Competitive Sourcing: Greater Emphasis Needed on Increasing	 
Efficiency and Improving Performance (27-FEB-04, GAO-04-367).	 
                                                                 
In August 2001, the administration announced competitive sourcing
as one of five initiatives in the President's Management Agenda. 
Under competitive sourcing, federal agencies open their 	 
commercial activities to competition among public and private	 
sector sources. While competitive sourcing is expected to	 
encourage innovation and improve efficiency and performance, it  
represents a major management change for most agencies. This	 
report describes the progress selected agencies have made in	 
establishing a competitive sourcing program, identifies major	 
challenges these agencies are facing, and discusses strategies	 
they are using to select activities for competition.		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-367 					        
    ACCNO:   A09383						        
  TITLE:     Competitive Sourcing: Greater Emphasis Needed on	      
Increasing Efficiency and Improving Performance 		 
     DATE:   02/27/2004 
  SUBJECT:   Comparative analysis				 
	     Competition					 
	     Federal procurement				 
	     Federal procurement policy 			 
	     Personnel management				 
	     Procurement planning				 
	     Source selection					 
	     Public-private competitions			 
	     President's Management Agenda			 

******************************************************************
** 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-04-367

United States General Accounting Office

GAO

                       Report to Congressional Requesters

February 2004

COMPETITIVE SOURCING

Greater Emphasis Needed on Increasing Efficiency and Improving Performance

GAO-04-367

Highlights of GAO-04-367, a report to the Honorable Robert C. Byrd, the
Honorable Susan M. Collins, the Honorable George

V. Voinovich, and the Honorable Henry A. Waxman

In August 2001, the administration announced competitive sourcing as one
of five initiatives in the President's Management Agenda. Under
competitive sourcing, federal agencies open their commercial activities to
competition among public and private sector sources. While competitive
sourcing is expected to encourage innovation and improve efficiency and
performance, it represents a major management change for most agencies.

This report describes the progress selected agencies have made in
establishing a competitive sourcing program, identifies major challenges
these agencies are facing, and discusses strategies they are using to
select activities for competition.

GAO is making three recommendations to the Office of Management and Budget
(OMB) to help agencies (1) ensure greater consistency in classifying
positions as either inherently governmental or commercial, (2) identify
functional areas for competition, and (3) focus competition plans more on
desired outcomes.

OMB concurred with our recommendations, but disagreed with the conclusion
that its recent guidance emphasizes process more than results. The seven
agencies GAO reviewed either agreed with the report, had no comments, or
offered only technical revisions.

www.gao.gov/cgi-bin/getrpt?GAO-04-367.

To view the full product, including the scope and methodology, click on
the link above. For more information, contact William Woods at (202)
512-8214 or [email protected].

February 2004

COMPETITIVE SOURCING

Greater Emphasis Needed on Increasing Efficiency and Improving Performance

Since the President announced competitive sourcing as a governmentwide
initiative, the six civilian agencies GAO reviewed created a basic
infrastructure for their competitive sourcing programs, including
establishing offices, appointing officials, hiring staff and consultants,
issuing guidance, and conducting training. With infrastructures in place
and leadership involvement, each agency has developed competitive sourcing
plans and conducted some competitions. The Department of Defense (DOD) has
had an extensive competitive sourcing program since the mid-1990s.
Interagency forums for sharing competitive sourcing information also have
been established.

While such activities are underway, each agency GAO reviewed, including
DOD, cited several significant challenges in achieving its competitive
sourcing goals. Key among these is maintaining workforce inventories that
distinguish inherently governmental positions from commercial positions-a
prerequisite to identifying potential positions to compete. Agencies also
have been challenged to develop competitive sourcing approaches that would
improve efficiency, in part because agencies have focused more on
following OMB guidance on the number of positions to compete-not on
achieving savings and improving performance. Ensuring adequate personnel
with the skills needed to run a competitive sourcing program also
challenged agencies. Many civilian department-level offices have only one
or two fulltime staff to interpret new laws, implement new OMB guidance,
maintain inventories of competable positions and activities, and oversee
agency competitions. The Federal Acquisition Council is currently
identifying agency staffing needs to address this challenge. Finally, some
of the civilian agencies we reviewed reported funding challenges in
implementing their competitive sourcing programs. OMB told agencies to
include a line item for competitive sourcing activities in their fiscal
year 2005 budget requests.

Several agencies integrated their strategic, human capital, and
competitive sourcing plans-an approach encouraged by the Commercial
Activities Panel, which was convened to conduct a congressionally mandated
study of the competitive sourcing process. For example, the Internal
Revenue Service (IRS) used business case analyses to assess the economic
benefits of various sourcing alternatives. An IRS official said this
approach required minimal investment to determine an activity's
suitability for competitive sourcing. The National Institutes of Health,
the Army, and the Department of Education also took a strategic approach
to competitive sourcing.

OMB's task in balancing the need for transparency and consistency with the
flexibility agencies need is not an easy one. While OMB is addressing
funding and human capital challenges, it needs to do more to assure that
the agencies' inventories of commercial positions and goal-setting
processes are more strategic and helpful to agencies in achieving savings
and improving performance.

Contents

  Letter

Results in Brief
Background
Agencies Have Established a Foundation for Their Competitive

Sourcing Programs Many Agencies Face Challenges in Implementing

Competitive Sourcing Some Agencies Used Strategic Approach to Identify and
Prioritize

Activities for Competition Conclusion Recommendations for Executive Action
Agency Comments and Our Evaluation

                                       1

                                      2 4

                                       7

11

20 23 23 24

Appendix I Scope and Methodology

Appendix II Guiding Principles for Competitive Sourcing

Appendix III 2002 FAIR Act Inventories

Appendix IV 	Competitive Sourcing Studies Initiated and Completed in 2002
and 2003

Appendix V 	Disposition of Competable Commercial FTEs Where Studies
Completed

              Appendix VI Evolution of OMB's FAIR Act Guidance 35

  Appendix VII 	OMB Scorecard Criteria for the Competitive Sourcing Initiative
  36

         Appendix VIII Strategic Approaches to Competitive Sourcing 37

Appendix IX 	Comments from the Department of Health & Human Services

Appendix X Comments from the Department of the Interior

        Appendix XI Comments from the Department of Veterans Affairs 47

Tables

Table 1: Overview of Civilian Agency Infrastructure Development Table 2:
Timeline of Selected Competitive Sourcing Initiative Events Table 3:
Disposition of 2002 Competable Commercial FTEs Where Studies Have Been
Completed Table 4: Disposition of 2003 Competable Commercial FTEs Where
Studies Have Been Completed

8 14 31 33

Figure

Figure 1: Major Competitive Sourcing Phases and Related Tasks

Abbreviations

FAIR Federal Activities Inventory Reform Act of 1998
FTE full-time equivalent
HHS Health and Human Services
MEO most efficient organization
OMB Office of Management and Budget
VA Veterans Affairs

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. However, because this
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this material
separately.

United States General Accounting Office Washington, DC 20548

February 27, 2004

The Honorable Robert C. Byrd
Ranking Minority Member
Committee on Appropriations
United States Senate

The Honorable Susan M. Collins
Chairman
Committee on Governmental Affairs
United States Senate

The Honorable George V. Voinovich

Chairman

Subcommittee on Oversight of Government Management, the Federal Workforce
and the District of Columbia Committee on Governmental Affairs United
States Senate

The Honorable Henry A. Waxman Ranking Minority Member Committee on
Government Reform House of Representatives

The environment in which the federal government currently operates- with
new security threats, demographic changes, rapidly evolving technologies,
increased pressure for results, and growing fiscal imbalances-demands that
agencies engage in a fundamental review of how they accomplish their
missions. Agencies increasingly rely on a range of technical and support
services to meet mission objectives. It is important for agencies to
decide how best to acquire and deliver such services, including whether to
obtain services in-house or through private sources. One way to inform
this decision is to use competitive sourcing, a strategy under which
agencies open the government's commercial activities to competition among
public and private sector sources.

In 2001, the administration identified competitive sourcing as one of five
governmentwide initiatives in the President's Management Agenda.1 This
initiative seeks to expand competition between the public and private
sectors to encourage innovation, increase efficiency, and to improve
performance. But the use of public-private competition represents a major
management change for agencies and has raised concerns about the fairness
of the process and the potential impact on federal jobs. Therefore, after
discussions with your staff, we agreed to (1) describe the progress
agencies have made in establishing a competitive sourcing program in
response to the President's Management Agenda, (2) identify major
challenges agencies are facing, and (3) identify strategies they are using
to select activities for competition based on mission-related needs.

Our work focused on the initial implementation efforts of the following
seven departments and the agencies within those departments that have the
most developed competitive sourcing programs: Agriculture; Defense;
Education; Health and Human Services (HHS); the Interior; the Treasury;
and Veterans Affairs (VA). Together, these departments account for about
84 percent of the commercial positions among the 26 executive branch
agencies implementing the President's Management Agenda. For more on our
scope and methodology, see appendix I.

Each of the agencies we reviewed has laid the foundation for its
competitive sourcing program. The Department of Defense (DOD) has had an
extensive competitive sourcing program in place since the mid-1990s, and
all of the civilian agencies we reviewed have created a basic
infrastructure for their competitive sourcing programs since the President
announced competitive sourcing as a governmentwide initiative in August
2001. In creating these infrastructures, agencies have established
offices, appointed officials, hired staff and consulting contractors,
issued guidance, and conducted training. With infrastructures in place and
leadership involvement, each agency-defense and civilian-has developed
competitive sourcing plans and conducted some competitions. At least two
interagency forums for sharing competitive sourcing information also have
been established.

1 The other four initiatives are strategic management of human capital,
improved financial performance, expanded electronic government, and budget
and performance integration.

