Commercial Activities Panel: Improving the Sourcing Decisions of the Federal Government (09/27/2002, GAO-02-847T}

-------------------------Indexing Terms-------------------------
REPORTNUM:   GAO-02-847T
    TITLE:   Commercial Activities Panel: Improving the Sourcing Decisions of the Federal Government
     DATE:   09/27/2002



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Testimony:



Before the Subcommittee on Technology and Procurement Policy, Committee 

on Government Reform, House of Representatives:



United States General Accounting Office:



GAO:



For Release on Delivery Expected at 2:00 p.m., EDT:



Thursday:



July 18, 2002:



Commercial Activities Panel:



Improving the Sourcing Decisions of the Federal Government:



Commercial Activities Panel:



Statement of David M. Walker, 

Comptroller General of the United States and:



Chair of the Commercial Activities Panel:



GAO-02-847T:



Mr. Chairman and Members of the Subcommittee:



I am pleased to be here today to participate in the subcommitteeï¿½s 

hearing on the report of the congressionally mandated Commercial 

Activities Panel (the Panel). The Panelï¿½s work was the result of a 

provision contained in the Fiscal Year 2001 Defense Authorization Act, 

which called for me, in my capacity as the Comptroller General, to 

convene a panel of experts to study, and make recommendations for 

improving, the policies and procedures governing the transfer of 

commercial activities for the federal government from government to 

contractor personnel. The impetus for this legislation was the growing 

controversy surrounding competitions conducted under Office of 

Management and Budget (OMB) Circular A-76 to determine whether the 

government should obtain commercially available goods and services from 

the public or private sectors.[Footnote 1] As noted in the introduction 

to the Panelï¿½s report, the use of cost comparison studies under A-76 

was under fire from all sides. All parties concerned--federal managers, 

employees, and industry representatives--were expressing growing 

frustration with the process, and many believed the process needed 

significant reform. The Panelï¿½s report was published on April 30, 2002, 

and is available on GAOï¿½s Web page at: www.gao.gov under the 

ï¿½Commercial Activities Panelï¿½ link.



Controversy surrounding the use of A-76 also occurred at a time of 

increasing questions over the role of government and who is in the best 

position to provide needed services. Specifically, should the work of 

government be performed by government employees, contractors, or a 

combination of both, possibly through a partnership agreement?



As I have testified on a number of occasions, given recent trends and 

our long-range fiscal challenges, the federal government needs to 

engage in a fundamental review, reassessment, and reprioritization of 

what the government does, how the government does business, and who 

does the governmentï¿½s business. This is essential in order to increase 

fiscal flexibility and improve how the government works in the modern 

world. This drives the need to evaluate and revise the current approach 

to acquiring commercial services to ensure that it achieves the maximum 

benefit for the taxpayers and a reasonable balance among a variety of 

competing interests.



Because of the importance of the issues to be addressed, I chose to 

chair the Panel rather than to designate someone else, as permitted in 

the legislation. In my opinion, the Panelï¿½s report presents a reasoned, 

reasonable, and balanced set of recommendations, which, if implemented, 

would significantly improve the governmentï¿½s sourcing processes and 

practices. My testimony today provides some context to the Panelï¿½s work 

and then focuses on (1) the processes used to select Panel members and 

other actions taken to ensure a fair and balanced process; (2) the 

guiding principles, findings, and recommendations of the Panel; and (3) 

the next steps needed to implement the Panelï¿½s recommendations.



Background:



Since 1955, the executive branch has encouraged federal agencies to 

obtain commercially available goods and services from the private 

sector when the agencies determine that such action is cost-effective. 

OMB formalized the policy in its 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 has 

updated this handbook several times.



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 (e.g., for activities 

involving 10 or fewer civilians).[Footnote 2] 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 with the 

cost of contractor performance in accordance with the principles and 

procedures set forth in Circular A-76 and the revised 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 on the basis of its most efficient 

organization,[Footnote 3] and compares it with the winning offer from 

the private sector.



According to A-76 guidance, an activity should not be moved from one 

sector to the other (whether public to private or vice versa) unless 

doing so would save at least $10 million or 10 percent of the personnel 

costs of the in-house performance (whichever is less). 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[Footnote 4] 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. Private-sector offerors who believe 

that the agency has not complied with applicable procedures have 

additional avenues of appeal. They may file a bid protest with GAO or 

file an action in a court of competent jurisdiction.[Footnote 5]



Circular A-76 requires agencies to maintain annual inventories of 

commercial activities performed in-house. A similar requirement was 

included in the Federal Activities Inventory Reform (FAIR) Act of 1998, 

which directs agencies to develop annual inventories of their positions 

that are not inherently governmental.[Footnote 6] The fiscal year 2001 

inventory identified approximately 841,000 full-time equivalent 

commercial-type positions, of which approximately 413,000 were in the 

Department of Defense (DOD).[Footnote 7]



DOD has been the leader among federal agencies in recent years in its 

use of OMB Circular A-76; the circularï¿½s use by other agencies has been 

very limited. However, in 2001, OMB signaled its intention to direct 

greater use of the circular on a government-wide basis. In a March 9, 

2001, memorandum, OMB 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. Subsequent guidance expanded the 

requirement to 15 percent by fiscal year 2003, with the ultimate goal 

of competing at least 50 percent.



