Sourcing Policy: Initial Agency Efforts to Balance the Government to Contractor Mix in the Multisector Workforce
Published: 2010-05-20T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Federal agencies face a complicated set of decisions in finding the right mix of government and contractor personnel to conduct their missions. While contractors, when properly used, can play an important role in helping agencies accomplish their missions, GAO has found that agencies face challenges with increased reliance on contractors to perform core agency missions. Congress and the Executive branch also have expressed concern as to whether federal agencies have become over-reliant on contractors and have appropriately outsourced services. A March 2009 Presidential memorandum tasked the Office of Management and Budget (OMB) to take several actions in response to this concern. Based on GAO's prior work, this statement discusses (1) civilian agencies' development and implementation of guidelines to consider whether contracted functions should be brought in-house --a process known as insourcing; (2) OMB's proposed policy on work reserved for federal employees; (3) challenges agencies face in managing the federal workforce; and (4) key tools available for insourcing and related efforts.
section_title: What GAO Found
paragraphs: GAO reviewed the status of civilian agencies efforts to develop and implementinsourcing guidance and reported in October 2009 that none of the nine civilian agencies with whom we met had met the statutory deadline to produce insourcing guidance. Primarily, they were waiting to ensure their guidance was consistent with or receive additional OMB guidance, and to use the results, best practices, and lessons learned from their multisector workforce pilots to better inform their insourcing guidelines. Since the time of our review, OMB reported in December 2009 that 24 agencies had launched pilots to address overuse of contractors in one or more of their organizations. Agencies were due to report the results of their pilots to OMB by May 1, 2010. In response to a congressional mandate, OMB recently issued a public notice that provides proposed policy for determining when work must be performed by federal employees. Comments on the policy are due from federal agencies and the public by June 1, 2010. The proposed policy provides the following guidance to executive branch agencies: it adopts a single, governmentwide definition of inherently governmental functions in accordance with the definition in the Federal Activities Inventory Reform Act of 1998, which classifies an activity as inherently governmental when it is so intimately related to the public interest that it must be performed by federal employees; it provides guidance for determining functions "closely associated with inherently governmental;" and it introduces the category of "critical functions," as work that must be reserved for federal employees in order to ensure the agency has the internal capability to maintain control of its missions and operations. Agency efforts to effectively insource functions performed by contractors will in large part depend on the ability to assess mission and human capital requirements and develop and execute plans to fulfill those requirements so agencies have a workforce that possesses the necessary knowledge, skills, and competencies to accomplish their mission. Furthermore, GAO's 2009 review of civilian agency insourcing efforts identified operational and administrative challenges agencies face with respect to implementing the conversion of contractor personnel to government positions. For example, agencies face difficulties in gathering and analyzing certain types of service contracting data needed for making insourcing decisions. Agency implementation of insourcing efforts could be facilitated by tools that GAO has previously identified, including: (1) Inventories to identify inherently governmental functions; (2) Business case analysis to facilitate agency decisions in determining whether insourcing a particular function has potential to achieve mission requirements; and (3) Human-capital flexibilities to efficiently fill positions that should be brought in-house.

section_title: Letter
paragraphs: I am pleased to be here to discuss current insourcing efforts, consideration  of work that should be performed only by federal employees, and related  workforce planning challenges—all issues needing consideration from the  broader perspective of managing the multisector workforce. To carry out  their missions agencies rely on an increasing complex workforce  composed of federal employees, contractor personnel, and in the case of  the Department of Defense (DOD), military personnel. Determining  whether to obtain services with current or new federal employees, private  sector contractors, or a combination of the two is an important economic  and strategic decision critical to the federal government’s effective and  efficient use of taxpayer dollars. Such decisions may have critical  implications for government control and accountability for policy and  program decisions.
The executive branch has encouraged federal agencies since the mid-1950s  to obtain commercially available services from the private sector when  doing so is cost-effective. However, federal agencies face a complicated  set of decisions in finding the right mix of government and contractor  personnel to conduct their missions. While contractors, when properly  used, can play an important role in helping agencies accomplish their  missions, our prior work has shown that agencies face challenges with  increased reliance on contractors to perform core agency missions.  Congress and the Executive branch also expressed concern as to whether  federal agencies have become overreliant on contractors and have  appropriately outsourced services. A March 2009 Presidential  memorandum tasked the Office of Management and Budget (OMB) with  issuing guidance in a number of areas related to addressing challenges in  the federal contracting environment, including when it is appropriate for  the government to outsource services and when it is not.
