To protect the security of the United States, DOD relies on a complex array of computer-dependent and mutually supportive organizational components, including the military services, Commanders in Chief, and Defense agencies. As such, it invests tens of billions of dollars each year in a broad array of computer systems, which include weapon systems, command and control systems, satellite systems, inventory management systems, transportation management systems, health systems, financial systems, personnel systems, and payment systems. In addition, DOD spends billions of dollars annually on IT services, which include database management, help-desk operations, software maintenance, and network services. In fiscal year 2001, DOD reportedly obligated more than $6.2 billion on IT services alone. Decisions regarding the purchasing of services are critical to ensuring the effectiveness of DOD’s operations as well as those of the government as a whole. Our November 2001 report recognizes the importance of such sourcing decisions and provides a framework that spans the full range of activities that are performed during IT services outsourcing. At the same time, governmentwide policies, initiatives, and challenges exist that significantly influence the government’s sourcing decisions. Outsourcing of IT services has become increasingly popular in both the public and private sector. For example, according to the Giga Information Group, Inc., a leading research firm, such outsourcing is expected to grow an average of 5 to 6 percent in 2003. The federal sector’s outsourcing is predicted to rise at an even greater rate. For example, INPUT, an IT market research firm, forecasts that defense IT outsourcing will increase about 143 percent between fiscal years 2002 and 2007. IT outsourcing involves the activities associated with acquiring services from one or more external providers. During outsourcing, a client organization transfers responsibilities for performing one or more IT services to one or more external providers. This responsibility is executed through control and management of the processes, people, and technology associated with these services. Figure 2 depicts the roles of the client and provider organizations in an outsourcing relationship. Our November 2001 guide on leading commercial practices for outsourcing IT services provides a generic framework of practices from leading commercial organizations that can improve purchasing decisions and manage the resulting government/provider relationship. The framework is represented in figure 3 as a hierarchy of phases, practices, and critical success factors. Table 1 provides a definition of each phase of the framework. Each of the phases has specific practices associated with it. Implementing these practices does not guarantee the success of an outsourcing project. However, our November 2001 study reflected a consensus view that these practices were the most critical to success when IT services are being acquired. Restated, application of these practices increases the probability of a successful outsourcing project. The organizations that we studied also identified certain capabilities (identified as critical success factors) that were essential for implementing the practices identified in our framework. First, executive leadership strengthens the interaction between executive management and the employees of the client organization. Second, partner alignment strengthens the interaction between the client and provider organization at the executive level, which ensures that the goals and objectives of these organizations support each other. Third, relationship management strengthens the interaction between the client and provider organization at the operational level. The federal government is one of the world’s largest users of services. Because of the large dollar value and the number of private- and public- sector jobs involved, deciding whether the public or private sector would be the most appropriate provider of the services the government needs (IT or otherwise) is an important, and often highly charged, question. Among the factors that agencies must consider as they determine how best to meet their missions is whether the public or private sector would be the most appropriate provider of the services the government needs. Phase I of our framework, determine the sourcing strategy, addresses the client’s assessment of whether expertise from within or outside of the organization can more effectively meet the client’s needs. The National Defense Authorization Act for Fiscal Year 2001 required the Comptroller General of the United States to convene a panel of experts to study the current process used by the government to make sourcing decisions. The resulting Commercial Activities Panel conducted a year-long study and heard repeatedly about the importance of competition and its central role in fostering economy, efficiency, and continuous performance improvement. In particular, the panel reviewed the government’s implementation of the Office of Management and Budget’s (OMB) Circular A-76, which sets forth federal policy for determining whether federal employees or private contractors will perform commercial activities for the government. Circular A-76 (1) outlines conditions under which agencies are permitted to perform a commercial activity with government employees or by contract and (2) provides guidance for whether, and if so, how, agencies should conduct a cost comparison when they are considering transferring the performance of commercial activities from the public to the private sector (or vice versa). The panel reported that there were positive elements to