GAO

United States General Accounting Office

Report to Congressional Committees

October 1999 DOD COMPETITIVE 

SOURCING

Plan Needed to 

Mitigate Risks in Army 

Logistics 

Modernization 

Program

GAO/NSIAD-00-19

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Contents

Letter 3

Appendixes Appendix I: Chronology of the Modernization Initiative 20

Appendix II: Comments From the Department of Defense 21

Appendix III: GAO Contacts and Staff Acknowledgments 23

Tables Table 1: Estimated Cost and Schedule for Wholesale Logistics 

Modernization Alternatives 11

Abbreviations

AMC Army Materiel Command

DOD Department of Defense

CECOM Communications and Electronics Command

OMB Office of Management and Budget
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United States General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-283303 Leter

October 4, 1999

The Honorable Floyd D. Spence

Chairman

The Honorable Ike Skelton

Ranking Minority Member

Committee on Armed Services

House of Representatives 

The Honorable James M. Inhofe

Chairman, Subcommittee on Readiness

 and Management Support

Committee on Armed Services

United States Senate

The Army is seeking to implement a Wholesale Logistics Modernization 

Program to reengineer its processes and modernize the aging computer 

information systems it uses to manage its inventories of equipment, parts, 

and supplies needed to support combat forces. To accomplish this 

modernization, the Army plans to contract with the private sector to 

reengineer its business processes and develop and operate a new system. 

Until the new system is operational, the contractor will operate the existing 

computer information system as well. The Army’s goal is to accomplish 

these objectives with the same level of resources currently devoted to the 

existing system. The contractor selected to perform the work would be 

expected to make the capital investment needed to develop the new 

system, with the expectation that it would be able to recoup its investment 

through future operating efficiencies.

This report responds to the request of the Chairman of the Senate 

Subcommittee on Readiness and Management Support, Committee on 

Armed Services, that we review the Army’s decision to contract for its 

wholesale logistics management information system. It also fulfills a 

requirement of the House National Security Committee’s1

 report (Report 

No. 105-532) on the Strom Thurmond National Defense Authorization Act 

for Fiscal Year 1999, which directed us to analyze and determine whether 

the information provided by the Army supports this proposed action. 

1

 Now known as the House Armed Services Committee.
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Specifically, this report discusses (1) the Army’s actions to comply with the 

requirements of 10 U.S.C. 2461, section 8014 of the Department of Defense 

Appropriations Act for Fiscal Year 1999 (P.L. 105-262), and Office of 

Management and Budget Circular A-76 and (2) cost uncertainties and other 

risks that could impact the future success of the modernization program.

Results in Brief The Army’s plans for implementing its Wholesale Logistics Modernization 

Program initiative by contracting with the private sector include actions to 

respond to the congressional notification requirements contained in 

legislation and the guidance contained in Office of Management and Budget 

Circular A-76. At the same time, significant uncertainties about the Army’s 

abilities to execute its modernization program as planned, particularly 

within preset funding levels, exist. Specifically, 

• In July 1998, the Army provided advance notification to the Congress, 

under 10 U.S.C. 2461, concerning its plans to consider contracting for 

the operation of its existing system and development of a modernized 

system. It subsequently notified the Congress in April 1999 concerning 

approval of a waiver of a detailed cost comparison between the public 

and private sector under Circular A-76. While the Army has not yet 

provided the Congress with cost information and certifications required 

under section 2461 and section 8014 of the Department of Defense 

Appropriations Act for Fiscal Year 1999 (P.L. 105-262), it expects to do so 

prior to entering into a contract for the modernization effort. To date, 

the Army has taken actions to comply with legislative and A-76 

requirements for the plan to contract for the wholesale logistics 

modernization. However, affected employees have filed four appeals of 

the A-76 waiver with the Assistant Secretary of the Army for 

Installations and Environment which are currently pending.

• Because it was granted an A-76 waiver, the Army did not conduct a 

detailed cost comparison, but it did complete a business case analysis to 

assess prospective costs of various alternatives and as a basis for 

selecting its planned approach. However, various factors suggest that 

much uncertainty exists over the Army’s ability to achieve its 

modernization objectives within preset funding levels and whether a 

new system would be put in place as quickly as initially anticipated to 

reduce operating costs. Thus, the Army could be faced with making 

future tradeoffs between Wholesale Logistics Modernization Program 

investment costs and its modernization objectives. Additionally, the 

Army faces uncertainties regarding the number of employees who may 

be willing to accept employment with the private sector to maintain the 
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existing system while a new system is being developed. Limited system 

documentation of the existing system increases the importance of 

existing employees to continue maintenance of the legacy system while 

a new system is being developed.

This report contains a recommendation to the Secretary of Defense 

concerning the need to mitigate the risks identified and to closely monitor 

this program as it progresses.

