Testimony

Before the Subcommittee on Military Readiness,

Committee on Armed Services,

House of Representatives

United States General Accounting Office

GAO

For Release on Delivery

Expected at 2:00 p.m., EDT

Wednesday

June 26, 2002

COMMERCIAL

ACTIVITIES PANEL

Improving the Sourcing

Decisions of the Federal

Government

Statement of David M. Walker

Comptroller General of the United States and

Chair of the Commercial Activities Panel

GAO-02-866T
Page 1 GAO-02-866T Commercial Activities Panel

Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to participate in the subcommittee’s hearing

on the report of the congressionally mandated Commercial Activities

Panel (the Panel). The Panel’s work was the result of a provision

contained in the Fiscal Year 2001 Defense Authorization Act, which called

for me, in my capacity as the Comptroller General, to convene a panel of

experts to study, and make recommendations for improving, the policies

and procedures governing the transfer of commercial activities for the

federal government from government to contractor personnel. The

impetus for this legislation was the growing controversy surrounding

competitions conducted under Office of Management and Budget (OMB)

Circular A-76 to determine whether the government should obtain

commercially available goods and services from the public or private

sectors.1

 As noted in the introduction to the Panel’s report, the use of cost

comparison studies under A-76 was under fire from all sides. All parties

concerned—federal managers, employees, and industry representatives—

were expressing growing frustration with the process, and many believed

the process needed significant reform. The Panel’s report was published

on April 30, 2002, and is available on GAO’s Web page at: www.gao.gov

under the “Commercial Activities Panel” link.

Controversy surrounding the use of A-76 also occurred at a time of

increasing questions over the role of government and who is in the best

position to provide needed services. Specifically, should the work of

government be performed by government employees, contractors, or a

combination of both, possibly through a partnership agreement.

As I have testified on a number of occasions, given recent trends and our

long-range fiscal challenges, the federal government needs to engage in a

fundamental review, reassessment, and reprioritization of what the

government does, how the government does business, and who does the

government’s business. This is essential in order to increase fiscal

flexibility and improve how the government works in the modern world.

This drives the need to evaluate and revise the current approach to

acquiring commercial services to ensure that it achieves the maximum

 1

 Examples of commercial functions typically subject to the competitive sourcing process

at the Department of Defense include transportation services, computer services,

education and training, and food services.
Page 2 GAO-02-866T Commercial Activities Panel

benefit for the taxpayers and a reasonable balance between a variety of

competing interests.

Because of the importance of the issues to be addressed, I chose to chair

the Panel rather than to designate someone else, as permitted in the

legislation. In my opinion, the Panel’s report presents a reasoned,

reasonable, and balanced set of recommendations, which, if implemented,

would significantly improve the government’s sourcing processes and

practices. My testimony today provides some context to the Panel’s work

and then focuses on (1) the processes used to select panel members and

other actions taken to ensure a fair and balanced process; (2) the guiding

principles, findings, and recommendations of the Panel; and (3) the next

steps needed to implement the Panel’s recommendations.

Since 1955, the executive branch has encouraged federal agencies to

obtain commercially available goods and services from the private sector

when the agencies determine that such action is cost-effective. OMB

formalized the policy in its Circular A-76, issued in 1966. In 1979, OMB

supplemented the circular with a handbook that included procedures for

competitively determining whether commercial activities should be

performed in-house, by another federal agency through an interservice

support agreement, or by the private sector. OMB has updated this

handbook several times.

Under A-76, commercial activities may be converted to or from contractor

performance either by direct conversion or by cost comparison. Under

direct conversion, specific conditions allow commercial activities to be

moved from government or contract performance without a cost

comparison study (e.g., for activities involving 10 or fewer civilians.)2

Generally, however, commercial functions are to be converted to or from

contract performance by cost comparison, whereby the estimated cost of

government performance of a commercial activity is compared with the

cost of contractor performance in accordance with the principles and

procedures set forth in Circular A-76 and the revised supplemental

handbook. As part of this process, the government identifies the work to

be performed (described in the performance work statement), prepares an

 2

 For functions performed by Defense Department employees, a number of additional

requirements, reports, and certifications are addressed in chapter 146 of title 10 United

States Code and in recurring provisions in the department’s annual appropriations acts.

Background
Page 3 GAO-02-866T Commercial Activities Panel

in-house cost estimate on the basis of its most efficient organization,3 and

compares it with the winning offer from the private sector.

According to A-76 guidance, an activity should not be moved from one

sector to the other (whether public to private or vice versa) unless doing

so would save at least $10 million or 10 percent of the personnel costs of

the in-house performance (whichever is less). OMB established this

minimum cost differential to ensure that the government would not

convert performance for marginal savings.

The handbook also provides an administrative appeals process. An eligible

appellant4

 must submit an appeal to the agency in writing within 20 days of

the date that all supporting documentation is made publicly available.

Appeals are supposed to be adjudicated within 30 days after they are

received. Private-sector offerors who believe that the agency has not

complied with applicable procedures have additional avenues of appeal.