Results in Brief

Although agencies have made progress, they cited several challenges in
implementing their competitive sourcing programs. Key among these
challenges is developing workforce inventories that identify commercial
and inherently governmental full-time equivalent (FTE) positions.2
Agencies reported difficulty in classifying positions as inherently
governmental or commercial and in applying guidance to categorize
activities, making it challenging for agencies to identify potential
candidates for competitions. While recent Office of Management and Budget
(OMB) guidance has stressed that agencies should tailor their plans to
meet mission needs, the emphasis in the guidance is still more on process
than results. Agencies have focused on meeting targets to announce and
complete competitions and have not assessed broader issues, such as
weighing potential improvements against the costs and risks associated
with performing the competitions.

Agencies also have been challenged to ensure they have adequate personnel
with the skills needed to run a competitive sourcing program. Although DOD
has a well-established management structure, many civilian
department-level offices have only one or two full-time staff members to
interpret new laws, implement new guidance issued by OMB, maintain
inventories of competable positions and activities, and oversee agency
competitions. According to a cognizant Army official, implementation of
OMB's revised guidance for competitions will require approximately 100 to
150 additional personnel in the Army alone, including attorneys, human
capital specialists, and contracting officials. Some of the civilian
agencies we reviewed also reported funding challenges associated with
implementing their competitive sourcing programs.

Despite these challenges, several agencies have developed strategic and
transparent competitive sourcing approaches by integrating their strategic
and human capital plans with their competitive sourcing plans. The
Commercial Activities Panel, which was convened to conduct a
congressionally mandated study of the government's competitive sourcing
process, supported use of this approach. Through broader functional
assessments and comprehensive analyses that include factors such as
potential savings, risks, current level of efficiency, market conditions,
and current and projected workforce profiles, these agencies are
identifying viable activities for competition.

2 Full-time equivalent (FTE) is a measure of federal civilian employment.
One FTE is equal to 1 work-year of 2,080 hours.

Background

We are making several recommendations to OMB to help agencies (1) ensure
greater consistency in classifying positions as inherently governmental or
commercial, (2) make more strategic and transparent sourcing decisions by
identifying broader functional areas for competition, and (3) focus on
efficiency and performance outcomes. We provided a draft of this report to
OMB and the seven agencies for their review and comment. OMB concurred
with our three recommendations, but disagreed with our conclusion that its
recent guidance emphasizes process more than results. The Department of
Agriculture and the Department of the Interior concurred with the report.
The Department of the Treasury said the recommendations were timely and
the remaining agencies either had no comments or offered only technical
revisions.

Since 1955, the executive branch has encouraged federal agencies to obtain
commercially available goods and services from the private sector when the
agency determines that it is cost-effective. In 1966, OMB formalized this
policy in its Circular A-76 and, in 1979, issued a handbook with
procedures for determining whether commercial activities should be
performed in-house, by another federal agency, or by the private sector.3

Administrative and legislative constraints from the late 1980s through
1995 resulted in a lull in awarding contracts under A-76 competitions. In
1995, when congressional and administration initiatives placed greater
emphasis on public-private competitions to achieve economies and
efficiency of operations, DOD gave competitive sourcing renewed emphasis.
In our past work, we have found that DOD achieved savings through
competitive sourcing, although it is difficult to estimate precisely the
amount of savings.4 By including competitive sourcing as one of five
governmentwide initiatives announced in August 2001, the administration
directed agencies to implement competitive sourcing programs to achieve
increased savings and to improve performance. The administration continues
to advocate the use of competitive sourcing, which is addressed in the
President's budget for fiscal year 2005.

3 OMB has updated this circular and handbook several times since 1979. In
May 2003, OMB released a revised Circular A-76, which supersedes previous
versions of the handbook. Office of Management and Budget, Circular A-76
(Washington, D.C.: May 29, 2003).

4 General Accounting Office, Results of A-76 Studies Over the Past 5
Years, GAO-01-20 (Washington, D.C.: Dec. 7, 2000).

Competitive sourcing has met with considerable controversy in both the
public and private sectors. Each sector expressed concerned that, in
general, the process was unfair and did not provide for holding the winner
of the competition accountable for performance. In response to this
controversy, in 2000, the Congress mandated a study of the government's
competitive sourcing process under A-765-a study conducted by the
Commercial Activities Panel, chaired by the Comptroller General of the
United States. The panel included representatives from OMB, DOD, the
Office of Personnel Management, private industry, academia, a trade
association, and unions. In April 2002, the panel released its report6
with recommendations that included 10 sourcing principles to provide a
better foundation for competitive sourcing decisions in the federal
government (see app. II). In particular, the panel stressed the importance
of linking sourcing policy with agency missions, promoting sourcing
decisions that provide value to the taxpayer regardless of the service
provider selected, and ensuring greater accountability for performance.
The panel also addressed an area of particular importance for all affected
partieshow the government's sourcing policies are implemented. In
this regard, one of the sourcing principles was that the government should
avoid arbitrary numerical or full-time equivalent (FTE) goals. This
principle is based on the concept that success in government programs
should be measured in terms of providing value to the taxpayer, not the
size of the in-house or contractor workforce.

The panel, in one of its 10 sourcing principles, also endorsed creating
incentives and processes to foster high-performing, efficient, and
effective organizations and continuous improvement throughout the federal
government.7 On November 6, 2003, the Comptroller General hosted a forum
to discuss what it means for a federal agency to be high-performing in an
environment where results and outcomes are increasingly accomplished
through partnerships that cut across different levels of government and
different sectors of the economy. There was broad

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

6 Commercial Activities Panel, Final Report: Improving the Sourcing
Decisions of the Government (Washington, D.C.: Apr. 30, 2002).

7 National Defense Authorization Act for Fiscal Year 2004, Section 337,
Public Law 108-136 (Nov. 24, 2003) directs the Secretary of Defense to
implement a pilot program under which DOD organizations are provided
incentives to re-engineer their operations in order to become
high-performing organizations.

agreement among participants at the forum on the key characteristics and
capabilities of high-performing organizations, which are organized around
four broad themes. These four themes are (1) clear, well-articulated, and
compelling missions; (2) strategic use of partnerships; (3) a focus on the
needs of clients and customers; and (4) strategic management of people.8

The competitive sourcing process starts with agencies developing
inventories of their commercial positions in accordance with the Federal
Activities Inventory Reform (FAIR) Act of 1998.9 Additionally, OMB
requires agencies to identify activities that are inherently governmental,
as well as commercial positions that are exempt from competition because
of legislative prohibitions, agency restructuring, or other reasons.10
Only activities classified as "commercial" and not otherwise exempt are
potentially competable. In the 2002 FAIR Act inventories,11 the proportion
of competable commercial, non-competable commercial, and inherently
governmental FTE positions varied widely among the agencies we reviewed.
Governmentwide, competable commercial positions in 2002 accounted for
approximately 26 percent of the total federal workforce. Except for the
Education Department's 62 percent, the percentage of competable commercial
positions in each of our selected agencies was less than 50 percent of the
agency's total FTEs (see app. III).

After agencies identify competable commercial positions under the FAIR Act
and OMB guidance, they select from these positions which ones to compete.
Resulting public-private competitions are guided by OMB Circular A-76. In
May 2003, OMB released a revised Circular A-76. Under this revised
circular, agencies must use a standard competition process for functions
with more than 65 FTEs. As part of the standard process, agencies identify
the work to be performed in a performance work

8 General Accounting Office, High-Performing Organizations Forum: Metrics,
Means, and Mechanisms for Achieving High-Performance in the 21st Century
Public Management Environment, GAO-04-343SP (Washington, D.C.: Feb. 13,
2004).

9 P.L. 105-270 (Oct. 19, 1998).

10 An "inherently governmental" activity is an activity that is so
intimately related to the public interest as to mandate performance by
government personnel. A "commercial" activity is a recurring service that
could be performed by the private sector and is resourced, performed, and
controlled by the agency through performance by government personnel, a
contract, or a fee-for-service agreement.

11 The 2002 FAIR Act inventories are the most currently available data for
most federal agencies in our review.

Agencies Have Established a Foundation for Their Competitive Sourcing
Programs

statement, establish a team to prepare an in-house proposal to perform the
work based on a "most efficient organization" (MEO),12 and evaluate that
proposal along with those submitted by private companies and/or public
reimbursable sources. For activities with 65 or fewer FTEs, agencies may
use either a streamlined or standard competition. Streamlined competitions
require fewer steps than the standard process and enable agencies to
complete a cost comparison more quickly.

When the President announced competitive sourcing as one of five
governmentwide management agenda items in August 2001, few agencies other
than DOD had an established competitive sourcing infrastructure-a key
component of OMB's strategy for institutionalizing competitive sourcing.
Few of the other departments and agencies that we reviewed had competitive
sourcing experience. Since that time, all six civilian agencies we
reviewed have established a basic competitive sourcing program
infrastructure. Leadership involvement and an established infrastructure
have enabled each agency that we reviewed to develop competitive sourcing
plans and complete a number of initial competitions. Interagency forums
for sharing information also have been established.

All Agencies We Although they lack DOD's A-76 experience, the civilian
agencies we Reviewed Have Made reviewed have made significant progress
toward establishing a Progress in Developing competitive sourcing
infrastructure with such actions as establishing an Their Infrastructures
office, hiring staff, obtaining contractor support, creating policies and

procedures, and providing training to agency staff involved in the
competitive sourcing process. Table 1 provides an overview of civilian
agency infrastructure development.

12 OMB defines a most efficient organization (MEO) as the staffing plan of
the agency, developed to represent the agency's most efficient and
cost-effective organization.