Background In August 1997, in response to a tasking from the Army Materiel Command 

(AMC), the Communications and Electronics Command (CECOM) formed 

a special project team to gather information and market research to 

develop alternatives for modernizing its logistics information system 

processes. The approach the Army ultimately selected was to rely on the 

private sector to modernize and operate the wholesale2

 logistics 

management information system. This approach affects existing software 

design, development, and operations involving Army employees and 

contractors at Army facilities in St. Louis, Missouri, and Chambersburg, 

Pennsylvania. Under the plan, functions currently performed by 

government employees would be performed by contractor personnel in the 

future. Accordingly, the Army must consider legislative provisions and 

policy guidance that may be applicable.

Overview of the 

Modernization Plan

The Army’s wholesale logistics management information system is 

currently sustained by the Logistics Systems Support Center in St. Louis, 

Missouri, and the Industrial Logistics Systems Center in Chambersburg, 

Pennsylvania. These centers report to the Communications and Electronics 

Command at Fort Monmouth, New Jersey, a major subordinate command 

of the Army Materiel Command. The two centers, referred to as Central 

Design Activities, design, develop, and maintain computer software 

systems and provide services that manage commodities, such as 

ammunition, avionics, communications and electronics, tanks, and 

missiles. The software systems integrate all wholesale logistics functions, 

2

 The Army has a two-tiered, wholesale and retail logistics support system. The wholesale 

system is comprised of the four major commands subordinate to the Army Materiel 

Command; these subordinate commands procure supplies directly from vendors and hold 

inventories of stocks to meet the demands of retail customers. Retail customers are

field-operating commands, which receive support from the wholesale level.
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including cataloging the inventory of items, processing customer orders, 

computing requirements for items and ordering replenishment stocks, and 

handling the accounting processes. The budget for the two centers has 

been about $40 million annually. The centers support numerous customers 

besides AMC, such as the Joint Chiefs of Staff, Defense Logistics Agency, 

and the Defense Finance and Accounting Service. In addition to the

$40 million used to sustain the software by the two centers, the Army also 

provides funding to have the current software processed by the Defense 

Information Systems Agency. This additional funding has been around

$60 million each year.3

The Wholesale Logistics Modernization Program4 is but one portion of a 

larger Army strategy for a future logistics system. The larger strategy, 

known as Global Combat Support System—Army, is to implement a single 

system to provide a seamless, integrated interactive communications and 

an automated information system for the Army’s retail and wholesale 

logistics support systems, and to support joint and allied operations. The 

retail logistics support system is currently undergoing a modernization 

effort similar to the wholesale modernization program. The retail 

modernization is structured so that federal employees continue to operate 

the current system while working with the contractor to develop a new 

system, which will be operated and maintained by the contractor.

The software programs associated with the Army’s wholesale logistics 

management information system are complex, were initially developed 

about 30 years ago, and widely recognized as being in need of 

modernization to avoid system failure in the future. To undertake such a 

modernization effort, the Army believes its wholesale logistics 

modernization program must include business process reengineering. The 

goal would be to eliminate non-value added activities and develop 

processes that expedite sound decision making. The change would apply 

both on the battlefield and at home, and create a system that will be 

flexible, adaptable, and responsive to both a peacetime and a wartime 

environment. Reduced operating and support costs and the elimination of 

data redundancy and inaccuracy are additional anticipated benefits.

3

 This figure includes some costs for data processing that are outside the scope of the 

modernization effort. 

4

 This program is also referred to as logistics modernization, or LOGMOD.
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To accomplish such dramatic change in the wholesale logistics process, 

while containing costs, the Army decided to leverage industry’s investment 

in commercial logistics practices. CECOM considered the status quo and 

three alternatives to accomplish the modernization effort. Specifically, they 

included:

Status Quo: Maintain the current systems, supported by the Central Design 

Activities as currently staffed, organized, trained, and funded.

Alternative I: The Central Design Activities perform legacy sustainment, 

wholesale logistics modernization, and sustainment of the modernized 

system.

Alternative II: The Central Design Activities perform legacy sustainment; 

the contractor performs wholesale logistics modernization and 

sustainment of the modernized system.

Alternative III: The contractor performs legacy sustainment, wholesale 

logistics modernization, and sustainment of the modernized system. In 

addition, the contractor will employ displaced Central Design Activities 

workers.

The Army selected alternative III, which placed reliance on the private 

sector to operate the existing legacy system as it undertook the 

modernization effort and would be expected to operate the modernized 

system once it was in place. The alternative selected would have the 

potential to eliminate approximately 478 government civilian employees at 

the two center locations. AMC wanted to minimize the impact on these 

employees and help ensure continuity of operation of the legacy system 

and mission. To accomplish that goal, AMC decided to include as a key 

requirement in its request for proposals for the private-sector competition 

that the winning contractor offer displaced employees jobs with 

comparable pay and benefits, in the employees’ current geographical 

location, for a minimum of 1 year. A chronology of key decisions associated 

with the evolution of this program is contained in appendix I.

