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Proposed Revisions to OMB Circular A-76 (16-JAN-03, GAO-03-391R).
                                                                 
This report contains GAO's assessment of the Office of Management
and Budget's (OMB) efforts to revise OMB Circular A-76, which	 
prescribes policies and procedures agencies must use when	 
considering the transfer of commercial activities between the	 
public and private sectors. The proposed revision was issued for 
public comment on November 19, 2002. GAO found the proposed	 
revision consistent in many ways with the sourcing principles and
recommendations adopted by the Commercial Activities Panel. There
are several areas, however, where the proposed revisions to the  
Circular are not consistent with the principles or		 
recommendations of the Commercial Activities Panel. Specifically,
these include the absence of a link between sourcing policy and  
agency missions, unnecessarily complicated source selection	 
procedures, certain unrealistic time frames, and insufficient	 
guidance on calculating savings.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-391R					        
    ACCNO:   A05910						        
  TITLE:     Proposed Revisions to OMB Circular A-76		      
     DATE:   01/16/2003 
  SUBJECT:   Accountability					 
	     Agency missions					 
	     Competition					 
	     Federal legislation				 
	     Source selection					 

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GAO-03-391R

GAO- 03- 391R Proposed Revisions to OMB Circular A- 76 United States
General Accounting Office

Washington, DC 20548 Comptroller General

of the United States

January 16, 2003 The Honorable Mitchell E. Daniels, Jr. Director, Office
of Management

and Budget Subject: Proposed Revisions to OMB Circular A- 76

Dear Mr. Daniels: I want to recognize the considerable effort expended by
you and your team on the proposed revision to Office of Management and
Budget (OMB) Circular A- 76, which prescribes policies and procedures
agencies must use when considering the transfer of commercial activities
between the public and private sectors. The proposed revision was issued
for public comment on November 19, 2002, and I understand that OMB has
received hundreds of comments on the proposal. As you consider these
comments, I want to provide GAO*s assessment of the proposed changes, as
well as our recommendations for how the proposal could be improved.

The proposed revision in many ways is consistent with the sourcing
principles and recommendations adopted by the Commercial Activities Panel,
which I chaired, in its April 30, 2002, report. 1 In particular, the
proposal stresses the use of competition in making sourcing decisions and,
through reliance on procedures contained in the Federal Acquisition
Regulation (FAR), should result in a more transparent, expeditious, fair,
and consistently applied competitive process. The proposal should promote
sourcing decisions that reflect the best overall value to the agencies,
rather than just the lowest cost. Importantly, the proposed revision also
should result in greater accountability for performance, regardless of the
service provider selected.

There are several areas, however, where the proposed revisions to the
Circular are not consistent with the principles or recommendations of the
Commercial Activities Panel. Specifically, these include the absence of a
link between sourcing policy and agency missions, unnecessarily
complicated source selection procedures, certain unrealistic time frames,
and insufficient guidance on calculating savings. Each of these areas is
discussed in detail below, together with recommendations intended to align
the proposal more fully with the views expressed by the Panel.

1 Commercial Activities Panel, Improving the Sourcing Decisions of the
Government (Washington, D. C.: April 30, 2002).

GAO- 03- 391R Proposed Revisions to OMB Circular A- 76 Page 2 Emphasize
Sourcing As a Strategic Issue

The first of the 10 sourcing principles unanimously adopted by the Panel
is that federal sourcing policy should support agency missions, goals, and
objectives. In other words, sourcing policy is not just about choosing
among potential service providers. Rather, an agency*s sourcing policy
should be viewed as part of an overall strategy for how best to accomplish
the mission of the agency, including how it conducts human capital
planning. The current A- 76 Revised Supplemental Handbook reflects this
idea by pointing out that in focusing on core mission competencies and
service requirements, agencies should consider a wide range of options,
including restructuring, privatization, devolution of activities to state
and local governments, or the termination of obsolete functions. To this
list of options, the Panel recommended adding high- performing
organizations and public- private partnerships. The proposed revision,
however, does not list these or other options, 2 nor does it otherwise
stress the importance of considering alternative approaches to
accomplishing agency missions. Given that many of these options can result
in improved efficiency and enhanced performance, we recommend that the
Circular continue to encourage agencies to consider these and other
alternatives to A- 76.

Source Selection Issues The Panel recommended that public- private
competitions be conducted using the framework of the FAR, with appropriate
changes to accommodate public- sector proposals. For the most part, the
proposed revised Circular would implement this recommendation in a manner
consistent with the Panel*s principles. We have concerns, however,
regarding the source selection evaluation approaches contained in the
proposal.

The proposed revised Circular provides for two different types of
evaluation approaches** integrated* and *phased** to address cases where
an agency may wish to make trade- offs between cost and higher performance
levels in selecting a service provider. The trade- off concept is fully
consistent with the Panel*s call for a process that considers both quality
and cost factors and is used routinely throughout the government in FAR-
based acquisitions. In the proposed integrated approach, however, the
revised Circular would require that decisions to select other than the
lowest cost provider be supported by a *quantifiable rationale.* While it
is certainly reasonable to expect procurement officials to articulate the
rationale for their decisions* and the FAR requires that they do so* there
is no requirement in the FAR that the rationale be *quantifiable.* It is
not clear what is intended by the use of the term *quantifiable,* or what
the agencies would need to do beyond what the FAR currently requires to
ensure that trade- off decisions are justified and adequately explained.
We recommend that the revised Circular include additional guidance
concerning any requirement that an agency*s trade- off decision be
*quantifiable.*

In the phased evaluation approach, an agency would evaluate the technical
merit of tenders and offers in the first phase, adjust its required
performance standards as needed, and then select the lowest- cost provider
in the second phase. This approach

