For many years, federal agencies have been encouraged to consider the potential for significant savings by contracting with the private sector for commercial type goods and services rather than relying on government employees to provide them. Because competitive outsourcing can potentially displace thousands of government employees, federal agencies, including DOD components, traditionally approached competitive sourcing hesitantly. Thus, with a combination of institutional preference to maintain in-house control over activities, along with restrictive legislative provisions in effect between the late 1980s through 1994, DOD activities placed relatively little emphasis on competitive sourcing during that time. The limited competitions that did occur most often involved the Air Force. However, in 1995, with congressional and administration initiatives placing more emphasis on competitive sourcing as a means of achieving greater economies and efficiencies in operations, DOD’s senior leadership embraced it as a means of achieving savings and freeing up funds for other priority needs. In August 1995, the Deputy Secretary of Defense directed the services to make outsourcing a priority. Subsequently, DOD placed emphasis on competitive sourcing, recognizing that both the public and private sectors are parties to the competitions. This new emphasis led to plans by the services to consider studying over 200,000 positions by the end of fiscal year 2003. DOD’s competitive sourcing is guided by OMB’s Circular A-76, issued in 1966. In 1979, OMB supplemented the circular with a handbook that included procedures for competitively determining whether commercial activities should be performed in-house, by another federal agency through an interservice support agreement, or by the private sector. OMB updated this handbook in August 1983 and in March 1996. The latest revision was intended to reduce the administrative burden of performing A-76 competitions and to make cost comparisons between private sector proposals and government estimates more equitable. For example, in response to industry concerns that agencies were not fully accounting for their overhead costs, OMB imposed the requirement that government overhead costs be calculated based on a standard rate of 12 percent of direct labor costs and placed increased emphasis on the use of best value criteria in competitions. To compare costs of in-house versus contractor performance, OMB’s supplemental handbook requires the government to determine the most efficient and effective way of performing an activity with in-house staff. Based on this most efficient organization (MEO), the government prepares an in-house cost estimate and compares it with the offer selected from the private sector. OMB’s A-76 guidance stipulates that work will remain in-house unless the private sector offer meets a threshold of savings that is at least 10 percent of personnel costs or $10 million over the performance period. The minimum cost differential was established by OMB to ensure that the government would not contract out for marginal estimated savings. Appendix I contains a more detailed description of the A-76 process. DOD records the results of its competitive sourcing program in the Commercial Activities Management Information System (CAMIS). Each service and defense agency maintains its own version of CAMIS, but each system must contain DOD’s required minimum set of data elements for individual A-76 competitions, including numbers and length of individual competitions, numbers of in-house military and civilian positions affected, comparisons of in-house and contractor estimated costs, contract award dates, and changes in costs for 3 years after a contract award. DOD also requires that each service enter the original baseline cost of the function and the estimated dollar savings from each of the competitions into CAMIS and track actual costs and savings from the completed competitions for 3 years. We have previously reported some concerns about the accuracy and completeness of data contained in the CAMIS system. A list of our recent reports on competitive sourcing issues is included at the end of this report. DOD’s data on cost comparisons completed between fiscal year 1978 and 1994 show that estimated savings occurred—usually through a reduction in personnel—regardless of whether the government or a private sector company was awarded the work. These estimated savings were achieved primarily by closely examining the work to be done and reengineering the activities to do them with fewer personnel, whether in-house or outsourced. DOD’s data showed the government won about half of the A-76 competitions, and the private sector the other half. The Army, Navy, and Air Force project they will each achieve between 20 to 30 percent savings from competitive sourcing, based on prior experience and/or Center for Naval Analyses study data. While we believe that competitive sourcing competitions are likely to produce savings, we have urged caution regarding the magnitude of savings likely to be achieved. In March 1997, we reported that prior savings estimates were based on initial savings estimates from competitive sourcing competitions, but that expected savings can change over time with changes in scope of work or mandated wage changes. Further, we noted that continuing budget and personnel reductions could make it difficult to sustain the levels of previously projected savings. At the same time, we noted two areas of competitive sourcing that appeared to offer the potential for significant savings. These areas included giving