Policy Guidance and 

Legislative Reporting 

Requirements

Office of Management and Budget (OMB) Circular A-76 as well as two 

legislative provisions outline important requirements affecting agencies 

when they consider converting functions from performance by government 

employees to the private sector.
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Since 1955, federal agencies have been encouraged to obtain commercially 

available goods and services from the private sector if doing so is

cost-effective. In 1966, OMB issued Circular A-76, which established federal 

policy for the government’s performance of commercial activities and set 

forth the procedures for studying them for potential contracting. In 1979, 

OMB issued a supplemental handbook to the circular that included

cost-comparison procedures for determining whether commercial 

activities should be performed in-house, by another federal agency through 

an interservice support agreement, or by the private sector. OMB updated 

this handbook in 1983 and again in March 1996.5

 The March 1996 Revised 

Supplemental Handbook describes a wide range of options government 

officials must consider as they contemplate reinventing government 

operations. They include “the consolidation, restructuring or reengineering 

of activities, privatization options, make or buy decisions” and others. It 

also explains that the scope of the handbook is limited to conversion of 

recurring commercial activities to or from in-house, contract or 

interservice support agreement performances.6

Where A-76 cost-comparison procedures apply, the initial step is to develop 

a performance work statement describing what is needed to perform the 

activity, which is used as the technical performance section of a solicitation 

for private-sector offers. The government also develops a management plan 

that describes the most efficient organization for in-house performance of 

the activity described in the performance work statement. The cost of 

performance by the government in accordance with the most efficient 

organization is compared to the cost proposed by the private-sector source 

selected pursuant to the solicitation. The activity will be converted to 

performance by the private sector if the private sector’s offer represents a 

cost differential of at least 10 percent of direct personnel costs or

$10 million over the performance period when compared to the 

government’s in-house cost estimate.

The handbook also allows for direct conversions to contractor 

performance and cost comparison waivers. In the case of the Department 

of Defense (DOD), the authority to issue such a waiver may be delegated to 

the cognizant military service Assistant Secretary. A cost-comparison 

5

 The Handbook was revised again in June 1999 to issue guidance for implementing the 

Federal Activities Inventory Reform Act of 1998 (P.L. 105-270).

6

 While A-76 addresses conversions in both directions, for purposes of this report, we will 

focus on conversion from performance by government employees to the private sector.
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waiver must be accompanied by a detailed determination that the 

conversion meets at least one of the following requirements:

• the conversion will result in a significant financial or service quality 

improvement and a finding that the conversion will not serve to reduce 

significantly the level or quality of competition in the future award or 

performance of the work or

• the waiver will establish why in-house offers have no reasonable 

expectation of winning a competition conducted under the cost 

comparison procedures.

Cost-comparison waivers are subject to the administrative appeal 

procedures contained in the handbook. An appeal must be in writing and 

generally submitted within 20 calendar days of documentation being made 

publicly available concerning the outcome of the waiver. A final decision 

should be made within 30 days of receipt of the appeal.

In addition to Circular A-76, DOD must consider 10 U.S.C. 2461 and section 

8014 of the Department of Defense Appropriations Act for Fiscal Year 1999 

(P.L. 105-262). Both contain requirements for congressional notifications 

concerning the planned performance of functions by the private sector.

Section 2461, as amended by the Strom Thurmond National Defense 

Authorization Act for Fiscal Year 1999 (P.L. 105-261), requires that before 

any commercial or industrial type function that as of October 1, 1980, has 

been performed by DOD civilian employees is changed to private sector 

performance, DOD must report to the Congress, conduct an analysis 

showing that private-sector performance will result in a savings to the 

government over the life of the contract, and certify that analysis. 7

 Section 

8014 of the 1999 Defense Appropriations Act requires that DOD certify its 

in-house estimate to congressional committees before converting any 

activity performed by more than 10 DOD civilian employees to contractor 

performance. While this provision is applicable to fiscal year 1999 actions 

only, we expect that next year’s appropriation act will have this same 

provision as it has been included in recent years’ appropriations acts.

7

 The Army notified the Congress prior to the effective date for last year’s amendments. The 

prior version of section 2461 contains similar notification, certification, and cost 

comparison requirements.
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Army Plans Include 

Compliance With 

Circular A-76 and 

Legislative Reporting 

Requirements

The Army has provided notifications to the Congress under 10 U.S.C. 2461 

concerning its intent to contract for its modernization effort. The Army 

plans to provide the Congress with relevant cost information and 

certifications required under section 2461 and the applicable appropriation 

act provision prior to awarding any contract for the program. Further, the 

Army has executed a waiver of the cost comparison provision under the 

terms of the supplemental handbook.

