Department of Labor: Better Cost Assessments and Departmentwide Performance Tracking Are Needed to Effectively Manage Competitive Sourcing Program
Released: 2008-11-21T00:00:00

Letter

Background

Federal agencies rely on a mix of public and private sector sources to perform a wide variety of commercial activities, such as information technology, building maintenance, property management, and logistics. Competitive sourcing is the term used to describe the strategy under which agencies use competitions between public and private sector organizations to identify the most cost-effective provider of commercial activities. In 2001 and 2002, the Comptroller General convened a Commercial Activities Panel to study the policies and procedures governing competitive sourcing. This panel included officials from federal agencies, federal labor unions, and private industry. The panel unanimously approved a set of 10 principles (see sidebar), and a supermajority of two-thirds of the panel members adopted an additional set of recommendations that they believed would significantly improve the government’s policies and procedures for making competitive sourcing decisions. tht me performed y either the public or the privte ector, wold permit public nd privte rce to prticipte in competition for work crrently performed in-house, work crrently contrcted to the privte ector, nd new work, content with thee principle. dollars by taking advantage of competitive forces. Further, in July 2008, OMB issued a memorandum on commercial services management recognizing that agencies should improve the operation of their commercial functions using a variety of techniques—such as business process re-engineering efforts and strengthened oversight of contractors— in addition to competitive sourcing.

Competitive Sourcing Process

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The first step in the competitive sourcing process is for agencies to determine which activities are suitable for competition. In accordance with the Federal Activities Inventory Reform Act of 1998 (FAIR Act) and OMB Circular No. A-76, federal agencies categorize all of the activities performed by their employees as either inherently governmental (not subject to competitive sourcing) or commercial (potentially subject to competitive sourcing). OMB Circular No. A-76 then directs agencies to further categorize their commercial activities according to six “reason codes,” with only one code signifying suitability for competitive sourcing that year. Agencies are allowed considerable discretion in how they categorize their activities, subject to review by OMB.

Once the annual inventory is complete, agencies then select which activities will be competed and begin planning the associated competitions. In this stage, agencies separate the selected activities into groups and develop a full description of each group—called a “statement of work”—that will serve as a guide to potential bidders on what will be required by the final contracts or letters of obligation. Agencies also develop quality assurance plans and cost estimates to be used as standards against which to evaluate the performance of the winning service provider and the cost savings achieved by the competition. agencies also develop an in-house bid, or “tender,” under which agency employees will perform the work if the in-house government bid wins the competition. The staffing plan identified in the in-house agency bid is referred to as a “most efficient organization” (MEO). The MEO is not usually a representation of the incumbent organizational structure “as is,” but more commonly, it reflects a smaller, restructured version of the incumbent government organization doing the work.

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Generally, the lowest cost provider that is technically acceptable is awarded the contract, but factors other than cost may be considered in some circumstances. If a contractor (private sector service provider) wins the competition, certain federal worker protections are required, such as the right to “first refusal” in which the private sector service provider winning the competition generally must first offer any new employment openings under the contract to qualified government employees who were (or who will be) adversely affected as a result of the awarding of the contract. If the in-house government service provider wins the competition, other federal worker protections apply, such as those governing grade and salary retention rights. competitive process to used when more thn 65 FTE re involved (but mused when fewer thn 65 re involved). Bid re reqired to inclde quality control pl, nd gencie re reqired to develop pl to measure the winning ervice provider’ performnce. In-housid for ndrd competition re to inclde mot efficient orgniztion (MEO) nd more detiled ly nd docmenttion thfor tremlined competition.

Once the competition is complete and the letter of obligation or contract is awarded, agencies are required to monitor the performance of the winning service provider on an ongoing basis and must report findings to both Congress and OMB, regardless of whether the winner is the in-house government service provider or a private sector service provider. For example, federal law requires agencies to submit annual reports to Congress on competitions announced and completed. In addition, OMB Circular No. A-76 and other guidance directs agencies to monitor postcompetition performance of the winning service provider and to track the actual costs of the performance. (See appendix III for more details.)

Competitive Sourcing at DOL

Within DOL, the Office of Asset and Resource Management is responsible for planning and conducting the FAIR Act inventories of commercial and inherently governmental activities. It is also responsible for managing DOL’s competitive sourcing program, including the planning, monitoring, and evaluation of potential opportunities to improve effective and efficient program delivery at DOL. For example, this office coordinates the PCAR for each competition. According to DOL policy and procedures, an initial PCAR is normally conducted by an independent review official after the first full year of performance following a competition, with annual PCARs thereafter for the duration of the contract, in order to meet formal review and inspection requirements in OMB Circular No. A-76 and the Federal Acquisition Regulation. The competition process at DOL is illustrated in figure 1.

Beginning in fiscal year 2004, DOL’s strategy for identifying and selecting work activities for competitive sourcing competitions involved starting out small in scope and gradually expanding its efforts over time. DOL’s first competitions in fiscal year 2004 involved mostly small groups of FTEs within a single DOL office (see table 1). By fiscal year 2007, DOL had expanded its public-private competitions to include functions involving a greater number of FTEs across multiple DOL offices. In addition, the number of private sector bids decreased over time. For a complete listing of DOL’s fiscal year 2004 through 2007 competitive sourcing competitions, see appendix V.

DOL Has Established a Performance Assessment System but Does Not Track Deficiencies or Recommendations for Improvement Departmentwide

DOL has made progress developing a system to assess the performance of winning service providers in its competitive sourcing program. DOL’s system, as outlined in its policy and procedures issued in 2005, directs DOL offices to ensure that (1) records are maintained for independent review of the competition, (2) all assessments contain criteria to measure performance, and (3) lessons learned are reported. In our review of all assessments conducted as of July 2008, we found that these policies and procedures generally were followed and that these assessments provide key information for DOL policymakers to evaluate the effectiveness of its competitive sourcing program. However, we found that DOL lacks a departmentwide process for tracking and addressing deficiencies and recommendations for improvement.