Although comprising a relatively small portion of the governmentï¿½s 

overall service contracting activity, competitive sourcing under 

Circular A-76 has been the subject of much controversy because of 

concerns about the process raised both by the public and private 

sectors. Federal managers and others have been concerned about the 

organizational turbulence that typically follows the announcement of A-

76 studies. Government workers have been concerned about the impact of 

competition on their jobs, the opportunity for input into the process, 

and the lack of parity with industry offerors to protest A-76 

decisions. Industry representatives have complained about unfairness in 

the process and the lack of a level playing field between the 

government and the private sector in accounting for costs. Concerns 

have also been raised about the adequacy of the oversight of subsequent 

performance, whether the work is being performed by the public or 

private sector.



Amid these concerns over the A-76 process, the Congress enacted section 

832 of the National Defense Authorization Act for Fiscal Year 2001. The 

act required the Comptroller General to convene a panel of experts to 

study the policies and procedures governing the transfer of commercial 

activities for the federal government from government to contactor 

personnel. The act also required the Comptroller General to appoint 

highly qualified and knowledgeable persons to serve on the panel and 

ensure that the following entities received fair representation on the 

panel:



* DOD.



* Persons in private industry.



* Federal labor organizations.



* OMB.



Appendix I lists the names of the Panel members. The legislation 

mandating the Panelï¿½s creation required that the Panel complete its 

work and report the results of its study to the Congress no later than 

May 1, 2002. The Panelï¿½s report was published on April 30, 2002.



Steps Taken to Ensure a Representative

Panel and a Fair and Balanced Process:



In establishing the Panel, a number of steps were taken to ensure 

representation from all major stakeholders as well as to ensure a fair 

and balanced process. This began with my selection of Panel members, 

which was then followed by the Panelï¿½s establishment of a process to 

guide its work.



To ensure a broad array of views on the Panel, we used a Federal 

Register notice to seek suggestions on the Panelï¿½s 

composition.[Footnote 8] On the basis of the suggestions received in 

response to that notice, as well as the need to include the broad 

representation outlined in legislation, I personally interviewed 

potential panel members. I believe that we selected a group of 

outstanding individuals representative of diverse interest groups from 

the public and private sectors, labor unions, academia, with experience 

in dealing with sourcing decisions at both the federal and local 

government levels.



Once convened, the Panel, as a group, took a number of steps at the 

outset to guide its deliberations and ensure a full and balanced 

consideration of issues. The first step was the adoption of the 

following mission statement:



The Panel also agreed that all of its findings and recommendations 

would require the agreement of at least a two-thirds supermajority of 

the Panel in order to be adopted. The Panel further decided that each 

Panel member would have the option of having a brief statement included 

in the report explaining the memberï¿½s position on the matters 

considered by the Panel. In addition to the Federal Register notice 

soliciting input on issues to be considered by the Panel, the Panel 

held 11 meetings over the period of May 2001 to March 2002. Three of 

these were public hearings in Washington, D.C.; Indianapolis, Indiana; 

and San Antonio, Texas. In the public hearings, Panel members heard 

testimony from scores of representatives of the public and private 

sectors, state and local governments, unions, contractors, academia, 

and others. Panelists heard first-hand about the current process, 

primarily the cost comparison process conducted under OMB Circular A-

76, as well as alternatives to that process. Appendix II provides more 

detail on the topics and concerns raised at the public hearings. The 

Panel also maintained an E-mail account to receive written comments 

from any source.



After the completion of the field hearings, the Panel members met in 

executive session several times, augmented between meetings by the work 

of staff to help them (1) gather background information on sourcing 

trends and challenges, (2) identify sourcing principles and criteria, 

(3) consider A-76 and other sourcing processes to assess what works and 

what does not, and (4) assess alternatives to the current sourcing 

processes.



Principles, Findings, and Recommendations:



As the Panel began its work, it recognized early on the need for a set 

of principles that would provide a framework for sourcing decisions. 

Those principles, as they were debated and fleshed out, provided an 

important vehicle for assessing what does or does not work in the 

current A-76 process, and provided a framework for identifying needed 

changes in the process.



Guiding Principles:



During its meetings, the Panel coalesced around a set of principles to 

guide sourcing decisions. The principles helped frame many of the 

Panelï¿½s deliberations and became a reference point for the Panelï¿½s 

work. Moreover, the principles were unanimously adopted by the Panel 

and included as part of the Panelï¿½s recommendations. While each 

principle is important, no single principle stands alone, and several 

are interrelated. Therefore, the Panel adopted the principles and their 

accompanying narrative comments as a package and then used these 

principles to assess the governmentï¿½s existing sourcing system and to 

develop additional Panel recommendations.