The Army’s notification to the Congress in July 1998 stated that the Army 

was considering an initiative to rely on private industry to reengineer its 

wholesale logistics business processes and to provide information 

management support for these processes. The notification stated that the 

Army would provide the Congress a summary of its cost comparison and 

other reports and certifications pursuant to section 2461 prior to entering 

into a modernization contract. 

At the time of its initial congressional notification, the Army believed that 

its planned action was not subject to OMB Circular A-76. Subsequently, the 

Army changed its view and decided that A-76 did apply. The Army 

concluded that in-house performance of the reengineering was not feasible 

or cost-effective, and Army officials decided to seek a waiver to A-76

cost-comparison requirements from the Assistant Secretary. 

On April 27, 1999, the Army submitted a notification to the Congress that a 

waiver of the A-76 cost comparison process had been approved. The waiver 

was approved by the Assistant Secretary of the Army (Installations and 

Environment) pursuant to section E of chapter 1 of the supplemental 

handbook. Specifically, the waiver stated that the modernization initiative 

will result in significant service quality improvement beyond that which 

could be reasonably expected from a reorganization of the current 

approach, that the modernization effort will not serve to reduce 

significantly the level or quality of competition in the future award of work, 

and that the functions involved are not inherently governmental. However, 

pursuant to the waiver appeal process provided for in A-76, four appeals 

have been filed by affected employees with the Assistant Secretary of the 

Army for Installations and Environment and are currently pending. This 

latest congressional notification reiterated that section 2461 cost 

information would be provided prior to entering into a contract for the 

performance of the modernization effort. DOD likewise is expected to 

provide the 1999 Defense Appropriations Act certification prior to entering 

into a contract for the modernization project.
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Cost and Personnel 

Uncertainties Could 

Adversely Impact 

Modernization Efforts

Because it was granted an A-76 waiver, the Army did not conduct a detailed 

cost comparison between the public and private sectors for its wholesale 

logistics modernization program. Nevertheless, it did complete a business 

case analysis in formulating its logistics modernization strategy. The Army’s 

business case analysis outlined the modernization program alternatives 

being considered and analyzed each alternative’s estimated costs, benefits, 

and risks. While numerous criteria were considered in developing 

alternative strategies, emphasis was placed on cost containment and a 

transition approach for affected government employees in selecting the 

preferred alternative. Table 1 summarizes the estimated cost and schedule 

for the three alternatives. (The Army determined that the status quo was 

not a viable option because it could not meet the design, implementation, 

and timeliness of future requirements. The Army concluded that the risk of 

doing nothing was unacceptable.)

Table 1: Estimated Cost and Schedule for Wholesale Logistics Modernization 

Alternatives

Note: We did not attempt to validate the figures in the table.

a

Cost of performing the legacy sustainment and modernization to a common end-state over a 10-year 

period.

b

This cost is included in the 10-year program cost. The cost of new system development includes 

sustaining the legacy system until the new system is deployed.

Source: The Business Case, Wholesale Logistics Modernization Program, February 12, 1999.

Current dollars in millions

Estimated cost to government

Alternative

Program cost over

the 10-year perioda

New system

development costb

Time to deploy

new system

I

(All work done

in-house) $581.7 $562.5 8 years

II

(In-house/contractor 

mix of work) 425.2 329.8 6 years

III

(All work done by 

contractor) 420.9 253.5 5 years
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According to the Army, its analysis showed that alternative III, which called 

for contractor operation of the legacy system while developing the 

modernized system, was the alternative expected to require the least time 

to develop a new system, the smallest estimated investment costs, and the 

lowest estimated operational costs over a 10-year period. It was also 

considered the option most likely to be able to meet the Army’s goal of a 

solution that was executable within the program’s existing operating 

budget.8

 However, available Army data show a range of uncertainty about 

the cost estimates that could make it difficult to achieve this objective. 

Also, uncertainties associated with the transfer of the work to the private 

sector could affect program stability during the transition period.

Cost Uncertainties The Army’s request for proposals provides for an expenditure limit on the 

planned contract, with certain exceptions,9 of under $40 million a year, the 

approximate current funding level of the two centers. The request for 

proposals further provides that up to an additional $30.5 million per 

contract year would be available for the data processing of the modernized 

services. The amount allowed for processing is to be based directly on the 

percentage of data processing performed by the contractor, with the 

Defense Information Systems Agency performing the residual processing. 

However, various factors suggest much uncertainty as to whether the 

modernized system may be achievable within the projected funding level.

