local relocation specialist that handles allaspects of finding and negotiating a lease and (2) being able to select aresidence that meets their needs. According to relocation officials inBrussels and London, expatriate employees typically identify a suitableresidence during a 2 or 3 day home search. In addition, outsourcing allowsprivate sector firms to minimize the number of in-house personnel neededto support operations. For example, in Brussels, Citibank needed only oneemployee9 working part-time to support the expatriate program forapproximately 80 employees, whereas State employed 42 staff to providehousing and maintenance support for about 250 employees. In London, 2 Texaco employees provided housing support for about 150 expatriateemployees, whereas State required 13 staff to provide housing andmaintenance support for about 119 employees. Also in London, theAustralian High Commission used a relocation company to locate housingfor its 55 foreign service employees, which reduced its in-house supportrequirements to one person, part-time. Furthermore, most propertypreparation and related maintenance expenses were typically handled bylandlords for leases signed either by individuals or by the corporation.

We conducted a cost analysis of the U.S. mission’s housing office inBrussels and the embassy in London to determine if relocation companyservices could be a cost-attractive option for posts having large housingsupport components. Our analysis indicated that using a relocationcompany could potentially yield significant savings at those posts. Forexample, in fiscal year 1996, the mission in Brussels employed 10 staff, fullor part-time, to provide short-term lease housing support for about 30 newor lease renewals annually.10 Based on cost data provided by the post, theannual salary expenses attributable to short-term leasing for these staffwere estimated to total about $700,000. If property preparation and other

9Neither of the two private sector companies we visited in Brussels or London provided propertypreparation staff but instead relied on the landlord to make minor repairs or contracted with localvendors for services as needed.

10State officials said the 250 government leases are awarded for 9 years in Brussels; thus, the housingoffice must negotiate or renew approximately 30 leases annually.


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support costs11 are included, the embassy’s direct and indirect supportcosts for short-term residential leases exceed $1.5 million annually. Incontrast, a private sector company outsourcing its homefinding functionwould incur salary expenses and the relocation company’s fees, which weestimate would total between $207,000 and $277,000 depending on the mixof new leases and renewals.12 Thus, if all costs are weighed, outsourcinghomefinding services could result in a substantial savings, particularly ifoutsourcing resulted in leased properties having lower rents and reducedproperty preparation and maintenance-related costs.

In London, the U.S. embassy identified four persons having full orpart-time responsibility for the short-term residential leasing program.According to the post, their estimated salary costs for short-term leasedduties totaled about $200,000 annually, and if all ICASS support costs andproperty preparation costs are considered, the total costs for London’sresidential short-term lease support are a little over $700,000 annually. Theembassy is responsible for placing about 40 new employees in short-termresidences each year. Using a relocation company to find new propertiesor assist employees to move into existing leases would cost between$118,000 and $151,000. If the embassy continued its current policy ofpreassigning employee housing selected from a pool of propertiesidentified by a relocation company, data provided by the post indicatedthat the embassy could potentially save money, depending on the prices itnegotiates and the services that would be included.

In weighing the pros and cons of using relocation companies, State notedthat there are costs that probably would not be reduced by outsourcing.These include, for example, the costs of security surveys and securityupgrades. Additional costs could also be generated by outsourcing,including temporary living costs for employees waiting to move into theirresidences. For example, post officials in London estimated thattemporary living costs could increase by as much as $264,000 annually, ifemployees were allowed to choose their residences instead of having thempreassigned. Even if such costs were incurred, the outsourcing optioncould still be attractive because of the large indirect support and propertypreparation/maintenance costs incurred in the current embassy program.Further, several options exist to reduce temporary living costs, includingthe use of temporary apartments or homefinding visits prior to relocating.

11State’s new ICASS system includes property preparation and related maintenance costs in the costsof short-term residential leases.

12According to officials of one relocation company, their firm could provide several services for about$2,250 per unit, including housing search, lease negotiation, and supervision of legal requirements.


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We also note from our benchmarking that the relocation industry isgrowing and becoming more competitive, offering a wide range of servicesat increasingly competitive prices. Industry data shows that relocationcompanies have operations in most developed and many developingcountries, especially throughout Europe. Some companies are affiliatedwith U.S.-based firms that are used domestically by U.S. governmentagencies including the General Services Administration, the Department ofDefense, and the Federal Bureau of Investigation. One relocationcompany, together with its affiliates, operates in 250 cities worldwide. Atleast one relocation company is located in 24 of the 25 countries havingthe largest U.S. overseas presence—comprising over 50 percent of totaloverseas State and other agency assignments. Officials at most of thecompanies we visited overseas said that multiple relocation companies areavailable in their respective cities offering quality services at competitiveprices.

