United States General Accounting Office

GAO Report to Congressional Requesters

December 1997 OUTSOURCING DOD

LOGISTICS

Savings Achievable But

Defense Science

Board’s Projections

Are Overstated

GAO/NSIAD-98-48

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-277816 

December 8, 1997

Congressional requesters

As you requested, we reviewed the basis for the Defense Science Board’s

(DSB) estimate that the Department of Defense (DOD) could potentially save

$6 billion annually by reducing its logistics infrastructure costs within the

continental United States (CONUS).1

 This report provides our analysis of the

reasonableness of the savings projected by the Board. Specifically, we

discuss (1) the opportunities for logistics infrastructure savings and

(2) DOD’s and our analyses of the DSB’s projected logistics infrastructure

savings.

Background Faced with a goal of increasing the Department’s investments in

modernization without increasing overall defense budgets, DOD has

recently focused on the cost of support operations and their associated

infrastructure, with the objective of finding ways to provide required

support resources and capability at reduced costs.2 DOD recognizes that

portions of its support structure are inefficient and continue to absorb a

large share of the defense budget. To the extent support costs can be

reduced, available future defense dollars could be used for modernization

or other defense priorities.

DSB Studies Project

Infrastructure Cost Savings

From Outsourcing and

Other Initiatives

The Office of the Secretary of Defense (OSD) requested that DSB identify

DOD activities that the private sector could do more efficiently and to

determine the expected savings from outsourcing. DSB, a civilian advisory

board to DOD, issued two reports in 1996 addressing outsourcing and other

opportunities for substantially reducing DOD support services.3

 The first

focused solely on outsourcing and privatization issues.4

 The second,

incorporating findings from the earlier report, had a broader scope that

1

As discussed in this report, logistics infrastructure refers only to CONUS logistics.

2

We have identified this as a high-risk area. High-risk areas are those critical government operations

that are highly vulnerable to waste, fraud, abuse, and mismanagement. High-Risk Series: Defense

Infrastructure (GAO/HR-97-7, Feb. 1997) provides further discussion of our assessment of the defense

infrastructure.

3

Report of the Defense Science Board Task Force on Outsourcing and Privatization, August 1996, and

Report on the Defense Science Board 1996 Summer Study on Achieving an Innovative Support

Structure for 21st Century Military Superiority: Higher Performance at Lower Costs, November 1996.

4

DOD defines outsourcing as the transfer of a function, previously performed in-house, to an outside

provider. Privatization is a subset of outsourcing that involves the transfer or sale of government

assets to the private sector.

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included other methods for reducing infrastructure costs. In preparation

for the Quadrennial Defense Review (QDR), OSD’s Program Analysis and

Evaluation (PA&E) directorate assessed the DSB’s savings estimates from

the second report.5

 Our analysis also focused on the second report’s

findings and recommendations.

First Study The first DSB task force concluded that DOD could realize savings of 30 to

40 percent of logistics costs and achieve broad improvements in service

delivery and responsiveness by outsourcing support services traditionally

done by government personnel. The report cited evidence from the Center

for Naval Analyses (CNA) public-private competition studies of commercial

and depot maintenance activities. The Board also noted that an

Outsourcing Institute study found that the private sector saved about 10 to

15 percent by outsourcing but that the public sector savings from

outsourcing would be higher because of the inefficiency of government

service organizations.6

 The DSB task force stated that an aggressive DOD

outsourcing initiative could generate savings ranging from $7 billion to

$12 billion annually by fiscal year 2002.

Second Study Building on the earlier study, DSB’s second task force report provided a

new vision wherein DOD would only provide warfighting, direct battlefield

support, policy- and decision-making, and oversight activities. All other

activities would be done by the private sector. DSB said that DOD would

need to make an investment of about $6 billion but would ultimately save

about $30 billion annually by the year 2002, primarily through outsourcing

support functions.

Of these $30 billion in annual savings, $6 billion was to come from CONUS

logistics infrastructure activities, which DSB defined as including inventory

control points, distribution depots, maintenance depots, and installation

supply and repair. About $4.2 billion of the savings would be achieved by

outsourcing these activities; the remaining $1.8-billion savings would be

achieved through improvements in inventory management practices and

equipment reliability. Table 1 shows a breakout of the estimated logistics

infrastructure savings.

5

The QDR is required by the Military Force Structure Review Act of 1996, which was included as part

of the National Defense Authorization Act for Fiscal Year 1997. DOD designed the QDR to be a

fundamental and comprehensive examination of America’s defense needs from 1997 to 2015. The

review examines potential threats, strategy, force structure, readiness posture, military modernization

programs, defense infrastructure, and other elements of the defense program.

6

The Outsourcing Institute, founded in 1993, is a professional association that provides information on

the strategic use of outside resources.

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Table 1: Breakout of DSB Savings

Estimates for CONUS Logistics

Infrastructure

Dollars in billions

Savings initiative Savings

Use of prime vendors and contractor logistics support

Filling orders and repairing equipment $3.5

Wholesale inventory 0.7

Subtotal 4.2

Reductions from other initiatives

Inventory management improvements for non-deploying units 0.3

Equipment reliability improvements 1.5

Subtotal 1.8

Total $6.0

Source: DSB.