First, as part of its economic analysis, AMC performed a limited sensitivity 

analysis on alternative III10 by assessing how underlying assumptions could 

affect cost estimates. The analysis showed that for this alternative, 

developmental costs, an element of investment cost, ranged from a low of 

$107.3 million to a high of $232.7 million. For purposes of its comparison of 

alternatives, the Army adopted an estimate at the mid-point of this range; 

nevertheless, the analysis underscored the uncertainty associated with 

development cost estimates. Further, concerning the issue of additional 

8

 The Army’s approach is predicated on the assumption that a contractor will be willing to 

provide a sizable investment in the first few years with the anticipation that those costs, and 

a profit, will be forthcoming in the later years of the contract.

9

 Exceptions include additional functionality and in-processing changes, data processing for 

transferred systems, data processing for modernized services, related logistics services, and 

expanded services.

10 Documentation of the Army’s economic analysis states that a sensitivity analysis was 

conducted only for alternative III because it was the most favorable option.
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requirements in the future, the economic analysis states that “the cost of 

system growth, adding new functions during the ten year contract, has not 

been addressed by the estimate and could be a significant area of cost 

considering the number of related logistic process improvement plans.” 

Underestimating the effects of changing requirements can significantly 

affect software development schedule and costs. History shows that the 

average project experiences about a 25-percent increase in requirements 

over its lifetime. Such a change can produce at least a 25-percent addition 

to the software schedule and increase cost. Also, projects that skimp on 

initial system development activities, such as requirement definition, must 

have the same work performed later at anywhere from 10 to 100 times the 

cost of doing it properly in the first place.

Second, cost uncertainties also exist because of the uncertain nature of the 

requirements. The request for proposals11 provides for a contract that 

contains a requirements portion and indefinite delivery portion. The work 

is to be performed pursuant to task orders issued on both a firm fixed price 

and time and materials basis. The cost of the work is not known in advance 

for any of the task orders. The cost estimates of those task orders to be 

issued on a time and materials basis are particularly uncertain, even though 

the hourly rates would be fixed in the contract, because the number of 

labor hours and the cost of materials are not. 

A third risk area that could affect costs relates to the Army’s tentative plans 

for developing and implementing a modernized information system under 

an incremental approach. Under the incremental approach, changes 

affecting the legacy system would be made on a graduated basis. This 

would allow a gradual transition from the legacy system to the modernized 

system, requiring less sustainment of the legacy system as the functions are 

transferred from the old to the new systems. Should this prove feasible, the 

government would likely begin to realize the benefits of a modernized 

system sooner, and the contractor might be able to achieve operating 

efficiencies much sooner—and realize additional revenues by assuming 

responsibilities for processing the new software code as it comes online. 

Until that occurs, the processing of the existing software will continue to 

be performed by the Defense Information Systems Agency. However, an 

Office of Secretary of Defense official providing oversight for the 

modernization effort has expressed concern that a modular, incremental 

11 The Army issued its request for proposals on April 29, 1999; contractor proposals were 

submitted June 28, 1999.
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approach of transferring functions from the legacy system to a new, 

modernized system will not work. He indicated that since the new system 

is expected to be predicated upon reengineered processes, and new 

software code tied to the new processes, this would likely preclude a

one-for-one modular replacement between old and new systems. An Army 

official responsible for oversight of information systems issues agreed that 

such an incremental approach is likely not to be feasible.

Fourth, known problems with DOD data—particularly “cost” data—

undermine confidence in the reliability of the cost estimates. DOD has 

acknowledged fundamental problems with its ability to accumulate reliable 

cost information. Continuing problems in this area were confirmed by our 

most recent audit of the federal government’s 1998 consolidated financial 

statements.12 For example, we reported that DOD is unable to provide data 

on the costs associated with functions to be considered for A-76 

outsourcing competitions. Our audit also revealed a material deficiency in 

DOD’s ability to report budget information. Given the severity of these 

deficiencies, the estimated cost of the modernization effort must be 

considered uncertain.

Each of the above factors has the potential to affect the timing and costs 

associated with developing and implementing the Army’s modernized 

wholesale logistics information management system. This could put the 

Army in the difficult position of having to revisit issues of cost, timing, or 

making tradeoffs in terms of modernization objectives. Close program 

monitoring against specific program objectives and milestones will be 

important to ensuring the program meets the requirements of relevant 

legislation and policy guidance, including the Clinger-Cohen Act of 1996, 

which requires federal agencies to have processes and information to help 

ensure that technology projects (1) are implemented at acceptable costs, 

within reasonable and expected time frames and (2) contribute to tangible, 

observable improvements in mission performance. Such monitoring or 

tracking of progress should be facilitated by the use of a performance plan 

establishing specific goals and indicators to measure performance as 

provided for in the Government Performance and Results Act of 1993. 

Without performance measures, managers often have great difficulty 

getting results from information systems because they cannot define their 

needs precisely.