Housing Allowances Greater use of housing allowances is another private sector practice thatcould substantially reduce State’s overseas in-house support requirementsand maintenance costs, and give employees a choice in selecting theirresidences. Private sector employees are provided a housing allowance tocover rental costs based on local market conditions, family size, andposition. Allowances permit companies to manage and control costs withminimal oversight. Other governments sometimes use allowances—forexample, the Australian High Commission’s employees received housingallowances in London. State also has the LQA program that providesparticipating employees a set amount based on rank and family size, letsemployees choose their residence, and operates with minimal in-housesupport requirements. As previously mentioned, State has chosen tosubstantially reduce its participation in the LQA program over the years dueto employees’ complaints about the inconveniences of finding a residencein foreign countries and temporarily staying in hotels, and the difficultiesencountered in finding suitable residences within LQA rates. State officialssaid that it is hard to put a price tag on the costs associated with theinconvenience factor but believed that it could be substantial.

We believe that the private sector practices we identified could helpmitigate some of the problems that employees of State and othergovernment agencies have with the LQA program and encourage State toexpand it as a cost-effective option to government leasing at certain posts.Specifically, using relocation companies (a process not used in the LQA

program) to help employees find housing and negotiate leases could ease


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the burden associated with negotiating leases in foreign countries and alsooffer employees a greater choice in selecting their residence. As alreadynoted, use of relocation companies can be less costly to the government atposts having large in-house support structures. Also, providing rental orgovernment-owned furniture until the employee’s household effects arrivewould allow employees to move directly into their residences upon arrival.We were told that the U.S. embassy in Madrid provides State’s employeeswith furniture welcome kits enabling them to move quickly into theirresidences. In London, Texaco provided rental furniture enablingemployees to move into their residences almost immediately upon arrival,which has resulted in improved employee morale, improved productivity,and has also reduced or eliminated expensive temporary living costs.According to a Texaco official, about one-third of incoming employeesmove directly into their residence shortly after their arrival. In cases wherehousehold effects have not arrived, rental furniture or company-owned“temporary packages” of basic furniture and accessories are provided. Theofficial noted that the $2,200 rental cost of furnishing a two-bedroomapartment for 1 month is still less expensive than temporary livingexpenses that could easily exceed $9,000 for a month.

In addition, a furniture rental company in the United Kingdom with a clientbase of over 250 companies told us that temporary rentals have becomemore popular and that many U. S. companies are utilizing this service toreduce temporary living expenses. We also found that one of the majorU.S. companies operating in Caracas provided employees the option oftemporarily using company furniture in their residences until theirhousehold effects arrived. According to a company official, this furniturewas procured locally in Caracas and stored/managed by the same localfirm used to handle household effects shipments upon arrival in Caracas.In addition, this company also has two apartments that it uses fortemporary employee housing.

It is difficult to determine the validity of concerns expressed by State’semployees that its housing allowances are frequently insufficient to coverthe costs of suitable housing at overseas posts. If allowances areinsufficient to cover the costs of suitable housing, expansion of LQA

programs based on any model could be problematic for State. We noteState’s documents indicate that LQA rates are insensitive to local marketconditions and are intended to ensure that 80 percent of all employees inthe program are fully covered for LQA expenses.13 Furthermore, State

13LQA rates are intended to substantially cover expenditures for rent, electricity, fuel, water, certaintaxes levied by the local government, and agents’ fees required by law to be paid to the landlord.


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employees complain that they frequently must pay out-of-pocket for itemsunder LQA because the system has a “lag problem” 14and that the system’spaperwork requirements are time-consuming and cumbersome. Incomparison, State’s government leased housing program places littleadministrative burden on the employee and pays all rental costs. Withthese factors in mind, it seems obvious that posts would choose a systemthat pays 100 percent of housing costs (government leasing) instead of asystem that pays only 80 percent (LQA).

State allowance office officials agreed that LQA’s limited coverage policyhas encouraged posts to adopt government leasing programs even thoughState’s additional support costs are substantial. However, they believedthat the Department of Defense, which has the largest number of overseascivilian employees under the LQA system, would not support 100 percentcoverage of rental costs due to the additional costs that would be incurredby the Department of Defense. They acknowledged that State and theDepartment of Defense have not (1) examined all costs involved inoverseas housing or attempted to determine if an increase in the coverageof LQA rates would be advantageous or disadvantageous to the governmentas a whole or (2) determined if State should ensure its government leaseceilings are consistent with LQA rates to control costs and ensure equityamong all civilian government employees at overseas posts. FBO officialsexpressed concern about pegging government lease ceilings to current LQA

rates, stating that the quality of overseas embassy housing could suffer.FBO officials were supportive of an allowance option that allowed rates tobe set by a monthly survey or mechanism such as that used by the privatesector.

