National Aeronautics and

Space Administration

OFFICE OF INSPECTOR GENERAL

AUDIT

REPORT

 

IG-98-001

 

RAPID ACTION

APPLICATION OF OMB CIRCULAR A-76

TO DESKTOP OUTSOURCING

December 19, 1997
ADDITIONAL COPIES

To obtain additional copies of this audit report, contact the Assistant Inspector General for

Auditing at 202-358-1232.

SUGGESTIONS FOR FUTURE AUDITS

To suggest ideas for or to request future audits, contact the Assistant Inspector General for

Auditing. Ideas and requests can also be mailed to:

Assistant Inspector General for Auditing

NASA Headquarters

Code W

300 E St., SW

Washington, DC 20546

NASA HOTLINE

To report fraud, waste, abuse, or mismanagement, contact the NASA OIG Hotline by calling 1-

800-424-9183; 1-800-535-8134 (TDD); or by writing the NASA Inspector General, P.O. Box

23089, L'Enfant Plaza Station, Washington, DC 20026. The identity of each writer and caller can

be kept confidential upon request to the extent permitted by law.
TABLE OF CONTENTS

BACKGROUND .................................................. 1

OVERALL EVALUATION ........................................... 1

OMB CIRCULAR A-76 ....................................... 2

NASA MANAGEMENT BELIEVES A-76 IS NOT APPLICABLE ........... 3

NASA MANAGEMENT REACHED WRONG CONCLUSION .............. 3

CONCLUSION AND RECOMMENDATION ............................... 5

APPENDIX A - OBJECTIVES, SCOPE, AND METHODOLOGY ................ A-1

APPENDIX B B NASA MANAGEMENT'S RESPONSE ..................... B-1

APPENDIX C - DISTRIBUTION LIST ................................. C-1

APPENDIX D - MAJOR CONTRIBUTORS TO THIS REPORT ................. D-1
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APPLICATION OF OMB CIRCULAR A-76

TO DESKTOP OUTSOURCING

BACKGROUND In July 1996, the NASA Chief Information Officer (CIO) and

Associate Administrator for Procurement formed a management team

and a requirements team to assess the outsourcing of desktop

computing. The management team defined "desktop computing" to

include hardware, software, local area networks, and customer

support. The management team studied three options concerning

desktop computing: (1) ?business as usual,” (2) consolidation, and

(3) outsourcing. 

The assessment resulted in a report called the Business Case for

Outsourcing of Desktop Computers (Business Case), dated

October 24, 1996. The Business Case concluded that desktop

outsourcing could produce cost savings and other nonquantified

benefits. Accordingly, it recommended that NASA consolidate its

desktop management responsibilities at a designated lead center, and

outsource its desktop requirements. The NASA Administrator

concurred with the management team's recommendations. The CIO

then formed another team (called the Outsourcing Desktop Initiative

for NASA, or ODIN team), to refine the original desktop cost

baseline. NASA issued the final request for proposals (RFP) from

potential outsourcing vendors on November 28, 1997. NASA

expects to award the contract during the third quarter of Fiscal Year

1998.

OVERALL

EVALUATION

NASA has mistakenly concluded that cost comparison requirements

as set forth in OMB Circular A-76, Performance of Commercial

Activities (hereinafter called A-76), do not apply to its plan to

outsource desktop computers. While NASA officials cited several

reasons why they believe A-76 does not apply to the outsourcing

initiative, we believe these reasons do not exempt NASA from the A76 requirements. Beyond not complying with the OMB regulation,

NASA may enter into desktop outsourcing contracts without

assurance that outsourcing will produce cost savings. In accordance

with A-76, NASA should develop an in-house cost estimate based on

the Agency's Most Efficient Organization, and compare this cost

estimate with offeror proposals to determine whether NASA should

outsource its desktop requirements. Details follow.
2 A-HA-97-061

OMB CIRCULAR

A-76

The general policy of the Government, as stated in A-76, is to rely on

commercial sources to supply the products and services the

Government needs, unless a cost comparison demonstrates that inhouse performance is more cost effective. In this regard, A-76

establishes Federal policy regarding the performance of commercial

activities. The Revised Supplemental Handbook to A-76, dated

March 1996, sets forth procedures for determining whether an agency

should contract for commercial activities, or perform such activities

in-house using Government facilities and personnel. A-76 and the

Supplemental Handbook include the following provisions:

C Whenever commercial sector performance of a Government

operated commercial activity is permissible, the agency shall

compare the cost of contracting and the cost of in-house

performance, to determine who will do the work.