Circular A-76 but that both federal employees and private firms complained that it does not meet the standard of a clear, transparent, and consistently applied process. For example, both federal employees and private firms criticized the Circular A-76 process as unequal and therefore unfair. The Commercial Activities Panel strongly supported continued emphasis on competition and concluded that whenever the government is considering converting work from one sector to another, public/private competitions should be the norm. In addition, the panel made four recommendations, including that all sourcing decisions be consistent with the principles adopted unanimously by the panel, such as the principle that federal policy provide for accountability in connection with all sourcing decisions. As part of the administration’s efforts to implement the recommendations of the Commercial Activities Panel, OMB has published proposed changes to Circular A-76. Key highlights of the proposed changes include presuming that all functions are commercial in nature unless they are justified as inherently governmental; limiting the length of time for competitions; and emphasizing awarding contracts on the basis of best value, not just lowest cost. Best value allows the contracting official to consider technical superiority, quality, innovation, and past performance as well as price. However, we reported that there are several areas in which the proposed revisions to the circular are not consistent with the principles or recommendations of the Commercial Activities Panel. Specifically, the proposed revision does not include a link between sourcing policy and agency missions, has unnecessarily complicated source selection procedures, contains certain unrealistic time frames, and includes insufficient guidance on calculating savings. Beyond the Commercial Activities Panel, other bodies have identified challenges that the federal government faces in reaching and executing effective sourcing decisions. For example, members of the Coalition for Government Procurement, the Professional Services Council, and the Information Technology Association of America told us that organizational culture is one of the biggest differences between the commercial sector and the federal government and one of the greatest barriers to the government’s use of commercial practices. Also, as we have previously reported, moving to outsourcing solutions can involve a cultural change for government organizations because it may require a change to an agency’s operating model, such as using a contractor to provide IT services previously performed by government staff or using a performance-based contract. This view was echoed by a 2001 study of DOD competitive sourcing that found cultural, process, execution, and training barriers. The study stated that these barriers need to be understood and mitigated before the benefits of outsourcing can be fully realized. Barriers such as these can be overcome by strong executive leadership, which is a critical success factor in our framework. Another challenge is creating a productive agency/provider relationship— another critical success factor in our framework. According to a report sponsored by the PricewaterhouseCoopers Endowment for the Business of Government, such public/private partnerships are based on trust, commitment to problem or conflict resolution, and the recognition that flexibility is necessary and that the relationship will evolve and change over time. If deadlines are not met, or public agency goals change with differing political climates, the partners need to discuss the basis of the partnership and construct a different relationship. Our prior report on desktop outsourcing found that developing a productive agency/contractor relationship is not always easy. Both sides must recognize and understand each other’s underlying motives and strive to achieve established expectations. Finally, human capital issues are another challenge facing federal agencies that affect their ability to implement outsourcing. Our framework recognizes the importance of having the right skills in place to support the outsourcing relationship. However, as we have previously reported, procurement reforms and technological changes have placed unprecedented demands on the acquisition workforce. Contracting personnel are now expected to have a much greater knowledge of market conditions, industry trends, and the technical details of the commodities and services they procure. The Commercial Activities Panel report stated that developing and maintaining a skilled acquisition workforce is the critical first step in managing this more complex procurement environment. The panel also reported that DOD bore the brunt of a 22 percent downsizing of the federal acquisition workforce in the last decade, going from 96,000 staff in 1991 to about 68,000 in fiscal year 2001. Addressing human capital issues is not just a matter of the size of the workforce; it is also a knowledge and skills issue. According to the Commercial Activities Panel, it is critically important that federal agencies adequately address human capital needs in meeting the current and emerging needs of government and its citizens in the most effective, efficient, and economical manner possible. This will require increased emphasis on training and development, particularly in the area of technology. The five projects in our study varied in how they approached outsourcing IT services, such as in using various solicitation methods, including holding a public/private competition under the policies outlined in OMB Circular A- 76 or carrying out a negotiated competitive procurement.