Competitive Sourcing: Challenges in Expanding A-76 Governmentwide
Published: 2002-03-06T00:00:00

Fast Facts:

Highlights:
section_title: What GAO Found
paragraphs: The Department of Defense (DOD) has been at the forefront of federal agencies in using the OMB Circular A-76 process. In 1995, DOD made it a priority to reduce operating costs and free funds for other needs. DOD has also augmented the A-76 program with what it terms strategic sourcing--a broader array of reinvention and reengineering options that may not necessarily involve A-76 competitions. The number of positions--at one point 229,000--that DOD planned to study and the time frames for the studies have varied. Current plans are to study about 183,000 positions between fiscal years 1997 and 2007. Changes in the inventory of commercial activities and the current administration's sourcing initiatives could change the number of positions studied in the future. However, GAO has not evaluated the extent to which these changes might occur. DOD's A-76 program has faced several challenges that may provide valuable lessons learned for other federal agencies. These lessons include the following: (1) studies took longer than initially projected, (2) costs and resources required for the studies were underestimated, (3) selecting and grouping functions to compete can be difficult, and (4) determining and maintaining reliable estimates of savings were difficult. The Commercial Activities Panel is studying and has held public hearings about the policies and procedures, including the A-76 process, and the transfer of commercial activities from government personnel to contractors. The panel, comprised of federal and private sector experts, is required to report its findings and recommendations to Congress by May 2002.

section_title: Letter
paragraphs: I am pleased to be here today to participate in the committee’s hearing on  competition and accountability in the federal and service contract  workforce with a particular focus on the use of Office of Management and  Budget (OMB) Circular A-76. That circular established federal policy for  the performance of recurring commercial activities. Issued in 1966, OMB  supplemented it in 1979 with a handbook of procedures for conducting  cost comparison studies to determine whether commercial activities  should be performed by the government or by the private sector. OMB  updated the handbook in 1983, 1996, and 1999. Cost comparisons  completed under Circular A-76 are variously referred to as public-private  competitions, outsourcing, or competitive sourcing.
Emphasis on use of the A-76 process has varied over the years. The  Department of Defense (DOD), which began giving strong emphasis to the  program in the mid- to late-1990s, has been the primary user of the  process. Greater focus on the potential for expanded use of competitive  sourcing governmentwide began with passage of the Federal Activities  Inventory Reform (FAIR) Act legislation in 1998 requiring agencies to  compile annual inventories of commercial activities. Then, in 2001, OMB  began directing federal agencies to conduct public-private competitions or  convert work involving specified percentages of commercial positions on  their FAIR Act inventories directly to the private sector.
My comments today are largely based on our work in recent years tracking  DOD’s progress in implementing its A-76 program with the goal of saving  billions of dollars to apply to other priority needs (see list of related  products at the end of this statement). In response to questions you have  asked me to address, my testimony will highlight (1) DOD’s progress under  the A-76 program, (2) challenges faced by DOD that may also be faced by  other government agencies as they pursue A-76 studies, and (3) concerns  that gave rise to the creation of the Commercial Activities Panel to study  sourcing policies and procedures under section 832 of the National  Defense Authorization Act for Fiscal Year 2001. Chaired by Comptroller  General David M. Walker, the Commercial Activities Panel is required to  report its findings and recommendations to the Congress by May 1, 2002.  Given the ongoing nature of the panel’s work, I hope you will appreciate  limitations on my ability to discuss panel deliberations and their potential  outcome.
subsections: section_title: Background
paragraphs: Under A-76, commercial activities may be converted to or from contractor  performance either by direct conversion or by cost comparison. Under  direct conversion, specific conditions allow commercial activities to be  moved from government or contract performance without a cost  comparison study (for example, for activities involving 10 or fewer  civilians). Generally, however, commercial functions are to be converted  to or from contract performance by cost comparison, whereby the  estimated cost of government performance of a commercial activity is  compared to the cost of contractor performance in accordance with the  principles and procedures set forth in Circular A-76 and the revised  supplemental handbook. As part of this process, the government identifies  the work to be performed (described in the performance work statement),  prepares an in-house cost estimate based on its most efficient  organization, and compares it with the winning offer from the private  sector.
