Report to Congressional Requesters

United States General Accounting Office 

GAO 

February 2004 COMPETITIVE 

SOURCING 

Greater Emphasis 

Needed on Increasing 

Efficiency and 

Improving 

Performance 

GAO-04-367 
www.gao.gov/cgi-bin/getrpt?GAO-04-367.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact William Woods 

at (202) 512-8214 or woodsw@gao.gov. 

Highlights of GAO-04-367, a report to the 

Honorable Robert C. Byrd, the Honorable 

Susan M. Collins, the Honorable George 

V. Voinovich, and the Honorable Henry A. 

Waxman 

February 2004

COMPETITIVE SOURCING 

Greater Emphasis Needed on Increasing 

Efficiency and Improving Performance 

Since the President announced competitive sourcing as a governmentwide 

initiative, the six civilian agencies GAO reviewed created a basic 

infrastructure for their competitive sourcing programs, including 

establishing offices, appointing officials, hiring staff and consultants, issuing 

guidance, and conducting training. With infrastructures in place and 

leadership involvement, each agency has developed competitive sourcing 

plans and conducted some competitions. The Department of Defense (DOD) 

has had an extensive competitive sourcing program since the mid-1990s. 

Interagency forums for sharing competitive sourcing information also have 

been established. 

While such activities are underway, each agency GAO reviewed, including 

DOD, cited several significant challenges in achieving its competitive 

sourcing goals. Key among these is maintaining workforce inventories that 

distinguish inherently governmental positions from commercial positions—a 

prerequisite to identifying potential positions to compete. Agencies also have 

been challenged to develop competitive sourcing approaches that would 

improve efficiency, in part because agencies have focused more on following 

OMB guidance on the number of positions to compete—not on achieving 

savings and improving performance. Ensuring adequate personnel with 

the skills needed to run a competitive sourcing program also challenged 

agencies. Many civilian department-level offices have only one or two fulltime staff to interpret new laws, implement new OMB guidance, maintain 

inventories of competable positions and activities, and oversee agency 

competitions. The Federal Acquisition Council is currently identifying 

agency staffing needs to address this challenge. Finally, some of the civilian 

agencies we reviewed reported funding challenges in implementing their 

competitive sourcing programs. OMB told agencies to include a line item for 

competitive sourcing activities in their fiscal year 2005 budget requests. 

Several agencies integrated their strategic, human capital, and competitive 

sourcing plans—an approach encouraged by the Commercial Activities 

Panel, which was convened to conduct a congressionally mandated study of 

the competitive sourcing process. For example, the Internal Revenue Service 

(IRS) used business case analyses to assess the economic benefits of various 

sourcing alternatives. An IRS official said this approach required minimal 

investment to determine an activity’s suitability for competitive sourcing. 

The National Institutes of Health, the Army, and the Department of 

Education also took a strategic approach to competitive sourcing. 

OMB’s task in balancing the need for transparency and consistency with the 

flexibility agencies need is not an easy one. While OMB is addressing funding 

and human capital challenges, it needs to do more to assure that the 

agencies’ inventories of commercial positions and goal-setting processes are 

more strategic and helpful to agencies in achieving savings and improving 

performance. 

In August 2001, the administration 

announced competitive sourcing 

as one of five initiatives in the 

President’s Management Agenda. 

Under competitive sourcing, 

federal agencies open their 

commercial activities to 

competition among public and 

private sector sources. While 

competitive sourcing is expected to 

encourage innovation and improve 

efficiency and performance, it 

represents a major management 

change for most agencies. 

This report describes the progress 

selected agencies have made in 

establishing a competitive sourcing 

program, identifies major 

challenges these agencies are 

facing, and discusses strategies 

they are using to select activities 

for competition. 

GAO is making three 

recommendations to the Office of 

Management and Budget (OMB) to 

help agencies (1) ensure greater 

consistency in classifying positions 

as either inherently governmental 

or commercial, (2) identify 

functional areas for competition, 

and (3) focus competition plans 

more on desired outcomes. 

OMB concurred with our 

recommendations, but disagreed 

with the conclusion that its recent 

guidance emphasizes process more 

than results. The seven agencies 

GAO reviewed either agreed with 

the report, had no comments, or 

offered only technical revisions. 
Page i GAO-04-367 Competitive Sourcing 

Letter 1

Results in Brief 2

Background 4

Agencies Have Established a Foundation for Their Competitive 

Sourcing Programs 7

Many Agencies Face Challenges in Implementing 

Competitive Sourcing 11

Some Agencies Used Strategic Approach to Identify and Prioritize 

Activities for Competition 20

Conclusion 23

Recommendations for Executive Action 23

Agency Comments and Our Evaluation 24

Appendix I Scope and Methodology 26 

Appendix II Guiding Principles for Competitive Sourcing 28 

Appendix III 2002 FAIR Act Inventories 29 

Appendix IV Competitive Sourcing Studies Initiated and 

Completed in 2002 and 2003 30 

Appendix V Disposition of Competable Commercial FTEs 

Where Studies Completed 31 

Appendix VI Evolution of OMB’s FAIR Act Guidance 35 

Appendix VII OMB Scorecard Criteria for the Competitive 

Sourcing Initiative 36 

Contents 
Page ii GAO-04-367 Competitive Sourcing 

Appendix VIII Strategic Approaches to Competitive Sourcing 37 

Appendix IX Comments from the Department of Health & 

Human Services 44 

Appendix X Comments from the Department of the Interior 45 

Appendix XI Comments from the Department of Veterans Affairs 47 

Tables 

Table 1: Overview of Civilian Agency Infrastructure Development 8

Table 2: Timeline of Selected Competitive Sourcing 

Initiative Events 14

Table 3: Disposition of 2002 Competable Commercial FTEs Where 

Studies Have Been Completed 31

Table 4: Disposition of 2003 Competable Commercial FTEs Where 

Studies Have Been Completed 33

Figure 

Figure 1: Major Competitive Sourcing Phases and Related Tasks 17
Page iii GAO-04-367 Competitive Sourcing 

Abbreviations 

FAIR Federal Activities Inventory Reform Act of 1998 

FTE full-time equivalent 

HHS Health and Human Services 

MEO most efficient organization 

OMB Office of Management and Budget 

VA Veterans Affairs 

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further 

permission from GAO. However, because this work may contain copyrighted images or 

other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately. 
Page 1 GAO-04-367 Competitive Sourcing 

February 27, 2004 

The Honorable Robert C. Byrd 

Ranking Minority Member 

Committee on Appropriations 

United States Senate 

The Honorable Susan M. Collins 

Chairman 

Committee on Governmental Affairs 

United States Senate 

The Honorable George V. Voinovich 

Chairman 

Subcommittee on Oversight of Government Management, 

 the Federal Workforce and the District of Columbia 

Committee on Governmental Affairs 

United States Senate 

The Honorable Henry A. Waxman 

Ranking Minority Member 

Committee on Government Reform 

House of Representatives 

The environment in which the federal government currently operates—

with new security threats, demographic changes, rapidly evolving 

technologies, increased pressure for results, and growing fiscal 

imbalances—demands that agencies engage in a fundamental review of 

how they accomplish their missions. Agencies increasingly rely on a 

range of technical and support services to meet mission objectives. It is 

important for agencies to decide how best to acquire and deliver such 

services, including whether to obtain services in-house or through private 

sources. One way to inform this decision is to use competitive sourcing, 

a strategy under which agencies open the government’s commercial 

activities to competition among public and private sector sources. 

United States General Accounting Office

Washington, DC 20548 
Page 2 GAO-04-367 Competitive Sourcing 

In 2001, the administration identified competitive sourcing as one of five 

governmentwide initiatives in the President’s Management Agenda.1

 This 

initiative seeks to expand competition between the public and private 

sectors to encourage innovation, increase efficiency, and to improve 

performance. But the use of public-private competition represents a major 

management change for agencies and has raised concerns about the 

fairness of the process and the potential impact on federal jobs. Therefore, 

after discussions with your staff, we agreed to (1) describe the progress 

agencies have made in establishing a competitive sourcing program in 

response to the President’s Management Agenda, (2) identify major 

challenges agencies are facing, and (3) identify strategies they are using to 

select activities for competition based on mission-related needs. 

Our work focused on the initial implementation efforts of the following 

seven departments and the agencies within those departments that have 

the most developed competitive sourcing programs: Agriculture; Defense; 

Education; Health and Human Services (HHS); the Interior; the Treasury; 

and Veterans Affairs (VA). Together, these departments account for about 

84 percent of the commercial positions among the 26 executive branch 

agencies implementing the President’s Management Agenda. For more on 

our scope and methodology, see appendix I. 

Each of the agencies we reviewed has laid the foundation for its 

competitive sourcing program. The Department of Defense (DOD) has had 

an extensive competitive sourcing program in place since the mid-1990s, 

and all of the civilian agencies we reviewed have created a basic 

infrastructure for their competitive sourcing programs since the President 

announced competitive sourcing as a governmentwide initiative in August 

2001. In creating these infrastructures, agencies have established offices, 

appointed officials, hired staff and consulting contractors, issued 

guidance, and conducted training. With infrastructures in place and 

leadership involvement, each agency—defense and civilian—has 

developed competitive sourcing plans and conducted some competitions. 

At least two interagency forums for sharing competitive sourcing 

information also have been established. 

 1

 The other four initiatives are strategic management of human capital, improved financial 

performance, expanded electronic government, and budget and performance integration. 

Results in Brief 
Page 3 GAO-04-367 Competitive Sourcing 

Although agencies have made progress, they cited several challenges in 

implementing their competitive sourcing programs. Key among these 

challenges is developing workforce inventories that identify commercial 

and inherently governmental full-time equivalent (FTE) positions.2

Agencies reported difficulty in classifying positions as inherently 

governmental or commercial and in applying guidance to categorize 

activities, making it challenging for agencies to identify potential 

candidates for competitions. While recent Office of Management and 

Budget (OMB) guidance has stressed that agencies should tailor their 

plans to meet mission needs, the emphasis in the guidance is still more 

on process than results. Agencies have focused on meeting targets to 

announce and complete competitions and have not assessed broader 

issues, such as weighing potential improvements against the costs and 

risks associated with performing the competitions. 

Agencies also have been challenged to ensure they have adequate 

personnel with the skills needed to run a competitive sourcing program. 

Although DOD has a well-established management structure, many civilian 

department-level offices have only one or two full-time staff members to 

interpret new laws, implement new guidance issued by OMB, maintain 

inventories of competable positions and activities, and oversee agency 

competitions. According to a cognizant Army official, implementation of 

OMB’s revised guidance for competitions will require approximately 100 to 

150 additional personnel in the Army alone, including attorneys, human 

capital specialists, and contracting officials. Some of the civilian agencies 

we reviewed also reported funding challenges associated with 

implementing their competitive sourcing programs. 