Over the years, we have found that in choosing to use contractors, the  decisions agencies need to make involve determining which functions and  activities should be contracted out and which should not to ensure  institutional capacity, as well as identifying and distinguishing the roles  and responsibilities of contractors and civilian and military personnel. In  addition, they must develop a total workforce strategy to address the  extent of contractor use and the appropriate mix of contractor and  government personnel. In response to your interest in the government’s  use of contractors and related workforce issues, I will draw primarily on  our prior work to discuss (1) civilian agencies’ development and  implementation of insourcing guidelines; (2) the proposed policy on work  that should be performed only by, or reserved for, federal employees; (3)  challenges agencies face in managing the federal workforce; and (4) key  tools available for insourcing and related efforts. The reports which form  the basis for this statement were prepared in accordance with generally  accepted government auditing standards. Those standards require that we  plan and perform the audit to obtain sufficient, appropriate evidence to  provide a reasonable basis for our findings and conclusions based on our  audit objectives. We believe that the evidence obtained provides a  reasonable basis for our findings and conclusions based on our audit  objectives.
subsections: section_title: Background
paragraphs: Since 1955, the executive branch has encouraged federal agencies to  obtain commercially available goods and services from the private sector  when the agency determines it is cost-effective. However, in the past, both  the private and public sectors expressed concern about the fairness with  which these sourcing decisions were made. In response, Congress in 2000  mandated a study of government sourcing conducted by the Commercial  Activities Panel and chaired by the Comptroller General. In April 2002, the  panel released its report with recommendations that stressed the  importance of linking sourcing policy with agency missions, promoting  sourcing decisions that provide value to the taxpayer regardless of the  service provider selected, and ensuring greater accountability for  performance. For example, the panel found that federal sourcing policy  should:  support agency missions, goals, and objectives;    be consistent with human-capital practices designed to attract,  motivate, retain, and reward a high-performing federal workforce;  recognize that inherently governmental functions and certain others  should be performed by federal workers;  avoid arbitrary full-time equivalent or other arbitrary numerical goals;  and    provide for accountability in all sourcing decisions.
Government contracting has more than doubled to reach over $500 billion  annually since the panel issued its report. This increased reliance on  contractors to perform agency missions increases the risk that  government decisions can be influenced by contractor employees, which  can result in a loss of control and accountability. Agencies buy services  that range from basic operational support, such as custodial and  landscaping, to more complex professional and management support  services, which may closely support inherently governmental functions.  Such services include acquisition support, budget preparation, and  intelligence services. Our work at DOD and the Department of Homeland  Security (DHS) has found that it is now commonplace for agencies to use  contractors to perform activities historically performed by government  employees. Inherently governmental functions require discretion in  applying government authority or value judgments in making decisions for  the government, and as such they should be performed by government  employees, not private contractors. The closer contractor services come  to supporting inherently governmental functions, the greater this risk of  influencing the government’s control over and accountability for decisions  that may be based, in part, on contractor work.
In part to address the increased reliance on contractors, the Fiscal Year  2008 National Defense Authorization Act required DOD to develop and  implement insourcing guidelines. In April 2008, DOD issued its initial  insourcing guidelines, and on May 28, 2009, DOD issued implementing  guidance for the insourcing of contracted services. The guidance is  designed to assist DOD components as they develop and execute plans to  decrease funding for contractor support and increase funding for new  civilian manpower authorizations.
Similarly, the Omnibus Appropriations Act of 2009, required the heads of  executive branch agencies to devise and implement insourcing guidelines  and procedures. The guidelines and procedures were to ensure that  “consideration” was given to using, on a regular basis, federal employees  to perform new functions and functions that are performed by contractors  and could be performed by federal employees.
