Defense Management: DOD Faces Challenges Implementing Its Core	 
Competency Approach and A-76 Competitions (15-JUL-03,		 
GAO-03-818).							 
                                                                 
The Department of Defense (DOD) is pursuing a new initiative	 
involving a core competency approach for making sourcing	 
decisions--that is, sourcing decisions based on whether the	 
function is core to the agency's warfighting mission. In	 
determining how to best perform non-core functions, DOD's	 
position is that its components should look beyond just the use  
of public-private competitions under Office of Management and	 
Budget (OMB) Circular A-76 in making sourcing decisions, and	 
consider other alternatives such as partnering or employee stock 
ownership. GAO was asked to assess (1) the department's progress 
in assessing its core functions as a basis for sourcing 	 
decisions, (2) the plans and progress DOD has made in identifying
and implementing alternatives to A-76, and (3) the current status
of DOD's A-76 program.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-818 					        
    ACCNO:   A07543						        
  TITLE:     Defense Management: DOD Faces Challenges Implementing Its
Core Competency Approach and A-76 Competitions			 
     DATE:   07/15/2003 
  SUBJECT:   Defense budgets					 
	     Defense capabilities				 
	     Defense operations 				 
	     Private sector					 
	     Internal controls					 
	     DOD A-76 Program					 

******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO Product.                                                 **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
******************************************************************
GAO-03-818

Report to the Ranking Minority Member, Subcommittee on Military Readiness,
Committee on Armed Services, House of Representatives

United States General Accounting Office

GAO

July 2003 DEFENSE MANAGEMENT

DOD Faces Challenges Implementing Its Core Competency Approach and A- 76
Competitions

GAO- 03- 818

Progress in assessing core functions has been varied and limited across
major Defense components, affected somewhat by ambiguous definitions of
the term *core function.* In some instances additional guidance was
obtained, but definitions of core remain somewhat broad and subjective,
and will likely remain so in the future. Army and Air Force have led
within DOD in assessing core functions, but the Army has done the most,
and found, contrary to its expectations, that distinguishing between core
and non- core functions does not, by itself, prescribe a sourcing
decision. Other factors must also be considered such as risk and
operational considerations.

The range of alternatives to A- 76 likely to be pursued under the core
competency- based approach is not yet clear, but DOD has made some
progress toward identifying and/ or using some alternatives through pilot
projects and other efforts by the services as they have focused on the
core initiative. However, the use of alternatives could be limited without
special legislative authorities and/ or repeal of various existing
prohibitions, and some could be tempered by the department*s efforts to
meet the A- 76 competitive sourcing goals set by OMB.

DOD reported that as of June 1, 2003, it has met OMB*s short- term goal to
use the A- 76 process to study 15 percent of the positions identified in
DOD*s commercial activities inventory by the end of fiscal year 2003.
However, meeting the longer- term goal to study at least 50 percent
(226,000) of its

nearly 453,000 commercial activity positions through fiscal year 2008 will
present a challenge. This is nearly double the number of positions that
DOD has previously studied during a comparable time period, and providing
sufficient resources (financial and technical) to complete the studies may
prove challenging. Also, the defense components, particularly the Air
Force,

plan to transfer certain military personnel into warfighting functions and
replace them with government civilian and/ or contractor personnel. This
will require the components to reprioritize their funding for operation
and maintenance accounts, because it is from those accounts the services
must fund replacement civilian or contractor personnel.

DOD*s A- 76 Positions Completed and OMB*s Goal, Fiscal Years 1997- 2008

The Department of Defense (DOD) is pursuing a new initiative involving a
core competency approach for making sourcing

decisions* that is, sourcing decisions based on whether the function is
core to the agency*s warfighting mission. In determining how to best
perform non- core

functions, DOD*s position is that its components should look beyond just
the use of public- private

competitions under Office of Management and Budget (OMB) Circular A- 76 in
making sourcing decisions, and consider other alternatives such as
partnering

or employee stock ownership. GAO was asked to assess (1) the department*s
progress in assessing its core functions as a basis for sourcing
decisions, (2) the plans

and progress DOD has made in identifying and implementing alternatives to
A- 76, and (3) the current status of DOD*s A- 76 program.

GAO is recommending that DOD clarify its expectations for sourcing
decisions based on core competency assessment results

and provide guidance on additional factors that should be considered in
reaching a sourcing decision; and ensure that conversion of functions from
performance by military to government civilian or contractor personnel
have clearly identified sources of funding to

support those decisions. The department generally concurred with the
recommendations.

www. gao. gov/ cgi- bin/ getrpt? GAO- 03- 818. To view the full product,
including the scope and methodology, click on the link above. For more
information, contact Barry W. Holman at (202) 512- 8412 or holmanb@ gao.
gov. Highlights of GAO- 03- 818, a report

to the Ranking Minority Member, Subcommittee on Military Readiness,
Committee on Armed Services, House of Representatives July 2003

DEFENSE MANAGEMENT

DOD Faces Challenges Implementing Its Core Competency Approach and A- 76
Competitions

Page i GAO- 03- 818 Defense Management Letter 1 Results in Brief 2
Background 5 Progress in Assessing Core Functions Has Varied Across the

Defense Components and Has Been Affected Somewhat by Definitions of *Core*
9 Some Progress Made in Identifying Alternative Sourcing

Arrangements, but the Extent to Which Alternatives Are Likely to Be Used
Is Unclear 18 DOD Expected to Maintain an Active A- 76 Competitive

Sourcing Program 23 Conclusions 29 Recommendations 29 Agency Comments and
Our Evaluation 30 Scope and Methodology 30 Appendix I Alternatives to A-
76 for Sourcing Non- Core Competencies 33

Appendix II Army*s Plans for Transforming Its In- House Industrial
Facilities 37

Appendix III Senior Executive Council Definitions of Core Competency 38

Appendix IV Pioneer Projects 39

Appendix V Comments from the Department of Defense 42

Appendix VI GAO Contact and Staff Acknowledgments 44 Contents

Page ii GAO- 03- 818 Defense Management Related GAO Products 45

Tables

Table 1: Pioneer Projects Submitted to OMB 19 Table 2: DOD Positions
Announced for Study under A- 76, by Component, Fiscal Years 1997- 2002 24
Table 3: Number of Positions for Which A- 76 Studies Have Been Completed,
by Component, Fiscal Years 1997- 2002 25 Table 4: Number of Positions for
Which A- 76 Studies Are Ongoing, by Component and Year When Study Was
Announced, Fiscal Years 1999- 2003 25 Figure

Figure 1: DOD*s A- 76 Positions Completed and OMB*s Goal, Fiscal Years
1997- 2008 24

Page iii GAO- 03- 818 Defense Management Abbreviations

AMC U. S. Army Materiel Command CAMIS Commercial Activities Management
Information System CINC commander- in- chief

DFAS Defense Finance and Accounting Service DLA Defense Logistics Agency
DOD Department of Defense

ESOP Employee Stock Ownership Plans FAIR Federal Activities Inventory
Reform Act NSA National Security Agency OMB Office of Management and
Budget TBC Transitional Benefit Corporations

This is a work of the U. S. Government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. It may contain
copyrighted graphics, images or other materials. Permission from the
copyright holder may be necessary should you wish to reproduce copyrighted
materials separately from GAO*s product.

Page 1 GAO- 03- 818 Defense Management July 15, 2003 The Honorable Solomon
P. Ortiz Ranking Minority Member

Subcommittee on Military Readiness Committee on Armed Services House of
Representatives Dear Mr. Ortiz: The Department of Defense (DOD) is
currently examining a core competency- based approach for making sourcing
decisions* that is, the decision to use a public or private sector source
to perform a necessary agency function or activity based on whether the
function or activity is core to the agency*s mission. 1 This is one of the
business transformation initiatives that have been endorsed by one of
DOD*s high- level management committees, the Senior Executive Council. 2
It believes that the department should focus its energies and talents on
those functions that are core or directly linked to its warfighting
mission, and which must be performed by the agency, with the expectation
that necessary products or services associated with non- core functions
should be obtained from other government agencies or the private sector.

In determining how to best perform non- core functions, DOD*s position is
that its components should look beyond just the use of Office of
Management and Budget (OMB) Circular A- 76, with its focus on public-
private competitions, in making sourcing decisions. It has expressed
interest in examining the use of other alternatives, such as public-
private partnering, transferring functions to other agencies, employee
stock ownerships, and quasi- government corporations. Nevertheless,
Circular A- 76 remains an important tool for making sourcing decisions for
non- inherently governmental functions typically

1 Throughout this report, we use the terms *activities* and *functions*
interchangeably. 2 The Senior Executive Council is a high- level
management committee established in 2001 to (1) help guide efforts across
the department to transform and improve the department*s business
practices, and (2) to function as a board of directors for DOD. The
Council is chaired by the Secretary of Defense and is comprised of the
Deputy Secretary of Defense, the service secretaries, and the Under
Secretary of Defense for Acquisition, Technology and Logistics.

United States General Accounting Office Washington, DC 20548

Page 2 GAO- 03- 818 Defense Management involving commercially available
services. Also, A- 76 competitive sourcing is a major initiative under the
President*s Management Agenda 3 and OMB has set ambitious goals for those
competitions.

At your request, we examined DOD*s plans for sourcing non- core functions
and the effect this may have on its A- 76 program. Accordingly, we
assessed (1) the department*s progress in assessing its core functions

as a basis for sourcing decisions, (2) the plans and progress DOD has made
in identifying and implementing alternatives to A- 76, and (3) the current
status of DOD*s A- 76 program.

In performing work for this review, we obtained and analyzed plans
available from DOD and its components for assessing non- core functions
and identifying alternate sourcing approaches, and reviewed relevant
documents from DOD agencies. We met with officials from the Office of

the Secretary of Defense, the Army, the Navy, the Air Force, the Marine
Corps, the Defense Logistics Agency, and other organizations to obtain
information on their sourcing programs and efforts to identify alternative
sourcing options. The A- 76 data used in this report are derived from a
Web- based DOD commercial activities database; we did not validate the
information in this database. Further details on our scope and methodology
are included at the end of this report.

Progress in assessing core functions has been varied and limited across
major Defense components 4 and has been challenging. Multiple and somewhat
ambiguous definitions of what constitutes a core function have made it
difficult for the components to easily employ the core competency- based
approach to decision making. As a result, some components have sought
additional guidance and/ or applied their

own criteria to identify core functions. Even then, much guidance 3
Executive Office of the President, Office of Management and Budget, The
President*s Management Agenda, Fiscal Year 2002. The report can be found
at www. whitehouse. gov/ omb/ budget. The President*s Management Agenda,
announced in the summer of 2001, is a strategy for improving the
management of the federal government. It focuses on five areas of
management weakness across the government where improvements and the most
progress can be made. In addition to competitive

sourcing, the President*s Management Agenda includes an emphasis on
strategic management of human capital, improved financial performance,
expanded electronic government, and budget and performance integration.