Despite these challenges, several agencies have developed strategic and 

transparent competitive sourcing approaches by integrating their strategic 

and human capital plans with their competitive sourcing plans. The 

Commercial Activities Panel, which was convened to conduct a 

congressionally mandated study of the government’s competitive sourcing 

process, supported use of this approach. Through broader functional 

assessments and comprehensive analyses that include factors such as 

potential savings, risks, current level of efficiency, market conditions, and 

current and projected workforce profiles, these agencies are identifying 

viable activities for competition. 

 2

 Full-time equivalent (FTE) is a measure of federal civilian employment. One FTE is equal 

to 1 work-year of 2,080 hours. 
Page 4 GAO-04-367 Competitive Sourcing 

We are making several recommendations to OMB to help agencies 

(1) ensure greater consistency in classifying positions as inherently 

governmental or commercial, (2) make more strategic and transparent 

sourcing decisions by identifying broader functional areas for competition, 

and (3) focus on efficiency and performance outcomes. We provided a 

draft of this report to OMB and the seven agencies for their review and 

comment. OMB concurred with our three recommendations, but disagreed 

with our conclusion that its recent guidance emphasizes process more 

than results. The Department of Agriculture and the Department of the 

Interior concurred with the report. The Department of the Treasury said 

the recommendations were timely and the remaining agencies either had 

no comments or offered only technical revisions. 

Since 1955, the executive branch has encouraged federal agencies to 

obtain commercially available goods and services from the private sector 

when the agency determines that it is cost-effective. In 1966, OMB 

formalized this policy in its Circular A-76 and, in 1979, issued a handbook 

with procedures for determining whether commercial activities should be 

performed in-house, by another federal agency, or by the private sector.3

Administrative and legislative constraints from the late 1980s through 1995 

resulted in a lull in awarding contracts under A-76 competitions. In 1995, 

when congressional and administration initiatives placed greater emphasis 

on public-private competitions to achieve economies and efficiency of 

operations, DOD gave competitive sourcing renewed emphasis. In our past 

work, we have found that DOD achieved savings through competitive 

sourcing, although it is difficult to estimate precisely the amount of 

savings.4

 By including competitive sourcing as one of five governmentwide 

initiatives announced in August 2001, the administration directed agencies 

to implement competitive sourcing programs to achieve increased savings 

and to improve performance. The administration continues to advocate 

the use of competitive sourcing, which is addressed in the President’s 

budget for fiscal year 2005. 

 3

 OMB has updated this circular and handbook several times since 1979. In May 2003, OMB 

released a revised Circular A-76, which supersedes previous versions of the handbook. 

Office of Management and Budget, Circular A-76 (Washington, D.C.: May 29, 2003). 

4

 General Accounting Office, Results of A-76 Studies Over the Past 5 Years, 

GAO-01-20 (Washington, D.C.: Dec. 7, 2000). 

Background 
Page 5 GAO-04-367 Competitive Sourcing 

Competitive sourcing has met with considerable controversy in both the 

public and private sectors. Each sector expressed concerned that, in 

general, the process was unfair and did not provide for holding the winner 

of the competition accountable for performance. In response to this 

controversy, in 2000, the Congress mandated a study of the government’s 

competitive sourcing process under A-765

—a study conducted by the 

Commercial Activities Panel, chaired by the Comptroller General of the 

United States. The panel included representatives from OMB, DOD, the 

Office of Personnel Management, private industry, academia, a trade 

association, and unions. In April 2002, the panel released its report6

 with 

recommendations that included 10 sourcing principles to provide a better 

foundation for competitive sourcing decisions in the federal government 

(see app. II). In particular, the panel stressed the importance of linking 

sourcing policy with agency missions, promoting sourcing decisions that 

provide value to the taxpayer regardless of the service provider selected, 

and ensuring greater accountability for performance. The panel also 

addressed an area of particular importance for all affected partieshow 

the government’s sourcing policies are implemented. In this regard, one of 

the sourcing principles was that the government should avoid arbitrary 

numerical or full-time equivalent (FTE) goals. This principle is based on 

the concept that success in government programs should be measured in 

terms of providing value to the taxpayer, not the size of the in-house or 

contractor workforce. 

The panel, in one of its 10 sourcing principles, also endorsed creating 

incentives and processes to foster high-performing, efficient, and effective 

organizations and continuous improvement throughout the federal 

government.7

 On November 6, 2003, the Comptroller General hosted a 

forum to discuss what it means for a federal agency to be high-performing 

in an environment where results and outcomes are increasingly 

accomplished through partnerships that cut across different levels of 

government and different sectors of the economy. There was broad 

 5

 Section 832, Floyd D. Spence National Defense Authorization Act for Fiscal Year 2001, 

P.L. 106-398 (Oct. 30, 2000). 

6

 Commercial Activities Panel, Final Report: Improving the Sourcing Decisions of the 

Government (Washington, D.C.: Apr. 30, 2002). 

7

 National Defense Authorization Act for Fiscal Year 2004, Section 337, Public Law 108-136 

(Nov. 24, 2003) directs the Secretary of Defense to implement a pilot program under which 

DOD organizations are provided incentives to re-engineer their operations in order to 

become high-performing organizations. 
Page 6 GAO-04-367 Competitive Sourcing 

agreement among participants at the forum on the key characteristics and 

capabilities of high-performing organizations, which are organized around 

four broad themes. These four themes are (1) clear, well-articulated, and 

compelling missions; (2) strategic use of partnerships; (3) a focus on the 

needs of clients and customers; and (4) strategic management of people.8

The competitive sourcing process starts with agencies developing 

inventories of their commercial positions in accordance with the Federal 

Activities Inventory Reform (FAIR) Act of 1998.9

 Additionally, OMB 

requires agencies to identify activities that are inherently governmental, as 

well as commercial positions that are exempt from competition because of 

legislative prohibitions, agency restructuring, or other reasons.10 Only 

activities classified as “commercial” and not otherwise exempt are 

potentially competable. In the 2002 FAIR Act inventories,11 the proportion 

of competable commercial, non-competable commercial, and inherently 

governmental FTE positions varied widely among the agencies we 

reviewed. Governmentwide, competable commercial positions in 2002 

accounted for approximately 26 percent of the total federal workforce. 

Except for the Education Department’s 62 percent, the percentage of 

competable commercial positions in each of our selected agencies was 

less than 50 percent of the agency’s total FTEs (see app. III). 

After agencies identify competable commercial positions under the FAIR 

Act and OMB guidance, they select from these positions which ones to 

compete. Resulting public-private competitions are guided by OMB 

Circular A-76. In May 2003, OMB released a revised Circular A-76. Under 

this revised circular, agencies must use a standard competition process for 

functions with more than 65 FTEs. As part of the standard process, 

agencies identify the work to be performed in a performance work 

 8

 General Accounting Office, High-Performing Organizations Forum: Metrics, Means, 

and Mechanisms for Achieving High-Performance in the 21st Century Public 

Management Environment, GAO-04-343SP (Washington, D.C.: Feb. 13, 2004). 

9

 P.L. 105-270 (Oct. 19, 1998). 

10 An “inherently governmental” activity is an activity that is so intimately related to the 

public interest as to mandate performance by government personnel. A “commercial” 

activity is a recurring service that could be performed by the private sector and is 

resourced, performed, and controlled by the agency through performance by government 

personnel, a contract, or a fee-for-service agreement. 

11 The 2002 FAIR Act inventories are the most currently available data for most federal 

agencies in our review. 
Page 7 GAO-04-367 Competitive Sourcing 

statement, establish a team to prepare an in-house proposal to perform the 

work based on a “most efficient organization” (MEO),12 and evaluate that 

proposal along with those submitted by private companies and/or public 

reimbursable sources. For activities with 65 or fewer FTEs, agencies may 

use either a streamlined or standard competition. Streamlined 

competitions require fewer steps than the standard process and enable 

agencies to complete a cost comparison more quickly. 

When the President announced competitive sourcing as one of five 

governmentwide management agenda items in August 2001, few agencies 

other than DOD had an established competitive sourcing infrastructure—a 

key component of OMB’s strategy for institutionalizing competitive 

sourcing. Few of the other departments and agencies that we reviewed 

had competitive sourcing experience. Since that time, all six civilian 

agencies we reviewed have established a basic competitive sourcing 

program infrastructure. Leadership involvement and an established 

infrastructure have enabled each agency that we reviewed to develop 

competitive sourcing plans and complete a number of initial competitions. 

Interagency forums for sharing information also have been established. 

Although they lack DOD’s A-76 experience, the civilian agencies we 

reviewed have made significant progress toward establishing a 

competitive sourcing infrastructure with such actions as establishing an 

office, hiring staff, obtaining contractor support, creating policies and 

procedures, and providing training to agency staff involved in the 

competitive sourcing process. Table 1 provides an overview of civilian 

agency infrastructure development. 

 12 OMB defines a most efficient organization (MEO) as the staffing plan of the agency, 

developed to represent the agency’s most efficient and cost-effective organization. 

Agencies Have 

Established a 

Foundation for Their 

Competitive Sourcing 

Programs 

All Agencies We 

Reviewed Have Made 

Progress in Developing 

Their Infrastructures 
Page 8 GAO-04-367 Competitive Sourcing 

Table 1: Overview of Civilian Agency Infrastructure Development 

Then-year dollars 

Structure and staffing Contract support 

Policies, procedures, and 

guidance Training and other resources 

Agriculture 

• Established competitive 

sourcing office under the 

Chief Financial Officer 

• Two full-time staff 

• $1.16 million in fiscal year 

2002 

• $8.68 million in fiscal year 

2003 

• Departmental guidebook and 

brochures 

• Departmentwide training 

• Web site 

Education 

• Directed by Chief Financial 

Officer as part of One-ED 

approach 

• Nine employee teams 

assessed functions and 

processes 

• $1.87 million to prepare 

business cases and 

$456,000 for training and 

support in fiscal years 2002 

and 2003 

• Primers on reengineering and 

competitive sourcing 

• 1-day training 

• Consultants help teams 

working on studies 

Health and Human Services 

• Directed by the Office of the 

Assistant Secretary for 

Administration and 

Management 

• Three full-time staff 

• $7.6 million obligated for 

competitive sourcing program 

support and studies in fiscal 

years 2002, 2003, and 2004 

• Fact sheet on competitive 

sourcing 

• Policy letters issued and 

comprehensive guidebook 

developed 

• Department holds monthly 

outreach meetings with 

operating division managers 

• “All-hands” meetings to 

discuss competitive sourcing 

and A-76 

• Web sites 

Interior 

• Directed by Center for 

Competitive Sourcing 

Excellence under the Deputy 

Assistant Secretary for 

Performance and 

Management 

• Two full-time staff 

• As of September 26, 2003, 

$150,000 for support of 

Center for Competitive 

Sourcing Excellence, 

including training, FAIR Act 

inventory and database 

• Guidance on competitive 

sourcing and labormanagement resolution on 

competitive sourcing 

• Leadership sent memoranda 

on its commitment to 

competitive sourcing 

• Departmentwide competitive 

sourcing workshop 

• Governmentwide competitive 

sourcing meetings and 

conferences 

• Web site with frequently 

asked questions and 

guidance 

Treasury 

• Directed by the Office of the 

Deputy Assistant Secretary 

for Management and Budget 

• One full-time staff 

• $1.9 million for training on 

regulations, information 

technology needs, and other 

support services as of June 

2002 

• Office of the Procurement 

Executive provided policy 

guidance. 