        Table 1: Overview of Civilian Agency Infrastructure Development

Then-year dollars

Policies, procedures, and Contract support guidance Training and other
resources

Structure and staffing Agriculture

o  	Established competitive  o  $1.16 million in fiscal year  o 
Departmental guidebook and  o  Departmentwide training sourcing office
under the 2002 brochures  o  Web site

Chief Financial Officer  o  $8.68 million in fiscal year

o  Two full-time staff 2003

Education

o  	Directed by Chief Financial  o  $1.87 million to prepare  o  Primers
on reengineering and  o  1-day training Officer as part of One-ED business
cases and competitive sourcing  o  Consultants help teams approach
$456,000 for training and working on studies

o  Nine employee teams support in fiscal years 2002

assessed functions and and 2003 processes

Health and Human Services

o  Directed by the Office of the

o  $7.6 million obligated for

o  Fact sheet on competitive

Assistant Secretary for Administration and Management

o  Three full-time staff competitive sourcing program support and studies
in fiscal years 2002, 2003, and 2004

sourcing

o  	Policy letters issued and comprehensive guidebook developed

o  	Department holds monthly outreach meetings with operating division
managers

o  	"All-hands" meetings to discuss competitive sourcing and A-76

o  Web sites

Interior

o  	Directed by Center for  o  As of September 26, 2003,  o  Guidance on
competitive Competitive Sourcing $150,000 for support of sourcing and
labor-Excellence under the Deputy Center for Competitive management
resolution on Assistant Secretary for Sourcing Excellence, competitive
sourcing Performance and including training, FAIR Act  o  Leadership sent
memoranda Management inventory and database on its commitment to

o  Two full-time staff competitive sourcing

o  	Departmentwide competitive sourcing workshop

o  	Governmentwide competitive sourcing meetings and conferences

o  	Web site with frequently asked questions and guidance

Treasury

o  	Directed by the Office of the  o  $1.9 million for training on  o 
Office of the Procurement  o  Departmentwide conference Deputy Assistant
Secretary regulations, information Executive provided policy  o  Seminars
and courses for Management and Budget technology needs, and other
guidance.  o  Encouraged attendance at

o  One full-time staff support services as of June OPM and OMB training on

2002 competitive sourcing

o  	Sponsors the Treasury Acquisition Institute

Veterans Affairs

o  	Directed by Office of  o  In fiscal year 2003, VA spent  o 
Departmental policy directive Competitive Sourcing and about $663,000 for
support  o  Competitive sourcingManagement Analysis items such as
communication handbook, communication Service under Office of strategies,
a training module, plan, and human resource Policy, Planning, and and a
Web-based guidance pamphletPreparedness competitive sourcing study

o  	Two Full-Time Equivalent tracking system (plans to recruit at least
one analyst if requisite funds are appropriated)

o  	Training material developed, but training not provided because VA's
General Counsel determined that use of funds was prohibited by 38 U.S.C.
8110 (a)(5).

o  	Evaluation of pilot training project for practitioners and new hires

Source: Agency information.

In addition, DOD, which has the most competitive sourcing experience in
the federal government, has issued numerous policies, procedures, and
guidance for implementing OMB's Circular A-76. DOD also has established a
management structure to oversee the department's A-76 activities.13 In
carrying out its competitive sourcing program, DOD uses both in-house
personnel and contractors to provide assistance within the department in
developing performance work statements and MEOs. In response to our
previous recommendation, DOD also has established a Web site14 to share
competitive sourcing knowledge and experience. This Web site is available
governmentwide.15 The site contains resources such as A-76 policy and
procedures, best practices, sample documents, bid protests, and links to
other sites with information on Circular A-76.

Studies Completed While Infrastructures Were Put into Place

The civilian agencies we reviewed completed their initial rounds of
competitive sourcing studies in fiscal years 2002 and 2003 (see app IV).
Based on data given to us by five of the six civilian departments,16 602
studies were completed in fiscal year 2003. Of these 602 studies, 363 were
streamlined competitions and 130 were direct conversions to performance

13 The Directorate of Competitive Sourcing and Privatization, Office of
the Deputy Under Secretary of Defense (Installations and Environment) has
overall responsibility for developing these major departmental documents.
The Deputy Under Secretary of Defense (Installations and Environment) is
the designated Competitive Sourcing Official responsible for implementing
OMB Circular A-76 within the department.

14 See http://emissary.acq.osd.mil/inst/share.nsf.

15 General Accounting Office, DOD Competitive Sourcing: Lessons Learned
System Could Enhance A-76 Study Process, GAO/NSIAD-99-152 (Washington,
D.C.: July 21, 1999).

16 The Department of Interior provided us only aggregated data for 2002
and 2003. As a result, we were unable to segregate the data for these 2
years for inclusion in appendix V.

by a contractor.17 In addition, DOD completed 126 studies, including 54
direct conversions and 7 streamlined competitions.18 Collectively, these
studies involved over 17,000 FTEs, with almost 57 percent of the FTEs
studied by DOD and the remaining 43 percent studied by the civilian
agencies. According to agency data, in-house teams won many of the
competitions, retaining almost 76 percent of the FTEs covered by the
studies. (See app. V for details on the outcome of these studies.) While
agencies have been able to complete these studies while establishing their
infrastructures, it is too early to assess the impact of the studies in
terms of efficiencies or performance improvements achieved.

Efforts to Share Competitive Sourcing Information across Agencies

A number of initiatives have been undertaken to share competitive sourcing
information across agencies. In addition to DOD's Web site, at least two
interagency forums have been established to facilitate interagency
information sharing. For example, staff working in competitive sourcing
offices in various agencies and subagencies meet monthly at the civilian
agencies' competitive sourcing working group to exchange ideas and
information. The Federal Acquisition Council-composed of senior
acquisition officials in the Executive Branch-also promotes
acquisition-related aspects of the President's Management Agenda by
providing a forum for monitoring and improving the federal acquisition
system. The Council has published a guide on frequently asked questions
and a manager's guide to competitive sourcing.

In addition, OMB is developing a competitive sourcing data tracking system
to provide consistent information and to facilitate the sharing of
competitive sourcing information by allowing agencies to identify planned,
ongoing, and completed competitions across the government. According to
OMB officials, future refinements to the system may allow agencies to
track and manage their own sourcing activities-a problem for most
agencies-as well as provide OMB with consistent information. OMB plans to
use the system to monitor agency implementation of the competitive
sourcing initiative and generate more consistent and accurate statistics,
including costs and related savings, for reporting to the Congress.

17 While direct conversions were eliminated under the revised circular,
OMB granted agencies permission to complete conversions initiated under
the previous circular.

18 These data cover studies completed through September 30, 2003. DOD
studies may have started prior to 2002.

Many Agencies Face Challenges in Implementing Competitive Sourcing

Despite their progress in establishing a competitive sourcing
infrastructure and conducting initial competitions in varying degrees, the
agencies we reviewed continue to face significant challenges in four
areas. First, agencies have been challenged to develop and use FAIR Act
inventory data to identify and group positions for competition. Second,
agencies are operating in a continually changing environment and under OMB
guidance focused more on meeting milestones rather than achieving desired
outcomes. Third, agencies have reported that they lack the staff needed to
carry out the numerous additional tasks required under the new Circular
A-76. Finally, agencies have reported that they lack the funding needed to
cover the substantial costs associated with implementing their programs.

Agencies Experience Difficulties in Developing Their FAIR Act Inventories

Classifying Positions as either Inherently Governmental or Commercial Is a
Complicated Process

The development of accurate FAIR Act inventories is the foundation for
determining which functions agencies compete. Agencies reported difficulty
in classifying positions as inherently governmental or commercial and in
applying OMB-assigned codes to categorize activities, making it
challenging for them to identify potential candidates for competitions.
This has been a persistent problem as we have reported in the past.19
Despite changes made to OMB's guidance for constructing FAIR Act
inventories, the guidance has not alleviated the difficulties some
agencies have had in developing and maintaining useful inventory data.

Under the FAIR Act and OMB guidance, agencies annually review and classify
positions as either inherently governmental or commercial. This
classification process is done using an OMB-provided coding schedule
containing nearly 700 functional codes in 23 major categories, such as
health services, grants management, and installation services. Civilian
agencies are having difficulty applying these functional codes, which were
developed by DOD. While intended to promote consistency, the codes are not
always applicable to civilian agencies, requiring some to create
supplemental codes to match their missions.

19 Our prior work on this issue includes General Accounting Office,
Competitive Contracting: The Understandability of FAIR Act Inventories Was
Limited,

GAO/GGD-00-68 (Washington, D.C.: Apr. 14, 2000); General Accounting
Office,

DOD Competitive Sourcing: More Consistency Needed in Identifying
Commercial Activities, GAO/NSIAD-00-198 (Washington, D.C.: Aug. 11, 2000);
and General Accounting Office, Competitive Sourcing: Challenges in
Expanding A-76 Governmentwide, GAO-02-498T (Washington, D.C.: Mar. 6,
2002).

Agencies Concerned about Consistency and Timeliness of OMB Guidance

As we have previously reported, selecting and grouping functions and
positions to compete can be difficult.20 For example, the Army has
determined that many functions, such as making eyeglasses for troops
located in a war zone, are core to its mission even though this function
may not be classified as inherently governmental when performed in the
United States. Also, some functions may involve both "commercial" and
"inherently governmental" tasks. While agencies have had difficulty
classifying mixed positions, OMB's guidance allows agencies to take a
variety of approaches to address this difficulty. For example, according
to agency officials, the Internal Revenue Service classifies mixed
positions on a case-by-case basis considering how critical the position is
to its mission, not just the percentage of tasks related to that position
that may be inherently governmental or commercial.

The process also can be resource intensive. For example, according to
agency officials, to determine whether positions should be classified as
inherently governmental or commercial, the National Park Service-the
largest bureau in the Department of the Interior-used an employee team of
approximately 30 individuals that represented all occupational areas, as
well as its human resources and acquisition staff. The team used the
analysis, in conjunction with payroll system data showing employee time
usage, to determine the number of commercial and inherently governmental
FTEs.

Accuracy of inventories depends on agency classification of positions,
based on OMB guidance, as well as consistent OMB review of inventories.
OMB has updated its FAIR Act inventory guidance annually to address issues
identified by agencies (see app. VI) and it consults with agencies to
resolve issues identified. For example, in April 2001, OMB created a new
requirement to report civilian positions designated as inherently
governmental. OMB's guidance gives agencies considerable latitude in
preparing their inventories to determine if an activity is commercial.