The principles and their accompanying commentary are included in their 

entirety in appendix III.



Findings:



The Panelï¿½s principles supply a strong conceptual framework and 

specific criteria against which to measure any proposals for change in 

the governmentï¿½s competitive-sourcing policies. The Panel concluded 

that there are some advantages to the current system. First, A-76 cost 

comparisons are conducted under an established set of rules, the 

purpose of which is to ensure that sourcing decisions are based on 

uniform, transparent, and consistently applied criteria. Second, the A-

76 process has enabled federal managers to make cost comparisons 

between sectors that have vastly different approaches to cost 

accounting. Third, the current A-76 process has been used to achieve 

significant savings and efficiencies for the government. Savings result 

regardless of whether the public or the private sector wins the cost 

comparison. This is because competitive pressures have served to 

promote efficiency and improve the performance of the activity studied.



Despite these advantages, the Panel heard frequent criticisms of the A-

76 process. The Panelï¿½s report noted that both federal employees and 

private firms complain that the A-76 competition process does not meet 

the principlesï¿½ standard of a clear, transparent, and consistently 

applied process. For example, some Federal employees have complained 

that A-76 cost comparisons have included functions that were inherently 

governmental and should not have been subject to a cost comparison at 

all. While OMB guidance exists to help define what functions should be 

considered inherently governmental, the Panelï¿½s third principle 

recognized that making such determinations remains difficult. Also, 

others have expressed concern that some government officials in a 

position to affect contracting decisions may subsequently take 

positions with winning contractors. In this regard, various legislative 

provisions exist that place restrictions on former government employees 

taking positions with winning contractors. Time did not permit the 

Panel to explore the extent to which additional legislation may be 

needed in this area.



Since January 1999, GAO has issued 22 decisions on protests involving 

A-76 cost comparisons. Of these decisions, GAO sustained 11 and denied 

11. ï¿½Sustainingï¿½ a protest means that GAO found that the agency had 

violated procurement statutes or regulations in a way that prejudiced 

the protester. Protests involving A-76 represent a very small 

percentage of the many hundreds of bid protest decisions that GAO 

issued in the past 3 years. They do, however, indicate an unusually 

high percentage of sustained protests. In protest decisions covering 

all procurements, GAO has sustained about one-fifth of the protests, 

while in A-76 protests, GAO has sustained half. (It should be kept in 

mind, though, that most A-76 decisions are not protested, just as most 

contract award decisions are not protested.) These sustained protests 

generally reflect only the errors made in favor of the governmentï¿½s 

most efficient organization since only the private-sector offeror has 

the right to protest to GAO.



While any public-private competition is, by nature, challenging and 

open to some of the concerns that have been raised regarding the A-76 

process, the high rate of successful A-76 protests suggests that 

agencies have a more difficult time applying the A-76 rules than they 

do applying the normal (i.e., Federal Acquisition Regulation) 

acquisition rules. At least in part, this may be because the Federal 

Acquisition Regulation (FAR) rules are so much better known. While 

training could help overcome this lack of familiarity (and many 

agencies, particularly those in DOD, have been working on A-76 

training), the Panel noted that the FAR acquisition and source 

selection processes are already better known and better understood; 

they, in a sense, serve as a ï¿½common languageï¿½ for procurements and 

source selections.



In the Panelï¿½s view, the most serious shortcoming of the A-76 process 

is that it has been stretched beyond its original purpose, which was to 

determine the low-cost provider of a defined set of services. Circular 

A-76 has not worked well as the basis for competitions that seek to 

identify the best provider in terms of quality, innovation, 

flexibility, and reliability. This is particularly true in todayï¿½s 

environment, where solutions are increasingly driven by technology and 

may focus on more critical, complex, and interrelated services than 

previously studied under A-76. In the federal procurement system today, 

there is common recognition that a cost-only focus does not necessarily 

deliver the best quality or performance for the government or the 

taxpayers. Thus, while cost is always a factor, and often the most 

important factor, it is not the only factor that may need to be 

considered. In this sense, the A-76 process may no longer be as 

effective a tool, since its principal focus is on cost.



During its year-long study, the Panel identified several key 

characteristics of a successful sourcing policy. First, the Panel heard 

repeatedly about the importance of competition and its central role in 

fostering economy, efficiency, high performance, and continuous 

performance improvement. The means by which the government utilizes 

competition for sourcing its commercial functions was at the center of 

the Panelï¿½s discussions and work. The Panel strongly supported a 

continued emphasis on competition as a means to improve economy, 

efficiency, and effectiveness of the government. The Panel also 

believed that whenever the government is considering converting work 

from one sector to another, public-private competitions should be the 

norm. Direct conversions generally should occur only where the number 

of affected positions is so small that the costs of conducting a 

public-private competition clearly would outweigh any expected savings. 

