Competitive Sourcing: Implementation Will Be Key to Success of	 
New Circular A-76 (26-JUN-03, GAO-03-943T).			 
                                                                 
In May 2003, the Office of Management and Budget (OMB) issued a  
new Circular A-76--which sets forth the government's competitive 
sourcing process. Determining whether to obtain services in-house
or through commercial contracts is an important economic and	 
strategic decision for agencies, and the use of A-76 is expected 
to grow throughout the federal government. In the past, however, 
the A-76 process has been difficult to implement, and the impact 
on the morale of the federal workforce has been profound.	 
Moreover, there have been concerns in both the public and private
sectors about the timeliness and fairness of the process and the 
extent to which there is a "level playing field" for conducting  
public-private competitions. It was against this backdrop that	 
the Congress enacted legislation mandating a study of the	 
government's competitive sourcing process, which was carried out 
by the Commercial Activities Panel, which was chaired by the	 
Comptroller General of the United States. This testimony focuses 
on how the new Circular addresses the Panel's recommendations	 
with regard to providing a better foundation for competitive	 
sourcing decisions, and the challenges agencies may face in	 
implementing the new A-76.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-943T					        
    ACCNO:   A07385						        
  TITLE:     Competitive Sourcing: Implementation Will Be Key to      
Success of New Circular A-76					 
     DATE:   06/26/2003 
  SUBJECT:   Best practices					 
	     Cost control					 
	     Federal procurement				 
	     Federal procurement policy 			 
	     Procurement planning				 
	     Strategic planning 				 
	     Competitive procurement				 

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GAO-03-943T

Testimony Before the Committee on Government Reform, House of
Representatives

United States General Accounting Office

GAO For Release on Delivery Expected at 10: 00 a. m. EDT Thursday, June
26, 2003 COMPETITIVE SOURCING

Implementation Will Be Key to Success of New Circular A- 76

Statement of David M. Walker Comptroller General of the United States

GAO- 03- 943T

Overall, the new Circular is generally consistent with the principles and
recommendations that the Commercial Activities Panel reported in April
2002, and should provide an improved foundation for competitive sourcing
decisions in the federal government. In particular, the new Circular
permits greater reliance on procedures in the Federal Acquisition
Regulation* which should result in a more transparent and consistently
applied competitive process* as well as source selection decisions based
on tradeoffs between technical factors and cost. The new Circular also
suggests potential use of alternatives to the competitive sourcing
process, such as public- private and public- public partnerships and high-
performing organizations.

The new Circular should result in increased savings, improved performance,
and greater accountability. However, this initiative is a major change in
the way the government operates, and implementing the new Circular A- 76
will likely be challenging for many agencies. A major challenge agencies
will face will be meeting a 12- month limit for completing the standard
competition

process. This provision aims to respond to complaints about the length of
time taken to conduct A- 76 cost comparisons. However, GAO studies of
competitive sourcing at the Department of Defense (DOD) have found that
competitions can take much longer than 12 months. Other provisions in the
new Circular may also prove burdensome in implementation.

Lessons learned by DOD and other agencies as they initiate efforts to
improve acquisition, human capital, and information technology management
could prove invaluable as agencies implement the new A- 76 provisions*
especially those that demonstrate best competitive sourcing

practices. Successful implementation of the Circular*s provisions will
also likely require additional financial and technical support and
incentives. In May 2003, the Office of Management and Budget (OMB)

issued a new Circular A- 76* which sets forth the government*s competitive
sourcing process. Determining whether to obtain services in- house or
through commercial contracts is an important economic and strategic

decision for agencies, and the use of A- 76 is expected to grow throughout
the federal government. In the past, however, the A- 76 process has been
difficult to implement, and the impact on the

morale of the federal workforce has been profound. Moreover, there have
been concerns in both the public and private sectors

about the timeliness and fairness of the process and the extent to which
there is a *level playing field* for conducting public- private
competitions.