C Supplemental Handbook -- Part II, contains detailed guidance

on the conduct of cost comparisons and how to determine an

agency's Most Efficient Organization (MEO). The MEO refers

to the agency's in-house organization and may include a mix of

Federal employees and contract support. In identifying and

developing the MEO, the agency may consider management

reinvention, consolidation, re-engineering, personnel

classification, market and other analyses. The MEO is the

basis for all agency costs used in the cost comparison.

C Conversion without cost comparison can occur when:

- The agency can obtain fair and reasonable prices

through competitive award, and

- the agency can reassign all directly affected Federal

employees serving on permanent appointments, to

other comparable Federal positions for which they

are qualified.
3 A-HA-97-061

NASA MANAGEMENT

BELIEVES A-76 IS

NOT APPLICABLE

The NASA CIO advised the OIG that NASA does not consider A-76

applicable to the outsourcing initiative. NASA's Outsourcing Guide

and Benefit-Cost Model (used as a guide in preparing the Business

Case) states that "Outsourcing as envisioned in these guidelines is

going one step further than a typical A-76 study by having

management of these functions performed outside of NASA, while

oversight of key performance metrics is provided by NASA."

In response to an OIG Request for information, NASA's CIO

expressed his belief that A-76 cost comparison requirements do not

apply to the desktop outsourcing initiative. He cited several reasons:

C The activities covered in the NASA outsourcing initiative are

activities that A-76 defines as commercial activities that should

not be performed by the Government.

C NASA already contracts for a large portion (80 to 90 percent)

of this activity with the private sector. This portion is not

subject to A-76.

C The remaining portion of the activity is being performed by

NASA civil service employees. A-76 provides that commercial

activities of 11 or more full time equivalent (FTE) staff may be

converted to contract, without cost comparison, if (a) fair and

reasonable prices can be obtained through competitive award,

and (b) all directly affected Federal employees serving on

permanent assignments are reassigned to other comparable

Federal positions for which they are qualified. Current plans

are to reassign any affected individual to a position for which

they are qualified.

NASA MANAGEMENT

REACHED WRONG

CONCLUSION

We believe NASA erred in determining that A-76 is not applicable to

the desktop outsourcing initiative. Our comments follow regarding

the CIO's response.

C We agree that the IT activities covered in the NASA

outsourcing initiative are commercial activities. That in itself,

however, does not remove the outsourcing initiative from

coverage under A-76. Indeed, A-76 sets forth Federal policy

for the performance of commercial activities. It states a

preference for "the Government to
4 A-HA-97-061

rely on commercial sources to supply the products and

services the Government needs." [paragraph 4.a]

However, "[w]henever commercial sector performance

of a Government operated commercial activity is

permissible, in accordance with this Circular and its

Supplement, comparison of the cost of contracting and

the cost of in-house performance shall be performed to

determine who shall do the work," [paragraph 5.a],

and "Government performance of a commercial activity

is authorized if a cost comparison prepared in accordance

with . . . the Supplement demonstrates that the

Government is operating or can operate the activity . . .

at an estimated lower cost than a qualified commercial

source." [paragraph 8.d]

C That NASA already contracts out 80 to 90 percent of its

desktop activity is not sufficient to avoid A-76 cost

comparison requirements. The outsourcing proposal includes

work that NASA personnel now perform. There is no prima

facie authorization to convert that portion of the activity just

because a high percentage has already been converted.

C The CIO cites the exemption for "Activities of 11 or More

FTE," at Part I, Chapter 1, paragraph D.6, Supplement. To

use the exemption, NASA must meet both conditions: fair and

reasonable prices through competitive award, and reassignment

of all directly affected Federal employees. We are not

convinced that NASA can fulfill these conditions, for the

following reasons.