Moreover, there should be adequate safeguards to ensure that 

activities, entities, or functions are not improperly separated to 

reduce the number of affected positions and avoid competition.



A second theme consistently cited at the public hearings was the need 

for a broader approach to sourcing decisions, rather than an approach 

that relies on the use of arbitrary quotas or that is unduly 

constrained by personnel ceilings. Critical to adopting a broader 

perspective is having an enterprise-wide perspective on service 

contract expenditures, yet the federal government lacks timely and 

reliable information about exactly how, where, and for what purposes, 

in the aggregate, taxpayer dollars are spent for both in-house and 

contracted services. The Panel was consistently reminded about, and 

fully agrees with, the importance of ensuring accountability throughout 

the sourcing process, providing the workforce with adequate training 

and technical support in developing proposals for improving 

performance, and assisting those workers who may be adversely affected 

by sourcing decisions. Improved accountability extends to better 

monitoring of performance and results after competitions are completed-

-regardless of the winner.



The Panel heard about several successful undertakings involving other 

approaches to sourcing decisions. Some involved business process 

reengineering and public-private partnerships, and emphasized labor-

management cooperation in accomplishing agency missions. For example, 

in Indianapolis, Indiana, on August 8, 2001, the Panel heard from 

representatives from several organizations that had taken different 

approaches to the sourcing issue. Among them were the Naval Surface 

Warfare Center in Crane, Indiana, which reengineered its business 

processes to reduce costs and gain workshare, and the city of 

Indianapolis, which effectively used competition to greatly improve the 

delivery of essential services. In doing so, the city also provided 

certain technical and financial assistance to help city workers 

successfully compete for work. These entities endeavored to become 

ï¿½most efficient organizations.ï¿½ It was from these examples and others 

that the Panel decided that all federal agencies should strive to 

become ï¿½high performing organizations.ï¿½:



Third, sourcing policy is inextricably linked to the governmentï¿½s human 

capital policies. This linkage has many levels, each of which is 

important. It is particularly important that sourcing strategies 

support, not inhibit, the governmentï¿½s efforts to attract, motivate, 

and retain a high-performing in-house workforce, as well as support its 

efforts to access and collaborate with high-performance, private-sector 

providers. Properly addressed, these policies should be complementary, 

not conflicting.



Panel Recommendations:



In addition to the principles discussed earlier, the Panel adopted a 

package of additional recommendations it believed would improve 

significantly the governmentï¿½s policies and procedures for making 

sourcing decisions. It is important to emphasize that the Panel decided 

to consider and adopt these latter recommendations as a package, 

recognizing the diverse interests represented on the Panel and the give 

and take required to reach agreement among a supermajority of the 

Panelists. As a result, a supermajority of the Panel members 

recommended the adoption of the following actions:



* Conduct public-private competitions under the framework of an 

integrated FAR-based process. The government already has an established 

mechanism that has been shown to work as a means to identify high-value 

service providers: the negotiated procurement process of the Federal 

Acquisition Regulation. The Panel believes that in order to promote a 

more level playing field on which to conduct public-private 

competitions, the government needs to shift, as rapidly as possible, to 

a FAR-type process under which all parties compete under the same set 

of rules. Although some changes in the process will be necessary to 

accommodate the public-sector proposal, the same basic rights and 

responsibilities would apply to both the private and the public 

sectors, including accountability for performance and the right to 

protest. This and perhaps other aspects of the integrated competition 

process would require changes to current law or regulation (e.g., 

requirements in title 10 of the U.S. Code that DOD competitive sourcing 

decisions be based on low cost).



* Make limited changes to the existing A-76 process. The development of 

an integrated FAR-type process will require some time to be 

implemented. In the meantime, the Panel expects current A-76 activities 

to continue, and therefore believes some modifications to the existing 

process can and should be made. Accordingly, the Panel recommended a 

number of limited changes to OMB Circular A-76. These changes would, 

among other things, strengthen conflict-of-interest rules, improve 

auditing and cost accounting, and provide for binding performance 

agreements.



* Encourage the development of high-performing organizations (HPOs). 

The Panel recommended that the government take steps to encourage HPOs 

and continuous improvement throughout the federal government, 

independent of the use of public-private competitions. In particular, 

the Panel recommended that the Administration develop a process to 

select a limited number of functions currently performed by federal 

employees to become HPOs, and then evaluate their performance. Then, 

the authorized HPOs would be exempt from competitive sourcing studies 

for a designated period of time. Overall, however, the HPO process is 

intended to be used in conjunction with, not in lieu of, public-private 

competitions. The successful implementation of the HPO concept will 

require a high degree of cooperation between labor and management, as 

well as a firm commitment by agencies to provide sufficient resources 

for training and technical assistance. In addition, a portion of any 

savings realized by the HPO should be available to reinvest in 

continuing reengineering efforts and for the HPO to use for further 

training and/or for incentive purposes.