According to the officials at some of the companies we used asbenchmarks, they have often purchased their housing allowance ratesfrom private sources15 that reflect local living conditions and rental costs.According to one of the commercial vendors providing these rates, data onhousing costs is currently available quarterly for more than 150 countries,including State’s largest 25 posts, as well as, many remote African and EastAsian countries. State may want to determine if using the rates availablefrom these commercial sources would enable it to have rates moresensitive to local market conditions. The purchase of these rates couldalso possibly help State address some of the deficiencies it has identified

14According to FBO officials, State’s current allowances tend to lag behind real costs because ofadministrative delays in processing changes in allowance rates.

15Allowance rates are developed by human resource staff in country or procured from commercialsources.


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in the current LQA system. According to State documents, theseinefficiencies include labor intensive reconciliation requirements.

Use of Employees’Household Effects

Private sector companies typically expect their employees to furnish theiroverseas residences with their own household effects. Employees’furniture is typically shipped door-to-door16 by contractors directly fromthe United States to the overseas residence at the company’s expense. Theadvantages of this process include minimal in-house support requirementsand little or no investments in warehouses and furniture inventories. Statemaintains, however, that expanding the use of household effects to furnishresidences would often result in unacceptable increases in itstransportation and temporary living costs. Our analysis shows thatshipping costs would not increase as much as State officials estimate andthat there are opportunities to offset or reduce temporary living expenses.If these factors are considered, the expanded use of employees’ householdeffects may be an efficient and cost-effective alternative to State’s practiceof buying, storing, and managing large inventories of residential furnituresupplemented by making additional shipments of employee-ownedfurniture.

We reviewed transportation documents and other information provided byState to determine if there were significant differences between furnishedand unfurnished posts in the amount of household effects shipped. Ouranalysis showed that the average weight of household effects shippedoverseas is often about the same regardless of whether the post providesfurniture or not. A State transportation document listing shipments tomore than 50 posts in 1996 showed relatively small differences betweenpartial and full-shipment posts in the average amounts of householdeffects shipped. For example, the average weight of shipments ofhousehold effects to Brussels (a furnished post) was about 4,800 poundscompared with an average weight of about 5,100 pounds for Rome (anunfurnished post). For those posts included in the document, acomparison of seven furnished and unfurnished posts having the largestnumber of shipments showed that the average weight of shipments variedby only about 1,100 pounds.

16In our October 1997 report on State’s transfer process State Department: Using Best Practices toRelocate Employees Could Reduce Costs and Improve Services (GAO/NSIAD-98-19), we concludedthat the Department could operate much more efficiently and save money by adopting thedoor-to-door method for shipping overseas that is used by the private sector. Unlike State’s currentprocess for shipping household effects that involves substantial personnel and other indirect supportcosts, the door-to-door approach used by the private sector entails contracting with only onecommercial freight forwarder for all transportation and related services to relocate an employee’shousehold effects.


http://www.gao.gov/cgi-bin/getrpt?NSIAD-98-19

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We also identified options, such as providing temporary furniture or usingrental furniture until an employees’ household effects arrive, that mayoffset or reduce temporary living costs. For example, the embassy in Paris,a mostly unfurnished post, was able to accommodate about 80 incomingemployees in 1997 by using temporary furniture in their assigned quartersor by using government-owned and furnished transient quarters, accordingto the general services officer. He said that the post did not pay anytemporary quarters allowances in fiscal year 1997. In addition,representatives of a furniture rental company in London told us theircompany offers a basic set of temporary furniture and private sectorcompanies are taking advantage of this option.

Local Procurement ofFurniture

If State decides to continue to procure furniture, purchasing furniturelocally or regionally may be a cost-effective option at certain locations.Local or regional procurement would be consistent with the practices ofsome of the organizations we studied and with State’s own reengineeringefforts. Moreover, officials at a number of posts told us they can purchasecomparable furniture from local and regional sources and save money ontransportation and warehousing costs.

Some foreign governments and private sector companies purchaseresidential furniture either locally or regionally. For example, according toBritish officials, the British government operates four central procurementunits to purchase residential furniture. The unit in Washington, D.C.,purchases furniture from local markets for British posts in the Americas;the Hong Kong unit, for posts in Australia and Asia; New Delhi, for thatregion; and London, for all other locations. British officials stated that inthe past, their government had purchased furniture in the United Kingdomfor distribution worldwide. However, about 10 years ago, the Britishgovernment initiated a study of procurement options to develop ways toincrease efficiency and established regional procurement units as a result.Other governments purchasing furniture locally include the AustralianHigh Commission in New Delhi and the Canadians in Canberra, accordingto U.S. officials at those locations. In addition, officials of Proctor &Gamble in Caracas and Texaco in London told us their companiespurchase furniture locally for use in company-owned temporary quarters.