4 Defense components refer to the military services and Defense agencies.
Results in Brief

Page 3 GAO- 03- 818 Defense Management remained somewhat broad in nature
and subjective, and will likely remain so in the future. The Army has made
the most progress to identify core and

non- core functions, having completed core competency determinations for
over 200, 000 positions, but has had to deal with numerous appeals to its
initial core determinations. The Air Force has recently completed a more
limited effort, focusing predominately on military positions. As a result
of its core competency- based effort, the Air Force identified over 17,000
military positions and almost 9,000 civilian positions it believes are
non- core. The Navy and Marine Corps are in the early stages of
determining their core functions. The Defense Logistics Agency broadly
identified its core and non- core competencies, but has not identified
specific positions as core or non- core. Meanwhile, through its efforts to
operationalize the core competency- based approach, the Army discovered
that the utility of identifying core functions for the purpose of making
sourcing decisions can have its limitations. More specifically, contrary
to its original expectations, the Army found that distinguishing between
core

and non- core functions may not, by itself, prescribe a sourcing decision.
Once it has been determined that a function is not core to an agency*s
mission, other factors that are not currently covered in DOD*s guidance
must also be considered, such as risk and operational considerations. As a
result, this creates some uncertainty regarding how and to what extent the
Army will use the results of the core analyses and potentially has
implications for other Defense components as well.

The magnitude of alternate sourcing arrangements that DOD will pursue
under the core competency- based approach is not yet clear, based on
limitations in core assessments conducted to date and due to legal and
other constraints that could impact use of alternate arrangements. Even
so, DOD has made some progress toward identifying and using some sourcing
arrangements that are alternatives to A- 76, including some identified as
part of an initiative to identify alternatives through use of

pilot projects, 5 and a few others that have been identified by the
services as they have focused on the core initiative. For example, in an
effort to stimulate consideration of alternatives, DOD tasked each of its
components with identifying at least one non- core competency pilot
project and developing plans to transition the affected functions out of
DOD using alternatives to A- 76 competition. Six pilot projects have been
approved and are in varying stages of implementation. They range from
divestiture to partnering with municipalities for services, with the
latter

5 Officially referred to as pioneer projects.

Page 4 GAO- 03- 818 Defense Management expected to be used as a model for
more widespread implementation. Beyond those six pilot projects,
department officials told us about

two additional projects under way that would transfer certain functions to
other agencies. At the same time, various officials told us that
legislative restrictions* such as those that restrict outsourcing* and
OMB*s emphasis on competitive sourcing under A- 76 could impact the extent
to which alternatives are used.

While the department continues to examine the potential for implementing
its core concept and alternative sourcing plans, it is also actively
maintaining an A- 76 competitive sourcing program. This is largely due to
the emphasis on competitive sourcing in the President*s Management

Agenda and the A- 76 goals set by OMB. Building on its ongoing A- 76
program, DOD reported that as of June 1, 2003, it has met OMB*s short-
term goal to study 15 percent of the positions that the department
identified in its year 2000 commercial activities inventory by the end of
fiscal year 2003. Meeting the longer- term goal of studying at least 50
percent of its nearly 453,000 commercial activity positions 6 through
fiscal year 2008 could present a challenge because the goal requires
studying far more positions* nearly double* than DOD has previously
studied under a comparable time period. If the history of DOD*s A- 76
program is a guide, the department could face other challenges associated
with studying such sizeable numbers of positions. These challenges include
providing sufficient time and resources to complete the studies, and
encountering difficulties in identifying and grouping positions for study.
Another challenge to completing OMB*s A- 76 goals involves the defense
components* plans, particularly the Air Force, to convert a sizeable
number of military positions to performance by government civilian or
contractor personnel, either as a result of the core- competency process
or through A- 76 studies. Although precise numbers are not available for
each of the components, the services have indicated they plan to use such
conversions to transfer the affected military personnel and their slots to
fill other priorities, rather than reduce authorized military end-
strength. To do so will require the services to reprioritize their funding
for operation and maintenance accounts, because it is from those 6 This
goal is based on DOD*s inventory of commercial activities reported in
2000; the

numbers vary by year.

Page 5 GAO- 03- 818 Defense Management accounts the services must fund
replacement civilian or contractor personnel. 7 This report contains
recommendations for additional guidance in making

sourcing decisions based on core assessments and to ensure conversion of
functions from performance by military to civilian or contractor personnel
are accompanied by identified sources of funding to support those
decisions. In commenting on a draft of this report, the department
generally concurred with our recommendations.

Since 1955, the executive branch has encouraged federal agencies to obtain
commercially available goods and services from the private sector when the
agencies determined that such action was 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
three times since 1979. An extensive revision to Circular A- 76 was issued
on May 29, 2003, based in part on the recent work of the

congressionally mandated Commercial Activities Panel. 8 Under the newly
revised circular, agencies may convert commercial activities to or from
contractor performance through a public- private competition, whereby the
estimated cost of public or private performance of the function is
evaluated against published selection criteria in accordance with the
principles and procedures outlined in the circular. 9 7 The costs of
military positions are funded through military personnel appropriation

accounts, whereas costs associated with government civilian or contractor
personnel are funded through operation and maintenance appropriation
accounts. 8 The Panel, mandated by section 832 of the Defense
Authorization Act for fiscal year 2001, required the Comptroller General
to convene a panel of experts to study the process used by the federal
government to make sourcing decisions. After a yearlong study, the Panel
published its report in April 2002. See Commercial Activities Panel,
Improving the Sourcing Decisions of the Government: Final Report,
(Washington, D. C.: Apr. 30, 2002). The report can be found on GAO*s Web
site at http:// www. gao. gov under the Commercial Activities Panel
heading. 9 The current revision to the circular replaces the use of direct
conversion with a

requirement to compete all non inherently governmental functions. In
addition, the revised circular provides for a streamlined cost comparison
for 65 or fewer civilian positions in addition to standard competitions.
Background

Page 6 GAO- 03- 818 Defense Management As part of this process, the
government identifies the work to be performed in a *performance work
statement,* prepares an in- house offer

which includes its most efficient organization, and compares all the
offers against each other and the selection criteria. The revised circular
provides several alternative procedures for conducting source selections,
only one of which allow agencies to select a contract based on other than
the lowest cost technically acceptable offer. 10 The four source selection
alternatives are: sealed bid, lowest price technically acceptable, phased
evaluation, and, in certain cases, trade- off (which permits agencies to
weigh cost and non- cost factors).

Administrative and legislative constraints from the late 1980s through
1995 resulted in a lull* and even a moratorium* on awarding contracts
resulting from A- 76 competitions. In 1995, congressional and
administration initiatives placed more emphasis on A- 76 as a means of
achieving greater economies and efficiencies in operations. Beginning
about 1995, DOD began to give renewed emphasis to the use of A- 76
competitive sourcing under Circular A- 76. More recently, competitive
sourcing has received governmentwide attention, as one of five initiatives
of the President*s Management Agenda for fiscal year 2002. DOD has been a
leader among federal agencies in using A- 76 in recent years.

The revised circular requires agencies to prepare two annual inventories
that categorize all activities performed by government personnel as either
commercial or inherently governmental. 11 A similar requirement was
included in the 1998 Federal Activities Inventory Reform (FAIR) Act, 12
which directs agencies to develop annual inventories of their positions
that are not inherently governmental. DOD*s 2000 FAIR Act inventory
identified nearly 453,000 in- house civilian positions engaged in a
variety of commercial activities, nearly 260,000 of which have been, or
are, subject

10 DOD has submitted a legislative proposal for inclusion in the National
Defense Authorization Bill for Fiscal Year 2004, a request to eliminate
the existing requirement that the department base its competitive sourcing
decisions on cost. This would allow DOD to consider quality as well as
cost when making sourcing decisions.

11 OMB Circular A- 76 defines an inherently governmental function as one
that requires either the exercise of substantial discretion in applying
government authority or the making of value judgments in making decisions
for the government. Positions deemed inherently governmental are not
subject to the A- 76 program. 12 Section 5 of P. L. 105- 270, 31 U. S. C.
501 note (1998), on the other hand, defines an

inherently governmental function as a *function that is so intimately
related to the public interest as to require performance by Federal
Government employees.*

Page 7 GAO- 03- 818 Defense Management to competition or direct conversion
under Circular A- 76. The number of positions subject to A- 76 is less
than the total number of positions in

commercial activities because DOD made adjustments to exclude certain
commercial activities from being considered eligible for competition; they
included such reasons as statutory, national security, or operational
considerations. Under the President*s Management Agenda, OMB has directed
agencies to directly convert or compete through cost comparison studies 15
percent of their total fiscal year 2000 inventories of commercial
activities by the end of fiscal year 2003, with the ultimate goal of
competing at least 50 percent of their inventories by the end of fiscal
year 2008.

In providing guidance for determining whether activities and functions,
and associated positions are considered to be inherently governmental in
nature, DOD has sometimes equated the term *inherently governmental* with
the somewhat parallel term *core.* 13 While use of the term *core* is
associated with the private sector, DOD has sometimes used the term to
designate military and civilian essential positions required for military
and national security reasons. The old A- 76 Handbook provided yet
another, but similar, meaning for core. In the context of A- 76, core
capability was defined as *a commercial activity operated by a cadre of
highly skilled employees, in a specialized technical or scientific
development area to ensure that a minimum capability is maintained.*

The concept of core in DOD has also been associated with legislative
requirements to establish core logistics capabilities in government- owned
military maintenance depots. This process is based on a requirement
contained in 10 U. S. C. 2464 to identify and maintain within
governmentowned and *operated facilities a core logistics capability
including the equipment, personnel, and technical competence required to
maintain weapon systems identified as necessary for national defense
emergencies and contingencies. Regardless of usage, determinations of core
and

inherently governmental functions within DOD have often been viewed as
somewhat subjective in nature.

The term *core function* recently has gained increased and more expanded
use within DOD, beginning with DOD*s publication of its September 2001
Quadrennial Defense Review Report, which

13 As noted in subsequent discussion, the terms are not always
interchangeable.

Page 8 GAO- 03- 818 Defense Management recommended the identification of
core and non- core functions. 14 According to the report, *only those
functions that must be performed by DOD should be kept by DOD. Any
function that can be provided by

the private sector is not a core government function.* The test to
separate core and non- core functions would be to determine whether a
function is directly necessary for warfighting, according to the report.

Further emphasis on assessing core functions subsequently came from DOD*s
Senior Executive Council, 15 which, in April 2002, launched a
departmentwide effort to distinguish between core and non- core functions
with an emphasis on retaining in- house only those functions deemed core
to the warfighting mission. Under this approach, it tasked the defense

components with developing plans to transition non- core functions to
alternative sourcing arrangements or A- 76 studies, if appropriate, as
soon as possible. In advocating the use of alternatives, the Senior
Executive Council noted that A- 76 cost comparisons were lengthy,
expensive, and hard on the workforce. Examples of alternate sourcing
strategies cited by the Council included public- private partnering,
employee stock ownership,

and quasi- governmental organizations. Details about these and other
alternatives can be found at appendix I. While use of A- 76 studies was
still permitted, emphasis was expected to be given to identifying
alternate sourcing approaches that might be used to transfer non- core
functions out of the department.

Much publicity to this new core emphasis surrounded Army*s efforts under
its program, which it designated as *the Third Wave.* The term *Third
Wave* was used to distinguish this current effort from two previous
sourcing efforts under A- 76, the first occurring largely in the 1980s and
the second beginning in the 1996- 97 time period. Unlike the earlier two
waves, which focused on A- 76 studies of about 25,000 and 33,000 positions
respectively, the scope of the Third Wave was to be significantly larger,
potentially involving over 200,000 positions. This was of significant
concern to government employees after several years of A- 76 study efforts
within DOD. The Army*s program also received much public attention

14 U. S. Department of Defense, Quadrennial Defense Review Report (Sept.
30, 2001). 15 The Senior Executive Council is a high- level management
committee established in 2001 to (1) help guide efforts across the
department to transform and improve the department*s business practices,
and (2) to function as a board of directors for DOD. The Council is
chaired by the Secretary of Defense and is comprised of the Deputy
Secretary of Defense, the service secretaries, and the Under Secretary of
Defense for Acquisition, Technology and Logistics.