Let me speak specifically to the creation of HPOs. Many organizations 

in the past, for various reasons, have found it difficult to become 

high-performing organizations. Moreover, the federal government 

continues to face new challenges in making spending decisions for both 

the long and near term because of federal budget constraints, rapid 

advances in technology, the impending human capital crisis, and new 

security challenges brought on by the events of September 11, 2001. 

Such a transformation will require that each organization reverse 

decades of underinvestment and lack of sustained attention to 

maintaining and enhancing its capacity to perform effectively.



The Panel recognized that incentives are necessary to encourage both 

management and employees to promote the creation of HPOs. It envisioned 

that agencies would have access to a range of financial and consulting 

resources to develop their plans, with the costs offset by the savings 

realized. The Panelï¿½s report focused primarily on HPOs in the context 

of commercial activities, given its legislative charter. However, there 

is no reason why the concept could not be applied to all functions, 

since much of the governmentï¿½s work will never be subject to 

competition.



HPOs may require some additional flexibility coupled with appropriate 

safeguards to prevent abuse. The Panel also envisioned the use of 

performance agreements and periodic performance reviews to ensure 

appropriate transparency and accountability.



Although a minority of the Panel did not support the package with the 

three additional recommendations noted above, some of them indicated 

that they supported one or more elements of the package. Importantly, 

there was a good faith effort, even at the last minute of the reportï¿½s 

preparation, to maximize agreement and minimize differences among 

Panelists. In fact, changes were made even when it was clear that some 

Panelists seeking changes were highly unlikely to vote for the 

supplemental package of recommendations. As a result, on the basis of 

Panel meetings and my personal discussions with Panel members at the 

end of our deliberative process, the major differences among Panelists 

were few in number and philosophical in nature. Specifically, 

disagreement centered primarily on (1) the recommendation related to 

the role of cost in the new FAR-type process and (2) the number of 

times the Congress should be required to act on the new integrated 

process, including whether the Congress should specifically authorize a 

pilot program that tests that process for a specific time period.



Implementation Strategy:



Many of the Panelï¿½s recommendations can be accomplished 

administratively under existing law, and the Panel recommends that they 

be implemented as soon as practical. The Panel also recognizes that 

some of its recommendations would require changes in statutes or 

regulations and that making the necessary changes could take some time. 

Any legislative changes should be approached in a comprehensive and 

considered manner rather than a piecemeal fashion in order for a 

reasonable balance to be achieved. Like the guiding principles, the 

other recommendations were the result of much discussion and compromise 

and should be considered as a whole.



Moreover, although the Panel views the use of a FAR-type process for 

conducting public-private competitions as the end state, the Panel also 

recognizes that some elements of its recommendations represent a shift 

in current procedures for the federal government. Therefore, the 

Panelï¿½s report outlined the following phased implementation strategy 

that would allow the federal government to demonstrate and then refine 

its sourcing policy on the basis of experience:



* A-76 studies currently under way or initiated during the near term 

should continue under the current framework. Subsequent studies should 

be conducted in accordance with the improvements listed in the report. 

OMB should develop and oversee the implementation of a FAR-type, 

integrated competition process. In order to permit this to move forward 

expeditiously, it may be advisable to limit the new process initially 

to civilian agencies where, except for allowing protests by federal 

employees, its use would not require legislation. Statutory provisions 

applying only to DOD agencies may require repeal or amendment before 

the new process could be used effectively at DOD, and the Panel 

recommends that any legislation needed to accommodate the integrated 

process in DOD be enacted as soon as possible. As part of a phased 

implementation and evaluation process, the Panel recommends that the 

integrated competition process be used in a variety of agencies and in 

meaningful numbers across a broad range of activities, including those 

currently performed by federal employees, work currently performed by 

contractors, and new work.



* Within 1 year of initial implementation of the new process, and again 

1 year later, the Director of OMB should submit a detailed report to 

the Congress identifying the costs of implementing the new process, any 

savings expected to be achieved, the expected gains in efficiency or 

effectiveness of agency programs, the impact on affected federal 

employees, and any lessons learned as a result of the use of this 

process together with any recommendations for appropriate legislation.



* GAO would review each of these OMB reports and provide its 

independent assessment to the Congress. The Panel anticipates that OMB 

would use the results of its reviews to make any needed ï¿½mid-course 

corrections.ï¿½ On the basis of the results generated during the 

demonstration period, and on the reports submitted by OMB and GAO, the 

Congress will then be in a position to determine the need for any 

additional legislation.



Conclusions:



The federal government is in a time of transition, and we face a range 

of challenges in the 21ST century. This will require the federal 

government to transform what it does, the way that it does business, 

and who does the governmentï¿½s business. This may require changes in 

many areas, including human capital and sourcing strategies. On the 

basis of the statutory mandate, the Commercial Activities Panel 

primarily focused on the sourcing aspects of this needed 

transformation.