OMB officials told us they have provided training on Circular A-76
procedures to its budget examiners, who act as liaisons between OMB and
each participating agency. The examiners address questions and provide
guidance on an agency-by-agency basis. OMB does not have formal written

20 General Accounting Office, Defense Management: DOD Faces Challenges
Implementing Its Core Competency Approach and A-76 Competitions,
GAO-03-818 (Washington, D.C.: July 15, 2003).

guidance for reviewing FAIR Act data. Examiners provide verbal guidance on
an on-going basis to agencies and discuss concerns agencies have with the
FAIR Act and the related competitive sourcing program. Once agencies
submit their inventories, OMB officials review the inventories looking for
"red flags"-that is, deviations from the norm, such as one agency listing
a position as inherently governmental while others classify the same
position as commercial-and then consult with agency officials as necessary
on these deviations. However, a number of competitive sourcing officials
at two interagency forums expressed concern about the process. For
example, one official told us that an OMB program examiner said there were
too many function codes in one agency's inventory. Then, after the agency
resubmitted its inventory, the same examiner said the inventory had too
few codes. An official from another agency told us that its OMB examiners
did not appear familiar with OMB's own guidance for applying the function
codes. Given the lack of formal written OMB guidance on reviewing the FAIR
Act inventory data, there is little assurance that OMB's review of
inventories will be consistent across agencies.

According to a number of agency officials, implementation of OMB guidance
is further complicated due to time constraints. OMB inventory guidance is
typically issued in the spring, and agency inventories are due to OMB by
June 30. Officials contend that more time is needed to properly implement
the guidance. In response, OMB officials pointed out that the basic
guidance for developing inventories is set forth in Circular A-76 and
agencies can undertake significant steps to prepare their inventories
based on the Circular's guidance.

OMB Guidance Has Focused More on Meeting Targets and Milestones Than on
Improving Outcomes

The ultimate goal of the competitive sourcing initiative is to improve
government performance and efficiency. To date, however, OMB's competitive
sourcing guidance to federal agencies has focused more on targets and
milestones for conducting competitions than on the outcomes the
competitions are designed to produce: savings, innovation, and performance
improvements. Although recent OMB guidance has stressed the need for
agencies to be more strategic, the emphasis in the guidance is still more
on process than results. The President's Management Agenda established
expected results for the competitive sourcing initiative to encourage
innovation, increase efficiency, and improve performance of agencies. The
Commercial Activities Panel similarly stated that the success of
government programs, such as competitive sourcing, should be measured by
the results achieved in terms of providing value to the taxpayer.

Since the inception of the competitive sourcing initiative in 2001,
agencies have faced continual changes to OMB's targets and guidance for
conducting public-private competitions.21 OMB initially set a target for
agencies to compete or directly convert at least 5 percent of their
full-time equivalent commercial positions by the end of fiscal year 2002,
and an additional 10 percent by the end of fiscal year 2003. They also set
a long-term target for agencies to compete at least 50 percent of
commercial FTEs. OMB later moved to agency-specific plans that reflect
each agency's own mission and workforce mix. OMB also developed a traffic
light system (red, yellow, green) for evaluating the progress agencies are
making in implementing these plans. Table 2 shows the chronology of these
changes.

      Table 2: Timeline of Selected Competitive Sourcing Initiative Events

March 2001 August 2001 May 2003 July 2003 December 2003

OMB set 5-percent FTE OMB set an additional OMB released revised OMB
replaced OMB issued guidance on

target for fiscal year 2002 and a long-term goal of 50 percent 10-percent
target for 2003

                                 Circular A-76

governmentwide goals with agency-specific plans

the development of "green" competition plans

Source: OMB documents.

As shown in table 2, in December 2003, OMB released a memorandum with
guidance on developing competitive sourcing plans that would receive a
"green" rating under its traffic light evaluation system (see app. VII).
The guidance notes the need for a long-range vision, strategic action by
agencies, and public-private competitions tailored to the

21 According to several agency officials, numerous pieces of legislation
passed by Congress also have added to the complexity of implementing
competitive sourcing. Before OMB repealed numerical FTE targets, the
Congress, concerned with the arbitrary nature of such goals, passed
legislation in January 2003 that applies to the Department of the
Treasury, the U.S. Postal Service, and other entities, requiring
competitive sourcing goals to be based on considered research and
analysis. (Pub. L. 108-7 (Feb. 20, 2003) Division J, Section 647) Since
OMB's release of its revised circular, Congress has passed several laws
that impose limitations and reporting requirements concerning
implementation of the program, e.g., section 340 of the Department of the
Interior and Related Agencies Appropriations Act for FY 2004 (Pub. L.
108-108 (Nov. 10, 2003)), section 8014 of the Department of Defense
Appropriations Act for FY 2004 (Pub. L. 108-87 (Sept. 30, 2003)), and most
recently, section 647 of the Consolidated Appropriations for FY 2004 (Pub.
L. 108-199 (Jan. 23, 2004)). Generally, these provisions require affected
agencies to develop a most efficient and cost effective organization for
activities or functions performed by more than ten government employees.
Additionally, conversion to contractor performance must be supported by a
determination that savings will equal or exceed the lesser of 10 percent
of government personnel costs or $10,000,000.

agency's unique mission and goals. The memorandum also advises agencies to
include in their plans their general decision-making process for selecting
activities to compete, identification of activities to be competed,
potential constraints, and plans for handling activities suitable for
competition that the agency does not intend to compete.

Neither OMB's initial FTE-based goals nor its revised competitive sourcing
goals and traffic light evaluation system calls for agencies to assess how
their plans for competitive sourcing could achieve the broader
improvements envisioned by the President's Management Agenda or the
Commercial Activities Panel. In this regard, the Panel said that arbitrary
competition goals should be avoided. In testimony before the Congress, the
Comptroller General has stated that OMB's initial competition targets were
inappropriate. Similarly, OMB's revised goals continue to emphasize
process milestones such as competitions completed more than enhancing
value through performance improvements and efficiencies. For example, for
an agency to receive a "green" rating on OMB's scorecard, it must have
developed an OMB-approved green competition plan, have publicly announced
standard competitions in accordance with the schedule in its green plan,
and have completed 95 percent of streamlined competitions in 90 days. The
emphasis throughout OMB's most recent guidance is similarly more on
process than on results.

Agencies have used a range of criteria to select positions for
competition. For most agencies, selection criteria have been based on the
size and composition of the workforce, such as attrition rates, skill
needs, and difficulty in hiring, as well as the agency's capability to
manage the competitions. Because these agencies have focused on meeting
targets to announce and complete competitions, they have not assessed
broader issues, such as weighing potential improvements against the costs
and risks associated with performing the competitions. Some agencies,
however, used a broader set of factors such as the function's contribution
to the mission, risks associated with the function being contracted out,
and the potential return on investment. (See app. VIII for further
discussion on the criteria these agencies have used to select positions
for competition.)

Human Capital Challenges 	Officials in most of the agencies we reviewed
expressed concern that they lack sufficient staff to perform the
additional tasks included in the recently revised Circular A-76. To
address this challenge, the Federal Acquisition Council is currently
studying agency staffing and skill requirements. As we previously
reported, agencies need to build and maintain capacity

to manage competitions, build the in-house MEO, and oversee the
implementation of competition decisions22-skills that the Commercial
Activities Panel recognized may require additional capacity. Adding to
this complexity is agencies' need to consider their competitive sourcing
staffing capacity in the context of their strategic human capital
management, an area we have identified as high-risk governmentwide and one
of the five President's Management Agenda governmentwide initiatives. For
example, we recently reported 23 that DOD's civilian human capital
strategic plan does not address the respective roles of civilian and
contractor personnel or how DOD plans to link its human capital
initiatives with its sourcing plans, such as efforts to outsource non-core
responsibilities. Finally, ensuring and maintaining employee morale is
also a challenge for agencies.

OMB's revised Circular A-76 emphasizes the following key competitive
sourcing phases: preparing an inventory of agency's activities,
preliminary planning, announcing and conducting the competition,
conducting the competition using either a streamlined or standard
competition process, implementing the performance decision, and conducting
post-competition accountability activities (see fig. 1). Each phase
involves a number of tasks.

22 General Accounting Office, Competitive Sourcing: Implementation Will Be
Key to Success of New Circular A-76, GAO-03-943T (Washington, D.C: June
26, 2003).

23 General Accounting Office, DOD Personnel: DOD Actions Needed to
Strengthen Civilian Human Capital Strategic Planning and Integration with
Military Personnel and Sourcing Decisions, GAO-03-475 (Washington, D.C:
Mar. 28, 2003).

Figure 1: Major Competitive Sourcing Phases and Related Tasks

aAgency inventory process is not done for each specific competition, but
is required under the FAIR Act.

bCompetitive Sourcing Officials appoint competition officials for each
standard competition, and, as appropriate, may appoint competition
officials for streamlined competitions. These include: Agency Tender
Official, Contracting Officer, Performance Work Statement Team Leader,
Human Resource Advisor, and Source Selection Authority.

According to agency officials, many of these tasks require skills and
human capital resources beyond those currently available. As we reported
in December 2002, in the current environment, acquisition staff can no
longer simply be purchasers or process managers. Rather, they need to be
adept at analyzing business problems and in helping to develop acquisition

strategies.24 For example, human capital, job, and market analysis skills
are needed to inventory agency activities; benchmarking, and strategic and
workforce planning skills are needed to conduct the preliminary planning;
organizational analysis, contract management and cost analysis skills are
needed to conduct competitions; and financial management and oversight
skills are needed in the implementation and post-competition phase. Some
skills, such as labor relations and information technology, are required
throughout the competitive sourcing process.