Page 9 GAO- 03- 818 Defense Management because of what Army officials have
characterized as an unrelated, but parallel, effort to have a contractor
(RAND) study options for rethinking

governance of the Army*s arsenals and manufacturing plants. 16 The Army
has subsequently indicated it does not plan to pursue the options outlined
in that study which ranged from privatization to creation of a federal

government corporation to operate these facilities. On March 24, 2003, the
Secretary of the Army directed that other action plans be developed to
deal with these facilities. (See app. II for a summary of the actions
directed.)

Progress in assessing core functions has been varied and limited across
the major Defense components, and affected by somewhat ambiguous and
subjective definitions of what constitutes a *core function.* These
multiple and somewhat ambiguous definitions of what is a *core function*
have made it difficult for the components to easily employ the core
competency approach to decision- making, and some DOD components have
sought additional guidance and/ or applied their own criteria to identify
core functions. Even so, progress in assessing core functions has varied
across the components, with the Army and the Air Force having made the
most progress in their efforts. In addition, the Army, which has devoted
the greatest attention to assessing core functions, has found that
distinguishing between core and non- core functions, by itself, has
limited value because that distinction alone does not necessarily
prescribe a sourcing decision.

DOD guidance to define a core function under the new program emphasis has
been broad and, as a result, there are multiple and somewhat ambiguous
definitions of *core,* leading some DOD components to seek additional
guidance. The term *core* has had different meanings depending upon the
context in which it was used. Moreover, there has been and remains a
significant amount of subjectivity in defining *core* as there has been
with the term *inherently governmental.* Recognizing the

potential difficulty in applying the core competency- based approach, the
Senior Executive Council provided several definitions of *core* as well as
criteria for determining core competencies in its April 2002 implementing
memo.

16 William M. Hix et al., Rethinking Governance of the Army*s Arsenals and
Ammunition Plants, RAND (Santa Monica, Calif., 2003). Progress in
Assessing

Core Functions Has Varied Across the Defense Components and Has Been
Affected Somewhat by Definitions of *Core*

Guidance in Defining Core Has Been Broad and Additional Guidance Sought

Page 10 GAO- 03- 818 Defense Management As a starting point for its core-
competency emphasis, a work group commissioned by the Senior Executive
Council chose a business concept

outlined in a 1990 Harvard Business Review article. 17 The article
provides several examples of corporations that identified their core
competencies, helping them to become more successful than their
competitors. The authors likened a diversified corporation to a business
tree. For example, the trunk and major limbs are core products; the
smaller branches are business units. While admitting this concept is
difficult to apply to DOD, the Senior Executive Council nonetheless
translated that business tree to a military application* the core services
were described as the set of activities that actually contribute to the
value of the end product (land, sea, and air operations), the business
units were the units of a component command, the end products were
military effects, and the customer was the combatant commander employing
forces and resources.

In adapting the definition of *core* from the Harvard Business Review

article to the DOD environment, the Senior Executive Council defined core
as *A complex harmonization of individual technologies and *production*
(employment, delivery) skills that create unique military capabilities
valued by the force employing [commander in chief]!* Several additional
definitions were provided in the Council*s April 2002 memo to help clarify
the reader*s understanding of the definition (see app. III). According to
the memo, however, there are three themes common to each definition: (1)
the knowledge and experience acquired by people, (2) the

discrete and finite set of technologies the people employ, and (3) the
business objectives to be achieved. It stated that DOD*s business
objective to be achieved is warfare.

The Senior Executive Council*s memo also provided some criteria for
determining core competencies. According to the Council, a core competency
 has potential application to a wide variety of national security needs,

 provides a significant contribution to the combatant commander*s desired
effect,  would be difficult for competitors to imitate,  provides the
means to differentiate from competitors,  crosses organizational
boundaries within an enterprise,

17 C. K. Prahalad and Gary Hamel, *The Core Competence of the
Corporation,* Harvard Business Review, May- June 1990.

Page 11 GAO- 03- 818 Defense Management  is a direct contributor to the
perceived value of the service,  does not diminish with use,  deploys
with forces, and

 provides training and experience that forms the basis of ethos and
culture. The memo also noted that these criteria are not *pass/ fail*
criteria. That is, some criteria may help to identify core competencies
while others may not, and that these criteria are based on business
concepts that have been adapted to the military domain. Furthermore, the
memo stressed the importance of senior leadership judgment in identifying
core competencies.

According to various officials, the lack of a clear and concise definition
of the terms related to the core concept initially made it difficult for
the Army and Air Force to apply the core concept to their functions. Both
services have subsequently supplemented the Senior Executive Council
definitions with their own internal documents and specific guidance, which
are discussed in the next sections. 18 That notwithstanding, the
definition of core remains somewhat broad in nature and subjective, and
will likely remain so in the future. The Navy and Marine Corps have only
recently begun their efforts to identify core functions, and have not yet
sought to develop additional guidance. A Defense Logistics Agency official
told us they did not use any additional guidance.

DOD and service officials told us that while the concepts *inherently
governmental* and *core* are similar and may overlap, they may not always
be the same. Specifically, not all inherently governmental functions would
be considered core, nor would all core functions be designated inherently
governmental. For example, according to Army analysis, many civil
functions performed by the Army Corps of Engineers, such as wetlands
regulation and eminent domain authority, are inherently governmental, but
they are not core to the Army*s mission. Conversely, we were told, certain
medical services provided by doctors and nurses in the

operating forces are not deemed to be inherently governmental; however,
these services are considered to be core to the Army*s mission.

18 For example, the Army used its Field Manual No. 1, The Army, to provide
additional guidance. The Army describes this as its capstone doctrinal
manual, which, among other things, delineates the Army*s purpose, roles,
and functions.

Page 12 GAO- 03- 818 Defense Management The Senior Executive Council
directed the services and defense agencies to inventory their
organizations and identify their core functions, but only

the Army and Air Force have made much progress in doing so. The Army took
the lead in pursuing this initiative and has recently completed an effort
to identify its core and non- core functions. The Air Force also

initiated a core competency review, which focused predominately on
military positions. The Navy and Marine Corps are in the early stages of
assessing their core functions. The Defense Logistics Agency broadly
identified its core and non- core competencies, but has not identified
specific positions as core or non- core.

The Army has recently completed an effort to identify its core and non-
core functions for over 200,000 positions. Initially, the Army*s Third
Wave program assumed that all commercial positions were non- core and thus
potential candidates for performance by the private sector or other
government agencies. However, it permitted its components to request
exemption from the non- core designation and, as a result, considered
appeals involving numerous functional areas. Some were sustained while
others were not. The results of this process differed somewhat from the
Army*s initial expectations that all non- core functions could be subject
to competition or alternate sourcing, and the number of positions likely
to be

subject to alternate sourcing is not yet clear. In permitting its
components to present a case for functions to be exempt from the non- core
designation, the Army provided specific guidance on the submission of
exemption requests and the factors to be used to evaluate those requests.
An exemption request needed to provide a compelling case

that a non- core designation could pose substantial and specific risks to
core warfighting missions or would violate a statutory requirement
affecting a function. The Army components submitted 24 requests for
exemption from non- core designation, each representing one or more broad
functional areas. For example, these areas included civilian personnel,
installation management, law enforcement and criminal investigations, and
both military and civilian career progression activities. Progress on
Identifying

Core Functions Has Varied Army Efforts Recently Completed

Page 13 GAO- 03- 818 Defense Management The Army*s authority for reviewing
and approving core- competency exemption requests was the Assistant
Secretary of the Army for Manpower and Reserve Affairs. In evaluating the
exemption requests, the Office of Manpower and Reserve Affairs
supplemented the Senior Executive

Council*s definitions of core with six core competencies identified by the
Army in Army Field Manual 1 and other documents. The six competencies were
depicted as:

 Shape the security environment* provide a military presence.  Prompt
response* provide a broad range of land power options to shape

the security environment and respond to natural or manmade crises
worldwide.  Forcible entry operations* provide access to contested areas
worldwide.  Mobilize the Army* provide the means to confront unforeseen
challenges and ensure America*s security.

 Sustained land dominance* provide capabilities to control land and
people across various types of conflicts.  Support civil authorities*
provide support to civil authorities in domestic

and international contingencies, including homeland security. After
evaluating the appeals, the Army, in some instances, sustained the
exemption requests, while, in other instances, they were denied. However,
in many instances a mixed decision was rendered regarding individual
functions within a broad functional area. This is illustrated by the
Army*s determination of core competencies for two functions* medical
services and information resources.

In making its decisions, Army officials determined that medical activities
could be considered core in some circumstances and non- core in others.
The Army also found that, in some cases, functions considered to be core*
such as information resources* contained elements that were designated
non- core.

The Army determined that many medical functions are core to the Army*s
mission even though they are not classified as inherently governmental.
The Army recognizes that medical functions do not require unique military
knowledge or skills or recent experience in the operating forces to be
performed. However, for troops deployed in theater (i. e., a war zone),
medical functions do need to be performed by in- house personnel because
reliance on host nation contracting for medical support could place
significant risks on the Army forces. The Army has determined that the in-
theater medical mission is a critical element of the Army*s ability to

accomplish its core competencies. Even so, certain functions within the

Page 14 GAO- 03- 818 Defense Management medical area can be considered
both core and non- core. For example, the optical fabrication function*
which is the ability to produce eyewear

(replacement spectacles and protective mask inserts)* is considered a core
competency in support of the operational forces close to the point of need
in the area of engagement. However, this same function performed in the
United States is not considered to be a core competency, and the Army
states that this function may be reviewed for divestiture or
privatization.

Within the information resources function, the Army considers the
management of information resources in a network- centric, knowledgebased
workforce to be a core warfighting competency. This core competency
includes information operations that support operating forces, and
utilizes commercial technology adapted for military applications.
Organizations and personnel performing functions that ensure command,
control, and communications interoperability across Army, joint,
interagency, and coalition forces are core functions and need to be kept
in- house. However, other information resource functions* such as help-
desk services* are deemed to be non- core and can be considered for
possible outsourcing.

Army officials said they recognized that once the determination was made
that a function was considered to be core or non- core to the Army*s
mission, the sourcing of the function would, in many instances, require
additional analysis to determine the amount of core capability to be kept
in- house and the risk the Army might face by sourcing the function. The
types of risk to be considered in evaluating impacts upon a core mission
are force management, operational, future challenges, and institutional.
19 Additional factors must also be considered. For example, the Army

determined that its casualty and mortuary affairs function is not a core
mission, nor is it an inherently governmental function. However, national
policy dictates that Army officials notify families of a casualty in
person.

Overall, the Army found the results of its review were somewhat contrary
to its, and the Senior Executive Council*s, initial expectation that all

19 Force management risk includes the ability to recruit, retain, train,
and equip sufficient numbers of quality personnel and sustain the
readiness of the force while accomplishing its many operations tasks.
Operational risk concerns the ability to achieve military objectives

in a near- term conflict or other contingency. Future challenges risk
involves the ability to invest in new capabilities and develop new
operational concepts needed to dissuade or defeat mid- to long- term
military challenges. Institutional risk entails the ability to develop
management practices and controls that use resources efficiently and
promote the effective operation of the Defense establishment.