According to A-76 guidance, an activity currently performed in-house is  converted to performance by the private sector if the private sector offer is  either 10 percent lower than the direct personnel costs of the in-house  cost estimate or is $10 million less (over the performance period) than the  in-house cost estimate. OMB established this minimum cost differential to  ensure that the government would not convert performance for marginal  savings.
The handbook also provides an administrative appeals process. An eligible  appellant must submit an appeal to the agency in writing within 20 days of  the date that all supporting documentation is made publicly available.  Appeals are supposed to be adjudicated within 30 days after they are  received. Private sector offerors who believe that the agency has not  complied with applicable procedures have additional avenues of appeal.  They may file a bid protest with the General Accounting Office or file an  action in a court of competent jurisdiction.
Circular A-76 requires agencies to maintain annual inventories of  commercial activities performed in-house. A similar requirement was  included in the 1998 FAIR Act, which directs agencies to develop annual  inventories of their positions that are not inherently governmental. The  fiscal year 2000 inventory identified approximately 850,000 full-time  equivalent commercial-type positions, of which approximately 450,000  were in DOD. OMB has not yet released DOD’s inventory for 2001.
DOD has been the leader among federal agencies in recent years in its use  of OMB Circular A-76, with very limited use occurring in other agencies.  However, in 2001, OMB signaled its intention to direct greater use of the  circular on a government-wide basis. In a March 9, 2001, memorandum to  the heads and acting heads of departments and agencies, the OMB Deputy  Director directed agencies to take action in fiscal year 2002 to directly  convert or complete public-private competitions of not less than 5 percent  of the full-time equivalent positions listed in their FAIR Act inventories.  Subsequent guidance expanded the requirement by 10 percent in 2003,  with the ultimate goal of competing at least 50 percent.
In 1999, DOD began to augment its A-76 program with what it terms  strategic sourcing. Strategic sourcing may encompass consolidation,  restructuring, or reengineering activities; privatization; joint ventures with  the private sector; or the termination of obsolete services. Strategic  sourcing can involve functions or activities regardless of whether they are  considered inherently governmental, military essential, or commercial. I  should add that these actions are recognized in the introduction to the  A-76 handbook as being part of a larger body of options, in addition to  A-76, that agencies must consider as they contemplate reinventing  government operations.
Strategic sourcing initially does not involve A-76 competitions between the  public and the private sector, and the Office of the Secretary of Defense  and service officials have stressed that strategic sourcing may provide  smarter decisions because it determines whether an activity should be  performed before deciding who should perform it. However, these officials  also emphasized that strategic sourcing is not intended to take the place of  A-76 studies and that positions examined under the broader umbrella of  strategic sourcing may be subsequently considered for study under A-76.
section_title: DOD’s Ambitious Goals for Using A-76 Have Varied Over Time
paragraphs: After several years of limited use of Circular A-76, the deputy secretary of  defense gave renewed emphasis to the A-76 program in August 1995 when  he directed the services to make outsourcing of support activities a  priority in an effort to reduce operating costs and free up funds to meet  other priority needs. The effort was subsequently incorporated as a major  initiative under the then secretary’s Defense Reform Initiative, and the  program became known as competitive sourcing—in recognition of the  fact that either the public or the private sector could win competitions.  A-76 goals for the number of positions to be studied have changed over  time, and out-year study targets are fewer than in previous years.  However, future study targets could be impacted by the current  administration’s emphasis on reliance on the private sector for  commercial activities.
The number of positions planned for study and the timeframes for  accomplishing those studies have changed over time in response to  difficulties in identifying activities to be studied. In 1997, DOD’s plans  called for about 171,000 positions to be studied by the end of fiscal year  2003. In February 1999, we reported that DOD had increased this number  to 229,000 but had reduced the number of positions to be studied in the  initial years of the program. In August 2000, DOD decreased the number of  positions to be studied under A-76 to about 203,000, added about 42,000  Navy positions for consideration under strategic sourcing, and extended  the program to fiscal year 2005. Last year we noted that DOD had reduced  the planned number to study to approximately 160,000 positions under an  expanded time frame extending from 1997 to 2007. It also planned to study  about 120,000 positions under strategic sourcing during that timeframe.