• Departmentwide conference 

• Seminars and courses 

• Encouraged attendance at 

OPM and OMB training on 

competitive sourcing 

• Sponsors the Treasury 

Acquisition Institute 
Page 9 GAO-04-367 Competitive Sourcing 

Veterans Affairs 

• Directed by Office of 

Competitive Sourcing and 

Management Analysis 

Service under Office of 

Policy, Planning, and 

Preparedness 

• Two Full-Time Equivalent 

(plans to recruit at least one 

analyst if requisite funds are 

appropriated) 

• In fiscal year 2003, VA spent 

about $663,000 for support 

items such as communication 

strategies, a training module, 

and a Web-based 

competitive sourcing study 

tracking system 

• Departmental policy directive 

• Competitive sourcing 

handbook, communication 

plan, and human resource 

guidance pamphlet 

• Training material developed, 

but training not provided 

because VA’s General 

Counsel determined that use 

of funds was prohibited by 38 

U.S.C. 8110 (a)(5). 

• Evaluation of pilot training 

project for practitioners and 

new hires 

Source: Agency information. 

In addition, DOD, which has the most competitive sourcing experience in 

the federal government, has issued numerous policies, procedures, and 

guidance for implementing OMB’s Circular A-76. DOD also has 

established a management structure to oversee the department’s A-76 

activities.13 In carrying out its competitive sourcing program, DOD uses 

both in-house personnel and contractors to provide assistance within the 

department in developing performance work statements and MEOs. In 

response to our previous recommendation, DOD also has established a 

Web site14 to share competitive sourcing knowledge and experience. This 

Web site is available governmentwide.15 The site contains resources such 

as A-76 policy and procedures, best practices, sample documents, bid 

protests, and links to other sites with information on Circular A-76. 

The civilian agencies we reviewed completed their initial rounds of 

competitive sourcing studies in fiscal years 2002 and 2003 (see app IV). 

Based on data given to us by five of the six civilian departments,16 602 

studies were completed in fiscal year 2003. Of these 602 studies, 363 were 

streamlined competitions and 130 were direct conversions to performance 

 13 The Directorate of Competitive Sourcing and Privatization, Office of the Deputy Under 

Secretary of Defense (Installations and Environment) has overall responsibility for 

developing these major departmental documents. The Deputy Under Secretary of Defense 

(Installations and Environment) is the designated Competitive Sourcing Official 

responsible for implementing OMB Circular A-76 within the department. 

14 See http://emissary.acq.osd.mil/inst/share.nsf. 

15 General Accounting Office, DOD Competitive Sourcing: Lessons Learned System Could 

Enhance A-76 Study Process, GAO/NSIAD-99-152 (Washington, D.C.: July 21, 1999). 

16 The Department of Interior provided us only aggregated data for 2002 and 2003. As a 

result, we were unable to segregate the data for these 2 years for inclusion in appendix V. 

Studies Completed While 

Infrastructures Were Put 

into Place 
Page 10 GAO-04-367 Competitive Sourcing 

by a contractor.17 In addition, DOD completed 126 studies, including 54 

direct conversions and 7 streamlined competitions.18 Collectively, these 

studies involved over 17,000 FTEs, with almost 57 percent of the FTEs 

studied by DOD and the remaining 43 percent studied by the civilian 

agencies. According to agency data, in-house teams won many of the 

competitions, retaining almost 76 percent of the FTEs covered by the 

studies. (See app. V for details on the outcome of these studies.) While 

agencies have been able to complete these studies while establishing their 

infrastructures, it is too early to assess the impact of the studies in terms 

of efficiencies or performance improvements achieved. 

A number of initiatives have been undertaken to share competitive 

sourcing information across agencies. In addition to DOD’s Web site, 

at least two interagency forums have been established to facilitate 

interagency information sharing. For example, staff working in 

competitive sourcing offices in various agencies and subagencies 

meet monthly at the civilian agencies’ competitive sourcing working 

group to exchange ideas and information. The Federal Acquisition 

Council—composed of senior acquisition officials in the Executive 

Branch—also promotes acquisition-related aspects of the President’s 

Management Agenda by providing a forum for monitoring and improving 

the federal acquisition system. The Council has published a guide on 

frequently asked questions and a manager’s guide to competitive sourcing. 

In addition, OMB is developing a competitive sourcing data tracking 

system to provide consistent information and to facilitate the sharing of 

competitive sourcing information by allowing agencies to identify planned, 

ongoing, and completed competitions across the government. According 

to OMB officials, future refinements to the system may allow agencies to 

track and manage their own sourcing activities—a problem for most 

agencies—as well as provide OMB with consistent information. OMB plans 

to use the system to monitor agency implementation of the competitive 

sourcing initiative and generate more consistent and accurate statistics, 

including costs and related savings, for reporting to the Congress. 

 17 While direct conversions were eliminated under the revised circular, OMB granted 

agencies permission to complete conversions initiated under the previous circular. 

18 These data cover studies completed through September 30, 2003. DOD studies may have 

started prior to 2002. 

Efforts to Share 

Competitive Sourcing 

Information across 

Agencies 
Page 11 GAO-04-367 Competitive Sourcing 

Despite their progress in establishing a competitive sourcing infrastructure 

and conducting initial competitions in varying degrees, the agencies we 

reviewed continue to face significant challenges in four areas. First, 

agencies have been challenged to develop and use FAIR Act inventory data 

to identify and group positions for competition. Second, agencies are 

operating in a continually changing environment and under OMB guidance 

focused more on meeting milestones rather than achieving desired 

outcomes. Third, agencies have reported that they lack the staff needed to 

carry out the numerous additional tasks required under the new Circular 

A-76. Finally, agencies have reported that they lack the funding needed to 

cover the substantial costs associated with implementing their programs. 

The development of accurate FAIR Act inventories is the foundation for 

determining which functions agencies compete. Agencies reported 

difficulty in classifying positions as inherently governmental or 

commercial and in applying OMB-assigned codes to categorize activities, 

making it challenging for them to identify potential candidates for 

competitions. This has been a persistent problem as we have reported in 

the past.19 Despite changes made to OMB’s guidance for constructing FAIR 

Act inventories, the guidance has not alleviated the difficulties some 

agencies have had in developing and maintaining useful inventory data. 

Under the FAIR Act and OMB guidance, agencies annually review and 

classify positions as either inherently governmental or commercial. This 

classification process is done using an OMB-provided coding schedule 

containing nearly 700 functional codes in 23 major categories, such as 

health services, grants management, and installation services. Civilian 

agencies are having difficulty applying these functional codes, which were 

developed by DOD. While intended to promote consistency, the codes are 

not always applicable to civilian agencies, requiring some to create 

supplemental codes to match their missions. 

 19 Our prior work on this issue includes General Accounting Office, Competitive 

Contracting: The Understandability of FAIR Act Inventories Was Limited, 

GAO/GGD-00-68 (Washington, D.C.: Apr. 14, 2000); General Accounting Office, 

DOD Competitive Sourcing: More Consistency Needed in Identifying Commercial 

Activities, GAO/NSIAD-00-198 (Washington, D.C.: Aug. 11, 2000); and General 

Accounting Office, Competitive Sourcing: Challenges in Expanding A-76 

Governmentwide, GAO-02-498T (Washington, D.C.: Mar. 6, 2002). 

Many Agencies Face 

Challenges in 

Implementing 

Competitive Sourcing 

Agencies Experience 

Difficulties in Developing 

Their FAIR Act Inventories 

Classifying Positions as either 

Inherently Governmental or 

Commercial Is a Complicated 

Process 
Page 12 GAO-04-367 Competitive Sourcing 

As we have previously reported, selecting and grouping functions and 

positions to compete can be difficult.20 For example, the Army has 

determined that many functions, such as making eyeglasses for troops 

located in a war zone, are core to its mission even though this function 

may not be classified as inherently governmental when performed in the 

United States. Also, some functions may involve both “commercial” and 

“inherently governmental” tasks. While agencies have had difficulty 

classifying mixed positions, OMB’s guidance allows agencies to take a 

variety of approaches to address this difficulty. For example, according to 

agency officials, the Internal Revenue Service classifies mixed positions on 

a case-by-case basis considering how critical the position is to its mission, 

not just the percentage of tasks related to that position that may be 

inherently governmental or commercial. 

The process also can be resource intensive. For example, according to 

agency officials, to determine whether positions should be classified as 

inherently governmental or commercial, the National Park Service—the 

largest bureau in the Department of the Interior—used an employee team 

of approximately 30 individuals that represented all occupational areas, as 

well as its human resources and acquisition staff. The team used the 

analysis, in conjunction with payroll system data showing employee time 

usage, to determine the number of commercial and inherently 

governmental FTEs. 

Accuracy of inventories depends on agency classification of positions, 

based on OMB guidance, as well as consistent OMB review of inventories. 

OMB has updated its FAIR Act inventory guidance annually to address 

issues identified by agencies (see app. VI) and it consults with agencies to 

resolve issues identified. For example, in April 2001, OMB created a new 

requirement to report civilian positions designated as inherently 

governmental. OMB’s guidance gives agencies considerable latitude in 

preparing their inventories to determine if an activity is commercial. 

OMB officials told us they have provided training on Circular A-76

procedures to its budget examiners, who act as liaisons between OMB and 

each participating agency. The examiners address questions and provide 

guidance on an agency-by-agency basis. OMB does not have formal written 

 20 General Accounting Office, Defense Management: DOD Faces Challenges Implementing 

Its Core Competency Approach and A-76 Competitions, GAO-03-818 (Washington, D.C.: 

July 15, 2003). 

Agencies Concerned about 

Consistency and Timeliness of 

OMB Guidance 
Page 13 GAO-04-367 Competitive Sourcing 

guidance for reviewing FAIR Act data. Examiners provide verbal guidance 

on an on-going basis to agencies and discuss concerns agencies have with 

the FAIR Act and the related competitive sourcing program. Once agencies 

submit their inventories, OMB officials review the inventories looking for 

“red flags”—that is, deviations from the norm, such as one agency listing a 

position as inherently governmental while others classify the same 

position as commercial—and then consult with agency officials as 

necessary on these deviations. However, a number of competitive sourcing 

officials at two interagency forums expressed concern about the process. 

For example, one official told us that an OMB program examiner said 

there were too many function codes in one agency’s inventory. Then, after 

the agency resubmitted its inventory, the same examiner said the 

inventory had too few codes. An official from another agency told us that 

its OMB examiners did not appear familiar with OMB’s own guidance for 

applying the function codes. Given the lack of formal written OMB 

guidance on reviewing the FAIR Act inventory data, there is little 

assurance that OMB’s review of inventories will be consistent across 

agencies. 