Page 15 GAO- 03- 818 Defense Management non- core functions should be
subject to competition or alternative sourcing. As noted previously, the
Army found the designation of *core*

does not necessarily indicate military or government civilian performance
is required or necessarily precludes competitive sourcing of the function.
That is, a designation of *non- core* does not automatically mean that a
function can, or should, be contracted out* other factors must also be
considered. As a result, this has led to some uncertainty regarding how
and to what extent the results of the Army*s core analyses will be used in
sourcing decisions and this potentially has implications for other Defense
components as well. While at this point, the Army is still deciding how to
proceed with implementing the results of its core assessments, Army
officials told us that the core decisions would be reflected in the Army*s

2003 FAIR Act inventory. The Air Force focused its initial core competency
review predominately on military positions. This was done because the Air
Force wanted to identify functions performed by military personnel that
might be realigned for civilian or contractor performance, thus permitting
affected military personnel to be reassigned to operational areas where
shortages of military personnel existed. All military positions were
reviewed in terms of three main core competencies and six distinctive
capabilities. The three institutional core competencies were depicted as:

 Developing Airmen (the heart of combat capability).  Technology to
Warfighting (the tools of combat capability).  Integrating Operations
(maximizing combat capability).

Six distinctive Air Force capabilities also considered were those related
to:  Precision engagement* the ability to locate the objective or target,

provide responsive command and control, generate the desired effect,
assess the level of success, and retain the flexibility to reengage. 
Rapid global mobility* the ability to rapidly and flexibly respond to the

full spectrum of contingencies worldwide.  Information superiority* the
ability to collect, control, exploit and defend

information while denying the adversary the same.  Agile combat support*
the ability to provide combat support in a

responsive, deployable, and sustainable manner.  Air and space
superiority* the ability to establish control over the entirety of air and
space, providing freedom from attack and freedom to attack.  Global
attack* the ability to find, fix, and attack targets anywhere on the

globe. Air Force Efforts Focus on

Military Positions

Page 16 GAO- 03- 818 Defense Management Although the core competency
review process did involve some subjective judgment, each position was
classified into three basic categories* those (1) requiring military
performance, (2) requiring government civilian

performance, and (3) available for contractor consideration. As a result
of this review, 17,800 military positions were identified for potential
conversion to either government civilian or contractor civilian positions.
Our prior work has identified various instances where personnel costs are
generally less for civilian personnel than for military. 20 An additional
4,477 military positions were identified for possible future realignment
through other reengineering efforts, such as adjusting the manpower
requirements process and conducting a business case analysis for
alternative installation support practices, for a total of 22,277 military
positions. Because many of the functions reviewed involved both military
and civilian personnel, an additional 8,900 Air Force civilian positions
were identified for possible conversion to contractor performance. An Air
Force official stated that the service hopes to do a more in- depth review
on the civilian side in the future; however, at the moment, none is
planned. The Air Force expects the number of positions that can be
competed in its FAIR Act inventory will be increased as a result of this
review.

In the near- term, as a direct result of the core function review, the Air
Force has indicated it plans to outsource a significant portion of the
workload of its Pentagon Communications Agency currently performed by over
400 military personnel. Although Air Force officials indicated the service
has the resources to implement this action, other efforts may have to be
postponed until the funds are available. To move military positions to
operational warfighting positions, additional government civilian or
contractor personnel would be needed to replace the military personnel.
Air Force officials told us that moving the military personnel out of non-
core functions is a high priority, but because of the high cost involved
in adding funds to the operations and maintenance appropriation account to
pay for replacement civilian or contractor

20 See U. S. General Accounting Office, Base Operations: Challenges
Confronting DOD as It Renews Emphasis on Outsourcing, GAO/ NSIAD- 97- 86
(Washington, D. C.: Mar. 11, 1997); DOD Force Mix Issues: Converting Some
Support Officer Positions to Civilian Status Could Save Money, GAO/ NSIAD-
97- 15 (Washington, D. C.: Oct. 23, 1996);

and DOD Force Mix Issues: Greater Reliance on Civilians in Support Roles
Could Provide Significant Benefits, GAO/ NSIAD- 95- 5 (Washington, D. C.:
Oct. 19, 1994.)

Page 17 GAO- 03- 818 Defense Management positions, it is currently an
unfunded priority. 21 They recently estimated this additional cost to be
about $5 billion over the next 5 years. Moreover,

in its internal budget planning documents for fiscal year 2004, the Air
Force stated that its number one unfunded priority is funding ($ 2.34
billion) for moving the initial 6,300 military positions out of non- core
functions. As a result, it is not yet clear to what extent larger number
of conversions would take place and the extent to which they might involve
direct conversions or be done as part of public- private competitions
using the A- 76 process.

As mentioned earlier, the Marine Corps has recently begun its effort to
identify core functions and has convened a working group to determine how
to proceed. The Secretary of the Navy tasked the Navy components to
determine their core competencies on April 18, 2003, so this effort is
still in its infancy. The Defense Logistics Agency has identified four
core competencies* customer knowledge, integrated combat logistics
solutions, rapid worldwide response, and single face to industry and
customers. In addition, it identified 10 non- core competencies. These
are: base operations; warehousing services; transportation services;
document

automation, printing and production services; marketing of unneeded
materiel; computer application software; computer operations and database
management support; cataloging; payroll services; and civilian personnel
services. However, it has not determined which positions are

considered to be core. 21 Military positions are funded out of the
Military Personnel Appropriation accounts. With military personnel being
shifted to other positions, this does not free up funds that could be used
to increase funding for replacement personnel in the Operations and
Maintenance Appropriation accounts. Other DOD Component Efforts Are Not as
Advanced

Page 18 GAO- 03- 818 Defense Management The range of alternatives to A- 76
likely to be pursued under the core competency- based approach is not yet
clear given limitations in the core analyses, but DOD has made some
progress toward identifying and/ or

using some sourcing arrangements that are alternatives to A- 76. Some were
identified as part of an initiative to identify alternatives through the
use of pilot projects, and a few others have been identified by the
services as they have focused on the core initiative. At the same time,
some DOD

officials indicated that the use of some alternatives could be limited
without special legislative authorities and/ or repeal of various existing
prohibitions. The use of alternative sourcing could also be affected by
the emphasis on A- 76 competitions and OMB*s goals for the department.

DOD has made some progress in identifying and using sourcing arrangements
that are alternatives to A- 76, including some as part of an initiative to
identify alternatives through use of pilot projects, and a few others that
have been identified by the services as they have focused on the core
initiative. These projects are in various stages of implementation. DOD*s
Senior Executive Council and Business Initiative Council 22 asked the
components to identify and submit at least one pilot or

*pioneer* project to provide alternative sourcing methods for widespread
implementation. Ten projects were approved by the Business Initiative
Council and were then submitted to OMB for approval. OMB approved eight
projects in August 2002. The department later withdrew two projects
because the timing was not appropriate. The following table provides a
listing of the 10 Pioneer Projects. (A description of the ongoing pioneer
projects can be found in app. IV.)

22 The Business Initiative Council, an organization that reports directly
to the Senior Executive Council, was established in 2001 to encourage the
military services to explore new money- saving business practices to help
offset funding requirements for transformation and other high- priority
efforts. It is headed by the Under Secretary of Defense for Acquisition,
Technology and Logistics, and its membership consists of the service
secretaries, the Vice Chairman of the Joint Chiefs of Staff, the Under
Secretary of

Defense (Comptroller), and the Under Secretary of Defense for Personnel
and Readiness. Some Progress Made in Identifying

Alternative Sourcing Arrangements, but the Extent to Which Alternatives
Are Likely to Be Used Is Unclear

Alternate Sourcing Approaches Identified through Pilot Projects and Other
Initiatives

Page 19 GAO- 03- 818 Defense Management Table 1: Pioneer Projects
Submitted to OMB Title Proposed sourcing

method Approved by OMB Disapproved by

OMB Withdrawn by DOD

Reengineer existing information technology structure Streamlined A- 76 x
Metalworking machinery repair/ rebuild services Waiver to A- 76 x Desk top
management services New requirement x Groundbreaker II (information
technology

support) New requirement x

Municipal services partnership for base support Direct service contract

(legislation required) x Randolph Air Force Base MEO (Most Efficient
Organization) developed with an A- 76 competition to follow at a later
date

Reengineering x Revitalize and reshape the workforce Reengineering x
Ophthalmic services Divestiture x Brooks city- base partnership
Divestiture x White House Communication Agency military manpower Military
conversion

x Source: DOD.

The projects propose to use a variety of alternatives, including
partnering and divestiture, and are in varying stages of implementation,
as noted in appendix IV. For example, the Army previously developed a
partnership with the city of Monterey, California, to provide municipal
services needed for the operation of DOD assets in Monterey County.
Because of the success of this project, the Army submitted legislation to
Congress that would allow contracting for municipal services defense-
wide. 23 In another example, the Navy has identified optical (eyewear)
fabrication as a potential candidate for divestiture, because that service
is readily available in the private sector. However, this project is still
in the conceptual phase and no decision will be made until a thorough
analysis has been completed to determine the most appropriate sourcing
method.

DOD was required to go to OMB for approval of these Pioneer Projects to
determine if they would count toward the competitive sourcing goals set by
OMB. The criteria for OMB approval required that projects involve an

23 This legislative request was included as part of the department*s
request for legislation submitted to Congress for consideration as part of
the fiscal year 2004 Defense Authorization bill. As of May 2003, this
proposal was not included in either the House or Senate approved versions
of the bill.

Page 20 GAO- 03- 818 Defense Management element of divestiture,
competition, or the transfer of responsibility to other private or public
sector performers. The two pilot Pioneer Projects

that were not approved by OMB had proposed using reengineering or the
development of most efficient organizations as an alternative to A- 76
competition. These two projects were not approved because they neither

involved the divestiture of responsibility for performing the function nor
contained a near- term element of competition. DOD officials withdrew two
others because they believed timing was not appropriate for those actions.

In responding to OMB*s draft of its most recent revision to Circular A-
76, 24 we stressed the importance of considering alternative approaches to
accomplishing agency missions. Such approaches encompass a wide range of
options, including restructuring, privatizing, transferring functions to
state and local governments, terminating obsolete functions, and creating
public- private partnerships. Given that these options can result in
improved efficiency and enhanced performance, we recommended at that time
that OMB continue to encourage agencies to consider these

and other alternatives to A- 76 competition. The revised circular allows
agencies to deviate from certain requirements of the circular with prior
written approval from OMB. For example, agencies are permitted to explore
innovative alternatives, including public- private partnerships, public-
public partnerships, and high performing organizations, with prior written
approval from OMB for a specific competition.

In addition to these Pioneer Projects, some other initiatives to use an
alternate sourcing approach have emerged within the military services. For
example, the department plans to transfer its personnel security
investigations function, now performed by the Defense Security Service to
the Office of Personnel Management. In another instance, the Secretary of
the Army recently determined that the long- term incarceration of
prisoners was not a core competency of the Army. The department is in the
process of finalizing plans for transferring its military- dedicated
prison at Fort Leavenworth, Kansas, 25 to the Federal Bureau of Prisons.
Although exact savings from this transfer have not yet been determined, an
Army official stated that transferring the facility to the Bureau of
Prisons would

24 U. S. General Accounting Office, Proposed Revisions to OMB Circular A-
76, GAO- 03- 391R (Washington, D. C.: Jan. 16, 2003). 25 This prison
houses level III prisoners from each of the military services. This level
has been defined as those prisoners with a sentence of 7 years or more.