2 In fact, the proposed Circular discourages public- private partnerships
by prohibiting agencies from entering into new contracts when creating
*most efficient organizations.*

Page 3 GAO- 03- 391R Proposed Revisions to OMB Circular A- 76

raises two issues. First, in the technical evaluation phase, the agency
essentially would conduct a cost- benefit analysis for each instance in
which a proposed performance standard differed from a solicitation
requirement. This process, which does not appear to be based on the FAR,
likely would be quite burdensome both for the offerors, who must assign
specific dollar values to each differing level of performance, and for the
agencies in evaluating the costs and benefits of differing performance
levels for perhaps scores of discrete performance standards. Second,
should it decide that an offered performance standard is desirable, an
agency would be required to advise all competitors of its revised
requirements and allow the submission of revised proposals or tenders.
Particularly for some of the more complex requirements, this process could
serve as a disincentive to innovation should offerors become reluctant to
propose improved ways to enhance contract performance out of fear that
their proposed approaches will be shared with their competitors. We
recommend that the phased evaluation approach be revised to simplify the
process and ensure the protection of certain proprietary and highly
competition- sensitive information.

Unrealistic Time Frames In the course of its review, the Commercial
Activities Panel repeatedly heard complaints from all sides about the
length of time required to conduct A- 76 cost comparisons, and there is an
obvious effort in the proposed revision to expedite the process. The
proposal would establish a 12- month limit for completing the standard
competition process and, within that time frame, a 4- month limit for
source selection. In our view, however, the proposed required time frames
are unrealistic. Over the last 5 years, the average time to complete a
cost comparison process in the Department of Defense was 25 months
(excluding appeals and protests). Source selection alone averaged 7
months. While these averages demonstrate the need to expedite the process,
we question whether simply imposing aggressive, fixed deadlines is the
answer. Rather, additional training, technical resources, or other support
for agency officials in preparing for and participating in public- private
competitions may be needed. We recommend that the time frames be revised
to be more realistic (perhaps 15 to 18 months overall) and that OMB ensure
that agencies provide sufficient resources to comply with the new A- 76
requirements.

Business Case Direct Conversions The Commercial Activities Panel strongly
supported continued emphasis on competition in determining whether the
public or the private sectors should perform commercial services. In fact,
the Panel said that direct conversions from one sector to another without
the benefit of competition generally should occur only where the number of
affected positions is de minimis (10 or fewer full- time equivalent [FTE]
positions). For the most part, the proposed revision of A- 76 would
maintain current policy and permit direct conversions only in limited
circumstances, such as for direct research and development, for national
defense or intelligence security with the prior approval of OMB, or for
*small activities* (i. e., 10 or fewer civilian employees). The proposed
revision would expand the list of permissible direct conversions, however,
to include activities performed by up to 50 employees based on a *business
case analysis.* This analysis, which is essentially the same as the
streamlined cost comparisons currently permitted for activities involving
up to 65 positions, would

GAO- 03- 391R Proposed Revisions to OMB Circular A- 76 Page 4 compare the
estimated cost of agency performance with the lowest- priced existing

contract for a similar workload to determine whether to directly convert
the function. We have two concerns about the proposed business case direct
conversions. First, changing the characterization of the process from a
streamlined cost comparison to a business case direct conversion sends an
unfortunate signal that the administration is attempting to increase the
number of direct conversions. As you know, this is a particularly
sensitive matter for federal employees, whose trust in the objectivity and
fairness of the system will be critical to the success of the
administration*s competitive sourcing initiative. Second, the cost
comparison would continue to be based upon an agency*s current
organization, with no opportunity for developing a

*most efficient organization* (MEO). We recommend that the proposed
revision require that any streamlined cost comparison be based on a
reliable estimate of the efficiencies likely to be realized through the
creation of an in- house MEO. Should the cost comparison indicate that
continued agency performance of the function would be more advantageous to
the government than other alternatives, the agency should be required to
develop and implement the MEO.

Lack of Guidance on Calculating Savings The Circular requires that
agencies report the savings that accrue from A- 76 competitions. The
Circular does not provide any guidance, however, on how savings are to be
calculated. Our work examining the use of Circular A- 76 in the Department
of Defense has shown a lack of consistency among and even within the
military services in how they calculate savings. While our analyses
indicate that significant savings are likely from many of these
competitions, we have not been able to quantify the precise level of
savings because of the lack of good baseline data and other limitations.
Calculation of savings is an area that requires additional OMB guidance.

Implementation Is Key Finally, the critical issue for all affected parties
is how the government*s sourcing policies are implemented. In this regard,
one of the Panel*s sourcing principles was that the government should
avoid arbitrary numerical or FTE goals. This principle is based on the
concept that the success of government programs should be measured by the
results achieved in terms of providing value to the taxpayer, not the size
of the in- house or contractor workforce. Although the proposed revised
Circular contains no numerical targets or goals for competitive sourcing,
this has been a controversial area in the past. In our view, the
administration needs to avoid arbitrary targets or quotas, or any goal
that is not based on considered research and analysis.

Page 5 GAO- 03- 391R Proposed Revisions to OMB Circular A- 76

With the changes specified above, the revised Circular A- 76 would be more
consistent with the recommendations of the Commercial Activities Panel and
with the sourcing principles the Panel adopted. Please contact me at (202)
512- 5500 or Bill Woods, Director, Acquisition and Sourcing Management, if
you would like further discussion of these issues. Bill can be reached at
(202) 512- 8214 or at Woodsw@ gao. gov.

Sincerely yours, David M. Walker Comptroller General

of the United States cc: Mark Everson

Deputy Director for Management Angela Styles Administrator, Office of
Federal Procurement Policy

(120191)
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