12 Financial Audit: 1998 Financial Report of the United States Government

(GAO/AIMD-99-130, Mar. 31, 1999.)
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Uncertainty Over 

Employees’ Receptivity to 

“Soft-Landing” Package

As the Army contemplates relying upon a contractor to operate the legacy 

system while developing a modernized system, uncertainties exist 

regarding the extent to which government employees will be willing to 

accept the “soft-landing” approach of employment with the winning 

contractor. Given the limited amount of documentation on the legacy 

system, the continued support of the existing workforce could be 

important to continuing maintenance of the system during the transition 

period. While experience in other DOD cases suggests that significant 

numbers of government employees in other circumstances have accepted 

similar employment opportunities with the private sector, the large number 

of center employees nearing retirement eligibility under the Civil Service 

Retirement System could limit the number of acceptances depending on 

the availability of opportunities for other government positions.

An important feature of the Army’s approach to the modernization program 

is a so-called soft landing for displaced government employees,13 ensuring 

them of employment with the winning contractor. The Army believes such 

an approach also has important benefits to both the government and the 

contractor since these employees may be essential to maintaining the 

Army’s existing legacy system as a modernized system is being developed. 

The current system, as it has evolved over time, consists of over 560 

program applications, 3,000 major subordinate command bridging 

programs, 260 databases, and over 20 million lines of computer software 

code. Available information suggests that the institutional knowledge of 

the current employees may be essential to maintaining the system given 

extensive system modifications that have been made over the years, but 

with limited documentation. Based on analyses of the Central Design 

Activities completed in 1994 and 1997, employing criteria developed by the 

Software Engineering Institute, both centers ranked very low in written 

technical documentation needed to replicate operation and maintenance of 

their systems.14 This means that much of the institutional knowledge 

13 Specifically, the “soft landing” requires the contractor to offer displaced employees jobs 

with comparable pay and benefits, in the employees’ current geographical location, for a 

minimum of 1 year. Displaced employees are those who are on the Central Design Activities’ 

rolls on the date immediately preceding the transfer and who are involuntarily separated 

from federal service as a result of the contracting action.

14 The Industrial Logistics Systems Center was determined to be level 2 by the Software 

Production Consortium in October 1997 and the Logistics System Support Center was 

ranked as level 1 by itself and the Software Engineering Institute in 1994. The scale goes 

from 1 to 5, with 1 being the lowest ranking.
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concerning the existing system resides with the individual employees who 

have been responsible for maintaining and modifying the system over time.

The Army currently plans for the wholesale logistics modernization 

program contractor to assume operation and maintenance of the existing 

legacy system about 90 days after contract award. The contractor is 

expected to maintain and operate the legacy system, in full or in part, until 

the modernized system becomes fully operational in an estimated 5 years. 

Whether a contractor can sustain a system as complex as the Army’s 

without adequate documentation and staff experienced with that system 

remains uncertain. In its business case analysis, the Army acknowledged 

the potential for “interruption of wholesale logistics services to the war 

fighter due to the transfer of expertise, workload, software, and 

documentation of its legacy system to the contractor.” The mitigation 

proposed by the Army, however, does not fully address the risk. The Army’s 

mitigation strategy was that “the government would retain control of the 

wholesale logistics processing at the Defense Information Systems Agency 

Megacenters.” However, the risk is in the contractor’s ability to sustain the 

legacy software, not process it.

While the Army’s request for proposals requires that displaced government 

employees be given positions with the winning contractor for a period of at 

least 1 year, the number of employees who would be willing to accept such 

positions, if offered, is unknown. About 85 percent of the current center 

employees are participants in the government’s Civil Service Retirement 

System, and 83 percent will be eligible for either regular or early retirement 

within 5 years15—reportedly making them reluctant to leave Federal 

service before becoming eligible for retirement. 

The number of persons willing to accept the soft-landing package could be 

significantly affected by the availability of other federal opportunities for 

employment. During on-site interviews, staff indicated to us that they 

would prefer to continue working for the federal government rather than 

join the contractor. A 1997 study sponsored by the Office of the Secretary 

of Defense and conducted in RAND’s National Defense Research Institute, 

Outsourcing of DOD Commercial Activities: Impacts on Civil Service 

15 Regular voluntary retirement occurs when an employee wants to retire and meets the full 

age and service eligibility requirements. Early voluntary retirement occurs when an 

employee meets lesser age and/or service requirements than for regular voluntary 

retirement. Authority to grant early voluntary retirement must be approved by the Office of 

Personnel Management.
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Employees, addresses this issue. The report states, “Civil service workers 

are averse to leaving civil service and accepting employment with

private-sector contractors. Reasons cited are nonportability of some 

federal retirement benefits, better civil service wages and benefits, and 

better job security.” 