They may file a bid protest with GAO or file an action in a court of

competent jurisdiction.5

Circular A-76 requires agencies to maintain annual inventories of

commercial activities performed in-house. A similar requirement was

included in the 1998 Federal Activities Inventory Reform (FAIR) Act,

which directs agencies to develop annual inventories of their positions

that are not inherently governmental.6

 The fiscal year 2001 inventory

identified approximately 841,000 full-time equivalent commercial-type

 3

 The most efficient organization is the government’s in-house organization to perform a

commercial activity. It may include a mix of federal employees and contract support. It is

the basis for all government costs entered on the cost comparison form. It is the product of

the management plan and is based upon the performance work statement.

4

 An eligible appellant is defined as (1) federal employees (or their representatives) and

existing federal contractors affected by a tentative decision to waive a cost comparison; (2)

federal employees (or their representatives) and contractors who have submitted formal

bids or offers and who would be affected by a tentative decision; or (3) agencies that have

submitted formal offers to compete for the right to provide services through an interservice

support agreement.

5

 Federal employees do not have standing to file a protest with GAO and have generally

been denied standing to sue in court.

6

 Section 5 of P.L. 105-270, codified at 31 U.S.C. 501 note (1998), defines an inherently

governmental function as a “function that is so intimately related to the public interest as to

require performance by Federal Government employees.”
Page 4 GAO-02-866T Commercial Activities Panel

positions, of which approximately 413,000 were in the Department of

Defense (DOD).7

DOD has been the leader among federal agencies in recent years in its use

of OMB Circular A-76; the Circular’s use by other agencies has been very

limited. However, in 2001, OMB signaled its intention to direct greater use

of the circular on a government-wide basis. In a March 9, 2001,

memorandum, OMB directed agencies to take action in fiscal year 2002 to

directly convert or complete public-private competitions of not less than 5

percent of the full-time equivalent positions listed in their FAIR Act

inventories. Subsequent guidance expanded the requirement to 15 percent

in fiscal year 2003, with the ultimate goal of competing at least 50 percent.

Although comprising a relatively small portion of the government’s overall

service contracting activity, competitive sourcing under Circular A-76 has

been the subject of much controversy because of concerns about the

process raised both by the public and private sectors. Federal managers

and others have been concerned about the organizational turbulence that

typically follows the announcement of A-76 studies. Government workers

have been concerned about the impact of competition on their jobs, the

opportunity for input into the process, and the lack of parity with industry

offerors to protest A-76 decisions. Industry representatives have

complained about unfairness in the process and the lack of a level playing

field between the government and the private sector in accounting for

costs. Concerns have also been raised about the adequacy of the oversight

of subsequent performance, whether the work is being performed by the

public or private sector.

Amid these concerns over the A-76 process, the Congress enacted section

832 of the National Defense Authorization Act for Fiscal Year 2001. The act

required the Comptroller General to convene a panel of experts to study

the policies and procedures governing the transfer of commercial

activities for the federal government from government to contactor

personnel. The act also required the Comptroller General to appoint highly

qualified and knowledgeable persons to serve on the panel and ensure that

the following entities received fair representation on the panel:

 7

 Guidance implementing the FAIR Act permitted agencies to exempt many commercial

activities from competitive sourcing consideration on the basis of legislative restrictions,

national security considerations, and other factors. Accordingly, DOD’s fiscal year 2001

inventory of positions it considered to be potentially subject to competition was reduced to

approximately 241,000.
Page 5 GAO-02-866T Commercial Activities Panel

• DOD.

• Persons in private industry.

• Federal labor organizations.

• OMB.

Appendix I lists the names of the Panel members. The legislation

mandating the Panel’s creation required that the Panel complete its work

and report the results of its study to the Congress no later than May 1,

2002. The Panel’s report was published on April 30, 2002.

In establishing the Panel, a number of steps were taken to ensure

representation from all major stakeholders as well as to ensure a fair and

balanced process. This began with my selection of Panel members, which

was then followed by the Panel’s establishment of a process to guide its

work.

To ensure a broad array of views on the panel, we used a Federal Register

notice to seek suggestions on the Panel’s composition.8

 On the basis of the

nominations received in response to that notice, as well as the need to

include the broad representation outlined in legislation, I personally

interviewed a number of potential panel members before selecting other

members to serve on the panel. I believe that we selected a group of

outstanding individuals representative of diverse interest groups from the

public and private sectors, labor unions, academia, and members with

experience in dealing with sourcing decisions at the local government

level.

 8

 A Federal Register notice was also used to solicit public input on issues the panel should

address.

Steps Taken to Ensure

a Representative

Panel and a Fair and

Balanced Process
Page 6 GAO-02-866T Commercial Activities Panel

Once convened, the Panel, as a group, took a number of steps at the outset

to guide its deliberations and ensure a full and balanced consideration of

issues. The first step was the adoption of the following mission statement:

The Panel also agreed that all of its findings and recommendations would

require the agreement of at least a two-thirds supermajority of the Panel in

order to be adopted. The Panel further decided that each Panel member

would have the option of having a brief statement included in the report

explaining the member’s position on the matters considered by the Panel.