It was against this backdrop that the Congress enacted legislation
mandating a study of the government*s competitive sourcing process, which
was carried out by the Commercial Activities Panel, which was chaired by
the

Comptroller General of the United States. This testimony focuses on how
the new Circular addresses the Panel*s recommendations with regard to
providing a better foundation for competitive sourcing decisions, and the
challenges agencies may face in implementing the new A- 76.

www. gao. gov/ cgi- bin/ getrpt? GAO- 03- 943T. To view the full product,
including the scope and methodology, click on the link above. For more
information, contact William T. Woods at (202) 512- 8214, or woodsw@ gao.
gov. Highlights of GAO- 03- 943T, a testimony

before the House Committee on Government Reform

June 26, 2003

COMPETITIVE SOURCING

Implementation Will Be Key to Success of New Circular A- 76

Page 1 GAO- 03- 943T Competitive Sourcing Chairman Davis, Ranking Member
Waxman, and Members of the Committee:

I am pleased to be here today to participate in the Committee*s hearing on
the Office of Management and Budget*s (OMB) revised Circular A- 76. The
revisions to the Circular, released May 29, 2003, represent the most
comprehensive set of changes to the rules governing the competitive
sourcing of commercial services in the federal government since the
initial Circular A- 76 was issued in 1966.

Today*s hearing occurs at a critical and challenging time for federal
agencies. Agencies are responding to an environment in which new security
threats, demographic changes, rapidly evolving technologies, increased
pressure for demonstrable results, and serious and growing fiscal
imbalances demand that the federal government engage in a fundamental
review, reassessment, and reprioritization of its missions and operations.
Federal agencies are increasingly relying on enhanced technology and a
range of technical and support services to accomplish their missions.
Consequently, it is important for agencies to consider how best to acquire
and deliver such capabilities* including, in some cases, who the service
provider should be. Determining whether to obtain services in- house,
through contracts with

the private sector, or through a combination of the two* in other words,
through insourcing, outsourcing, or, in some cases, co- sourcing* is an
important economic and strategic decision for agency managers. In the
past, however, the government*s competitive sourcing process* set forth in
OMB Circular A- 76* has been difficult to implement. The impact of the A-
76 process on the morale of the federal workforce has been profound, and
there have been concerns in both the public and private sectors about the
timeliness and fairness of the process and the extent to which there is a
*level playing field* for conducting public- private competitions. While

Circular A- 76 competitions historically have represented only a small
portion of the government*s service contracting dollars, competitive
sourcing is expected to grow throughout the federal government.

It was against this backdrop that the Congress enacted legislation
mandating a study of the government*s competitive sourcing process. 1 This

1 Section 832, Floyd D. Spence National Defense Authorization Act for
Fiscal Year 2001, P. L. 106- 398 (Oct. 30, 2000).

Page 2 GAO- 03- 943T Competitive Sourcing study was carried out by the
Commercial Activities Panel, which I chaired. My comments today will focus
on how the new Circular addresses the

Panel*s recommendations with regard to providing a better foundation for
competitive sourcing decisions and the challenges agencies may face in
implementing the new A- 76. I will also highlight an important issue
involving the protest process under the new Circular.

Following a yearlong study, the Commercial Activities Panel in April 2002
reported its findings on competitive sourcing in the federal government.
The report lays out 10 sourcing principles and several recommendations,
which provide a roadmap for improving sourcing decisions across the
federal government. Overall, the new Circular is generally consistent with
these principles and recommendations.