According to the DSB estimates, the $6-billion savings represents an

approximate 40-percent reduction in the $14 billion the Board estimated

DOD spends annually for CONUS logistics activities. According to a DSB task

force member, estimates for the cost of installation supply and repair

activities were unavailable. Therefore, the group used $14 billion as a

rough estimate to approximate total CONUS logistics cost, not including

activities already contracted out. Although we were unable to substantiate

those numbers, the data that is available indicates that DSB’s estimate of

$14 billion for CONUS logistics costs is conservative. For example, the Navy

has reported that more than $8.5 billion of Navy resources was applied in

fiscal year 1996 to maintenance programs in support of fleet ships and

aircraft.7

The report also stated that to gain economies and achieve significant

savings, DOD needs to consider dramatic changes in the way it does

business. DSB said the Department must get out of the material

management/distribution and repair business by expanding contractor

logistics support to all fielded weapon systems and by expanding the use

of “prime vendors” for all commodities. Contractor logistics support,

which relies on a contractor to provide long-term, total life-cycle logistics

support, combines depot-level maintenance with wholesale and selected

retail material management functions. Under the “prime vendor” concept,

DOD would rely on a single vendor to buy, warehouse, and distribute

inventory to the customer as needed, thus removing the Defense Logistics

Agency and the services from their present middleman role.

7

Navy Regional Maintenance: Substantial Opportunities Exist to Build on Infrastructure Streamlining

Progress (GAO/NSIAD-96-30, Nov. 13, 1997).

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Results in Brief Overall, we agree with the Defense Science Board that DOD can reduce the

costs of its logistics activities through outsourcing and other initiatives.

DOD has already achieved over $700 million in savings from the use of a

prime vendor program and other inventory-related reduction efforts for

defense medical supplies. Also, according to studies by the Center for

Naval Analyses, competition for work, including competition between the

public sector and the private sector—regardless of which one wins—can

result in cost savings. Further, many private sector firms have successfully

used outsourcing to reduce their costs of operations.

The Program Analysis and Evaluation’s analysis shows, however, that the

Defense Science Board’s estimated annual savings of $6 billion is

overstated by about $4 billion because of errors in estimates, overly

optimistic savings assumptions, and legal and cultural impediments.

According to the Program Analysis and Evaluation’s analysis, this

$4 billion includes (1) $1 billion in overstated contract administration and

oversight savings and one-time inventory savings and (2) $3 billion in

savings that would be unlikely or would be difficult to achieve within the

Board’s 6-year time frame, given certain legislative requirements and DOD’s

resistance to outsourcing all logistics functions.

Our analysis confirmed the Program Analysis and Evaluation’s conclusion

that the Board’s estimated savings were overstated. Our analysis also

raised questions about the Board’s projected savings, but we do not know

by how much or whether these questions would change the $2 billion in

savings that the Program Analysis and Evaluation concluded were

achievable. For example, we found that the Board’s estimated savings

from improvements to equipment reliability were overstated by at least

$1.2 billion. Further, we question whether DOD would achieve a 25-percent

savings from outsourcing, as the Board assumed, because the savings were

based primarily on studies of public-private competitions in highly

competitive private sector markets. However, competitive markets may

not currently exist in some areas. For example, we reported that

91 percent of recent nonship depot maintenance contracts were awarded

on a sole-source basis.

Notwithstanding our concerns about the magnitude of savings, DOD can

make significant reductions in logistics costs. The Secretary of Defense

has recently issued a strategic plan for achieving such reductions. This

report is a step in the right direction. DOD now needs an implementation

plan based on a realistic assessment of the savings potential of various

cost-reduction alternatives and the time frames for accomplishing various

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activities required to identify and implement the most cost-effective

solutions. This plan should be presented to Congress to provide a basis for

congressional oversight.

Opportunities Exist

for Logistics

Infrastructure Savings

Our reviews of best practices within the private sector and ongoing work

at DOD indicate that DOD has significant opportunities for reducing logistics

costs and improving performance by changing its business processes. This

work also indicates that determining the most cost-effective processes to

use requires an evaluation of costs and benefits of each situation. These

findings are consistent with the general theme of the DSB’s reports that

opportunities exist for savings in the operation of DOD’s logistics support

activities. However, DSB focused on outsourcing, while our work has

focused first on reengineering and streamlining, and outsourcing where

appropriate and more cost-effective.

DOD Can Reduce Logistics

Costs

Over the past several years, DOD has considered a number of actions to

improve the efficiency and effectiveness of its logistics system. As with the

private sector, such actions should include using highly accurate

information systems, consolidating certain activities, employing various

process streamlining methods, and outsourcing. For example, defense

maintenance depots have about 40-percent excess capacity, and we have

advocated consolidating workloads to take advantage of economies of

scale and eliminate unnecessary duplication.8

 Consolidating workloads

from two closing depots would allow the Air Force, for instance, to

achieve annual savings of over $200 million and reduce its excess capacity

from 45 percent to about 8 percent.