In addition to the Federal Register notice soliciting input on issues to be

considered by the Panel, the Panel held 11 meetings over the period of

May 2001 to March 2002, 3 of which were public hearings in Washington,

D.C.; Indianapolis, Indiana; and San Antonio, Texas. In the public hearings,

Panel members heard testimony from scores of representatives of the

public and private sectors, state and local governments, unions,

contractors, academia, and others. Panelists heard first-hand about the

current process, primarily the cost comparison process conducted under

OMB Circular A-76, as well as alternatives to that process. Appendix II

provides more detail on the topics and concerns raised at the public

hearings. The Panel also maintained an E-mail account to receive written

comments from any source.

After the completion of the field hearings, the Panel members met in

executive session several times, augmented between meetings by the work

of staff to help them (1) gather background information on sourcing trends

and challenges, (2) identify sourcing principles and criteria, (3) consider

A-76 and other sourcing processes to assess what’s working and what’s

not, and (4) assess alternatives to the current sourcing processes.

As the Panel began its work, it recognized early on the need for a set of

principles that would provide a framework for sourcing decisions. Those

principles, as they were debated and fleshed out, provided an important

vehicle for assessing what does or does not work in the current A-76

Principles, Findings,

and

Recommendations

Mission of the Commercial Activities Panel

The mission of the Commercial Activities Panel is to improve the current sourcing

framework and processes so that they reflect a balance among taxpayer interests,

government needs, employee rights, and contractor concerns.
Page 7 GAO-02-866T Commercial Activities Panel

process, and provided a framework for identifying needed changes in the

process.

During its meetings, the Panel coalesced around a set of principles to

guide sourcing decisions. The principles helped frame many of the Panel’s

deliberations and became a reference point for the Panel’s work.

Moreover, the principles were unanimously adopted by the Panel and

included as part of the Panel’s recommendations. While each principle is

important, no single principle stands alone, and several are interrelated.

Therefore, the Panel adopted the principles and their accompanying

narrative comments as a package and then used these principles to assess

the government’s existing sourcing system and to develop additional Panel

recommendations.

Guiding Principles

Guiding Principles for Sourcing Policy

The Panel believes that federal sourcing policy should:

1. Support agency missions, goals, and objectives.

2. Be consistent with human capital practices designed to attract, motivate, retain,

and reward a high-performing federal workforce.

3. Recognize that inherently governmental and certain other functions should be

performed by federal workers.

4. Create incentives and processes to foster high-performing, efficient, and effective

organizations throughout the federal government.

5. Be based on a clear, transparent, and consistently applied process.

6. Avoid arbitrary full-time equivalent or other arbitrary numerical goals.

7. Establish a process that, for activities that may be performed by either the public

or the private sector, would permit public and private sources to participate in

competitions for work currently performed in-house, work currently contracted to

the private sector, and new work, consistent with these guiding principles.

8. Ensure that, when competitions are held, they are conducted as fairly, effectively,

and efficiently as possible.

9. Ensure that competitions involve a process that considers both quality and cost

factors.

10. Provide for accountability in connection with all sourcing decisions.
Page 8 GAO-02-866T Commercial Activities Panel

The principles and their accompanying commentary are included in their

entirety in appendix III.

The Panel’s principles supplied a strong conceptual framework and

specific criteria against which to measure any proposals for change in the

government’s competitive-sourcing policies. The Panel concluded that

there are some advantages to the current system. First, A-76 cost

comparisons are conducted under an established set of rules, the purpose

of which is to ensure that sourcing decisions are based on uniform,

transparent, and consistently applied criteria. Second, the A-76 process

has enabled federal managers to make cost comparisons between sectors

that have vastly different approaches to cost accounting. Third, the current

A-76 process has been used to achieve significant savings and efficiencies

for the government. Savings result regardless of whether the public or the

private sector wins the cost comparison. This is because competitive

pressures have served to promote efficiency and improve the performance

of the activity studied.

Despite these advantages, the Panel heard frequent criticisms of the A-76

process. The Panel’s report noted that both federal employees and private

firms complain that the A-76 competition process does not meet the

principles’ standard of a clear, transparent, and consistently applied

process. Since January 1999, GAO has issued 22 decisions on protests

involving A-76 cost comparisons. Of these decisions, GAO sustained 11

and denied 11. “Sustaining” a protest means that GAO found that the

agency had violated procurement statutes or regulations in a way that

prejudiced the protester. Protests involving A-76 represent a very small

percentage of the many hundreds of bid protest decisions that GAO issued

in the past 3 years. They do, however, indicate an unusually high

percentage of sustained protests. In protests decisions covering all

procurements, GAO has sustained about one-fifth of the protests, while in

A-76 protests, GAO has sustained half. (It should be kept in mind, though,

that most A-76 decisions are not protested, just as most contract award

decisions are not protested.) These sustained protests generally reflect

only the errors made in favor of the government’s most efficient

organization since only the private-sector offeror has the right to protest to

GAO.

