DOD Competitive Sourcing: Some Progress, but Continuing Challenges Remain
in Meeting Program Goals (Letter Report, 08/08/2000, GAO/NSIAD-00-106).

Pursuant to a congressional request, GAO reviewed the Department of
Defense's (DOD) progress in implementing its A-76 program and the impact
of strategic sourcing on the program, focusing on: (1) progress DOD has
made in achieving its A-76 goals and the extent to which strategic
sourcing is affecting these goals; and (2) the extent to which savings
from A-76 and strategic sourcing are likely to be achieved.

GAO noted that: (1) DOD has made progress in implementing its A-76
program, but it has not advanced as quickly as initially expected; (2)
while the goals have changed over time, DOD now projects studying
activities which would encompass about 203,000 positions under A-76
during fiscal years 1997-2005; (3) also, because they could not identify
activities with enough positions to study under the A-76 program, most
of DOD components are planning to use the broader strategic sourcing
approach to meet some of the study goals previously associated with just
the A-76 program; (4) however, to date, only the Navy has identified
specific strategic sourcing goals; it plans to review activities
involving about 42,000 positions under this expanded program, including
some positions previously targeted for A-76 studies; (5) because of the
Navy's shift in emphasis DOD is now planning to study activities
involving about 25,000 fewer positions under A-76 during fiscal years
1997-2005--a reduction of about 11 percent of the 229,000 previously
reported; (6) however, the A-76 studies are taking longer than the
expected average of 2 years to complete; (7) GAO's work continues to
show that while savings are being achieved, DOD's savings estimates are
overstated, at least in the short term, and that strategic sourcing has
added to uncertainties regarding the overall magnitude of savings; (8)
DOD projects the A-76 program will generate savings of about $9.2
billion during the period 1997-2005, with recurring savings of almost
$2.8 billion each year thereafter; (9) together, the A-76 and strategic
sourcing study goals are expected to produce an estimated cumulative
savings of almost $11.7 billion, with about $3.5 billion in recurring
savings; (10) however, these estimates do not fully account for costs
associated with completing the studies or implementing the results,
which will reduce the amount of savings realized in the short term; (11)
DOD components have begun to reduce their operating budgets based on
projected savings from these programs; (12) in addition, the services
are not planning to reduce military personnel end-strength as a result
of these studies; (13) rather, the services will reinvest military
spaces freed up as the result of these studies in other areas where
personnel shortfalls exist; and (14) this practice will make additional
funding for operation and maintenance accounts necessary to fund
replacement civilian or contractor personnel.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-00-106
     TITLE:  DOD Competitive Sourcing: Some Progress, but Continuing
	     Challenges Remain in Meeting Program Goals
      DATE:  08/08/2000
   SUBJECT:  Military downsizing
	     Reductions in force
	     Human resources utilization
	     Reengineering (management)
	     Cost effectiveness analysis
	     Privatization
IDENTIFIER:  OMB Circular A-76 Program

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GAO/NSIAD-00-106

Appendix I: Scope and Methodology

24

Appendix II: The A-76 Process

26

Appendix III: Strategic Sourcing

30

Appendix IV: Comments From the Department of Defense

34

Appendix V: GAO Contacts and Staff Acknowledgments

36

37

Table 1: DOD Positions Planned for A-76 and Strategic Sourcing
Studies as of February 2000 9

Table 2: Positions Announced for A-76 Studies 12

Table 3: Number of Positions for Which A-76 Studies Have Been
Completed 13

Table 4: Estimated Study and Transition Costs and Savings From
A-76 and Strategic Sourcing Studies for Fiscal Years
1997-2005 15

Figure 1: Overview of the A-76 Process 27

Figure 2: Strategic Sourcing Decision Process 31

DOD Department of Defense

OMB Office of Management and Budget

National Security and
International Affairs Division

B-285359

August 8, 2000

The Honorable Herbert H. Bateman
Chairman, Subcommittee on Military Readiness
Committee on Armed Services
House of Representatives

Dear Mr. Chairman:

Since 1995, the Department of Defense has had a significant effort under way
to use competitive sourcing under Office of Management and Budget Circular
A-76 to achieve greater organizational efficiencies and reduce operating
costs. In accordance with guidance contained in the circular, Defense
components perform studies to determine whether it would be more cost
efficient to maintain commercial activities in-house or contract with the
private sector for their performance. The Department has recently subsumed
its A-76 program under a broader initiative referred to as strategic
sourcing,1 expanding the number of positions to be studied and savings
expected to be realized. The concept of strategic sourcing extends to
activities that are considered to be inherently governmental2 and involve a
wide range of options, including restructuring or reengineering of
activities, privatization, and the termination of obsolete services or
programs. The strategic sourcing approach provides for a complete functional
or organizational assessment of functions and activities, but initially does
not involve competition between the public and private sectors. However, a
function may become a candidate for A-76 study after being reviewed under
the strategic sourcing program.

You asked us to review the Department's progress in implementing its A-76
program and the impact of strategic sourcing on the program. Accordingly, we
assessed (1) progress the Department has made in achieving its A-76 goals
and the extent to which strategic sourcing is affecting these goals and (2)
the extent to which savings from A-76 and strategic sourcing are likely to
be achieved. Our scope and methodology are included in appendix I.

The Department has made progress in implementing its A-76 program, but it
has not advanced as quickly as initially expected. While the goals have
changed over time, the Department now projects studying activities which
would encompass about 203,000 positions under A-76 during fiscal years
1997-2005. Also, because they could not identify activities with enough
positions to study under the A-76 program, most of the Defense components
are planning to use the broader strategic sourcing approach to meet some of
the study goals previously associated with just the A-76 program. However,
to date, only the Navy has identified specific strategic sourcing goals; it
plans to review activities involving about 42,000 positions under this
expanded program, including some positions previously targeted for A-76
studies. Because of the Navy's shift in emphasis, the Department is now
planning to study activities involving about 25,000 fewer positions under
A-76 during fiscal years 1997-2005--a reduction of about 11 percent of the
229,000 previously reported. The number of positions to be studied under
A-76 during this period will likely decline further when other components
submit their strategic sourcing plans. These decreases do not diminish the
fact that the Department launched
A-76 studies involving about 97,000 positions from fiscal years 1997-1999.
However, the A-76 studies are taking longer than the expected average of
2 years to complete.

