United States General Accounting Office

GAO Testimony

Before the Subcommittee on Readiness, Committee on

National Security, House of Representatives

For Release on Delivery

Expected at

2:00 p.m., EDT

Wednesday,

March 12, 1997

DEFENSE OUTSOURCING

Challenges Facing DOD as

It Attempts to Save Billions

in Infrastructure Costs

Statement of David R. Warren, Director, Defense

Management Issues, National Security and International

Affairs Division

GAO/T-NSIAD-97-110

Mr. Chairman and Members of the Committee

I am pleased to be here today to present our observations, based on past

and ongoing work, on the Department of Defense’s (DOD) goal to save

billions of dollars by outsourcing work to the private sector and through

other initiatives. For fiscal year 1997, DOD estimates that about $146 billion,

or almost two thirds of its budget, will be for operations and support

activities. These activities, which DOD generally refers to as its support

infrastructure, include maintaining installation facilities, providing nonunit

training to the force, providing health care to military personnel and their

families, repairing equipment, and buying and managing spare parts

inventories. As you requested, I will discuss DOD’s past experience in

achieving infrastructure savings, key infrastructure areas that offer the

greatest potential for savings, and challenges DOD faces in reaching goals

to reduce infrastructure in the future.

Background DOD defines infrastructure as activities that generally operate from fixed

locations to support missions like those carried out by combat forces.

Infrastructure includes installation support; central training; central

medical; central logistics; force management; acquisition; infrastructure;

central personnel; and central command, control, and communications.

DOD recognizes that its support structure is inefficient and that its costs

continue to absorb a large share of the defense budget and diverts funding

that could be used for modernization.

DOD has implemented various reform initiatives in the past to achieve

efficiencies and reduce costs. The Defense Management Review (DMR),

base realignment and closure (BRAC) process, National Performance

Review, the bottom-up review, and other efforts proposed various actions

intended to achieve these objectives. More recently, the Commission on

Roles and Missions (CORM) and the Defense Science Board (DSB) have

identified similar problems with DOD’s support structure and processes,

but have made outsourcing and privatization the centerpiece of their

reforms to reduce infrastructure and support costs. DOD defines

outsourcing as the transfer of functions performed inhouse to outside

providers and privatization as the transfer or sale of government assets to

the private sector.

Between fiscal year 1997 and 2002, DOD plans to increase procurement

funding from $44.1 billion to $68.3 billion, primarily to buy new weapon

systems and upgrade existing systems. DOD hopes that initiatives to reduce

Page 1 GAO/T-NSIAD-97-110 Defense Contractor
infrastructure costs will provide much of the increased procurement

funding. Initiatives to achieve infrastructure and support savings include

outsourcing and privatization, acquisition reforms, organizational

streamlining and consolidation, management process reengineering, base

and facility closures, personnel reductions, and inventory reductions.

DOD’s quadrennial review is likely to identify additional plans and

initiatives for reducing infrastructure costs. If savings from these

initiatives are not achieved and the defense budget remains relatively

constant, planned weapon systems procurements may have to be delayed,

stretched out, or canceled; the force structure may have to be further

reduced; and/or compromises may have to be made in military readiness.

Results in Brief Before providing the details of my statement, I would like to briefly

summarize the key points. First, we fully agree with DOD and others such

as the CORM and the DSB, that significant opportunities exist to reduce DOD’s

infrastructure and support costs. We also agree that many of the initiatives

that have been proposed relating to outsourcing represent real

opportunities for helping to achieve these savings. However, we question

whether the magnitude of savings anticipated by DOD and others is

attainable within the current strategy and force structure. To the extent

that these savings are not achieved, DOD and the Congress may have to

deal with difficult decisions about how to fund the needed modernization

of weapon systems and other DOD priorities.

Specifically, our past and ongoing work relative to DOD’s savings initiatives

shows that while past savings initiatives yielded significant savings, they

often fall short of DOD’s initial goal. For example, the DMR initiatives did not

achieve the level of savings that were originally estimated and many of the

initiatives proposed were not accomplished. For example, although

DOD-wide efforts to standardize and consolidate automatic data processing

systems under the Corporate Information Management initiatives

estimated savings of $2.18 billion during 1991 through 1995, these savings

were never realized and the program has largely been abandoned.

Likewise, most of the $5.6 billion savings projected for consolidation

initiatives have not materialized. Further, while DOD has substantially

reduced its infrastructure through the BRAC process and significant savings

will ultimately be achieved, savings will not be as great as initially

estimated or achieved as quickly as initially hoped. Also, efforts to

outsource various commercial activities under Office of Management and

Budget (OMB) Circular A-76, yielded some savings, but again the savings

were often less than anticipated. In the final analysis, today’s future years

Page 2 GAO/T-NSIAD-97-110 Defense Contractor
defense plan shows that, despite these initiatives, future infrastructure

costs will only slightly decline as a relative percentage of DOD’s budget.

Because of our concern about the waste and inefficiencies in DOD’s

support structure and operations, we have designated DOD’s infrastructure

as 1 of 24 high-risk areas that is vulnerable to waste and mismanagement

within the federal government. We believe that DOD could reap significant

savings by: (1) reducing excess capacity in its testing and evaluation areas

and reducing the 35-percent excess capacity in DOD’s laboratories and

centers; (2) reducing the 50-percent excess capacity within DOD’s depot

maintenance system; (3) reducing the costs of managing its $67 billion

inventory, of which almost half is beyond war reserve and operating

requirements, by aggressively adopting leading edge best practices;

(4) reducing installation support costs by relying more on interservice-type

arrangements and outsourcing more base support activities; and finally by

(5) reducing training costs by eliminating excess capacity within its

training facilities.

New ideas about reducing infrastructure costs have recently been

proposed to DOD that focus largely on outsourcing and privatization to

achieve savings. Our analysis of CORM, DSB, and OMB Circular A-76

proposals shows that, just as with past initiatives, there is reason for

caution about whether the magnitude of hoped for savings can be

achieved. Further, the CORM’s savings estimates are based primarily on

reported savings from public-private competitions under OMB Circular

A-76. However, as noted in our work and work done by others, the

projected savings from these competitions were not as high as expected.