(1) NASA has not shown that it can obtain fair and

reasonable prices through competitive award; only the

cognizant contracting officer can make this

determination. Such a determination was not evident as

the Business Case reflected only limited useful

information from potential outsourcing vendors.

(2) That NASA can reassign all employees to

comparable positions for which they are qualified is

speculative. NASA has neither identified the specific
5 A-HA-97-061

FTEs that will be affected, nor the positions to which the

FTEs would be assigned. In this regard, we asked the

NASA CIO by memorandum dated July 25, 1997, to

identify the number of civil servants, by location, who

would be reassigned to NASA's core activities as a result

of desktop outsourcing. The CIO requested 6 weeks to

assemble and provide the requested data.

The Business Case indicates that desktop outsourcing

will allow NASA to reassign 496 FTEs to its core

activities. The Business Case study derived this figure by

computing the ratio of desktop computers serviced by

the Payload Network Branch at the Kennedy Space

Center, to the number of civil servants in that

organization. A NASA official advised the OIG that the

data from the Payload Network Branch was the most

representative data available to NASA in terms of such

a ratio. About 77 percent of the civil servants in the

branch were "direct" employees whose jobs a contractor

presumably would perform under an outsourcing

contract. If NASA reassigns 77 percent of the total

FTEs identified by the Business Case to NASA's core

activities, then NASA will need to fill about 380

positions (.77 X 496 positions), to satisfy the

"reassignment" requirement under A-76.

CONCLUSION NASA has mistakenly determined that A-76 does not apply to its

desktop outsourcing initiative. Without an A-76 study and

comparison, NASA can not ensure that the decision to outsource

desktop computers will result in cost savings.

RECOMMENDATION NASA should develop an in-house cost estimate according to the

Revised Supplemental Handbook to OMB Circular A-76, and

compare this cost estimate with offeror proposals to determine

whether NASA should outsource its desktop requirements.
6 A-HA-97-061

MANAGEMENT'S

RESPONSE

Management did not concur with the recommendation, stating that

the draft rapid action report reflects a misunderstanding of A-76 and

its application to the Outsourcing Desktop Initiative for NASA

(ODIN). Management further stated that:

A-76 requires a cost comparison before an agency

converts a "commercial activity" to contract. To qualify

under A-76, a "commercial activity" must be operated

by the Federal agency and produce a product or service.

NASA acquires its desktop and communications

products and services almost exclusively through the

private sector. ODIN will continue private sector

provision of desktop and communication services, as

well as asset management. If NASA's current asset

management function and accompanying resources for

these environments were separated from their

organizations, these resources could not operate a

"commercial activity" to produce the needed products

and services, i.e., ODIN, to support NASA.

Consequently, NASA's existing resources are not a

"commercial activity" and A-76 does not require a cost

comparison. A-76 clearly did not contemplate

comparing the cost of a diffuse civil servant activity with

a defined, discrete contractor task.

Management also stated that even if it applied A-76 to ODIN, NASA

is not required to perform a cost comparison according to Chapter 3,

Part I, Revised Supplemental Handbook, A-76 (March 1996).

Management cited A-76 paragraph D6, Chapter 1, which states that:

Commercial activities may be converted . . ., without

cost comparison if fair and reasonable prices can be

obtained through competitive award and all directly

affected Federal employees serving on permanent

appointments are reassigned to other comparable

Federal positions for which they are qualified.

The NASA Chief Information Officer (CIO) stated that it is

incumbent upon the contracting officer for the master contracts, and

the contracting officers for the delivery orders, to make judgments

about the fairness and reasonableness of the prices offered, as

required by the FAR. In the former case, it will also be up to the

Center Director of the Goddard Space Flight Center to select those
7 A-HA-97-061

vendors for contract award who represent the best value to the

Government - not necessarily the lowest price. Similarly, each

Center Director or Institutional Program Office Associate

Administrator will perform the same best value analysis for their

delivery orders. The NASA CIO said he expected these source

selection officials to make prudent programmatic and business

decisions with all the information in-hand.