Our work continues to show that while savings are being achieved, the
Department's savings estimates are overstated, at least in the short term,3
and that strategic sourcing has added to uncertainties regarding the overall
magnitude of savings. The Department projects the A-76 program will generate
savings of about $9.2 billion during the period 1997-2005, with recurring
savings of almost $2.8 billion each year thereafter. Together, the A-76 and
strategic sourcing study goals are expected to produce an estimated
cumulative savings of almost $11.7 billion, with about $3.5 billion in
recurring savings. However, these estimates do not fully account for costs
associated with completing the studies or implementing the results, which
will reduce the amount of savings realized in the short term. Also, delays
in completing the studies will postpone the realization of savings. Further,
officials from the Office of the Secretary of Defense emphasize that the
estimated costs and potential savings of strategic sourcing efforts are
difficult to project at this point. Nonetheless, Defense components have
begun to reduce their operating budgets based on projected savings from
these programs. In addition, the services are not planning to reduce
military personnel end strength as a result of these studies. Rather, the
services will reinvest military spaces freed up as the result of these
studies in other areas where personnel shortfalls exist. This practice will
make additional funding for operation and maintenance accounts necessary to
fund replacement civilian or contractor personnel.

This report contains recommendations for improving the management of the
A-76 and strategic sourcing initiatives. Overall, the Department agreed with
the report while providing some clarifications regarding selected issues.

Since 1955, the executive branch has encouraged federal agencies to obtain
commercially available goods and services from the private sector when the
agencies determined that such action was cost-effective. The Office of
Management and Budget (OMB) formalized the policy in its Circular A-76,
issued in 1966. In 1979, OMB supplemented the circular with a handbook that
included procedures for competitively determining whether commercial
activities should be performed in-house, by another federal agency through
an interservice support agreement, or by the private sector. OMB updated
this handbook in August 1983, March 1996, and June 1999. As part of this
process, the government identifies the work to be performed--described in
the performance work statement--and prepares an in-house cost estimate,
based on its most efficient organization, and compares it with the winning
offer from the private sector. From 1978-1994, competition decisions were
split about evenly between the private and public sectors. (App. II contains
a more detailed description of the
A-76 process.)

Because of lengthy time frames previously required to perform cost
comparisons, a provision was included in the Department of Defense (DOD)
Appropriations Act for Fiscal Year 19914 and in subsequent DOD
appropriations acts requiring that single function competitions (under
Circular A-76) be completed within 24 months and multifunction competitions
within 48 months.5

Administrative and legislative constraints from the late 1980s through 1995,
resulted in a lull--and even a moratorium--on awarding contracts resulting
from competitions for a time. In 1995, congressional and administration
initiatives placed more emphasis on A-76 as a means of achieving greater
economies and efficiencies in operations. The Deputy Secretary of Defense in
1995 directed the services to make outsourcing of support activities a
priority, and the effort subsequently was incorporated as a major initiative
under the Secretary's November 1997 Defense Reform Initiative.

In recent years, some in Congress have also sought to encourage greater
reliance on the private sector for commercial activities being performed by
government employees. Accordingly, Congress enacted the Federal Activities
Inventory Reform Act of 1998. The act directs federal agencies to submit to
OMB by June 30th of each year an inventory of all their activities that are
performed by federal employees but are not inherently governmental functions
and to make their inventories public. Guidance implementing the legislation
also permitted agencies to exempt many activities from competitive sourcing
consideration based on legislative restrictions, national security
considerations, and other factors.6

As we and others have reported,7 A-76 competitions can achieve savings
regardless of whether the competitions are won by the public or the private
sector. Savings may increase if multiple functions can be grouped together
under a single contract, where appropriate, rather than under multiple
contracts. Because the average military position is more costly than its
civilian equivalent, greater savings may occur if DOD converts military
support positions to civilian positions or contractor performance. However,
we have also expressed caution about whether savings as large as the DOD has
projected are likely to occur in the short term due, in part, to delays in
launching and completing these studies and the need to offset up-front
investment costs (such as the cost of conducting studies) before net savings
begin to accrue on a recurring basis.

Guidance for completing A-76 studies is contained in OMB's Circular A-76
Supplemental Handbook, which is updated periodically. The March 1996 update
clarified numerous areas, including the application of the A-76 cost
comparison requirements. The handbook's introduction describes a wide range
of options in addition to the A-76 process that government officials must
consider as they contemplate reinventing government operations. They include
consolidation, restructuring or reengineering activities, privatization,
joint ventures with the private sector, and the termination of obsolete
services.8

During fiscal year 1999, based on a request from the Navy--which was
experiencing difficulty in identifying activities involving a sufficient
number of positions to study under A-76 to meet its competitive sourcing
goals--DOD approved use of the broader reinvention options noted above to
complement the A-76 program. This larger program is commonly referred to as
strategic sourcing.

Office of the Secretary of Defense and service officials stressed that
neither the idea nor implementation of strategic sourcing is new--services
have been conducting such reviews for years as part of their manpower
management program. The officials stated that strategic sourcing provides
for smarter decisions since it addresses the question of whether an activity
should be performed before it answers the question of who should perform it.
However, the fiscal year 2001 President's budget is the first time that
strategic sourcing efforts have been counted toward the goals of the A-76
program. Appendix III provides additional information on this expanded
program.

The Department has made progress in implementing its large A-76 program that
uses competitive sourcing to gain economies and efficiencies in its
operations and to reduce support costs. However, progress has not occurred
as quickly as initially expected. Recognizing the difficulty in meeting
study targets under A-76 alone, most of the services are planning to use
strategic sourcing to help them meet the study goals previously associated
with the A-76 program. DOD's fiscal year 2001 budget request projects
studying 25,000 fewer positions under A-76 from fiscal years
1997-2005 than projected last year for fiscal years 1997-2003. However, when
its current projections for the A-76 and strategic sourcing programs are
combined, the Department's study goals are now about 16,000 positions
greater than were planned last year under the A-76 program alone. To date,
only the Navy has identified numbers of positions to be reviewed under
strategic sourcing, but other Defense components are expected to do so in
the future. This could further change the number and mix of positions
expected to be studied under A-76 and strategic sourcing. While studies
involving about 97,000 positions began in fiscal years 1997-1999, this is
significantly less than planned. Studies involving only about
12 percent of these positions have been completed.

The Department plans to study and review functions involving over 245,000
positions in its expanded program for fiscal years 1997-2005, including
203,625 government positions under the A-76 program. While still a large
program, this represents an 11-percent reduction over the Department's
stated goal last year of studying functions involving 229,000 positions
under A-76. At the same time, the Department's expanded program emphasis is
based on the Navy having identified 41,879 positions to be reviewed under
strategic sourcing, helping it to meet study and savings goals previously
planned to be realized using only A-76.