In addition, our work has pointed out the benefits of outsourcing when

careful economic analysis indicates the private sector can provide

required support at less cost than a DOD activity can. For example, the

Defense Logistics Agency has successfully taken steps to use prime

vendors to supply personnel items directly to military facilities.9

 The

consumable items under these vendor programs account for 2 percent of

the consumable items DOD manages. DOD’s prime vendor program for

medical supplies, along with other inventory reduction efforts, has

resulted in savings that we estimate exceed $700 million. More

8

Defense Depot Maintenance: Challenges Facing DOD in Managing Working Capital Funds

(GAO/T-NSIAD/AIMD-97-152, May 7, 1997).

9

Inventory Management: Greater Use of Best Practices Could Reduce DOD’s Logistics Costs

(GAO/T-NSIAD-97-214, July 24, 1997).

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importantly, this program has moved DOD out of the inventory storage and

distribution function for these supplies, thus emptying warehouses,

eliminating unnecessary layers of inventory, and reducing the overall size

of the DOD supply system. Also, service is improved because DOD buys only

the items that are currently needed and consumers can order and receive

inventory within hours of the time the items are used.

While DOD has achieved benefits from outsourcing, it has been shown that

adequate competition has been key to achieving significant reductions.

Public-private competition studies by CNA have stressed this point. In its

1993 review of the Navy’s Commercial Activities Program, CNA noted that

about half the competitions were won by the in-house team and that when

competitions with no savings were excluded, the savings from contracts

awarded to the public sector were 50 percent and those to the private

sector were 40 percent.10 CNA officials concluded that because of

competition both sectors were spurred to increase efficiency and reduce

costs and DOD achieved greater savings. CNA also concluded that savings

would have been less had the public sector been excluded from

competition. Likewise, our review of DOD’s public-private competition

program for depot maintenance determined that such competitions

resulted in reduced costs.

Private Sector Closely

Analyzes Outsourcing

Decisions

Facing increasing pressures to maintain market competitiveness, private

companies have been reevaluating their organization and processes to cut

costs and improve customer service. The most successful improvements

include (1) using highly accurate information systems that provide cost,

tracking, and control data; (2) consolidating and/or centralizing certain

activities; (3) employing various methods to streamline work processes;

and (4) shifting certain activities to third-party providers.11 Each

company’s overall business strategy and assessment of “core

competencies” guide which tools to use and how to use them.

10Analysis of the Navy’s Commercial Activities Program, Center for Naval Analyses, July 1993 and

Outsourcing and Competition: Lessons Learned From DOD Commercial Activities Programs, Center

for Naval Analyses, October 1996.

11Reports on this include: Best Management Practices: Reengineering the Air Force’s Logistics System

Can Yield Substantial Savings (GAO/NSIAD-96-5, Feb. 21, 1996); Inventory Management: The Army

Could Reduce Logistics Costs for Aviation Parts by Adopting Best Practices (GAO/NSIAD-97-82, 

Apr. 15, 1997); Base Operations: Challenges Confronting DOD as It Renews Emphasis on Outsourcing

(GAO/NSIAD-97-86, Mar. 11, 1997); Contract Management: Fixing DOD’s Payment Problems Is

Imperative (GAO/NSIAD-97-37, Apr. 10, 1997); Defense Infrastructure: Enhancing Performance

Through Better Business Practices (GAO/T-NSIAD/AIMD-95-126, Mar. 23, 1995); and Financial

Management Outsourcing Finance and Accounting (GAO/AIMD/NSIAD-98-43, Oct. 17, 1997).

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Private companies use a variety of approaches to meet their logistics

support needs. For example, Southwest Airlines contracts out almost all

maintenance, thus avoiding costly investments in facilities, personnel, and

inventory. However, in contrast, having already made a significant

investment in building infrastructure and training personnel, British

Airways reached a different decision about its support operations. While it

has sold off and/or outsourced some activities (namely engine repair and

parts supply) and improved remaining in-house repair operations, the

airline now has become a third-party supplier of aircraft overhaul.

Whether the organization decides to consolidate, reengineer, or outsource

activities, or to do some combination thereof, the private firms and

consultants with whom we met stressed that identifying and

understanding the organization’s core activities and obtaining accurate

cost data for all in-house operations are critical to making informed

business decisions and assessing overall performance. Core activities are

those that are essential for meeting an organization’s mission.

Before making decisions on what cost-saving options should be used, an

organization should develop a performance-based, risk-adjusted analysis

of benefits and costs for each option to provide (1) the foundation for

comparing the baseline benefits and costs with proposed options and (2) a

basis for decisionmakers to use in selecting a feasible option that meets

performance goals.12 The organization should also factor into the analysis

the barriers and risks in implementing the options. Thus, the best practice

would be to make an outsourcing decision only after a core assessment

and comprehensive cost-benefit analysis have been performed rather than

to take a blanket approach and outsource everything in a certain area.

PA&E Analysis Raises

Questions on DSB

Savings Estimates

PA&E’s analysis of the DSB’s estimated $6 billion in annual logistics savings

found that the estimate was overstated by about $1 billion and that

another $3 billion in projected savings would be difficult to achieve or

unlikely to be achieved.13

12Business Process Reengineering Assessment Guide (GAO/AIMD-10.1.15, Apr. 1997).

