In May 1997, DOD completed a comprehensive review of national security threats, risks, and opportunities facing the United States to 2015. This review, known as the Quadrennial Defense Review (QDR), was intended to examine America’s defense needs and provide a blueprint for a strategy- based, balanced, and affordable defense program. The QDR noted that DOD had reduced active duty personnel by 32 percent between 1989 and 1997 while reducing personnel performing infrastructure functions by only 28 percent. The report called for additional reductions in both military and civilian personnel. Our July 1998 report on the 1999-2003 FYDP noted that the services planned to reduce military and civilian personnel by 175,000 and save $3.7 billion by 2003. Our recent reviews of planned Defense personnel reductions resulting from the QDR and the 1999-2003 FYDP raised questions about DOD’s ability to achieve some of these reductions and savings. The changes in military strategy and capabilities enunciated in the QDR and other reports have often been referred to as a revolution in military affairs. However, the QDR also recognized that DOD must undergo a similar revolution in its business affairs. To that end, the Secretary of Defense chartered a study effort that resulted in the November 1997 DRI report. The report emphasized the need to reduce excess Cold War infrastructure to free up resources for modernization. The report identified numerous initiatives to reengineer business practices, consolidate organizations, eliminate unneeded infrastructure through additional base closures, and conduct public/private competitive sourcing studies for commercial activities. Most of the potential savings identified in the report were expected to result from BRACs and competitive sourcing studies. Future BRAC actions were contingent on the Congress enacting legislation authorizing additional closures, while competitive sourcing studies were to be completed under the policy guidance of OMB. The concept of competitive sourcing is not new. Through the 1980s, DOD encouraged the services and Defense agencies to conduct competitions between the public and private sectors to determine who would be responsible for performing selected functions that were being provided by in-house staff. These competitions were to be done under OMB Circular A-76. Although DOD’s use of Circular A-76 was limited from the early to mid-1990s, in 1995 DOD reestablished the competition program in the hope of obtaining significant savings that could be used to fund modernization and other priority needs. Circular A-76 and its supplemental handbook specify a process to develop a statement that defines the work to be done and a comparison of in-house costs with contractor costs to determine who should perform the work. Circular A-76 is limited to competitions for the conversion of recurring commercial activities. The handbook identifies circumstances under which detailed cost studies may not be required, such as for the conversion from performance by military personnel to contractor performance or if the number of affected civilian positions is below a specific threshold. It also indicates instances in which Circular A-76 may not apply, such as for restructured or reengineered functions. Appendix I contains a more detailed description of the A-76 process. In addition, several laws affect competitive sourcing. Some, such as 10 U.S.C. 2461 and 2462, affect the process of transferring work currently being performed by civilian government employees to the private sector. Section 2461, as amended by the National Defense Authorization Act for Fiscal Year 1999 (P.L. 105-261), requires an analysis of the activity and a comparison of the costs of having the activity performed by DOD civilian employees and by a contractor to determine whether changing to contractor performance will save money. It also requires that DOD notify the Congress of this analysis and provide other information before making a change in performance. Section 2462 requires the Secretary of Defense to obtain needed supplies or services from the private sector, if a private-sector source can provide the supply or service at less cost, and establishes criteria for conducting the cost comparison. DOD expects savings from individual DRIs but has not incorporated specific savings from these initiatives in the FYDP, except in the areas of potential BRAC and competitive sourcing. Both have significant up-front investment costs that can limit net savings in the short term. The 1999-2003 FYDP shows a more complete accounting of these investment costs for potential BRACs than it does for competitive sourcing, but the latter provides the majority of DRI savings incorporated in the FYDP. While personnel reductions are programmed in the 1999-2003 FYDP and are expected to represent a portion of savings from DRIs, DOD has not required the services to link specific personnel reductions to individual initiatives. Some services, however, have projected personnel reductions in conjunction with competitive sourcing studies. We previously reported that BRAC actions can provide the basis for significant savings in infrastructure costs. However, while savings can begin to accrue even as costs are being incurred to implement BRAC decisions, it can take several years for net savings to begin accruing on an annual recurring basis. The 1999-2003 FYDP reflects this situation, showing