Table 1 provides detail on the number of positions DOD plans to study under
both the A-76 and strategic sourcing programs.

                                      Fiscal year
 Component by program 1997   1998   1999   2000  2001   2002   2003  2004 2005  Total
 A-76
 Army                 14,176 11,909 11,630 12,91014,781 5,726  0     0    0     71,132
 Navya                7,478  5,783  11,646 13,6897,856  23     59    0    0     46,534
 Air Forceb           3,786  9,203  9,083  8,605 5,537  4,177  3,839 42   0     44,272
 Marine Corps         0      0      2,583  2,300 2,300  0      0     0    0     7,183
 Defense agencies     1,938  3,421  6,876  8,508 4,838  1,697  2,413 2,6212,192 34,504
 Total −A-76    27,378 30,316 41,818 46,01235,312 11,623 6,311 2,6632,192 203,625
 Strategic sourcing
 Navy                 0      9,177  13,961 12,4353,691  1,365  1,250 0    0     41,879
 Total−strategic
 sourcing             0      9,177  13,961 12,4353,691  1,365  1,250 0    0     41,879
 Grand Total          27,378 39,493 55,779 58,44739,003 12,988 7,561 2,6632,192 245,504

aPositions for fiscal years 1997-1999 represent positions under study and
differ from announced positions reported in table 2.

bFigures do not include 10,000 positions from fiscal year 1993 through
fiscal year 1996 that previously have been considered part of the Air
Force's current efforts to achieve program savings.

Source: President's Budget for Fiscal Year 2001, exhibit 42.

Table 1 reflects reductions made to the Department's study projections for
fiscal years 1997-1999 since fewer A-76 studies were launched than planned.
For example, last year DOD projected it would study 52,630 positions in
fiscal year 1998 and 60,113 in fiscal year 1999 but, as table 1 indicates,
it has reduced those positions to 30,316 and 41,818 positions, respectively.
About 82 percent of the positions (200,688) identified in
table 1 are civilian positions, while about 18 percent (44,816) are military
positions. The Army and Air Force each account for about 42 percent of the
military positions to be studied.

Table 1 shows the Navy included strategic sourcing positions for review
beginning in fiscal year 1998, although the Navy did not present its
strategic sourcing plan to the Office of the Secretary of Defense until the
fiscal year 2001 budget cycle. The Navy was allowed to retroactively include
some reviews under this broader strategic sourcing program.9 This broader
thrust came about as the Navy began to execute its A-76 program and
officials had difficulty finding activities involving sufficient numbers of
positions for study. For example, the Navy planned to announce 15,000
positions in fiscal year 1998, but announced only 8,980 (about 60 percent of
planned). The Navy planned to announce 20,000 positions in fiscal year 1999,
but announced just 10,807 (about 54 percent of planned).

Currently, the Navy plans to study activities involving 46,534 positions
under A-76 from fiscal years 1997-2005, despite the fact that it had
identified about 71,500 positions as eligible for competition under the
Federal Activities Inventory Reform Act. However, Navy officials stated that
the smaller number currently planned for A-76 study reflects the
difficulties they had in ultimately determining how many positions could be
studied. They stated that many of these positions were already part of other
study initiatives, such as regionalization and consolidation. They also
noted that other factors, such as geographic location and an inability to
separate commercial from inherently governmental activities, can prevent the
packaging of some commercial positions into suitable groups for competition.
Navy officials therefore searched for another way to meet its goals.

As table 1 shows, the Navy plans to study activities involving 46,534
positions under A-76 and review activities involving 41,879 positions under
strategic sourcing, for a total of 88,413 positions from fiscal years
1997-2005. For the Navy, this represents a net increase of about
8,000positions over prior plans as reported in our February 1999 report,10
but a 42-percent reduction in positions expected to be studied under A-76
alone. Guidance issued by the Office of the Secretary of Defense11 and by
the Navy12 emphasizes that the strategic sourcing program is not intended to
be a substitute or replacement for A-76; rather, it is intended to be a
supplement to the A-76 program. Nonetheless, nearly half the total positions
the Navy plans to study are under the strategic sourcing program and, in
some instances, positions previously identified for study under A-76 have
been shifted to strategic sourcing. A senior departmental official told us
that strategic sourcing has changed the nature of the A-76 program and that,
while the Department is still committed to conducting A-76 studies,
strategic sourcing provides a broader approach to accomplish improved
performance for an entire function or organization at a reduced cost.

The Army and the Air Force have also had some difficulty identifying enough
positions to meet their A-76 goals. The Air Force sought relief through a
broader reengineering proposal, similar to the Navy's, during the prior
year's budget cycle, but Office of the Secretary of Defense officials told
us the Air Force did not have sufficient justification at that time for them
to approve the plan. However, Air Force and Army officials told us they may
seek approval to use strategic sourcing next year for approximately 14,000
and 16,000 positions, respectively.

and Completing Studies Has Fallen Short of Expectations

In our February 1999 report, we reported that DOD expected to complete more
A-76 studies over the next several years even though the services were
experiencing difficulties in meeting the previous goals. A senior official
in the Office of the Secretary of Defense agreed the program's goals are
ambitious, but told us that it was important to keep the goals at a high
level to ensure that the services strive to meet them. Even so, data show
that the services and Defense agencies continue to have difficulties meeting
their study goals. Table 2 provides information on the number of positions
announced for study13 during the previous 3 fiscal years.

                   Fiscal year
 Component         1997    1998    1999    Total
 Army              13,739  11,909  11,334  36,982
 Navy              10,663  8,980   10,807  30,450
 Air Force         3,906   8,638   8,732   21,276
 Marine Corps      0       0       3,722   3,722
 Defense agenciesa 365     2,152   2,264   4,781
 Total             28,673  31,679  36,859  97,211

Note: In some cases, positions actually announced for study differ from
initial goals or planned announcements cited in table 1 due to difficulties
encountered in identifying activities at specific locations to be studied.

aIncludes Defense Logistics Agency, Defense Finance and Accounting Service,
and Defense Commissary Agency.

Source: Military services and Defense agencies from data available as of
April 30, 2000.

The number of positions announced for study was about 65 percent of the
number of positions planned for study during the 1997-1999 period (149,783),
as reported in our February 1999 study. In addition to falling behind in its
timetable for initiating A-76 studies, the Department has also had
difficulties in completing its studies within the average 2-year goal it
established for these studies. Table 3 shows the number of positions DOD
reported were studied under the A-76 program.