I supported the adoption of the set of principles as well as the 

package of additional recommendations contained in the Panelï¿½s report. 

Overall, I believe that the findings and recommendations contained in 

the Panelï¿½s report represent a reasoned, reasonable, fair, and balanced 

approach to addressing this important, complex, and controversial area. 

I hope that the Congress and the Administration will consider and act 

on this report and its recommendations in a timely manner. I 

particularly want to urge the Congress and the Administration to 

consider the importance of encouraging agencies to become high-

performing organizations on an ongoing basis. Agencies should not wait 

until faced with the challenge of public-private competitions to seek 

efficiencies to retain work in-house. In addition, most of the 

governmentï¿½s workers will never be subject to competitions. As a 

result, I believe that the Panelï¿½s recommendation pertaining to high-

performing organizations could be an important vehicle for fostering 

much needed attention to how we enhance the economy, efficiency, and 

effectiveness of the federal government in ways other than through 

competition.



Finally and most importantly, in considering the Panelï¿½s package of 

recommendations or any other changes that may be considered by the 

Congress and the Administration, the guiding principles, developed and 

unanimously agreed upon by the Panel, should be the foundation for any 

future action.



Let me also add that I appreciate the hard work of my fellow Panelists 

and their willingness to engage one another on such a tough issue--one 

where we found much common ground despite a range of divergent views. I 

also want to thank the GAO staff and the other support staff who 

contributed to this effort. The Panel has completed its work. It is 

time for the Congress and the Administration to act on our report.



Mr. Chairman, this concludes my prepared statement. I would be happy to 

respond to any questions that you or other members of the subcommittee 

may have.



[End of section]



Appendix I: Members of the Commercial Activities Panel:



David M. Walker, Chairman,

Comptroller General of the United States:



E. C. ï¿½Peteï¿½ Aldridge, Jr.,

Under Secretary of Defense for Acquisition,

Technology and Logistics:



Frank A. Camm, Jr.,

Senior Analyst, RAND:



Mark C. Filteau,

President, Johnson Controls

World Services, Inc.



Stephen Goldsmith,

Senior Vice President, Affiliated

Computer Services:



Bobby L. Harnage, Sr.,

National President, American Federation

of Government Employees, AFL-CIO:



Kay Coles James,

Director, U.S. Office of Personnel Management:



Colleen M. Kelley,

National President, National Treasury Employees Union:



The Honorable David Pryor,

Director, Institute of Politics, Harvard University:



Stan Z. Soloway,

President, Professional Services Council:



Angela B. Styles,[Footnote 9] 

Administrator, Office of

Federal Procurement Policy:



Robert M. Tobias,

Distinguished Adjunct Professor,

American University:



[End of section]



Appendix II: Summary of Commercial Activities Panel Public Hearings:



Washington, D.C., June 11, 2001

ï¿½Outsourcing Principles and Criteriaï¿½:



Key Points:



* Status quo is not acceptable to anyone.



* Sourcing decisions require a strategic approach.



* Federal workers should perform core government functions.



* Need for MEOs throughout the government.



* Government needs clear, transparent, and consistently applied 

sourcing criteria.



* Avoid arbitrary FTE goals.



* Objective should be to provide quality services at reasonable cost.



* Provide for fair and efficient competition between the public and 

private sectors.



* Sourcing decisions require appropriate accountability.





Indianapolis, Indiana, August 8, 2001

ï¿½Alternatives to A-76ï¿½:



Key Points:



* Crane Naval Surface Warfare Centerï¿½s reengineering process led to 

significant efficiencies and reduced workforce trauma.



* Employees must be involved with any reform effort. Secrecy is 

counterproductive.



* Committed leadership, effective implementation, and well-planned 

workforce transition strategies are key to any reform effort.



* Privatization-in-place was used effectively at Indianapolis Naval Air 

Warfare Center to avert a traditional Base Realignment and Closure 

action.



* The city of Indianapolis provided certain technical and financial 

assistance to help workers successfully compete for the work.



* Certain technology upgrades in Monterey, California, via a public-

private partnership led to efficiencies and increased effectiveness.



* Measuring performance is critical.



* A-76 is only one of many efficiency tools available to federal 

managers.



* Other tools include:



* Bid to goal, which helps units become efficient and thus avoid A-76,



* Transitional Benefit Corporation, a concept that promotes the 

transfer of government assets to the private sector and provides 

transition strategies for employees, and:



* ESOP, under which employees own a piece of the organization that 

employs them. ESOPs have been established in a few federal 

organizations.



San Antonio, Texas, August 15, 2001

ï¿½A-76: Whatï¿½s Working and Whatï¿½s Notï¿½:



Key Points:



* A-76 process is too long and too costly.



* Cost of studies can greatly reduce government savings.



* Cost to industry in both dollars and uncertainty.