In the area of staffing, management stated that Agency human

resources policy is to avoid any reductions in force. Staff reductions

resulting from other downsizing efforts have successfully been

accommodated through attrition, reassignment, and retraining.

Management said it expects these methods will allow the Agency to

avoid displacing Federal workers as a result of ODIN

implementation.

The NASA CIO stated that "Industry is replete with examples where

companies expected significant cost savings through outsourcing but

ultimately realized that other synergistic and less quantifiable benefits

were the true benefits of outsourcing." Further, even without cost

savings, the other benefits alone would have vastly improved

NASA's information technology environment and NASA's ability to

manage it. Finally, the CIO stated that the rapid action report did

not recognize the other benefits and management's prerogative to

make decisions on other than a cost basis.

Management's response is included in its entirety at Appendix B.

EVALUATION OF

MANAGEMENT'S

RESPONSE

Following issuance of the draft OIG report on August 27, 1997, we

obtained additional relevant information from the former CIO, other

NASA officials, and the OMB. This information has confirmed our

position that A-76 applies to NASA's plans to outsource its desktop

requirements. Also, as noted below, NASA can be exempt from A76 Cost Comparison requirements by committing to reassigning all

affected NASA employees to comparable positions. Additional

information follows.

APPLICATION OF A-76

TO ODIN

In his September 11, 1997, response to the draft report, the former

CIO said A-76 did not apply to the outsourcing initiative because

NASA's existing desktop resources do not represent a commercial

activity. The CIO's position directly contradicts his earlier stated
8 A-HA-97-061

position to the OIG in which he said that "Clearly, Information

Technology activities covered in the NASA outsourcing initiative are

activities that A-76 defines as commercial activities . . ." OMB

advised the OIG that, contrary to the CIO's written response to the

draft report, NASA's desktop computing is a commercial activity,

and A-76 applies to the desktop outsourcing initiative.

Appendix 1 to the Revised A-76 Supplemental Handbook provides

updated guidance and, we believe, confirms the OIG position. It

defines commercial activity as follows:

A commercial activity is the process resulting in a

product or service that is or could be [emphasis added]

obtained from a private sector source. Agency

missions may be accomplished through commercial

facilities and resources, Governmental facilities and

resources or mixes thereof [emphasis added],

depending upon the product, service, type of mission

and the equipment required.

Attachment A to OMB Circular A-76 provides examples of

"commercial activities" including automatic data processing (ADP)

services, and ADP equipment installation, operation, and

maintenance.

ODIN is to be an entirely new contract, and it includes both the

current contractor and civil servant activities. Accordingly, for cost

comparison purposes, NASA should not separate desktop support

currently provided by NASA civil servants from the portion

currently provided by contractor employees. Since a portion of the

desktop activity is to be converted from government to commercial

performance, under an entirely new contract, we believe A-76

provisions apply to the entire activity.

The NASA CIO stated that NASA expects to realize other benefits

from desktop outsourcing. While other benefits may accrue to

NASA, such benefits are not relevant to determining whether A-76

provisions apply to the desktop outsourcing activity.
 NASA will need to reassign about 40 civil servants to other comparable positions. The 1

380 FTE positions cited in this report represented the number of personnel that NASA could

reassign to its core activities, using NASA's methodology for computing the total number of FTE

personnel that outsourcing could affect. The smaller number (40), provided in response to an

OIG questionnaire received after the draft rapid action report was issued to management for

comment, represents the number of individuals that NASA expects it would have to reassign.

9 A-HA-97-061

EXEMPTION FROM

A-76 COST

COMPARISONS

NASA may be eligible for an exemption from the A-76 cost

comparison requirement if it satisfies each of two conditions. These

are:

(1) The agency can obtain fair and reasonable prices through

competitive award.

(2) The agency can reassign all directly affected Federal

employees serving on permanent appointments to other

comparable positions for which they are qualified.

Regarding the first condition, OMB has advised that the General

Service Administration's plans to assist agencies in outsourcing their

desktop requirements, in effect, establishes that NASA can indeed

expect fair and reasonable prices. Accordingly, NASA has met the

first condition.

