Since 1955, the executive branch has encouraged federal agencies to obtain commercially available goods and services from the private sector through competitions when the agencies determined that such action was cost-effective. OMB formalized the policy in OMB Circular A-76, issued in 1966. As part of this process, the government identifies the work to be performed—described in the performance work statement—and prepares an in-house cost estimate, based on its most efficient organization (MEO), and compares it with the best offer from the private sector. Between 1978 and 1994, competition winners were split between the private and public sectors. Appendix II contains a more detailed description of the A-76 process. Because of lengthy time frames previously required to perform competitive sourcing studies, a provision was included in the DOD Appropriations Act for Fiscal Year 1991 (P.L. 101-511), and in subsequent DOD appropriation acts requiring that single function competitions (under Circular A-76) be completed within 24 months and multifunction competitions within 48 months. Because of administrative and legislative constraints from the late 1980s through 1995, there was a lull—and for some time even a moratorium—on competitions. In 1995, congressional and administration initiatives placed more emphasis on competitive sourcing as a means of achieving greater economies and efficiencies in operations. The Deputy Secretary of Defense in 1995 directed the services to make outsourcing of support activities a priority. Subsequently, DOD placed emphasis on competitions involving both the public and private sectors, known as competitive sourcing. DOD components identify functions eligible for competitive sourcing studies from a list of commercial activities. Under OMB and DOD guidance, the components must maintain and periodically update their lists of commercial functions, but until fiscal year 1997, they were only required to consider commercial positions that were not inherently governmental in nature. In 1997, DOD directed its components to include inherently governmental functions on their lists. Because of concern over inconsistencies within and among the services in identifying positions eligible for competition, the House National Security Committee in report number 105-132 on H.R. 1119, the Defense Authorization Act for Fiscal Year 1998, directed DOD to develop a uniform set of criteria. DOD’s components are currently reviewing which functions performed by DOD personnel are (1) inherently governmental, (2) exempted from competition for national defense reasons, (3) exempted from competition for other reasons, or (4) subject to competitive sourcing competitions. DOD expected to report the results of this reassessment in January 1999. As we and others have reported, A-76 competitions can be cost-effective.Data indicates that savings can occur, regardless of whether the competitions are won by the public or the private sector. Savings may increase if, in accordance with applicable legal standards, multiple functions can be grouped together under a single contract rather than under multiple contracts. Because the average military positions are more costly than their civilian equivalents, greater savings may occur if DOD converts military support positions to government civilian or contractor positions. While competitions can produce significant savings, caution is needed when estimating the overall magnitude of potential savings. Estimates of savings in the 20- to 30-percent range or higher have been cited in some assessments of previous competitive sourcing studies but often have been based on initial savings estimates from previous competitions, rather than on actual savings over time. DOD has not systematically tracked or updated the savings estimates from competitions. Further, the savings from current competitions may not necessarily match those achieved in competitions completed before defense downsizing—because personnel cuts carried out during downsizing helped streamline organizations and eliminate unneeded positions. DOD has established far greater and more aggressive goals for competitions than in the past. DOD also estimates that the competitions will bring significant cost savings. OMB has recognized DOD as the pacesetter among government agencies in the use of competitions to gain economies and efficiencies in operations and to reduce support costs. However, achieving the goals of an initiative of this magnitude is a significant management challenge. According to DOD, between 1979 and 1996, it studied over 90,000 positions using the A-76 process. In early 1998, DOD components outlined plans to compete over 225,000 positions between fiscal year 1997 and 2003. The number of positions planned for competition during this period is more than twice the number of positions studied in the previous 17 years. Table 1 summarizes the plans by individual components as of early 1998. According to our analysis, DOD’s data indicates that about 79 percent of the positions identified in table 1 are civilian positions, while 21 percent are military positions. Over half of all the military positions to be competed are in the Air Force. The greatest number of positions competed would occur during fiscal years 1999 and 2000. As indicated in figure 1, if DOD components launch the competitions projected for fiscal years 1999 and 2000, and if each competition lasts 24 months, DOD could be competing over 100,000 positions