The Commercial Activities Panel held 11 meetings, including three public
hearings in Washington, D. C.; Indianapolis, Indiana; and San Antonio,
Texas. In these hearings, the Panel heard repeatedly about the importance
of competition and its central role in fostering economy, efficiency, and
continuous performance improvement. Panel members heard first- hand about
the current process* primarily the cost comparison process conducted under
OMB Circular A- 76* as well as alternatives to that process. Panel staff
conducted extensive additional research, review, and analysis to
supplement and evaluate the public comments. Recognizing

that its mission was complex and controversial, the Panel agreed that a
supermajority of two- thirds of the Panel members would have to vote for
any finding or recommendation in order for it to be adopted. Importantly,
the Panel unanimously agreed upon a set of 10 principles it believed
should guide all administrative and legislative actions in competitive

sourcing. The Panel itself used these principles to assess the
government*s existing sourcing system and to develop additional
recommendations. New Circular

Provides an Improved Foundation for Competitive Sourcing Decisions

Page 3 GAO- 03- 943T Competitive Sourcing A supermajority of the Panel
agreed on a package of additional recommendations. Chief among these was a
recommendation that publicprivate

competitions be conducted using the framework of the Federal Acquisition
Regulation (FAR). Although a minority of the Panel did not support the
package of additional recommendations, some of these Panel members
indicated that they supported one or more elements of the package, such as
the recommendation to encourage high- performing organizations (HPO)
throughout the government. Importantly, there was a good faith effort to
maximize agreement and minimize differences among Panel members. In fact,
changes were made to the Panel*s report and recommendations even when it
was clear that some Panel members seeking changes were highly unlikely to
vote for the supplemental package of recommendations. As a result, on the
basis of Panel meetings and my personal discussions with Panel members at
the end of our deliberative process, I believe the major differences among
Panel members were few in number and philosophical in nature.
Specifically, disagreement centered primarily on (1) the recommendation
related to the role of cost in the new FAR- type process, and (2) the
number of times the Congress should be required to act on the new FAR-
type process, including whether the Congress should authorize a pilot
program to test that process for a specific time period.

As I noted previously, the new A- 76 Circular is generally consistent with
the Commercial Activities Panel*s sourcing principles and recommendations
and, as such, provides an improved foundation for competitive sourcing

Page 4 GAO- 03- 943T Competitive Sourcing decisions in the federal
government. In particular, the new Circular permits:

 greater reliance on procedures contained in the FAR, which should result
in a more transparent, simpler, and consistently applied competitive
process, and  source selection decisions based on tradeoffs between
technical

factors and cost. The new Circular also suggests potential use of
alternatives to the competitive sourcing process, such as public- private
and public- public partnerships and high- performing organizations. It is
not, however, specific as to how and when these alternatives might be
used.

If effectively implemented, the new Circular should result in increased
savings, improved performance, and greater accountability, regardless of
the service provider selected. However, this competitive sourcing
initiative is a major change in the way government agencies operate, and
successful

implementation of the Circular*s provisions will require that adequate
support be made available to federal agencies and employees, especially if
the time frames called for in the new Circular are to be achieved.

Implementing the new Circular A- 76 will likely be challenging for many
agencies. GAO*s past work on the competitive sourcing program at the
Department of Defense (DOD)* as well as agencies* efforts governmentwide
to improve acquisition, human capital, and information technology
management* has identified practices that have either advanced these
efforts or hindered them. The lessons learned from these experiences*
especially those that demonstrate best competitive sourcing practices*
could prove invaluable to agencies as they implement the

provisions in the new Circular. A major challenge agencies will face will
be meeting a 12- month limit for completing the standard competition
process in the new Circular. This provision is intended to respond to
complaints from all sides about the length of time taken to conduct A- 76
cost comparisons* complaints that the Panel repeatedly heard in the course
of its review. OMB*s new Circular states that standard competitions shall
not exceed 12 months from public announcement (start date) to performance
decision (end date). Under certain conditions, there may be extensions of
no more than 6 months. The new Circular also states that agencies shall
complete certain Ultimate Success of