More recently, DOD officials told us that the A-76 study goal for fiscal  years 1997-2007 is now approximately 183,000 positions—135,000 between  fiscal years 1997-2001, and 48,000 between fiscal years 2002-2007. It  projects that it will study approximately 144,000 positions under strategic  sourcing. To what extent the A-76 study goals are likely to change in the  future could be a function of changes in inventories of commercial  activities and continuing management emphasis on competitive sourcing.
Although DOD’s fiscal year 2001 inventory of commercial activities has not  been publicly released, we have noted some reductions between previous  inventories as the department has gained experience in completing them.  In reporting on our analysis of DOD’s initial FAIR Act inventory, we cited  the need for more consistency in identifying commercial activities. We  found that the military services and defense agencies did not always  consistently categorize similar activities. We have not had an opportunity  to analyze more recent inventories to determine to what extent improved  guidance may have helped to increase consistency in categorizing  activities. At the same time, we also previously reported that a number of  factors could reduce the number of additional functions studied under  A-76. For example, we noted that factors such as geographic dispersion of  positions and the inability to separate commercial activities from  inherently governmental activities could limit the number of inventory  positions studied. Likewise, the inventory already makes provision for  reducing the number of positions eligible for competition such as where  performance by federal employees was needed because of national  security or operational risk concerns.
On the other hand, The President’s Management Agenda, Fiscal Year  2002, notes “Agencies are developing specific performance plans to meet  the 2002 goal of completing public-private or direct conversion  competition on not less than five percent of the full-time equivalent  employees listed on the FAIR Act inventories. The performance target will  increase by 10 percent in 2003.” Additionally, DOD’s Quadrennial Defense  Review Report, September 30, 2001, states that the department should  “Focus DOD ‘owned’ resources on excellence in those areas that  contribute directly to warfighting.  Only those  functions that must be performed by DOD should be kept by DOD. Any  function that can be provided by the private sector is not a core  government function. Traditionally, ‘core’ has been very loosely and  imprecisely defined and too often used as a way of protecting existing  arrangements.” We have not assessed to what extent efforts in this area  are likely to strengthen emphasis on A-76.
section_title: Challenges Faced by DOD That May Be Applicable to Other Federal Agencies
paragraphs: As we tracked DOD’s progress in implementing its A-76 program since the  mid-to late-1990s, we identified a number of challenges and concerns that  have surrounded the program—issues that other agencies may encounter  as they seek to respond to the administration’s emphasis on competitive  sourcing. They include (1) the time required to complete the studies,  (2) cost and resources to conduct and implement the studies, (3) selecting  and grouping positions to compete, and (4) developing and maintaining  reliable estimates of projected savings expected from the competitions.  These need not be reasons to avoid A-76 studies but are factors that need  to be taken into consideration in planning for the studies.
subsections: section_title: Studies Took Longer to Complete Than Initially Expected
paragraphs: Individual A-76 studies in DOD have taken longer than initially projected.  In launching its A-76 program, some DOD components made overly  optimistic assumptions about the amount of time needed to complete the  competitions. For example, the Army initially projected that it would take  13 to 21 months to complete studies, depending on their size. The Navy  initially projected completing its studies in 12 months. The numbers were  subsequently adjusted upward, and the most recent available data indicate  that the studies take on average about 22 months for single-function and  31 months for multifunction studies. Agencies need to keep these  timeframes in mind when projecting resources required to support the  studies and timeframes for when savings are expected to be realized—and  may need to revisit these projections as they gain experience under the  program.
section_title: Costs and Resources to Conduct and Implement Studies Were Underestimated
paragraphs: Once DOD components found that the studies were taking longer than  initially projected, they realized that a greater investment of resources  would be needed than originally planned to conduct the studies. For  example, the 2001 president’s budget showed a wide range of projected  study costs, from about $1,300 per position studied in the Army to about  $3,700 in the Navy. Yet, various officials expressed concern that these  figures underestimated the costs of performing the studies. While the costs  they cited varied, some ranged up to several thousand dollars per position.  One factor raising costs was the extent to which the services used  contractors to facilitate completion of the studies. Given differences in  experience levels between DOD and other agencies in conducting A-76  studies, these other agencies may need to devote greater resources to  training or otherwise obtaining outside assistance in completing their  studies.