each year during 1999 and 2000. Between March 1997 and early 1998, DOD increased the number of positions it plans to compete over the next several years by about 30 percent—from 171,000 to over 225,000. In October 1998, DOD again increased the number of positions expected to be competed to over 237,000 and stretched out the time frame to 2005. However, that figure was recently adjusted to 229,000 by 2005. We were unable to obtain details of how the new numbers would be allocated among the services. Prior to establishing the competition goal of 229,000 positions, DOD aimed for cumulative savings of about $6 billion between fiscal years 1997 and 2003. That goal still existed at the time we completed our review and DOD has already begun to reduce future years operating budgets of components in anticipation of these savings and to transfer the expected savings to their research and development and procurement accounts to increase funding for weapon system modernization. Office of the Secretary of Defense (OSD) guidance projects that components will complete competitions within 2 years and begin transferring funds to higher resource priority budget objectives. According to OSD officials, if the savings do not occur as quickly as planned, the components will have to absorb the shortfalls in their operations and maintenance accounts or shift money back from planned modernization. The Army’s competitive sourcing strategic plan, for example, states that if major commands do not achieve programmed savings, they will have to achieve the savings through other efficiencies. The savings estimates could change. A DOD official told us that, after receiving more detailed information from its components, DOD reduced its projected annual recurring savings as of fiscal year 2004 from $2.5 billion to $2.3 billion. This savings figure was still under review when we completed our fieldwork and OSD had not yet decided whether to revise its savings goals or its timetables for achieving them when we completed our review. The projections of competition savings that DOD provided to Congress in fiscal year 1998 appear overstated. The projections did not adequately consider investment costs related to performing A-76 cost studies. In addition, the competitions will likely take longer to complete than estimated. Both of these factors will affect how quickly DOD components will begin to realize net savings from the competitions. DOD components have expressed concerns about their ability to meet the savings goals. DOD is working to improve these estimates for its fiscal year 2000 budget request. Much like base realignment and closure actions, competitions have up-front investment costs that need to be considered when estimating net savings. In competitions, these investments involve study costs, personnel separation costs, and, in the case of the Army, the costs of substituting civilians for military personnel. Once these investment costs have been offset by program savings, net savings can begin to accrue on an annual recurring basis. However, available information indicates that OSD and its components have not fully and consistently accounted for and deducted these investment costs from their savings projections. This means that DOD will not accrue the estimated initial savings as quickly as projected. However, recurring long-term net savings are potentially significant. Both OSD and its components made initial assumptions about competition study costs that are understated. While the components are registering concern about these costs, they have not yet developed comprehensive assessments of them. DOD reported to Congress in April 1998 that the services expected savings of about $5.8 billion from their competitions and investment costs of $277 million to conduct the competitions. Table 2 indicates the savings projected by each service and the identified costs to implement the program. DOD’s savings projections provided an inconsistent and incomplete picture of A-76 competitive sourcing costs and savings for the period ending in fiscal year 2003. Only the Navy deducted identified investment costs from its net savings estimate. Additionally, available information indicates that DOD and its components understated or later changed their initial estimates of investment costs. Although the magnitude of the competition program greatly eclipses previous efforts, DOD components have not yet fully identified the resources needed to carry out the competitions. Many components are now projecting that the competitions will likely take much longer and hence require a greater investment of resources than they originally expected and reported to Congress. Many components have noted that this situation is occurring when they have significantly fewer in-house personnel trained to deal with A-76 programs than they had prior to downsizing. Conducting the competitions may require the use of contractors in addition to existing in-house staff from contracting, personnel, legal, manpower, accounting, internal audit, and the function being studied. To the extent existing in-house resources are limited, if resources need to be shifted to meet new missions, such as performing competitions, other tasks or activities may be delayed or not performed. DOD initially established a benchmark estimate for competition costs of $2,000 per position. The benchmark was based on an Air Force analysis of the costs it incurred in performing A-76 studies with in-house personnel.