DOL’s System for Assessing Performance Shows Progress

In 2005, DOL issued policy and procedures for conducting PCARs—DOL’s system for monitoring performance in accordance with OMB Circular No. A-76 and the Federal Acquisition Regulation. We examined all of DOL’s initial PCARs completed as of July 2008 (18 total), and we found that DOL’s policy and procedures generally were followed in conducting the reviews. Most initial PCARs were completed in a timely manner and most records were maintained for review. Criteria to measure performance were established for half of the competitions, and the majority of initial PCARs included lessons learned.

Most Initial PCARs Completed in a Timely Manner

According to DOL policy and procedures and DOL officials, initial PCARs are normally conducted approximately 1 year after the first full year of performance for each competition. As of July 2008, we found that DOL had completed 18 of these reviews, based on the 21 competitions that were completed during fiscal years 2004 through 2006. Of the 3 competitions that did not have an initial PCAR, one case involved a fiscal year 2005 competition that, according to DOL officials, had been delayed in implementation. The initial PCAR for this competition was later completed in September 2008. The second case was DOL’s very first fiscal year 2004 competition to be won by a private sector service provider, and at the time, DOL had not yet issued the policy and procedures for conducting PCARs. In the last case, the contract was terminated a few months before the initial PCAR was expected to be completed.

In addition to calling for initial PCARs, DOL’s policy also calls for annual PCARs thereafter. As of August 2008, we found that DOL had completed two annual follow-up reviews of the 14 cases where 1 year or more had elapsed since the initial PCAR. In 4 cases, implementation of the competitions had been terminated. In the remaining 10 cases, the follow- up reviews were still pending; in 6 cases, 2 or 3 years had elapsed since the initial PCAR was completed. A senior DOL official explained that DOL interpreted OMB guidance as calling for follow-up reviews only for certain standard competitions. However, as noted by OMB officials, OMB’s guidance states that all competitions should still be reviewed as part of the agency’s management oversight activities (unless otherwise exempted by law). Thus, in all of these cases, follow-up PCARs should be completed annually in accordance with DOL’s policy for performance monitoring.

Most Records Maintained for Review

Following issuance of DOL’s policy and procedures in 2005, DOL officials generally maintained the records needed for conducting PCARs, but this was not the case at the outset of DOL’s competitive sourcing program. Independent review officials noted that they were unable to fully assess four competitions completed in fiscal year 2004 because of missing documentation. For example, these reviewers noted that records such as the initial solicitation and public announcement of the competition, backup cost information, and the performance decision were missing. DOL officials explained that these fiscal year 2004 competitions were the department’s first under its competitive sourcing program and that they experienced a learning curve. They said that the missing files for all of these competitions have been recovered and corrective actions such as recreating the files have been taken. The independent review officials for all four PCARs also noted that the files had been recreated for each of their competitions. Subsequent reviews of other competitions completed in fiscal years 2005 through 2007 did not cite similar problems.

Criteria to Measure Performance Established for Half of the Competitions

According to the PCARs, criteria to measure performance had been established for half of the competitions reviewed. OMB Circular No. A-76 calls for quality assurance and quality control plans to be established to assist agencies with monitoring the performance of winning service providers for standard competitions. Although OMB Circular No. A-76 does not specify a requirement for streamlined competitions, DOL’s policy and procedures call for streamlined competitions to establish quality assurance plans or, at a minimum, abbreviated work requirements, with quality control plans optional in some cases. Of the 18 initial PCARs completed as of July 2008, we found that independent reviewers identified a lack of quality assurance plans in nine cases and a lack of quality control plans in seven cases (all of which were streamlined competitions). In three of the nine cases lacking quality assurance plans, reviewers noted the difficulty in assessing the performance of a winning service provider without any kind of general standards or requirements that may be used to measure performance. In addition, in one case that had established a quality control plan, the independent review official commented that the service provider who had won the competition was not utilizing the quality control plan.

Majority of Initial PCARs Reported Lessons Learned

The majority of the 18 initial PCARs completed as of July 2008 reported information on lessons learned: 13 provided this information, but the remaining 5 did not. OMB Circular No. A-76 calls for agencies to allocate resources to effectively apply a clear, transparent, and consistent competition process based on lessons learned and best practices. DOL policy and procedures also state that reporting lessons learned in a competition should be documented in each PCAR. Yet, a senior DOL management official stated that DOL considers providing lessons learned in a PCAR to be a best practice, rather than a requirement, and that the “lessons learned” often can be found elsewhere in the body of the review. However, in three initial PCARs, reviewers noted specifically that there were no lessons learned identified or reported in any part of the reviews. In one other follow-up PCAR, the reviewer noted that lessons learned were not formally documented, but the in-house organization has effectively applied lessons learned after the competition decision.

DOL Lacks a Departmentwide Process for Tracking and Addressing Deficiencies and Recommendations for Improvement

DOL does not ensure that deficiencies identified and recommendations made in initial PCARs are tracked and followed up on at a departmentwide level. Instead, DOL relies on an ad hoc process. As a result, DOL is hindered in its ability to systematically monitor performance trends and determine if the winning service providers are performing more efficiently than the prior service providers.

OMB Circular No. A-76 directs agencies to maintain a database to track the execution of competitions through completion of the last performance period (or cancellation of the competition), and to post best practices and lessons learned. In addition, guidance on internal controls from OMB, GAO, and others typically points out that taking a more systematic approach to identifying weaknesses and needed improvements enhances the accountability and effectiveness of an agency’s programs. For example, OMB Circular No. A-123 directs agencies and individual federal managers to take systematic and proactive measures to identify needed improvements and to take corresponding corrective action to improve the accountability and effectiveness of their programs. OMB Circular No. A- 123 also directs agencies to carefully consider whether systemic weaknesses exist that adversely affect internal control across organizational or program lines. With respect to internal controls, GAO has issued standards which state that assessing the quality of performance over time is a key aspect of internal control monitoring in a government agency and that managers need to compare actual performance to planned or expected results throughout the organization and analyze significant differences. In addition, GAO’s Commercial Activities Panel report states that methods to track success or deviation from objectives are required to ensure accountability.