Officials from CECOM’s personnel office told us that the current employees 

expressed an overwhelming preference to remain in government service. 

CECOM does not plan to conduct a formal survey to determine the number 

of staff by functionality that would actually go to work for the winning 

contractor, since many staff do not make decisions until the action is 

imminent. 

At the same time, we found that some employees are already beginning to 

seek other federal employment and that existing shortages of information 

technology personnel within the government could provide other options 

for the affected employees. As of May 31, 1999, the CECOM personnel 

office told us its estimate of displaced employees who would be required to 

be offered jobs by the contractor has been reduced from 350 to 335. 

However, it believes the number may be further reduced since there 

already has been more attrition than expected because of uncertainty 

about the program’s future. An official in the Office of Secretary of Defense 

has expressed concern that continuing program uncertainties could 

endanger the capability of the Army to maintain its existing wholesale 

logistics functionality. 

Conclusions To date, the Army has taken actions to comply with legislative and A-76 

requirements for the plan to contract for the wholesale logistics 

modernization. While we agree that there is a need to modernize and 

improve operating efficiencies, we believe the modernization initiative has 

significant uncertainties and risks. We expect some of these uncertainties 

will be addressed during the contract negotiation process. Even then, the 

uncertainties over cost and implementation schedule for the modernized 

system are likely to remain for some time. Also, performance measures 

have not been established for measuring whether the modernization 

program is achieving observed results.

Recommendation We recommend that the Secretary of Defense require the Secretary of the 

Army to develop a transition plan based on an assessment of the 
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quantitative and qualitative risks associated with this project and what 

actions are planned to mitigate those risks. We also recommend that the 

Secretary of Defense require the Secretary of the Army provide for 

sufficient oversight with quantifiable performance measures to track the 

success of the modernization program.

Agency Comments and 

Our Evaluation

The Deputy Under Secretary of Defense (Logistics) provided written 

comments on a draft of this report. The Department of Defense concurred 

with the report’s recommendations to develop a strategy to ensure actions 

are in place to mitigate the risks associated with the Wholesale Logistics 

Modernization Program. It indicated the Army will develop a transition 

plan that will be put in place before contract award. The department also 

stated that the Army plans to negotiate performance metrics as part of the 

contract award. We are encouraged that DOD is starting to address the 

risks and uncertainties that have been identified for this major 

modernization effort. However, as we previously noted, we expect that the 

uncertainties over cost and implementation schedule for the modernized 

system will continue for some time and, as indicated in our 

recommendation, will require high level oversight to track the success of 

the modernization program.

DOD also provided technical comments, which have been incorporated as 

appropriate. The department’s written comments on a draft of this report 

are included in appendix II.

Scope and 

Methodology

To determine if the Army’s actions complied with the requirements of 

applicable legislation and policy guidance, we reviewed Circular A-76 and 

relevant legislation; the Army’s programming and implementation plans; 

and the A-76 waiver package, including the business case and economic 

analysis, although we did not establish the reliability of the data. We 

interviewed senior officials at the Logistics Systems Support Center, St. 

Louis, Missouri; the Industrial Logistics Systems Center, Chambersburg, 

Pennsylvania; CECOM, Fort Monmouth, New Jersey; and AMC, the Army’s 

Office of General Counsel, and the Office of Management and Budget, 

Washington, D.C. We met and talked with many of the employees of both 

Central Design Activities in St. Louis and Chambersburg. We also made use 

of our prior work regarding A-76 issues.
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Page 19 GAO/NSIAD-00-19 DOD Competitive Sourcing

To assess the risks associated with this proposal, we reviewed the A-76 

waiver package, which included the business case, economic analysis, and 

risk analysis of proposed alternatives, although we did not independently 

verify the data. We also reviewed the request for proposals and the 

solicitation package. We interviewed officials at the Office of the Assistant 

Secretary of Defense, Command, Control, Communications, and 

Intelligence and the Army Office of the Director of Information Systems for 

Command, Control, Communication, and Computers charged with 

monitoring the program and officials at AMC, CECOM, the Central Design 

Activities, and the Defense Information Systems Agency. We also made use 

of our prior work in the outsourcing area. 

We conducted our review from May 1998 through August 1999 in 

accordance with generally accepted government auditing standards. 

We are providing copies of this report to the Honorable Charles S. Robb, 

Ranking Minority Member of the Subcommittee on Readiness and 

Management Support, Senate Armed Services Committee; the Honorable 

Ted Stevens, Chairman of the Senate Committee on Appropriations; the 

Honorable Robert C. Byrd, Ranking Minority Member of the Senate 

Committee on Appropriations; the Honorable C.W. Bill Young, Chairman of 

the House Committee on Appropriations; the Honorable David R. Obey, 

Ranking Minority Member of the House Committee on Appropriations; the 

Honorable James M. Talent, House Armed Services Committee; the 

Honorable William S. Cohen, Secretary of Defense; the Honorable Louis 

Caldera, Secretary of the Army; and the Honorable Jacob J. Lew, Director 

of OMB. We will make copies available to others upon request.