Similarly, the DSB savings projections may be overly optimistic because

while they indicate that competition will result in reduced costs, a highly

competitive market does not exist in some of the areas being proposed.

Lastly, there are various legislative requirements that will also restrict and

otherwise affect DOD’s ability to implement some proposed initiatives. For

example, legislation prohibits the outsourcing of certain functions, such as

civilian firefighters or security guards at military installations. Also, there

are other provisions that affect the extent to which outsourcing can be

accomplished in other areas.

In conclusion, the opportunities for savings are great. However, from what

we have seen historically and from our analysis of current initiatives, it is

questionable whether the magnitude of hoped for savings will be achieved.

Notwithstanding this, we think DOD’s effort to reduce costs and achieve

savings is extremely important and we encourage DOD to move forward as

Page 3 GAO/T-NSIAD-97-110 Defense Contractor
quickly as possible. As we stated in our high-risk infrastructure report,

breaking down cultural resistance to change, overcoming service

parochialism, and setting forth a clear framework for a reduced defense

infrastructure are key to effectively implementing savings. To do this, the

Secretary of Defense and the service secretaries need to give greater

structure to their efforts by developing an overall strategic plan. The plan

needs to establish time frames and identify organizations and personnel

responsible for accomplishing fiscal and operational goals. DOD needs to

present this plan to the Congress in much the same way it presented its

plan for force structure reductions in the Base Force Plan and the

bottom-up review. This will provide a basis for the Congress to oversee

DOD’s plan for infrastructure reductions and will allow the affected parties

to see what is going to happen and when.

DOD Initiatives Have

Achieved Less Savings

Than Projected

DOD has initiated several efforts to improve the efficiency and reduce the

costs of its support structure since 1990. While DOD has achieved some

success, it has not reaped the level of savings expected. Our prior work on

several of DOD’s major initiatives such as the DMR, the BRAC process, and

personnel downsizing illustrates this point and raises some issues the

Congress should be aware of as it reviews DOD’s current and anticipated

infrastructure and support cost reduction initiatives. Despite its initiatives

over the past 10 years, DOD’s infrastructure and support costs remain about

the same, in relative terms, as they were when these initiatives started. In

recent testimony before your Committee, one senior Air Force officer

noted:

“Our infrastructure was reduced by less than 21 percent after four BRAC rounds, while the

force structure fell by 40 percent. This disparity has introduced organizational

inefficiencies that drive up O&M costs, making it more difficult for us to give the taxpayers

best value for the dollars that we invest in national security . . . . Funding for military

construction and real property maintenance by contract has been cut to the bone, and

perhaps beyond. We are being pressed hard to find the resources to maintain our mission

essential facilities.”

Our work has shown that several factors have limited DOD’s success in

implementing prior initiatives and achieving the expected savings. DOD

officials have repeatedly recognized the importance of using resources for

the highest priority operational and investment needs rather than

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

found infrastructure reductions to be difficult and painful because they

require up-front investments, the closure of installations, and the

Page 4 GAO/T-NSIAD-97-110 Defense Contractor
elimination of military and civilian jobs. Service parochialism, a cultural

resistance to change, and congressional and public concern about the

economic effects on local communities, as well as the fairness of closure

decisions, have historically hindered DOD’s ability to close or realign bases.

DOD has also recognized that streamlining and reengineering its business

practices could result in savings, but it has made limited progress in doing

so. Many opportunities exist for consolidating and streamlining the

services support functions and activities. Unfortunately, DOD has

eliminated people and reduced funding without ensuring that the

initiatives have achieved the intended efficiencies. In some cases people

were reduced without redesigning the function or activity to reduce the

staffing needs. While DOD gained some efficiencies through this approach it

could have done better by thoroughly and thoughtfully analyzing what

work had to be done and where and by whom the work could most

cost-effectively be done.

DMR Savings Are Less

Than Projected

The 1989 DMR proposed a program of consolidations and management

improvements estimated to save tens of billions of dollars in support and

overhead programs and eliminate an estimated 42,900 civilian and military

positions over fiscal years 1991-95. The review resulted in 250 decisions to

implement consolidations, improve information systems, enhance

management, and employ better business practices. The projected savings

from each decision ranged from a few million dollars to over $10 billion.

Early in the program, DOD made several adjustments that included

reducing savings projections, extending the savings period for 2 years, and

identifying additional savings associated with new initiatives. As a result,

in April 1992, DOD projected DMR savings to be $71.1 billion for fiscal years

1991-97 (Air Force, $22.5 billion; Navy, $21.6 billion; Army, $20.9 billion;

and DOD agencies, $6.1 billion). In early 1993, DOD Comptroller officials

estimated that changes to the future years defense program (FYDP), force

reductions, and workload reductions could result in total savings of about

$62.8 billion rather than $71.1 billion. The savings reductions, however,

could not be tracked to specific DMR initiatives.

In reviewing initial savings estimates, we found that the estimates were

not always based on cost analyses supported by historical facts or

empirical cost data.1

 During our 1993 review of the DMR we found it

difficult to validate and track savings to specific initiatives.2

 Moreover, we

1

Acquisition Reform: Defense Management Report Savings Initiatives (GAO/NSIAD-91-11, Dec. 4,

1990).

2

Defense Management Review (NSIAD-94-17R, Oct. 7,1993).

Page 5 GAO/T-NSIAD-97-110 Defense Contractor
could not easily determine the extent to which savings resulted from the

initiatives or from other factors such as reduced workloads, changes in

force structure, or defense downsizing. For example, one initiative

claimed savings of $5.6 billion for the possible consolidation of supply

depots, inventory control points, maintenance depots, automatic data

processing design centers and operations, accounting operations and

finance centers, and research and development laboratories and test

facilities. However, most of these consolidations did not occur. Likewise,

an initiative to develop standard and consolidated automated data

processing systems throughout DOD was not accomplished. Finally, a DSB

task force known as the Odeen panel evaluated the DMR savings

projections and concluded there could be a $12.6-billion to $16.7-billion

shortfall between the DOD’s 1992 budget projections for fiscal years

1994-97. The panel also projected additional potential budget shortfalls of

$7.4 billion to $9.8 billion in fiscal years 1998 and 1999. Overall, it

projected an estimated shortfall for the 1994-99 FYDP could be between

$20 billion and $26.5 billion and that a shortfall existed in operation and

maintenance (O&M) funding. We reported in 1994 that the panel’s estimated

budget shortfall was generally low.3

BRAC Savings Are Less

Than Projected

Through the BRAC process initiated in 1988, DOD has closed or is closing 

97 domestic bases. About 50 percent of the planned closures have been

completed. DOD reported that last year, for the first time, the savings from

closures exceeded the costs and savings from closures will continue to

accumulate each year.