All of DOL’s 18 initial PCARs completed as of July 2008 contained recommendations for improvements for each of their competitions. The recommendations included suggestions such as modifying the performance work statement to more accurately reflect the workload of the winning service provider, developing educational briefings, and providing an example of a completed PCAR in DOL’s policy and procedures for conducting performance reviews. But DOL does not track such recommendations at the departmentwide level. According to a senior DOL official in the Office of Asset and Resource Management, it is the responsibility of each individual DOL office—such as the Mine Safety and Health Administration or the Office of Administrative Law Judges—to document and respond to deficiencies and recommendations noted in the initial PCARs. Information about whether any deficiencies have or have not been addressed is maintained only at the individual office level.

At our request, DOL officials from individual offices were able to provide information for a sample of six competitions that described how they had followed up on some of the issues reported in the initial PCARs. For example, DOL officials stated that after tracking the findings from one PCAR, they decided to conduct a follow-up work management study that provided a blueprint for undertaking a series of programmatic and quality assurance surveillance improvements. Senior DOL officials also told us that they have an executive steering committee, with members from its competitive sourcing, human resources, and labor management relations offices, that meets weekly to discuss items that need to be adjusted in competitive sourcing competitions. However, as one DOL senior management official acknowledged, they do not always follow up on all of the problems that they keep on file. Thus, DOL’s ad hoc system does not currently take a systematic approach to identifying weaknesses and needed improvements to enhance the effectiveness and accountability of its competitive sourcing program across the organization, as called for by OMB guidance and GAO internal control standards.

DOL Competitive Sourcing Cost Reports Are Not Comprehensive or Reliable

DOL’s savings reports for competitive sourcing, while adhering to OMB guidance, exclude a number of substantial costs and also are unreliable. OMB’s guidance directs agencies to exclude certain costs associated with the competitions, such as some staff costs and costs incurred before the competition’s announcement. These costs can be substantial. In addition, DOL’s savings reports are unreliable for a number of reasons. For example, we found cases of inflated savings reports due to calculation errors, the use of projections rather than actual costs, and the use of baseline costs that were inaccurate and misrepresented actual savings.

Savings Reports Are Not Comprehensive

DOL’s savings reports to Congress are not comprehensive because they exclude substantial costs associated with the competition process. Although these reporting practices conform to OMB’s guidance for competitive sourcing, reporting costs in this way does not comprehensively assess competitive sourcing as a tool to manage a particular commercial activity, compared with other possible management tools.

The Consolidated Appropriations Act, 2004, established a requirement for all executive agencies to report on their competitive sourcing efforts for the prior fiscal year. As part of this law, Congress requires agencies to report the incremental cost directly attributable to conducting the competitions, including costs attributable to paying outside consultants and contractors; an estimate of the total anticipated savings, or a quantifiable description of improvements in service or performance, derived from completed competitions; and actual savings, or a quantifiable description of improvements in service or performance, derived from the implementation of competitions completed after May 29, 2003.

In its oversight role for competitive sourcing, OMB issues a yearly memorandum providing guidance to agency heads on how to develop this report. From 2004 through 2007, these memos have directed agencies to exclude certain costs that are associated with the competition process (see table 2).

OMB officials told us that their policy directs agencies to exclude certain costs because these costs reflect what would be incurred as part of an agency’s typical management responsibilities. For example, OMB directs agencies to exclude the costs of precompetition planning and agency staff time spent on competition activities, as these activities can help the agency identify and correct performance gaps and improve efficiency and should be taking place whether or not the agency is conducting any competitions. Additionally, OMB officials explained that transition costs associated with competitions should be excluded because such costs also occur with other management processes, such as new program re- engineering and separation payments provided to employees who are displaced by a downsizing. Similarly, they explained that the costs associated with conducting PCARs should be excluded because these reviews help organizations identify and correct performance gaps in their work groups and should be considered as part of normal business operations. OMB officials commented that they do not believe that excluding these costs has a major impact on an agency’s ability to determine the cost-effectiveness of competitive sourcing as a management tool.

However, because OMB’s guidance directs agencies to exclude certain costs, the full cost associated with DOL’s competitive sourcing program is not transparent. Since 1990, we have reported that improvements in the completeness and accuracy of savings reports of competitive sourcing could help present a more comprehensive picture of program costs and benefits and help determine the most cost-effective use of resources. For example, in our reviews of the competitive sourcing programs at DOD and USDA’s Forest Service, we recommended that these agencies improve the way they account for and report costs associated with their competitive sourcing programs.

In this review, we found similar issues with the comprehensiveness of DOL’s savings reports. Specifically, DOL reported a total of $15.7 million in savings and $4.3 million in competition costs for all of its completed competitions for fiscal years 2004 through 2007. While DOL reported these savings in conformance with OMB guidance, we found that the excluded costs attributable to competitive sourcing over this period were substantial, and—importantly—it is not clear that these costs would be incurred when using a commercial management tool other than competitive sourcing.

For example, consistent with OMB guidance, DOL excluded costs attributable to the time in-house staff spent on assisting with competition activities (staff not dedicated to central oversight of DOL’s competitive sourcing program). While these staff are already paid by the government, their time spent away from regular work duties represents a cost that is attributable to the competition process. We were not able to obtain specific estimates on the number of hours that such staff members spent on competition activities, since DOL does not require its offices to record this information. However, employees in one office who were at the GS-12 level or higher estimated that they worked a total of 2,263 hours on one competition. Including these staff costs would have doubled the costs reported by DOL for this competition. Employee responses in our interviews suggest that the amount of time employee staff spent assisting on competitions varied greatly, with some staff members spending little, if any, time on competition activities and others who reported spending one- quarter to one-half of their total working time over the course of a year.

According to OMB’s guidance, agencies should also exclude costs incurred during the preliminary planning phase of a competition, such as the use of contractors, as well as other costs that are directly related to the conduct of the competition (see table 2). DOL employed private sector consultants to conduct precompetition planning, including feasibility studies before the competition phase, and to conduct PCARs following the competition. DOL also employed private sector consultants for other activities related to competitive sourcing, such as to conduct business and industry analyses to determine the likelihood of generating private sector offers and to review the government positions open for bidding to determine if they had been appropriately designated during the FAIR Act inventory process.

