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.