Despite these additional personnel requirements, many department-level
offices in the civilian agencies we reviewed have only one or two
full-time staff to complete FAIR Act inventories, interpret new laws and
regulations, and oversee agency selection of positions to compete and the
competitions. Officials at the six civilian agencies we reviewed stated it
would be helpful to have additional personnel well versed in the use of
Circular A-76. Even DOD, the leader among federal agencies in competitive
sourcing and A-76, may face human capital challenges in running its
competition program. According to a cognizant Army competitive sourcing
official who has analyzed this issue, the Army's implementation of the
revised Circular A-76 will require approximately 100 to 150 additional
personnel, including attorneys, human resources specialists, and
contracting officials. A final determination on Army staffing requirements
and capabilities has not been made.

As we reported in June 2003, building the capacity to conduct competitions
as fairly, effectively, and efficiently as possible will likely be a
challenge for all agencies, but particularly those that have not
previously been invested in competitive sourcing.25 The Commercial
Activities Panel also recognized in its recommendations that accurate cost
comparisons, accountability, and fairness would require high-level
commitment from leadership; adequate, sustained attention and resources;
and technical and other assistance in structuring the MEO, as well as
centralized teams of trained personnel to conduct the cost comparisons.
According to officials of the Federal Acquisition Council, its competitive
sourcing working group is now inventorying agency resources, skill sets
and training needs required to address this challenge.

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

25 GAO-03-943T.

At the same time, agencies we reviewed are challenged to maintain
employee morale. While most agencies have established vehicles for
communicating their competitive sourcing goals internally-such as work
groups and Web sites-officials from OMB report that it is difficult to
convince employees that the current competitive sourcing program is
designed to create value and improve efficiency, not to reduce the size
of the federal workforce-as was the case with past competitive
sourcing efforts.

                               Funding Challenges

Funding their competitive sourcing programs also has been cited as a
challenge for agencies. Officials in some of the agencies we reviewed
cited limited funding as a barrier to implementing their competitive
sourcing programs. Such program costs can be significant-at both the
department and agency levels. For example, USDA reported spending a total
of $36.3 million in fiscal years 2002 and 2003 on its competitive sourcing
program. The Forest Service, part of USDA, accounted for $18.7 million of
USDA's $36.3 million on competitive sourcing. In fiscal year 2003, NIH
reported spending approximately $3.5 million on contract support for two
competitions involving more than 1,400 positions.26 The National Park
Services' financial needs prompted the agency to ask the Congress for
permission to reprogram $1.1 million to help pay for its competitive
sourcing program. Other agency officials stated that funding to finance
their competitive sourcing initiatives was taken from other agency
activities. As we have previously reported,27 DOD has also been challenged
to ensure adequate funding for implementing competitive sourcing under
Circular A-76. Finally, in August 2003, the Department of Veterans Affairs
terminated all competitive sourcing studies as its General Counsel

26 OMB has developed guidance (which it plans to issue in March 2004) for
agencies to use in calculating the incremental "out of pocket" costs of
competitions. OMB advises that it has developed this guidance to create
greater consistency and understanding in agency reporting and to assist
agencies in responding to reporting required by section 647(b) of Division
F of the Consolidated Appropriations, Fiscal Year 2004. According to OMB
agencies that have previously released cost figures on recent competitions
may need to make adjustments to conform to this guidance.

27 General Accounting Office, Defense Management: DOD Faces Challenges
Implementing Its Core Competency Approach and A-76 Competitions,
GAO-03-318 (Washington, D.C.: July 15, 2003).

Some Agencies Used Strategic Approach to Identify and Prioritize
Activities for Competition

determined that the prohibition regarding funds from the three health care
appropriation accounts under 38 U.S. C. 8110 (a)(5) is applicable.28

According to officials from most of the agencies we reviewed, they have
funded their competitive sourcing programs using existing funds. However,
some officials told us that OMB recently instructed their agencies to
include a line item in their fiscal year 2005 budget request for their
competitive sourcing programs. Doing so should provide agencies with a
more stable fiscal environment in which to plan and conduct competitions.

Several agencies have developed strategic and transparent competitive
sourcing approaches by integrating their strategic and human capital plans
with their competitive sourcing plans-an approach encouraged by the
Commercial Activities Panel. These approaches have gone beyond the
requirement to identify positions for competition as called for in OMB's
initial FTE targets. These approaches employ broader functional
assessments of FAIR Act inventories and more comprehensive analysis of
factors such as mission impact, potential savings, risks, current level of
efficiency, market conditions, and current and projected workforce
profiles. Not only do these agencies' processes identify viable activities
for competition, they also provide greater transparency in this critical
part of the process. Some of these approaches are summarized below.
Appendix VIII contains a more detailed discussion of these approaches.
While it is too early to tell whether the various agencies' approaches
will be effective, a key to success will be learning from them and
adapting them to each agency's unique circumstances.

OMB has recognized the challenges that agencies have faced in implementing
their competitive sourcing programs and recently publicly endorsed
agencies' use of a more strategic approach to competitive

28 Title 38 U.S.C. 8110 (a)(5) states: "Notwithstanding any other
provision of this title or of any other law, funds appropriated for the
department under the appropriation accounts for medical care, medical and
prosthetic research, and medical administration and miscellaneous
operating expenses may not be used for, and no employee compensated from
such funds may carry out any activity in connection with, the conduct of
any study comparing the cost of the provision by private contractors with
the cost of the provision by the department of commercial or industrial
products and services for the Veterans Health Administration unless such
funds have been specifically appropriated for that purpose."

sourcing.29 For example, OMB supported the innovative approaches some
agencies have taken to ensure sound planning and effective use of
public-private competitions. OMB further stated that consulting with
program, human resources, acquisition, budget, and legal professionals
facilitates effective communication and a broad-based understanding of
competitive sourcing actions within the agency.

NIH Uses Decision Support Software

Officials from HHS' National Institutes of Health told us they used a
steering committee of senior-level officials to determine the activities
to be competed under its competitive sourcing program. This committee used
a systematic approach that considered FAIR Act inventory data, the
knowledge and experience of program managers, and a decision support
software application to capture the judgments of managers familiar with
the commercial activity under study. The software application used a set
of evaluation questions that assessed a function regarding NIH's mission,
human capital and risk, and recorded and scored managers' responses.

Committee officials then reviewed the scores produced by the software,
considering factors such as (1) the activity's impact on NIH's mission,
(2) costs, (3) socioeconomic impacts, and (4) potential advantages to
competing the activity. NIH officials also stated that once a decision has
been made to compete an activity, consideration is given to re-engineering
the applicable business process, whether the activity remains in-house or
undergoes a public-private competition.

IRS Uses Business Case Analysis

Officials from the Internal Revenue Service, a bureau of the Department of
the Treasury, told us they used business case analysis and an
enterprisewide approach to determine if a commercial function has the
potential to create significant business process improvements and a
sizable return on investment. The business case analysis, which is
completed in approximately 4 to 6 months, calculates the economic benefits
of potential alternatives based on IRS responses to critical questions
such as: Is the function core to the mission? What does the function cost?
Is there potential to reduce cost and/or improve productivity by competing
the function? How does the function fit into other current or planned
strategic projects?

29 Office of Management and Budget, Competitive Sourcing: Reasoned and
Responsible Public-Private Competition (Washington, D.C.: Sept. 2003).

An IRS competitive sourcing official cited several benefits from the
business case approach used during the planning stage

o  	up-front consideration of major decision variables such as economics,
market research, and risk;

o  involvement of top-level management and leadership;

o  	the ability to test candidate projects against strategic goals and
performance improvement objectives; and

o  	low investment of resources to qualify or reject an activity as a
competitive sourcing project.

Army's "Core, Non-Core" Approach Is Evolving

The Army's "core, non-core concept" for assessing functions employed a
more strategic approach. Initially, the Army's approach for classifying
positions for its inventory focused on determining whether functions were
core or non-core to the agency's mission. However, the Army found that
such a distinction did not, by itself, provide a good basis for a
decision, and that other factors, such as risk and operational
considerations, also must be considered. A cognizant Army official told us
that focusing on positions does not consider how well the function is
being performed or who should perform the function-military, civilian,
contractor, or some combination of these. In contrast, the Army learned
that looking at broader functional areas, such as utilities and family
housing, as opposed to positions, should allow them to better identify
potential positions for competition. For example, functions such as
childcare and equal employment opportunity operations, while not
inherently governmental, are exempt from competitive sourcing because they
are important for reasons such as military morale and quality of life.
According to a DOD competitive sourcing official, the Army's approach is
evolving and is unique within DOD.

Officials at four civilian agencies in our review expressed similar
concerns that the Army official expressed on developing their inventories.
Officials told us that given the investment of time and resources required
to develop an inventory, agencies should focus on mission-related
functions rather than individual positions.

Education Uses Integrated The Department of Education's "One-ED"
initiative also used strategic

Approach 	approaches in identifying candidates for competition. One-ED
covers all elements of major departmental operations, and seeks management
changes through integrated human capital reform, competitive sourcing, and
organizational restructuring. As part of its broader approach, the

Conclusion

Recommendations for Executive Action

department developed its FAIR Act inventory by analyzing key processes in
the activities under consideration. It then used the results of this
process to restructure positions as either commercial or inherently
governmental and frame a broader analysis of the function's activities.

The ultimate success of the administration's competitive sourcing
initiative hinges on the extent to which agencies achieve the
efficiencies, innovation, and improved performance envisioned by the
President's Management Agenda. Successful implementation of this
initiative requires results-oriented goals and strategies; clear criteria
and analysis to support agency decisions; and adequate resources. OMB, in
its leadership role, has a difficult task in guiding this initiative and
must balance the need for transparency and consistency with the
flexibility agencies need in implementing significant changes to
operations. While OMB is addressing the funding and human capital
challenges that agencies face, it needs to ensure that the FAIR Act
inventory and goal-setting process is more strategic and helpful to
agencies in carrying out their competitive sourcing responsibilities.
Recognizing that agency missions, organizational structures, and workforce
composition vary widely, the Commercial Activities Panel provided a
framework of sourcing principles that provide an implementation roadmap
for this initiative. However, OMB's current emphasis on meeting
implementation milestones and targets does not fully align with these
principles or ensure achievement of the ultimate goal of increasing
efficiency and improving the performance of commercial activities. OMB
needs to work with agencies to ensure their long-range plans are
strategically focused. A more strategic approach focused on achieving
improvement outcomes would help focus agency efforts and better achieve
the results envisioned at the outset of the competitive sourcing
initiative.