In addition, OMB guidance does not require agencies to include many of the transition costs directly associated with generating savings from competitive sourcing activities, such as the costs of voluntary separation payments and system re-engineering costs. For example, according to DOL data, in calendar year 2006, 14 employees were provided voluntary incentive payments due to competitive sourcing that totaled $350,000. Including these costs would have increased total completed competition costs by 32 percent for the year. In addition to these costs, one competition utilized a newly re-engineered process to decrease total staff hours and to help generate a reported $3.3 million in savings from fiscal year 2005 to fiscal year 2007. The costs of full-time staff hours spent on the re-engineering process were not shown as costs of competitive sourcing, and DOL did not have information on the amount of staff time used.

Finally, OMB guidance does not require agencies’ savings reports to include the costs of monitoring performance after the winning service provider begins its activities. However, we found that the PCARs are often conducted by contractors or consultants to monitor competitive sourcing performance for DOL and that they represent a cost in addition to normal federal employee and contractor oversight costs. DOL spent a total of $126,614 on PCARs conducted by consultants as of July 2008.

DOL Savings Reports Are Not Reliable

In addition to excluding costs, DOL’s savings reports are unreliable. We reviewed the process DOL uses to compile its reports for a sample of competitions. We found a number of calculation errors in the sample; we also found cases where DOL used projections rather than actual costs to estimate savings or used a baseline that was inaccurate and overstated savings.

Calculation Errors

We randomly selected three competitions for review to determine the accuracy and reliability of DOL’s savings reports. While not necessarily representative of all DOL competitions, these three savings reports contained inaccuracies—with two of the three containing significant errors that inflated the reported savings achieved through those competitions. For example, in the first competition, won by a private sector service provider, DOL reported $2.7 million in savings from fiscal year 2005 through fiscal year 2007. This savings figure did not include contract administration costs that are directed to be included according to OMB guidance. By excluding these costs, DOL overstated its savings by about $185,000 per year, or 25 percent. In the second competition, DOL used an incorrect cost value that excluded some employee wage costs when calculating savings. This error inflated the reported savings by almost $169,000, or 22 percent, for fiscal year 2006. In the third competition, though the inaccuracy was less significant, DOL reported a full year’s worth of savings for fiscal year 2006, even though the new provider was not phased in until 7 months into the new fiscal year. DOL officials stated that the savings estimate was an interim figure that was used before the actual costs were updated for fiscal year 2008.

Use of Projections in Savings Estimates

DOL used projections—rather than actual costs—to report $9.3 million of its $15.7 million in savings to Congress, even though OMB guidance specifies that calculating savings based on actual costs rather than projections is preferred. OMB guidance states that agencies may use projections as an interim estimate but that the actual numbers should be used as soon as they are available.

Savings reports based on projections can be less accurate than reports using actual numbers because projections use average salaries for employees estimated during the competition, as well as projected staffing and hours that do not always reflect true personnel costs. Projections also exclude “retained pay,” which is pay to employees who receive grade demotions but keep their original pay due to worker protections. By using projections, these costs are excluded from competition savings reports but would be included if actual costs were used. For example, in one competition won by the in-house agency (MEO), 8 of the 9.3 full time employees in the MEO received retained pay after the competition. In total, a DOL review noted that retained pay for these employees caused the actual personnel costs to be 45 percent higher than the original estimated costs for the MEO. By using projections rather than actual values in estimating savings, DOL excluded the higher actual personnel costs for fiscal years 2004 and 2005, even though actual numbers were available.

Inaccurate Baseline

Of the 18 initial PCARs that we reviewed, 8 noted that organizational or workload changes had occurred. For example, in one instance, a DOL office lost 45 FTE positions in fiscal year 2006 due to budgetary reasons, with 8 of these lost positions designated for an activity being competed and that, at the time, was in the source selection phase. This reduced the designated FTEs for this competition from 32 to 24. As noted in the PCAR, the private sector service provider who won this competition was chosen on the basis of the smaller 24-employee demand. However, the final savings figure—the difference between the original government provider and the winning private sector service provider—was calculated using the baseline cost of the original 32 FTE service provider. A senior DOL official that we spoke with stated that the original baseline was used because the private sector service provider was doing the same level of work that the government service provider had been doing before. However, as noted in the PCAR, actual workload data was not available for this competition. Because of this, it cannot be known for certain if the same level of work was being performed. Using the baseline of 32 FTEs, rather than 24 FTEs, increased reported savings by almost $2.7 million over the 5-year performance period.

Vacancies within agency workgroups also increased reported savings, though it is unclear if these savings should be attributed to competitive sourcing efforts. For example, in five competitions, the in-house government bid won the competition by maintaining its original “as-is” work group organization, and no anticipated future savings were reported because, according to DOL officials, the staff structure did not change. However, in two of the competitions, savings were later reported. In one of these competitions, employee retirements and a decrease in organization workload resulted in vacancies that caused staff wages to be 46 percent lower than those originally projected, and DOL reported savings of $64,000 for fiscal year 2005 and $86,000 for fiscal year 2006. In the second competition, savings of $26,000 were recorded for 1 year, partly due to a vacant position. In addition to staffing vacancies after the competition, vacancies that occur before a competition can inflate reported savings, as the baseline used to calculate savings is determined by the government service provider’s budgeted staffing levels for the year of the planned competition. For example, the same competition discussed previously that reported $3.3 million in savings because of a re-engineered process that decreased workload and required staffing hours, did not change its actual staffing levels at the time of the competition due to pre- existing, budgeted vacancies. Thus, the savings figures based on full staffing levels were inflated.