According to a number of agency officials, implementation of OMB 

guidance is further complicated due to time constraints. OMB inventory 

guidance is typically issued in the spring, and agency inventories are due 

to OMB by June 30. Officials contend that more time is needed to properly 

implement the guidance. In response, OMB officials pointed out that the 

basic guidance for developing inventories is set forth in Circular A-76 and 

agencies can undertake significant steps to prepare their inventories based 

on the Circular’s guidance. 

The ultimate goal of the competitive sourcing initiative is to improve 

government performance and efficiency. To date, however, OMB’s 

competitive sourcing guidance to federal agencies has focused more on 

targets and milestones for conducting competitions than on the outcomes 

the competitions are designed to produce: savings, innovation, and 

performance improvements. Although recent OMB guidance has stressed 

the need for agencies to be more strategic, the emphasis in the guidance is 

still more on process than results. The President’s Management Agenda 

established expected results for the competitive sourcing initiative to 

encourage innovation, increase efficiency, and improve performance of 

agencies. The Commercial Activities Panel similarly stated that the 

success of government programs, such as competitive sourcing, should be 

measured by the results achieved in terms of providing value to 

the taxpayer. 

OMB Guidance Has 

Focused More on Meeting 

Targets and Milestones 

Than on Improving 

Outcomes 
Page 14 GAO-04-367 Competitive Sourcing 

Since the inception of the competitive sourcing initiative in 2001, agencies 

have faced continual changes to OMB’s targets and guidance for 

conducting public-private competitions.21 OMB initially set a target for 

agencies to compete or directly convert at least 5 percent of their full-time 

equivalent commercial positions by the end of fiscal year 2002, and an 

additional 10 percent by the end of fiscal year 2003. They also set a 

long-term target for agencies to compete at least 50 percent of commercial 

FTEs. OMB later moved to agency-specific plans that reflect each agency’s 

own mission and workforce mix. OMB also developed a traffic light 

system (red, yellow, green) for evaluating the progress agencies are 

making in implementing these plans. Table 2 shows the chronology of 

these changes. 

Table 2: Timeline of Selected Competitive Sourcing Initiative Events 

March 2001 August 2001 May 2003 July 2003 December 2003 

OMB set 5-percent FTE 

target for fiscal year 

2002 and a long-term 

goal of 50 percent 

OMB set an additional 

10-percent target for 

2003 

OMB released revised 

Circular A-76

OMB replaced 

governmentwide goals with 

agency-specific plans 

OMB issued guidance on 

the development of 

“green” competition plans

Source: OMB documents. 

As shown in table 2, in December 2003, OMB released a memorandum 

with guidance on developing competitive sourcing plans that would 

receive a “green” rating under its traffic light evaluation system (see 

app. VII). The guidance notes the need for a long-range vision, strategic 

action by agencies, and public-private competitions tailored to the 

 21 According to several agency officials, numerous pieces of legislation passed by Congress 

also have added to the complexity of implementing competitive sourcing. Before OMB 

repealed numerical FTE targets, the Congress, concerned with the arbitrary nature of such 

goals, passed legislation in January 2003 that applies to the Department of the Treasury, the 

U.S. Postal Service, and other entities, requiring competitive sourcing goals to be based on 

considered research and analysis. (Pub. L. 108-7 (Feb. 20, 2003) Division J, Section 647) 

Since OMB’s release of its revised circular, Congress has passed several laws that impose 

limitations and reporting requirements concerning implementation of the program, e.g., 

section 340 of the Department of the Interior and Related Agencies Appropriations Act for 

FY 2004 (Pub. L. 108-108 (Nov. 10, 2003)), section 8014 of the Department of Defense 

Appropriations Act for FY 2004 (Pub. L. 108-87 (Sept. 30, 2003)), and most recently, section 

647 of the Consolidated Appropriations for FY 2004 (Pub. L. 108-199 (Jan. 23, 2004)). 

Generally, these provisions require affected agencies to develop a most efficient and cost 

effective organization for activities or functions performed by more than ten government 

employees. Additionally, conversion to contractor performance must be supported by a 

determination that savings will equal or exceed the lesser of 10 percent of government 

personnel costs or $10,000,000. 
Page 15 GAO-04-367 Competitive Sourcing 

agency’s unique mission and goals. The memorandum also advises 

agencies to include in their plans their general decision-making process 

for selecting activities to compete, identification of activities to be 

competed, potential constraints, and plans for handling activities suitable 

for competition that the agency does not intend to compete. 

Neither OMB’s initial FTE-based goals nor its revised competitive 

sourcing goals and traffic light evaluation system calls for agencies to 

assess how their plans for competitive sourcing could achieve the broader 

improvements envisioned by the President’s Management Agenda or the 

Commercial Activities Panel. In this regard, the Panel said that arbitrary 

competition goals should be avoided. In testimony before the Congress, 

the Comptroller General has stated that OMB’s initial competition targets 

were inappropriate. Similarly, OMB’s revised goals continue to emphasize 

process milestones such as competitions completed more than enhancing 

value through performance improvements and efficiencies. For example, 

for an agency to receive a “green” rating on OMB’s scorecard, it must have 

developed an OMB-approved green competition plan, have publicly 

announced standard competitions in accordance with the schedule in its 

green plan, and have completed 95 percent of streamlined competitions in 

90 days. The emphasis throughout OMB’s most recent guidance is similarly 

more on process than on results. 

Agencies have used a range of criteria to select positions for competition. 

For most agencies, selection criteria have been based on the size and 

composition of the workforce, such as attrition rates, skill needs, and 

difficulty in hiring, as well as the agency’s capability to manage the 

competitions. Because these agencies have focused on meeting targets to 

announce and complete competitions, they have not assessed broader 

issues, such as weighing potential improvements against the costs and 

risks associated with performing the competitions. Some agencies, 

however, used a broader set of factors such as the function’s contribution 

to the mission, risks associated with the function being contracted out, 

and the potential return on investment. (See app. VIII for further 

discussion on the criteria these agencies have used to select positions 

for competition.) 

Officials in most of the agencies we reviewed expressed concern that they 

lack sufficient staff to perform the additional tasks included in the recently 

revised Circular A-76. To address this challenge, the Federal Acquisition 

Council is currently studying agency staffing and skill requirements. As 

we previously reported, agencies need to build and maintain capacity 

Human Capital Challenges 
Page 16 GAO-04-367 Competitive Sourcing 

to manage competitions, build the in-house MEO, and oversee the 

implementation of competition decisions22—skills that the Commercial 

Activities Panel recognized may require additional capacity. Adding to 

this complexity is agencies’ need to consider their competitive sourcing 

staffing capacity in the context of their strategic human capital 

management, an area we have identified as high-risk governmentwide 

and one of the five President’s Management Agenda governmentwide 

initiatives. For example, we recently reported 23 that DOD’s civilian human 

capital strategic plan does not address the respective roles of civilian 

and contractor personnel or how DOD plans to link its human capital 

initiatives with its sourcing plans, such as efforts to outsource non-core 

responsibilities. Finally, ensuring and maintaining employee morale is also 

a challenge for agencies. 

OMB’s revised Circular A-76 emphasizes the following key competitive 

sourcing phases: preparing an inventory of agency’s activities, preliminary 

planning, announcing and conducting the competition, conducting the 

competition using either a streamlined or standard competition process, 

implementing the performance decision, and conducting post-competition 

accountability activities (see fig. 1). Each phase involves a number 

of tasks. 

 22 General Accounting Office, Competitive Sourcing: Implementation Will Be Key to 

Success of New Circular A-76, GAO-03-943T (Washington, D.C: June 26, 2003). 

23 General Accounting Office, DOD Personnel: DOD Actions Needed to Strengthen Civilian 

Human Capital Strategic Planning and Integration with Military Personnel and 

Sourcing Decisions, GAO-03-475 (Washington, D.C: Mar. 28, 2003). 
Page 17 GAO-04-367 Competitive Sourcing 

Figure 1: Major Competitive Sourcing Phases and Related Tasks 

a

Agency inventory process is not done for each specific competition, but is required under the FAIR 

Act. 

b

Competitive Sourcing Officials appoint competition officials for each standard competition, and, as 

appropriate, may appoint competition officials for streamlined competitions. These include: Agency 

Tender Official, Contracting Officer, Performance Work Statement Team Leader, Human Resource 

Advisor, and Source Selection Authority. 

According to agency officials, many of these tasks require skills and 

human capital resources beyond those currently available. As we reported 

in December 2002, in the current environment, acquisition staff can no 

longer simply be purchasers or process managers. Rather, they need to be 

adept at analyzing business problems and in helping to develop acquisition 
Page 18 GAO-04-367 Competitive Sourcing 

strategies.24 For example, human capital, job, and market analysis skills are 

needed to inventory agency activities; benchmarking, and strategic and 

workforce planning skills are needed to conduct the preliminary planning; 

organizational analysis, contract management and cost analysis skills are 

needed to conduct competitions; and financial management and oversight 

skills are needed in the implementation and post-competition phase. Some 

skills, such as labor relations and information technology, are required 

throughout the competitive sourcing process. 

Despite these additional personnel requirements, many department-level 

offices in the civilian agencies we reviewed have only one or two full-time 

staff to complete FAIR Act inventories, interpret new laws and regulations, 

and oversee agency selection of positions to compete and the 

competitions. Officials at the six civilian agencies we reviewed stated it 

would be helpful to have additional personnel well versed in the use of 

Circular A-76. Even DOD, the leader among federal agencies in 

competitive sourcing and A-76, may face human capital challenges in 

running its competition program. According to a cognizant Army 

competitive sourcing official who has analyzed this issue, the Army’s 

implementation of the revised Circular A-76 will require approximately 

100 to 150 additional personnel, including attorneys, human resources 

specialists, and contracting officials. A final determination on Army 

staffing requirements and capabilities has not been made. 

As we reported in June 2003, building the capacity to conduct 

competitions as fairly, effectively, and efficiently as possible will likely be 

a challenge for all agencies, but particularly those that have not previously 

been invested in competitive sourcing.25 The Commercial Activities Panel 

also recognized in its recommendations that accurate cost comparisons, 

accountability, and fairness would require high-level commitment from 

leadership; adequate, sustained attention and resources; and technical and 

other assistance in structuring the MEO, as well as centralized teams of 

trained personnel to conduct the cost comparisons. According to officials 

of the Federal Acquisition Council, its competitive sourcing working group 

is now inventorying agency resources, skill sets and training needs 

required to address this challenge. 

 24 General Accounting Office, Acquisition Workforce: Status of Agency Effort to Address 

Future Needs, GAO-03-55 (Washington, D.C.: Dec. 18, 2002). 

25 GAO-03-943T. 
Page 19 GAO-04-367 Competitive Sourcing 

At the same time, agencies we reviewed are challenged to maintain 

employee morale. While most agencies have established vehicles for 

communicating their competitive sourcing goals internally—such as work 

groups and Web sites—officials from OMB report that it is difficult to 

convince employees that the current competitive sourcing program is 

designed to create value and improve efficiency, not to reduce the size 

of the federal workforce—as was the case with past competitive 

sourcing efforts. 