                  Fiscal year
 Component         1997   1998   1999   Total
 Army              32     235    987    1,254
 Navy              94     200    1,858  2,152
 Air Force         1,503  3,675  2,212  7,390
 Marine Corps      0      0      0      0
 Defense agenciesa 357    299    316    972
 Total             1,986  4,409  5,373  11,768

Note: Includes full studies, streamlined studies, and direct conversions for
the military services. Also includes positions announced prior to 1997.

aIncludes Defense Logistics Agency, Defense Finance and Accounting Service,
and Defense Commissary Agency.

Source: Military services and Defense agencies from data available as of
April 30, 2000.

A majority of these positions (8,558) reflect full cost comparison studies
completed under the A-76 process. They also include 659 positions examined
under streamlined cost comparison studies and 2,551 positions directly
converted to or from contract performance without cost comparison studies,
as authorized under A-76 guidelines.14

While precise comparisons between fiscal years is not possible,
tables 2 and 3 provide an indication that Defense components are
experiencing difficulties in completing their A-76 studies as planned. For
example, studies involving nearly 29,000 positions were announced for study
in fiscal year 1997; however, studies involving only 11,768 positions were
completed from fiscal years 1997-1999. (Figures on studies completed during
fiscal years 1997 and 1998 would also include studies that began before
1997.)

While our work continues to show that the savings estimates are likely
overstated, at least in the short term, the Department has revised its
savings goals for A-76, combined them with projected savings from strategic
sourcing, and increased its overall savings goal for the two initiatives.
Although the Department is now giving greater recognition to the up-front
investment cost estimates associated with its A-76 studies than it did last
year, we believe these cost estimates remain understated and give an overly
optimistic picture of savings likely to be realized in the short term. The
Department also continues to have difficulties realizing its
short-term savings because of delays in launching and completing A-76
studies. Further, prospects for long-term savings are clouded by what
Department officials acknowledge are uncertainties over cost estimates and
savings associated with strategic sourcing. Nonetheless, Defense components
have begun to reduce their operating budgets based on projected savings from
these programs. In addition, the services are not planning to reduce the end
strength of their military personnel as a result of these studies, so no
budgetary savings will be generated from studying military positions.
Rather, because some of the functions previously performed by the military
personnel will need to be performed by government civilian or contractor
personnel, the result will likely be an increased requirement for the
operation and maintenance budget accounts to pay for the civilian salaries
or contracts. Some military officials expressed concern that this added cost
could adversely affect their ability to meet regular operating requirements.

Likely Impact of Investment Costs

We reported last year that DOD projected its A-76 program would realize
nearly $6 billion in savings for fiscal years 1997-2003, with over $2
billion savings expected annually thereafter. More recently, the President's
Budget for Fiscal Year 2001 expanded the time frame for completing its
studies to 2005 and projected that cumulative savings for fiscal years
1997-2005 would be about $11.7 billion--$9.2 billion for the A-76 program
and nearly
$2.5 billion for the strategic sourcing program. It projected that annual
recurring savings from both (approximately $2.8 billion from A-76 studies
and $0.7 billion from strategic sourcing studies) would total $3.5 billion
annually thereafter.

Table 4 provides the Department's current estimates of investment costs and
cumulative net savings from A-76 and strategic sourcing from fiscal years
1997-2005.

 Dollars in millions

                   Army   Navy  Air Force Marine     Defense        Total
                                          Corps      agencies
 Study costs       94     317   60        18         66             555
 Transition costsa 284    539   202       63         200            1,288
 Cumulative net
 savings           2,786  5,169 1,739     311        1,680          11,685

aTransition costs represent the costs to implement the A-76 studies,
including separation costs.

Source: President's Budget for Fiscal Year 2001, exhibit 42.

The Department has increased its estimated study costs considerably since
last year, and has given greater recognition to the estimated cost of
implementing the results of the A-76 studies, including such costs as
employee separation pay.15 Nevertheless, we found that the Department is, in
some instances, still likely underestimating these costs.

A-76 Study Costs Are Underestimated

The President's fiscal 2001 budget projections for study costs for A-76 cost
comparisons vary considerably by service, ranging from $1,321 per position
in the Army to $3,718 per position in the Navy. Likewise, the amount of
funding the services provide their subcomponents to conduct their studies
also varies. Yet various officials believe these figures underestimate the
costs of performing these studies.

The Navy and the Air Force provide their subcomponents $2,000 per position
studied, while the Army provides $1,500 per position, an amount scheduled to
increase to $2,000 beginning in fiscal year 2001. At the same time, various
Defense officials told us that the cost of conducting these studies, which
includes use of in-house personnel as well as costs of contractor personnel
used to complete the studies, is much greater than these estimates. For
example, officials at one Army major command estimated that their study
costs would be at least $7,000 per position. Another Army command estimated
the cost could be as much as $5,000 per position.16 One Navy command
estimated its costs would be at least $4,000 per position, while another
command projected its study costs to be between $8,500 and $9,500 per
position. Our own recent assessment of a sample of completed A-76 studies
within the Army, Navy, Air Force, and Defense agencies showed that the costs
ranged from an average of $364 to $9,000 per position studied.

A-76 Transition Costs May Be Underestimated

In addition to study costs, significant costs can be incurred in
implementing the results of the A-76 studies. The President's Budget for
Fiscal Year 2001 represents the first time all Defense components have
estimated costs associated with implementing the A-76 competitions. The
budget shows components have estimated a total of almost $950 million for
transition costs resulting from A-76 studies for fiscal years 1997-2005.
This includes an estimate of $284 million for the Army, $400 million for the
Navy, and $202 million for the Air Force. While we view this as a positive
step toward fully identifying costs associated with these studies, we
believe these cost estimates may still be underestimated, depending on the
number of studies completed.

Transition costs represent the separation costs for civilian Defense
employees who lose their jobs as a result of competitions won by the private
sector or when in-house organizations win the competitions and the most
efficient organizations require a smaller civilian workforce. Such
separation costs include the costs of voluntary early retirement, voluntary
separation incentives, and involuntary separations through

reduction-in-force procedures. Each service estimates the average cost per
person separated. The Army estimates this average cost to be $21,000; the
Navy and Marine Corps, $25,000; and the Air Force, $33,000.

Unlike study costs, not all positions competed will incur a separation
cost--this cost will only be generated if civilians are separated from
federal service. Based on the results of prior competitions, the Department
expects that about 50 percent of military and civilian positions studied
under A-76 will likely be eliminated. However, our examination of DOD's
fiscal year 2001 budget submission indicates that the services' estimates of
the magnitude of civilian separations and transition costs associated with
A-76 studies may be significantly underestimated.