DOD expected its base closures to reduce annual base support costs from

$41 billion in 1988 to $29.5 billion in 1997. Our analysis of base support

costs in the FYDP and at nine closing installations indicates that BRAC

savings should be substantial.4 However, the total amount of actual

savings is uncertain because DOD’s systems do not provide this

information. If DOD BRAC savings are less than estimated, DOD’s ability to

fund future programs at planned levels will be affected.

DOD has submitted annual BRAC cost and savings estimates, but their

usefulness is limited. For example, the Air Force’s savings were not based

on budget-quality data, and the Army’s estimates excluded reduced

3

DOD Budget: Evaluation of Defense Science Board Report on Funding Shortfalls (GAO/NSIAD-94-139,

Apr. 20, 1994).

4

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

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

Page 6 GAO/T-NSIAD-97-110 Defense Contractor
military personnel costs that the Navy and the Air Force included in their

estimates. Further, BRAC cost estimates excluded more than $781 million in

economic assistance to local communities as well as other costs.

Consequently, the Congress does not have a complete picture of projected

BRAC savings.

Outsourcing Using OMB

Circular A-76 Procedures

For the past three decades, federal agencies have been encouraged to

expand their procurements of goods and services from the private sector.

For years, DOD has been contracting out functions, activities, and services

it formerly accomplished using DOD civilian or military personnel. OMB

established procedures for determining whether commercial activities

should be outsourced in Circular A-76. These procedures, which have been

the primary vehicle used to make these outsourcing decisions, include a

handbook for performing cost-effectiveness evaluations. However, these

procedures and various provisions of legislation have, to some extent,

limited DOD outsourcing and resulting savings.

Using the A-76 process and procedures, DOD has conducted over 2,100

public-private competitions between 1978 and 1994.5

 However, starting in

1988, the number of A-76 studies undertaken each year began to decline

substantially. Several legislative provisions limited DOD’s outsourcing

efforts. For example, the first provision, contained in the National Defense

Authorization Act for fiscal years 1988-89 (P.L. 100-180), gave authority to

installation commanders to determine whether to study activities for

potential outsourcing. Because of disruptions to their workforce, the cost

of conducting studies, and a desire for more direct control of their

workforce, various officials told us that commanders often chose not to

pursue outsourcing. This law, which was known as the “Nichols

Amendment” and codified at 10 U.S.C. 2468, was effective through

September 30, 1995. Another provision, contained in the DOD

Appropriations Act for Fiscal Year 1991 (P.L. 101-511) and subsequent DOD

appropriations acts, prohibited funding for lengthy A-76 studies. Finally, a

provision contained in the Department of Defense Authorization Acts for

Fiscal Years 1993 and 1994 prohibited DOD from entering into contracts

resulting from cost studies done under OMB Circular A-76. In response, DOD

imposed a moratorium on A-76 studies and canceled about three-quarters

of the ongoing studies. The prohibition expired on April 1, 1994, and DOD

subsequently lifted the moratorium. These provisions, along with the

Nichols Amendment, had the effect of limiting outsourcing in most of the

5

DOD maintains a database of those commercial activities that have undergone an A-76 study and the

projected savings that were estimated for each.

Page 7 GAO/T-NSIAD-97-110 Defense Contractor
services until 1996. In 1996, OMB revised its supplemental handbook in an

effort to streamline and improve the outsourcing process.

Fundamental to determining whether or not to outsource is the

identification of core functions and activities that DOD should continue to

do. OMB Circular A-76 characterizes core as those activities that are

“inherently governmental.” Under 10 U.S.C. 2464, the Secretary of Defense

is required to define DOD’s core functions, which are not to be contracted

out. DOD has proposed a risk assessment process to be used in identifying

core depot maintenance requirements and each of the services is in the

process of determining its core requirements using its own procedures.

DOD has not defined a core process or identified core requirements for

other logistics functions. It is not clear how the process will be used as

DOD increases outsourcing using OMB Circular A-76 and other procedures.

The A-76 competitions done through 1994 mostly involved low-skilled

work such as commissary operations, family housing and grounds

maintenance, administrative and custodial services, and food and guard

service. These activities generally involved low capital investment,

unskilled labor, and could be defined by relatively simple and

straight-forward requirements statements. The competitions generally

elicited vigorous competition. About 50 percent of the 2,100 competitions

were won by the public sector.

Concerns About Projected

Savings From A-76 Studies

For various reasons, we are concerned that projected savings of 20 to

40 percent reported from prior A-76 competitions are not reliable. For

example, our 1990 evaluation of DOD savings data showed that neither DOD

nor OMB had reliable data on which to assess the soundness of savings

estimates. Also, DOD and OMB did not know the extent to which expected

savings were realized because DOD did not routinely collect and analyze

cost information to track savings after a cost study had been done.6

Further, we have reported that (1) savings estimates represent projected,

rather than realized savings; (2) the costs of the competitions were not

included; (3) baseline cost estimates are lost over time; (4) actual savings

have not been tracked; (5) where audited, projected savings have not been

achieved; and (6) in some cases, work contracted out was more expensive

than estimated before privatization.7

6

OMB Circular A-76: DOD’s Reported Savings Figures Are Incomplete and Inaccurate

(GAO/GGD-90-58, Mar. 15, 1990).