In 1995, State established a Logistics Reengineering Project team to studyhow State procured its goods and services and to recommendimprovements. The team, which met with a number of private sectorcompanies to identify “best practices” applicable to State, concluded that


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State’s procurement system was characterized by long-cycle times, highoverhead costs, redundancy, and substantial inventory. To address theseinefficiencies, the team designed a new system offering customers moreefficient alternatives for obtaining goods and services. Direct localpurchase, where feasible, was a key option identified by the team.However, residential furniture purchases were not included in the team’sstudy because State’s residential furniture contract requires that, with fewexceptions, all furniture be procured under the contract.

We previously raised the issue of central procurement of furniture withState in June 1997.17 State responded that the program had served it wellfor decades, was efficient, and was supported by “Buy America” Actprinciples. State officials have defended the domestically procuredfurniture as important in helping the Department meet its representationalresponsibilities. However, State did not cite any studies or analyses tosupport its conclusion that the furniture program is cost-effective ornecessary for representational purposes. In addition, a State procurementofficial told us the Buy America Act does not generally apply to thepurchase of furniture for use outside the United States.

Officials at a number of State’s overseas posts told us that purchasingresidential furniture locally or regionally would result in significantsavings in direct procurement, transportation, and warehouse costs. Forexample, post officials in Costa Rica told us that they have explored thefeasibility of local procurement, largely because of the long lead-timeassociated with contract purchases (typically 5 months or longer) and thesignificant number of missing items in recent shipments. They found thathigh-quality U.S. furniture can be purchased locally from a companyoperating furniture showrooms in San Jose. According to the officials, thecompany could deliver and set up furniture in a residence within 6 weeks.Furthermore, the purchase price of the furniture available through thiscompany is typically lower than that offered under the contract. Forexample, according to post officials, a living room set would have cost$4,296 under the contract compared with $2,850 if purchased locally,representing a potential cost savings of 30 percent or more. In addition,their analyses showed that the post could buy four sets of furniture for theprice it pays for three sets under the General Services Administrationcontract. They believed that the savings in containerization and shippingcosts make the local purchase option even more attractive to the post inSan Jose. Additional savings would also accrue from reduced inventories

17State Department: Provision of Residential Furniture Inconsistent With Best Practices(GAO/NSIAD-97-173R, June 10, 1997).


http://www.gao.gov/cgi-bin/getrpt?NSIAD-97-173R

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of furniture in the embassy warehouse. Post officials also noted that theU.S. furniture distributor operating in San Jose has similar showrooms inother countries. We contacted the company’s headquarters and confirmedthat similar operations exist in Guatemala, Colombia, Honduras,Venezuela, and Turkey. Other examples include the following:

• Officials at posts in Bogota and Panama City said significant opportunitiesexist to procure furniture locally or regionally and that such procurementwould result in significant savings and better service.

• A post official in New Delhi estimated that he could save about $13,000 ona complete set of furniture for a three-bedroom house with living room ifpurchased locally.

• Officials at the embassy in London told us they are exploring alternativesto the furniture contract and they are interested in pilot-testing optionsincluding local purchase.

Some posts already purchase residential furniture locally or regionally,further demonstrating the feasibility of expanding this option. Forexample, posts purchase items that are not provided under the contract orbecause contract items are unsuitable. The U.S. embassy in Hong Kongpurchases furniture locally because furniture built to U.S. specifications istoo large for Hong Kong residences. Because of the high costs associatedwith moving furniture inland from the port of destination to the embassy,and the availability of good quality/comparably priced local furniture, theDrug Enforcement Administration in Bogota recently decided to purchasefive households of furniture from a local manufacturer for approximately$55,000. According to Drug Enforcement Administration officials, theycould purchase only three or four households of furniture for that priceunder State’s contract, once inland transportation charges were added.

Conclusions State’s residential leasing and furniture processes are costly and, in somecases, do not result in a high level of customer satisfaction. Unlike theprivate sector companies we analyzed, State has not systematicallyweighed the potential cost advantages of using services available fromprivate sector relocation companies or developing a sound housingallowance program. It also has not conducted valid, systematic analysis ofits furniture program and its costs. We believe that State could save moneyand provide quality services to its employees and those of other agenciesby adopting the practices we identified in the private sector.


