Competitive Sourcing: Implementation Will Be Key to Success of New Circular A-76
Published: 2003-06-26T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In May 2003, the Office of Management and Budget (OMB) issued a new Circular A-76--which sets forth the government's competitive sourcing process. Determining whether to obtain services in-house or through commercial contracts is an important economic and strategic decision for agencies, and the use of A-76 is expected to grow throughout the federal government. In the past, however, the A-76 process has been difficult to implement, and the impact on the morale of the federal workforce has been profound. Moreover, there have been concerns in both the public and private sectors about the timeliness and fairness of the process and the extent to which there is a "level playing field" for conducting public-private competitions. It was against this backdrop that the Congress enacted legislation mandating a study of the government's competitive sourcing process, which was carried out by the Commercial Activities Panel, which was chaired by the Comptroller General of the United States. This testimony focuses on how the new Circular addresses the Panel's recommendations with regard to providing a better foundation for competitive sourcing decisions, and the challenges agencies may face in implementing the new A-76.
section_title: What GAO Found
paragraphs: Overall, the new Circular is consistent with the principles and recommendations that the Commercial Activities Panel reported in April 2002, and should provide an improved foundation for competitive sourcing decisions in the federal government. In particular, the new Circular permits greater reliance on procedures in the Federal Acquisition Regulation--which should result in a more transparent and consistently applied competitive process--as well as source selection decisions based on tradeoffs between technical factors and cost. The new Circular also suggests potential use of alternatives to the competitive sourcing process, such as public-private and public-public partnerships and high-performing organizations. The new Circular should result in increased savings, improved performance, and greater accountability. However, this initiative is a major change in the way the government operates, and implementing the new Circular A-76 will likely be challenging for many agencies. A major challenge agencies will face will be meeting a 12-month limit for completing the standard competition process. This provision aims to respond to complaints about the length of time taken to conduct A-76 cost comparisons. However, GAO studies of competitive sourcing at the Department of Defense (DOD) have found that competitions can take much longer than 12 months. Other provisions in the new Circular may also prove burdensome in implementation. Lessons learned by DOD and other agencies as they initiate efforts to improve acquisition, human capital, and information technology management could prove invaluable as agencies implement the new A-76 provisions--especially those that demonstrate best competitive sourcing practices. Successful implementation of the Circular's provisions will also likely require additional financial and technical support and incentives.

section_title: Letter
paragraphs: I am pleased to be here today to participate in the Committee’s hearing on  the Office of Management and Budget’s (OMB) revised Circular A-76. The  revisions to the Circular, released May 29, 2003, represent the most  comprehensive set of changes to the rules governing the competitive  sourcing of commercial services in the federal government since the initial  Circular A-76 was issued in 1966.
Today’s hearing occurs at a critical and challenging time for federal  agencies. Agencies are responding to an environment in which new  security threats, demographic changes, rapidly evolving technologies,  increased pressure for demonstrable results, and serious and growing  fiscal imbalances demand that the federal government engage in a  fundamental review, reassessment, and reprioritization of its missions and  operations. Federal agencies are increasingly relying on enhanced  technology and a range of technical and support services to accomplish  their missions. Consequently, it is important for agencies to consider how  best to acquire and deliver such capabilities—including, in some cases,  who the service provider should be.
Determining whether to obtain services in-house, through contracts with  the private sector, or through a combination of the two—in other words,  through insourcing, outsourcing, or, in some cases, co-sourcing—is an  important economic and strategic decision for agency managers. In the  past, however, the government’s competitive sourcing process—set forth  in OMB Circular A-76—has been difficult to implement. The impact of the  A-76 process on the morale of the federal workforce has been profound,  and there have been concerns in both the public and private sectors about  the timeliness and fairness of the process and the extent to which there is  a “level playing field” for conducting public-private competitions. While  Circular A-76 competitions historically have represented only a small  portion of the government’s service contracting dollars, competitive  sourcing is expected to grow throughout the federal government.