In three separate PCARs, as well as in our interviews with DOL employees, DOL staff were identified as inappropriately contributing to the work assigned to the winning bids, and in some cases, this resulted in overestimating the savings achieved by the competitions. In one case, the bid was won by a private sector contractor, yet the independent reviewer determined that a DOL employee was performing some of the work, noting that “a government employee is assisting a [private sector service provider] employee for up to1-2 hours per day and could total up to 500 hours on an annual basis. The service provider is being supplemented with the government workforce at this time.” DOL officials stated that the government employee was no longer assisting the private sector service provider and that a workload study was being conducted to help address this problem. Additionally, in two cases, staff who were not part of the MEO were found to be contributing to the work assigned to the MEO. For example, in one case, the PCAR indicated that non-MEO workers were found contributing to work within the MEO and that DOL had not included these costs. DOL savings estimates were based on the cost of only the MEO staff; thus, though the non-MEO staff costs were not available, including these costs would have decreased the reported savings of the competition.

DOL’s Competitions Rarely Resulted in Lost Jobs or Lower Salaries, but Employees Report Negative Impacts on Morale

DOL’s competitions reportedly had negative impacts on morale, even though they rarely resulted in lost jobs or salary reductions for DOL workers. Of the 28 competitions DOL held during fiscal years 2004 through 2007, 23 resulted in formal job changes (that is, changes reflected in personnel actions) for DOL employees—most often, reassignments to different positions at the same or higher salary levels. Many of the workers experiencing personnel actions have been minorities and women. DOL management stated that they made their best efforts to treat well those employees who were involved in the process, in adherence with the Commercial Activities Panel principles; nevertheless, employees we spoke with reported negative impacts on morale.

Most Affected Personnel Were Reassigned but Kept Their Same Salary Level

In 23 of the 28 competitive sourcing competitions conducted by DOL during fiscal years 2004 through 2007, personnel actions affected the jobs of a total of 314 DOL employees. Most often, the affected employees were reassigned to new DOL positions. About 79 percent (248 workers) were reassigned to new positions at the same federal grade and salary level (see fig. 2). For example, a worker who was a GS-13 safety and occupational health specialist before the competition was reassigned as a GS-13 safety and occupational health specialist after the competition, but was placed under a different agency management structure designed as part of the winning in-house bid (MEO). Another 15 workers were promoted to a higher federal grade with entitlement to any associated salary increases. Of the 16 workers who were demoted to a lower federal grade, 5 retained their same grade and 9 retained their same salaries that they had before the competition, due to grade and pay retention provisions. All the remaining workers left DOL, including 29 who left voluntarily, either through retirement or through a nonretirement separation with an incentive payment, and 6 who were laid off from the agency through a reduction in force.

Many Affected Personnel Were African-Americans, Women, and Older Workers

Of the 314 DOL workers who were affected by personnel actions due to competitive sourcing during fiscal years 2004 through 2007, 47 percent were African-Americans, 60 percent were women, and 89 percent were 40 years old or older—much higher proportions than their representation in the general DOL working population overall. It may be that these population groups more frequently hold the commercial positions eligible for competition compared with the general DOL population. However, DOL does not tabulate demographic data by OMB’s list of FAIR Act function code categories for commercial activities, and the data were not readily available. Thus, we were unable to determine if this could be an underlying cause.

Although DOL does not routinely track the demographic characteristics of those affected by competitive sourcing decisions, agency officials were able to gather these data from various sources in response to our request. A comparison of these data with the demographic profile of DOL personnel overall shows that African-Americans comprised about 47 percent of affected workers, compared with 23 percent of the overall DOL working population. Similarly, Native Americans comprised a greater proportion of the affected workers compared with the overall DOL working population. In contrast, the proportions of affected Caucasian, Hispanic/Latino, and Asian/Pacific Islander workers were lower than their representation in the general DOL working population (see fig. 3). Moreover, among those affected, African-Americans experienced more negative impacts. All 16 workers who were demoted, and all 6 workers who were laid off, were African-American. In contrast, of the 15 workers who were promoted, 10 were Caucasian, 3 were African-American, 1 was Hispanic/Latino, and 1 was Asian/Pacific Islander.

Similarly, 60 percent of affected workers were women, compared with 50 percent of the DOL working population. Likewise, 89 percent of affected workers were age 40 or over, compared with 75 percent of DOL workers overall, mostly due to the impact of those over age 50. (See fig. 4.)

Selected Employees’ Views on Implementation and Morale Issues

Although DOL management stated that they made their best efforts to treat well those employees whose positions were competed in the competitive sourcing process, almost all DOL employees we spoke with who assisted with competition activities, and whose positions were affected by the competitions, reported that the competitive sourcing process has had a negative impact on morale. The Commercial Activities Panel principles include, among other things, that agencies should base their competitions on a “clear, transparent, and consistently applied process” and ensure that, when competitions are held, they are conducted as “fairly, effectively, and efficiently as possible.” According to DOL management officials, extensive efforts were made to adhere to these principles. DOL issued a guidebook describing how the process worked, and management officials said they made every effort to find a job for all those affected by a competition. Employees were offered reassignments, voluntary early retirement options, separation incentives, and other services for career transition. However, most employees we interviewed said that they were either dissatisfied or very dissatisfied with how DOL has implemented the competitive sourcing process (see fig. 5). Though not a representative sample of all those involved in the process, these interviews included employees who were responsible for assisting with competition activities, as well as employees whose positions had been competed.

In general, the employees we interviewed said that the process has harmed morale. For example, some noted that it has led to a lack of trust between staff and management and that these effects appear to be long-lasting. They told us that competitive sourcing had taken away the job security that federal employment used to provide and that this change has harmed the morale of current employees, as well as the agency’s ability to recruit future employees. Some said that even though employees may have ended up benefiting from competitive sourcing, many were still unhappy about having been subjected to the process. They noted that they felt they must have done something wrong for their jobs to have been selected for the competition. Others said that they were no longer in positions that they had been trained for or wanted. Several said that if their jobs were competed again, they would leave the agency.

Among those reporting that they were satisfied or very satisfied with the process, several commented on the improved efficiency and effectiveness of the organization after the competition. For example, the employees responsible for overseeing the competition in one location noted that the competition had an overall positive impact on the organization because the winning MEO incorporated a better balance of personnel and resources than what had existed before. According to these employees, they met their goals, saved some money, and came up with a better organization afterward. However, others we spoke with commented that employees are not as willing to put in the extra effort needed to provide high-quality work. For example, some DOL employees told us that the job was still being done but that loyalty and effort has decreased. Moreover, even employees who said they were satisfied with the process noted that there were negative impacts on morale.