7

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

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

Page 8 GAO/T-NSIAD-97-110 Defense Contractor
One commercial activity—depot maintenance—has in most cases been

exempted from the A-76 process by 10 U.S.C. 2469. However, DOD

implemented a similar program for depot maintenance activities beginning

in 1985, when the Congress authorized in the DOD Appropriations Act for

Fiscal Year 1985 (P.L. 98-473), a test program to allow public and private

shipyards to compete for the overhaul of selected ships on the basis of

cost comparisons. The program was later expanded to cover Naval

aviation, Air Force, and Army depot maintenance. In 1994, DOD terminated

its public-private competition program for depot maintenance. We

reported that the program had resulted in savings, although these savings

were difficult to quantify, and the program should be reinstated.8

 The

statement of managers in the conference report on the DOD Appropriations

Act for Fiscal Year 1995 provided for the reinstitution of the program,

which was accomplished in 1996.9

Large Personnel

Reductions Have Not

Resulted in Commensurate

Operations and

Maintenance Budget

Reductions

Since about 40 percent of the O&M budget funds civilian salaries, DOD

expects that initiatives to reduce civilian personnel will result in

substantial O&M budget reductions. Between 1990 and 1997, DOD has

reduced its civilian workforce by 275,000 people—or about 26 percent.

Over the same period, the number of active duty service members were

reduced by 29 percent and defense-related private sector employees were

reduced by 34 percent. Table 1 shows personnel reductions for selected

civilian occupational categories. Secretaries and depot maintenance

personnel took the largest percentage reduction, at 52 percent and

48 percent, respectively, while educators were reduced by only 5 percent

and scientists by 6 percent. Fire and police personnel were reduced by

17 percent and installation maintenance by 20 percent.

8

Navy Maintenance: Assessment of the Public-Private Competition Program for Depot Maintenance

(GAO/NSIAD-96-30, Jan. 22, 1996); Depot Maintenance: Opportunities to Privatize Repair of Military

Engines (GAO/NSIAD-96-33, Mar. 5, 1996); and Closing Maintenance Depots: Savings, Workload, and

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

9

H.R. CONF. REP. NO. 103-747.

Page 9 GAO/T-NSIAD-97-110 Defense Contractor
Table 1: Changes in Personnel Strengths for DOD and Defense-Related Private Sector Employees

Numbers in thousands

Personnel FY 1990 FY 1997 Reduction

Reductions in

percent

Active duty military 2,143 1,521 622 29

DOD civilian 1,073 798 275 26

Total 3,216 2,319 897 28

Defense-related private sector

employees

3,150 2,080 1,070 34

Selected occupational categories of DOD civilians

DOD depot maintenance employees 147 76 71 48

Scientists 16 15 1 6

Data systems managers 37 25 12 32

Installation maintenance 10 8 2 20

Legal 3 3 0 0

Medical technicians 10 9 1 10

Personnel services 19 15 4 21

Secretarial 69 33 36 52

Fire and police 18 15 3 17

Educators 20 19 1 5

During our review of outsourcing base support operations, various

installation commanders told us that one way of achieving

across-the-board personnel reductions mandated by the Office of the

Secretary of Defense is to outsource, which would free remaining civilian

authorizations for use in other activities. One senior command official in

the Army stated that the need to reduce civilian positions is greater than

the need to save money. This view was reinforced by the DOD Inspector

General’s 1995 report on cost growth, which noted that “the goal of

downsizing the Federal workforce is widely perceived as placing DOD in a

position of having to contract for services regardless of what is more

desirable and cost effective.”

Despite a reduction of 275,000 civilian personnel since 1990, and plans for

further substantial reduction over the next several years, our analysis of

the 1997-2001 FYDP shows that infrastructure costs are expected to

increase. In May 1996, we reported that the infrastructure portion of the

1997 FYDP is projected to increase about $9 billion, from $146 billion in

1997 to $155 billion in 2001 (see table 2).10 Despite this increase, the

10Defense Infrastructure: Budget Estimates for 1996-2001 Offer Little Savings for Modernization

(GAO/NSIAD-96-131, Apr. 4, 1996).

Page 10 GAO/T-NSIAD-97-110 Defense Contractor
infrastructure costs as a proportion of the total budget, is projected to

decrease slightly from about 60 percent in 1997 to about 57 percent in

2001. The decrease results primarily because DOD’s total budget is

projected to increase at a faster rate than the infrastructure part of the

budget.11

Table 2: DOD’s Projected Funding

Through Fiscal Year 2001 Dollars in billions

Fiscal year

Total projected

budget

Infrastructure part

of budget

Percentage of

budget that is

infrastructure

1997 $244 $146 60

1998 249 145 58

1999 255 148 58

2000 263 150 57

2001 270 155 57

Source: GAO analysis of DOD’s 1997-2001 FYDP.

The installation support portion of DOD’s infrastructure budget is projected

to decline during the 1997 to 2001 period, in part, due to savings generated

from the BRAC process. However, other infrastructure categories, including

acquisition infrastructure; force management; central logistics; central

medical; central training; central personnel; and central command, control,

and communications are projected to increase, although individual

accounts within these areas, such as military construction and real

property maintenance, are declining. The combination of O&M and military

personnel appropriations fund about 80 percent of infrastructure activities

that can be clearly identified in the FYDP. Thus, DOD must look to these

appropriations if it intends to spend less for infrastructure activities.

11Defense Infrastructure: Costs Projected to Increase Between 1997 and 2001 (GAO/NSIAD-96-174,

May 31, 1996).

Page 11 GAO/T-NSIAD-97-110 Defense Contractor
Shortfalls in Operation and

Support Cost Reductions

Limit Planned

Procurement Fund

Increases

Planned reductions in DOD’s O&M costs have not achieved expected

decreases in the O&M budget. For example, as illustrated in figure 1,

although the fiscal year 1995 FYDP projected that O&M funding would be

about $88 billion in fiscal year 1997, the 1997 FYDP estimated that O&M

expenditures for fiscal year 1997 would be $1.2 billion more than projected

2 years earlier. Moreover, the most recent 1998 FYDP estimate shows that

about $92.9 billion will be required to support operations funded by the

O&M account during 1997—$5 billion more than projected by the 1995 FYDP.