While any public-private competition is, by nature, challenging and open to

some of the concerns that have been raised regarding the A-76 process, the

high rate of successful A-76 protests suggests that agencies have a more

difficult time applying the A-76 rules than they do applying the normal (i.e.,

Federal Acquisition Regulation) acquisition rules. At least in part, this may

Findings
Page 9 GAO-02-866T Commercial Activities Panel

be because the Federal Acquisition Regulation (FAR) rules are so much

better known. While training could help overcome this lack of familiarity

(and many agencies, particularly those in DOD, have been working on A-76

training), the Panel noted that the FAR acquisition and source selection

processes are already better known and better understood; they, in a

sense, serve as a “common language” for procurements and source

selections.

In the Panel’s view, the most serious shortcoming of the A-76 process is

that it has been stretched beyond its original purpose, which was to

determine the low-cost provider of a defined set of services. Circular A-76

has not worked well as the basis for competitions that seek to identify the

best provider in terms of quality, innovation, flexibility, and reliability.

This is particularly true in today’s environment, where solutions are

increasingly driven by technology and may focus on more critical,

complex, and interrelated services than previously studied under A-76. In

the federal procurement system today, there is common recognition that a

cost-only focus does not necessarily deliver the best quality or

performance for the government or the taxpayers. Thus, while cost is

always a factor, and often the most important factor, it is not the only

factor that may need to be considered. In this sense, the A-76 process may

no longer be as effective a tool, since its principal focus is on cost

comparisons.

During its year-long study, the Panel identified several key characteristics

of a successful sourcing policy. First, the Panel heard repeatedly about the

importance of competition and its central role in fostering economy,

efficiency, high performance, and continuous performance improvement.

The means by which the government utilizes competition for sourcing its

commercial functions was at the center of the Panel’s discussions and

work. The Panel strongly supported a continued emphasis on competition

as a means to improve economy, efficiency, and effectiveness of the

government. The Panel also believed that whenever the government is

considering converting work from one sector to another, public-private

competitions should be the norm. Direct conversions generally should

occur only where the number of affected positions is so small that the

costs of conducting a public-private competition clearly would outweigh

any expected savings. Moreover, there should be adequate safeguards to

ensure that activities, entities, or functions are not improperly separated to

reduce the number of affected positions and avoid competition.

A second theme consistently cited at the public hearings was the need for

a broader approach to sourcing decisions, rather than an approach that
Page 10 GAO-02-866T Commercial Activities Panel

relies on the use of arbitrary quotas or that is unduly constrained by

personnel ceilings. Critical to adopting a broader perspective is having an

enterprise-wide perspective on service contract expenditures, yet the

federal government lacks timely and reliable information about exactly

how, where, and for what purposes, in the aggregate, taxpayer dollars are

spent for both in-house and contracted services. The Panel was

consistently reminded about, and fully agrees with, the importance of

ensuring accountability throughout the sourcing process, providing the

workforce with adequate training and technical support in developing

proposals for improving performance, and assisting those workers who

may be adversely affected by sourcing decisions. Improved accountability

extends to better monitoring of performance and results after

competitions are completed—regardless of the winner.

The Panel heard about several successful undertakings involving other

approaches to sourcing decisions. Some involved business process

reengineering and public-private partnerships, and emphasized labormanagement cooperation in accomplishing agency missions. For example,

in Indianapolis, Indiana, on August 8, 2001, the Panel heard from

representatives from several organizations that had taken different

approaches to the sourcing issue. Among them were the Naval Surface

Warfare Center in Crane, Indiana, which reengineered its business

processes to reduce costs and gain workshare, and the city of

Indianapolis, which effectively used competition to greatly improve the

delivery of essential services. In doing so, the city also provided certain

technical and financial assistance to help city workers successfully

compete for work. These entities endeavored to become “most efficient

organizations.” It was from these examples and others that the Panel

decided that all federal agencies should strive to become “high performing

organizations.”

Third, sourcing policy is inextricably linked to the government’s human

capital policies. This linkage has many levels, each of which is important.

It is particularly important that sourcing strategies support, not inhibit, the

government’s efforts to attract, motivate, and retain a high-performing inhouse workforce, as well as support its efforts to access and collaborate

with high-performance, private-sector providers. Properly addressed,

these policies should be complementary, not conflicting.

In addition to the principles discussed earlier, the Panel adopted a

package of additional recommendations it believed would improve

significantly the government’s policies and procedures for making

sourcing decisions. It is important to emphasize that the Panel decided to

Panel Recommendations
Page 11 GAO-02-866T Commercial Activities Panel

consider and adopt these latter recommendations as a package,

recognizing the diverse interests represented on the Panel and the give and

take required to reach agreement among a supermajority of the Panelists.