To complement efforts already underway that address funding and human
capital challenges and to help agencies realize the potential benefits of
competitive sourcing and ensure greater transparency and accountability,
we recommend that the Director of OMB take the following three actions:

o  	ensure greater consistency in the classification of positions as
commercial or inherently governmental when positions contain a mix of
commercial and inherently governmental tasks by reviewing current guidance
and developing additional guidelines, as necessary, for agencies and OMB
examiners;

o  	work with agencies to ensure they are more strategic in their sourcing
decisions and are identifying broader functional areas and/or
enterprisewide activities, as appropriate, for possible public-private
competition; and

o  require agencies to develop competition plans that focus on achieving

Agency Comments
and Our Evaluation

measurable efficiency and performance improvement outcomes.

We provided a draft of this report to OMB and the seven agencies for their
review and comment. OMB provided oral comments concurring with our three
recommendations, but disagreed with our conclusion that OMB's recent
guidance on competitive sourcing emphasized process more than results.
Based on our review of the factors OMB considers in its review of agency
plans, we continue to believe that factors such as the agency's ability to
conduct competitions are emphasized more than results such as expected
savings and the potential for improved performance as called for in the
President's Management Agenda.

On the first recommendation, OMB officials concurred that there needs to
be consistency in the classification of positions and stated that OMB will
review its current guidance in light of the findings in this report to
determine how best to help agencies that have had difficulties in
classifying their activities. OMB officials stated that they would
consider additional guidelines as necessary.

OMB officials, while agreeing with the second and third recommendations,
emphasized that long-range "green" plans are intended to ensure that
agencies think strategically in choosing activities for review and
routinely take into account the type of factors that will ensure
successful application of competition. OMB reiterated that before an
agency may receive a green score on the President's Management Agenda
scorecard, the agency must have an approved green competition plan.

OMB stated that its evaluation of plans will not be one-dimensional, but
instead will account for each agency's unique mission and workforce needs
and demonstrated ability to conduct reviews in a reasonable and
responsible manner. OMB will also review agency plans to understand how
the agency has selected activities and their potential for savings and
performance improvements. However, while OMB's guidance mentions the
importance of improving the cost effectiveness and quality of commercial
operations, we note that the guidance does not cite the potential for
savings or improved performance as factors OMB will look for when
reviewing agency green plans.

The Department of Agriculture and the Department of the Interior concurred
with our report. The Department of the Treasury stated that the report's
recommendations were timely. The Department of Education and DOD did not
have any comments. The Department of the Interior, HHS, OMB and VA
provided technical comments, which were incorporated as appropriate.

We are sending copies of this report to other interested congressional
committees; the Director, Office of Management and Budget; the
Administrator, Office of Federal Procurement Policy; and the Secretaries
of Agriculture, Defense, Education, Health and Human Services, the
Interior, the Treasury, and Veterans Affairs. We also will provide copies
to
others on request. This report will also be available at no charge on
GAO's
Web site at http://www.gao.gov.

If you have any questions about this report, please contact me at
(202) 512-4841 or John K. Needham at (202) 512-5274. Other major
contributors to this report were Robert L. Ackley, Christina M. Cromley,
Thomas A. Flaherty, Rosa M. Johnson, Nancy T. Lively, William M.
McPhail, Karen M. Sloan, Marilyn K. Wasleski, and Anthony J. Wysocki.

William T. Woods
Director, Acquisition and Sourcing Management

                       Appendix I: Scope and Methodology

To describe the progress DOD and the civilian agencies have made in
establishing the competitive sourcing program in response to the
President's Management Agenda, we interviewed officials at the Department
of Agriculture; DOD; and the Departments of Education, Health and Human
Services, the Interior, the Treasury, and Veterans Affairs. We selected
the agencies based on the number of commercial positions in their 2001
FAIR Act inventories. The agencies selected represent 84 percent of the
2002 FAIR Act inventory of commercial positions among the 26 executive
branch agencies implementing the President's Management Agenda. We
selected the Department of Education because OMB highlighted its unique
approach to implementing the competitive sourcing initiative. We obtained
and reviewed pertinent documents from the seven government agencies. We
also met with members of the Civilian Agency Competitive Sourcing Working
Group, executive members of the Federal Acquisition Council and its
Working Group on Competitive Sourcing, and attended several competitive
sourcing conferences and workshops. We reviewed statutes and circulars
governing this program and reports on competitive sourcing. We also
reviewed reports on related subjects such as human capital, costs, and
savings that were issued by academic and independent research
organizations.

To identify what, if any, challenges exist for the agencies in
implementing the competitive sourcing initiative, we interviewed
senior-level officials at the seven competitive sourcing programs. In
identifying the challenges agencies face, we also reviewed OMB and agency
guidance as well as criteria and data used to develop inventories and
select the activities to study and compete. We discussed management
expertise, training requirements, planned contract support and contract
oversight, timeline and budget impact to achieve fiscal year 2003 goals as
well as intra-agency interactions, including budget and human resources
offices.

To identify strategies agencies are using to identify activities for
competition, we discussed extensively the alternatives and strategies
agencies used to take a more strategic approach and obtained contractor
documents, if available. These studies, conducted in support of a
"compete/no compete" decision, gave us insight regarding decision
criteria, competitive sourcing strategies, and costs involved.

We did not evaluate savings from completed competitions during this review
as the program is new and such data are limited. The FAIR Act inventory
data used in this report have been reviewed by OMB, reported to Congress,
and made available to the public and covers the years 2000,

Appendix I: Scope and Methodology

2001, and 2002. We did not independently verify this information.
OMB-reviewed data for 2003 were not available for all agencies at the time
of our review.

We performed our review between April and December 2003 in accordance with
generally accepted government auditing standards.

Appendix II: Guiding Principles for Competitive Sourcing

In 2000, Congress enacted legislation creating the Commercial Activities
Panel and mandating a study of the government's competitive sourcing
process.1 The Commercial Activities Panel's mission was to devise a set of
recommendations that would improve the government's sourcing framework and
processes so that they would reflect a balance among the taxpayer
interests, government needs, employee rights, and contractor concerns.

In April 2002, the panel released its report2 with recommendations that
included 10 sourcing principles to guide federal sourcing policy. The
panel believed that federal sourcing policy should

o  support agency missions, goals, and objectives;

o  	be consistent with human capital practices designed to attract,
motivate, retain, and reward a high-performing federal workforce;

o  	recognize that inherently governmental functions and certain others
should be performed by federal workers;

o  	create incentives and processes that foster high-performing,
efficient, and effective organizations throughout the federal government;

o  be based on a clear, transparent, and consistently applied process;

o  avoid arbitrary FTE or other arbitrary numerical goals;

o  	establish a process that, for activities that may be competitively
sourced, would permit public and private sources to participate in
competitions for work currently performed in-house and work currently
contracted to the private sector as well as new work;

o  ensure that competitions are conducted fairly, effectively, and
efficiently;

o  	ensure that competitions involve a process that considers both quality
and cost factors; and

o  provide for accountability in all sourcing decisions.

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

2 Commercial Activities Panel, Final Report: Improving the Sourcing
Decisions of the Government (Washington, D.C.: Apr. 30, 2002).

                    Appendix III: 2002 FAIR Act Inventories

                Total commercial FTEs Competable commercial FTEs

                                          Percent of               Percent of 
      Agency     Total FTEs     Number    total FTEs    Number     total FTEs 
       USDA            99,902   53,394       53.4       35,600   
       DODa           596,570  410,699       68.8       239,001  
    Education           4,710   3,062        65.0        2,903   
       HHS             62,604   32,095       51.0       11,641   
     Interior          69,147   32,900       47.6       26,545   
     Treasury         148,100   27,103       18.3       12,313   
        VA            221,541  190,546       86.0        4,870   

Source: GAO analysis of 2002 FAIR Act data.

Note: Full-time equivalent (FTE) is a measure of federal civilian
employment. One FTE is equal to one work-year of 2,080 hours. As of
January 23, 2004, OMB had publicly released 2003 FAIR Act inventory data
for only three of our selected agencies.

aAccording to DOD, these FAIR Act inventory numbers do not include
military, foreign nationals. depot-level maintenance and repair commercial
activities, DOD Inspector General, civilian performance of any commercial
activities that have already been contracted out, and the DOD intelligence
community.

Appendix IV: Competitive Sourcing Studies Initiated and Completed in 2002
and 2003

                      Results of Completed Studies (FTEs)a

              Positions Studied  Remain in-house         Contract-out 
                   (FTEs)                                             
    Agency        2002 2003           2002        2003       2002     
     USDA         379 7,111             6         3,776      373      
      DOD        8,477 3,434         16,886b     7,826b     7,185b     2,167b 
Education        0 230               0        Pending      0       Pending 
      HHS         775 2,192            165        1,592      610      

Interiorc

Treasuryd 4,170 234 487

                              VA 0 1,380e 0 0 120f

Source: GAO analysis of agency data.

aFull-time equivalent (FTE) is a measure of federal civilian employment.
One FTE is equal to one work-year of 2,080 hours.

bFor DOD, these numbers include studies initiated prior to 2002 or 2003.

cInterior provided only aggregated data for 2002 and 2003. Over this
2-year period, 2,483 FTEs were studied. Of those FTEs, 968 remained
in-house and 1,515 were contracted out.

dData represent bureaus remaining after transfer made to the Department of
Homeland Security. Actions on 3,449 FTEs are underway; some are in the
planning stage, while others await senior management approval before
results are announced.

eStudies of these positions were initiated but not completed because VA's
General Counsel determined that use of funds for this purpose was
prohibited by 38 U.S.C. 8110 (a)(5).

fVeterans Affairs had one formal A-76 competitionVeterans Benefits
Administration Property Management Services. This study began in 1999,
competition was announced in 2001, and the contract was awarded in August
2003.