It was against this backdrop that the Congress enacted legislation  mandating a study of the government’s competitive sourcing process. This  study was carried out by the Commercial Activities Panel, which I chaired.  My comments today will focus on how the new Circular addresses the  Panel’s recommendations with regard to providing a better foundation for  competitive sourcing decisions and the challenges agencies may face in  implementing the new A-76. I will also highlight an important issue  involving the protest process under the new Circular.
subsections: section_title: New Circular Provides an Improved Foundation for Competitive Sourcing Decisions
paragraphs: Following a yearlong study, the Commercial Activities Panel in April 2002  reported its findings on competitive sourcing in the federal government.  The report lays out 10 sourcing principles and several recommendations,  which provide a roadmap for improving sourcing decisions across the  federal government. Overall, the new Circular is generally consistent with  these principles and recommendations.
The Commercial Activities Panel held 11 meetings, including three public  hearings in Washington, D.C.; Indianapolis, Indiana; and San Antonio,  Texas. In these hearings, the Panel heard repeatedly about the importance  of competition and its central role in fostering economy, efficiency, and  continuous performance improvement. Panel members heard first-hand  about the current process—primarily the cost comparison process  conducted under OMB Circular A-76—as well as alternatives to that  process. Panel staff conducted extensive additional research, review, and  analysis to supplement and evaluate the public comments. Recognizing  that its mission was complex and controversial, the Panel agreed that a  supermajority of two-thirds of the Panel members would have to vote for  any finding or recommendation in order for it to be adopted. Importantly,  the Panel unanimously agreed upon a set of 10 principles it believed  should guide all administrative and legislative actions in competitive  sourcing. The Panel itself used these principles to assess the government’s  existing sourcing system and to develop additional recommendations.
A supermajority of the Panel agreed on a package of additional  recommendations. Chief among these was a recommendation that public- private competitions be conducted using the framework of the Federal  Acquisition Regulation (FAR). Although a minority of the Panel did not  support the package of additional recommendations, some of these Panel  members indicated that they supported one or more elements of the  package, such as the recommendation to encourage high-performing  organizations (HPO) throughout the government. Importantly, there was a  good faith effort to maximize agreement and minimize differences among  Panel members. In fact, changes were made to the Panel’s report and  recommendations even when it was clear that some Panel members  seeking changes were highly unlikely to vote for the supplemental package  of recommendations. As a result, on the basis of Panel meetings and my  personal discussions with Panel members at the end of our deliberative  process, I believe the major differences among Panel members were few in  number and philosophical in nature. Specifically, disagreement centered  primarily on (1) the recommendation related to the role of cost in the new  FAR-type process, and (2) the number of times the Congress should be  required to act on the new FAR-type process, including whether the  Congress should authorize a pilot program to test that process for a  specific time period.
As I noted previously, the new A-76 Circular is generally consistent with the  Commercial Activities Panel’s sourcing principles and recommendations  and, as such, provides an improved foundation for competitive sourcing  decisions in the federal government. In particular, the new Circular  permits:    greater reliance on procedures contained in the FAR, which should  result in a more transparent, simpler, and consistently applied  competitive process, and   source selection decisions based on tradeoffs between technical  factors and cost.
The new Circular also suggests potential use of alternatives to the  competitive sourcing process, such as public-private and public-public  partnerships and high-performing organizations. It is not, however,  specific as to how and when these alternatives might be used.
If effectively implemented, the new Circular should result in increased  savings, improved performance, and greater accountability, regardless of  the service provider selected. However, this competitive sourcing initiative  is a major change in the way government agencies operate, and successful  implementation of the Circular’s provisions will require that adequate  support be made available to federal agencies and employees, especially if  the time frames called for in the new Circular are to be achieved.
section_title: Ultimate Success of Competitive Sourcing Will Depend on How It Is Implemented
paragraphs: Implementing the new Circular A-76 will likely be challenging for many  agencies. GAO’s past work on the competitive sourcing program at the  Department of Defense (DOD)— as well as agencies’ efforts  governmentwide to improve acquisition, human capital, and information  technology management—has identified practices that have either  advanced these efforts or hindered them. The lessons learned from these  experiences—especially those that demonstrate best competitive sourcing  practices—could prove invaluable to agencies as they implement the  provisions in the new Circular.