As a result, a supermajority of the Panel members recommended the

adoption of the following actions:

• Conduct public-private competitions under the framework of an

integrated FAR-based process. The government already has an established

mechanism that has been shown to work as a means to identify high-value

service providers: the negotiated procurement process of the Federal

Acquisition Regulation. The Panel believes that in order to promote a more

level playing field on which to conduct public-private competitions, the

government needs to shift, as rapidly as possible, to a FAR-type process

under which all parties compete under the same set of rules. Although

some changes in the process will be necessary to accommodate the publicsector proposal, the same basic rights and responsibilities would apply to

both the private and the public sectors, including accountability for

performance and the right to protest. This and perhaps other aspects of

the integrated competition process would require changes to current law

or regulation (e.g., requirements in title 10 of the U.S. Code that DOD

competitive sourcing decisions be based on low cost).

• Make limited changes to the existing A-76 process. The development of

an integrated FAR-type process will require some time to be implemented.

In the meantime, the Panel expects current A-76 activities to continue, and

therefore believes some modifications to the existing process can and

should be made. Accordingly, the Panel recommended a number of limited

changes to OMB Circular A-76. These changes would, among other things,

strengthen conflict-of-interest rules, improve auditing and cost accounting,

and provide for binding performance agreements.

• Encourage the development of high-performing organizations (HPOs).

The Panel recommended that the government take steps to encourage

HPOs and continuous improvement throughout the federal government,

independent of the use of public-private competitions. In particular, the

Panel recommended that the Administration develop a process to select a

limited number of functions currently performed by federal employees to

become HPOs, and then evaluate their performance. Then, the authorized

HPOs would be exempt from competitive sourcing studies for a designated

period of time. Overall, however, the HPO process is intended to be used

in conjunction with, not in lieu of, public-private competitions. The

successful implementation of the HPO concept will require a high degree

of cooperation between labor and management, as well as a firm
Page 12 GAO-02-866T Commercial Activities Panel

commitment by agencies to provide sufficient resources for training and

technical assistance. In addition, a portion of any savings realized by the

HPO should be available to reinvest in continuing reengineering efforts

and for the HPO to use for further training and/or for incentive purposes.

Let me speak specifically to the creation of HPOs. Many organizations in

the past, for various reasons, have found it difficult to become highperforming organizations. Moreover, the federal government continues to

face new challenges in making spending decisions for both the long and

near term because of federal budget constraints, rapid advances in

technology, the impending human capital crisis, and new security

challenges brought on by the events of September 11, 2001. Such a

transformation will require that each organization reverse decades of

underinvestment and lack of sustained attention to maintaining and

enhancing its capacity to perform effectively.

The Panel recognized that incentives are necessary to encourage both

management and employees to promote the creation of HPOs. It

envisioned that agencies would have access to a range of financial and

consulting resources to develop their plans, with the costs offset by the

savings realized. The Panel’s report focused primarily on HPOs in the

context of commercial activities, given its legislative charter. However,

there is no reason why the concept could not be applied to all functions,

since much of the government’s work will never be subject to competition.

HPOs may require some additional flexibility coupled with appropriate

safeguards to prevent abuse. The Panel also envisioned the use of

performance agreements and periodic performance reviews to ensure

appropriate transparency and accountability.

Although a minority of the Panel did not support the package with the

three additional recommendations noted above, some of them indicated

that they supported one or more elements of the package. Importantly,

there was a good faith effort, even at the last minute of the report’s

preparation, to maximize agreement and minimize differences between

Panelists. In fact, changes were made even when it was clear that some

Panelists seeking changes were highly unlikely to vote for the

supplemental package of recommendations. As a result, on the basis of

Panel meetings and my personal discussions with Panel members at the

end of our deliberative process, the major differences between the

Panelists were few in number and philosophical in nature. Specifically,

disagreement centered primarily on the (1) recommendation related to the

role of cost in the new FAR-type process and (2) the number of times the

Congress should be required to act on the new integrated process,
Page 13 GAO-02-866T Commercial Activities Panel

including whether the Congress should specifically authorize a pilot

program that tests that process for a specific time period.

Many of the Panel’s recommendations can be accomplished

administratively under existing law, and the Panel recommends that they

be implemented as soon as practical. The Panel also recognizes that some

of its recommendations would require changes in statutes or regulations

and that making the necessary changes could take some time. Any

legislative changes should be approached in a comprehensive and

considered manner rather than a piecemeal fashion in order for a

reasonable balance to be achieved. Like the guiding principles, the

recommendations were the result of much discussion and compromise

and should be considered as a whole.