If you have any questions regarding this report, please contact me on

(202) 512-8412. Other GAO contacts and other key contributors to this 

assignment are listed in appendix III.

David R. Warren, Director

Defense Management Issue
Page 20 GAO/NSIAD-00-19 DOD Competitive Sourcing

Appendix I

Chronology of the Modernization Initiative ApendxIi

August 1997 In response to tasking from the Army Materiel Command (AMC), the Communications and Electronics Command 

formed a Special Project Team to gather information and market research to develop alternatives for modernizing 

its logistics processes.

October 1997 Contractors were invited to present their approach to performing the function.

February 1998 AMC approved the team’s approach, which proposed to contract for development and sustainment of the wholesale 

logistics system, provide a “soft landing” for affected government employees, and provide for contractor operation of 

legacy systems until total implementation of a modernized system could be completed. 

April 28, 1998 Concerned that the proposed approach would place “national security at risk” by contracting for “mission essential 

support to the warfighter,” the Chairman of the Military Readiness Subcommittee, House Committee on National 

Security, requested that the Office of the Assistant Secretary of the Army (Manpower and Reserve Affairs) and the 

Army Audit Agency answer specific questions about the proposed action. The Army considered its planned action 

was not subject to A-76 requirements. 

July 15, 1998 Pursuant to 10 U.S.C. 2461, the Army notified the Congress of its intent to rely on private industry to modernize its 

information management system for wholesale logistics. The notification stated the Army would provide the 

Congress a summary of its cost comparison and other reports and certification required under 2461 prior to 

contract award.

August 17, 1998 The Army Audit Agency published its report.

October 22, 1998 Because the Army changed its view and decided that A-76 should apply, the Commander of AMC sent an A-76 

waiver package to the Assistant Secretary of the Army for Installations, Logistics and Environment, a

 recommending 

that a cost-comparison waiver be granted. AMC recommended an alternative that would transfer responsibility of 

software support services to a private contractor, reengineer the business processes and recommend changes, 

and replace the legacy system with commercial software applications. 

March 3, 1999 The original waiver package was revised, based on input from cognizant Army organizations, and resubmitted to 

the Assistant Secretary. This package included a revised business case analysis, an economic analysis, an 

acquisition strategy, a logistics integration agency study, background research of industry’s achievements in supply 

chain management, and a risk analysis of proposed alternatives. A draft request for proposals was also sent 

forward. 

The memorandum supporting the waiver request emphasized the need to modernize the Army’s logistics support 

system and proposed to leverage industry’s investments and technology in the logistics field. The basis for the 

waiver request was threefold: (1) the conversion would result in significant service quality improvement, (2) the 

conversion would not serve to reduce significantly the level or quality of competition in the future award or 

performance of work, and (3) the functions to be converted are not inherently governmental. 

April 20, 1999 The Assistant Secretary approved the A-76 waiver request—the first A-76 waiver approved by the Army.

April 27, 1999 The Army informed the Congress that it had approved a waiver of the cost comparison requirements of A-76. The 

notice also reconfirmed the Army’s intent to provide a detailed summary of its cost comparison and other reports 

and certifications pursuant to section 2461 prior to entering into any contract for wholesale logistics modernization.

April 29, 1999 Employees and union are officially notified.

Final request for proposals is issued.

May 13-28, 1999 A total of four appeals are filed with the Assistant Secretary of the Army for Installations and Environment by both 

the Industrial Logistics Systems Center and the Logistics System Support Center and are currently pending. The 

appeals are from individuals, a group of individuals, and the Local 1763 union, representing employees at the St. 

Louis Central Design Activity. 

June 17, 1999 Appellants are notified that the Secretary of the Army will resolve the appeals after he has received a 

recommendation from an independent panel of senior civilian officials after July 30, 1999.

 aNow known as the Assistant Secretary of the Army (Installations and Environment).
Page 21 GAO/NSIAD-00-19 DOD Competitive Sourcing

Appendix II

Comments From the Department of Defense ApendxIi
Appendix II

Comments From the Department of Defense

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Page 23 GAO/NSIAD-00-19 DOD Competitive Sourcing

Appendix III

GAO Contacts and Staff Acknowledgments ApendxIi

GAO Contacts Barry Holman, (202) 512-5581

Marilyn Wasleski, (202) 512-8436

Acknowledgments In addition to those named above, John Brosnan, Stephanie May,

J. T. “Mickey” McDermott, Debra McKinney, and Bonita Page made key 

contributions to this report.

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