13The PA&E estimates have been rounded. PA&E’s figures are slightly higher than DSB’s because

PA&E used 1997 constant dollars. According to PA&E officials, the analysis required a quick

turnaround, which limited its scope to considering costing factors such as investment costs and the

double-counting of savings. The officials noted that PA&E did the analysis “in the same spirit” as DSB,

therefore, it did not question the DSB’s underlying assumptions, such as the savings potential from

technological improvements or outsourcing.

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According to PA&E officials, DSB’s $6-billion savings estimate was

overstated by about $1 billion because contract administration and

oversight costs were understated and one-time inventory savings (spread

over 6 years) was claimed as steady state savings. Further, in assessing the

degree of difficulty in achieving the savings, PA&E concluded that about

$1 billion would be difficult to achieve, but was possible if Congress

changed the required 60/40 public-private split to 50-50, which has since

occurred.14 PA&E also believed that another $2 billion was unlikely to be

saved primarily because of timing and DOD’s culture. It did not believe that

DOD could carry out the proposals within the DSB’s 6-year schedule, if at all.

PA&E’s assessment concluded that the remaining $2 billion of the DSB’s

$6-billion savings estimate was achievable or already identified in DOD’s

future year defense program. PA&E officials defined as achievable those

savings that they believed could be realized given DSB’s 25-percent savings

assumption and the then-current legal restrictions on outsourcing depot

maintenance activities. About $0.2 billion in savings would involve

maximizing the use of outsourcing under legislative constraints as they

existed at that time, such as the 60/40 rule.15 The remainder of the

achievable savings have already been identified in DOD’s future year

defense program. Table 2 shows PA&E’s revised estimate of the DSB’s

logistics savings.

14In addition to the 60/40 rule, other relevant statutes that govern depot-level activities have been

amended, and new provisions added by the recently enacted 1998 DOD Authorization Act. For

example, the 1998 Authorization Act provides for a new section 2460 in title 10, which for the first time

would establish a statutory definition of depot-level maintenance and repair. Also, section 2464 of 

title 10 is amended to provide for the first time a DOD-maintained core logistics capability that is

required to be government-owned and government-operated. The provision now requires the

performance of core workloads necessary to maintain this capability within the public depots and that

these facilities be assigned sufficient workloads to ensure cost-efficient operation and sufficient surge

capacity. The impact of these changes remains to be seen.

15At the time of the PA&E report, 10 U.S.C. 2466 prohibited the use of more than 40 percent of the

funds made available in a given fiscal year for the depot-level maintenance for performance of

maintenance activities by nonfederal personnel. The provision has been amended by the 1998 DOD

Authorization Act to increase the percentage to 50 percent.

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Table 2: PA&E’s Revised Estimate of

DSB’s Logistics Savings Dollars in billions

Savings

DSB $6

PA&E

Understated costs/overstated savings (1)

Savings hard to achieve (1)

Unlikely savings (2)

Achievable savings $2

Source: PA&E.

Our Analysis Also

Raises Questions

About DSB Savings

Estimates

Our analysis confirms PA&E’s conclusion that the DSB’s logistics savings

estimates are not well supported and are unlikely to be as large as

estimated. Specifically, we found that (1) the Board’s projected annual

savings from reliability improvements are overstated by over $1 billion;

(2) the DSB’s 25-percent savings rate from outsourcing appears to be overly

optimistic; and (3) DSB, while recognizing it would be difficult to do so,

assumed that DOD would overcome impediments that prevent the

outsourcing of all logistics functions. We do not know by how much or

whether these questions would change the $2 billion in savings that PA&E

concluded were achievable.

Savings From Reliability

Improvements Overstated

In addition to overstating inventory management savings noted by PA&E,

the DSB task force overstated its estimate of annual savings from

equipment reliability improvements. The Board’s estimate of $1.5 billion in

annual savings by year 2002 (6 years from the year of DSB’s study) is

overstated by at least $1.2 billion. DSB based its estimate on a Logistics

Management Institute (LMI) study that assessed the reductions of operation

and support costs that result from improved reliability and maintainability

due to technological advancements.16 Such advancements may include

using improved materials and fewer component parts; thus reducing the

number of spare purchases and the need for scheduled and unscheduled

maintenance. Accomplishing these advancements requires an investment

that must be evaluated in light of the expected return on investment.

For its study, LMI assumed an aggressive technology improvement

program. For example, it assumed a 9 to 1 return on investment that would

16Using Technology to Reduce Cost of Ownership, Volume 1: Annotated Briefing (LG404RD4,

Apr. 1996).

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accrue over 20 years, with savings starting the second year. Further, it

assumed that any given investment would generate a savings stream for at

least 10 years. Based on these assumptions and its analysis, LMI concluded

that with an annual investment starting at $100 million and leveling at

$500 million within 5 years, DOD could achieve $300 million in savings in

the sixth year. DOD would not achieve the $1.5-billion savings that DSB

included in its savings estimate until the fourteenth year. Thus, even

without questioning LMI’s aggressive assumptions, the DSB’s savings

estimate is overstated by at least $1.2 billion.