Conclusions

As the Commercial Activities Panel report describes, the government’s goal for competitive sourcing is to obtain high-quality services at a reasonable cost and to achieve outcomes that represent the best deal for the taxpayer. DOL has conducted public-private competitions under its competitive sourcing program for 4 years and has set up performance and cost reporting systems to track its progress in meeting such goals. Yet these systems have a number of weaknesses, and unless these weaknesses are addressed, they will continue to inhibit DOL’s ability to reliably and comprehensively assess whether the cost of the work performed by the winning service providers—whether in-house government service providers or contracted private sector service providers—achieves the savings promised through the competitive sourcing process.

Under OMB’s new Commercial Services Management guidance, agencies are encouraged to use the tool that provides the best value and the most efficient process to manage its commercial activities. However, without a better system to track deficiencies and improvements departmentwide and identify all the costs associated with competitive sourcing, it will be difficult to assess whether competitive sourcing truly provides the best deal for the taxpayer. To accurately determine which management tool is most cost-effective in performing a certain activity, agencies need a full accounting of the costs and performance.

Previous GAO reports have cited problems at other federal agencies— DOD and USDA’s Forest Service, in particular—because they did not develop comprehensive estimates for the costs associated with competitive sourcing. This report identifies similar problems at DOL. To enhance the transparency surrounding their estimates of savings from competitive sourcing, federal agencies need to track all costs—including planning costs, transition costs, postcompetition monitoring, and the labor costs of all staff who participate in competitions.

We found that DOL does not ensure that identified deficiencies and recommendations are tracked and followed up on at a departmentwide level. Without such departmentwide tracking, DOL is hindered in identifying and monitoring agencywide competitive sourcing performance trends, reliably determining whether all deficiencies or recommendations for improvement have been addressed, or determining whether the new organization is working more efficiently. Moreover, if DOL continues to conduct more competitions that involve multiple DOL offices, the ability to track competitions departmentwide will become increasingly important.

We also found that in a sample of three of DOL’s savings reports to Congress, all three contained errors that overstated the savings achieved through competitive sourcing, two of which were significant. Without reliable savings assessments, policymakers do not have the information that they need to determine the effectiveness of competitive sourcing.

Recommendations for Executive Action

We are making four recommendations.

In the interest of providing agency decision makers and policymakers with more complete information on the total costs associated with competitive sourcing, we recommend that in addition to the current cost reports that OMB requires agencies to prepare, the Director of OMB should: require agencies to systematically report all costs associated with competitive sourcing, including regular FTE staff wages for time spent on planning and conducting competitions, as well as all other precompetition, transition, and implementation costs, including postcompetition monitoring or accountability reviews.

To improve the reliability and comprehensiveness of DOL’s performance assessments and savings estimates in its competitive sourcing program, we recommend that the Secretary of Labor take the following three actions: implement a consistently applied, departmentwide system to track identified deficiencies and recommendations for improvement in each of the competitions and the program overall; implement a system to track the full costs associated with managing DOL’s commercial management activities, including—but not limited to—all costs associated with competitive sourcing; and develop and implement a review process to ensure the accuracy of competitive sourcing savings reports to Congress.

Agency Comments and Our Evaluation

We provided a draft of this report to the Office of Management and Budget and the Department of Labor for review and comment. Both agencies provided written comments on a draft of our report which are reprinted in appendixes VI and VII, respectively. These agencies also provided us with technical comments that we incorporated, as appropriate.

OMB concurred with our conclusion that all agencies can maximize savings and performance benefits by ensuring appropriate internal controls are in place to monitor results but questioned the need for reporting all costs associated with competitive sourcing. OMB stated that certain costs are not necessarily unique to competitive sourcing and would not have a significant impact on the amount of savings. However, as the examples in this report and past GAO reports demonstrate, the lack of complete and accurate savings reports for the competitive sourcing program results in agencies not having a comprehensive, transparent picture of all the costs and benefits associated with the program. Moreover, while not unique to competitive sourcing, some costs could nevertheless vary across the myriad of management tools for improving the delivery of commercial services. Even if OMB does not expect a significantly different result in savings achieved by including these additional costs, agencies need a full accounting of all of the costs associated with competitive sourcing in order to enhance the transparency of their savings estimates and accurately determine if competitive sourcing truly provides the best deal for the taxpayer. OMB stated that it would work with the transition team so the next administration will be fully informed about the costing policies for competitive sourcing as it considers our recommendation.

DOL acknowledged that improving cost assessments and performance tracking can provide better tools for managing their competitive sourcing program and agreed with our recommendation to implement a departmentwide system to track identified deficiencies and recommendations for improvement, as well as our recommendation to develop and implement an internal review process to ensure the accuracy of savings reports. However, DOL expressed concerns about our recommendation to implement a system to track full costs related to competitive sourcing in the absence of governmentwide guidance from OMB to do so. While we recognize that DOL is subject to OMB guidance on reporting costs, we continue to maintain that federal agencies like DOL need to track all costs associated with competitive sourcing—whether they are reported or not—so they can accurately determine if competitive sourcing is the most cost- effective tool for managing certain commercial activities. This is a separate issue from our recommendation that the Director of OMB require federal agencies to report all costs associated with competitive sourcing. We maintain that tracking all costs would enhance the transparency surrounding the estimates of savings from competitive sourcing and provide for accountability in connection with sourcing decisions—one of the principles of the Commercial Activities Panel.

We are sending copies of this report to interested congressional committees, the Director of the Office of Management and Budget, the Secretary of Labor, and other interested parties. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov.

If you or your staffs have any questions regarding this report, please contact me at (202) 512-7215 or scottg@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix VIII.