Using the services' budget data, we calculated the number and percentage of
positions for which the services estimated separation costs and compared it
to the anticipated 50-percent separation rate mentioned above. We found that
the Air Force had identified transition costs for only
24 percent of the civilian positions planned to be studied under A-76; the
Army, 26 percent; the Marine Corps, 40 percent; and the Navy, 51 percent.
Assuming the 50-percent separation rate continues, Army and Air Force
transition costs could be nearly twice as much as their current
estimates--assuming they complete their studies as planned.

As previously noted, A-76 studies have taken longer than initially
projected, which will also delay the onset of savings. From fiscal years
1997-1999, the services announced activities involving over 97,000 positions
for study but had completed fewer than 12,000. While our work has shown that
savings are being realized from individual A-76 studies, overall program
costs to date are still exceeding realized savings.17 The President's Fiscal
Year 2001 budget submission reports that during fiscal years 1998 and 1999,
the overall costs of the A-76 program have exceeded the expected savings.18

An Army A-76 official acknowledged that A-76 studies have taken longer than
expected, and consequently savings have been delayed. He said that instead
of the expected savings of $48 million for fiscal year 1999, the Army
achieved gross savings of about $22 million. However, the $22 million
savings estimate did not include transition costs, estimated to be about
$31 million, which created a shortfall of about $9 million that year.
Nonetheless, the official predicted that in the long run, the A-76 program
would generate significant savings for the Department. Further, he said that
the Army expects to see net savings during fiscal year 2000 or 2001.

In the meantime, however, the services' operation and maintenance budgets
are being reduced in anticipation of projected savings from A-76 studies.
Estimated savings are based on average cost of salary and benefits per
position studied. The Army uses a factor of 20 percent per position planned
for study when estimating savings; the Air Force uses 25 percent; the Marine
Corps uses 30 percent. Half of the estimated savings are programmed out of
the budget in the third year of the study, and the full amount is taken
every year thereafter. The Navy previously used a factor of 30 percent, but
officials told us they now develop individual estimates for each A-76 study.
The Navy assumes these savings will begin in the third year after the
studies are begun, and budgets are reduced accordingly.

In addition to delayed savings, the reported costs of the A-76 program have
been higher than estimated, and commands have been absorbing these
additional expenses out of their current budgets as well. Various service
officials expressed concern about the impact of such reductions given their
perception that they are already operating under constrained resources in
relation to their operating requirements.

The Navy estimates that almost $2.5 billion--nearly half its projected
$5.2 billion savings from fiscal years 1997-2005--will come from the
strategic sourcing program. However, some departmental and service officials
we met with expressed concern that fewer savings could be forthcoming from
strategic sourcing and said they lack a rigorous basis for projecting costs
and savings.

Department of Defense and Navy officials acknowledge much uncertainty over
study costs and savings estimates for strategic sourcing. Data included in
the President's fiscal year 2001 budget submission indicate that the Navy
estimated that study costs and savings generated from strategic sourcing
efforts are virtually the same as those generated from A-76 studies for each
position studied. However, according to the budget submission data,
strategic sourcing efforts are expected to result in manpower savings of
less than 10 percent while A-76 studies are expected to generate manpower
savings of 60 percent.19

Office of the Secretary of Defense officials acknowledged uncertainties over
the projected costs and savings from strategic sourcing, saying that it
would likely take some years before the results of strategic sourcing
initiatives can be measured. They also noted that there is wide variation in
the types of initiatives that make up strategic sourcing, and consequently,
there can be wide variation in the resultant savings.

In general, Office of the Secretary of Defense and Navy officials expect
that savings per position reviewed under strategic sourcing will be less
than under A-76, primarily because fewer positions will be eliminated than
if a decision to contract or implement the most efficient organization were
made. Office of the Secretary of Defense officials expect that a larger
number of positions will need to be reviewed to generate the same level of
savings expected in A-76 studies.

The Army, Air Force, Navy, and Marine Corps are planning to study activities
involving a total of 44,816 military positions and will likely replace many
of these military positions with government civilian or contractor
personnel. Yet officials told us that regardless of the results of those
competitions and functional assessments, none of the services plan to reduce
the military end-strength levels resulting from these
conversions.20 Rather, the services plan to transfer the affected military
personnel and their slots to fill other priorities.

We have previously reported that the conversion of positions from military
to civilian (either government or contractor) as part of the A-76 process
could save money, assuming that the elimination of the military positions
results in corresponding reductions in the services' authorized end
strengths.21 However, currently the services do not intend to eliminate
these positions, but rather reallocate them to other areas where shortages
exist (e.g., combat and combat support). While this practice can be
considered a reasonable resource reallocation or reinvestment decision, it
does have two practical implications for costs and savings. First, while
such conversions are a relatively small part of the A-76 program at this
time, such conversions will reduce the dollar savings available to
reallocate to modernization needs since end strength is not being
eliminated. Second, such conversions will require the services to increase
their funding for operation and maintenance accounts, because it is from
those accounts the services must fund replacement civilian or contractor
personnel.22 For example, the Marine Corps, which plans to compete
activities involving
915 military positions, estimates the cost to replace its military positions
with government civilian or contractor personnel to be about $35 million
through fiscal year 2005. Various officials expressed concern about whether
adequate replacement funds were being programmed in the operation and
maintenance accounts.

The Department of Defense has established ambitious A-76 and strategic
sourcing programs, and the effects of failing to achieve its goals could be
significant. The Department is already reducing future operating budget
estimates in anticipation of savings, and such reductions can create
operational difficulties for service components. While savings are expected,
DOD's anticipated savings projections have not adequately accounted for the
estimated costs of conducting and implementing the studies, which could
significantly reduce the anticipated level of savings in the short run.
Also, cost comparison studies are likely to take longer than initially
projected, further reducing the annual savings that will be realized in the
short term. Consequently, the estimated savings from fiscal years 1997-2005
are likely overstated. In addition, rather than eliminating military
positions as a result of A-76 studies, the reallocation of military
positions to other needs will necessitate increases in operation and
maintenance accounts to provide funding for replacement government civilian
or contractor personnel.

Because of difficulties in meeting its A-76 study targets, the Department is
now permitting its components to complement this effort with its broader
strategic sourcing initiative. While this expanded emphasis has the
potential to achieve greater operating efficiencies than might have been
achieved under A-76 studies alone, this initiative will likely require even
more up-front investment costs which must be offset before net savings are
realized. Results of these reviews will require close monitoring to provide
a basis for more realistically projecting the time and resources required to
complete those studies and to identify the magnitude and timing of savings
likely to be achieved.