A major challenge agencies will face will be meeting a 12-month limit for  completing the standard competition process in the new Circular. This  provision is intended to respond to complaints from all sides about the  length of time taken to conduct A-76 cost comparisons—complaints that  the Panel repeatedly heard in the course of its review. OMB’s new Circular  states that standard competitions shall not exceed 12 months from public  announcement (start date) to performance decision (end date). Under  certain conditions, there may be extensions of no more than 6 months.  The new Circular also states that agencies shall complete certain  preliminary planning steps before a public announcement. We welcome  efforts to reduce the time required to complete these studies. Even so, our  studies of DOD competitive sourcing activities have found that  competitions can take much longer than the time frames outlined in the  new Circular. Specifically, DOD’s most recent data indicate that  competitions take on average 25 months. It is not, however, clear how  much of this time was needed for any planning that may now be outside  the revised Circular’s time frame. In commenting on OMB’s November  2002 draft proposal, we recommended that the time frame be extended to  perhaps 15 to 18 months overall, and that OMB ensure that agencies  provide sufficient resources to comply with A-76. In any case, we believe  additional financial and technical support and incentives will be needed  for agencies as they attempt to meet these ambitious time frames.
Another provision in the new Circular that may affect the timeliness of the  process is the “phased evaluation” approach—one of four approaches for  making sourcing selections. Under this approach, an agency evaluates  technical merit and cost in two separate phases. In the first phase, offerors  may propose alternate performance standards. If the agency decides that a  proposed alternate standard is desirable, it incorporates the standard into  the solicitation. All offerors may then submit revised proposals in  response to the new standard. In the second phase, the agency selects the  offeror who meets these new standards and offers the lowest cost. While  not in conflict with the principles or recommendations of the Commercial  Activities Panel, the approach, if used, may prove burdensome in  implementation, given the additional step involved in the solicitation.
subsections: section_title: DOD’s Competitive Sourcing Lessons Provide Insight for Civilian Agencies
paragraphs: DOD has been at the forefront of federal agencies in using the A-76  process. We have tracked DOD’s progress in implementing its A-76  program since the mid-to-late-1990s and have identified a number of  challenges that hold important lessons that civilian agencies should  consider as they implement their own competitive sourcing initiatives.  Notably:    competitions took longer than initially projected,   costs and resources required for the competitions were    selecting and grouping functions to compete was problematic, and   determining and maintaining reliable estimates of savings was difficult.
DOD’s experience and our work identifying best practices suggest that  several key areas will need sustained attention and communication by  senior leadership as agencies plan and implement their competitive  sourcing initiatives.
Basing goals and decisions on sound analysis and integrating sourcing  with other management initiatives. Sourcing goals and targets should  contribute to mission requirements and improved performance and be  based on considered research and sound analysis of past activities.  Agencies should consider how competitive sourcing relates to strategic  management of human capital, improved financial performance,  expanded reliance on electronic government, and budget and  performance integration, consistent with the President’s Management  Agenda.
Capturing and sharing knowledge. The competition process is  ultimately about promoting innovation and creating more economical,  efficient, and effective organizations. Capturing and disseminating  information on lessons learned and providing sufficient guidance on  how to implement policies will be essential if this is to occur. Without  effectively sharing lessons learned and sufficient guidance, agencies  will be challenged to implement certain A-76 requirements. For  example, calculating savings that accrue from A-76 competitions, as  required by the new Circular, will be difficult or may be done  inconsistently across agencies without additional guidance, which will  contribute to uncertainties over savings.