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Savings could be realized several ways. Using relocation and other serviceproviders could reduce overall costs at posts having substantial in-housesupport costs. The data provided by the U.S. mission in Brussels and theU.S. embassy in London showed that the posts’ internalcompensation-related housing support costs for short-term leases werehigher than the estimated costs of services available from relocationcompanies. If other support costs typically shared among agenciesoperating overseas are included in the posts’ cost calculations, these twoposts alone could potentially save several hundred thousand dollarsannually by outsourcing relocation services instead of performing themin-house. Other posts having costly in-house support infrastructures couldpotentially do the same.

Expanding the use of housing allowances could eliminate most in-housesupport requirements at individual posts, reduce or eliminate maintenancecosts, and produce overall savings. For example, it was projected in 1994that a housing allowance program in Singapore could reduce annualhousing costs to the U.S. government by as much as $3,000 per leasecompared to government short-term leases. Considering that State andother agencies have over 8,000 short-term leases worldwide, and sharedproperty preparation and maintenance-related support costs of about$30 million annually, the potential savings through the use of allowancesare significant. Shipping employees’ household effects as an alternative toproviding government furniture could produce significant savings at postshaving large furniture inventories, substantial staff resources devoted tosupport warehouse operations, and large warehouse rents. Although thesavings are difficult to quantify, the potential appears large because Statespends millions annually to purchase, store, and maintain residentialfurniture. Buying residential furniture locally could save up to 30 percentor more of the purchase, shipping, and packing price of governmentfurniture at some posts. Furniture inventories, which have been estimatedto exceed $100 million, could also be reduced.

Clearly, some practices may have applicability only at certain posts, due toregional or country conditions. Thus, pilot projects should be used toestablish the applicability of the practices at a broad selection ofappropriate posts. In addition, each practice would have off-setting coststhat would have to be carefully considered in the pilots before decisionsare made. For example, the expanded use of housing allowances wouldhave to consider how to minimize temporary housing costs, through theuse of temporary furniture, rental furniture, or other means.


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Recommendation We recommend that the Secretary of State direct the Under Secretary forManagement to establish a pilot program for testing the practices weidentified for leasing and furnishing of overseas residences. The pilotshould be coordinated through the ICASS framework at the pilot posts,which provides a mechanism to fully document direct and indirect costs ofalternatives and involve all key agencies operating at posts. Options thatshould be in the pilot include outsourcing homefinding, expanding the useof housing allowances, increasing the use of employees’ household effects,and procuring furniture locally. The Under Secretary should designatespecific posts for the pilot. We believe the pilot should initially focus on6-8 posts. We believe good candidates include Brussels, London, Paris, theHague, Singapore, Bangkok, San Jose, Nassau and Mexico City. If the pilottests confirm the cost advantages of one or more of the practices, theUnder Secretary should also establish an implementation plan for a largerroll-out of these practices.

Agency Commentsand Our Evaluation

In written comments on a draft of this report, State noted our report raisedlegitimate questions about possible savings in its housing program and thatit plans to establish a task force to study whether modifications to thehousing program are warranted. State did not agree with our conclusionthat expanding shipments of employee-owned furniture or purchasingresidential furniture locally are potential alternatives to the currentsystem. State cautioned that its housing program is not a “one size fits all”activity and believed that the results of the pilot program would beprejudiced because the posts we suggested for consideration in the pilotare in well-developed countries. State said that its test would include agreater variety of posts from countries at other levels of the economicscale and geographic diversity. It also noted its test would include othercosts and benefits of suggested alternatives. State identified several costelements that it believed would not be reduced by outsourcing, such asmarket analyses and staff time and expenses related to participation in thehousing boards, or would lead to additional costs, such as the overheadassociated with private relocation services and the additional costs forshipping employees’ household effects. State also said that changing toprivate relocation firms would not reduce the overhead State incurs inmanaging congressionally-mandated housing standards and regulationswithout a change in statute.

We are encouraged that State plans to establish a task force to study itshousing practices. However, we are concerned that this proposed effort, ifundertaken as described in State’s comments, will preclude a full


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examination of the merits of applying proven business practices to keyoperations. Specifically, State does not plan to review its furnitureprogram, and its comments regarding the proposed housing study suggestthat State (1) may select test locations that will not afford reasonableopportunities to explore the options, (2) has predetermined that some costelements cannot be reduced and that other costs will be incurred, and(3) does not plan to explore options other than outsourcing that webelieve offer cost savings potential. Our analysis clearly shows thatopportunities exist to maximize efficiencies and cost savings in both thehousing and furniture programs through the application of outsourcingand other business practices. Therefore, we urge State to expand thescope of its study to include the review of all the practices werecommended for pilot testing in both the housing and furniture programs.