Considering the delays in implementing the studies and offsetting the
initial investment costs, we recommend that the Secretary of Defense require
DOD components to periodically determine if savings are being realized
commensurate with the reductions being made in the operating accounts. We
also recommend that the Secretary of Defense take steps to ensure that the
services increase funding for operation and maintenance accounts, as
necessary, to fund the civilian or contractor personnel replacing military
positions that have been transferred to meet other needs.

The Deputy Under Secretary of Defense (Installations) provided written
comments on a draft of this report. Overall, the Department of Defense
agreed with the report and generally agreed with the recommendations, while
providing additional insights concerning savings involving military
personnel. The Department also provided a number of technical comments,
which we incorporated into the report, where appropriate. DOD's overall
comments are included in appendix IV.

The Department agreed with our recommendation that DOD components should
periodically determine if savings are being realized commensurate with the
reductions being made in the operating accounts. In addition to sponsoring
studies of savings from competitions, the Department noted that it has
efforts under way to develop Activity Based Cost accounting systems, which
it believes will improve management oversight.

The Department partially agreed with the recommendation contained in our
draft report that called for DOD components to adjust their savings
estimates to reflect that military positions which are the subject of
competitive sourcing and strategic sourcing studies will be retained and
will not result in a reduction in authorized end strength. The Department
noted that these military spaces are being reinvested in other areas where
shortages exist in order to address readiness concerns. They acknowledge,
however, that this practice will require the services to provide additional
funding for operation and maintenance accounts to fund replacement
government civilian or contractor personnel in implementing the results of
the competitive and strategic sourcing studies. We have modified our
recommendation to reflect the need for the services to provide such
replacement funding.

We are providing copies of this report to Representative Solomon Ortiz,
Ranking Minority Member, Subcommittee on Military Readiness, House Committee
on Armed Services; and Senator James M. Inhofe, Chairman, and Senator
Charles Robb, Ranking Minority Member, Subcommittee on Readiness and
Management Support, Senate Committee on Armed Services. We are also sending
copies of this report to the Honorable
William S. Cohen, Secretary of Defense; the Honorable Louis Caldera,
Secretary of the Army; the Honorable F. W. Peters, Secretary of the Air
Force; the Honorable Richard Danzig, Secretary of the Navy; General James L.
Jones, Commandant of the Marine Corps; and the Honorable Jacob Lew,
Director, Office of Management and Budget. Copies will be made available to
others upon request.

If you have any questions regarding this report, please contact me on
(202) 512-8412. Other GAO contacts and other key contributors to this
assignment are listed in appendix V.

Sincerely yours,
David R. Warren, Director
Defense Management Issues

Scope and Methodology

The objectives of this report were to assess (1) progress the Department of
Defense has made in achieving its study goals and the extent to which
strategic sourcing is affecting these goals and (2) the extent to which
savings from A-76 and strategic sourcing are likely to be achieved.

To evaluate the Department's progress in achieving its study goals and
savings estimates, we met with the Deputy Under Secretary of Defense for
Acquisition Reform, the Deputy Under Secretary of Defense for Installations,
and representatives from their offices. We also contacted the Office of the
Under Secretary of Defense (Comptroller and Chief Financial Officer)
regarding the movement of money from the operation and maintenance account
to other accounts. We obtained and analyzed the planning assumptions each
military service and Defense agency used. Working with headquarters
officials from each of the services and Defense agencies, we obtained
information on the numbers of positions planned for study, which they used
as the basis for projected savings from fiscal years 1997-2005. We obtained
data on past, ongoing, and future A-76 studies from the services and Defense
agencies and estimates on savings and costs. We gathered and analyzed
information on the number of A-76 full competitions, streamlined cost
studies, and direct conversions. We considered a cost study to be completed
when an award was made to a contractor or the final decision was made to
keep the function in-house.

To assess the impact of the strategic sourcing program, we met with
responsible officials from the Office of the Secretary of Defense, the Army,
the Air Force, the Navy, and the Marine Corps. We also contacted officials
from the Defense agencies. We gathered information on plans, timetables,
goals and objectives from Navy officials. However, the Army and Air Force
were in the planning stages of their strategic sourcing programs, and could
offer little information on their objectives and timetables. The Marine
Corps had no plans to participate in strategic sourcing. Therefore, our work
was limited regarding this objective.

We performed our work at the Office of the Army Assistant Chief of Staff for
Installation Management, Pentagon; the Army Materiel Command, Alexandria,
Virginia; the Office of the Chief of Naval Operations, Logistics, Pentagon;
the Office of the Assistant Secretary of the Navy (Financial Management,
Comptroller), Pentagon; the Naval Sea Systems Command, Arlington, Virginia;
the Air Force Directorate of Manpower and Organization, Pentagon; the U.S.
Marine Corps; and the Office of the Secretary of Defense. We contacted
officials at the Defense Finance and Accounting Service, Arlington,
Virginia, and the Defense Logistics Agency, Fort Belvoir, Virginia. We also
visited and performed work at the Army Forces Command, Atlanta, Georgia; the
Army Training and Doctrine Command, Fort Monroe, Virginia; the U.S. Atlantic
Fleet, Norfolk, Virginia; the Naval Air Systems Command, Patuxent River,
Maryland; the Naval Surface Warfare Center, Crane, Indiana; the Air Force
Air Education and Training Command, San Antonio, Texas; and the Air Force
Materiel Command, Dayton, Ohio.

During the course of our study, many of the numbers changed, in part,
because of delays in reporting. Data provided in this report represent
information available as of April 30, 2000. We expect the numbers may change
again, so what we reported may not represent final figures.

We conducted our review from September 1999 through April 2000 in accordance
with generally accepted government auditing standards.

The A-76 Process

In general, the A-76 process consists of six key activities--(1) developing
a performance work statement and quality assurance surveillance plan;
(2) conducting a management study to determine the government's most
efficient organization; (3) developing an in-house government cost estimate
for the most efficient organization; (4) issuing a Request for Proposals or
Invitation for Bids; (5) evaluating the proposals or bids and comparing the
in-house estimate with a private sector offer or interservice support
agreement and selecting the winner of the cost comparison; and
(6) addressing any appeals submitted under the administrative appeals
process, which is designed to ensure that all costs are fair, accurate, and
calculated in the manner prescribed by the A-76 handbook.

Figure 1 shows an overview of the process. The solid lines indicate the
process used when the government issues an Invitation for Bids or Request
for Proposals, requesting bids or proposals on the cost of performing a
commercial activity. This type of process is normally used for more routine
commercial activities, such as grass-cutting or cafeteria operations, where
the work process and requirements are well defined. The dotted lines
indicate the additional steps that take place when the government wants to
pursue a negotiated, "best value" procurement. This type of process is often
used when the commercial activity involves high levels of complexity,
expertise, and risk.