Page 21 GAO- 03- 818 Defense Management free up almost 500 military
positions. In addition, Army officials believe it will allow for
efficiency gains because the cost to incarcerate a prisoner

per year by the Bureau of Prisons is expected to be less than half what it
costs the Army to do so.

The services have been charged by the Senior Executive Council to identify
and use sourcing arrangement alternatives to A- 76 for their non- core
functions; however, DOD and the services have encountered potential
limitations to their efforts. These include legislative impediments and
the requirement to support the President*s Management Agenda to meet the
competitive sourcing goals of OMB.

Various officials in the Office of the Secretary of Defense and the
services expressed uncertainty over the extent to which existing
legislative prohibitions or the lack of legislative authority could limit
the pursuit of some alternatives. They noted existing prohibitions such as
those contained in 10 U. S. C. S: 2461, 26 and section 8014 27 of the
annual appropriations acts that require public- private competition in all
but a few circumstances. In citing areas where legislation might be
needed, they noted that to complete the planned transfer of the personnel
security

investigative functions to the Office of Personnel Management, DOD
recently submitted a legislative request to Congress seeking authority to
do so as part of its legislative package known as the Defense
Transformation for the 21st Century Act of 2003. Specifically, the
legislation would allow DOD to transfer this non- core function to the
Office of Personnel Management, which would allow for consolidation of
requests for security clearances under this agency. Alternatively, Army
officials told us that in the initiative to transfer its Fort Leavenworth
prison to the Federal Bureau of Prisons, they did not believe special
authorizing legislation is required. They believe DOD is not required, by

26 Section 2461 requires, among other things, that before any commercial
or industrial type function that as of October 1, 1980, was being
performed by DOD civilian employees is changed to private sector
performance, DOD must report to the Congress, conduct an analysis showing
that private- sector performance will result in a savings to the
government

over the life of the contract, and certify that the analysis is available
for examination. 27 This provision requires that DOD certify its most
efficient and cost- effective organization analysis to congressional
committees before converting any activity performed by more than 10 DOD
civilian employees to contractor performance. Potential Limitations on

Use of Alternatives Exist Legislation Can Limit Use of Alternatives

Page 22 GAO- 03- 818 Defense Management statute, 28 to maintain prisoners
in DOD facilities and may use any facility under the control of the U. S.
government.

DOD officials have also requested some legislative relief to implement
some initiatives that they have already identified. For example, DOD has
requested the repeal of 10 U. S. C. S: 2465 29 to allow the department to
bid and compete contracts for security guard services and for the
performance of firefighting functions at military installations in the
continental United States. 30 DOD believes such contracts would be cost-
effective and provide a needed flexibility in exigent situations, such as
September 11, 2001. In another case, DOD has sought legislative authority
to contract directly with local governments for municipal services based
on the success of its Pioneer Project in Monterey, California. Doing so
would allow DOD components to use this type of arrangement at other
locations, as appropriate.

The department, in attempting to meet OMB*s goals to conduct A- 76
competitions, is unlikely to pursue alternative sourcing on a large scale.
One of the five governmentwide initiatives in the President*s Management
Agenda is competitive sourcing. Under this initiative, OMB has directed
agencies to compete 15 percent of positions deemed commercial in their
fiscal year 2000 FAIR Act inventories by the end of fiscal year 2003, with

the ultimate goal of 50 percent by the end of fiscal year 2008. For DOD,
this represents approximately 226,000 positions. Although OMB has recently
allowed some alternative sourcing methods that contain an element of
competition to be counted toward meeting these goals, DOD expects that the
vast majority of positions will be competed under A- 76

28 10 U. S. C. S: 858 (Sentences of confinement adjudged by a court-
martial may be carried into execution in any facility under control of the
United States). 10 U. S. C. S: 951 (The military may but is not required
to provide for the establishment of correctional facilities). 29 Also
included in the Defense Transformation for the 21st Century Act of 2003.
Generally,

10 U. S. C. S: 2465 prohibits DOD from contracting for firefighters and
security guards except when (1) the contract is to be performed overseas,
(2) when the contract is to be performed on government- owned but
privately operated installations, or (3) when the

contract (or renewal of the contract) is for the performance of a function
already under contract as of September 24, 1983. In addition, there is
temporary exception for contracts for security services with local
governments with respect to closing bases.

30 We have previously reported that the best way to determine if savings
can be achieved from contracting firefighter and security guard services
is by completing an A- 76 study at each base where these services are
being considered for conversion to contract. See U. S. General Accounting
Office, Base Operations: Contracting for Firefighters and Security Guards,
GAO/ NSIAD- 97- 200BR (Washington, D. C.: Sept. 12, 1997). Supporting the
President*s

Management Agenda May Limit Use of Alternatives

Page 23 GAO- 03- 818 Defense Management competitions. Positions competed
under A- 76, of course, would not be available for consideration for
alternative sourcing methods.

While the department initially placed a priority on identifying
alternative sourcing arrangements, the most recent department guidance is
less clear regarding the priority of alternate sourcing arrangements over
A- 76 competitions. The Business Initiative Council recently directed the
defense components to submit the status of their core competency reviews
and detailed competitive sourcing plans* including both A- 76 and
alternatives to A- 76* by June 2, 2003. The Business Executive Council
will review these plans in preparation for the fiscal 2005- 2009
preliminary budget review. Details on these plans were not available at
the time we completed our review.

Limited progress in implementing the core competency- based approach,
coupled with OMB*s emphasis on the use of A- 76 in conjunction with the
President*s Management Agenda, suggest that the use of A- 76 may remain a
key vehicle for sourcing decisions involving non- core and non- inherently
governmental functions. Nonetheless, despite its experience in

implementing competitive sourcing, the department faces a number of
challenges related to its A- 76 program. OMB has established ambitious A-
76 competitive sourcing program goals

for the department to meet in both the short term and the long term, even
while DOD is focusing on its core competency approach. The department*s A-
76 goals for the number of positions to be studied and the time frames for
accomplishing those studies have varied over time, reaching a high in 1999
of studying 229,000 positions between 1997 and 2005. However, DOD
experienced difficulty in identifying eligible functions for study and
consequently, in 2001, reduced the goal to study 160,000 positions between
1997 and 2007. Recently, DOD*s study goals have increased because of OMB*s
competitive sourcing goals. To meet OMB*s goal of directly converting or
studying 15 percent of the 453,000 commercial activity positions
identified in the 2000 FAIR Act inventories by the end of fiscal

year 2003, DOD would need to complete A- 76 studies on about 68,000
positions between fiscal year 2000 and the end of fiscal year 2003. 31
Then, to meet the larger goal of 50 percent, DOD would need to study an

31 As of June 1, 2003, DOD reported that it has met OMB*s 15- percent
goal. DOD Expected to

Maintain an Active A- 76 Competitive Sourcing Program

OMB Has Established Ambitious A- 76 Program Goals for DOD

Page 24 GAO- 03- 818 Defense Management additional 158,000 positions in
the out years (fiscal years 2004- 08). This represents a total of 226,000
positions to be studied, far more than DOD

has been able to complete in a similar time period. Figure 1 illustrates
OMB*s goals for DOD compared to what DOD has completed at the end of
fiscal year 2002.

Figure 1: DOD*s A- 76 Positions Completed and OMB*s Goal, Fiscal Years
1997- 2008 The strength of DOD*s A- 76 program is shown in the number of
positions announced or planned for study, those completed, and those still
ongoing. Table 2 provides data on the number of positions the department
has announced for study under its A- 76 program since its resurgence in
1997. Table 2: DOD Positions Announced for Study under A- 76, by
Component,

Fiscal Years 1997- 2002 Fiscal year Component 1997 1998 1999 2000 2001
2002 Total

Army 10,878 14,430 8,757 381 517 426 35,389

Navy 11,460 10,415 10,470 6,445 5,273 2,516 46,579

Air Force 5,674 8,442 8,161 4,124 1,553 904 28,858

Marine Corps 0 0 4,324 704 0 13 5,041

Defense agencies 978 2,220 3,953 533 528 3,442 11,654 Total 28,990 35,507
35,665 12,187 7,871 7,301 127,521

Source: DOD*s Commercial Activities Management Information System (CAMIS)
as of April 2003.

The number of positions planned for study by year for each component for
fiscal years 2003- 08 was not available, but it would seem to require much
greater numbers of announcements per year than were made in recent

years. The services are currently determining the number of positions they
plan to study in future years, including the number of military and
civilian

Page 25 GAO- 03- 818 Defense Management positions to be studied, and are
required to submit preliminary data to the Office of the Secretary of
Defense by June 2, 2003. However, as noted, the

total number of positions that would be required to be studied for fiscal
years 2004- 08 to meet OMB*s target for DOD is a total of 158,000
positions.

Table 3 shows the number of positions completed in A- 76 studies since
1997. Of the total, 48,921 were civilian positions and 19,336 were
military positions.

Table 3: Number of Positions for Which A- 76 Studies Have Been Completed,
by Component, Fiscal Years 1997- 2002

Fiscal year Component 1997 1998 1999 2000 2001 2002 Total

Army 26 129 691 1,538 7,534 10,423 20,341

Navy 82 234 2,936 4,214 5,323 2,382 15,171

Air Force 1,838 3,930 2,993 5,915 6,352 4,450 25,478

Marine Corps 0 0 0 41 551 1,214 1,806

Defense agencies 306 894 361 1,400 1,008 1,492 5,461 Total 2,252 5,187
6,981 13,108 20,768 19,961 68,257

Source: DOD Commercial Activities Management Information System data, as
of March 2003.

Table 4 shows the number of positions being reviewed in ongoing A- 76
studies. Of the total, 23,766 are civilian positions and the remaining
2,622 are military positions.

Table 4: Number of Positions for Which A- 76 Studies Are Ongoing, by
Component and Year When Study Was Announced, Fiscal Years 1999- 2003
Fiscal year Component 1999 2000 2001 2002 2003 Total

Army 1,605 368 277 417 0 2,667

Navy 2,353 4,622 4,118 2,509 92 13,694

Air Force 1,241 264 321 876 156 2,858

Marine Corps 45 489 0 13 1,041 1,588

Defense agencies 1,448 506 3,046 581 0 5,581 Total 6,692 6,249 7,762 4,396
1,289 26,388

Source: DOD Commercial Activities Management Information System data, as
of April 2003.

As shown in table 3 above, DOD had already studied over 68,000 positions
through fiscal year 2002, although OMB did not count approximately 14,000
positions contained in A- 76 studies completed during fiscal years 1997-
99 toward the 15- percent goal because the positions studied were

Page 26 GAO- 03- 818 Defense Management not derived from DOD*s 2000 FAIR
Act inventory. Nonetheless, OMB permitted use of nearly 54,000 of the
positions for which DOD

subsequently completed studies, leaving the department approximately
14,000 positions to study by the end of fiscal year 2003. DOD recently
reported that it has met its 15- percent goal by completing competitions
in excess of 71, 000 positions between October 1,1999, through June 1,
2003. DOD hopes to reach agreement with OMB to meet its additional

158,000- position study requirement through a combination of A- 76 studies
and alternatives to A- 76, and change the period of study from fiscal
years 2004- 08 to fiscal years 2005- 09. Regardless, this longer- term
goal could be a challenge, requiring completion of a significantly larger

number of positions for study than has actually been completed in similar
periods in the past. For example, between fiscal years 1997 and 2002, DOD
completed competition studies for about 68,000 positions. Under the new
goals, DOD would be required to complete studies involving 158,000
positions during a 5- year period between fiscal years 2004- 08. This is
more than double what DOD has been able to complete in the past

during a similar time frame. In addition to size of effort required to
meet OMB*s out- year study goals, DOD faces a number of challenges in
meeting OMB*s A- 76 program goals. As we have tracked DOD*s progress in
implementing its A- 76 program since the mid- to late- 1990s, we have
identified various challenges and concerns that have surrounded the
program. 32 We believe those challenges and concerns are still relevant to
the department*s current A- 76 program.