We fully recognize that a “one size fits all” program is not practical, giventhe varying conditions in individual countries and cities. We also recognizethat alternative service providers may not be available at some locations.The posts we identified for pilot testing were chosen because our analysisindicated that those posts had the potential to adopt some or all of thepractices we identified and reduce costs. Our post selection profileincluded large and high-support cost operations, the existence of arelatively sophisticated business and diplomatic community, postreceptivity to options and problems with existing programs, and theavailability of alternative service providers. In selecting posts for its tests,State needs to consider these factors while ensuring that the location,scope, and cost of post operations warrant consideration for change.

We agree that State should consider all relevant cost elements in testingalternatives but it needs to ensure that cost analyses are not geared tomaintaining the status quo. For example, it is premature to assume thatoutsourcing would not reduce costs associated with State’s marketanalysis programs, management of housing profiles, and housing boardoperations. State needs to determine if part or all of these supportfunctions could be handled by a relocation company to lower costs and/orfree up post staff to do higher priority work. Further, fees charged byoutside service providers are negotiable, offering opportunities for poststo exercise their leverage in obtaining prices. The cost elements discussedin our report represent the major costs that must be considered inexamining the merits of specific options. For example, in Brussels andLondon, the prices typically charged by relocation companies for housingservices were significantly less than the direct and indirect costs incurredby those posts for short-term lease support.


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Outsourcing, however, is not the only option that State should consider.Our analysis of the furniture program and State’s own data demonstratethat local procurement could save substantial amounts of money andreduce delivery time at a number of posts. In addition, our report indicatesthat State employees at more than 50 posts are shipping almost the sameamount of household effects regardless of whether the post is furnished orunfurnished. Therefore, the additional shipping costs incurred in shippingemployees’ household effects would likely be minimal, resulting in little orno need for a government-furniture program at some locations.

State is also incorrect in its assertion that statutory change is needed toreduce the management overhead associated with the housing program.According to State’s regulations, the Congress mandated the developmentof an interagency housing policy in 1979 to ensure uniformity and equity inthe program. Although there is general language in the conference reportaccompanying the 1979 Foreign Assistance Appropriations Act indicatingthat real property should be acquired under a consolidated master planthrough a single government agency, that language does not legally requireany particular housing policy. Therefore, State can address inefficienciesin its housing process without statutory change.

State needs a management commitment to cost-based decision-makingand a willingness to change. Cost-based decisions can help State improveits operations, reduce support requirements, and free up resources tofocus on core diplomatic programs and activities. The options weproposed are based on modern business practices that strive to achievethese objectives. Therefore, we believe that our recommendation for Stateto fully consider all of our identified options in the process of conductingits tests remain valid. Lastly, State expressed concern that ourrecommendation presupposed the outcome of any test by calling for aproposed implementation schedule for a larger rollout of the suggestedpractices. We clarified the recommendation to reflect that a scheduleshould be prepared if the test confirms the advantages of the suggestedpractices. State’s comments and our analyses are detailed in appendix I.

Scope andMethodology

In recognition of the need for cost-effectiveness in undertaking foreignaffairs activities, we identified potential efficiencies and cost savings inState’s residential leasing and furniture processes. To map State’sprocesses, we met with State officials and reviewed pertinent documents.We conducted fieldwork at embassies/missions in Brussels, Belgium;London, England; and Caracas, Venezuela—these cities each have


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substantial embassy/mission operations and large numbers of expatriatesemployed by U.S. firms. We also contacted embassy officials at severaladditional posts and interviewed officials at State’s headquarters inWashington, D.C., including key officials responsible for benchmarkingwith private and public sector organizations and designing State’s newlogistics system. We developed flow charts of generic housing andfurniture processes and developed related cost data to the extentpractical.

To identify best practices in the private sector and other organizations, weresearched literature and consulted with various experts in the area,including representatives of the Employee Relocation Council—aprofessional organization of several thousand corporations and otherorganizations concerned with issues affecting the relocation of employeesand their families overseas. To compare private sector and Stateprocesses, we visited six companies in the United States and three fieldoffices for those companies in Brussels and London, and one company inCaracas to develop detailed information on these processes. We selectedthese companies based on the number of employees transferred overseas,the typical time frames for an overseas assignment, and actions taken tocontrol costs of international operations. We also met with severalinternational destination service and furniture rental companies todocument the scope of their services and costs.

We visited the embassies of the United Kingdom and Canada inWashington, D.C., and met with the British Foreign and CommonwealthOffice, London Procurement Group; and the Office of the Australian HighCommission in London to obtain an understanding of how other nationalgovernments provide housing and furniture for their employees atoverseas locations. In addition, we developed information on the U.S.Agency for International Development’s housing and furniture processes.We did not independently verify any cost savings or performance benefitsdata provided by the companies and other organizations we visited orthose identified in other studies.

