I'd love to give you a quick and easy answer, but the honest truth is that attentive heeling is a lot of work on the part of the handler. You need to be consistent, persistent and highly rewarding to get that happy, head-up focused heeling that looks so good in the ring. Ideally you work with a trainer who can help you along and get you past all the mistakes we humans tend to make (that usually screw up the dog .. *L*).
I'll give you some tips and you can try these, though - if you're consistent you will see definite improvement in your heeling.
Since you already have taught your dogs to "watch", the next step is to do the "watch" while the dog is in heel position. Initially you DO NOT pressure your dog into proper heel position (you want to keep this very upbeat). So put a leash on your dog, go into a low-distraction area, have some great treats (in a pocket on your right side, or set the treats on a shelf or table) and put a smile on your face and in your voice. Tell your dog "sit" and then "stay" - and then step into proper heel position. Where your dog sits is immaterial right now - you will put yourself into heel position and work the "watch" command from there. Once in heel position, keep your shoulders straight and forward (don't dip your left shoulder back - common error!), smile at your dog and give your "watch" command (if you have one - or wait for your dog to give you eye contact). When your dog gives you eye contact, mark that behavior (click or "YESS!!" or whatever your reward marker is) and then either bring a treat over from your right hand to your left and give the treat, or run the dog over to the table/shelf and give a treat.
Then you do it again. Tell the dog "sit" and "stay" (keep your voice happy!) and then step into heel position, wait/ask for eye contact, mark the behavior and reward. Do this several times and end the session on a positive note (before the dog gets bored).
Do this twice a day for at least a week. By this time your dog should be eagerly looking up at you when you step into heel position. You can start adding in a bit of time - hesitate (still smiling) for a few seconds before marking the attention, and then gradually increase the amount of time. Don't rush this - good attention takes TIME and takes REPETITION. If you rush it, your dog will start looking away and that only teaches them that it's okay to look away. You want to make your dog succeed, not fail.
When your dog is looking eagerly at you for at least 15 seconds duration, you can start the next step. And that's literally ONE step. Your dog has learned that attention at heel position is highly rewarded. Now he has to learn to move forward while maintaining that attention, and this can be very difficult for many dogs.
Step into heel position as you've been doing. Smile as your dog looks at you, give your "heel" command and step forward one short step with your LEFT leg. Don't move your right foot - leave it planted and only step out with your left foot. Let your body lean forward slightly - VERY slightly, like it naturally would when you start walking forward. And stop on that one step, with your right foot still planted in position.
Now, if your dog comes forward and keeps looking up, immediately mark that behavior and reward. This is great! Some dogs move into this step without any problems.
If your dog comes forward and drops his head, clap your hands and say "whoops!" and smile but don't reward. Have him sit again, step into heel position, get eye contact and then praise him softly, give your heel command and continue to talk to him as you move forward, encouraging him to move with you while keeping attention. IMMEDIATELY mark and reward the proper behavior when you get it.
Some dogs, after a week or two of being rewarded while sitting, find it hard to move forward. If you find this is the case, you can do a bit of luring with a treat. I'm not big on luring because visible rewards can easily result in a dog that is dependent on seeing a reward as part of the cue for a behavior, but sometimes a lure can help you through a tough spot. While in heel position, take a treat into your left hand (holding it between thumb and first finger, with your fingers pointing backwards) and touch it to his nose. Smile, give your "heel" command, and encourage him to move with you as you take that single step forward with your left foot. Hold your hand against your side, slightly forward and high enough to keep his nose upwards. What you want to do is lure him forward in perfect heel position, with attention upwards toward you. Mark/reward the behavior.
Only lure a couple of times and then try without the visible lure. Keep your hand in the same position, though, and he will probably move forward just fine.
Now, after a week or so of two sessions a day with that single step, you should have a dog that is moving forward with absolute attention on you. At this point, you can add in a second step. Literally, you take one step forward with your left foot and a second step with your right foot, stopping IN STRIDE (right foot forward and left back) to mark and reward the continued attention. The reason I said IN STRIDE is because the dog should sit if you bring your feet up together, so we want to avoid that as the sit is NOT part of the attention training right now.
You can see how this can be a long procedure - you very slowly add in steps, then you teach a left turn and a right turn and an about turn and then the halt/sit. Each change in criteria (a different turn, a different speed) means you have to train for it - all those changes don't come naturally to a dog. There's really not much natural about attentive heeling, in all honesty. Most dogs don't prance along with their heads cocked sideways looking up .. *L* ..
Now, if you find that your dog is starting to wrap himself around your leg (and coming slightly in front of you) then that's an error you made in training early on. NEVER reward when the dog is not in proper heel position (or actually, when YOU are not in proper position!). Keep that left shoulder back where it belongs. Either let your left arm hang naturally or put your hand on your stomach above your belly button.
Once you can get a few good solid attentive steps, you can try raising the distraction level. You need to expect that you'll have to go back to one step (or even just attention at heel position) when you add in distractions. There are a couple of reasons for this. One, dogs learn in conjunction with their surroundings. A dog that learns "sit" in their home may truly not understand that "sit" means the bottom hits the floor in other places, too. The surroundings become part of the cue to the dog. Two, distractions are exactly that - distracting! *L* Dogs WANT to see what's going on around them, and a breed like the GSD is naturally going to want to look around to keep an eye on any potential threats. So you have to gradually add in distractions and train within those distractions until your dog learns that "sit" means "sit" everywhere, and the distractions are not something to be concerned with.
Dogs, when stressed, will often give in to distractions more easily. Attentive heeling can be tough and if you don't keep it upbeat and fun, your dog will want to be distracted in order to avoid the stress of the training. You may need to upgrade your rewards so that your dog is more highly rewarded under higher levels of stress/distraction.
Like I said, this is a long-term training goal. But it's really fun to have a dog that heels with attention - it looks beautiful. Here are some photos of Khana heeling. You just can't help but smile at her focus .. she is enjoying herself (primarily in anticipation of a reward, because that's what works for her! *L*).
Melanie and the gang in Alaska