Moreover, although the Panel views the use of a FAR-type process for

conducting public-private competitions as the end state, the Panel also

recognizes that some elements of its recommendations represent a shift in

current procedures for the federal government. Therefore, the Panel’s

report outlined the following phased implementation strategy that would

allow the federal government to demonstrate and then refine its sourcing

policy on the basis of experience:

• A-76 studies currently under way or initiated during the near term should

continue under the current framework. Subsequent studies should be

conducted in accordance with the improvements listed in our report. OMB

should develop and oversee the implementation of a FAR-type, integrated

competition process. In order to permit this to move forward

expeditiously, it may be advisable to limit the new process initially to

civilian agencies where, except for allowing protests by federal employees,

its use would not require legislation. Statutory provisions applying only to

DOD agencies may require repeal or amendment before the new process

could be used effectively at DOD, and the Panel recommends that any

legislation needed to accommodate the integrated process in DOD be

enacted as soon as possible. As part of a phased implementation and

evaluation process, the Panel recommends that the integrated competition

process be used in a variety of agencies and in meaningful numbers across

a broad range of activities, including those currently performed by federal

employees, work currently performed by contractors, and new work.

• Within 1 year of initial implementation of the new process, and again 1

year later, the Director of OMB should submit a detailed report to the

Congress identifying the costs of implementing the new process, any

savings expected to be achieved, the expected gains in efficiency or

Implementation

Strategy
Page 14 GAO-02-866T Commercial Activities Panel

effectiveness of agency programs, the impact on affected federal

employees, and any lessons learned as a result of the use of this process

together with any recommendations for appropriate legislation.

• GAO would review each of these OMB reports and provide its independent

assessment to the Congress. The Panel anticipates that OMB would use

the results of its reviews to make any needed “mid-course corrections.” On

the basis of the results generated during the demonstration period, and on

the reports submitted by OMB and GAO, the Congress will then be in a

position to determine the need for any additional legislation.

The federal government is in a time of transition, and we face a range of

challenges in the 21st century. This will require the federal government to

transform what it does, the way that it does business, and who does the

government’s business in the 21st century. This may require changes in

many areas, including human capital and sourcing strategies. On the basis

of our statutory mandate, the Commercial Activities Panel primarily

focused on the sourcing aspects of this needed transformation.

I supported the adoption of the set of principles as well as the package of

additional recommendations contained in the Panel’s report. Overall, I

believe that the findings and recommendations contained in the Panel’s

report represent a reasoned, reasonable, fair, and balanced approach to

addressing this important, complex, and controversial area. I hope that the

Congress and the Administration will consider and act on this report and

its recommendations in a timely manner. I particularly want to urge the

Congress and the Administration to consider the importance of

encouraging agencies to become high-performing organizations on an

ongoing basis. Agencies should not wait until faced with the challenge of

public-private competitions to seek efficiencies to retain work in-house. In

addition, most of government’s workers will never be subject to

competitions. As a result, I believe that the Panel’s recommendation

pertaining to high-performing organizations could be an important vehicle

for fostering much needed attention to how we enhance the economy,

efficiency, and effectiveness of the federal government in ways other than

through competition.

Finally and most importantly, in considering the Panel’s package of

recommendations or any other changes that may be considered by the

Congress and the Administration, the guiding principles, developed and

unanimously agreed upon by the Panel, should be the foundation for any

future action.

Conclusions
Page 15 GAO-02-866T Commercial Activities Panel

Let me also add that I appreciate the hard work of my fellow Panelists and

their willingness to engage one another on such a tough issue—one where

we found much common ground despite a range of divergent views. I also

want to thank the GAO staff and the other support staff who contributed

to this effort. The Panel has completed its work. It is time for the Congress

and OMB to act on our report.

Mr. Chairman, this concludes my prepared statement. I would be happy to

respond to any questions that you or other members of the subcommittee

may have.
Appendix I: Members of the Commercial Activities Panel

Page 16 GAO-02-866T Commercial Activities Panel

David M. Walker, Chairman,

Comptroller General of the United States

E. C. “Pete” Aldridge, Jr.,

Under Secretary of Defense for Acquisition,

Technology and Logistics

Frank A. Camm, Jr.,

Senior Analyst, RAND

Mark C. Filteau,

President, Johnson Controls

World Services, Inc.

Stephen Goldsmith,

Senior Vice President, Affiliated

Computer Services

Bobby L. Harnage, Sr.,

National President, American Federation

of Government Employees, AFL-CIO

Kay Cole James,

Director, U.S. Office of Personnel Management

Colleen M. Kelley,

National President, National Treasury Employees Union

The Honorable David Pryor,

Director, Institute of Politics, Harvard University

Stan Z. Soloway,

President, Professional Services Council

Appendix I: Members of the Commercial

Activities Panel
Appendix I: Members of the Commercial Activities Panel

Page 17 GAO-02-866T Commercial Activities Panel

Angela B. Styles,1

Administrator, Office of

Federal Procurement Policy

Robert M. Tobias,

Distinguished Adjunct Professor,

American University

 1

 Angela Styles replaced Sean O’Keefe on the Commercial Activities Panel in December

2001 after he was confirmed as the Administrator of the National Aeronautics and Space

Administration.
Appendix II: Summary of Commercial Activities Panel Public

Hearings

Page 18 GAO-02-866T Commercial Activities Panel

Washington, D.C., June 11, 2001

“Outsourcing Principles and Criteria”

Key Points

• Status quo is not acceptable to anyone.