The circular requires the government to develop a performance work
statement. This statement, which is incorporated into either the Invitation
for Bids or Request for Proposals, serves as the basis for both government
estimates and private sector offers. If the Invitation for Bids process is
used, each private sector company develops and submits a bid, giving its
price for performing the commercial activity. While this process is taking
place, the government activity performs a management study to determine the
most efficient and effective way of performing the activity with
in-house staff. Based on this "most efficient organization," the government
develops a cost estimate and submits it to the selecting authority. The
selecting authority concurrently opens the government's estimate along with
the bids of all private sector firms.

If the Request for Proposals--best value process--is used, the Federal
Acquisition Regulation and the A-76 supplemental handbook require several
additional steps. The private sector offerors submit proposals that often
include a technical performance proposal and a price. The government
prepares an in-house management plan and cost estimate based strictly on the
performance work statement. On the other hand, private sector proposals can
offer a higher level of performance or service. The government's selection
authority reviews the private sector proposals to determine which one
represents the best overall value to the government based on such
considerations as (1) performance levels, (2) proposal risk, (3) past
performance, and (4) price. After the completion of this analysis, the
selection authority prepares a written justification supporting its
decision. This includes the basis for selecting a contractor other than the
one that offered the lowest price to the government. Next, the authority
evaluates the government's most efficient organization and determines
whether it can achieve the same level of performance and quality as the
selected private sector proposal. If not, the government must then make
changes to its most efficient organization to meet the performance standards
accepted by the authority. This is intended to ensure that the
in-house cost estimate is based upon the same scope of work and performance
levels as the best value private sector offer. After the authority
determines that the most efficient organization and the private sector
proposal are based on the same level of performance, the cost estimates are
compared.

According to the Office of Management and Budget's A-76 guidance, the
activity will be converted to performance by the private sector if the
private sector offer is either lower by an amount equal to 10 percent of the
direct personnel costs of the in-house cost estimate or is $10 million less
over the performance period than the in-house estimate, whichever is less.
The Office of Management and Budget established this minimum cost
differential to ensure that the government would not convert performance for
marginal estimated savings.

Participants in the process--for either the Invitation for Bids or Request
for Proposals process--may appeal the selection authority's decision if they
believe the costs submitted by one or more of the participants were not
fair, accurate, or calculated in the manner prescribed by the A-76 handbook.

Appeals must be submitted in writing and within 20 days after the date that
all supporting documentation is made publicly available. The appeal period
may be extended to 30 days if the cost comparison is particularly complex.
Appeals are supposed to be adjudicated within 30 days after they are
received.

Strategic Sourcing

The strategic sourcing program is intended to maximize effectiveness,
efficiencies, and savings throughout the Department by providing for a
complete functional or organizational assessment of functions and activities
that are commercial, commercial but exempt from competition, and inherently
governmental.

The Strategic Sourcing Program represents another method available to the
services to help achieve their A-76 goals. Guidance from both the Office of
the Secretary of Defense and the Navy states that strategic sourcing is
consistent with the goals and objectives of the reinvention process outlined
in A-76, which allows the consideration of a wide range of options other
than A-76 cost comparisons to determine whether processes can be eliminated,
improved, or streamlined. The Office of the Secretary of Defense's interim
guidance does not mandate the use of strategic sourcing, but if strategic
sourcing is used to meet A-76 goals, it is subject to Office of the
Secretary of Defense reporting criteria and approval. The Navy's draft
guidance requires that the results from strategic sourcing be kept separate
from the A-76 results. For example, savings from strategic sourcing are to
be documented in a separate database that will track baseline data on
milestones and amount of savings.

The key step in strategic sourcing is to properly define an entire function
or activity to optimize or improve the level of performance at a reduced
cost, regardless of whether the function or activity is commercial or
inherently governmental. Through the use of an elaborate decision process,
service components can then consider a wide range of options and
combinations, including elimination of obsolete practices, consolidation,
adoption of best business practices, privatization, or competitive sourcing.
Functions that cannot be eliminated, combined, or converted to private
sector performance are candidates for functional assessments, a process
reengineering-based approach designed to achieve the most efficient
operation. Figure 2 shows a graphic of the decision process.

Source: "Strategic Sourcing Program," Department of Defense Strategic and
Competitive Sourcing Program Interim Guidance (Apr. 3, 2000).

At this time, the Navy is the only service with a definite plan to use the
strategic sourcing program to achieve the goals of the A-76 program. Naval
headquarters officials have emphasized that the strategic sourcing program
is an effort driven and endorsed by naval commands, which are also
responsible for execution and milestones. We visited two naval commands that
are performing functionality assessments on various activities--the Naval
Sea Systems Command's weapons station at Crane, Indiana, and the Naval Air
Systems Command, Patuxent, Maryland.

Crane and the Naval Air Systems Command strategic sourcing efforts are based
on reengineering processes. Crane's program, begun in fiscal year 1998, has
served as the strategic sourcing pilot for the Naval Sea Systems Command,
and its efforts contributed to the Navy's decision to pursue the use of
strategic sourcing. Crane currently has 1,949 of its 3,200 (61 percent)
employees under study in its strategic sourcing program and anticipates
cumulative savings of $158 million by fiscal year 2005. (Strategic sourcing
is taking the place of 369 positions previously projected to be studied
under A-76 at this location. Slightly more than 200 positions continue in
the A-76 process.) Naval Air Systems Command officials stated that they plan
to study 7,840 positions. The initial startup costs for the effort were
estimated at $32 million, to be funded from its operating budget. Net
savings are budgeted at about $395 million by fiscal year 2005. Although the
services have been conducting reengineering efforts for years, Office of the
Secretary of Defense officials stress the costs and amount of potential
savings of strategic sourcing is still unclear.

Both the Army and Air Force have stated their intentions to consider the use
of strategic sourcing to obtain the savings goals established for A-76
efforts. Both services are working with their major commands to identify
potential candidates for submission in the President's Budget for Fiscal
Year 2002. According to an Army program official, it is likely that the Army
will propose to study about 55,000 positions through A-76 (the total is
currently over 71,000) and about 16,000 under strategic sourcing (77 and
23 percent, respectively). While the number of potential candidates the Air
Force is considering for strategic sourcing is about 14,000 positions,
officials indicated they do not plan to lower their goal of conducting A-76
studies for 40,000 positions.

