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 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 offer is either 10 percent lower than the direct personnel costs of the in-house cost estimate or $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. Under current law, private sector offerors who believe that the agency has not complied with applicable procedures have additional avenues of appeal. Specifically, 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 Federal Activities Inventory Reform (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 recently indicated that it intends to expand its emphasis on A-76 governmentwide. 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. 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 sectors, 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. DOD has been the leader among federal agencies in emphasizing A-76 studies. DOD's use of A-76 waned from the late 1980s to the mid-1990s, then grew substantially in 1995 before falling again in1999 to the present. DOD is currently emphasizing a combination of A-76 and strategic sourcing. Available information indicates that A-76 studies in civilian agencies have been minimal, compared with those carried out in DOD. Unfortunately, no central database exists to provide information on the actual number of studies undertaken. From the late 1970s through the mid-1990s, DOD activities studied approximately 90,000 positions under A-76. However, program controversy and administrative and legislative constraints caused a drop in program emphasis from the late 1980s through 1995. In August 1995, the Deputy Secretary of Defense gave renewed emphasis to the A-76 program 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. The number of positions planned for study and the time frames 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 then found it reduced the number of positions to be studied in the initial years of the program. In August 2000, DOD decreased the total 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. The introduction of strategic sourcing came about as the Navy--which was having difficulty identifying sufficient numbers of positions for study--sought and obtained approval to use this broader approach to help meet its A-76 study goals. In March 2001, DOD officials announced that they had again reduced the number of positions to be studied under A-76 to about 160,000 but increased the number of strategic sourcing positions to 120,000. DOD's latest targets include strategic sourcing study goals for each of the military services. Tables 1 and 2 show the number of positions Defense components planned to study under A-76 and strategic sourcing as of March 2001. DOD's data shown above show fewer positions planned to be studied under both A-76 and strategic sourcing in the out-years compared to those projected before 2001. To what extent these numbers will change on the basis of recent program direction from OMB for an expanded A-76 program emphasis is yet to be determined. As these numbers changed, so did savings targets. In 1999, for example, DOD projected that its A-76 program would produce $6 billion in cumulative savings from fiscal year 1997 to 2003 and $2.3 billion in net savings each year thereafter. In 2000, DOD projected savings of about $9.2 billion in 1997-2005, with recurring annual net savings of almost $2.8 billion thereafter. Additional savings were to come from strategic sourcing, which was expected to produce nearly $2.5 billion in cumulative savings by 2005 and recurring annual savings of $0.7 billion thereafter. Together, A-76 and strategic sourcing are expected to produce estimated cumulative savings of almost $11.7 billion, with about $3.5 billion in recurring annual net savings. More recent savings estimates have not yet been made available. Most importantly, these projected savings have become more than ambitious goals, when it developed its fiscal year 2000 budget, DOD reprogrammed about $11.2 billion of these anticipated savings into its modernization accounts, spread over future years' planning period. Our work has consistently shown that while savings are being achieved by DOD's A-76 program, it is difficult to determine precisely the magnitude of net savings. Furthermore, 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. 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 compliance with a congressional requirement that DOD report specific information of all instances since 1995 in which DOD missions or functions were reviewed under OMB Circular A-76. For the 286 studies for which it had complete information, the Department's July 2000 report to the Congress largely complied with the reporting requirement. 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 that savings are difficult to quantify 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 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 less than the $290 million that 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 cost 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 begun efforts to revise 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 change, affecting program costs and the baseline from which savings are calculated. Given that the Department has reduced operating budgets on the basis of projected savings from A-76 studies, it is important that it have as much and as accurate information as possible on savings, including information on adjustments for up-front investment costs and other changes that may occur over time. In monitoring DOD's progress in implementing the A-76 program, we have reported on a number of issues that should be considered when expanding emphasis on the A-76 process, either in DOD or at other government agencies. These issues include (1) the time required to complete studies, (2) the costs and other resources needed to conduct and implement studies, (3) the difficulties involved in selecting functions to compete, and (4) the timing of budget reductions in anticipation of projected savings. This last issue is a fundamental issue that is directly affected by the first three. Individual A-76 studies 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 projected that it would take 13-21 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 studies take about 24 months for single-function and 27 months for multifunction studies. 