We conducted our review from May 1997 to March 1998 in accordancewith generally accepted government auditing standards.

We are sending copies of this report to the Administrator, U.S. Agency forInternational Development; the Director of the U.S. Information Agency;the Director, Office of Management and Budget; and interested


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congressional committees. We will also make copies available to othersupon request.

Please contact me at (202) 512-4128 if you or any of your staff have anyquestions concerning this report. The major contributors to this report arelisted in appendix II.

Benjamin F. Nelson, DirectorInternational Relations and Trade Issues


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List of Congressional Committees

The Honorable Jesse A. HelmsChairmanThe Honorable Joseph R. Biden, Jr.Ranking Minority MemberCommittee on Foreign RelationsUnited States Senate

The Honorable Judd GreggChairmanThe Honorable Ernest F. HollingsRanking Minority MemberSubcommittee on Commerce, Justice, State, the Judiciary and Related AgenciesCommittee on AppropriationsUnited States Senate

The Honorable Benjamin A. GilmanChairmanThe Honorable Lee H. HamiltonRanking Minority MemberCommittee on International RelationsHouse of Representatives

The Honorable Harold RogersChairmanThe Honorable Alan B. MollohanRanking Minority MemberSubcommittee on Commerce, Justice, State, and the JudiciaryCommittee on AppropriationsHouse of Representatives


Contents

Letter 1

Appendix I Comments From theDepartment of State

32

Appendix II Major Contributors toThis Report

45

Figures Figure 1: Typical Steps in State’s Government Leasing Process 6Figure 2: State’s Process for Providing Residential Furniture at

Posts11

Figure 3: Typical Housing and Furnishing Processes Used byPrivate Sector Companies

13

Abbreviations

FBO Office of Foreign Buildings OperationsICASS International Cooperative Administrative Support ServicesLQA Living Quarters Allowance



Appendix I

Comments From the Department of State

Note: GAO commentssupplementing those in thereport text appear at theend of this appendix.


Appendix I



Appendix I



Appendix I



Appendix I



Appendix I


See comment 1.Now on p. 2.


See comment 3.Now on pp. 3-5.





Appendix I







Appendix I



See comment 7.Now on pp. 19-20.

See comment 8.


Appendix I









Appendix I


The following are GAO’s comments on the Department of State’s letterdated June 1, 1998.

GAO Comments 1. The estimate that millions of dollars could be saved is based on ouranalyses of several cost indicators. As noted in the report, one indicator isthe large numbers of American and foreign national personnel directlyinvolved in managing and supporting posts’ residential housing andfurniture programs. The costs to support one American direct hireoverseas have been estimated to exceed $200,000 annually, and the costsof foreign nationals average at least $18,500. Very few positions worldwidewould have to be eliminated or assigned to higher priority tasks to achievesubstantial savings and/or efficiencies. Another example is the potentialuse of LQA—as noted in our report, data generated by the post in Singaporeindicated that savings of as $3,000 per lease could result from using LQA inplace of government leasing. Considering that State and other agencieshave over 8,000 short-term leases worldwide, the potential for significantcost savings is apparent.

2. We do not agree that a statutory change is needed to reduce theoverhead associated with the State’s housing program. With the exceptionof the current legislative requirement for approval of leases in excess of$50,000 per year, inefficiencies in State’s overseas processes can beaddressed without changes in statutory requirements, primarily by lookingfor ways to minimize posts’ in-house support requirements. State’s housingallowance programs already demonstrate that posts’ support requirementscan be minimized while still complying with housing standards. Anotheralternative is to contract with relocation companies to measure propertiesfor compliance with space standards, conduct market surveys, and visitpotential properties to determine the compatibility with State’s policies.According to State’s regulations, Congress mandated the development ofan interagency housing policy in 1979 to ensure uniformity and equity inthe program. Although there is general language in the conference reportaccompanying the 1979 Foreign Assistance Appropriations Act indicatingthat real property should be acquired under a consolidated master planthrough a single government agency, the language does not legally requireany particular housing policy.

3. We believe that high cost operations that include substantial overheadand numerous administrative steps deserve special attention forreengineering and consideration of alternative practices. For example, wenoted in our draft report that the internal support budget for the


Appendix I


short-term leasing program in Brussels totaled more than $1.5 million infiscal year 1998, compared to about $150,000 in total for leasing andshort-term residential leasing building operation expense support at threeposts currently under LQA (Geneva, Guatemala City, and Quito).

4. The staff, compensation, and time data were supplied by the posts inLondon and Brussels based on their budget and personnel records.