OMB stated that NASA can satisfy the second condition only if it

unequivocally commits to reassigning all affected NASA employees

to comparable positions. The mere expectation that NASA will

reassign all affected employees is not sufficient to satisfy this

condition. If NASA does not fully comply with the second

condition, it risks adverse employee actions.

If NASA unequivocally commits, in writing, to reassigning all

affected NASA employees to comparable positions, then NASA

1

will have satisfied each of the prerequisites for exemption from A-76

cost comparison requirements. Such a commitment would satisfy

the intent of the OIG recommendation and allow the

recommendation to be closed.
10 A-HA-97-061

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Appendix A

A-1 A-HA-97-061

OBJECTIVES The overall objective of the ongoing audit is to determine the

adequacy of NASA's outsourcing study and analysis; specifically, it

will determine whether NASA has:

C Based its outsourcing analysis on current, accurate, complete,

and relevant cost data;

C Used appropriate and consistent methodology in analyzing the

various options identified; and

C Adequately considered alternatives to outsourcing.

SCOPE AND

METHODOLOGY

We reviewed OMB Circular A-76 (Performance of Commercial

Activities) and the Revised Supplemental Handbook to A-76. Also,

we obtained legal advice from the OIG's Associate Attorney-Advisor

and conferred with an OMB official having cognizance for A-76. We

also interviewed various NASA officials and queried the NASA CIO

regarding his rationale for not performing a cost comparison

according to A-76. The NASA CIO's response is cited earlier in this

report.

AUDIT FIELD

WORK

Audit field work began in March 1997, and continues at several

NASA centers and NASA Headquarters. We are performing the

audit according to generally accepted government auditing standards.
A-2 A-HA-97-061

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Appendix C

C-1 A-HA-97-061

DISTRIBUTION LIST

NASA Headquarters

Code AO/Chief Information Officer

Code B/Chief Financial Officer

Code B/Comptroller

Code G/General Counsel

Code J/Associate Administrator for Management System and Facilities

Code JM/Management Assessment Division(10 copies)

Code L/Associate Administrator for Legislative Affairs

Code R/Associate Administrator for Aeronautics and Space Transportation Technology

Code R/Chief Information Officer Representative

Code S/Associate Administrator for Space Science

NASA Field Installations

I/Director, Office of the Director of Information Systems, Ames Research Center

IA/Chief Information Officer, Ames Research Center

NASA Offices of Inspector General

Ames Research Center

Goddard Space Flight Center

Jet Propulsion Laboratory

Lyndon B. Johnson Space Center

John F. Kennedy Space Center

Langley Research Center

Lewis Research Center

George C. Marshall Space Flight Center

John C. Stennis Space Center
Appendix C

C-2 A-HA-97-061

Non-NASA Federal Organizations and Individuals

Assistant to the President for Science and Technology Policy

Deputy Associate Director, Energy and Science Division, Office of 

 Management and Budget

Budget Examiner, Energy Science Division, Office of Management and Budget

Associate Director, National Security and International Affairs Division, General

 Accounting Office

Special Counsel, Subcommittee on National Security, International Affairs, and 

 Criminal Justice

Professional Assistant, Subcommittee on Science, Technology, and Space

Chairman and Ranking Minority Member - Congressional Committees and Subcommittees

Senate Committee on Appropriations

Senate Subcommittee on VA-HUD-Independent Agencies

Senate Committee on Commerce, Science and Transportation

Senate Subcommittee on Science, Technology and Space

Senate Committee on Governmental Affairs

House Committee on Appropriations

House Subcommittee on VA-HUD-Independent Agencies

House Committee on Government Reform and Oversight

House Committee on Science

House Subcommittee on Space and Aeronautics

Congressional Members

The Honorable Pete Sessions, U.S. House of Representatives
Appendix D

D-1 A-HA-97-061

MAJOR CONTRIBUTORS TO THIS REPORT

Ames Research Center David L. Gandrud, Program Director

Ernest L. Willard, Auditor-in-Charge

Johnson Space Center Bessie J. Cox, Auditor

Ellis D. Lee, Auditor

Langley Research Center James H. Pearce, Auditor

OIG Headquarters Elizabeth M. Richardson, Associate Attorney-Advisor
D-2 A-HA-97-061

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