DSB’s Outsourcing Savings

Assumption Is Overly

Optimistic

DSB assumed that outsourcing all logistics activities would reduce DOD’s

logistics costs by 25 percent. The Board based this projection on

public-private competition studies, industry studies by such companies as

Caterpillar and Boeing, and anecdotal evidence. While we believe that

savings can be achieved through appropriate outsourcing, these savings

are a result of competition rather than from outsourcing itself. The studies

DSB cited were primarily for commercial activities—such as base

operations, real property maintenance, and food service.17 As we have

reported, these activities generally have highly competitive markets.18 For

some logistics activities, such as nonship depot maintenance, our recent

work has shown that competitive markets do not currently exist. To the

extent that competitive markets do not exist, the amount of savings that

can be generated through outsourcing may be reduced.

As we reported in 1996, 76 percent of the 240 open depot maintenance

contracts we examined were awarded noncompetitively (i.e., sole

source).19 More recently, we reported that the percentage of

noncompetitive depot maintenance contracts had increased for activities

other than shipyards. For the three services, about 91 percent of the 15,346

new depot maintenance contracts awarded from the beginning of fiscal

year 1996 to date were sole source.20 Moreover, the DSB recommended

contractor logistics support arrangements for new and modified weapon

17Analysis of the Navy’s Commercial Activities Program, Center for Naval Analyses, July 1993 and

Outsourcing and Competition: Tools to Increase Efficiency (briefing to DSB), Center for Naval

Analyses, January 1995.

18Defense Depot Maintenance: Commission on Roles and Mission’s Privatization Assumptions Are

Questionable (GAO/NSIAD-96-161, July 15, 1996) and Navy Maintenance: Assessment of the Public and

Private Shipyard Competition Program (GAO/NSIAD-94-184, May 25, 1994).

19Defense Depot Maintenance: Commission on Roles and Mission’s Privatization Assumptions Are

Questionable (GAO/NSIAD-96-161, July 15, 1996).

20Defense Depot Maintenance: Challenges Facing DOD in Managing Working Capital Funds

(GAO/T-NSIAD/AIMD-97-152, May 7, 1997).

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systems. Our past work demonstrates that most contractor logistics

support depot work is sole sourced to the original equipment

manufacturer, raising cost and future competition concerns. Furthermore,

eliminating the public sector from competition, as advocated by DSB, could

further decrease savings.

Impediments Limit DOD’s

Outsourcing of All

Logistics Activities

In developing its savings estimates for CONUS logistics, DSB assumed that

DOD would outsource all logistics activity. However, certain barriers,

including legal and cultural impediments, must be overcome to fully

implement DSB’s recommendations. While it may be possible to implement

DSB’s recommendations, in some cases, implementation may require

congressional action, and in others, implementation may take substantially

longer than DSB’s 6-year estimate. We did not quantify how much these

impediments will reduce DSB’s savings, but consistent with PA&E’s analysis,

these factors will mitigate portions of the projected savings.

Legislative Barriers Although it recommended that essentially all logistics—including material

management and depot maintenance, distribution, and other activities—be

outsourced, DSB recognized that outsourcing is limited or precluded by

various laws and regulations. For example, fundamental to determining

whether or not to outsource is the identification of core functions and

activities. Section 2464 of title 10 U.S.C. states that DOD activities should

maintain the government-owned and government-operated core logistics

capability necessary to maintain and repair weapon systems and other

military equipment needed to fulfill national strategic and contingency

plans.

The delineation of core activities has historically proven to be extremely

difficult. For example, proponents of increased privatization have

questioned the justification for retaining many support activities as core

and have recommended revising the core logistics requirement. Section

311 of the 1996 DOD Authorization Act directed the Secretary of Defense to

develop a comprehensive depot maintenance policy, including a definition

of DOD’s required core depot maintenance capability. While DOD has

identified a process for determining core depot maintenance capability

requirements, it has not completed its evaluation. Moreover, DOD has not

developed a process for identifying core requirements for other logistics

functions and activities. Thus, core requirements in these areas are also

unknown. The 1998 DOD Authorization Act again requires that the

Department identify its core depot maintenance requirements, this time

under the new provisions described above.

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Additionally, 10 U.S.C. 2466 states that no more than 50 percent of the

depot maintenance funds made available in a given fiscal year may be

spent for depot maintenance conducted by nonfederal personnel. This

provision, along with other relevant provisions significantly affects DSB’s

savings estimate because about 50 percent of depot maintenance would

not be subject to outsourcing.21

Section 2469 of title 10 states that DOD-performed depot maintenance and

repair workloads valued at not less than $3 million cannot be changed to

contractor-performed work without using competitive procedures that

include both public and private entities.22 This requirement for

public-private competition affects the DSB savings estimate because DSB

assumed the requirement would be eliminated. The 1998 DOD

Authorization Act also added a new section 2469a to title 10 that affects

public-private competitions for certain workloads from closed or realigned

installations.

Further, during the congressional deliberation on the 1997 DOD

Authorization Act, DOD provided Congress a list of statutory encumbrances

to outsourcing, including

• 10 U.S.C. 2461, which requires studies and reports before converting

public workloads to a contractor;

• 10 U.S.C. 2465, which prohibits contracts for performance of fire-fighting

and security guard functions;

• section 317 of the National Defense Authorization Act for Fiscal Year 1987

(P.L. 99-661), which prohibits the Secretary of Defense from contracting

for the functions performed at Crane Army Ammunition Activity or

McAllister Army Ammunition Plant;

• 10 U.S.C. 4532, which requires the Army to have supplies made by

factories and arsenals if they can do so economically; and

• 10 U.S.C. 2305 (a)(1), which specifies that in preparing for the

procurement of property or services, the Secretary of Defense shall

specify the agency’s needs and solicit bids or proposals in a manner

designed to achieve full and open competition.