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. In August 2000, we reported that DOD had increased its study cost estimates considerably since the previous year and had given greater recognition to the costs of implementing the results of A-76 studies. But we expressed concern that the Department was, in some instances, still likely underestimating those costs. 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. The Army, the Navy, and the Air Force provide their subcomponents $2,000 per position studied. Yet various officials believe these figures underestimate the costs of performing the studies. Officials at one Army major command estimated that their study costs would be at least $7,000 per position. One Navy command estimated its costs at between $8,500 and $9,500 per position. Our own assessment of a sample of completed A- 76 studies within the Army, the Navy, the Air Force, and Defense agencies showed that study costs ranged from an average of $364 to $9,000 per position. 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 Defense 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. The President's Budget for Fiscal Year 2001 included for the first time all Defense components' estimated costs of implementing A-76 competitions and showed a total of about $1 billion in transition costs resulting from A-76 studies for fiscal years 1997-2005. 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, DOD approved strategic sourcing as a way to complement its A-76 program. The Navy, for instance, had planned to announce 15,000 positions for study under A-76 in fiscal year 1998 but announced only 8,980 (about 60 percent). The following year it planned to announce 20,000 positions but announced 10,807 (about 54 percent). Although DOD's FAIR Act inventory in 2000 identified commercial functions involving about 450,000 civilian positions, including about 260,000 associated with functions considered potentially eligible for competition, DOD does not expect to study all these functions. It remains to be seen to what extent the Department will significantly increase the number of functions it studies under A-76 in the near future. Department officials told us that the process identified few new functions and associated positions that could be studied under A-76 and that the increases in positions identified did not automatically translate into potentially large numbers of additional studies. The number of positions that will actually be studied for possible competition may be limited by a number of factors, including the following: Some activities are widely dispersed geographically. Having positions associated with commercial activities that are scattered over many locations may prevent some of them from being grouped for competition. Some work categorized as commercial may not be separated from inherently governmental or exempted work. In some cases, commercial activities classified as subject to competition are in activities that also contain work that is inherently governmental or exempt from competition, and the commercial workload may not always be separable from the workload performed by the exempted positions. Resources to conduct A-76 studies are limited. Officials of several military service commands have told us that they already have aggressive competition programs under way and that they lack sufficient resources and staff to conduct more competition studies in the near future. Even before it developed its FAIR Act inventory, DOD had already established goals for positions that the services and the Defense agencies should study and the savings to be achieved. For the most part, the services and Defense agencies delegated to their components responsibility for determining which functions to study. DOD then fell behind in its initial timetable for initiating and completing A-76 studies. Service officials told us that they had already identified as many competition opportunities as they could to meet savings goals under the A-76 program, and they believed that their capacity to conduct studies beyond those already underway or planned over the next few years was limited. Difficulties encountered in identifying A-76 study candidates, and in launching and completing the studies in the time frames initially projected, along with greater than expected costs associated with completing the studies, have led to concerns among various service officials about their ability to meet previously established savings targets. Some Defense officials have also voiced uncertainties over cost estimates and savings associated with strategic sourcing and the lack of a rigorous basis for projecting savings from this effort. Data included in the President's fiscal year 2001 budget submission indicated that the Navy estimated that study costs and savings generated by strategic sourcing efforts would be virtually the same as those generated by A-76 studies for each position studied. Office of the Secretary of Defense officials have noted there is a wide variation in the types of initiatives that make up strategic sourcing and, consequently, that there can be wide variation in the resultant savings. These uncertainties led us to previously recommend that DOD periodically determine whether savings are being realized in line with the reductions in operating accounts that are based on projected savings. Increasing emphasis on A-76 has served to underscore concerns expressed by both government employees and industry about the process. 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 appeal 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. It appears that everyone involved is concerned about the time required to complete the studies. 