In July 2009, OMB issued guidance for agencies to begin the process of  developing and implementing policies, practices, and tools for managing  the multisector workforce. This guidance included insourcing criteria  intended to provide the civilian agencies with a framework for consistent  and sound application of insourcing guidance, in accordance with  statutory requirements. The criteria consisted of four sections: (1) general  management responsibilities; (2) general consideration of federal  employee performance; (3) special consideration of federal employee  performance; and (4) restriction on the use of public-private competition.  Each criterion addresses different aspects of the mandate for insourcing  guidelines and procedures and describes circumstances and factors  agencies should consider when identifying opportunities for insourcing.  (See app. I for a more detailed description of OMB’s insourcing criteria.)  Additionally, the guidance, as part of a planning pilot, requires each  agency to conduct a multisector human-capital analysis of an organization,  program, project, or activity where there are concerns about reliance on  contractors and report on the pilot by May 1, 2010.
section_title: Civilian Agencies’ Efforts to Develop Insourcing Requirements
paragraphs: In response to the mandate in the 2009 Omnibus Appropriations Act, we  reviewed the status of civilian agencies’ efforts to develop and implement  insourcing guidance. We reported in October 2009 that none of the nine  civilian agencies we met with between July and October 2009 had met the  statutory deadline to produce insourcing guidance. One agency had  issued preliminary guidelines, and two others had drafted but not issued  their guidelines as of our review, but most of the agencies’ efforts were  still in the early stages. For example, two of the nine agencies reviewed  at the time had designated the offices responsible for leading the effort to  develop the guidelines and were in the process of deciding what approach  they would take. In contrast, two other agencies had drafted guidelines,  with one waiting on management approval to issue them and the other  planning to finalize its guidelines once OMB issued additional guidance  regarding outsourcing and inherently governmental functions. Agency  officials cited a number of reasons as to why they did not meet the  statutory deadline and had not issued final insourcing guidelines. The  reasons included, but were not limited to the following:    Wanting to ensure their guidelines were consistent with OMB’s  guidance, issued in July 2009, which caused them to delay finalizing or  drafting their guidelines.
Waiting for additional OMB guidance and clarification regarding  outsourcing and inherently governmental functions. Several officials  stated that they anticipated this guidance would have a significant  effect on their development and implementation of insourcing  guidelines. Similarly, OMB indicated when it provided the insourcing  criteria in July 2009 that it expected to refine the criteria as it  developed guidance on when outsourcing is and is not appropriate.  Intending to use the results, best practices, and lessons learned from  the multisector workforce planning pilots to better inform their  insourcing guidelines and procedures. For example, one agency told us  it planned to use its experience with its planning pilot as the basis for  its final guidelines, while another planned to issue initial guidelines to  be used during the pilot and then revise the guidelines as appropriate  based on the experiences during the pilot.
Stressing that developing effective insourcing guidelines is complex  and involves many agency functions, including human capital,  acquisition, and finance and budget, all of which requires a great deal  of coordination and takes time. They added that their ability to focus  on the development of the guidelines has been constrained by their  capacity to deal with multiple management initiatives in addition to  their regular core duties.
Although OMB and agencies have yet to issue insourcing guidance, OMB  reported in December 2009 that 24 agencies had launched planning pilots  to address the use of contractors in one or more of their organizations.  Agencies were due to report the results of their pilots to OMB by May 1,  2010.
section_title: Proposed OMB Policy on Work Reserved for Federal Employees
paragraphs: Following the initiative of the March 2009 Presidential memo on  government contracting and in response to a congressional mandate,  OMB’s Office of Federal Procurement Policy issued a public notice on  March 31, 2010 that provides proposed policy for determining when work  must be performed by, or reserved for, federal employees. The proposal  provides the following guidance to executive branch agencies:    Adopts the statutory definition in the Federal Activities Inventory  Reform (FAIR) Act of 1998 as a single, governmentwide definition of  inherently governmental functions. This definition classifies an activity  as inherently governmental when it is so intimately related to the  public interest that it must be performed by federal employees. Such  activities include determining budget priorities and awarding and  administering contracts, which are reserved exclusively for federal  employees.
Retains the illustrative list of examples of “closely associated with  inherently governmental functions” from the Federal Acquisition  Regulation, such as preparing budgets and developing agency  regulations, and provides guidance to help agencies decide whether to  use contractors to perform these functions. Unlike inherently  governmental functions, agencies can determine whether contractor  performance of these functions is appropriate. The proposed policy  lays out the responsibilities agencies must perform, such as ensuring  sufficient government capacity for oversight during the contract award  and administration process, if they decide to use a contractor for these  services.  Introduces the category of “critical functions,” as functions whose  importance to the agency’s mission and operation requires that at least  a portion of the function must be reserved for federal employees to  ensure the agency has sufficient internal capability to effectively  perform and maintain control.