Cultural Barriers DOD officials have repeatedly recognized the importance of using resources

for the highest priority operational and investment needs rather than

21As described earlier, the 1998 DOD Authorization Act changed the applicable provisions. For

example, a new definition of depot maintenance was added in 10 U.S.C. 2460 that together with the

amendment to 10 U.S.C. 2464 will impact DOD’s ability to outsource depot maintenance activities.

22For these workloads, OMB Circular A-76 does not apply.

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maintaining unneeded property, facilities, and overhead. However, DOD has

found that infrastructure reductions, whether through outsourcing or

some other means, are difficult and painful because achieving significant

cost savings may require up-front investments, the closure of installations,

and the elimination of military and civilian jobs. In addition, according to

DOD officials, the military services fear that savings achieved from

outsourcing would be diverted to support other DOD requirements and may

not be available to the outsourcing organization to fund service needs.

DSB recognized DOD’s cultural resistance to outsourcing logistics activities

and said that overcoming resistance may take some time. DOD has a

tradition of remarkable military achievement but it also has an entrenched

culture that resists dramatic changes from well-established patterns of

behavior. In 1992, we reported that academic experts and business

executives generally agreed that a culture change is a long-term effort that

takes at least 5 to 10 years to complete.23 Although a change in DOD’s

management culture is underway, continual support of its top managers is

critical to successful completion of cultural change.

Conclusions and

Recommendations

We agree with DSB that there are many opportunities for significant

reductions in logistics infrastructure costs. However, the Board’s

projected savings are overly optimistic. Further, savings opportunities

from consolidating and reengineering must be considered in addition to

outsourcing. Even though the Board recognized that there are

impediments to outsourcing, PA&E’s and our analyses show that because of

such impediments, not all logistics activities can be outsourced. This is

particularly true for the legislative barriers—principally, the legislated

workload mix between the public and private sectors. Moreover, PA&E’s

and our analyses show estimating errors of about $1 billion for contract

administration and inventory reductions and another $1 billion for

reliability improvements. These combined adjustments will further reduce

the Board’s projected savings by another 30 percent.

Notwithstanding the problems with DSB’s estimates, DOD’s effort to reduce

costs and achieve savings is extremely important, and we encourage DOD

to move forward as quickly as possible to develop a realistic and

achievable cost-reduction program. As discussed in our high-risk

infrastructure report, breaking down cultural resistance to change,

overcoming service parochialism, and setting forth a clear framework for a

23Organizational Culture: Techniques Companies Use to Perpetuate or Change Beliefs and Values

(GAO/NSIAD-92-105, Feb. 27, 1992).

Page 13 GAO/NSIAD-98-48 Outsourcing DOD Logistics
B-277816 

reduced defense infrastructure are key to effectively implementing

savings.

To aid in achieving the most savings possible, we recommend that the

Secretary of Defense require the development of a detailed

implementation plan for improving the efficiency and effectiveness of

DOD’s logistics infrastructure, including reengineering, consolidating,

outsourcing logistics activities where appropriate, and reducing excess

infrastructure. We recommend that the plan establish time frames for

identifying and evaluating alternative support options and implementing

the most cost-effective solutions and identify required resources, including

personnel and funding, for accomplishing the cost-reduction initiatives.

We also recommend that DOD present the plan to Congress in much the

same way it presented its force structure reductions in the Base Force

Plan and the bottom-up review. This would provide Congress a basis to

oversee DOD’s plan and would allow the affected parties to see what is

going to happen and when.

Agency Comments In commenting on a draft of this report (see app. II), DOD said that DSB had

considered legal barriers to outsourcing and had expressly sought to

identify the savings that could result if they were lifted. As noted in the

report, we believe it is unlikely that the legal barriers cited would be lifted

within the time frame DSB envisioned. DOD said that actions consistent with

our recommendation were underway and there was no need for the

recommended plan. Specifically, DOD said that the Secretary of Defense

was preparing a more detailed plan for implementing the strategy

formulated by QDR.

Subsequently, on November 12, 1997, the Secretary of Defense announced

the publication of the Defense Reform Initiative Report. This report

contained the results of the task force on defense reform established as a

result of QDR. The task force, which was charged with identifying ways to

improve DOD’s organization and procedures, defined a series of initiatives

in four major areas:

• reengineering, by adopting modern business practices to achieve

world-class standards of performance;

• consolidating, by streamlining organizations to remove redundancy and

maximize synergy;

• competing, by applying market mechanisms to improve quality, reduce

costs, and respond to customer needs; and

Page 14 GAO/NSIAD-98-48 Outsourcing DOD Logistics
B-277816 

• eliminating infrastructure, by reducing excess support structure to free

resources and focus on competencies.

This report is a step in the right direction and sets forth certain strategic

goals and direction. However, the intent of our recommendation was that

a detailed implementation plan be developed, and we have modified our

final recommendations accordingly.

Our scope and methodology are provided in appendix I.