5. We recognize that the current process may offer several benefits. Wenote that the options we presented may also offer benefits, including someof the same benefits that currently exist. For example, it is ourunderstanding that relocation companies can negotiate the same favorablelease terms on behalf of the U.S. government as State currently receives.As stated in our report, we reviewed whether any private sector practicesoffer the potential to reduce costs and provide quality services overseas toState. Since we identified several practices with such potential, we wouldexpect that State, in its study of the housing program, would examine andcompare specific costs and benefits of the practices we identified and itscurrent process. Until State performs this analysis, it is difficult to projectthe cost-effectiveness of State’s current system.

6. We found that State has little comprehensive cost data to support itsdecisions concerning whether to use government short-term leasing or LQA

for housing programs. However, ICASS data shows that government leasingprograms often have substantially higher support costs compared to LQA

programs—an important issue to be considered. Because the support costdifferences are potentially so great, State should include an examination ofhousing allowance options in its housing studies. If State determines thatthe costs of other factors—such as the need for employees to stay homefor maintenance and look for residences—outweigh the advantages ofreduced in-house administrative support costs, then these costs should befully documented as part of the decision-making process.

7. We agree various shipping cost factors need to be considered in acomparative analysis. However, State appears to miss the point by makingthe comment that to compare shipping household effects with contractfurniture, the cost of shipping contract furniture under current practicesshould be added to the costs of household effects. This would skew theresults of any analyses designed to determine if it is more cost-effective toship employee household effects or provide government furniture.Analyses must first be based on State’s actual shipping data, which wefound to show that employees often ship the same weight of household


Appendix I


effects whether a post is furnished or unfurnished. For example, Stateprovided us actual shipping data for over 50 posts in 1996. Our comparisonof seven furnished and unfurnished posts having the largest number ofshipments showed that the average weight of shipments varied by onlyabout 1,100 pounds, or about 6 percent of the maximum amountauthorized for shipment to unfurnished posts. This data suggests that thesignificant sums of money spent on operating a government-furnitureprogram may be excessive and unneeded. In addition, State’s commentsdid not consider the potential cost savings that could be derived by usinghousehold effects in place of government furniture. For example, the postin Singapore estimated that its annual warehousing costs alone could bereduced about $180,000 by using household effects instead of governmentfurniture.

8. Clearly, country-unique factors would have to be considered in makingdecisions. Assuming State’s assertion is correct, in countries such as Brazilit may not make sense to consider the use of employees’ household effectsas an option to government furniture. Other options may exist, however,such as purchasing furniture locally or even working with the hostgovernment to eliminate rules/customs that contribute to inefficiencies indiplomatic missions.

9. We clarified the text to state that the estimate of potential savingsresulting from local procurement could be as much as 30 percent or moreof the purchase, shipping, and packing costs of the contract furniture. Thisconclusion was based on data provided by State’s overseas posts. Forexample, post officials in San Jose told us that they could purchase a livingroom set locally for about $2,850, compared to the contract cost ofapproximately $4,296.

10. The information was provided by post officials in San Jose. We did notverify the data on local costs and availability, but post officials told us thathigh-quality furniture is available locally often with purchase prices belowthe government-furniture contract price. In addition, they note that thelead time for local delivery would be about 6 weeks, compared to5-months or longer under the contract.

11. We recognize the importance of purchasing quality products andexpect that State would consider this factor in examining the localpurchasing option. We found that a few posts now purchase furniturelocally, and based on our overseas visits, we are unaware of any concerns


Appendix I


about safety or fulfilling representational responsibilities associated withthese purchases.

12. State’s comments assume that its current furniture contract would becontinued and that prices would increase if quantities were decreased.However, until State explores the various options identified in this report,it is difficult to project how the current contract might be affected,including whether it should be continued or renegotiated. We againencourage State to include its furniture program in its study plans.

13. We modified the text in response to this data.

14. The lack of a worldwide property inventory system in State makes itdifficult to verify State’s claim that most of the residential furniture is inuse. Although this seems to be a logical assumption, at two of the posts wevisited large inventories of residential furniture were in storage at thattime. For example, in London, the majority of the items in the warehousewere residential furniture, including hundreds of dining chairs. Overall,our analysis shows that local procurement can substantially reduce thetime for delivery of goods and services; thus, reductions in overallinventory and storage requirements could be expected. This view isconsistent with State’s own efforts to reengineer its logistics system.According to State, the benefits associated with simpler and cheapersupply channels are expected to total millions of dollars in savings,partially resulting from reduced inventory costs and consolidatedwarehousing.


Appendix II

Major Contributors to This Report

National Security andInternational AffairsDivision, Washington,D.C.

Diana M. GlodLynn B. MooreJodi M. ProsserLaVerne G. Tharpes

Office of the GeneralCounsel

Richard Seldin

(711259) GAO/NSIAD-98-128 State DepartmentPage 45

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