Appendix V: Disposition of Competable Commercial FTEs Where Studies
Completed

Table 3: Disposition of 2002 Competable Commercial FTEs Where Studies Have
Been Completed

Direct Streamlined Full conversionsa competitions competitions Otherb
Total USDA HHS DOD Education

        Number of studies            11          0          0          0      
        Total FTEs studied          379          0          0          0      
          In-house wins              6           0          0          0      
           Contract out             373          0          0          0      

        Number of studies          133           33          0          0     
       Total FTEs studied          599          176          0          0     
          In-house wins             0           165          0          0     
          Contract out             599           11          0          0     

       Number of studies          58          5         112      
      Total FTEs studied        1,153        171       22,148          23,472 
         In-house wins           121         171       16,565          16,857 
         Contract out           1,032         0        5,583            6,615 

Number of studies 0 0 0 0
Total FTEs studied 0 0 0 0
In-house wins 0 0 0 0
Contract out 0 0 0 0
Treasury
Number of studies 6 3 0 9
Total FTEs studied 109 72 0 181
In-house wins 0 70 0 70
Contract out 109 2 0 111
Total
Number of studies 208 41 112 361
Total FTEs studied 2,240 419 22,148 24,807
In-house wins 127 406 16,565 17,098
Contract out 2,113 13 5,583 7,709

Source: GAO analysis of agency data.

Appendix V: Disposition of Competable Commercial FTEs Where Studies
Completed

Note: The Interior Department provided aggregated data for 2002. Over this
2-year period, 2002 and 2003, it studied 2,483 FTEs. On these, 968 were
retained in-house and 1,515 were contracted out.

In addition, VA did not initiate any studies in 2002.

aDirect conversions are not competitions, but are included in this table
as they represent federal employee positions whose work has been
outsourced to the private sector.

bIncludes various OMB approved approaches.

 Appendix V: Disposition of Competable Commercial FTEs Where Studies Completed

Table 4: Disposition of 2003 Competable Commercial FTEs Where Studies Have Been
                                   Completed

Direct Streamlined Full conversions competitions competitionsa Otherb
Total USDA HHS DOD Education

      Number of studies        15        307        3        92    
      Total FTEs studied       150      3,256      410      620         4,436 
        In-house wins           0       3,250      290      236         3,776 
         Contract out          150        6        120      384    

      Number of studies        96        45         7        0    
      Total FTEs studied       569       645       978       0          2,192 
        In-house wins           0        614       978       0          1,592 
         Contract out          569       31         0        0    

       Number of studies          54         7           65      
       Total FTEs studied        873        298        8,822            9,993 
         In-house wins           105        298        7,423            7,826 
          Contract out           768         0         1,399            2,167 

       Number of studies         0            1             4               5 
      Total FTEs studied         0           10            220            230 
         In-house wins           0         Pending       Pending            0 
         Contract out            0         Pending       Pending            0 
           Treasury                                                 
       Number of studies         19          10             2              31 
      Total FTEs studied        290          145           47             482 
         In-house wins           0           145           19             164 
         Contract out           290           0            14             304 
              VA                                                    
       Number of studies         0            0             1               1 
      Total FTEs studied         0            0           270c            270 
         In-house wins           0            0             0               0 
         Contract out            0            0            120            120 

 Appendix V: Disposition of Competable Commercial FTEs Where Studies Completed

Direct Streamlined Full conversions competitions competitionsa Otherb
Total Total

      Number of studies       184        370        82       92    
     Total FTEs studied      1,882      4,354     10,747     620       17,603 
        In-house wins         105       4,307     8,710      236       13,358 
        Contract out         1,777       37       1,653      384        3,851 

Source: GAO analysis of agency data.

Note: The Interior Department provided aggregated data for 2003. Over this
2-year period, 2002 and 2003, it studied 2,483 FTEs. On these, 968 were
retained in-house and 1,515 were contracted out.

In addition, VA did not initiate any studies in 2002.

aThe winning MEO can require fewer FTEs than were originally performing
the function.

bIncludes various OMB approved approaches.

cThis activity had 270 FTEs at the time the study was announced in 1999.
The Most Efficient Organization provided for 120 FTEs if the work was
retained in-house. VA awarded the contract to the private sector in 2003.

Appendix VI: Evolution of OMB's FAIR Act Guidance

1998  o  	FAIR Act passed and required agencies to provide OMB an annual
inventory of their FTE positions that are not considered inherently
governmental.

o  The first submission of inventory data was 1999.

2001  o  Directed agencies to also submit a separate report listing their
inherently governmental positions.

2002  o  	Directed agencies to provide a single inventory submission that
reflects both the agency's inherently governmental FTE positions and its
commercial FTE positions. Once reviewed by OMB, agencies must provide a
listing of their commercial FTE positions to the Congress and the public.

o  	Instructed agencies that they should anticipate the possibility that
after their list of inherently governmental positions has been reviewed,
it too may be released to the public.

2003 (March)  o  	Directed agencies to submit their FAIR Act inventory in
two parts-(1) a list of commercial activities performed by FTE civilian
personnel and (2) a list of inherently governmental activities performed
by FTE civilian personnel. After OMB reviews these lists, both will be
released to the Congress and the public.

o  FTE civilian personnel. After OMB reviews these lists, both will be
released to the Congress and the public.

o  	Instructed agencies in developing their 2003 inventories to justify in
writing all commercial positions that they consider as not being
appropriate for private sector performance.

2003 (May)  o  	Provided guidance for preparing inventories, directs
agencies to annually submit inventories of (1) their commercial activities
performed by government personnel, (2) inherently governmental activities
performed by government personnel and (3) a summary report that identifies
aggregate commercial and inherently governmental inventory data.
(Contained in revised Circular A-76)

o  	Instructed agencies to justify in writing all inherently governmental
positions and all commercial positions classified as not appropriate for
private sector performance. (Contained in revised Circular A-76)

                    Source: GAO analysis of OMB information.

Appendix VII: OMB Scorecard Criteria for the Competitive Sourcing
Initiative

                           Yellow status Green status

Agency has

o  	an OMB approved "yellow" competition plan to compete commercial
activities available for competition;

o  	completed one standard competition or publicly announced standard
competitions that exceed the number of positions identified for
competition in the agency's yellow competition plan;

o  	in the past two quarters, completed 75% of streamlined competitions in
a 90-day timeframe; and

o  	in the past two quarters, canceled less than 20% of publicly announced
standard and streamlined competitions.

Agency has

o  	an OMB approved "green" competition plan to compete commercial
activities available for competition;

o  	publicly announced standard competitions in accordance with the
schedule outlined in the agency "green" competition plan;

o  	since January 2001, completed at least 10 competitions (no minimum
number of positions required per competition);

o  	in the past year, completed 90% of all standard competitions in a
12-month time frame;

o  	in the past year, completed 95% of all streamlined competitions in a
90-day timeframe;

o  	in the past year, canceled fewer than 10% of publicly announced
standard and streamlined competitions; and

o  	OMB-approved justifications for all categories of commercial
activities exempt from competition.

Source: OMB.

Appendix VIII: Strategic Approaches to Competitive Sourcing

HHS' National Institutes of Health Used Transparent Criteria to Identify
Candidates for Competitive Sourcing

Several agencies used approaches that considered and balanced multiple
agency interests within the competitive sourcing environment. The
following discussion provides a more detailed description of these
approaches.

NIH has developed a more strategic competitive sourcing approach that
includes use of software and integration of the agency's human capital and
strategic plans. According to NIH officials, in 2002, NIH appointed a
Commercial Activities Steering Committee, comprised of 14 senior level
officials, to work with NIH's 27 centers to determine the activities to be
competed under its competitive sourcing program. The committee used FAIR
Act inventory data, knowledge and experience, and a decision support
software application that provides objective and analytical results. The
software, enabled managers to respond to NIH-developed questions related
to mission effectiveness, human capital, as well as demand and risk.

              Mission effectiveness Human capital Demand and risk

o   Criticality of the   o   Annual rate of staff   o   Current capacity   
       function's role in             turnover            relative to current 
      relationship to NIH's o  Number of staff              demand for the    
             mission           performing the function         function       
o    Current state of       Match between workforce o  Long-term trend of  
      tools and technology  o        skills and           demand for function 
                                                           Normative periodic 
      used by the function         program/service     o       fluctuation in 
                                   function needs                      demand 
        Current level of                                  for function (i.e.  
o  effectiveness of the     Percent of staff in           stability of     
                            o  function who are true            demand)       
      processes used by the                                   Availability of 
            function            masters of their art   o      function in the 
                                                                  marketplace 
        Current level of         Percent of staff in        Risk to program   
o  customer satisfaction o       function from      o     integrity and    
                                                              control of      
        Current level of                                  sensitive           
o    efficiency in the      underrepresented groups    information if the  
            activity                                      function were       
           under study      o  Openness of staff in           outsourced.     
                               the function toward        
      Expected cost to            conducting a cost            Degree of      
o  maintain an                 comparison study     o  difficulty expected 
      acceptable                                              for NIH to      
                                                              manage the      
      level of performance                                  consequences of   
                                                               losing a       
                                                           cost competition   

Source: GAO analysis of NIH data.