We are sending copies of this report to interested congressional

committees; the Secretaries of Defense, the Army, the Navy, and the Air

Force; the Director of the Office of Management and Budget; and

interested congressional committees. Copies will be made available to

others upon request.

Please contact me at (202) 512-8412 if you or your staff have any questions

concerning this report. Major contributors to this report were 

James Wiggins, Julia Denman, Hilary Sullivan, and Jeffrey Knott. John

Brosnan from our Office of General Counsel provided the legal review.

David R. Warren, Director

Defense Management Issues

Page 15 GAO/NSIAD-98-48 Outsourcing DOD Logistics
B-277816 

List of Requesters

The Honorable James M. Inhofe

Chairman

The Honorable Charles S. Robb

Ranking Minority Member

Subcommittee on Readiness

Committee on Armed Services

United States Senate

The Honorable Neil Abercrombie

The Honorable Saxby Chambliss

The Honorable Tillie K. Fowler

The Honorable James V. Hansen

The Honorable John N. Hostettler

The Honorable Ernest J. Istook

The Honorable Walter B. Jones, Jr.

The Honorable Solomon P. Ortiz

The Honorable Norman Sisisky

The Honorable J.C. Watts, Jr.

House of Representatives

Page 16 GAO/NSIAD-98-48 Outsourcing DOD Logistics
Page 17 GAO/NSIAD-98-48 Outsourcing DOD Logistics
Contents

Letter 1

Appendix I 

Scope and

Methodology

20

Appendix II 

Comments From the

Department of

Defense

22

Related GAO Products 26

Tables Table 1: Breakout of DSB Savings Estimates for CONUS Logistics

Infrastructure

3

Table 2: PA&E’s Revised Estimate of DSB’s Logistics Savings 9

Abbreviations

CNA Center for Naval Analyses

CONUS continental United States

DOD Department of Defense

DSB Defense Science Board

LMI Logistics Management Institute

PA&E Program Analysis and Evaluation

QDR Quadrennial Defense Review

OSD Office of the Secretary of Defense

Page 18 GAO/NSIAD-98-48 Outsourcing DOD Logistics
Page 19 GAO/NSIAD-98-48 Outsourcing DOD Logistics
Appendix I 

Scope and Methodology

The scope of our review was limited to reviewing the Defense Science

Board’s (DSB) projected $6 billion annual savings for the continental

United States (CONUS) logistics. To determine the basis of DSB’s savings

estimate and recommendations, we reviewed the two DSB reports that

made savings estimates based on outsourcing: Report of the Defense

Science Board Task Force on Outsourcing and Privatization, August 28,

1996, and Report of the Defense Science Board 1996 Summer Study on

Achieving an Innovative Support Structure for 21st Century Military

Superiority: Higher Performance at Lower Costs, November 1996. We

discussed the assumptions with task force members and reviewed

supporting data that was available to us. We requested DSB task force

minutes pertaining to these studies; however, we did not receive them in

time to include them in our review.

We reviewed the Center for Naval Analyses (CNA) studies of public-private

competitions cited by DSB as well as CNA’s more recent studies and

discussed those studies with CNA officials. A CNA official said that CNA

analysts performed limited testing of the computer-generated data they

had used in analyzing the results from the commercial activity

competitions. He said that the data was reasonably accurate for the

purposes of their studies. We did not independently verify the data used in

CNA’s studies because we did not rely solely on CNA’s studies for our

conclusions.

To further evaluate DSB’s savings estimates and recommendations we

(1) reviewed Program Analysis and Evaluation’s (PA&E) analysis and

discussed that analysis and conclusions with PA&E officials and

(2) reviewed the Logistics Management Institute’s (LMI) study, Using

Technology to Reduce Cost of Ownership, Volume 1: Annotated Briefing

(LG404RD4, April 1996), and discussed the studies’ assumptions and

conclusions with LMI officials. In addition, we reviewed our past reports

and testimony on depot maintenance, public-private competitions, and

infrastructure reductions.

To determine other infrastructure savings opportunities for the

Department of Defense (DOD), we relied on our past reports and testimony

on commercial “best practices,” public-private competitions, and depot

maintenance. In addition, we also drew on ongoing work on outsourcing

practices within the private sector.

We performed our review at the following locations: Logistics

Management Institute, Arlington, Va.; DOD’s Office of Maintenance Policy,

Page 20 GAO/NSIAD-98-48 Outsourcing DOD Logistics
Appendix I 

Scope and Methodology

Office of Program Analysis and Evaluation; and the Defense Science

Board, Washington, D.C. We also had discussions with officials from the

Center for Naval Analyses, Alexandria, Va.

We conducted our review in July and August 1997, and, except where

noted, in accordance with generally accepted government auditing

standards.

Page 21 GAO/NSIAD-98-48 Outsourcing DOD Logistics
Appendix II 

Comments From the Department of Defense

Page 22 GAO/NSIAD-98-48 Outsourcing DOD Logistics
Appendix II 

Comments From the Department of Defense

Page 23 GAO/NSIAD-98-48 Outsourcing DOD Logistics
Appendix II 

Comments From the Department of Defense

Page 24 GAO/NSIAD-98-48 Outsourcing DOD Logistics
Appendix II 

Comments From the Department of Defense

Page 25 GAO/NSIAD-98-48 Outsourcing DOD Logistics
Related GAO Products

Air Force Depot Maintenance: Information on the Cost Effectiveness of

B-1B and B-52 Support Options (GAO/NSIAD-97-210BR, Sept. 12, 1997).