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 personnel to a federal contractor. The Panel, which Comptroller General David Walker has elected to chair, includes senior officials from DOD, private industry, federal labor organizations, and OMB. Among other issues, the Panel will be reviewing the A-76 process and implementation of the FAIR Act. The Panel had its first meeting on May 8, 2001, and its first public hearing on June 11. At the hearing, over 40 individuals representing a wide spectrum of perspectives presented their views. The Panel currently plans to hold two additional hearings, on August 8 in Indianapolis, Indiana, and on August 15 in San Antonio, Texas. The hearing in San Antonio will specifically address OMB Circular A-76, focusing on what works and what does not in the use of that process. The hearing in Indianapolis will explore various alternatives to the use of A-76 in making sourcing decisions at the federal, state, and local levels. The Panel is required to report its findings and recommendations to the Congress by May 1, 2002. This concludes my statement. I would be pleased to answer any questions you or other members of the Subcommittee may have at this time. For further contacts regarding this statement, please contact Barry W. Holman at (202) 512-8412 or Marilyn Wasleski at (202) 512-8436. Individuals making key contributions to this statement include Debra McKinney, Stefano Petrucci, Thaddeus Rytel, Nancy Lively, Bill Woods, John Brosnan, and Stephanie May. DOD Competitive Sourcing: Effects of A-76 Studies on Federal Employees' Employment, Pay, and Benefits Vary (GAO-01-388, Mar. 16, 2001). DOD Competitive Sourcing: Results of A-76 Studies Over the Past 5 Years (GAO-01-20, Dec. 7, 2000). DOD Competitive Sourcing: More Consistency Needed in Identifying Commercial Activities (GAO/NSIAD-00-198, Aug. 11, 2000). DOD Competitive Sourcing: Savings Are Occurring, but Actions Are Needed to Improve Accuracy of Savings Estimates (GAO/NSIAD-00-107, Aug. 8, 2000). DOD Competitive Sourcing: Some Progress, but Continuing Challenges Remain in Meeting Program Goals (GAO/NSIAD-00-106, Aug. 8, 2000). Competitive Contracting: The Understandability of FAIR Act Inventories Was Limited (GAO/GGD-00-68, Apr. 14, 2000). DOD Competitive Sourcing: Potential Impact on Emergency Response Operations at Chemical Storage Facilities Is Minimal (GAO/NSIAD-00-88, Mar. 28, 2000). DOD Competitive Sourcing: Plan Needed to Mitigate Risks in Army Logistics Modernization Program (GAO/NSIAD-00-19, Oct. 04, 1999). DOD Competitive Sourcing: Air Force Reserve Command A-76 Competitions (GAO/NSIAD-99-235R, Sept. 13, 1999). DOD Competitive Sourcing: Lessons Learned System Could Enhance A-76 Study Process (GAO/NSIAD-99-152, July 21, 1999). Defense Reform Initiative: Organization, Status, and Challenges (GAO/NSIAD-99-87, Apr. 21, 1999). Quadrennial Defense Review: Status of Efforts to Implement Personnel Reductions in the Army Materiel Command (GAO/NSIAD-99-123, Mar. 31, 1999). Defense Reform Initiative: Progress, Opportunities, and Challenges (GAO/T-NSIAD-99-95, Mar. 2, 1999). Force Structure: A-76 Not Applicable to Air Force 38th Engineering Installation Wing Plan (GAO/NSIAD-99-73, Feb. 26, 1999). Future Years Defense Program: How Savings From Reform Initiatives Affect DOD's 1999-2003 Program (GAO/NSIAD-99-66, Feb. 25, 1999). DOD Competitive Sourcing: Results of Recent Competitions (GAO/NSIAD-99-44, Feb. 23, 1999). DOD Competitive Sourcing: Questions About Goals, Pace, and Risks of Key Reform Initiative (GAO/NSIAD-99-46, Feb. 22, 1999). OMB Circular A-76: Oversight and Implementation Issues (GAO/T-GGD-98-146, June 4, 1998). Quadrennial Defense Review: Some Personnel Cuts and Associated Savings May Not Be Achieved (GAO/NSIAD-98-100, Apr. 30, 1998). Competitive Contracting: Information Related to the Redrafts of the Freedom From Government Competition Act (GAO/GGD/NSIAD-98-167R, Apr. 27, 1998). Defense Outsourcing: Impact on Navy Sea-Shore Rotations (GAO/NSIAD-98-107, Apr. 21, 1998). Defense Infrastructure: Challenges Facing DOD in Implementing Defense Reform Initiatives (GAO/T-NSIAD-98-115, Mar. 18, 1998). Defense Management: Challenges Facing DOD in Implementing Defense Reform Initiatives (GAO/T-NSIAD/AIMD-98-122, Mar. 13, 1998). Base Operations: DOD's Use of Single Contracts for Multiple Support Services (GAO/NSIAD-98-82, Feb. 27, 1998). Defense Outsourcing: Better Data Needed to Support Overhead Rates for A-76 Studies (GAO/NSIAD-98-62, Feb. 27, 1998). Outsourcing DOD Logistics: Savings Achievable But Defense Science Board's Projections Are Overstated (GAO/NSIAD-98-48, Dec. 8, 1997). Financial Management: Outsourcing of Finance and Accounting Functions (GAO/AIMD/NSIAD-98-43, Oct. 17, 1997).

Summary:
This testimony discusses the Department of Defense's (DOD) use of the Office of Management and Budget's Circular A-76, which establishes federal policy for the performance of recurring commercial activities. DOD has been a leader among federal agencies in the use of the A-76 process and at one point planned to use the process to study more than 200,000 positions over several years. However, the number of positions planned for study has changed over time and the Department recently augmented its A-76 program with what it terms strategic sourcing. DOD has saved money through the A-76 process primarily by reducing the number of in-house positions. Yet, GAO has repeatedly found that it is extremely difficult to measure the precise amount of savings because available data has been limited and inconsistent. The lessons learned from DOD's A-76 program include the following: (1) studies have generally taken longer than initially expected, (2) studies have generally required higher costs and resources than initially projected, (3) finding and selecting functions to compete can be difficult, and (4) making premature budget cuts on the assumption of projected savings can be risky. Both government groups and the private sector have expressed concerns about the fairness, adequacy, costs, and timeliness of the A-76 process.