Competitive Sourcing: Implementation Will Be Challenging for Federal Agencies
Published: 2003-07-24T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In May 2003, the Office of Management and Budget (OMB) released a revised Circular A-76, which represents a comprehensive set of changes to the rules governing competitive sourcing--one of five governmentwide items in the President's Management Agenda. Determining whether to obtain services in-house or through commercial contracts is an important economic and strategic decision for agencies, and the use of Circular 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. Concerns in the public and private sectors were also raised about the timeliness and fairness of the process for public-private competitions. It was against this backdrop that the Congress enacted legislation mandating a study of the A-76 process, which was carried out by the Commercial Activities Panel, chaired by the Comptroller General of the United States. This testimony focuses on how the new Circular addresses the Panel's recommendations reported in April 2002, the challenges agencies may face in implementing the new Circular A-76, and the need for effective workforce practices to help ensure the successful implementation of competitive sourcing in the federal government.
section_title: What GAO Found
paragraphs: The revised Circular A-76 is generally consistent with the Commercial Activities Panel's principles and recommendations, 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 trade-offs between technical factors and cost. The new Circular also suggests the potential use of alternatives to the competitive sourcing process, such as public-private and public-public partnerships. However, implementing the new Circular will likely be challenging for many agencies. Foremost among the challenges that agencies face is setting and meeting appropriate goals integrated with other priorities, as opposed to arbitrary quotas. Additionally, there are potential issues with the streamlined cost comparison process and protest rights. The revised streamlined process lacks a number of key features designed to ensure that agency sourcing decisions are sound, including the absence of an appeal process. Finally, the right of in-house competitors to file a bid protest at GAO challenging the sourcing decisions in favor of the private sector remains an open question. For many agencies, effective implementation will depend on their ability to understand that their workforce is their most important organizational asset. Agencies will need to aid their workforce in transitioning to a competitive sourcing environment. For example, agencies will need a skilled workforce and adequate infrastructure and funding to manage competitions; to prepare the in-house offer; and to oversee the cost, quality, and performance of whichever service provider is selected.

section_title: Letter
paragraphs: I am pleased to be here today to participate in the subcommittee’s hearing  on competitive sourcing, one of five governmentwide initiatives in the  President’s Management Agenda. The Office of Management and Budget  (OMB) recently released a new Circular A-76, which represents the most  comprehensive set of changes to the rules governing competitive sourcing  since the initial Circular A-76 was issued in 1966. As agencies implement  the revised Circular and the initiative outlined in the President’s  Management Agenda, they will need to develop strategies to address the  challenges they inevitably will face in implementing this significant change  in their operations.
Today’s hearing occurs at a critical and challenging time for federal  agencies. They operate in 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, cosourcing—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 that agencies may face  in implementing the new Circular A-76. I will also highlight the need for  effective workforce practices to help ensure successful implementation of  competitive sourcing.
subsections: section_title: New Circular Provides an Improved Foundation for Competitive Sourcing Decisions
paragraphs: In April 2002, following a yearlong study, the Commercial Activities Panel  reported its findings on competitive sourcing in the federal government.  The report lays out 10 sourcing principles and several recommendations,  which provide a road map 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. At 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  between 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 between 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 Circular A-76 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 trade-offs between technical factors  and cost.
The new Circular also suggests the potential use of alternatives to the  competitive sourcing process, such as public-private and public-public  partnerships and high-performing organizations. It does not, however,  specifically address 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: Challenges in Implementing Competitive Sourcing
paragraphs: Implementing the new Circular A-76 will likely be challenging for many  agencies. Our prior work on acquisition, human capital, and information  technology management—in particular, our work on the Department of  Defense’s (DOD) efforts to implement competitive sourcing—provides a  strong knowledge base from which to anticipate challenges as agencies  implement this initiative.