Figure 1: Operation and Maintenance Spending Estimates for Fiscal Years 1997-99

FY 1997 FY 1998 FY 1999

86

88

90

92

94

Fiscal Year

Dollars in billions

Thousands

FYDP 95 FYDP 96 FYDP 97 FYDP 98

Dollars in billions

Conversely, as shown in figure 2, the procurement account had to be

reduced over that same period to offset increases in O&M cost. Thus,

planned DOD increases in procurement funding had to be put aside because

of the realities of funding day-to-day operational support costs. For

example, the 1995 FYDP projected that DOD would spend $49.8 billion for

procurement in fiscal year 1997. However, DOD actually budgeted only

Page 12 GAO/T-NSIAD-97-110 Defense Contractor
$38.9 billion for procurement—over $10 billion less than projected 2 years

earlier. Although the 1998 FYDP indicates that an additional $5.2 billion was

spent for Procurement during 1997 than was budgeted the previous year,

the $44.1 billion expenditure was still $5.7 less than had been projected in

1995 to be spent for procurement in 1997.

Figure 2: Procurement Spending Estimates for Fiscal Years 1997-99

FY 1997 FY 1998 FY 1999

35

40

45

50

55

60

65

Fiscal Year 

Dollars in billions

 1995 FYDP 1996 FYDP 1997 FYDP 1998 FYDP 

Opportunities for

Achieving Future

Infrastructure Savings

As we recently reported, despite DOD’s initiatives, it is critical for DOD to

further reduce infrastructure and support costs.12 After 10 years of effort,

billions of dollars are still being wasted annually on inefficient and

unneeded activities. For fiscal year 1997, DOD estimates that about

$146 billion, or almost two-thirds of its budget, will be for operation and

support activities. These activities, which DOD generally refers to as

12High-Risk Series: Defense Infrastructure (GAO/HR-97-7, Feb. 1997).

Page 13 GAO/T-NSIAD-97-110 Defense Contractor
support infrastructure, include research, development, and procurement

of major weapon systems; buying and managing spare parts and repairing

equipment; maintaining installation facilities; providing non-unit training

to the force; and providing health care to military personnel and their

families. Significant excess capacity exists in these activities. While there

are many opportunities to reduce this excess capacity and improve the

cost-effectiveness of DOD support operations, DOD faces many challenges in

doing so. I will briefly highlight some of the key areas where costly excess

capacity and infrastructure remain and have the greatest potential for

savings—particularly through reengineering and consolidating functions

and activities among the services.

• Acquisition infrastructure, which includes activities and personnel that

support the research, production, and procurement of weapon systems

and other critical defense items, accounts for about $10.2 billion. We have

noted problems in achieving consolidations in testing and evaluation areas

and stated that DOD should consider consolidations in two areas—Air

Force and Navy electronic warfare threat testing capabilities and high

performance fixed-wing aircraft testing capabilities. No major

consolidations or reductions have occurred. Likewise, although DOD’s

laboratories and logistics centers have excess capacity of about

35 percent, prior reform initiatives have generally focused on management

efficiencies rather than infrastructure reductions.

• Central logistics, which includes maintenance activities, the management

of materials, operation of supply systems, communications, and minor

construction, accounts for as much as $51 billion, including funding from

the military revolving funds. We have identified long-standing problems

and opportunities to reduce infrastructure costs in the key area of

inventory management. While the Defense Logistics Agency has taken

steps to reengineer its logistics practices and reduce consumable

inventories, it could do more to achieve substantial savings. Further,

although DOD has made progress in reducing the value of its secondary

inventory, in part by adopting leading edge practices, including use of

prime vendor delivery, our analysis of inventory valued at $67 billion

showed that $41.2 billion of the inventory was not needed. About

$14.6 billion of the unneeded inventory did not have projected demands

and will likely not ever be used.13 Additionally, DOD is currently reassessing

the issue of streamlining and consolidating the management of the

inventory control points, which are responsible for material management.

We have also reported that BRAC recommendations for depot maintenance

closures during the 1995 round did little to eliminate excess capacity and

13Defense Logistics: Much of the Inventory Exceeds Current Needs (GAO/NSIAD-97-71, Feb. 28, 1997).

Page 14 GAO/T-NSIAD-97-110 Defense Contractor
that excess capacity in the depot system remains at about 50 percent, with

the Air Force and the Army having the greatest problems in this area.

• Installation support, which includes personnel and activities that fund,

equip, and maintain facilities from which defense forces operate, will

consume about $30 billion, or about 17 percent of the projected fiscal year

1997 infrastructure expenditures. The central issue is that after four BRAC

rounds, the services have reduced their facilities infrastructure at a much

smaller rate than their force structure. Despite the recognized potential to

reduce base operating support costs through greater reliance on

interservice-type arrangements, the services have not taken sufficient

advantage of available opportunities. Differing service traditions and

cultures and concern over losing direct control of support assets have

often caused commanders to resist interservicing. Additionally, by having

too much infrastructure to support, available military construction and

repair dollars are thinly spread.

• Central training infrastructure, which includes basic training for new

personnel, aviation and flight training, military academies, officer training

corps, other college commissioning programs, and officer and enlisted

training schools, will account for about $19 billion, or 13 percent of

projected 1997 infrastructure expenditures. We have identified several

training-related installations with relatively low military value that were

not proposed for closure, despite the long-term savings potential. We have

also pointed out interservicing opportunities that remain.

• Central medical, which includes personnel and funding for medical care

provided to military personnel, dependents, and retirees, will account for

about $16 billion of the projected 1997 infrastructure expenditures.

Activities include medical training, management of the military health care

system, and support of medical installations. Each of the military

departments operates its own health care system, even though these

systems have many of the same administrative, management, and

operational functions. Since 1949, over 22 studies have reviewed the

feasibility of creating a health care entity within DOD to centralize

management and administration of the three systems—most of them

encouraging some form of organizational consolidation.

Page 15 GAO/T-NSIAD-97-110 Defense Contractor
Challenges DOD

Faces as It

Implements and

Considers Proposals

to Achieve

Infrastructure Savings

Over the last several years, DOD has renewed its efforts to achieve

infrastructure savings through the use of the A-76 process. At the same

time, studies provided by the CORM and DSB over the last 2 years have

provided increasingly aggressive outsourcing proposals and predictions of

significant savings. Key elements of the DOD effort and the two studies are:

• DOD anticipates that by 2003 it can achieve over $2 billion savings annually

from outsourcing activities that involve about 130,000 civilian personnel.