Competitive Sourcing Will Depend on How It Is Implemented

Page 5 GAO- 03- 943T Competitive Sourcing preliminary planning steps
before a public announcement. We welcome efforts to reduce the time
required to complete these studies. Even so, our

studies of DOD competitive sourcing activities have found that
competitions can take much longer than the time frames outlined in the new
Circular. Specifically, DOD*s most recent data indicate that competitions
take on average 25 months. It is not, however, clear how much of this time
was needed for any planning that may now be outside the revised Circular*s
time frame. In commenting on OMB*s November 2002 draft proposal, we
recommended that the time frame be extended to perhaps 15 to 18 months
overall, and that OMB ensure that agencies

provide sufficient resources to comply with A- 76. In any case, we believe
additional financial and technical support and incentives will be needed
for agencies as they attempt to meet these ambitious time frames. Another
provision in the new Circular that may affect the timeliness of the
process is the *phased evaluation* approach* one of four approaches for
making sourcing selections. Under this approach, an agency evaluates
technical merit and cost in two separate phases. In the first phase,
offerors may propose alternate performance standards. If the agency
decides that a proposed alternate standard is desirable, it incorporates
the standard into the solicitation. All offerors may then submit revised
proposals in response to the new standard. In the second phase, the agency
selects the offeror who meets these new standards and offers the lowest
cost. While not in conflict with the principles or recommendations of the
Commercial Activities Panel, the approach, if used, may prove burdensome
in implementation, given the additional step involved in the solicitation.

DOD has been at the forefront of federal agencies in using the A- 76
process. We have tracked DOD*s progress in implementing its A- 76 program
since the mid- to- late- 1990s and have identified a number of challenges
that hold important lessons that civilian agencies should consider as they
implement their own competitive sourcing initiatives. 2 Notably:

 competitions took longer than initially projected, 2 U. S. General
Accounting Office, Competitive Sourcing: Challenges in Expanding A- 76
Governmentwide, GAO- 02- 498T (Washington, D. C.: Mar. 6, 2003). DOD*s
Competitive

Sourcing Lessons Provide Insight for Civilian Agencies

Page 6 GAO- 03- 943T Competitive Sourcing  costs and resources required
for the competitions were underestimated,

 selecting and grouping functions to compete was problematic, and 
determining and maintaining reliable estimates of savings was difficult.
DOD*s experience and our work identifying best practices 3 suggest that
several key areas will need sustained attention and communication by
senior leadership as agencies plan and implement their competitive
sourcing initiatives.

 Basing goals and decisions on sound analysis and integrating sourcing
with other management initiatives. Sourcing goals and targets should
contribute to mission requirements and improved performance and be based
on considered research and sound analysis of past activities. Agencies
should consider how competitive sourcing relates to strategic management
of human capital, improved financial performance, expanded reliance on
electronic government, and budget and performance integration, consistent
with the President*s Management

Agenda.  Capturing and sharing knowledge. The competition process is

ultimately about promoting innovation and creating more economical,
efficient, and effective organizations. Capturing and disseminating
information on lessons learned and providing sufficient guidance on how to
implement policies will be essential if this is to occur. Without

effectively sharing lessons learned and sufficient guidance, agencies will
be challenged to implement certain A- 76 requirements. For example,
calculating savings that accrue from A- 76 competitions, as required by
the new Circular, will be difficult or may be done inconsistently across
agencies without additional guidance, which will contribute to
uncertainties over savings.

3 U. S. General Accounting Office, Best Practices: Taking A Strategic
Approach Could Improve DOD*s Acquisition of Services, GAO- 02- 230
(Washington, D. C.: Jan. 18, 2002); U. S. General Accounting Office,
Information Technology: DOD Needs to Leverage Lessons Learned from Its
Outsourcing Projects, GAO- 03- 37 (Washington, D. C.: Apr. 25, 2003); U.
S. General Accounting Office, A Model of Strategic Human Capital
Management,

GAO- 02- 373SP (Washington, D. C.: Mar. 15, 2002); U. S. General
Accounting Office,

Acquisition Workforce: Status of Agency Efforts to Address Future Needs,
GAO- 03- 55 (Washington, D. C.: Dec. 18, 2002).