* Demoralized workers quit. But successful contractors need these 

workers.



* Larger A-76 studies can yield greater savings, but these studies 

become much more complex.



* Lack of impetus for savings without competition.



* One-step bidding process should be used.



* MEO and contractors should:



* Compete together in one procurement action,



* Be evaluated against the same solicitation requirements using the 

same criteria, and:



* Be awarded contracts based on best value.



* Provide more training for MEO and A-76 officials.



* MEOs should have legal status to protest and appeal awards and obtain 

bid information.



* A-76 rules should be more clear and applied consistently through a 

centralized management structure.



* For bid and monitoring purposes, government costs should be collected 

and allocated consistent with industry (e.g., activity-based costing).



* Need to eliminate any suggestion of conflicts of interest.



* Need incentives for agencies and workers (e.g., share-in-savings).



* Provide soft landings for workers.



* Allow workers to form public-sector organizations for bidding.



[End of section]



Appendix III: Sourcing Principles[Footnote 10]



Based on public input, a review of previous studies and other relevant 

literature, and many hours of deliberation, the Panel developed and 

unanimously adopted a set of principles that it believes should guide 

sourcing policy for the federal government. While each principle is 

important, no single principle stands alone. As such, the Panel adopted 

the principles as a package. The Panel believes that federal sourcing 

policy should:



1. Support agency missions, goals, and objectives.



Commentary: This principle highlights the need for a link between the 

missions, goals, and objectives of federal agencies and related 

sourcing policies.



2. Be consistent with human capital practices designed to attract, 

motivate, retain, and reward a high-performing federal workforce.



Commentary: This principle underscores the importance of considering 

human capital concerns in connection with the sourcing process. While 

it does not mean that agencies should refrain from outsourcing due to 

its impact on the affected employees, it does mean that the federal 

governmentï¿½s sourcing policies and practices should consider the 

potential impact on the governmentï¿½s ability to attract, motivate, 

retain, and reward a high-performing workforce both now and in the 

future. Regardless of the result of specific sourcing decisions, it is 

important for the workforce to know and believe that they will be 

viewed and treated as valuable assets. It is also important that the 

workforce receive adequate training to be effective in their current 

jobs and to be a valuable resource in the future.



3. Recognize that inherently governmental and certain other functions 

should be performed by federal workers.



Commentary: Recognizing the difficulty of precisely defining 

ï¿½inherently governmentalï¿½ and ï¿½certain other functions,ï¿½ there is 

widespread consensus that federal employees should perform certain 

types of work. Office of Management and Budget (OMB) Directive 92-1 

provides a framework for defining work that is clearly ï¿½inherently 

governmentalï¿½ and the Federal Activities Inventory Reform (FAIR) Act 

has helped to identify commercial work currently being performed by the 

government. It is clear that government workers need to perform certain 

warfighting, judicial, enforcement, regulatory, and policymaking 

functions, and the government may need to retain an in-house capability 

even in functions that are largely outsourced. Certain other 

capabilities, such as adequate acquisition skills to manage costs, 

quality, and performance and to be smart buyers of products and 

services, or other competencies such as those directly linked to 

national security, also must be retained in-house to help ensure 

effective mission execution.



4. Create incentives and processes to foster high-performing, 

efficient, and effective organizations throughout the federal 

government.



Commentary: This principle recognizes that, historically, it has 

primarily been when a government entity goes through a public-private 

competition that the government creates a ï¿½most efficient organizationï¿½ 

(MEO). Since such efforts can lead to significant savings and improved 

performance, they should not be limited to public-private competitions. 

Instead, the federal government needs to provide incentives for its 

employees, its managers, and its contractors to constantly seek to 

improve the economy, efficiency, and effectiveness of the delivery of 

government services through a variety of means, including competition, 

public-private partnerships, and enhanced worker-management 

cooperation.



5. Be based on a clear, transparent, and consistently applied process.



Commentary: The use of a clear, transparent, and consistently applied 

process is key to ensuring the integrity of the process as well as to 

creating trust in the process on the part of those it most affects: 

federal managers, users of the services, federal employees, the private 

sector, and the taxpayers.



6. Avoid arbitrary full-time equivalent (FTE) or other arbitrary 

numerical goals.



Commentary: This principle reflects an overall concern about arbitrary 

numbers driving sourcing policy or specific sourcing decisions. The 

success of government programs should be measured by the results 

achieved in terms of providing value to the taxpayer, not the size of 

the in-house or contractor workforce. Any FTE or other numerical goals 

should be based on considered research and analysis. The use of 

arbitrary percentage or numerical targets can be counterproductive.



7. Establish a process that, for activities that may be performed by 

either the public or the private sector, would permit public and 

private sources to participate in competitions for work currently 

performed in-house, work currently contracted to the private sector, 

and new work, consistent with these guiding principles.