They include (1) the time required to complete the studies, (2) the cost
and other resources required to conduct and implement the studies, and (3)
the selection and grouping of positions to compete.

In addition, as noted earlier, the Army*s core competency review has shown
that the designation of *core* does not necessarily mean that in- house
employees should perform a function, nor does the designation of *non-
core* mean a function should necessarily be considered for alternative
sourcing or A- 76 competitions. This may cause further

32 U. S. General Accounting Office, DOD Competitive Sourcing: Some
Progress, but Continuing Challenges Remain in Meeting Program Goals, GAO/
NSIAD- 00- 106 (Washington, D. C.: Aug. 8, 2000); and DOD Competitive
Sourcing: Questions About Goals, Pace, and Risk of Key Reform Initiatives,
GAO/ NSIAD- 99- 46 (Washington, D. C.: Feb. 22, 1999). DOD Faces Other

Challenges in Meeting A- 76 Goals

Page 27 GAO- 03- 818 Defense Management difficulties in selecting and
grouping functions for A- 76 reviews or other sourcing alternatives.

OMB*s revised A- 76 circular states that standard competitions 33 shall
not exceed 12 months from public announcement (start date) to performance
decision (end date). Under certain conditions, a time limit waiver of no
more than 6 months can be granted. The revised circular also states that
agencies shall complete certain preliminary planning* such as scope,
baseline costs, and schedule* before public announcement. Even so DOD*s
studies have historically taken significantly longer than 12- 18 months.
DOD*s most recent data indicate that the studies take on average 20 months
for single- function studies and 35 months for multifunction studies. It
is not clear how much of this time was needed for planning that will now
be outside the revised circular*s study time frame.

Once DOD components found that the studies were taking longer than
initially projected, they realized that a greater investment of resources
would be needed than originally planned to conduct the studies. We
previously reported that the President*s 2001 budget showed a wide range
of projected study costs, from about $1,300 per position studied in the
Army to about $3,700 in the Navy. 34 DOD is now estimating costs at $3,000
per position for new studies beginning in fiscal year 2004. However, the
much larger number of studies required to be completed in the out- years
to meet OMB*s study goals could require DOD components to devote much
greater total resources to this effort than in the past.

In addition, DOD components, particularly the Air Force, are attempting to
shift military personnel away from commercial type functions to those more
directly related to warfighting. As noted above, because these functions
are not being eliminated, new operations and maintenance account funds
will have to be provided to pay for the additional civilians or
contractors that perform the function( s) currently being performed by
uniformed personnel. As previously mentioned in the report, the Air Force
alone has recently estimated this additional cost to be about $5 billion
over the next 5 years.

33 Streamlined competitions allow for an abbreviated source selection for
65 or fewer civilian positions and/ or any number of military personnel.
Streamlined competitions are to be completed within 90 days, with a
possible extension of no more than 45 days.

34 GAO/ NSIAD- 00- 106.

Page 28 GAO- 03- 818 Defense Management This is an issue other services
have also encountered in the past and will in the future as they plan to
shift military personnel away from

commercial positions into warfighting positions, either as a result of its
core assessment or as part of its A- 76 studies. We have not seen precise,
reliable figures on the extent to which these conversions may occur, and
the extent to which all affected military personnel would be needed in
warfighting positions. In the past we identified instances where service

components were required to absorb these costs without additional
resources. We recommended in our 2000 report that the Secretary of Defense
take steps to ensure that the services increase funding for operation and
maintenance accounts, as necessary, to fund the civilian and contractor
personnel replacing military positions that have been transferred to meet
other needs. 35 The department acknowledged that this practice would
require the services to program additional funding for operation and
maintenance accounts, viewing this as a service investment decision.
However, given the increased emphasis the department has placed on moving
the military from commercial functions to warfare, officials from the Army
and the Air Force have expressed concern that there were not adequate
funds to replace the military with civilian or contractor personnel once
their positions have been competed or transferred. This can have the
effect of either limiting the number of conversions that can be made or
requiring Defense components to absorb the costs within their existing
budgets, creating limitations in other program areas.

As we have previously reported, selecting and grouping functions and
positions to compete can also be difficult. Some functions may be spread
across different geographic locations or may fulfill a roll that blurs the

distinction between *commercial* and *inherently governmental,* thus
preventing the packaging of some commercial positions into suitable groups
for competition. In addition, as previously noted, DOD excluded certain
commercial functions in its FAIR Act inventories from competition. DOD*s
fiscal year 2002 FAIR Act inventory exempted 171,698 positions from
competition because of statutory, national security, or operational
concerns. Further, as we have previously reported, most services have
already faced growing difficulties in finding enough study candidates to
meet their A- 76 study goals. 36 Finally, use of alternatives

35 GAO/ NSIAD- 00- 106. 36 GAO/ NSIAD- 00- 106.

Page 29 GAO- 03- 818 Defense Management under the core- competency
approach could also limit positions available for A- 76 study.

Progress varies among DOD components in assessing core competencies and
identifying and pursuing alternative sourcing strategies. Even so, some
limitations have been identified which indicate that, contrary to some
initial expectations, the determination of whether a function is core by

itself will not automatically lead to a sourcing decision because, as the
Army has discovered, other factors can also affect sourcing decisions.
Clarification of the department*s expectations for sourcing decisions is
needed along with additional guidance on other factors that may need to be
considered in sourcing decisions. Otherwise, the components may be

left with unrealistic expectations on making sourcing decisions or they
may make changes in sourcing that later prove to be problematic.

Under the core- competency process, the Air Force identified large numbers
of military personnel who could be reassigned to meet other military
requirements and be replaced by civilian or contractor personnel who may
be a more economical alternative. However, to accomplish this
reassignment, Air Force officials stated that it would need to find funds
for replacement personnel out of operations and maintenance accounts. This
is indicative of what other services are likely to face in seeking to
accomplish such conversions* the need for additional funding in

operations and maintenance accounts to support these conversions. Such
conversions may be a more cost- effective alternative than simply
increasing military end- strength where shortages exist in military
positions. However, decisions to replace military personnel with civilians
or contractors without identifying sources for increases in operations and
maintenance funds to support those decisions could stress the ability of
the operations and maintenance account to meet other pressing needs.

We recommend that the Secretary of Defense, through the Senior Executive
Council, clarify its expectations for DOD components in making sourcing
decisions based on core competency assessment results and provide
additional guidance identifying the range of additional factors to be
considered once the determination is made that a function is not
considered core.

We also recommend that the Secretary of Defense require DOD components to
ensure that decisions to convert functions performed by military personnel
to performance by civilians or contractors are Conclusions

Recommendations

Page 30 GAO- 03- 818 Defense Management predicated on having clearly
identified sources of funding to support those decisions.

The Principal Assistant Deputy Under Secretary of Defense (Installations
and Environment) provided written comments on a draft of this report. The
department generally concurred with our recommendations. With respect to
our first recommendation, the department agreed that, in addition to the
determination of core competency, there are additional steps necessary to
making effective sourcing decisions. However, the response did not
indicate what specific guidance, if any, would be provided to clarify and
assist the components in making sourcing determinations. Instead, the
department suggested that core assessments would be used as input to the
Inherently Governmental Commercial Activities Inventory and that the
department*s guidance on how to prepare these inventories will be
continually refined to help the sourcing decision process. To the extent
the department continues to emphasize core competency assessments and
alternatives to A- 76 competitions in making sourcing decisions, we still
believe that additional guidance is needed to assist components on factors
other than the designation of core or non- core that need to be considered
when making a souring decision.

With respect to the second recommendation, the department agreed that the
identification of adequate resources is a critical factor in meeting its
competitive sourcing goals and, consequently, the response ensures that
they will be properly funded. The department also provided a number of
technical comments, which we incorporated into the report, where
appropriate. The department*s comments are reprinted in their entirety in
appendix V. As requested by the Ranking Minority Member of the House
Committee on

Armed Services, Subcommittee on Readiness, we reviewed DOD*s plans for
sourcing non- core functions and the effect this may have on its A- 76
program. Specifically, the objectives of this report were to assess (1)
the department*s progress in assessing its core functions as a basis for
sourcing decisions, (2) the plans and progress DOD has made in identifying
and implementing alternatives to A- 76, and (3) the current status of
DOD*s A- 76 program.

To evaluate the department*s progress in assessing its core functions as a
basis for sourcing decisions, we met with responsible officials from the
Senior Executive Council, the Business Initiative Council, and the Office
of the Secretary of Defense to identify plans and guidance for this Agency
Comments

and Our Evaluation Scope and Methodology

Page 31 GAO- 03- 818 Defense Management initiative. We also met with
officials from the Army, the Air Force, the Navy, the Marine Corps, and
the Defense Logistics Agency to identify their

implementation plans, guidance, and analyzed available data to assess
progress being made. Our work was conducted in the Washington, D. C.,
metropolitan area.

To evaluate the plans and progress DOD has made in identifying and
implementing alternatives to A- 76, we met with officials in organizations
identified above and obtained and analyzed relevant documentation
pertaining to alternatives identified. Additionally, we spoke with
representatives from the Defense Contract Management Agency and the
Defense Finance and Accounting Service about their Pioneer projects.

Likewise, to assess the status of DOD*s A- 76 program, we met with
cognizant officials within DOD and its key components to update
information we had previously obtained in other recent studies in this
area concerning studies planned and completed and we updated information

we had previously obtained regarding challenges associated with this
program. Data on the number of A- 76 competitions used in this report were
based on DOD*s Commercial Activities Management Information System (CAMIS)
Web- based system. Because the numbers change daily, what we reported are
the precise figures in the database at the specified point in time. We
have previously identified limitations in accuracy and completeness of
data included in this system, which limit the precision of

information included in the system. Since then, the department has made
changes to improve the accuracy of data in the system, and the database
remains the principal source of aggregate information on studies underway
and completed. However, we did not audit the accuracy of the numbers in
the database. We conducted our review from October 2002 to May 2003 in
accordance with generally accepted government auditing standards.

We are sending copies of this report to the appropriate congressional
committees; the Secretary of Defense; the Secretaries of the Army, the
Navy, and the Air Force; the Commandant of the Marine Corps; and the
Director, Office of Management and Budget. We will make copies available
to others upon request. In addition, the report will be available at no
charge on the GAO Web site at http:// www. gao. gov.

Page 32 GAO- 03- 818 Defense Management If you or your staff have
questions regarding this report, please contact me on (202) 512- 8412 or
holmanb@ gao. gov. Other contacts and key

contributors to this report are listed in appendix VI. Sincerely yours,

Barry W. Holman, Director Defense Capabilities and Management

Appendix I: Alternatives to A- 76 for Sourcing Non- Core Competencies

Page 33 GAO- 03- 818 Defense Management In its April 2002 memo, the Senior
Executive Council noted that *there are a number of imaginative
alternatives to DOD ownership of Non- Core

competencies.* The memo provided detailed information on six specific
alternatives* employee stock ownership plans, transitional benefit
corporations, negotiation with private sector, city- base partnership,
strategic partnering, and quasi- government corporations. Following is a
description of the concept, an example of usage within the government, and
recommended Internet sites for each alternative, based on the Senior
Executive Council memo.