Further, DOD has reportedly programmed the savings into its fiscal year

1998 FYDP.

• The CORM report issued in May 1995 recommended that DOD outsource or

privatize all current and newly established commercial-type support

services. The report estimated that taking this action could save over

$3 billion a year.

• The DSB report issued in November 1996 recommended dramatic

restructuring of DOD’s support structure by maximizing the use of the

private sector for almost all support functions. From this and other

proposed changes such as the use of better business practices, the DSB

estimated over $30 billion dollars could be saved annually from defense

infrastructure accounts by the year 2002.

We agree that substantial savings can be achieved by outsourcing and

privatizing; consolidating similar functions to reduce excess capacity;

reengineering remaining functions, processes, and organizations; more

effectively using technology innovations; and through other initiatives.14

Our recent report on downsizing the defense infrastructure provides 

13 options that could result in savings of about $11.8 billion from fiscal

years 1997 to 2001. However, based on the lessons learned from past

initiatives and principally our work on depot maintenance and base

support operations, we are concerned that savings of the magnitude

projected by DOD, the CORM, and the DSB may not be achievable. Last, as

noted by DOD, the CORM, and DSB, a number of legislative requirements

restrict or affect implementation of these proposals. The extent to which

these requirements change or remain the same will also affect savings

estimates.

14Defense Infrastructure: Budget Estimates for 1996-2001 Offer Little Savings for Modernization

(GAO/NSIAD-96-131, Apr.4, 1996).

Page 16 GAO/T-NSIAD-97-110 Defense Contractor
Outsourcing Savings

Expectations May Not Be

Achievable in the

Magnitude Projected

In 1993, the National Performance Review endorsed outsourcing, noting

that DOD should implement a comprehensive program for outsourcing

non-core functions. According to its report, Creating a Government That

Works Better & Costs Less, DOD had identified 50 broad area candidates

for outsourcing, such as base operations support, housing, health services,

maintenance and repair, training, labs, security, and transportation. The

report noted that outsourcing should take place when it makes economic

and operational sense, based on accomplishing the following steps:

• clearly describe the function in objective terms of what gets done and how

its gets done, but not who does it;

• categorize the function as either core or non-core;

• establish detailed, specific performance requirements for each function

based on the commander/manager’s mission and customer requirements;

• analyze legal, supplier, and performance requirements for each function to

determine the source that best balances economic benefits with

operational risks;

• produce a detailed performance agreement and associated documents for

the function (e.g., performance work statement and request for proposals

if the function is to be outsourced); and

• introduce cost competition.

We recently reported that DOD is significantly increasing its emphasis on

outsourcing base operation support and other activities through the A-76

process.15 Our work shows that while opportunities for savings exist, it is

questionable whether they will be in the magnitude currently being

projected. From October 1995 to January 1997, the services announced

plans to begin studies during fiscal years 1996 and 1997 that involve over

34,000 positions, most of which were associated with base support

activities. Further studies involving an additional 100,000 positions will be

started over the next 6 years. We recognized that outsourcing is

cost-effective because the competitions generate savings—usually through

a reduction in personnel—whether the competition is won by the

government or the private sector. However, we questioned some of the

services’ savings projections.

After a somewhat slow start in beginning to do A-76 cost studies after

reinstitution of the program within DOD, the services are now expanding

the A-76 program. One of the reasons is that the services had lost much of

the expertise required to define the requirements and conduct the cost

15Base Operations: Challenges Confronting DOD as It Renews Emphasis on Outsourcing

(GAO/NSIAD-97-86, Mar. 11, 1997).

Page 17 GAO/T-NSIAD-97-110 Defense Contractor
evaluations during recent personnel downsizing. The Air Force, which has

led the way in initiating new studies, plans to study up to 60,000 positions

for potential outsourcing from 1998 through 2003—the majority of which

are in base support services. The Army plans to study about 11,000 mostly

civilian positions in fiscal year 1997 and another 5,000 from fiscal year

1998 to 2003. The Navy plans to begin studies of about 80,000 positions for

potential outsourcing over the next several years—about 50,000 civilians

and 30,000 military. Although the Marine Corps estimates it will study

about 5,000 positions, it does not have a firm timetable for initiating or

completing these studies.

The Air Force projects a 20-percent cost savings of up to $1.26 billion

initially from outsourcing mostly base support functions between 1998 and

2003. The Army projected a 10-percent savings but recently increased its

savings projection to 20 percent. The Marine Corps projects initial savings

of about $10 million per year beginning in 1998, increasing to $110 million

per year by fiscal year 2004. The Navy projects a 30-percent net cost

savings.

As previously discussed, we have concerns about whether the 20- to

30-percent savings assumed by the services will be achieved. The savings

projections are based on unverified projections rather than on actual A-76

savings, and where audited, the estimated savings did not achieve the

projections, even though the costs of the competitions were not taken into

consideration. Additionally, we recently found that many installation

officials expressed concern that personnel downsizing had already

eliminated much of the potential for outsourcing to achieve additional

personnel savings. Also, potential outsourcing savings may be minimized

by increases in the scope of work done under outsourcing. Such increases

can occur, when funding becomes available to restore a level of service

that had been previously reduced due to resource constraints, such as

maintenance and repair activities.

Savings in the Magnitude

Projected by the CORM

Are Questionable

In its report, Directions for Defense (May 24,1995), the CORM

recommended that DOD outsource all current and newly established

commercial-type support services. According to the report, outsourcing

candidates should range from routine commercial support services widely

available in the private sector to highly specialized support of military

weapons. For example, janitorial companies might perform facilities

maintenance, replacing government custodians; and commercial software

engineering firms might upgrade computer programs for sophisticated

Page 18 GAO/T-NSIAD-97-110 Defense Contractor
aircraft electronic countermeasures equipment, replacing government

software specialists. CORM’s report recommended the following actions:

• Outsource new support requirements, particularly the depot-level logistics

support of new and future weapon systems.

• OMB withdraw Circular A-76; the Congress repeal or amend legislative

restrictions; and DOD extend to all commercial-type activities a policy of

avoiding public-private competition where adequate private sector

competition exists.

• Move to a time-phased plan to privatize essentially all existing depot-level

maintenance.

• Outsource selected material management activities.