• Sourcing decisions require a strategic approach.

• Federal workers should perform core government functions.

• Need for MEOs throughout the government.

• Government needs clear, transparent, and consistently applied sourcing

criteria.

• Avoid arbitrary FTE goals.

• Objective should be to provide quality services at reasonable cost.

• Provide for fair and efficient competition between the public and private

sectors.

• Sourcing decisions require appropriate accountability.

Indianapolis, Indiana, August 8, 2001

“Alternatives to A-76”

Key Points

• Crane Naval Surface Warfare Center’s reengineering process led to

significant efficiencies and reduced workforce trauma.

• Employees must be involved with any reform effort. Secrecy is

counterproductive.

• Committed leadership, effective implementation, and well-planned

workforce transition strategies are key to any reform effort.

• Privatization-in-place was used effectively at Indianapolis Naval Air

Warfare Center to avert a traditional Base Realignment and Closure action.

• The city of Indianapolis provided certain technical and financial assistance

to help workers successfully compete for the work.

• Certain technology upgrades in Monterey, California, via a public–private

partnership led to efficiencies and increased effectiveness.

• Measuring performance is critical.

• A-76 is only one of many efficiency tools available to federal managers.

• Other tools include

• Bid to goal, which helps units become efficient and thus avoid A-76,

• Transitional Benefit Corporation, a concept that promotes the transfer

of government assets to the private sector and provides transition

strategies for employees, and

Appendix II: Summary of Commercial

Activities Panel Public Hearings
Appendix II: Summary of Commercial Activities Panel Public

Hearings

Page 19 GAO-02-866T Commercial Activities Panel

• ESOP, under which employees own a piece of the organization that

employs them. ESOPs have been established in a few federal

organizations.

San Antonio, Texas, August 15, 2001

“A-76, What’s Working and What’s Not”

Key Points

• A-76 process is too long and too costly.

• Cost of studies can greatly reduce government savings.

• Cost to industry in both dollars and uncertainty.

• Demoralized workers quit. But successful contractors need these workers.

• Larger A-76 studies can yield greater savings, but these studies become

much more complex.

• Lack of impetus for savings without competition.

• One-step bidding process should be used.

• MEO and contractors should

• Compete together in one procurement action,

• Be evaluated against the same solicitation requirements using the same

criteria, and

• Be awarded contracts based on best value.

• Provide more training for MEO and A-76 officials.

• MEOs should have legal status to protest and appeal awards and obtain

bid information.

• A-76 rules should be more clear and applied consistently through a

centralized management structure.

• For bid and monitoring purposes, government costs should be collected

and allocated consistent with industry (e.g., activity-based costing).

• Need to eliminate any suggestion of conflicts of interest.

• Need incentives for agencies and workers (e.g., share-in-savings).

• Provide soft landings for workers.

• Allow workers to form public-sector organizations for bidding.
Appendix III: Sourcing Principles

Page 20 GAO-02-866T Commercial Activities Panel

Based on public input, a review of previous studies and other relevant

literature, and many hours of deliberation, the Panel developed and

unanimously adopted a set of principles that it believes should guide

sourcing policy for the federal government. While each principle is

important, no single principle stands alone. As such, the Panel adopted the

principles as a package. The Panel believes that federal sourcing policy

should:

1. Support agency missions, goals, and objectives.

Commentary: This principle highlights the need for a link between the

missions, goals, and objectives of federal agencies and related sourcing

policies.

2. Be consistent with human capital practices designed to attract,

motivate, retain, and reward a high-performing federal workforce.

Commentary: This principle underscores the importance of considering

human capital concerns in connection with the sourcing process. While it

does not mean that agencies should refrain from outsourcing due to its

impact on the affected employees, it does mean that the federal

government’s sourcing policies and practices should consider the potential

impact on the government’s ability to attract, motivate, retain, and reward

a high-performing workforce both now and in the future. Regardless of the

result of specific sourcing decisions, it is important for the workforce to

know and believe that they will be viewed and treated as valuable assets. It

is also important that the workforce receive adequate training to be

effective in their current jobs and to be a valuable resource in the future.

3. Recognize that inherently governmental and certain other functions

should be performed by federal workers.

Commentary: Recognizing the difficulty of precisely defining “inherently

governmental” and “certain other functions,” there is widespread

consensus that federal employees should perform certain types of work.

Office of Management and Budget (OMB) Directive 92-1 provides a

framework for defining work that is clearly “inherently governmental” and

 1

 The sourcing principles were taken in their entirety from Commercial Activities Panel,

Improving the Sourcing Decisions of Government: Final Report (Washington, D.C.:

April 2002).