greater emphasis to (1) the use within the applicable legal standards of a single contract to cover multiple requirements, rather than multiple contracts, for support services and (2) the conversion of military support positions to civilian or contractor positions. We identified 53 competitions completed between October 1995 and March 1998, involving 5,757 positions (3,226 military and 2,531 civilian).Of the 53 competitions, 43 involved single functions such as grounds maintenance, storage and warehousing, and child care centers; and 10 involved multiple functions such as base operating support and shelf stocking, receiving, and storage at commissaries. A majority (77 percent) of the competitions were held by the Air Force. Many of these competitions were initiated prior to or close to the time that DOD began to emphasize competitive sourcing. Table 1 shows the number of government positions competed for under recently completed competitions along with those announced for competition during fiscal years 1996, 1997, and 1998. Although most (85 percent) of the recently completed competitions belonged to the Air Force, table 1 shows that most of the defense components, reacting to the August 1995 guidance from the Deputy Secretary of Defense, have mounted an aggressive program. Most components can be expected to complete considerably more competitions each year for the next several years. However, unlike the most recently completed competitions, most future competitions are expected to involve civilian rather than military positions. In examining the results of the 53 completed A-76 competitions, we found that 10 appeals had been filed; half were filed by government and half by private sector firms. These appeals were based on questions regarding compliance with the requirements of Circular A-76 and its supplemental handbook, and/or questions regarding costs entered on the cost comparison form. One appeal, however, did not meet this criteria and was dismissed. Of the appeals accepted for consideration, only one resulted in a reversal of the original award decision. The private sector competitor stated that the government in-house estimate did not include all relevant costs, and the agency’s reviewing authority agreed. When these costs were included in the government’s estimate, the private sector firm’s price was lower. In addition to the 10 appeals cited above, we identified one protest to GAO from one of the private sector competitors. GAO upheld the service’s decision to retain the activity in-house. We also examined the files of a sample of nine completed competitions and conducted interviews with officials associated with completing the competitions and satisfied ourselves that the required cost comparisons were made as required by A-76 guidelines. In eight instances, we found that the agencies had elected to conduct public/private competitions and cost comparisons even where the number of civilian employees involved was less than 10, and according to A-76 guidance, direct conversions could have been made without competition. Agency officials said that they conducted a cost comparison on these functions, because they felt it was fairer to the employees. At the same time, service and defense agency officials indicated that during the period covered by our review, they directly converted to contract 119 functions, each involving 10 or fewer positions. Most services and defense agencies have completed few competitions. Accordingly, these competitions cannot be viewed as representing a trend or necessarily indicative of future outcomes. Nevertheless, they provide some initial data for limited comparison on a variety of metrics such as outcomes won by the public and private sectors, time required to complete the competitions, use of best value, and indications of savings. Overall, 60 percent of the competitions were won by the private sector. Table 2 summarizes the number of competitions and results by individual defense activities. The aggregate data shows an increase in the number of competitions won by the private sector, compared with the historic trend of about 50 percent for all services. However, the percent won by the private sector was closer to the Air Force’s historic average of 60 percent. At the same time, when considering all competitions completed in the October 1995 through March 1998 time frame, the percentage of competitions won by the private and public sectors fluctuated over time. For example, for 26 competitions completed in fiscal years 1996 and 1997, 77 percent were won by the private sector. This contrasted with 27 competitions completed between October 1997 and March 1998, where 56 percent were won by the private sector. We also analyzed the results to determine whether any differences existed among winners depending on whether competitions involved single or multiple functions. We found that 43 of the competitions involved single functions, while 10 involved multiple functions. However, the outcomes were the same for each grouping, with 60 percent being won by the private sector. We further analyzed the results to determine to what extent the use of a standardized 12-percent overhead rate imposed on government cost estimates may have affected the outcome of the competitions. As previously noted, the private sector has historically registered concerns about the extent to which government activities fully account for costs of their operations in developing MEOs under the A-76 process. Also, some concerns existed on the public side that the new overhead rate could cause more competitions to be won by the private sector.