Outlines a number of new management determinations and actions  that federal agencies should employ to avoid allowing contractor  performance of inherently governmental functions, including  developing agency procedures, providing training and designating  senior officials responsible for implementation of the proposed policy.  Comments from agencies and the public on the proposed policy are  due to OMB by June 1, 2010.
section_title: Effective Implementation of Insourcing Policies Will Depend on Agencies’ Ability to Address Workforce Planning and Other Challenges
paragraphs: Agency efforts to effectively insource certain functions now performed by  contractors will in large part depend on their ability to assess their human- capital and mission requirements and develop and execute plans to fulfill  those requirements so they have a workforce that possesses the necessary  education, knowledge, skills, and competencies to accomplish their  mission. We and others have shown that successful public and private  organizations use strategic management approaches to prepare their  workforces to meet present and future mission requirements. Strategic  human-capital management—which includes workforce planning—helps  ensure that agencies have the talent and skill mix they need to address  their current and emerging human-capital and other challenges, such as  long-term fiscal constraints and changing demographics.
A strategic human-capital plan helps agency managers and stakeholders to  systematically consider what is to be done, how it will be done, and how  to gauge progress and results. Our prior work has identified workforce  planning challenges that can affect an agency’s ability to obtain the right  mix of federal employees and contractor personnel. Strategic workforce  planning is an iterative, systematic process that addresses two critical  needs: (1) aligning an organization’s human-capital program with its  current and emerging mission and programmatic goals and (2) developing  long-term strategies for acquiring, developing, and retaining an  organization’s workforce to achieve programmatic goals. These  strategies should include contractor as well as federal personnel and link  to the knowledge, skills, and abilities agencies need. As agencies develop  workforce strategies, they also need to consider the extent to which  contractors should be used and the appropriate mix of contractor and  federal personnel. With the increased reliance on contractors, there has  been an increased concern about the ability of agencies to ensure  sufficient numbers of staff to perform some functions that should only be  performed by government employees. Strategic workforce planning can  position federal agencies to meet such workforce challenges. However,  our prior work has found that the increased reliance on contractors to  perform the work of government is in part attributed to difficulties in  hiring for certain hard-to-staff positions, training and retaining government  employees. For example, we have previously reported that federal  agencies have relied increasingly on contractors to support the acquisition  function due to the fact that the capacity and the capability of the federal  government’s acquisition workforce to oversee and manage contracts have  not kept pace with increased spending for increasingly complex  purchases. This pattern can also be found in other functions such as  information technology and intelligence activities. Importantly, federal  agencies also face competition in hiring and retaining government  employees as contractors can offer higher salaries in some cases.
In 2001, we first identified strategic human-capital management as a high- risk area because of the federal government’s long-standing lack of a  consistent approach to human-capital management. In 2010, while  agencies and Congress have taken steps to address the federal  government’s human-capital shortfalls, strategic human-capital  management remains a high-risk area because of the continuing need for a  governmentwide framework to advance human-capital reform. We have  reported that federal agencies have used varying approaches to develop  their strategic workforce plans, depending on their particular  circumstances. For example, an agency with a future workload that  could rise or fall sharply may focus on identifying skills to manage a  combined workforce of federal employees and contractors. We and the  Office of Personnel Management (OPM) have identified the following six  leading principles that agencies should incorporate in their workforce  planning efforts:    Align workforce planning with strategic planning and budget  formulation;  Involve managers, employees, and other stakeholders in planning;  Identify critical occupations, skills, and competencies and analyze  workforce gaps;    Develop strategies to address workforce gaps;    Build capability to support workforce strategies; and    Monitor and evaluate progress.
Furthermore agencies face other operational and administrative  challenges as our 2009 review of civilian agency insourcing efforts  identified with respect to implementing guidance to facilitate the  conversion of contractor personnel to government positions, including the  following:  Infrastructure. The complex nature of insourcing and the many  functional parts of an agency involved in the hiring process require  managers to share responsibility and coordinate activities. The various  functions involved in an agency’s insourcing efforts—such as human  capital, acquisition, finance and budget—must be identified, as well as  the roles each will play.
Culture. Insourcing represents a major shift in the focus and culture of  the multisector workforce. Established processes and procedures are  geared toward outsourcing and shifting to insourcing and a “total  workforce” approach—that considers both contractors and federal  employees—will take time and requires flexibility to meet the needs of  an agency within an ever-changing environment.