Commentary: Competitions, including public-private competitions, have 

been shown to produce significant cost savings for the government, 

regardless of whether a public or a private entity is selected. 

Competition also may encourage innovation and is key to improving the 

quality of service delivery. While the government should not be 

required to conduct a competition open to both sectors merely because a 

service could be performed by either public or private sources, federal 

sourcing policies should reflect the potential benefits of competition, 

including competition between and within sectors. Criteria would need 

to be developed, consistent with these principles, to determine when 

sources in either sector will participate in competitions.



8. Ensure that, when competitions are held, they are conducted as 

fairly, effectively, and efficiently as possible.



Commentary: This principle addresses key criteria for conducting 

competitions. Ineffective or inefficient competitions can undermine 

trust in the process. The result may be, for private firms (especially 

smaller businesses), an unwillingness to participate in expensive, 

drawn-out competitions; for federal workers, harm to morale from overly 

long competitions; for federal managers, reluctance to compete 

functions under their control; and for the users of services, lower 

performance levels and higher costs than necessary. Fairness is 

critical to protecting the integrity of the process and to creating and 

maintaining the trust of those most affected. Fairness requires that 

competing parties, both public and private, or their representatives, 

receive comparable treatment throughout the competition regarding, for 

example, access to relevant information and legal standing to challenge 

the way a competition has been conducted at all appropriate forums, 

including the General Accounting Office and the United States Court of 

Federal Claims.



9. Ensure that competitions involve a process that considers both 

quality and cost factors.



Commentary: In making source selection decisions in public-private 

competitions: (a) cost must always be considered; (b) selection should 

be based on cost if offers are equivalent in terms of non-cost factors 

(for example, if they offer the same level of performance and quality); 

but (c) the government should not buy whatever services are least 

expensive, regardless of quality. Instead, public-private competitions 

should be structured to take into account the governmentï¿½s need for 

high-quality, reliable, and sustained performance, as well as cost 

efficiencies.



10. Provide for accountability in connection with all sourcing 

decisions.



Commentary: Accountability serves to assure federal workers, the 

private sector, and the taxpayers that the sourcing process is 

efficient and effective. Accountability also protects the governmentï¿½s 

interest by ensuring that agencies receive what they are promised, in 

terms of both quality and cost, whether the work is performed by 

federal employees or by contractors. Accountability requires defined 

objectives, processes, and controls for achieving those objectives; 

methods to track success or deviation from objectives; feedback to 

affected parties; and enforcement mechanisms to align desired 

objectives with actual performance. For example, accountability 

requires that all service providers, irrespective of whether the 

functions are performed by federal workers or by contractors, adhere to 

procedures designed to track and control costs, including, where 

applicable, the Cost Accounting Standards. Accountability also would 

require strict enforcement of the Service Contract Act, including 

timely updates to wage determinations.



FOOTNOTES



[1] Examples of commercial functions typically subject to the 

competitive sourcing process at the Department of Defense include 

transportation services, computer services, education and training, and 

food services.



[2] For functions performed by Defense Department employees, a number 

of additional requirements, reports, and certifications are addressed 

in chapter 146 of title 10, United States Code, and in recurring 

provisions in the Departmentï¿½s annual appropriations.



[3] The most efficient organization is the governmentï¿½s in-house plan 

to perform a commercial activity. It may include a mix of federal 

employees and contract support. It is the basis for all government 

costs entered on the cost comparison form. It is the product of the 

management plan and is based upon the performance work statement.



[4] An eligible appellant is defined as (1) federal employees (or their 

representatives) and existing federal contractors affected by a 

tentative decision to waive a cost comparison; (2) federal employees 

(or their representatives) and contractors who have submitted formal 

bids or offers and who would be affected by a tentative decision; or 

(3) agencies that have submitted formal offers to compete for the right 

to provide services through an interservice support agreement.



[5] Federal employees do not have standing to file a protest with GAO 

and have generally been denied standing to sue in court.



[6] Section 5 of P.L. 105-270, codified at 31 U.S.C. 501 note (1998), 

defines an inherently governmental function as a ï¿½function that is so 

intimately related to the public interest as to require performance by 

Federal Government employees.ï¿½



[7] Guidance implementing the FAIR Act permitted agencies to exempt 

many commercial activities from competitive sourcing consideration on 

the basis of legislative restrictions, national security 

considerations, and other factors. Accordingly, DODï¿½s fiscal year 2001 

inventory of positions it considered to be potentially subject to 

competition was reduced to approximately 241,000.



[8] A Federal Register notice was also used to solicit public input on 

issues the Panel should address.



[9] Angela Styles replaced Sean Oï¿½Keefe on the Commercial Activities 

Panel in December 2001 after he was confirmed as the Administrator of 

the National Aeronautics and Space Administration.



[10] The sourcing principles were taken in their entirety from 

Commercial Activities Panel, Improving the Sourcing Decisions of 

Government: Final Report (Washington, D.C.: 

April 2002).