Appendix I: Objectives, Scope, and Methodology

As required unde directed by the House Committee on Appropriations, this report examines the use of competitive sourcing at the Department of Labor (DOL). The House Committee on Appropriations directed that we review the extent to which DOL has established a reliable and comprehensive system to track costs, savings, and the quality of work performed by contractors, as well as DOL’s adherence to the principles adopted in 2002 by the Commercial Activities Panel chaired by the Comptroller General. In response, GAO’s review focused on the following: r the Consolidated Appropriations Act, 2008, and as 1. The extent to which DOL has established a reliable and comprehensive system to assess the quality of work performed as a result of competitive sourcing. 2. The comprehensiveness and reliability of DOL’s assessments of the savings and costs associated with competitive sourcing. 3. The implications of competitive sourcing for certain DOL worker populations, such as women and minorities.

To address these issues, we examined relevant statutes, regulations, and guidance on competitive sourcing, Office of Management and Budget (OMB) guidance, DOL internal policies and guidance on competitive sourcing, annual reports to Congress, DOL Inspector General reports, GAO reports, and related documents. We interviewed DOL officials and employees, OMB officials, two private sector companies, and the president of a leading national private sector trade association representing over 300 companies. We also met with representatives from the American Federation of Government Employees (AFGE)—a union representing 600,000 federal and D.C. government workers nationwide and overseas— and employee representatives to AFGE from DOL. We focused on DOL’s competitive sourcing activities from fiscal years 2004 through 2007. There were no DOL competitive sourcing activities in 2008 for us to review because the Consolidated Appropriations Act, 2008 prohibited funds fr that act from being used for carrying out competitions under OMB Circular No. A-76 until 60 days after this report is provided to the Committees on Appropriations for the House of Representatives and the Senate.

To address the first issue, we examined all 18 of DOL’s postcompetition accountability reviews (PCARs) completed as of July 2008 for the 28 competitions conducted from fisc interviewed DOL officials, together with one performance review contractor selected by DOL, about their processes for conducting the PCA acc policy. In addition, we selected a group of six PCARs to evaluate the extent to which DOL management had followed up and addressed the deficiencies and suggestions for improvement that we ide simple random sample of 3 PCARs from among the 13 initial PCARs completed between 2006 and 2007, plus a nonrandom sample of three a significant findings and recommendations that were not present in the three random PCARs selected. al years 2004 through 2007. We Rs, and we evaluated the structure and content of the review ording to DOL and OMB ntified in each of these reviews. The six PCARs were com itional PCARs completed between 2004 and 2 005 that had examples of To address the second issue, we interviewed DOL officials responsible for completing these assessments and reviewed the process they used to complete the savings and cost reports. To assess the accuracy of DOL’s reports, we reviewed DOL’s annual reports to Congress, all 18 of DOL’s PCARs completed as of July 2008, and the cost records for the private contractors involved in assisting with the competition process and completing the PCARs. We reviewed the documents from all 18 initial PCAR and conducted more detailed analyses of the calculations provided in the cos reports for the same 3 randomly selected initial PCARs completed between 2006 and 2007, as described above. We chose to focus our sample on PCARs completed during 2006 and 2007 to ensure that the most recent, full reco were available for analysis. We examined the savings and costs for these three rds competitions, including the contract billing for the private sector consultants employed by DOL during the competition, and compared the results to the amounts reported in DOL’s annual reports to Co ngress. We did not examine the accuracy of the reports for the remaining DOL competitions. Due to this limited sample size, our findings should not be used to make inference all of DOL’s competitions. Finally, we obtained anecdotal evidence of the ome staff spent on competitive sourcing activities number of hours that s during our group interviews with staff members involved in assisting competitions (see below). with the To address the third issue, we analyzed DOL’s demographic data on total personnel departmentwide and on personnel who experienced personnel as a result of the competitive sourcing process. We did not assess the demographic characteristics of DOL personnel by OMB’s list of the Federal Activities because DOL does not tabulate demographic data in that way and the data were not readily available. To obtain employee views on the process and impacts on morale, we conducted group interviews with 60 DOL employees affected by competitive sourcing competitions in four locations: Arlington Heights, Beckley, West Virginia; San Francisco, California; and Washington, D.C. selected the four group interview locations in order to obtain perspectives fro range of geographic locations and from competitions of different sizes. On ce the four locations were determined, we selected five competitions as our focus: one large competition that affected personnel at all four sites (though mostly personnel in D.C.); one smaller competition in D.C.; and three additional competitions—one that affected a large number of personnel at each of the thr sites outside of D.C. (see table 3).

Appendix II: DOL’s Categorization of Commercial Activities

Once agencies have designated all their activities as either inherently governmental or commercial, OMB Circular No. A-76 requires agencies to further categorize their commercial activities according to six “reason codes” labeled A through F. Only one category—Reason B—signifies suitability for competitive sourcing that year. For example, in fiscal year 2006, DOL categorized about 20 percent of its total full-time employees (FTE) as Reason B: suitable for a streamlined or standard competition (see table 5).

Appendix III: Required Reporting and Monitoring for Competitive Sourcing

Section 647(b) of Division F of the Consolidated Appropriations Act, 2004 requires agencies to report their competitive sourcing activities to Congress at the end of each calendar year. These reports are to include the total numb er of competitions announced and completed; the incremental costs directly attributable to conducting those competitions; and the savings—both actual and anticipated—derived from such competitions. In addition, OMB Circular sts No. A-76 outlines the requirements for monitoring the performance and co service provider following a competitive sourcing competition, of the winning whether the winner is the in-house government service provider or a service provider from the private sector. (See table 6.)

Division F of the Consolidated Appropriations Act, 2004 (Pub. L. No. 108-199 (2004)) and OMB Memorandum M-08-02 (October 31, 2007)

Completed at the end of each calendar year. general description of competitive sourcing process; and itions.

OMB Circular No. A- Completed by 76 (Revised May 29, 2003) and OMB Memorandum for the President’s Management Council: Validating the Results of Public-Private Competition (April 13, 2007)

Regardless of the selected ser performance period, as determined by the agency. monitor performance for all performance periods stated implement the quality assurance surveillance plan; retain the solicitation and any other documentation from the streamlined or standard competition as part of the competition file; maintain the currency of the contract file, consistent with the Federal Acquisition Regulation; record the actual cost of performance by performance period; and monitor, collect, and report performance information, consistent with the Federal Acquisition Regulation.