• Increase access to and require enrollment in private sector medical care

and require users of DOD care to enroll and DOD to set a fee structure and

institute a medical allowance for active duty service members’ families.

• Outsource family housing, finance and accounting, data center operations,

education and training, and base infrastructure.

The report stated that its recommendations for greater use of private

market competition would lower DOD’s support costs and improve

performance—noting that a 20-percent savings from outsourcing DOD’s

commercial-type workload would free over $3 billion per year for higher

defense needs.

DOD’s Response In response to the CORM report, in 1995 the Deputy Secretary of Defense

established integrated policy teams to explore outsourcing opportunities

for base support, depot maintenance, material management, education and

training, finance and accounting, data processing, and family housing. The

teams were expected to identify potential outsourcing candidates, analyze

obstacles to outsourcing, and develop solutions to facilitate

implementation. In addition, the Secretary established cross-functional

teams to recommend changes to OMB Circular A-76 and various legislative

provisions that could otherwise delay or impede implementation of newly

identified outsourcing initiatives.

The material management team developed business case analyses for

outsourcing parts of the Defense Reutilization and Marketing Service and

Defense Logistics Agency storage and warehousing operations. The team

also identified the Defense Logistics Agency and military inventory control

point cataloging function for possible outsourcing. The finance and

accounting team identified several potential outsourcing candidates,

including claims management, defense commissary bill paying,

Page 19 GAO/T-NSIAD-97-110 Defense Contractor
nonappropriated fund accounting, and payroll. One of the cross-functional

teams developed a proposed legislative package that called for the

Congress to rescind all legislative and administrative provisions

constraining outsourcing. This proposal was not adopted. While some

outsourcing team meetings are still being held, this effort could be

consumed by DOD’s current quadrennial defense review, which is likely to

identify outsourcing as one of its key initiatives.

Savings Projections Are Not

Well Supported

While recognizing the potential savings from outsourcing, we question the

savings projections cited by the CORM. As we reported in July 1996, the

CORM’s data did not support its depot privatization savings assumption.16

Half of the competitions were won by the public sector. Further,

assumptions were based primarily on reported savings from public-private

competitions for commercial activities under OMB Circular A-76. Many

private sector firms generally made offers for this work due to the highly

competitive nature of the private sector market for these activities, and

estimated savings were generally greater if there were a large number of

competitors. We also noted that our work and defense audit agencies have

reported that projected savings were often not achieved or were less than

expected due to cost growth and other factors. Further, the savings

resulted from competition rather than from privatization.

Finally, we also noted that outsourcing in the absence of a highly

competitive market, would not likely achieve expected savings and could

increase the cost of depot maintenance operations. Further, our data

shows that outsourcing risks are higher when privatizing unique, highly

diverse, and complex work where requirements are difficult to define,

large capital investments are required, extensive technical data is involved,

and highly skilled and trained personnel are required. CORM assumed that

meaningful competition would be generated for most of the work it

recommended be privatized. Yet, for depot maintenance, 76 percent of the

240 depot maintenance contracts we reviewed were awarded on a

sole-source basis.

DSB Projected $30 Billion

Savings Are Questionable

The final report of the DSB in November 1996, Achieving an Innovative

Support Structure for 21st Century Military Superiority, recommended a

dramatic restructuring of DOD’s support structure by maximizing the use of

the private sector for almost all support functions. The DSB provided a new

vision where DOD would only provide warfighting, direct battlefield

16Defense Depot Maintenance: Commission on Roles and Mission’s Privatization Assumptions Are

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

Page 20 GAO/T-NSIAD-97-110 Defense Contractor
support, policy and decision-making, and oversight. All other activities

would be done by the private sector—using best practices for achieving

better, faster, lower-cost results. The following are examples of changes

that might result from DSB’s new vision:

• Use the private sector for logistics and maintenance in the continental

United States. DOD would get out of the repair and inventory management

business. Expand contractor logistics support—the life-cycle support of

weapon systems often by the original equipment manufacturers. The

report noted that relief from legislative constraints would be required, but

that most contractor logistic support could be done without legislative

changes. DOD would make an investment of $300 million to $500 million for

reliability improvements.

• Privatize-in-place testing and evaluation facilities.

• Outsource automatic data processing business to four to six

contractor-owned facilities.

• Outsource most DOD finance and accounting service functions.

• Use the private sector to manage DOD housing. Raise allowances and use

contractors to build and manage housing where no markets exist.

• Privatize DOD commissaries.

• Privatize all remaining special skills training.

• Privatize all remaining base operating support functions.

DSB’s report also advocated revoking OMB Circular A-76. In the meantime,

the report suggested avoiding it by recategorizing and getting out of the

business of performing various functions, an approach the report noted

the Defense Logistics Agency had successfully employed when it

transferred the pharmaceutical warehousing and distribution functions to

vendors. According to the report, if DOD implemented the specific

recommendations of DSB, over $30 billion could be reduced annually from

defense infrastructure accounts by the year 2002. The report used a

baseline of $140 billion for current annual DOD infrastructure costs. These

savings were dependent on a reduction of about 5 percent per year in the

civilian workforce and about 2 percent per year of military personnel over

the next 5 years. The report also recommended a series of base

realignment and closure reviews.

DSB Savings Assumptions Are

Questionable

We have not yet completed our analysis of the DSB report. In general, we

agree that there are great opportunities for savings in many of the areas

they address. Also, we share their concern that too much excess capacity

remains in many of DOD’s infrastructure activities. We also believe that

outsourcing and the use of leading edge business practices, such as direct

Page 21 GAO/T-NSIAD-97-110 Defense Contractor
vendor delivery for inventory, represent opportunities to reduce costs.

However, the outsourcing savings projected by this study were based on

essentially the same assumptions as those used by the CORM, although the

DSB study expanded the functions and activities that it recommended for

outsourcing and claimed savings of up to 40 percent from privatization.