Concept: Mechanism used to spin off existing government activities to form
an employee- owned company.

Description: The ESOP gives federal workers the ability to control their
own destiny and obtain a stake in the successful outcome of a new
business. ESOP is a contribution benefit plan that buys and holds company
stock. Shares in the trust are allocated to individual employee accounts.
While many privatizations result in layoffs and disruptions, ESOPs save
jobs, retain critical skills, and provide seamless customer service to
federal agencies.

Where Used Previously: U. S. Investigative Services (1995)

Internet Sites: http:// www. nceo. org/ esops/ index. html and http://
americancapitalonline. com/ datacenter/ articleaspArticleID145. html
Concept: Umbrella organization created to facilitate smooth transition of

government employees.

Description: The TBC is designed to transition employees to the private
sector while maintaining their federal benefits. Normally, a transition
period is established where the government continues to pay for the
benefits and then the new private company will eventually pay for those
benefits back through the federal government. In addition, the TBC can
contract with the private sector and partner with other governmental,
private sector, educational or not- for- profit entities. It maintains
core capabilities, preserves expertise of key personnel, finds a *soft
landing* for underutilized workers, creates business environment for new
growth, and

provides a new business model for the government. Appendix I: Alternatives
to A- 76 for Sourcing

Non- Core Competencies Employee Stock Ownership Plans (ESOP)

Transitional Benefit Corporations (TBC)

Appendix I: Alternatives to A- 76 for Sourcing Non- Core Competencies

Page 34 GAO- 03- 818 Defense Management Where Used Previously: Department
of Energy

Internet Site: http:// www. reedsmith. com/ db30/ cgi- bin/ pubs/
a76costs. pdf

Concept: Negotiated transfer of government workforce to a private company.

Description: Negotiate with the private sector in the outsourcing of a
government function to the private sector. However, the government
negotiates to have the workers who performed the function be hired by the
contractor. The goal is to get the employees comparable pay, at the

same location (for an agreed upon minimum time period), and a matched
retirement plan. It offers stability that a normal A- 76 cost comparison
study does not provide.

Where Used Previously: Army Logistics Data System Modernization with CSC
Corporation

Internet Sites: http:// www. gcn. com/ vol20 no6/ news/ 3836- 1. html and
http:// www. csc. com/ newsandevents/ news/ 720. shtml Concept:
Transforming a military installation to city- owned property with

military, public, non- profit, and commercial tenants occupying and
leasing facilities.

Description: City Base is transforming a former military installation to
city- owned property with military, public, non- profit, and commercial
tenants occupying and leasing facilities. The service conveys the
installation to the city and then leases back the facilities needed for
mission operations. The city may contract with a third party to manage and
develop the property.

Where Used Previously: Brooks Air Force Base and the City of San Antonio,
Texas. The Air Force created the Brooks City- Base Partnership with the
city of San Antonio as a means to reduce Air Force base operating and
personnel cost and to promote public- public and public- private

partnerships. Special authorizing legislation in 1999 and 2000 allowed
such partnership in which the Air Force transferred real property to San
Antonio in July 2002 in exchange for a leaseback of facilities and for the
city to provide municipal services such as fire protection and law
Negotiation with Private

Sector (i. e., transfer workforce to the private sector as part of a
contract negotiation)

City- Base Partnership

Appendix I: Alternatives to A- 76 for Sourcing Non- Core Competencies

Page 35 GAO- 03- 818 Defense Management enforcement. Also, the Army has
implemented a similar type of partnership with the city of Monterey,
California. Internet Site: http:// www. ci. sat. tx. us/ edd/ brooks/
citybasedef. htm

Concept: Similar to negotiating with the private sector, this establishes
a government- industry partnership and leverages the expertise of the
commercial marketplace.

Description: Strategic partnering moves a function and employees away from
the government. The function is not given to a private corporation but is
*taken over* by the employees. However, the employees do not form a stand-
alone corporation, but instead, a partnership with the private

company. It is used when an organization has many of the necessary
elements for operating as a private company, but does not have the
complete framework necessary to operate as a stand- alone corporation
(payroll, benefits programs, taxes, marketing, and business development).
A strategic partnership allows the employees to partner with an entity
that already has these systems and procedures in place. Such partnering

arrangements could be made with a private firm, joint venture, or a non-
profit organization. Where Used Previously: National Security Agency
(NSA)* CSC- led

group with Logicon (Northrup Grumman) and dozens of *Alliance* contractors

Internet Site: http:// www. reedsmith. com/ db30/ cgi- bin/ pubs/
a76costs. pdf Concept: Publicly owned, common stock corporation, chartered
by Congress and provided a marketplace niche in which to accomplish some
public good. They can be monopolies (e. g., the U. S. Postal Service) or
competitors (e. g., Fannie Mae and Freddie Mac). Description: Quasi-
government corporations are an alternative similar to

the non- profit corporation. The principal difference is that it is
established by a government agency in order to serve a governmental
purpose, rather than being established by private individual firms. The
employees are not federal civil servants and do not participate in the
federal retirement or

other federal employee benefit systems. The advantages are that they can
operate more flexibly than a government agency and they are not required
Strategic Partnering Quasi- Government

Corporations

Appendix I: Alternatives to A- 76 for Sourcing Non- Core Competencies

Page 36 GAO- 03- 818 Defense Management to comply with all of the federal
personnel rules and acquisition regulations. Where Used Previously: Fannie
Mae, Freddie Mac

Internet Sites: http:// www. reedsmith. com/ db30/ cgi- bin/ pubs/
a76costs. pdf and http:// www. auditor. leg. state. mn. us/ fyi19a7. htm

Appendix II: Army*s Plans for Transforming Its In- House Industrial
Facilities

Page 37 GAO- 03- 818 Defense Management In 2002, the Army*s *Third Wave*
initiative received much public attention because of what Army officials
have characterized as an unrelated, but parallel effort underway whereby
RAND, under contract to the Army,

was studying alternatives for rightsizing the Army*s government- owned
ammunition manufacturing facilities and two arsenals that manufacture
ordnance materiel* facilities that overall had been recognized as having
declining workloads, excess capacity, and high operating costs.

Although RAND had studied various options, such as privatization and
creation of a federal government corporation, the Army decided in March
2003 not to pursue the options outlined in what was then a draft RAND
report. Instead, in a March 24, 2003 memorandum to the Commanding General,
U. S. Army Materiel Command (AMC), the Secretary of the Army directed the
following actions to transform the Army owned portion of its defense
industrial base to include ammunition facilities, manufacturing arsenals,
and also its maintenance depots:

 AMC was directed to develop a written concept for consolidation,
divestiture, or leasing, as appropriate, of the government- owned/
government- operated and governmentowned/ contractor- operated ammunition
facilities.  AMC was directed to continue to work towards reducing
governmentowned and operated manufacturing arsenal plant capacity and
develop internal efficiency measures for facilities responsible for
ground- based

systems.  AMC was directed to use existing legal authority to form and
maintain

partnerships between government- owned and operated maintenance depots and
the private sector, and implement initiatives to improve efficiencies,
optimize utilization, and upgrade the core capabilities required to meet
current and future requirements. Appendix II: Army*s Plans for
Transforming

Its In- House Industrial Facilities

Appendix III: Senior Executive Council Definitions of Core Competency

Page 38 GAO- 03- 818 Defense Management In attempting to define core
competency in a defense environment, the Senior Executive Council defined
core as *A complex harmonization of

individual technologies and *production* (employment, delivery) skills
that create unique military capabilities valued by the force employing
CINC!* The Council provided the following additional definitions to help
in the understanding of core:

 Proficiency in the coordination of human activity and employment of
technology and technical systems to conduct military operations called for
by a CINC.  A complex integration of human knowledge and skills with the

technologies of warfare to accomplish a military objective of value to a
commander.  It*s what we do better than anyone else to produce specific
effects desired

by a CINC.  The essence of what we provide in world- class warfighting
and related

unique capabilities* through a synergistic combination of knowledge,
technologies, and people* to produce desired effects for CINCs.  The deep
commitment of people, using technologies and delivering

capabilities to meet a desired effect in support of national objectives. 
A synergistic employment of individual and organizational knowledge,

technologies, and capabilities producing world- class services (military
operations) to deliver a desired effect to a CINC. Appendix III: Senior
Executive Council

Definitions of Core Competency

Appendix IV: Pioneer Projects Page 39 GAO- 03- 818 Defense Management In
support of the Senior Executive and Business Initiative Councils*
direction to identify alternative approaches to A- 76 for selected non-
core competencies, the services and Defense agencies identified 10 pilot
*pioneer* projects. All 10 were approved by the Business Initiative
Council and presented to the Office of Management and Budget. Eight of the
projects were approved by OMB to be counted toward DOD*s FAIR Act
inventory goal. OMB endorsed the pioneer projects whose techniques were
waivers to A- 76, new requirements, direct service contract, and

divestiture, but disapproved the projects that proposed reengineering as
their technique. Subsequently, DOD withdrew 2 projects, leaving 6 pilot
projects for implementation. A brief description of those projects and
their current status is provided below.

Description: Optical fabrication involves eyewear component production and
assembly and is performed at about 37 locations within and outside of the
United States, employing personnel in the Departments of the Navy and
Army. The Department of the Navy has the lead responsibility for this
pioneer project and is now starting its analysis of this divestiture
proposal. It anticipates that the analysis will take approximately 6 to 18
months to complete. A final decision regarding the optical fabrication
divestiture will be made after the completion of the analysis.

Alternative: Divestiture

Positions Affected: Approximately 69 civilians and 300 military

Status: Conceptual Stage

Description: The Brooks City- Base Partnership involves a partnership
between the Air Force and the city of San Antonio for which the Congress
passed special authorizing legislation in 1999 and 2000. This divestiture
was a way to reduce Air Force base operating and personnel cost and build
public- public and public- private partnerships. As part of this effort,
the Air Force transferred Brooks Air Force Base*s real property to San
Antonio in July 2002 in exchange for a leaseback of facilities and for the
city to provide municipal services such as fire protection, law
enforcement, custodial and landscaping. Also, as part of this partnering
arrangement, the city of San Antonio will provide the Air Force a share of
the revenues generated from the contracts and developments resulting from
the land and facilities transferred. Appendix IV: Pioneer Projects

Department of the Navy: Ophthalmic Services

Department of the Air Force: Brooks City- Base

Appendix IV: Pioneer Projects Page 40 GAO- 03- 818 Defense Management
Alternative: Divestiture

Positions Affected: Approximately 100 civilian and 40 military

Status: Ongoing.

Description: According to its current arrangement with the city of
Monterey, California, the Department of the Army proposed the Municipal
Services Partnership for Base Support as its pioneer project. The Army is
seeking legislative authority for all components within the department to
be able to contract directly with local governments for municipal services
such as public works and utility.

Alternative: Direct Service Contract Positions Affected: Approximately 500
civilian employees (depending upon the number of installations selected
for this type of contract).

Status: Enabling legislation has been submitted to Congress for
consideration as part of the fiscal year 2004 authorization process.

The Army is conducting business case analyses for additional installation
selection in the event the legislation is approved. However, as of May
2003, this proposal was not included in either the House or Senate
approved versions of the bill.

Description: The Defense Logistics Agency (DLA) is proposing that the
repair and rebuilding of depot- level industrial plant equipment by in-
house personnel at the Defense Supply Center Richmond*s facility in
Mechanicsburg, Pennsylvania, be subject to direct conversion through an A-
76 waiver in accordance with the Office of Management and Budget Circular
A- 76*s Revised Supplement Handbook, part I, chapter I, section E.