Page 7 GAO- 03- 943T Competitive Sourcing  Building and maintaining
agency capacity. Conducting competitions as fairly, effectively, and
efficiently as possible requires sufficient agency

capacity* that is, a skilled workforce and adequate infrastructure and
funding. Agencies will need to build and maintain capacity to manage
competitions, to prepare the in- house most- effective organization (MEO),
and to oversee the work* regardless of whether the private sector or the
MEO is selected. Building this capacity will likely be a challenge,
particularly for agencies that have not been heavily invested in
competitive sourcing previously. An additional challenge facing agencies
in managing this effort will be doing so while addressing highrisk areas,
such as human capital and contract management. In this regard, GAO has
listed contract management at the National Aeronautics and Space
Administration, the Department of Housing and Urban Development, and the
Department of Energy as an area of high risk. With a likely increase in
the number of public- private competitions and the requirement to hold
accountable whichever sector wins, agencies will need to ensure that they
have an acquisition workforce sufficient in numbers and abilities to
administer and oversee these arrangements effectively.

We recently initiated work to look at how agencies are implementing their
competitive sourcing programs. Our prior work on acquisition, human
capital, and information technology management* in particular, our work on
DOD*s efforts to implement competitive sourcing* provides a strong
knowledge base from which to assess agencies* implementation of this
initiative.

Finally, an important issue for implementation of the new Circular A- 76
is the right of in- house competitors to appeal sourcing decisions in
favor of the private sector. The Panel heard frequent complaints from
federal employees and their representatives about the inequality of
protest rights. While both the public and the private sectors had the
right under the earlier Circular to file appeals to agency appeal boards,
only the private sector had the right, if dissatisfied with the ruling of
the agency appeal

board, to file a bid protest at GAO or in court. Under the previous
version of the Circular, both GAO and the Court of Appeals for the Federal
Circuit held that federal employees and their unions were not *interested
parties* with the standing to challenge the results of A- 76 cost
comparisons.

The Panel recommended that, in the context of improving to the federal
government*s process for making sourcing decisions, a way be found to
level the playing field by allowing in- house entities to file a protest
at GAO, Protest Rights of In- house

Competitors

Page 8 GAO- 03- 943T Competitive Sourcing as private- sector competitors
have been allowed to do. The Panel also viewed the protest process as one
method of ensuring accountability to

assure federal workers, the private sector, and the taxpayer that the
competition process is working properly.

The new Circular provides a right to *contest* a standard A- 76
competition decision using procedures contained in the FAR for protests
within the contracting agencies. The new Circular thus abolishes the A- 76
appeal board process and instead relies on the FAR- based agency- level
protest process. An important legal question is whether the shift from the
cost comparisons under the prior Circular to the FAR- like public- private
competitions under the new one means that the in- house MEO should be
eligible to file a bid protest at GAO. If the MEO is allowed to protest,
there is a second question: Who will speak for the MEO and protest in its
name? To ensure that our legal analysis of these questions benefits from
input from everyone with a stake in this important area, GAO posted a
notice in the Federal Register on June 13, seeking public comment on these
and

several related questions. Responses are due by July 16, and we intend to
review them carefully before reaching our legal conclusion. While the new
Circular provides an improved foundation for competitive sourcing
decisions, implementing this initiative will undoubtedly be a significant
challenge for many federal agencies. The success of the competitive
sourcing program will ultimately be measured by the results achieved in
terms of providing value to the taxpayer, not the size of the inhouse or
contractor workforce or the number of positions competed to meet arbitrary
quotas. Successful implementation will require adequate technical and
financial resources, as well as sustained commitment by senior leadership
to establish fact- based goals, make effective decisions, achieve
continuous improvement based on lessons learned, and provide ongoing
communication to ensure federal workers know and believe that they will be
viewed and treated as valuable assets.

- - - - - Mr. Chairman, this concludes my statement. I will be happy to
answer any questions you or other Members of the Committee may have.
Conclusion

(120271)

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