Appendix III: Sourcing Principles1
Appendix III: Sourcing Principles

Page 21 GAO-02-866T Commercial Activities Panel

the Federal Activities Inventory Reform (FAIR) Act has helped to identify

commercial work currently being performed by the government. It is clear

that government workers need to perform certain warfighting, judicial,

enforcement, regulatory, and policymaking functions, and the government

may need to retain an in-house capability even in functions that are largely

outsourced. Certain other capabilities, such as adequate acquisition skills

to manage costs, quality, and performance and to be smart buyers of

products and services, or other competencies such as those directly linked

to national security, also must be retained in-house to help ensure

effective mission execution.

4. Create incentives and processes to foster high-performing, efficient,

and effective organizations throughout the federal government.

Commentary: This principle recognizes that, historically, it has primarily

been when a government entity goes through a public-private competition

that the government creates a “most efficient organization” (MEO). Since

such efforts can lead to significant savings and improved performance,

they should not be limited to public-private competitions. Instead, the

federal government needs to provide incentives for its employees, its

managers, and its contractors to constantly seek to improve the economy,

efficiency, and effectiveness of the delivery of government services

through a variety of means, including competition, public-private

partnerships, and enhanced worker-management cooperation.

5. Be based on a clear, transparent, and consistently applied process.

Commentary: The use of a clear, transparent, and consistently applied

process is key to ensuring the integrity of the process as well as to creating

trust in the process on the part of those it most affects: federal managers,

users of the services, federal employees, the private sector, and the

taxpayers.

6. Avoid arbitrary full-time equivalent (FTE) or other arbitrary

numerical goals.

Commentary: This principle reflects an overall concern about arbitrary

numbers driving sourcing policy or specific sourcing decisions. The

success of government programs should be measured by the results

achieved in terms of providing value to the taxpayer, not the size of the inhouse or contractor workforce. Any FTE or other numerical goals should

be based on considered research and analysis. The use of arbitrary

percentage or numerical targets can be counterproductive.
Appendix III: Sourcing Principles

Page 22 GAO-02-866T Commercial Activities Panel

7. Establish a process that, for activities that may be performed by

either the public or the private sector, would permit public and private

sources to participate in competitions for work currently performed inhouse, work currently contracted to the private sector, and new work,

consistent with these guiding principles.

Commentary: Competitions, including public-private competitions, have

been shown to produce significant cost savings for the government,

regardless of whether a public or a private entity is selected. Competition

also may encourage innovation and is key to improving the quality of

service delivery. While the government should not be required to conduct

a competition open to both sectors merely because a service could be

performed by either public or private sources, federal sourcing policies

should reflect the potential benefits of competition, including competition

between and within sectors. Criteria would need to be developed,

consistent with these principles, to determine when sources in either

sector will participate in competitions.

8. Ensure that, when competitions are held, they are conducted as

fairly, effectively, and efficiently as possible.

Commentary: This principle addresses key criteria for conducting

competitions. Ineffective or inefficient competitions can undermine trust

in the process. The result may be, for private firms (especially smaller

businesses), an unwillingness to participate in expensive, drawn-out

competitions; for federal workers, harm to morale from overly long

competitions; for federal managers, reluctance to compete functions under

their control; and for the users of services, lower performance levels and

higher costs than necessary. Fairness is critical to protecting the integrity

of the process and to creating and maintaining the trust of those most

affected. Fairness requires that competing parties, both public and private,

or their representatives, receive comparable treatment throughout the

competition regarding, for example, access to relevant information and

legal standing to challenge the way a competition has been conducted at

all appropriate forums, including the General Accounting Office and the

United States Court of Federal Claims.

9. Ensure that competitions involve a process that considers both

quality and cost factors.

Commentary: In making source selection decisions in public-private

competitions: (a) cost must always be considered; (b) selection should be

based on cost if offers are equivalent in terms of non-cost factors (for
Appendix III: Sourcing Principles

Page 23 GAO-02-866T Commercial Activities Panel

example, if they offer the same level of performance and quality); but (c)

the government should not buy whatever services are least expensive,

regardless of quality. Instead, public-private competitions should be

structured to take into account the government’s need for high-quality,

reliable, and sustained performance, as well as cost efficiencies.

10. Provide for accountability in connection with all sourcing

decisions.

Commentary: Accountability serves to assure federal workers, the private

sector, and the taxpayers that the sourcing process is efficient and

effective. Accountability also protects the government’s interest by

ensuring that agencies receive what they are promised, in terms of both

quality and cost, whether the work is performed by federal employees or

by contractors. Accountability requires defined objectives, processes, and

controls for achieving those objectives; methods to track success or

deviation from objectives; feedback to affected parties; and enforcement

mechanisms to align desired objectives with actual performance. For

example, accountability requires that all service providers, irrespective of

whether the functions are performed by federal workers or by contractors,

adhere to procedures designed to track and control costs, including,

where applicable, the Cost Accounting Standards. Accountability also

would require strict enforcement of the Service Contract Act, including

timely updates to wage determinations.

(350238)