Foremost among the challenges that agencies face is setting and meeting  appropriate goals that are integrated with other priorities. Quotas and  arbitrary goals are inappropriate. 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 will need to consider how competitive sourcing relates to  the 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. At the request of Senator Byrd and this subcommittee, we  recently initiated work to look at how agencies are implementing their  competitive sourcing programs. Our work is focused on goal setting and  implementation strategies at several large agencies.
DOD has been at the forefront of federal agencies in using the A-76  process and, since the mid-to-late 1990s, we have tracked DOD’s progress  in implementing its A-76 program. The challenges we have identified 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 underestimated,    selecting and grouping functions to compete were problematic, and    determining and maintaining reliable estimates of savings were difficult.
DOD’s experience also indicates that agencies will have difficulties in  meeting the time frames set out in the new Circular for completing the  standard competition process. Those time frames are 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. The new Circular states that standard competitions  shall not exceed 12 months from public announcement (start date) to  performance decision (end date), with certain preliminary planning  steps to be completed before a public announcement. Under certain  conditions, there may be extensions of no more than 6 months. We  welcome efforts to reduce the time required to complete these studies.  Even so, our studies of DOD’s competitive sourcing 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 have taken, on average, 25 months. It is not clear, however,  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 Circular A-76. In any  case, we believe that additional financial and technical support and  incentives will be needed for agencies as they attempt to meet these  ambitious time frames.
Finally, federal agencies and OMB will be challenged to effectively share  lessons learned and establish sufficient guidance 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.
subsections: section_title: Potential Issues with Streamlined Cost Comparison Process
paragraphs: The prior version of Circular A-76 provided for a streamlined cost  comparison process for activities with 65 or fewer full-time equivalent  (FTE) employees. Although the revised Circular also provides for a  streamlined process at comparable FTE levels, the revised streamlined  process lacks a number of key features designed to ensure that agencies’  sourcing decisions are sound.
First, the prior version of the Circular contained an express prohibition  on dividing functions so as to come under the 65-FTE limit for using a  streamlined process. The revised Circular contains no such prohibition.  We are concerned that in the absence of an express prohibition, agencies  could arbitrarily split activities, entities, or functions to circumvent the  65-FTE ceiling applicable to the streamlined process. Second, the  10 percent conversion differential under the prior Circular has been  removed for streamlined cost comparisons. The Panel viewed this  differential as a reasonable way to account for the disruption and risk  entailed in converting between the public and private sectors. Third, the  streamlined process requires an agency to certify that its performance  decision is cost-effective. It is not clear from the revised Circular,  however, whether the term “cost-effective” means the low-cost provider or  whether other factors may be taken into account (such as the disruption  and risk factors previously accounted for through the 10 percent  conversion differential).
Finally, the revised Circular has created an accountability gap by  prohibiting all challenges to streamlined cost comparisons. Under the  prior Circular, both the public and the private sectors had the right to file  appeals to ad hoc agency appeal boards. That right extended to all cost  comparisons, no matter how small or large (and to decisions to waive  the A-76 cost comparison process). The new Circular abolishes the ad hoc  appeal board process and instead relies on the FAR-based agency-level  protest process for challenges to standard competitions, which are  conducted under a FAR-based process. While we recognize that  streamlined cost comparisons are intended to be inexpensive, expeditious  processes for relatively small functions, we are nonetheless concerned  that the absence of an appeal process may result in less transparency  and accountability.
section_title: Protest Rights
paragraphs: Another accountability issue relates to the right of in-house competitors  to challenge sourcing decisions in favor of the private sector—an issue  that the Commercial Activities Panel addressed in its report. While both  the public and the private sectors could file appeals to the ad hoc agency  appeal boards under the prior Circular, 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  heard many complaints from federal employees and their representatives  about this inequality in protest rights. The Panel recommended that, in  the context of improving 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 noted, though, that if a decision  were made to permit the public-sector competitor to protest A–76  procurements, the question of who would have representational capacity  to file such a protest would need to be carefully considered.