Building and maintaining agency capacity. Conducting competitions as  fairly, effectively, and efficiently as possible requires sufficient agency  capacity—that is, a skilled workforce and adequate infrastructure and  funding. Agencies will need to build and maintain capacity to manage  competitions, to prepare the in-house most-effective organization  (MEO), and to oversee the work—regardless of whether the private  sector or the MEO is selected. Building this capacity will likely be a  challenge, particularly for agencies that have not been heavily invested  in competitive sourcing previously. An additional challenge facing  agencies in managing this effort will be doing so while addressing high- risk areas, such as human capital and contract management. In this  regard, GAO has listed contract management at the National  Aeronautics and Space Administration, the Department of Housing and  Urban Development, and the Department of Energy as an area of high  risk. With a likely increase in the number of public-private  competitions and the requirement to hold accountable whichever  sector wins, agencies will need to ensure that they have an acquisition  workforce sufficient in numbers and abilities to administer and oversee  these arrangements effectively.
We recently initiated work to look at how agencies are implementing their  competitive sourcing programs. Our prior work on acquisition, human  capital, and information technology management—in particular, our work  on DOD’s efforts to implement competitive sourcing—provides a strong  knowledge base from which to assess agencies’ implementation of this  initiative.
section_title: Protest Rights of In-house Competitors
paragraphs: Finally, an important issue for implementation of the new Circular A-76 is  the right of in-house competitors to appeal sourcing decisions in favor of  the private sector. The Panel heard frequent complaints from federal  employees and their representatives about the inequality of protest rights.  While both the public and the private sectors had the right under the  earlier Circular to file appeals to agency appeal boards, only the private  sector had the right, if dissatisfied with the ruling of the agency appeal  board, to file a bid protest at GAO or in court. Under the previous version  of the Circular, both GAO and the Court of Appeals for the Federal Circuit  held that federal employees and their unions were not “interested parties”  with the standing to challenge the results of A-76 cost comparisons.
The Panel recommended that, in the context of improving to the federal  government’s process for making sourcing decisions, a way be found to  level the playing field by allowing in-house entities to file a protest at GAO,  as private-sector competitors have been allowed to do. The Panel also  viewed the protest process as one method of ensuring accountability to  assure federal workers, the private sector, and the taxpayer that the  competition process is working properly.
The new Circular provides a right to “contest” a standard A-76 competition  decision using procedures contained in the FAR for protests within the  contracting agencies. The new Circular thus abolishes the A-76 appeal  board process and instead relies on the FAR-based agency-level protest  process. An important legal question is whether the shift from the cost  comparisons under the prior Circular to the FAR-like public-private  competitions under the new one means that the in-house MEO should be  eligible to file a bid protest at GAO. If the MEO is allowed to protest, there  is a second question: Who will speak for the MEO and protest in its name?  To ensure that our legal analysis of these questions benefits from input  from everyone with a stake in this important area, GAO posted a notice in  the Federal Register on June 13, seeking public comment on these and  several related questions. Responses are due by July 16, and we intend to  review them carefully before reaching our legal conclusion.
section_title: Conclusion
paragraphs: While the new Circular provides an improved foundation for competitive  sourcing decisions, implementing this initiative will undoubtedly be a  significant challenge for many federal agencies. The success of the  competitive sourcing program will ultimately be measured by the results  achieved in terms of providing value to the taxpayer, not the size of the in- house or contractor workforce or the number of positions competed to  meet arbitrary quotas. Successful implementation will require adequate  technical and financial resources, as well as sustained commitment by  senior leadership to establish fact-based goals, make effective decisions,  achieve continuous improvement based on lessons learned, and provide  ongoing communication to ensure federal workers know and believe that  they will be viewed and treated as valuable assets.  -     -     -     -     -  Mr. Chairman, this concludes my statement. I will be happy to answer any  questions you or other Members of the Committee may have.
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