Alternative: Waiver to A- 76 Full Cost Comparison Study

Positions Affected: Approximately 82 civilians Department of the Army:

Municipal Services Partnership for Base Support

Defense Logistics Agency: Metalworking Machinery Repair/ Rebuild Services

Appendix IV: Pioneer Projects Page 41 GAO- 03- 818 Defense Management
Status: DOD assessed the applicability of OMB Circular A- 76 to this
function and determined that the Mechanicsburg facility is a depot level
maintenance and repair operation and is therefore exempt from OMB

Circular A- 76.

Description: The Defense Contract Management Agency plans to use a
streamlined A- 76 approach to compete information technology functions
such as desk side support, district offices* information technology

operations, and automated application testing. The streamlined A- 76
approach will allow the Defense Contract Management Agency to directly
compare its costs for these types of functions with those of contractors
on the General Services Administration*s schedules. Also, it will shorten
the time for completing the A- 76 process.

Alternative: Streamlined A- 76

Positions Affected: 450 positions reviewed, approximately 250 positions
affected

Status: Streamlined A- 76 effort is scheduled to start January 2004 with
anticipated implementation of the most efficient organization and/ or
contracts by fiscal year 2005.

Description: The Defense Finance and Accounting Service (DFAS) is
proposing to acquire computer management services from a commercial
source. As part of this effort, DFAS plans to use a performance- based
service contract to obtain desktop hardware, software, and support
services.

Alternative: New Requirement

Positions Affected: Approximately 125 civilians Status: DFAS notified
Congress of this proposal and its plans to assess desktop management
services. DFAS has completed its desktop management business case
assessment and its announcement regarding that decision is imminent.
Defense Contract

Management Agency: Reengineer Existing Information Technology Structure

Defense Finance and Accounting Service: Desktop Management Services

Appendix V: Comments from the Department of Defense

Page 42 GAO- 03- 818 Defense Management Appendix V: Comments from the
Department of Defense

Appendix V: Comments from the Department of Defense Page 43 GAO- 03- 818
Defense Management

Appendix VI: GAO Contact and Staff Acknowledgments

Page 44 GAO- 03- 818 Defense Management Marilyn K. Wasleski (202) 512-
8436 In addition to the names above, Debra McKinney, Nancy Lively, R. K.
Wild, Daniel Kostecka, and Kenneth Patton also made significant
contributions

to this report. Appendix VI: GAO Contact and Staff

Acknowledgments GAO Contact Acknowledgments

Related GAO Products Page 45 GAO- 03- 818 Defense Management Sourcing and
Acquisition: Challenges Facing the Department of Defense.

GAO- 03- 574T. Washington, D. C.: March 19, 2003. Proposed Revisions to
OMB Circular A- 76. GAO- 03- 391R. Washington, D. C.: January 16, 2003.

Defense Management: New Management Reform Program Still Evolving.

GAO- 03- 58. Washington, D. C.: December 12, 2002.

Commercial Activities Panel: Improving the Sourcing Decisions of the
Federal Government. GAO- 02- 847T. Washington, D. C.: September 27, 2002.

Commercial Activities Panel: Improving the Sourcing Decisions of the
Federal Government. GAO- 02- 866T. Washington, D. C.: June 26, 2002.

Competitive Sourcing: Challenges in Expanding A- 76 Governmentwide.

GAO- 02- 498T. Washington, D. C.: March 6, 2002.

DOD Competitive Sourcing: A- 76 Program Has Been Augmented by Broader
Reinvention Options. GAO- 01- 907T. Washington, D. C.: June 28, 2001.

DOD Competitive Sourcing: Effects of A- 76 Studies on Federal Employees*
Employment, Pay, and Benefits Vary. GAO- 01- 388. Washington, D. C.: March
16, 2001.

DOD Competitive Sourcing: Results of A- 76 Studies Over the Past 5 Years.
GAO- 01- 20. Washington, D. C.: December 7, 2000.

DOD Competitive Sourcing: More Consistency Needed in Identifying
Commercial Activities. GAO/ NSIAD- 00- 198. Washington, D. C.: August 11,
2000.

DOD Competitive Sourcing: Savings Are Occurring, but Actions Are Needed to
Improve Accuracy of Savings Estimates. GAO/ NSIAD- 00- 107. Washington, D.
C.: August 8, 2000.

DOD Competitive Sourcing: Some Progress, but Continuing Challenges Remain
in Meeting Program Goals. GAO/ NSIAD- 00- 106. Washington, D. C.: August
8, 2000.

Competitive Contracting: The Understandability of FAIR Act Inventories Was
Limited. GAO/ GGD- 00- 68. Washington, D. C.: April 14, 2000. Related GAO
Products

Related GAO Products Page 46 GAO- 03- 818 Defense Management DOD
Competitive Sourcing: Potential Impact on Emergency Response Operations at
Chemical Storage Facilities Is Minimal.

GAO/ NSIAD- 00- 88. Washington, D. C.: March 28, 2000.

DOD Competitive Sourcing: Plan Needed to Mitigate Risks in Army Logistics
Modernization Program. GAO/ NSIAD- 00- 19. Washington, D. C.: October 4,
1999.

DOD Competitive Sourcing: Air Force Reserve Command A- 76 Competitions.
GAO/ NSIAD- 99- 235R. Washington, D. C.: September 13, 1999.

DOD Competitive Sourcing: Lessons Learned System Could Enhance A- 76 Study
Process. GAO/ NSIAD- 99- 152. Washington, D. C.: July 21, 1999. Defense
Reform Initiative: Organization, Status, and Challenges.

GAO/ NSIAD- 99- 87. Washington, D. C.: April 21, 1999.

Quadrennial Defense Review: Status of Efforts to Implement Personnel
Reductions in the Army Materiel Command. GAO/ NSIAD- 99- 123. Washington,
D. C.: March 31, 1999.

Defense Reform Initiative: Progress, Opportunities, and Challenges.

GAO/ T- NSIAD- 99- 95. Washington, D. C.: March. 2, 1999.

Force Structure: A- 76 Not Applicable to Air Force 38th Engineering
Installation Wing Plan. GAO/ NSIAD- 99- 73. Washington, D. C.: February
26, 1999.

Future Years Defense Program: How Savings From Reform Initiatives Affect
DOD*s 1999- 2003 Program. GAO/ NSIAD- 99- 66. Washington, D. C.: February
25, 1999.

DOD Competitive Sourcing: Results of Recent Competitions.

GAO/ NSIAD- 99- 44. Washington, D. C.: February 23, 1999.

DOD Competitive Sourcing: Questions About Goals, Pace, and Risks of Key
Reform Initiative. GAO/ NSIAD- 99- 46. Washington, D. C.: February 22,
1999.

OMB Circular A- 76: Oversight and Implementation Issues.

GAO/ T- GGD- 98- 146. Washington, D. C.: June 4, 1998.

Related GAO Products Page 47 GAO- 03- 818 Defense Management Quadrennial
Defense Review: Some Personnel Cuts and Associated Savings May Not Be
Achieved. GAO/ NSIAD- 98- 100. Washington, D. C.:

April 30, 1998.

Competitive Contracting: Information Related to the Redrafts of the
Freedom From Government Competition Act. GAO/ GGD/ NSIAD- 98- 167R.
Washington, D. C.: April 27, 1998.

Defense Outsourcing: Impact on Navy Sea- Shore Rotations.

GAO/ NSIAD- 98- 107. Washington, D. C.: April 21, 1998.

Defense Infrastructure: Challenges Facing DOD in Implementing Defense
Reform Initiatives. GAO/ T- NSIAD- 98- 115. Washington, D. C.: March 18,
1998.

Defense Management: Challenges Facing DOD in Implementing Defense Reform
Initiatives. GAO/ T- NSIAD/ AIMD- 98- 122. Washington, D. C.: March 13,
1998.

Base Operations: DOD*s Use of Single Contracts for Multiple Support
Services. GAO/ NSIAD- 98- 82. Washington, D. C.: February 27, 1998.

Defense Outsourcing: Better Data Needed to Support Overhead Rates for A-
76 Studies. GAO/ NSIAD- 98- 62. Washington, D. C.: February 27, 1998.

Outsourcing DOD Logistics: Savings Achievable But Defense Science Board*s
Projections Are Overstated. GAO/ NSIAD- 98- 48. Washington, D. C.:
December 8, 1997.

Financial Management: Outsourcing of Finance and Accounting Functions.
GAO/ AIMD/ NSIAD- 98- 43. Washington, D. C.: October 17, 1997. Base
Operations: Contracting for Firefighters and Security Guards.

GAO/ NSIAD- 97- 200BR. Washington, D. C.: September 12, 1997.

Terms Related to Privatization Activities and Processes. GAO/ GGD- 97-
121. Washington, D. C.: July 1, 1997.

Related GAO Products Page 48 GAO- 03- 818 Defense Management Defense
Outsourcing: Challenges Facing DOD as It Attempts to Save Billions in
Infrastructure Costs. GAO/ T- NSIAD- 97- 110. Washington, D. C.:

March 12, 1997.

Base Operations: Challenges Confronting DOD as It Renews Emphasis on
Outsourcing. GAO/ NSIAD- 97- 86. Washington, D. C.: March 11, 1997.

(350292)

The General Accounting Office, the audit, evaluation and investigative arm
of Congress, exists to support Congress in meeting its constitutional
responsibilities and to help improve the performance and accountability of
the federal government for the American people. GAO examines the use of
public funds; evaluates federal programs and policies; and provides
analyses, recommendations, and other assistance to help Congress make
informed oversight, policy, and funding decisions. GAO*s commitment to
good government is reflected in its core values of accountability,
integrity, and reliability.

The fastest and easiest way to obtain copies of GAO documents at no cost
is through the Internet. GAO*s Web site (www. gao. gov) contains abstracts
and fulltext files of current reports and testimony and an expanding
archive of older products. The Web site features a search engine to help
you locate documents using key words and phrases. You can print these
documents in their entirety, including charts and other graphics.

Each day, GAO issues a list of newly released reports, testimony, and
correspondence. GAO posts this list, known as *Today*s Reports,* on its
Web site daily. The list contains links to the full- text document files.
To have GAO e- mail

this list to you every afternoon, go to www. gao. gov and select
*Subscribe to daily E- mail alert for newly released products* under the
GAO Reports heading.

The first copy of each printed report is free. Additional copies are $2
each. A check or money order should be made out to the Superintendent of
Documents. GAO also accepts VISA and Mastercard. Orders for 100 or more
copies mailed to a single address are discounted 25 percent. Orders should
be sent to: U. S. General Accounting Office 441 G Street NW, Room LM
Washington, D. C. 20548 To order by Phone: Voice: (202) 512- 6000

TDD: (202) 512- 2537 Fax: (202) 512- 6061

Contact: Web site: www. gao. gov/ fraudnet/ fraudnet. htm E- mail:
fraudnet@ gao. gov Automated answering system: (800) 424- 5454 or (202)
512- 7470 Jeff Nelligan, Managing Director, NelliganJ@ gao. gov (202) 512-
4800

U. S. General Accounting Office, 441 G Street NW, Room 7149 Washington, D.
C. 20548 GAO*s Mission Obtaining Copies of

GAO Reports and Testimony

Order by Mail or Phone To Report Fraud, Waste, and Abuse in Federal
Programs Public Affairs
*** End of document. ***