In addition to study costs, significant costs can be incurred in  implementing the results of the competitions. Transition costs include the  separation costs for civilian employees who lose their jobs as a result of  competitions won by the private sector or when in-house organizations  require a smaller civilian workforce. Such separation costs include the  costs of voluntary early retirement, voluntary separation incentives, and  involuntary separations through reduction-in-force procedures. Initially,  we found that DOD budget documents had not fully accounted for such  costs in estimating savings that were likely to result from their A-76  studies. More recently, we found that the Department had improved its  inclusion of study and transition costs in its budget documents.
section_title: Selecting and Grouping Functions to Compete Can Be Difficult
paragraphs: Selecting and grouping functions and positions to compete can be difficult.  Because most services faced growing difficulties in or resistance to finding  enough study candidates to meet their A-76 study goals, the goals and time  frames for completing studies changed over time; and DOD ultimately  approved strategic sourcing as a way to complement its A-76 program and  help achieve its savings goals.
Guidelines implementing the FAIR Act permit agencies to exclude certain  commercial activities from being deemed eligible for competition such as  patient care in government hospitals. Additionally, as experienced by  DOD, factors such as geographic dispersion of positions and the inability  to separate commercial activities from inherently governmental activities  could limit the number of inventory positions studied. It becomes  important to consider such factors in determining what portions of the  FAIR inventories are expected to be subject to competition.
section_title: Developing and Maintaining Reliable Estimates of Savings Were Difficult
paragraphs: Considerable questions have been raised concerning to what extent DOD  has realized savings from its A-76 studies. In part, these concerns were  exacerbated by the lack of a reliable system for capturing initial net  savings estimates and updating them as needed and by other difficulties  associated with the lack of precision often associated with savings  estimates. Our work has shown that while significant savings are being  achieved by DOD’s A-76 program, it has been difficult to determine  precisely the magnitude of those savings. Savings may be limited in the  short-term because up-front investment costs associated with conducting  and implementing the studies must be absorbed before long-term savings  begin to accrue. Several of our reports in recent years have highlighted  these issues.
For example, we reported in March 2001 that A-76 competitions had  reduced estimated costs of Defense activities primarily by reducing the  number of positions needed to perform those activities under study. This  is true regardless of whether the government’s in-house organization or  the private sector wins the competition. Both government and private  sector officials with experience in such studies have stated that, in order  to be successful in an A-76 competition, they must seek to reduce the  number of positions required to perform the function being studied.  Related actions may include restructuring and reclassifying positions and  using multiskill and multirole employees to complete required tasks.
In December 2000, we reported on DOD’s savings estimates from a  number of completed A-76 studies. We noted that DOD had reported cost  reductions of about 39 percent, yielding an estimated $290 million savings  in fiscal year 1999. We also agreed that individual A-76 studies were  producing savings but stressed difficulty in quantifying the savings  precisely for a number of reasons:
Because of an initial lack of DOD guidance on calculating costs, baseline  costs were sometimes calculated on the basis of average salaries and  authorized personnel levels rather than on actual numbers.
DOD’s savings estimates did not take into consideration the costs of  conducting the studies and implementing the results, which of course  must be offset before net savings begin to accrue.
There were significant limitations in the database DOD used to calculate  savings.
Savings become more difficult to assess over time as workload  requirements or missions change, affecting program costs and the baseline  from which savings were initially calculated.