Navy Depot Maintenance: Privatizing the Louisville Operations in Place Is

Not Cost Effective (GAO/NSIAD-97-52, July 31, 1997).

Defense Depot Maintenance: Challenges Facing DOD in Managing Working

Capital Funds (GAO/T-NSIAD/AIMD-97-152, May 7, 1997).

Depot Maintenance: Uncertainties and Challenges DOD Faces in

Restructuring Its Depot Maintenance Program (GAO/T-NSIAD-97-111, Mar. 18,

1997) and (GAO/T/NSIAD-112, Apr. 10, 1997).

Defense Outsourcing: Challenges Facing DOD as It Attempts to Save

Billions in Infrastructure Costs (GAO/T-NSIAD-97-110, Mar. 12, 1997).

Navy Ordnance: Analysis of Business Area Price Increases and Financial

Losses (GAO/AIMD/NSIAD-97-74, Mar. 14, 1997).

High-Risk Series: Defense Infrastructure (GAO/HR-97-7, Feb. 1997).

Air Force Depot Maintenance: Privatization-in-Place Plans Are Costly

While Excess Capacity Exists (GAO/NSIAD-97-13, Dec. 31, 1996).

Army Depot Maintenance: Privatization Without Further Downsizing

Increases Costly Excess Capacity (GAO/NSIAD-96-201, Sept. 18, 1996).

Navy Depot Maintenance: Cost and Savings Issues Related to

Privatizing-in-Place the Louisville, Kentucky, Depot (GAO/NSIAD-96-202, 

Sept. 18, 1996).

Defense Depot Maintenance: Commission on Roles and Mission’s

Privatization Assumptions Are Questionable (GAO/NSIAD-96-161, 

July 15, 1996).

Defense Depot Maintenance: DOD’s Policy Report Leaves Future Role of

Depot System Uncertain (GAO/NSIAD-96-165, May 21, 1996).

Defense Depot Maintenance: More Comprehensive and Consistent

Workload Data Needed for Decisionmakers (GAO/NSIAD-96-166, May 21, 1996).

Page 26 GAO/NSIAD-98-48 Outsourcing DOD Logistics
Related GAO Products

Defense Depot Maintenance: Privatization and the Debate Over the

Public-Private Mix (GAO/T-NSIAD-96-146, Apr. 16, 1996) and (GAO/T-NSIAD-96-148,

Apr. 17, 1996).

Military Bases: Closure and Realignment Savings Are Significant, but Not

Easily Quantified (GAO/NSIAD-96-67, Apr. 8, 1996).

Depot Maintenance: Opportunities to Privatize Repair of Military Engines

(GAO/NSIAD-96-33, Mar. 5, 1996).

Closing Maintenance Depots: Savings, Personnel, and Workload

Redistribution Issues (GAO/NSIAD-96-29, Mar. 4, 1996).

Navy Maintenance: Assessment of the Public-Private Competition Program

for Aviation Maintenance (GAO/NSIAD-96-30, Jan. 22, 1996).

Depot Maintenance: The Navy’s Decision to Stop F/A-18 Repairs at Ogden

Air Logistics Center (GAO/NSIAD-96-31, Dec. 15, 1995).

Military Bases: Case Studies on Selected Bases Closed in 1988 and 1991

(GAO/NSIAD-95-139, Aug. 15, 1995).

Military Base Closure: Analysis of DOD’s Process and Recommendations

for 1995 (GAO/T-NSIAD-95-132, Apr. 17, 1995).

Military Bases: Analysis of DOD’s 1995 Process and Recommendations for

Closure and Realignment (GAO/NSIAD-95-133, Apr. 14, 1995).

Aerospace Guidance and Metrology Center: Cost Growth and Other

Factors Affect Closure and Privatization (GAO/NSIAD-95-60, Dec. 9, 1994).

Navy Maintenance: Assessment of the Public and Private Shipyard

Competition Program (GAO/NSIAD-94-184, May 25, 1994).

Depot Maintenance: Issues in Allocating Workload Between the Public and

Private Sectors (GAO/T-NSIAD-94-161, Apr. 12, 1994).

Depot Maintenance (GAO/NSIAD-93-292R, Sept. 30, 1993).

Depot Maintenance: Issues in Management and Restructuring to Support a

Downsized Military (GAO/T-NSIAD-93-13, May 6, 1993).

Page 27 GAO/NSIAD-98-48 Outsourcing DOD Logistics
Related GAO Products

Air Logistics Center Indicators (GAO/NSIAD-93-146R, Feb. 25, 1993).

Defense Force Management: Challenges Facing DOD as It Continues to

Downsize Its Civilian Workforce (GAO/NSIAD-93-123, Feb. 12, 1993).

Navy Maintenance: Public-Private Competition for F-14 Aircraft

Maintenance (GAO/NSIAD-92-143, May 20, 1992).

(709266) Page 28 GAO/NSIAD-98-48 Outsourcing DOD Logistics
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