a net cost for projected BRAC decisions between fiscal year 1999 and 2003. The 1999-2003 FYDP incorporated some savings from future BRAC rounds, but these savings were offset by implementation costs, resulting in net costs of $832 million for fiscal year 2002 and $1.45 billion for fiscal year 2003. DOD showed these net costs in the FYDP as a Department-level contingency account but did not allocate them to individual services. Beyond the FYDP period, DOD expects the two additional rounds of base closures to result in about $3.4 billion in annual savings after the closures are completed and implementation costs have been offset. We reported in November that DOD’s method of estimating costs and savings for future BRAC rounds was limited, principally because it assumed that savings from future base closures would closely resemble savings from the 1993 and 1995 BRAC rounds, adjusted for inflation. While DOD’s estimate may be appropriate for planning purposes, its precision is limited because the costs of future BRAC rounds might not parallel those of the prior two rounds. Previous base closures frequently involved facilities that were of low military value and were the least costly to implement. Often those closures required the shortest time for savings to offset implementation costs. Generally, DOD did not choose to close facilities that required higher implementation costs or longer periods to recover savings. More precise cost estimates will probably not be available until DOD actually studies implementation scenarios for specific BRAC actions and puts in place more reliable cost accounting systems. However, BRAC history suggests that future implementation costs could be greater than those in previous rounds and the closures could thus take longer to produce net recurring savings. DOD’s 1999-2003 FYDP projected $6.2 billion in savings from competitive sourcing between fiscal year 1997 and 2003. However, as we previously reported, the projected savings do not fully account for the up-front investment costs associated with completing the studies and implementing the results. Though recurring savings from competitive sourcing could be substantial in the long term, it will take longer to begin achieving these savings than DOD has projected, and net savings during the 1999-2003 period will be less than projected. In formulating their fiscal year 1999 budget, Defense components identified over 200,000 positions that would be subjected to competitive sourcing studies between 1997 and 2003. Table 1 shows the projected savings and the number of positions to be studied by fiscal year as summarized in documents supporting the President’s fiscal year 1999 budget submission. Our February 1999 report on competitive sourcing goals noted that, like BRACs, competitive sourcing studies and implementing actions require up-front investments that should be considered when estimating net savings. We also reported that the estimates of competition savings provided to the Congress in 1998 had limitations and that several factors were likely to reduce savings in the short term. We further noted that DOD had not fully identified the resources associated with the studies or the personnel separation costs likely to be needed for implementation. The Navy was the only component that had deducted some estimated investment costs when calculating the savings presented to the Congress in DOD’s April 1998 report on competitive sourcing. Personnel reductions are programmed in the 1999-2003 FYDP and are expected to represent a portion of savings from DRIs. DOD officials told us that they had not required the services to target specific personnel reductions to individual initiatives. The Army programmed a reduction of 9,600 civilian staff on the assumption that 20 percent of the positions studied would be eliminated. The Army programmed the 20-percent reduction based on the assumption that the 20-percent savings would result whether the government or a contractor won the A-76 competitions. Army officials said they made this assumption because they did not want to be seen as preselecting the winner. The Army recognizes, however, that it will likely separate more personnel based on the historical trends of contractors winning about 50 percent of the competitions. The Army did not program any reductions in military positions as a result of competitive sourcing and planned to make up for military personnel shortages elsewhere by transferring the military personnel from positions competed to other military duties. The Navy and the Marine Corps did not program any potential military or civilian personnel cuts as a result of competitive sourcing. According to Navy officials, the Navy’s overall objective is to achieve savings through competition, and personnel savings are a consequence and not a goal of the program. Further, Navy officials said they believed that establishing a goal for personnel reductions would send a negative message to staff and would affect morale. The Air Force was more aggressive in identifying personnel reductions from competitive sourcing and programmed about 26,000 military and 19,300 civilian position reductions between fiscal year 1997 and 2003, according to its final budget submission. The Air Force’s programmed reduction of all military positions to be competed was based on the belief that if a position could be competed, it did not have to be staffed by military personnel.