The software assigns weights to each response-using NIH-developed
values-and generates scores for each activity under study. Committee
officials then review the scores, considering factors such as (1) the
activity's impact on NIH's mission, (2) costs, (3) socioeconomic impacts,
and (4) potential advantages to competing the activity. NIH officials also
stated that once a decision has been made to compete an activity,
consideration might be given to re-engineering the applicable business
process, whether it remains in-house or undergoes a public-private
competition. Once the Steering Committee has made its competitive

Appendix VIII: Strategic Approaches to Competitive Sourcing

sourcing decision, the Commercial Activities Review Team, with contractor
assistance, implements the committee's decisions.

Further, in an effort to add rigor to its competitive sourcing process,
NIH in a recent competition used a contractor to mitigate potential risks.
NIH convened a panel of nine experts from the Georgia Institute of
Technology to analyze and evaluate a request for proposal and its related
performance work statement concerning real estate property management
services at six installations-the estimated value of which exceed $100
million each year. In light of the risks it could encounter if the
contract were deficient from a scope, technical, business, and/or legal
standpoint, NIH asked the panel to review the request for proposal
developed in-house and determine whether or not the contract documents
were properly conceived, logically organized, clearly written, and
sufficiently complete and accurate. As a result of its analysis, the panel
identified several areas where the request for proposal and performance
work statement subjected NIH to risks. NIH officials reviewed the risk and
made appropriate changes to these documents.

Finally, NIH officials sought advice and coordinated with HHS' Office of
Strategic Management and Planning and Human Capital Office to link their
competitive sourcing program to HHS' strategic and human capital plans.

Internal Revenue Service Uses Business Case Analysis and an Enterprisewide
Approach

According to an IRS official, IRS, a bureau within the Department of the
Treasury, developed a strategic approach to competitive sourcing, using a
business case analysis methodology used by leading industry firms to
determine if commercial function(s) within a business division have the
potential to create significant business process improvements along with a
sizeable return on investment. Based on the results of the business case
analyses, the Strategy and Resources Committee, headed by the Deputy
Commissioner of Operations and Support decide to compete (publicprivate
competition) or not compete the functions. According to IRS officials,
this process enhances the opportunities to make smart business decisions
aligned and supportive of the IRS Strategic Business Plan. IRS has focused
its competitive sourcing efforts primarily on more strategic and
enterprise-wide competitions because it has determined that this approach
makes more economic sense than identifying candidates in smaller groups.

The official stated that the IRS's initial step for identifying the
functions that will be considered to undergo a business case analysis is
its review of the FAIR Act inventory, which has been merged with IRS
personnel

Appendix VIII: Strategic Approaches to Competitive Sourcing

staffing database in a software application.1 This application, unique in
terms of the agencies that we reviewed, crosswalks the FAIR Act inventory
data with personnel staffing data to provide a comprehensive analysis of
the various commercial function groupings across the IRS. After
identifying these groupings, the bureau's subject matter experts and
high-level managers along with hired contractors conduct business case
analyses of these positions. As we reported, the business case analyses,
which are completed in approximately 4 to 6 months,2 calculate the
economic benefits of potential alternatives based on IRS responses to a
number of critical questions:

o  Is the function core to the mission?

o  How much does the function cost?

o  	Is there potential to reduce cost and/or improve productivity by
competing the function?

o  How does the function fit into other current or planned strategic
projects?

Based on the responses to these questions, and analyses of current
operations, market research and an MEO design, IRS calculates and
considers the economic benefits of each potential alternative and the
upfront and recurring investments required to achieve and maintain
efficiencies. IRS then makes a decision to compete or not compete based on
weighted values assigned to IRS strategic business alignment, investment
risks, return on investment, FAIR Act goal alignment, and alignment with
President's Management Agenda goals. A key success factor to this approach
is an expert validation of the assumptions used in the business case as
well as the inclusion of significant direct and indirect costs associated
with the function.

According to an IRS official, if competing a function makes the best
business sense, IRS appoints a team leader who selects a team and obtains

1 In its report The Accuracy of the Federal Activities Inventory Can Be
Improved (Reference Number: 2003-10-181, Washington, D.C.: Aug. 2003),
Treasury's Office of the Inspector General found that overall the IRS
needs to improve its compliance with FAIR Act requirements and recommended
that the Director, Competitive Sourcing Program provide the business units
with specific guidance for categorizing activities as commercial or
inherently governmental, including supplemental definitions to assist
business units in using Function Codes properly and consistently IRS-wide.
Other recommendations included the development of an IRS -wide process for
assembling the FAIR Act inventory and a methodology for properly
calculating FTEs.

2 According to an IRS official, the average contractor cost to support
business case studies ranges from $150,000 to $350,000, depending on the
number of FTE positions analyzed.

Appendix VIII: Strategic Approaches to Competitive Sourcing

contractor support to plan and develop the performance work statement.
Throughout the entire business case analysis and competitive sourcing
lifecycle, the IRS Office of Competitive Sourcing is engaged and provides
support to the various teams.

Officials from IRS' competitive sourcing program cited many benefits from
the business case approach used during the preliminary planning stage:
up-front consideration of major decision variables such as economics,
market research and risk; involvement of top level management and
leadership at the very early stages of the process; an opportunity to test
candidate projects against strategic goals and performance improvement
objectives; and a low investment requirement to qualify or reject an
activity as a competitive sourcing project. According to an IRS official,
while the time and cost to make a decision to compete or not to compete
may seem excessive, once IRS conducts a public - private competition, they
have confidence in the business case projected return-on-investment and an
understanding of why conducting a particular set of business functions
fits into the IRS strategic plan for business improvements and human
capital goals.

Army's "Core-Non-Core" Approach for Classifying Positions

The Army's experience in using a strategic approach to classify positions
offers lessons for other agencies in identifying positions for competitive
sourcing studies. The Army's attempt to focus on determining whether
functions were core or non-core to the agency's mission found that such a
distinction did not, by itself, adequately inform sourcing decisions. For
example, the Army's core competency review showed that designating a
function as "core" does not necessarily mean that in-house employees
should perform a function or necessarily preclude competitive sourcing of
the function. As we reported, Army officials found that other factors,
such as risk and operational considerations, must also be considered.3

The Army's effort assumed that all commercial positions were non-core to
its mission and thus potential candidates for performance by the private
sector or other government agencies. However, Army officials recognized
that, in many instances, these "non-core" functions would require
additional analysis to determine potential risks if the function were
contracted. There are four categories of risk analysis: force management,

3 GAO-03-818.

Appendix VIII: Strategic Approaches to Competitive Sourcing

operational, future challenges, and institutional.4 For example, Army
officials determined that many medical functions, which are not classified
as inherently governmental, could be considered core in some
circumstances. Although medical functions typically do not require unique
military knowledge or skills, medical activities in theater need to be
performed by in-house personnel because contracting for medical support in
host nations could present significant risk to U.S. armed forces.
Consequently, the Army has determined that the in-theater medical mission
is a critical element of the Army's ability to accomplish its core
competencies. Other medical functions could be considered both core and
non-core. For example, optical fabrication-the ability to produce
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, the same function performed in the
United States is not core. The Army also determined that its casualty and
mortuary affairs function is not a core or an inherently governmental
function. However, national policy dictates that Army officials notify
families of a casualty in-person.

Education's "One-ED" Approach Seeks to Integrate Competitive Sourcing with
Other Initiatives

In June 2002, the Department of Education launched, with OMB approval, an
ambitious management reform known as the "One-ED" concept. One-ED seeks to
transform departmental operations through the integration of human capital
reform, competitive sourcing, and organizational restructuring.

As part of its One-ED approach the Department developed its FAIR Act
inventory by first analyzing key processes. It then used the results of
this process to restructure positions as either commercial or inherently
governmental. As a result of this process, Education's reported inventory

4 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.

Appendix VIII: Strategic Approaches to Competitive Sourcing

data have changed significantly in the past few years,5 and according to
senior officials, the data are now more accurate and concise.

One-ED reviews cover selected elements of major departmental operations
and are being implemented in four phases over a period of three years. In
each phase, the Department (1) identifies specific business functions for
review, (2) conducts a business case analysis of each function, and (3)
decides whether to re-engineer the function or compete it with the private
sector.

Phase I, which concluded in mid-2003, focused on agency-wide support
functions, such as human resources, payment processing, and legal review.
As a result, five agency-wide support functions will be competed with the
private sector and four will be re-engineered and retained in-house. In
making this decision, nine teams-comprised of approximately sixty
employees knowledgeable about the function being studied and assisted by
contractor personnel trained in developing business case analyses reviewed
the functions and reported their findings to senior management. These
teams considered such factors as the

o  	skill sets and competencies required to perform the functions being
reviewed,

o  potential risks associated with outsourcing the position, and

o  	relationship of the business function to the Department's strategic
planning.

5 In the 2000 inventory, department employees were placed into 225
functional categories; today, 65 percent of the Department of Education
employees fall into only 15 functional categories.

Appendix VIII: Strategic Approaches to Competitive Sourcing

An Executive Management Team-chaired by the Deputy Secretary and staffed
by senior Department officials-made the final determination using the
information developed by the teams as well as other data. The Department
initiated four standard competitions and one streamlined competition in
fiscal year 2003. In addition, the Department is in the process of
implementing proposals related to those business functions that were
identified for in-house re-engineering. These projects were not completed
at the time of our review. The Department's Office of Inspector General
will report on its assessment on the implementation of the One-ED
initiative in early 2004.

Appendix IX: Comments from the Department of Health & Human Services

Appendix XI: Comments from the Department of Veterans Affairs

GAO's Mission

Obtaining Copies of GAO Reports and Testimony

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 e-mail alerts" under the "Order GAO Products"
heading.

Order by Mail or Phone 	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:

To Report Fraud, Web site: www.gao.gov/fraudnet/fraudnet.htm

Waste, and Abuse in E-mail: [email protected]

Federal Programs Automated answering system: (800) 424-5454 or (202)
512-7470

Jeff Nelligan, Managing Director, [email protected] (202) 512-4800

Public Affairs 	U.S. General Accounting Office, 441 G Street NW, Room 7149
Washington, D.C. 20548
*** End of document. ***