Funding their competitive sourcing programs also has been cited as a 

challenge for agencies. Officials in some of the agencies we reviewed cited 

limited funding as a barrier to implementing their competitive sourcing 

programs. Such program costs can be significant—at both the department 

and agency levels. For example, USDA reported spending a total of 

$36.3 million in fiscal years 2002 and 2003 on its competitive sourcing 

program. The Forest Service, part of USDA, accounted for $18.7 million of 

USDA’s $36.3 million on competitive sourcing. In fiscal year 2003, NIH 

reported spending approximately $3.5 million on contract support for 

two competitions involving more than 1,400 positions.26 The National Park 

Services’ financial needs prompted the agency to ask the Congress for 

permission to reprogram $1.1 million to help pay for its competitive 

sourcing program. Other agency officials stated that funding to finance 

their competitive sourcing initiatives was taken from other agency 

activities. As we have previously reported,27 DOD has also been challenged 

to ensure adequate funding for implementing competitive sourcing under 

Circular A-76. Finally, in August 2003, the Department of Veterans Affairs 

terminated all competitive sourcing studies as its General Counsel 

 26 OMB has developed guidance (which it plans to issue in March 2004) for agencies to use 

in calculating the incremental “out of pocket” costs of competitions. OMB advises that it 

has developed this guidance to create greater consistency and understanding in agency 

reporting and to assist agencies in responding to reporting required by section 647(b) of 

Division F of the Consolidated Appropriations, Fiscal Year 2004. According to OMB 

agencies that have previously released cost figures on recent competitions may need to 

make adjustments to conform to this guidance. 

27 General Accounting Office, Defense Management: DOD Faces Challenges Implementing 

Its Core Competency Approach and A-76 Competitions, GAO-03-318 (Washington, D.C.: 

July 15, 2003). 

Funding Challenges 
Page 20 GAO-04-367 Competitive Sourcing 

determined that the prohibition regarding funds from the three health care 

appropriation accounts under 38 U.S. C. 8110 (a)(5) is applicable.28

According to officials from most of the agencies we reviewed, they 

have funded their competitive sourcing programs using existing funds. 

However, some officials told us that OMB recently instructed their 

agencies to include a line item in their fiscal year 2005 budget request 

for their competitive sourcing programs. Doing so should provide 

agencies with a more stable fiscal environment in which to plan and 

conduct competitions. 

Several agencies have developed strategic and transparent competitive 

sourcing approaches by integrating their strategic and human capital plans 

with their competitive sourcing plans—an approach encouraged by the 

Commercial Activities Panel. These approaches have gone beyond the 

requirement to identify positions for competition as called for in OMB’s 

initial FTE targets. These approaches employ broader functional 

assessments of FAIR Act inventories and more comprehensive analysis of 

factors such as mission impact, potential savings, risks, current level of 

efficiency, market conditions, and current and projected workforce 

profiles. Not only do these agencies’ processes identify viable activities for 

competition, they also provide greater transparency in this critical part of 

the process. Some of these approaches are summarized below. Appendix 

VIII contains a more detailed discussion of these approaches. While it is 

too early to tell whether the various agencies’ approaches will be effective, 

a key to success will be learning from them and adapting them to each 

agency’s unique circumstances. 

OMB has recognized the challenges that agencies have faced in 

implementing their competitive sourcing programs and recently publicly 

endorsed agencies’ use of a more strategic approach to competitive 

 28 Title 38 U.S.C. 8110 (a)(5) states: “Notwithstanding any other provision of this title or of 

any other law, funds appropriated for the department under the appropriation accounts for 

medical care, medical and prosthetic research, and medical administration and 

miscellaneous operating expenses may not be used for, and no employee compensated 

from such funds may carry out any activity in connection with, the conduct of any study 

comparing the cost of the provision by private contractors with the cost of the provision by 

the department of commercial or industrial products and services for the Veterans Health 

Administration unless such funds have been specifically appropriated for that purpose.” 

Some Agencies Used 

Strategic Approach to 

Identify and Prioritize 

Activities for 

Competition 
Page 21 GAO-04-367 Competitive Sourcing 

sourcing.29 For example, OMB supported the innovative approaches some 

agencies have taken to ensure sound planning and effective use of 

public-private competitions. OMB further stated that consulting with 

program, human resources, acquisition, budget, and legal professionals 

facilitates effective communication and a broad-based understanding of 

competitive sourcing actions within the agency. 

Officials from HHS’ National Institutes of Health told us they used a 

steering committee of senior-level officials to determine the activities to be 

competed under its competitive sourcing program. This committee used a 

systematic approach that considered FAIR Act inventory data, the 

knowledge and experience of program managers, and a decision support 

software application to capture the judgments of managers familiar with 

the commercial activity under study. The software application used a set 

of evaluation questions that assessed a function regarding NIH’s mission, 

human capital and risk, and recorded and scored managers’ responses. 

Committee officials then reviewed the scores produced by the software, 

considering factors such as (1) the activity’s impact on NIH’s mission, 

(2) costs, (3) socioeconomic impacts, and (4) potential advantages to 

competing the activity. NIH officials also stated that once a decision has 

been made to compete an activity, consideration is given to re-engineering 

the applicable business process, whether the activity remains in-house or 

undergoes a public-private competition. 

Officials from the Internal Revenue Service, a bureau of the Department 

of the Treasury, told us they used business case analysis and an 

enterprisewide approach to determine if a commercial function has the 

potential to create significant business process improvements and a 

sizable return on investment. The business case analysis, which is 

completed in approximately 4 to 6 months, calculates the economic 

benefits of potential alternatives based on IRS responses to critical 

questions such as: Is the function core to the mission? What does the 

function cost? Is there potential to reduce cost and/or improve 

productivity by competing the function? How does the function fit into 

other current or planned strategic projects? 

 29 Office of Management and Budget, Competitive Sourcing: Reasoned and Responsible 

Public-Private Competition (Washington, D.C.: Sept. 2003). 

NIH Uses Decision 

Support Software 

IRS Uses Business Case 

Analysis 
Page 22 GAO-04-367 Competitive Sourcing 

An IRS competitive sourcing official cited several benefits from the 

business case approach used during the planning stage 

• up-front consideration of major decision variables such as economics, 

market research, and risk; 

• involvement of top-level management and leadership; 

• the ability to test candidate projects against strategic goals and 

performance improvement objectives; and 

• low investment of resources to qualify or reject an activity as a 

competitive sourcing project. 

The Army’s “core, non-core concept” for assessing functions employed a 

more strategic approach. Initially, the Army’s approach for classifying 

positions for its inventory focused on determining whether functions were 

core or non-core to the agency’s mission. However, the Army found that 

such a distinction did not, by itself, provide a good basis for a decision, 

and that other factors, such as risk and operational considerations, also 

must be considered. A cognizant Army official told us that focusing on 

positions does not consider how well the function is being performed or 

who should perform the function—military, civilian, contractor, or some 

combination of these. In contrast, the Army learned that looking at 

broader functional areas, such as utilities and family housing, as opposed 

to positions, should allow them to better identify potential positions for 

competition. For example, functions such as childcare and equal 

employment opportunity operations, while not inherently governmental, 

are exempt from competitive sourcing because they are important for 

reasons such as military morale and quality of life. According to a DOD 

competitive sourcing official, the Army’s approach is evolving and is 

unique within DOD. 

Officials at four civilian agencies in our review expressed similar concerns 

that the Army official expressed on developing their inventories. Officials 

told us that given the investment of time and resources required to develop 

an inventory, agencies should focus on mission-related functions rather 

than individual positions. 

The Department of Education’s “One-ED” initiative also used strategic 

approaches in identifying candidates for competition. One-ED covers all 

elements of major departmental operations, and seeks management 

changes through integrated human capital reform, competitive sourcing, 

and organizational restructuring. As part of its broader approach, the 

Army’s “Core, Non-Core” 

Approach Is Evolving 

Education Uses Integrated 

Approach 
Page 23 GAO-04-367 Competitive Sourcing 

department developed its FAIR Act inventory by analyzing key processes 

in the activities under consideration. It then used the results of this 

process to restructure positions as either commercial or inherently 

governmental and frame a broader analysis of the function’s activities. 

The ultimate success of the administration’s competitive sourcing 

initiative hinges on the extent to which agencies achieve the efficiencies, 

innovation, and improved performance envisioned by the President’s 

Management Agenda. Successful implementation of this initiative requires 

results-oriented goals and strategies; clear criteria and analysis to support 

agency decisions; and adequate resources. OMB, in its leadership role, has 

a difficult task in guiding this initiative and must balance the need for 

transparency and consistency with the flexibility agencies need in 

implementing significant changes to operations. While OMB is addressing 

the funding and human capital challenges that agencies face, it needs to 

ensure that the FAIR Act inventory and goal-setting process is more 

strategic and helpful to agencies in carrying out their competitive sourcing 

responsibilities. Recognizing that agency missions, organizational 

structures, and workforce composition vary widely, the Commercial 

Activities Panel provided a framework of sourcing principles that provide 

an implementation roadmap for this initiative. However, OMB’s current 

emphasis on meeting implementation milestones and targets does not fully 

align with these principles or ensure achievement of the ultimate goal of 

increasing efficiency and improving the performance of commercial 

activities. OMB needs to work with agencies to ensure their long-range 

plans are strategically focused. A more strategic approach focused on 

achieving improvement outcomes would help focus agency efforts and 

better achieve the results envisioned at the outset of the competitive 

sourcing initiative. 

To complement efforts already underway that address funding and human 

capital challenges and to help agencies realize the potential benefits of 

competitive sourcing and ensure greater transparency and accountability, 

we recommend that the Director of OMB take the following three actions: 

• ensure greater consistency in the classification of positions as commercial 

or inherently governmental when positions contain a mix of commercial 

and inherently governmental tasks by reviewing current guidance and 

developing additional guidelines, as necessary, for agencies and OMB 

examiners; 

Conclusion 

Recommendations for 

Executive Action 
Page 24 GAO-04-367 Competitive Sourcing 

• work with agencies to ensure they are more strategic in their sourcing 

decisions and are identifying broader functional areas and/or 

enterprisewide activities, as appropriate, for possible public-private 

competition; and 

• require agencies to develop competition plans that focus on achieving 

measurable efficiency and performance improvement outcomes. 

We provided a draft of this report to OMB and the seven agencies for their 

review and comment. OMB provided oral comments concurring with our 

three recommendations, but disagreed with our conclusion that OMB’s 

recent guidance on competitive sourcing emphasized process more than 

results. Based on our review of the factors OMB considers in its review of 

agency plans, we continue to believe that factors such as the agency’s 

ability to conduct competitions are emphasized more than results such as 

expected savings and the potential for improved performance as called for 

in the President’s Management Agenda. 

On the first recommendation, OMB officials concurred that there needs to 

be consistency in the classification of positions and stated that OMB will 

review its current guidance in light of the findings in this report to 

determine how best to help agencies that have had difficulties in 

classifying their activities. OMB officials stated that they would consider 

additional guidelines as necessary. 