Data. Agencies face difficulties in gathering and analyzing certain types  of service contracting data needed for making insourcing decisions.  For example, information on the type of service contracts and the  number of contractor-equivalent personnel may not be readily  available, even though some officials indicated that such information  may be needed to review contracted-out services and make insourcing  decisions. The lack of reliable data on contractors has been a recurrent  theme in our work over the past several years. For example, we have  reported that agencies faced challenges with developing workforce  inventories under the FAIR Act of 1998, especially as it relates to the  classification of positions as inherently governmental or commercial.  Our work on the acquisition workforces at DHS and DOD reported that  the departments lacked sufficient data to fully assess total acquisition  workforce needs including the use of contractors. And, more recently,  our review of DOD service contractor inventories for fiscal year 2008  found that each of the military departments used different approaches  and data sources to compile their inventory data and, as a result, DOD  data on service contracts are inconsistent and incomplete.
Resources. Limited budgets and resources may constrain insourcing  efforts. For example, if after applying its guidelines, an agency  determines that a function should be insourced and additional  government employees need to be hired, the agency must ensure the  funds are available to pay for them.
section_title: Tools Available for Agencies’ Insourcing Efforts
paragraphs: Agency implementation of insourcing efforts could be facilitated by tools  that we identified in prior work. These tools will allow agencies to capture  information, make strategic decisions and implement those decisions for  their multisector workforce. They include: inventories, business case  analysis, and human capital flexibilities.
Inventories. The inventories that federal agencies are required to  develop under congressional mandate will be used to inform a variety  of workforce decisions. For example, at DOD, the inventories are to  contain a number of different elements for service contracts, including  information on the functions and missions performed by the  contractor, the funding source for the contract, and the number of  contractor full-time equivalents working under the contract. Once  compiled, the inventories may be used to inform a variety of workforce  decisions, including how various agency functions should be sourced.    Business Case Analysis. A balanced analytical approach, used by some  agencies when deciding to outsource functions, could facilitate agency  decisions in determining whether insourcing a particular function has  the potential to achieve mission requirements. Such an analysis may  consider questions such as the following:   o  How critical is the function’s role in relationship to the  agency’s mission?  o  What is the risk to program integrity and control of  sensitive information if the function is not insourced?  o  What is the long-term trend of demand for the function; is  there periodic fluctuation in demand for the function (i.e.  stability of demand)?  o  What is the current state of technology used by the function  and what is the likelihood of the agency being able to  acquire and sustain the technology if the function is  brought in-house?  o  What are the number of staff and skill level of staff needed  o  What is the ability of the agency to recruit the workforce  to perform the function?  with the appropriate skills to continue to provide services  the contractor currently provides?  o  What is the likelihood of contractor staff in the function  applying to work for the agency?  o  What is the estimated cost to maintain an acceptable level  of performance if the function is brought in-house?
Human Capital Flexibilities. Once agencies determine which functions  they want to have provided by federal employees, taking advantage of  the variety of human-capital flexibilities is crucial to making  improvements in agencies’ efforts to recruit, hire, and manage their  workforces. For example, monetary recruitment and retention  incentives and special hiring authorities provide agencies with  flexibility in helping them manage their human-capital strategically to  fulfill insourcing needs.
section_title: Concluding Observations
paragraphs: OMB’s criteria for insourcing decisions provide a basis for agencies in  establishing their insourcing plans and can be used to facilitate balancing  the mix of federal employees and contractors to better assure government  control over critical functions. However, it will be in the implementation  of agency plans and in the individual sourcing decisions that federal  agencies make that will determine the ultimate success of this effort.  Making use of the full range of information and human-capital tools  available to implement these plans will be important to assuring effective  government control of critical functions, mitigating risks, and providing  value to the taxpayer.
Mr. Chairman, this concludes my prepared statement. I would be happy to  respond to any questions you or the other members of the subcommittee  may have at this time.
section_title: Contacts and Staff Acknowledgments
paragraphs: For further information regarding this testimony, please contact John  Needham at (202) 512-4841 or needhamjk1@gao.gov. Contact points for  our Offices of Congressional Relations and Public Affairs may be found on  the last page of this product. Staff making key contributions to this  statement were Amelia Shachoy, Assistant Director; Brendan Culley; Noah  Bleicher; Erin Carson; Lauren Heft; and John Krump.