Our analysis indicates that savings projections of $30 billion are not likely

to be achieved. These savings assumptions were not supported and were

based on favorable conditions that may not currently exist for a number of

activities recommended for outsourcing. We have found that outsourcing

savings are dependent on or highly influenced by (1) the continual

existence of a competitive commercial market; (2) the ability to clearly

define the tasks to be done and measure performance; (3) the assumption

that the private sector can do the required work more cost-effectively than

a reengineered DOD activity; (4) the extent that commercial contracting

and contract management practices can be applied to the outsourced

activity; (5) the relative cost-effectiveness of the public activity being

outsourced; and (6) the ability to reduce the existing public infrastructure

and personnel costs associated with the outsourced activity. Further, the

DSB savings projections may also include functions and activities that are

determined to be core.

Another area of concern is that the DSB referred often to outsourcing

competitively, yet it recommended total contractor logistics support for

weapon systems—often a sole-source arrangement with the original

equipment manufacturer—which could include maintenance, supply,

systems management, and other functions for the life of the systems. We

question whether this is the appropriate model for most weapon systems

and are concerned about its potential for cost growth and long-term

impact on core capabilities for several reasons:

• First, while DOD managers have found contractor logistics support to be

cost-effective for commercially derived systems with established

competitive repair sources—these conditions are not present for military

unique systems and cutting edge technologies.

• Second, our past work demonstrates that most depot work is sole-sourced

to the original equipment manufacturer, raising cost and future

competition concerns. DOD managers told us that steadily escalating prices

are typical of sole-source contractor logistics support contracts.

• Third, privatizing total support on new and future weapon systems can

make it difficult for the organic depots to acquire and sustain technical

competence on new systems, leading edge technologies, and critical repair

processes necessary to maintain future core capabilities, provide a

Page 22 GAO/T-NSIAD-97-110 Defense Contractor
credible competitive repair source, and be a smart buyer for those logistics

activities that will be contracted out.

When competition—whether from the private sector or an organic

depot—is introduced, prices decline. For example, the Air Force identified

$350 million in savings when it was able to recompete contractor logistics

support contracts and move the maintenance work from the manufacturer

to other commercial firms, including $50 million in savings on the KC-10

by awarding a competitive contract to the firm previously subcontracted

to the prime, thus cutting out the “middle-man”. The Air Force is also

achieving significant savings as a result of interservicing the F404 engine

to a Navy depot rather than continuing to contract on a sole-source basis

with the original equipment manufacturer as the Air Force did for many

years.

Finally, while the DSB report seems to assume that outsourcing is the most

cost-effective option for all DOD support operations, this may not be the

case. The reengineered public entity was determined to be the most

cost-effective for the over 2,100 competitions conducted using A-76

procedures. Further, our review of public-private depot maintenance

competitions indicated that the private sector frequently offered the best

value.

Effects of Legislation on

Outsourcing

A number of legislation provisions may limit outsourcing. For example,

section 2464 of title 10 provides that DOD activities should maintain a

logistics capability (personnel, equipment, and facilities) sufficient to

ensure technical competence and resources necessary for an effective and

timely response to a mobilization or other national defense emergency. It

also requires the Secretary of Defense to define logistics activities that are

necessary to maintain the logistics capability. Those activities may not be

contracted out without a waiver by the Secretary. DOD has proposed a risk

assessment process to be used in identifying core depot maintenance

requirements and each of the services is in the process of determining its

core requirements using the procedures each has implemented to do so.

DOD has not defined a core process or identified core requirements for

other logistics functions. It is not clear how that process will be conducted

as DOD increases outsourcing using OMB Circular A-76 and other

procedures. Other statutes affecting the privatization of depot

Page 23 GAO/T-NSIAD-97-110 Defense Contractor
maintenance are discussed in our March 1996 report addressing

opportunities for privatizing repair of military engines.17

Also, 10 U.S.C. 2461 requires A-76 cost comparisons, congressional

notification of studies involving more than 45 civilians, and annual reports

to the Congress on outsourcing. Section 2465 of title 10 prohibits DOD from

outsourcing civilian firefighters or security guards at military installations.

DOD’s fiscal year 1996 inventory of civilian and military personnel

performing commercial activities shows that about 9,600 firefighters and

16,000 security guards are exempt from outsourcing because of this law

and other considerations, such as mobility requirements. Outsourcing is

permitted only if the positions were outsourced before September 24,

1983. We plan to assess this issue more thoroughly by comparing the cost

of in-house positions in selected instances where such services have been

outsourced.

Conclusions In conclusion, we agree with DOD that its infrastructure costs can and

should be substantially reduced, and we believe that DOD should identify

key functions and activities where it should focus to identify

requirements—including core—and begin to reengineer those activities

and functional areas that appear to offer the best opportunities for savings.

Outsourcing, when used correctly, has been an effective tool in achieving

cost reductions. Our work advocates expanded reliance on the private

sector where that is the most cost-effective solution. However, evaluations

must be made on an individual basis, taking into consideration the costs

and benefits of each potential outsourcing opportunity.

DOD already has programs to identify potential infrastructure reductions in

many areas. However, breaking down cultural resistance to change,

overcoming service parochialism, making decisions to eliminate cross

functional stovepipes, and setting forth a clear framework for a reduced

defense infrastructure are key to avoiding waste and inefficiency and

generating the maximum savings from DOD’s infrastructure accounts. To

do this, the Secretary of Defense and the service secretaries need to give

greater structure to their efforts by developing an overall strategic plan

that establishes time frames and identifies organizations and personnel

responsible for accomplishing fiscal and operational goals. DOD needs to

present this plan to the Congress in much the same way that it presented

its plans for force structure reductions in the Base Force Plan and

17Depot Maintenance: Opportunities to Privatize Repair of Military Engines (GAO/NSIAD-96-33,

Mar. 5,1996).

Page 24 GAO/T-NSIAD-97-110 Defense Contractor
bottom-up review. The Congress can then oversee the plan and allow the

affected parties to see what is going to happen, and when. In developing

the plan, DOD should consider using a variety of means to achieve

reductions, including consolidations, reengineering, interservicing

agreements, and outsourcing—with appropriate personnel reductions

implemented to take advantage of the efficiencies generated by these

initiatives. It should also consider the need and timing for future BRAC

rounds, as suggested by the 1995 BRAC Commission and other groups.

Mr. Chairman, this concludes my prepared remarks. I would be pleased to

answer questions at this time.

(709217) Page 25 GAO/T-NSIAD-97-110 Defense Contractor
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