OMB officials, while agreeing with the second and third recommendations, 

emphasized that long-range “green” plans are intended to ensure that 

agencies think strategically in choosing activities for review and routinely 

take into account the type of factors that will ensure successful 

application of competition. OMB reiterated that before an agency may 

receive a green score on the President’s Management Agenda scorecard, 

the agency must have an approved green competition plan. 

OMB stated that its evaluation of plans will not be one-dimensional, but 

instead will account for each agency’s unique mission and workforce 

needs and demonstrated ability to conduct reviews in a reasonable and 

responsible manner. OMB will also review agency plans to understand 

how the agency has selected activities and their potential for savings and 

performance improvements. However, while OMB’s guidance mentions 

the importance of improving the cost effectiveness and quality of 

commercial operations, we note that the guidance does not cite the 

potential for savings or improved performance as factors OMB will look 

for when reviewing agency green plans. 

Agency Comments 

and Our Evaluation 
Page 25 GAO-04-367 Competitive Sourcing 

The Department of Agriculture and the Department of the Interior 

concurred with our report. The Department of the Treasury stated that the 

report’s recommendations were timely. The Department of Education and 

DOD did not have any comments. The Department of the Interior, HHS, 

OMB and VA provided technical comments, which were incorporated as 

appropriate. 

We are sending copies of this report to other interested congressional 

committees; the Director, Office of Management and Budget; the 

Administrator, Office of Federal Procurement Policy; and the Secretaries 

of Agriculture, Defense, Education, Health and Human Services, the 

Interior, the Treasury, and Veterans Affairs. We also will provide copies to 

others on request. This report will also be available at no charge on GAO’s 

Web site at http://www.gao.gov.

If you have any questions about this report, please contact me at 

(202) 512-4841 or John K. Needham at (202) 512-5274. Other major 

contributors to this report were Robert L. Ackley, Christina M. Cromley, 

Thomas A. Flaherty, Rosa M. Johnson, Nancy T. Lively, William M. 

McPhail, Karen M. Sloan, Marilyn K. Wasleski, and Anthony J. Wysocki. 

William T. Woods 

Director, Acquisition and Sourcing Management 
Appendix I: Scope and Methodology 

Page 26 GAO-04-367 Competitive Sourcing 

To describe the progress DOD and the civilian agencies have made in 

establishing the competitive sourcing program in response to the 

President’s Management Agenda, we interviewed officials at the 

Department of Agriculture; DOD; and the Departments of Education, 

Health and Human Services, the Interior, the Treasury, and Veterans 

Affairs. We selected the agencies based on the number of commercial 

positions in their 2001 FAIR Act inventories. The agencies selected 

represent 84 percent of the 2002 FAIR Act inventory of commercial 

positions among the 26 executive branch agencies implementing the 

President’s Management Agenda. We selected the Department of 

Education because OMB highlighted its unique approach to implementing 

the competitive sourcing initiative. We obtained and reviewed pertinent 

documents from the seven government agencies. We also met with 

members of the Civilian Agency Competitive Sourcing Working Group, 

executive members of the Federal Acquisition Council and its Working 

Group on Competitive Sourcing, and attended several competitive 

sourcing conferences and workshops. We reviewed statutes and circulars 

governing this program and reports on competitive sourcing. We also 

reviewed reports on related subjects such as human capital, costs, and 

savings that were issued by academic and independent research 

organizations. 

To identify what, if any, challenges exist for the agencies in implementing 

the competitive sourcing initiative, we interviewed senior-level officials at 

the seven competitive sourcing programs. In identifying the challenges 

agencies face, we also reviewed OMB and agency guidance as well as 

criteria and data used to develop inventories and select the activities to 

study and compete. We discussed management expertise, training 

requirements, planned contract support and contract oversight, timeline 

and budget impact to achieve fiscal year 2003 goals as well as intra-agency 

interactions, including budget and human resources offices. 

To identify strategies agencies are using to identify activities for 

competition, we discussed extensively the alternatives and strategies 

agencies used to take a more strategic approach and obtained contractor 

documents, if available. These studies, conducted in support of a 

“compete/no compete” decision, gave us insight regarding decision 

criteria, competitive sourcing strategies, and costs involved. 

We did not evaluate savings from completed competitions during this 

review as the program is new and such data are limited. The FAIR Act 

inventory data used in this report have been reviewed by OMB, reported to 

Congress, and made available to the public and covers the years 2000, 

Appendix I: Scope and Methodology 
Appendix I: Scope and Methodology 

Page 27 GAO-04-367 Competitive Sourcing 

2001, and 2002. We did not independently verify this information. 

OMB-reviewed data for 2003 were not available for all agencies at the time 

of our review. 

We performed our review between April and December 2003 in 

accordance with generally accepted government auditing standards. 
Appendix II: Guiding Principles for 

Competitive Sourcing 

Page 28 GAO-04-367 Competitive Sourcing 

In 2000, Congress enacted legislation creating the Commercial Activities 

Panel and mandating a study of the government’s competitive sourcing 

process.1

 The Commercial Activities Panel’s mission was to devise a set 

of recommendations that would improve the government’s sourcing 

framework and processes so that they would reflect a balance among the 

taxpayer interests, government needs, employee rights, and contractor 

concerns. 

In April 2002, the panel released its report2

 with recommendations that 

included 10 sourcing principles to guide federal sourcing policy. The panel 

believed that federal sourcing policy should 

• support agency missions, goals, and objectives; 

• be consistent with human capital practices designed to attract, motivate, 

retain, and reward a high-performing federal workforce; 

• recognize that inherently governmental functions and certain others 

should be performed by federal workers; 

• create incentives and processes that foster high-performing, efficient, and 

effective organizations throughout the federal government; 

• be based on a clear, transparent, and consistently applied process; 

• avoid arbitrary FTE or other arbitrary numerical goals; 

• establish a process that, for activities that may be competitively sourced, 

would permit public and private sources to participate in competitions for 

work currently performed in-house and work currently contracted to the 

private sector as well as new work; 

• ensure that competitions are conducted fairly, effectively, and efficiently; 

• ensure that competitions involve a process that considers both quality and 

cost factors; and 

• provide for accountability in all sourcing decisions. 

 1

 Section 832, Floyd D. Spence National Defense Authorization Act for Fiscal Year 2001, 

Pub. L. 106-398 (Oct. 30, 2000). 

2

 Commercial Activities Panel, Final Report: Improving the Sourcing Decisions of the 

Government (Washington, D.C.: Apr. 30, 2002). 

Appendix II: Guiding Principles for 

Competitive Sourcing 
Appendix III: 2002 FAIR Act Inventories 

Page 29 GAO-04-367 Competitive Sourcing 

 Total commercial FTEs Competable commercial FTEs 

Agency Total FTEs Number

Percent of 

total FTEs Number

Percent of 

total FTEs 

USDA 99,902 53,394 53.4 35,600 35.6 

DODa 596,570 410,699 68.8 239,001 40.1 

Education 4,710 3,062 65.0 2,903 61.6 

HHS 62,604 32,095 51.0 11,641 18.6 

Interior 69,147 32,900 47.6 26,545 38.3 

Treasury 148,100 27,103 18.3 12,313 8.3 

VA 221,541 190,546 86.0 4,870 2.2 

Source: GAO analysis of 2002 FAIR Act data. 

Note: Full-time equivalent (FTE) is a measure of federal civilian employment. One FTE is equal to 

one work-year of 2,080 hours. As of January 23, 2004, OMB had publicly released 2003 FAIR Act 

inventory data for only three of our selected agencies. 

a

According to DOD, these FAIR Act inventory numbers do not include military, foreign nationals. 

depot-level maintenance and repair commercial activities, DOD Inspector General, civilian 

performance of any commercial activities that have already been contracted out, and the DOD 

intelligence community. 

Appendix III: 2002 FAIR Act Inventories 
Appendix IV: Competitive Sourcing Studies 

Initiated and Completed in 2002 and 2003 

Page 30 GAO-04-367 Competitive Sourcing 

 Results of Completed Studies (FTEs)a

 Positions Studied (FTEs) Remain in-house Contract-out 

Agency 2002 2003 2002 2003 2002 2003 

USDA 379 7,111 6 3,776 373 660 

DOD 8,477 3,434 16,886b 7,826b 7,185b2,167b

Education 0 230 0 Pending 0 Pending 

HHS 775 2,192 165 1,592 610 600 

Interiorc 

Treasuryd 4,170 234 487 

VA 0 1,380e 0 0 120f

Source: GAO analysis of agency data. 

a

Full-time equivalent (FTE) is a measure of federal civilian employment. One FTE is equal to one 

work-year of 2,080 hours. 

b

For DOD, these numbers include studies initiated prior to 2002 or 2003. 

c

Interior provided only aggregated data for 2002 and 2003. Over this 2-year period, 2,483 FTEs were 

studied. Of those FTEs, 968 remained in-house and 1,515 were contracted out. 

d

Data represent bureaus remaining after transfer made to the Department of Homeland Security. 

Actions on 3,449 FTEs are underway; some are in the planning stage, while others await senior 

management approval before results are announced. 

e

Studies of these positions were initiated but not completed because VA’s General Counsel 

determined that use of funds for this purpose was prohibited by 38 U.S.C. 8110 (a)(5). 

f

Veterans Affairs had one formal A-76 competitionVeterans Benefits Administration Property 

Management Services. This study began in 1999, competition was announced in 2001, and the 

contract was awarded in August 2003. 

Appendix IV: Competitive Sourcing Studies 

Initiated and Completed in 2002 and 2003 
Appendix V: Disposition of Competable 

Commercial FTEs Where Studies Completed 

Page 31 GAO-04-367 Competitive Sourcing 

Table 3: Disposition of 2002 Competable Commercial FTEs Where Studies Have Been Completed 

Direct

 conversionsa

Streamlined 

competitions 

Full 

 competitions Otherb

 Total 

USDA 

Number of studies 11 0 0 0 11 

Total FTEs studied 379 0 0 0 379 

In-house wins 6 0 0 0 6 

Contract out 373 0 0 0 373 

HHS 

Number of studies 133 33 0 0 166 

Total FTEs studied 599 176 0 0 775 

In-house wins 0 165 0 0 165 

Contract out 599 11 0 0 610 

DOD 

Number of studies 58 5 112 175 

Total FTEs studied 1,153 171 22,148 23,472 

In-house wins 121 171 16,565 16,857 

Contract out 1,032 0 5,583 6,615 

Education 

Number of studies 0 0 0 0 

Total FTEs studied 0 0 0 0 

In-house wins 0 0 0 0 

Contract out 0 0 0 0 

Treasury 

Number of studies 6 3 0 9 

Total FTEs studied 109 72 0 181 

In-house wins 0 70 0 70 

Contract out 109 2 0 111 

Total 

Number of studies 208 41 112 361 

Total FTEs studied 2,240 419 22,148 24,807 

In-house wins 127 406 16,565 17,098 

Contract out 2,113 13 5,583 7,709 

Source: GAO analysis of agency data. 