Our August 2000 report assessed the extent to which there were cost  savings from nine A-76 studies conducted by DOD activities. The data  showed that DOD realized savings from seven of the cases, but overall less  than Defense components had initially projected. Each of the cases  presented unique circumstances that limited our ability to precisely  calculate savings. Some suggested lower savings. Others suggested higher  savings than initially identified. In two cases, DOD components had  included cost reductions unrelated to the A-76 studies as part of their  projected savings. Additionally, baseline cost estimates used to project  savings were usually calculated using an average cost of salary and  benefits for the number of authorized positions, rather than the actual  costs of the positions. The latter calculation would have been more  precise. In four of the nine cases, actual personnel levels were less than  authorized. While most baseline costs estimates were based largely on  personnel costs, up to 15 percent of the costs associated with the  government’s most efficient organizations’ plans or the contractors’ offers  were not personnel costs. Because these types of costs were not included  in the baseline, a comparison of the baseline with the government’s most  efficient organization or contractor costs may have resulted in  understating cost savings. On the other hand, savings estimates did not  reflect study and implementation costs, which reduced savings in the short  term.
DOD has revised its information systems to better track the estimated and  actual costs of activities studied but not to revise previous savings  estimates. DOD is also emphasizing the development of standardized  baseline cost data to determine initial savings estimates. In practice,  however, many of the cost elements that are used in A-76 studies will  continue to be estimated because DOD lacks a cost accounting system to  measure actual costs. Further, reported savings from A-76 studies will  continue to have some element of uncertainty and imprecision and will be  difficult to track in the out-years because workload requirements and  missions change, affecting program costs and the baseline from which  savings are calculated.
section_title: Commercial Activities Panel Is Studying Sourcing Policies and Procedures
paragraphs: Although comprising a relatively small portion of the government’s overall  service contracting activity, competitive sourcing under Circular A-76 has  been the subject of much controversy because of concerns about the  process raised both by the public and private sectors. Federal managers  and others have been concerned about organizational turbulence that  typically follows the announcement of A-76 studies. Government workers  have been concerned about the impact of competition on their jobs, their  opportunity for input into the competitive process, and the lack of parity  with industry offerors to protest A-76 decisions. Industry representatives  have complained about the fairness of the process and the lack of a “level  playing field” between the government and the private sector in  accounting for costs. Concerns also have been registered about the  adequacy of oversight of the competition winners’ subsequent  performance, whether won by the public or private sector.
Amid these concerns over the A-76 process, the Congress enacted section  832 of the National Defense Authorization Act for Fiscal Year 2001. The  legislation required the comptroller general to convene a panel of experts  to study the policies and procedures governing the transfer of commercial  activities for the federal government from government to contractor  personnel. The panel, which Comptroller General David M. Walker chairs,  includes senior officials from DOD, OMB, the Office of Personnel  Management, private industry, federal labor organizations, and academia.  The Commercial Activities Panel, as it is known, is required to report its  findings and recommendations to the Congress by May 1, 2002.
The panel had its first meeting on May 8, 2001, at which time it adopted a  mission statement calling for improving the current framework and  processes so that they reflect a balance among taxpayer interests,  government needs, employee rights, and contractor concerns.  Subsequently, the panel held three public hearings. At the first hearing on  June 11, in Washington, D.C., over 40 individuals representing a wide  spectrum of perspectives presented their views. The panel subsequently  held two additional hearings, on August 8 in Indianapolis, Indiana, and on  August 15 in San Antonio, Texas. The hearing in San Antonio specifically  addressed OMB Circular A-76, focusing on what works and what does not  in the use of that process. The hearing in Indianapolis explored various  alternatives to the use of A-76 in making sourcing decisions at the federal,  and local levels.
Since completion of the field hearings, the panel members have met in  executive session several times, augmented between meetings by work of  staff to help them (1) gather background information on sourcing trends  and challenges, (2) identify sourcing principles and criteria, (3) consider  A-76 and other sourcing processes to assess what’s working and what’s  not, and (4) assess alternatives to the current sourcing processes. Panel  deliberations continue with the goal of meeting the May 1 date for a report  to the Congress.
This concludes my statement. I would be pleased to answer any questions  you or other members of the committee may have at this time.
Contacts and Acknowledgment	 For further contacts regarding this statement, please contact  Barry W. Holman at (202) 512-8412 or Marilyn Wasleski at (202) 512-8436.  Other individuals making key contributions to this statement include  Debra McKinney, Donald Bumgardner, Jane Hunt, Nancy Lively, Stephanie  May, and Judith Williams.
section_title: A-76 Related GAO Products
paragraphs: DOD Competitive Sourcing: A-76 Program Has Been Augmented by  Broader Reinvention Options. GAO-01-907T. Washington, D.C.: June 28,  2001.