The April 13, 2007 OMB Memo also directs agencies to have a plan in place to independently validate results on a reasonable sampling of covered competitions.

Appendix IV: Po Review Checklist

DOL’s Office of Asset and Resource Management is responsible for coordinating the PCARs of the winning service providers, in accordance with OMB guidance and the Federal Acquisition Regulation. The following checklist specifies preaudit or review actions that DOL policy and procedures direct officials to document as part of the PCAR. (Note that not all items included in the checklist are applicable for all competitions.)

Appendix V: List of DOL Competitive Sourcing Competitions, Fiscal Years 2004 through 2007

Agencies involved

Location (State)

Personnel actions resulted. PCAR completed. Implementation terminated in May 2007.

Personnel actions resulted. No PCAR completed. Ongoing.

Personnel actions resulted. PCAR completed. Ongoing.

Personnel actions resulted. PCARs completed. Ongoing.

Personnel actions resulted. PCARs completed. Ongoing.

Personnel actions resulted. PCARs completed. Ongoing.

Personnel actions resulted. PCAR completed. Implementation terminated in May 2007.

No personnel actions. PCAR completed. Ongoing.

Location (State)

Number of FTEs in study el Personn actions res PCAR completed. Implementatio terminated in May 2007. ulted.

Personnel actions res PCAR completed. Implementatio terminated ind.

May 2007.

No personnel actions. PCAR completed. Ongoing.

No personn actions. PCAR completed. Ongoing.

Personnel actions res PCAR completed. Implementatioulted. terminated in May 2007.

Personnel actions resulted. No PCAR completed as of July 2008. O ngoing.

P actions resulte PCAR completed. Ongoing. d.

Personnel actions resulte PCAR completed. Ongoing. d.

Location (State)

Personnel actions resulted. PCAR completed. Ongoing.

Personnel actions result PCAR completed. Ongoing. ed.

Personnel actions resulted. PCAR completed. Ongoing.

Personnel actions resul PCAR completed. Ongoing. ted.

Personnel actions res No PCAR completed becaus implementat ion was terminated in May 2007.ulted. d.

Personnel actions resulte No PCAR completed July 2008. Ongoing.

Location (State)

Personnel actions resulted. No PCAR completed as of July 2008. Ongoing.

Personnel actions No PCAR completed as of July 2008 because implementation of competitio was suspended. resulted.

Personnel actions resulted. No PCAR completed as of July 2008 because implementation of competition was suspended.e, f Personnel actions resulted. No PCAR completed as of July 2008 because implementation of competition was suspended.

No personnel actions. No PCAR completed because contract was terminated in May 2007.

ILAB MSHA OALJ OASAM OASP OCFO OLMS OSBP OSHA OWCP VETS WB e of Administrati e of the Assistant Se e of the Assistant S e of the Chief Fin e of Labor Mana e of Small Business cretary for Administration and Manag nal Safety and Health Administration fter the first full year of performance followi Thus, for competitions completed in fiscal year 2007, PCARs normally would be co than the end of September 200; however, as noted, several have been suspende ng a competi nducted no later d. tion.

In six instances, the implementation of completed competitions involving MHSA FT terminated to comply with Pub. L. No. 110-2, §6602 (2007).

Competitions” are included h r d competition , §6602 (2007). h Pub.

Appendix VI: Comments from the Office of Management and Budget

Appendix VII: Comments from the Department of Labor

Appendix VIII: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the contact named above, Bill J. Keller, (Assistant Director), Kristy L. Kennedy, Margie K. Shields, Nicholas L. Weeks, Jeffrey W. Weinstein, Doreen S. Feldman, Alexander G. Galuten, William T. Woods, and Jessica S. Orr made significant contributions to this report.

Related GAO Products

Department of Defense: Department of Defense Pilot Authority for Acquiring Information Technology Services under OMB Circular A-76. GAO-08-753R. Washington, D.C.: May 29, 2008.

Defense Management: DOD Needs to Reexamine Its Extensive Reli on Contractors and Continue to Improve Management and Oversight. GAO-08-572T. Washington, D.C.: March 11, 2008. orest Service: Better Planning, Guidance, and Data Are Needed to F Improve Management of the Competitive Sourcing Program. GAO-08-195. Washington, D.C.: January 22, 2008.

Federal-Aid Highways: Increased Reliance on Contractors Can Pose Oversight Challenges for Federal and State Officials. GAO-08-198. Washington, D.C.: January 8, 2008.

Department of Homeland Security: Risk Assessment and Enhanced Oversight Needed to Manage Reliance on Contractors. GAO-08-142T. Washington, D.C.: October 17, 2007.

Defense Budget: Trends in Operation and Maintenance Costs and Support Services Contracting. GAO-07-631. Washington, D.C.: May 18, 2007.

Implementation of OMB Circular No. A-76 at Science Agencies. GAO-07-434R. Washington, D.C.: March 16, 2007.

Competitive Sourcing: Greater Emphasis Needed on Increasing Efficiency and Improving Performance. GAO-04-367. Washington, D.C.: February 27, 2004.

Competitive Sourcing: Implementation Will Be Challenging for Federal Agencies. GAO-03-1022T. Washington, D.C.: July 24, 2003.

Competitive Sourcing: Implementation Will Be Key to Success of New Circular A-76. GAO-03-943T. Washington, D.C.: June 26, 2003.

Commercial Activities Panel: Improving the Sourcing Decisions of the Government; Final Report. GAO/A03209. Washington, D.C.: April 30, 2002.

Competitive Sourcing: Challenges in Expanding A-76 Governmentwide. GAO-02-498T. Washington, D.C.: March 6, 2002.

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: Some Progress, but Continuing Challenges Remain in Meeting Program Goals. GAO/NSIAD-00-106. Washington, D.C.: August 8, 2000.

DOD Competitive Sourcing: Savings Are Occurring, but Actions Are Needed to Improve Accuracy of Savings Estimates. GAO/NSIAD Washington, D.C.: August 8, 2000. -00-107.

OMB Circular A-76: DOD’s Reported Savings Figures Incomplete and Inaccurate. GAO/GGD-90-58. Washington, D.C.: March 15, 1990.