Appendix V: Disposition of Competable 

Commercial FTEs Where Studies Completed 
Appendix V: Disposition of Competable 

Commercial FTEs Where Studies Completed 

Page 32 GAO-04-367 Competitive Sourcing 

Note: The Interior Department provided aggregated data for 2002. Over this 2-year period, 2002 and 

2003, it studied 2,483 FTEs. On these, 968 were retained in-house and 1,515 were contracted out. 

In addition, VA did not initiate any studies in 2002. 

a

Direct conversions are not competitions, but are included in this table as they represent federal 

employee positions whose work has been outsourced to the private sector. 

b

Includes various OMB approved approaches. 
Appendix V: Disposition of Competable 

Commercial FTEs Where Studies Completed 

Page 33 GAO-04-367 Competitive Sourcing 

Table 4: Disposition of 2003 Competable Commercial FTEs Where Studies Have Been Completed 

Direct 

conversions

Streamlined 

competitions 

Full 

competitionsa

Otherb

 Total 

USDA 

Number of studies 15 307 3 92 417 

Total FTEs studied 150 3,256 410 620 4,436 

In-house wins 0 3,250 290 236 3,776 

Contract out 150 6 120 384 660 

HHS 

Number of studies 96 45 7 0 148 

Total FTEs studied 569 645 978 0 2,192 

In-house wins 0 614 978 0 1,592 

Contract out 569 31 0 0 600 

DOD 

Number of studies 54 7 65 126 

Total FTEs studied 873 298 8,822 9,993 

In-house wins 105 298 7,423 7,826 

Contract out 768 0 1,399 2,167 

Education 

Number of studies 0 1 4 5 

Total FTEs studied 0 10 220 230 

In-house wins 0 Pending Pending 0 

Contract out 0 Pending Pending 0 

Treasury 

Number of studies 19 10 2 31 

Total FTEs studied 290 145 47 482 

In-house wins 0 145 19 164 

Contract out 290 0 14 304 

VA 

Number of studies 0 0 1 1 

Total FTEs studied 0 0 270c 270 

In-house wins 0 0 0 0 

Contract out 0 0 120 120 
Appendix V: Disposition of Competable 

Commercial FTEs Where Studies Completed 

Page 34 GAO-04-367 Competitive Sourcing 

Direct 

conversions

Streamlined 

competitions 

Full 

competitionsa

Otherb

 Total 

Total 

Number of studies 184 370 82 92 728 

Total FTEs studied 1,882 4,354 10,747 620 17,603 

In-house wins 105 4,307 8,710 236 13,358 

Contract out 1,777 37 1,653 384 3,851 

Source: GAO analysis of agency data. 

Note: The Interior Department provided aggregated data for 2003. Over this 2-year period, 2002 and 

2003, it studied 2,483 FTEs. On these, 968 were retained in-house and 1,515 were contracted out. 

In addition, VA did not initiate any studies in 2002. 

a

The winning MEO can require fewer FTEs than were originally performing the function. 

b

Includes various OMB approved approaches. 

c

This activity had 270 FTEs at the time the study was announced in 1999. The Most Efficient 

Organization provided for 120 FTEs if the work was retained in-house. VA awarded the contract to 

the private sector in 2003. 
Appendix VI: Evolution of OMB’s FAIR Act 

Guidance 

Page 35 GAO-04-367 Competitive Sourcing 

1998 • FAIR Act passed and required agencies to provide OMB an annual inventory of their FTE positions that are not 

considered inherently governmental. 

• The first submission of inventory data was 1999. 

2001 • Directed agencies to also submit a separate report listing their inherently governmental positions. 

2002 • Directed agencies to provide a single inventory submission that reflects both the agency’s inherently 

governmental FTE positions and its commercial FTE positions. Once reviewed by OMB, agencies must provide a 

listing of their commercial FTE positions to the Congress and the public. 

• Instructed agencies that they should anticipate the possibility that after their list of inherently governmental 

positions has been reviewed, it too may be released to the public. 

2003 (March) • Directed agencies to submit their FAIR Act inventory in two parts—(1) a list of commercial activities performed by 

FTE civilian personnel and (2) a list of inherently governmental activities performed by FTE civilian personnel. 

After OMB reviews these lists, both will be released to the Congress and the public. 

• FTE civilian personnel. After OMB reviews these lists, both will be released to the Congress and the public. 

• Instructed agencies in developing their 2003 inventories to justify in writing all commercial positions that they 

consider as not being appropriate for private sector performance. 

2003 (May) • Provided guidance for preparing inventories, directs agencies to annually submit inventories of (1) their 

commercial activities performed by government personnel, (2) inherently governmental activities performed by 

government personnel and (3) a summary report that identifies aggregate commercial and inherently 

governmental inventory data. (Contained in revised Circular A-76) 

• Instructed agencies to justify in writing all inherently governmental positions and all commercial positions 

classified as not appropriate for private sector performance. (Contained in revised Circular A-76) 

Source: GAO analysis of OMB information. 

Appendix VI: Evolution of OMB’s FAIR Act 

Guidance 
Appendix VII: OMB Scorecard Criteria for the 

Competitive Sourcing Initiative 

Page 36 GAO-04-367 Competitive Sourcing 

Yellow status Green status 

Agency has 

• an OMB approved “yellow” competition plan to compete 

commercial activities available for competition; 

• completed one standard competition or publicly announced 

standard competitions that exceed the number of positions 

identified for competition in the agency’s yellow competition 

plan; 

• in the past two quarters, completed 75% of streamlined 

competitions in a 90-day timeframe; and 

• in the past two quarters, canceled less than 20% of publicly 

announced standard and streamlined competitions. 

Agency has 

• an OMB approved “green” competition plan to compete 

commercial activities available for competition; 

• publicly announced standard competitions in accordance with 

the schedule outlined in the agency “green” competition plan; 

• since January 2001, completed at least 10 competitions (no 

minimum number of positions required per competition); 

• in the past year, completed 90% of all standard competitions in 

a 12-month time frame; 

• in the past year, completed 95% of all streamlined competitions 

in a 90-day timeframe; 

• in the past year, canceled fewer than 10% of publicly 

announced standard and streamlined competitions; and 

• OMB-approved justifications for all categories of commercial 

activities exempt from competition. 

Source: OMB. 

Appendix VII: OMB Scorecard Criteria for the 

Competitive Sourcing Initiative 
Appendix VIII: Strategic Approaches to 

Competitive Sourcing 

Page 37 GAO-04-367 Competitive Sourcing 

Several agencies used approaches that considered and balanced 

multiple agency interests within the competitive sourcing environment. 

The following discussion provides a more detailed description of these 

approaches. 

NIH has developed a more strategic competitive sourcing approach that 

includes use of software and integration of the agency’s human capital and 

strategic plans. According to NIH officials, in 2002, NIH appointed a 

Commercial Activities Steering Committee, comprised of 14 senior level 

officials, to work with NIH’s 27 centers to determine the activities to be 

competed under its competitive sourcing program. The committee used 

FAIR Act inventory data, knowledge and experience, and a decision 

support software application that provides objective and analytical 

results. The software, enabled managers to respond to NIH-developed 

questions related to mission effectiveness, human capital, as well as 

demand and risk. 

Mission effectiveness Human capital Demand and risk 

• Criticality of the function’s role in 

relationship to NIH’s mission 

• Current state of tools and technology 

used by the function 

• Current level of effectiveness of the 

processes used by the function 

• Current level of customer satisfaction 

• Current level of efficiency in the activity 

under study 

• Expected cost to maintain an acceptable 

level of performance 

• Annual rate of staff turnover 

• Number of staff performing the function 

• Match between workforce skills and 

program/service function needs 

• Percent of staff in function who are true 

masters of their art 

• Percent of staff in function from 

underrepresented groups 

• Openness of staff in the function toward 

conducting a cost comparison study 

• Current capacity relative to current 

demand for the function 

• Long-term trend of demand for function 

• Normative periodic fluctuation in demand 

for function (i.e. stability of demand) 

• Availability of function in the marketplace 

• Risk to program integrity and control of 

sensitive information if the function were 

outsourced. 

• Degree of difficulty expected for NIH to 

manage the consequences of losing a 

cost competition 

Source: GAO analysis of NIH data. 

The software assigns weights to each response—using NIH-developed 

values—and generates scores for each activity under study. Committee 

officials then review the scores, considering factors such as (1) the 

activity’s impact on NIH’s mission, (2) costs, (3) socioeconomic impacts, 

and (4) potential advantages to competing the activity. NIH officials also 

stated that once a decision has been made to compete an activity, 

consideration might be given to re-engineering the applicable business 

process, whether it remains in-house or undergoes a public-private 

competition. Once the Steering Committee has made its competitive 

Appendix VIII: Strategic Approaches to 

Competitive Sourcing 

HHS’ National 

Institutes of Health 

Used Transparent 

Criteria to Identify 

Candidates for 

Competitive Sourcing 
Appendix VIII: Strategic Approaches to 

Competitive Sourcing 

Page 38 GAO-04-367 Competitive Sourcing 

sourcing decision, the Commercial Activities Review Team, with 

contractor assistance, implements the committee’s decisions. 

Further, in an effort to add rigor to its competitive sourcing process, 

NIH in a recent competition used a contractor to mitigate potential risks. 

NIH convened a panel of nine experts from the Georgia Institute of 

Technology to analyze and evaluate a request for proposal and its related 

performance work statement concerning real estate property management 

services at six installations—the estimated value of which exceed 

$100 million each year. In light of the risks it could encounter if the 

contract were deficient from a scope, technical, business, and/or legal 

standpoint, NIH asked the panel to review the request for proposal 

developed in-house and determine whether or not the contract documents 

were properly conceived, logically organized, clearly written, and 

sufficiently complete and accurate. As a result of its analysis, the panel 

identified several areas where the request for proposal and performance 

work statement subjected NIH to risks. NIH officials reviewed the risk and 

made appropriate changes to these documents. 

Finally, NIH officials sought advice and coordinated with HHS’ Office of 

Strategic Management and Planning and Human Capital Office to link their 

competitive sourcing program to HHS’ strategic and human capital plans. 

According to an IRS official, IRS, a bureau within the Department of the 

Treasury, developed a strategic approach to competitive sourcing, using a 

business case analysis methodology used by leading industry firms to 

determine if commercial function(s) within a business division have the 

potential to create significant business process improvements along with a 

sizeable return on investment. Based on the results of the business case 

analyses, the Strategy and Resources Committee, headed by the Deputy 

Commissioner of Operations and Support decide to compete (publicprivate competition) or not compete the functions. According to IRS 

officials, this process enhances the opportunities to make smart business 

decisions aligned and supportive of the IRS Strategic Business Plan. IRS 

has focused its competitive sourcing efforts primarily on more strategic 

and enterprise-wide competitions because it has determined that this 

approach makes more economic sense than identifying candidates in 

smaller groups. 