DOD Competitive Sourcing: Effects of A-76 Studies on Federal  Employees’ Employment, Pay, and Benefits Vary. GAO-01-388.  Washington, D.C.: March 16, 2001.
DOD Competitive Sourcing: Results of A-76 Studies Over the Past  5 Years. GAO-01-20. Washington, D.C.: December 7, 2000.
DOD Competitive Sourcing: More Consistency Needed in Identifying  Commercial Activities. GAO/NSIAD-00-198. Washington, D.C.: August 11,  2000.
DOD Competitive Sourcing: Savings Are Occurring, but Actions Are  Needed to Improve Accuracy of Savings Estimates. GAO/NSIAD-00-107.  Washington, D.C.: August 8, 2000.
DOD Competitive Sourcing: Some Progress, but Continuing Challenges  Remain in Meeting Program Goals. GAO/NSIAD-00-106. Washington,  D.C.: August 8, 2000.
Competitive Contracting: The Understandability of FAIR Act Inventories  Was Limited. GAO/GGD-00-68. Washington, D.C.: April 14, 2000.
DOD Competitive Sourcing: Potential Impact on Emergency Response  Operations at Chemical Storage Facilities Is Minimal.  GAO/NSIAD-00-88. Washington, D.C.: March 28, 2000.
DOD Competitive Sourcing: Plan Needed to Mitigate Risks in Army  Logistics Modernization Program. GAO/NSIAD-00-19. Washington, D.C.:  October 4, 1999.
DOD Competitive Sourcing: Air Force Reserve Command A-76  Competitions. GAO/NSIAD-99-235R. Washington, D.C.: September 13,  1999.
DOD Competitive Sourcing: Lessons Learned System Could Enhance  A-76 Study Process. GAO/NSIAD-99-152. Washington, D.C.: July 21, 1999.
Defense Reform Initiative: Organization, Status, and Challenges.  GAO/NSIAD-99-87. Washington, D.C.: April 21, 1999.
Quadrennial Defense Review: Status of Efforts to Implement Personnel  Reductions in the Army Materiel Command. GAO/NSIAD-99-123.  Washington, D.C.: March 31, 1999.
Defense Reform Initiative: Progress, Opportunities, and Challenges.  GAO/T-NSIAD-99-95. Washington, D.C.: March 2, 1999.
Force Structure: A-76 Not Applicable to Air Force 38th Engineering  Installation Wing Plan. GAO/NSIAD-99-73. Washington, D.C.:  February 26, 1999.
Future Years Defense Program: How Savings From Reform Initiatives  Affect DOD’s 1999-2003 Program. GAO/NSIAD-99-66. Washington, D.C.:  February 25, 1999.
DOD Competitive Sourcing: Results of Recent Competitions.  GAO/NSIAD-99-44. Washington, D.C.: February 23, 1999.
DOD Competitive Sourcing: Questions About Goals, Pace, and Risks of Key Reform Initiative. GAO/NSIAD-99-46. Washington, D.C.: February 22, 1999.
OMB Circular A-76: Oversight and Implementation Issues. GAO/T-GGD-98-146. Washington, D.C.: June 4, 1998.
Quadrennial Defense Review: Some Personnel Cuts and Associated  Savings May Not Be Achieved. GAO/NSIAD-98-100. Washington, D.C.:  April 30, 1998.
Competitive Contracting: Information Related to the Redrafts of the  Freedom From Government Competition Act. GAO/GGD/NSIAD-98-167R.  Washington, D.C.: April 27, 1998.
Defense Outsourcing: Impact on Navy Sea-Shore Rotations.  GAO/NSIAD-98-107. Washington, D.C.: April 21, 1998.
Defense Infrastructure: Challenges Facing DOD in Implementing  Defense Reform Initiatives. GAO/T-NSIAD-98-115. Washington, D.C.:  March 18, 1998.
Defense Management: Challenges Facing DOD in Implementing Defense  Reform Initiatives. GAO/T-NSIAD/AIMD-98-122. Washington, D.C.:  March 13, 1998.