An important legal question is whether the shift from the cost comparisons  under the prior Circular to the FAR-like standard competitions under the  new one means that the in-house most-efficient organization (MEO)  should now be found 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, 2003,  seeking public comment on these and several related questions.  Responses were due July 16, and we are currently reviewing the more  than 50 responses that we received from private individuals, Members  of Congress, federal agencies, unions, and other organizations. We  intend to reach a conclusion on these important legal questions in the  coming weeks.
section_title: Effective Human Capital Practices Will Be Key to Successful Implementation of Competitive Sourcing
paragraphs: For many agencies, effective implementation of the new Circular will  depend on their ability to understand that their workforce is their most  important organizational asset. Recognizing this, the Panel adopted a  principle stipulating that sourcing and related policies be consistent with  human capital practices that are designed to attract, motivate, retain,  and reward a high-performing workforce. 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 MEO, and to oversee the work—regardless of  whether the private sector or MEO is selected. Building this capacity is  important, particularly for agencies that have not been heavily invested  in competitive sourcing previously. Agencies must manage this effort  while addressing high-risk areas, such as human capital and contract  management. In this regard, GAO has listed contract management at DOD,  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 manage the cost, quality, and  performance of the service provider.
In our prior work—notably in studying the lessons that state and local  governments learned in conducting competitions and in private-sector  outsourcing of information technology services—we found that certain  strategies and practices can help ensure the success of workforce  transitions when deciding who should provide the services they perform.  In general, these strategies recognized that the workforce defines an  organization’s character, affects its capacity to perform, and represents its  knowledge base. When an agency’s leadership is committed to effective  human capital management, they view people as assets whose value can  be enhanced through investments.
Agencies can aid their workforce in transitioning to a competitive sourcing  environment if they:    ensure employee involvement in the transition process; for example, by  clearly communicating to employees what is going to happen and when it  is going to happen;    provide skills training for either competing against the private sector or    create a safety net for displaced employees to bolster their support for the  changes as well as to aid in the transition to a competitive environment,  such as offering workers early retirement, severance pay, or a buyout;  facilitate the transition of staff to the private sector or reimbursable  provider when that is their choice and assist employees who do not want  to transfer to find other federal jobs; and    develop employee retention programs and offer bonuses to keep people  where appropriate.
Recognizing the workforce as an asset also requires agency officials to  view competitive sourcing—whether it results in outsourcing, insourcing,  or cosourcing—as a tool to help ensure we have the right people providing  services in an effective and efficient manner. The Panel recommended  that employees should receive technical and financial assistance, as  appropriate, to structure the MEO, to conduct cost comparisons, and to  create HPOs. However, it is unclear whether agencies will have adequate  financial and technical resources to implement effective competitive  sourcing programs or make needed improvements.
The administration has proposed the creation of a governmentwide fund  for performance-based compensation. However, most federal agencies  lack modern, effective, credible, and validated performance management  systems to effectively implement performance-based compensation  approaches. Importantly, a clear need exists to provide assistance both to  government employees to create MEOs that can compete effectively and  to agencies to promote HPOs throughout the federal government,  especially in connection with functions, activities, and entities that will  never be subject to competitive sourcing. Assistance is also needed in  helping to create the systems and structures needed to support the  effective and equitable implementation of more performance-based  compensation approaches. As a result, we believe consideration should be  given to establishing a governmentwide fund that would be available to  agencies, on the basis of a business case, to provide technical and  financial assistance to federal employees to develop MEOs and for  creating HPOs, including the creation of modern, effective, and credible  performance management systems.
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 that 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 subcommittee may have.
This is a work of the U.S. government and is not subject to copyright protection in the  United States. It may be reproduced and distributed in its entirety without further  permission from GAO. However, because this work may contain copyrighted images or  other material, permission from the copyright holder may be necessary if you wish to  reproduce this material separately.