The official stated that the IRS’s initial step for identifying the functions 

that will be considered to undergo a business case analysis is its review of 

the FAIR Act inventory, which has been merged with IRS personnel 

Internal Revenue Service 

Uses Business Case 

Analysis and an 

Enterprisewide Approach 
Appendix VIII: Strategic Approaches to 

Competitive Sourcing 

Page 39 GAO-04-367 Competitive Sourcing 

staffing database in a software application.1 This application, unique 

in terms of the agencies that we reviewed, crosswalks the FAIR Act 

inventory data with personnel staffing data to provide a comprehensive 

analysis of the various commercial function groupings across the IRS. 

After identifying these groupings, the bureau’s subject matter experts and 

high-level managers along with hired contractors conduct business case 

analyses of these positions. As we reported, the business case analyses, 

which are completed in approximately 4 to 6 months,2

 calculate the 

economic benefits of potential alternatives based on IRS responses to a 

number of critical questions: 

• Is the function core to the mission? 

• How much does the function cost? 

• Is there potential to reduce cost and/or improve productivity by 

competing the function? 

• How does the function fit into other current or planned strategic projects? 

Based on the responses to these questions, and analyses of current 

operations, market research and an MEO design, IRS calculates and 

considers the economic benefits of each potential alternative and the 

upfront and recurring investments required to achieve and maintain 

efficiencies. IRS then makes a decision to compete or not compete 

based on weighted values assigned to IRS strategic business alignment, 

investment risks, return on investment, FAIR Act goal alignment, and 

alignment with President’s Management Agenda goals. A key success 

factor to this approach is an expert validation of the assumptions used in 

the business case as well as the inclusion of significant direct and indirect 

costs associated with the function. 

According to an IRS official, if competing a function makes the best 

business sense, IRS appoints a team leader who selects a team and obtains 

 1

 In its report The Accuracy of the Federal Activities Inventory Can Be Improved 

(Reference Number: 2003-10-181, Washington, D.C.: Aug. 2003), Treasury’s Office of the 

Inspector General found that overall the IRS needs to improve its compliance with FAIR 

Act requirements and recommended that the Director, Competitive Sourcing Program 

provide the business units with specific guidance for categorizing activities as commercial 

or inherently governmental, including supplemental definitions to assist business units in 

using Function Codes properly and consistently IRS-wide. Other recommendations 

included the development of an IRS –wide process for assembling the FAIR Act inventory 

and a methodology for properly calculating FTEs. 

2

 According to an IRS official, the average contractor cost to support business case studies 

ranges from $150,000 to $350,000, depending on the number of FTE positions analyzed. 
Appendix VIII: Strategic Approaches to 

Competitive Sourcing 

Page 40 GAO-04-367 Competitive Sourcing 

contractor support to plan and develop the performance work statement. 

Throughout the entire business case analysis and competitive sourcing 

lifecycle, the IRS Office of Competitive Sourcing is engaged and provides 

support to the various teams. 

Officials from IRS’ competitive sourcing program cited many benefits from 

the business case approach used during the preliminary planning stage: 

up-front consideration of major decision variables such as economics, 

market research and risk; involvement of top level management and 

leadership at the very early stages of the process; an opportunity to test 

candidate projects against strategic goals and performance improvement 

objectives; and a low investment requirement to qualify or reject an 

activity as a competitive sourcing project. According to an IRS official, 

while the time and cost to make a decision to compete or not to compete 

may seem excessive, once IRS conducts a public - private competition, 

they have confidence in the business case projected return-on- investment 

and an understanding of why conducting a particular set of business 

functions fits into the IRS strategic plan for business improvements and 

human capital goals. 

The Army’s experience in using a strategic approach to classify positions 

offers lessons for other agencies in identifying positions for competitive 

sourcing studies. The Army’s attempt to focus on determining whether 

functions were core or non-core to the agency’s mission found that such a 

distinction did not, by itself, adequately inform sourcing decisions. For 

example, the Army’s core competency review showed that designating a 

function as “core” does not necessarily mean that in-house employees 

should perform a function or necessarily preclude competitive sourcing of 

the function. As we reported, Army officials found that other factors, such 

as risk and operational considerations, must also be considered.3

The Army’s effort assumed that all commercial positions were non-core to 

its mission and thus potential candidates for performance by the private 

sector or other government agencies. However, Army officials recognized 

that, in many instances, these “non-core” functions would require 

additional analysis to determine potential risks if the function were 

contracted. There are four categories of risk analysis: force management, 

 3 GAO-03-818. 

Army’s “Core-Non-Core” 

Approach for Classifying 

Positions 
Appendix VIII: Strategic Approaches to 

Competitive Sourcing 

Page 41 GAO-04-367 Competitive Sourcing 

operational, future challenges, and institutional.4 For example, Army 

officials determined that many medical functions, which are not 

classified as inherently governmental, could be considered core in some 

circumstances. Although medical functions typically do not require unique 

military knowledge or skills, medical activities in theater need to be 

performed by in-house personnel because contracting for medical support 

in host nations could present significant risk to U.S. armed forces. 

Consequently, the Army has determined that the in-theater medical 

mission is a critical element of the Army’s ability to accomplish its core 

competencies. Other medical functions could be considered both core and 

non-core. For example, optical fabrication—the ability to produce 

replacement spectacles and protective mask inserts—is considered a core 

competency in support of the operational forces close to the point of need 

in the area of engagement. However, the same function performed in the 

United States is not core. The Army also determined that its casualty and 

mortuary affairs function is not a core or an inherently governmental 

function. However, national policy dictates that Army officials notify 

families of a casualty in-person. 

In June 2002, the Department of Education launched, with OMB 

approval, an ambitious management reform known as the “One-ED” 

concept. One-ED seeks to transform departmental operations through 

the integration of human capital reform, competitive sourcing, and 

organizational restructuring. 

As part of its One-ED approach the Department developed its FAIR Act 

inventory by first analyzing key processes. It then used the results of this 

process to restructure positions as either commercial or inherently 

governmental. As a result of this process, Education’s reported inventory 

 4

 Force management risk includes the ability to recruit, retain, train, and equip sufficient 

numbers of quality personnel and sustain the readiness of the force while accomplishing its 

many operations tasks. Operational risk concerns the ability to achieve military objectives 

in a near-term conflict or other contingency. Future challenges risk involves the ability to 

invest in new capabilities and develop new operational concepts needed to dissuade or 

defeat mid- to long-term military challenges. Institutional risk entails the ability to develop 

management practices and controls that use resources efficiently and promote the effective 

operation of the defense establishment. 

Education’s “One-ED” 

Approach Seeks to 

Integrate Competitive 

Sourcing with Other 

Initiatives 
Appendix VIII: Strategic Approaches to 

Competitive Sourcing 

Page 42 GAO-04-367 Competitive Sourcing 

data have changed significantly in the past few years,5 and according to 

senior officials, the data are now more accurate and concise. 

One-ED reviews cover selected elements of major departmental 

operations and are being implemented in four phases over a period of 

three years. In each phase, the Department (1) identifies specific business 

functions for review, (2) conducts a business case analysis of each 

function, and (3) decides whether to re-engineer the function or compete 

it with the private sector. 

Phase I, which concluded in mid-2003, focused on agency-wide support 

functions, such as human resources, payment processing, and legal 

review. As a result, five agency-wide support functions will be competed 

with the private sector and four will be re-engineered and retained 

in-house. In making this decision, nine teams—comprised of 

approximately sixty employees knowledgeable about the function being 

studied and assisted by contractor personnel trained in developing 

business case analyses reviewed the functions and reported their findings 

to senior management. These teams considered such factors as the 

• skill sets and competencies required to perform the functions being 

reviewed, 

• potential risks associated with outsourcing the position, and 

• relationship of the business function to the Department’s strategic 

planning. 

 5

 In the 2000 inventory, department employees were placed into 225 functional categories; 

today, 65 percent of the Department of Education employees fall into only 15 functional 

categories. 
Appendix VIII: Strategic Approaches to 

Competitive Sourcing 

Page 43 GAO-04-367 Competitive Sourcing 

An Executive Management Team—chaired by the Deputy Secretary and 

staffed by senior Department officials—made the final determination using 

the information developed by the teams as well as other data. The 

Department initiated four standard competitions and one streamlined 

competition in fiscal year 2003. In addition, the Department is in the 

process of implementing proposals related to those business functions 

that were identified for in-house re-engineering. These projects were not 

completed at the time of our review. The Department’s Office of Inspector 

General will report on its assessment on the implementation of the 

One-ED initiative in early 2004. 
Appendix IX: Comments from the Department of Health & Human Services 

Page 44 GAO-04-367 Competitive Sourcing 

Appendix IX: Comments from the 

Department of Health & Human Services 
Appendix X: Comments from the Department 

of the Interior 

Page 45 GAO-04-367 Competitive Sourcing 

Appendix X: Comments from the Department 

of the Interior 
Appendix X: Comments from the Department 

of the Interior 

Page 46 GAO-04-367 Competitive Sourcing 
Appendix XI: Comments from the Department 

of Veterans Affairs 

Page 47 GAO-04-367 Competitive Sourcing 

Appendix XI: Comments from the 

Department of Veterans Affairs 

(120247) 
The General Accounting Office, the audit, evaluation and investigative arm of 

Congress, exists to support Congress in meeting its constitutional responsibilities 

and to help improve the performance and accountability of the federal 

government for the American people. GAO examines the use of public funds; 

evaluates federal programs and policies; and provides analyses, 

recommendations, and other assistance to help Congress make informed 

oversight, policy, and funding decisions. GAO’s commitment to good government 

is reflected in its core values of accountability, integrity, and reliability. 

The fastest and easiest way to obtain copies of GAO documents at no cost is 

through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and fulltext files of current reports and testimony and an expanding archive of older 

products. The Web site features a search engine to help you locate documents 

using key words and phrases. You can print these documents in their entirety, 

including charts and other graphics. 

Each day, GAO issues a list of newly released reports, testimony, and 

correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site 

daily. The list contains links to the full-text document files. To have GAO e-mail 

this list to you every afternoon, go to www.gao.gov and select “Subscribe to e-mail 

alerts” under the “Order GAO Products” heading. 

The first copy of each printed report is free. Additional copies are $2 each. A 

check or money order should be made out to the Superintendent of Documents. 

GAO also accepts VISA and Mastercard. Orders for 100 or more copies mailed to a 

single address are discounted 25 percent. Orders should be sent to: 

U.S. General Accounting Office 

441 G Street NW, Room LM 

Washington, D.C. 20548 

To order by Phone: Voice: (202) 512-6000 

TDD: (202) 512-2537 

Fax: (202) 512-6061 

Contact: 

Web site: www.gao.gov/fraudnet/fraudnet.htm 

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470 

Jeff Nelligan, Managing Director, NelliganJ@gao.gov (202) 512-4800 

U.S. General Accounting Office, 441 G Street NW, Room 7149 

Washington, D.C. 20548 

GAO’s Mission 

Obtaining Copies of 

GAO Reports and 

Testimony 

Order by Mail or Phone 

To Report Fraud, 

Waste, and Abuse in 

Federal Programs 

Public Affairs