Conversely, Marine Corps officials stated they have not made any commitments
to a strategic sourcing effort at this time. According to its latest
business plan, the Marine Corps is placing a strong emphasis on A-76 as the
primary tool for efficiencies in commercial functions.

Comments From the Department of Defense

GAO Contacts and Staff Acknowledgments

Barry Holman (202) 512-5581
Marilyn Wasleski (202) 512-8436

In addition to those named above, Debra McKinney, David Rowan, and Arnett
Sanders made key contributions to this report.

Related GAO Products

Competitive Contracting: The Understandability of FAIR Act Inventories Was
Limited (GAO/GGD-00-68 , Apr. 14, 2000).

DOD Competitive Sourcing: Potential Impact on Emergency Response Operations
at Chemical Storage Facilities Is Minimal (GAO/NSIAD-00-88 , Mar. 28, 2000).

DOD Competitive Sourcing: Plan Needed to Mitigate Risks in Army Logistics
Modernization Program (GAO/NSIAD-00-19 , Oct. 04, 1999).

DOD Competitive Sourcing: Air Force Reserve Command A-76 Competitions
(GAO/NSIAD-99-235R , Sept. 13, 1999).

DOD Competitive Sourcing: Lessons Learned System Could Enhance A-76 Study
Process (GAO/NSIAD-99-152 , July 21, 1999).

Defense Reform Initiative: Organization, Status, and Challenges
(GAO/NSIAD-99-87 , Apr. 21, 1999).

Quadrennial Defense Review: Status of Efforts to Implement Personnel
Reductions in the Army Materiel Command (GAO/NSIAD-99-123 , Mar. 31, 1999).

Defense Reform Initiative: Progress, Opportunities, and Challenges
(GAO/T-NSIAD-99-95 , Mar. 2, 1999).

Force Structure: A-76 Not Applicable to Air Force 38th Engineering
Installation Wing Plan (GAO/NSIAD-99-73 , Feb. 26, 1999).

Future Years Defense Program: How Savings From Reform Initiatives Affect
DOD's 1999-2003 Program (GAO/NSIAD-99-66 , Feb. 25, 1999).

DOD Competitive Sourcing: Results of Recent Competitions
(GAO/NSIAD-99-44 , Feb. 23, 1999).

DOD Competitive Sourcing: Questions About Goals, Pace, and Risks of Key
Reform Initiative (GAO/NSIAD-99-46 , Feb. 22, 1999).

OMB Circular A-76: Oversight and Implementation Issues (GAO/T-GGD-98-146 ,
June 4, 1998).

Quadrennial Defense Review: Some Personnel Cuts and Associated Savings May
Not Be Achieved (GAO/NSIAD-98-100 , Apr. 30, 1998).

Competitive Contracting: Information Related to the Redrafts of the Freedom
From Government Competition Act (GAO/GGD/NSIAD-98-167R , Apr. 27, 1998).

Defense Outsourcing: Impact on Navy Sea-Shore Rotations (GAO/NSIAD-98-107 ,
Apr. 21, 1998)

Defense Infrastructure: Challenges Facing DOD in Implementing Defense Reform
Initiatives (GAO/T-NSIAD-98-115 , Mar. 18, 1998).

Defense Management: Challenges Facing DOD in Implementing Defense Reform
Initiatives (GAO/T-NSIAD/AIMD-98-122 , Mar. 13, 1998).

Base Operations: DOD's Use of Single Contracts for Multiple Support Services
(GAO/NSIAD-98-82 , Feb. 27, 1998).

Defense Outsourcing: Better Data Needed to Support Overhead Rates for A-76
Studies (GAO/NSIAD-98-62 , Feb. 27, 1998).

Outsourcing DOD Logistics: Savings Achievable but Defense Science Board's
Projections Are Overstated (GAO/NSIAD-98-48 , Dec. 8, 1997).

Financial Management: Outsourcing of Finance and Accounting Functions
(GAO/AIMD/NSIAD-98-43 , Oct. 17, 1997).

Base Operations: Contracting for Firefighters and Security Guards
(GAO/NSIAD-97-200BR, Sept. 12, 1997).

Terms Related to Privatization Activities and Processes (GAO/GGD-97-121,
July 1997).

Defense Outsourcing: Challenges Facing DOD as It Attempts to Save Billions
in Infrastructure Costs (GAO/T-NSIAD-97-110, Mar. 12, 1997).

Base Operations: Challenges Confronting DOD as It Renews Emphasis on
Outsourcing (GAO/NSIAD-97-86, Mar. 11, 1997).

Public-Private Mix: Effectiveness and Performance of GSA's In-House and
Contracted Services (GAO/GGD-95-204, Sept. 29, 1995).

Government Contractors: An Overview of the Federal Contracting-Out Program
(GAO/T-GGD-95-131, Mar. 29, 1995).

Government Contractors: Are Service Contractors Performing Inherently
Governmental Functions (GAO/GGD-92-11, Nov. 18, 1991).

OMB Circular A-76: Legislation Has Curbed Many Cost Studies in Military
Services (GAO/GGD-91-100, July 30, 1991).

OMB Circular A-76: DOD's Reported Savings Figures Are Incomplete and
Inaccurate (GAO/GGD-90-58, Mar. 15, 1990).

(709449)

Table 1: DOD Positions Planned for A-76 and Strategic Sourcing
Studies as of February 2000 9

Table 2: Positions Announced for A-76 Studies 12

Table 3: Number of Positions for Which A-76 Studies Have Been
Completed 13

Table 4: Estimated Study and Transition Costs and Savings From
A-76 and Strategic Sourcing Studies for Fiscal Years
1997-2005 15

Figure 1: Overview of the A-76 Process 27

Figure 2: Strategic Sourcing Decision Process 31

  

1. While strategic sourcing includes A-76 studies, the Department commonly
uses the term to refer to all reinvention efforts other than A-76. For
purposes of this report, our reference to strategic sourcing will not
include A-76 studies.

2. The A-76 Supplemental Handbook defines an inherently governmental
activity as "one that is so intimately related to the exercise of the public
interest as to mandate performance by Federal employees." Positions deemed
inherently governmental are not subject to the A-76 program.

3. For purposes of this report, we consider the short term to be until the
program reaches a steady state of recurring savings.

4. Section 887, P.L. 101-511.

5. A single function competition could, for example, involve studying the
custodial services at an installation, while a multifunction competition
could involve studying both custodial services and refuse collection and
disposal services.

6. DOD's initial Federal Activities Inventory Reform Act inventory
identified 308,000 positions potentially subject to competitive sourcing
consideration. Even then, as discussed later in this report, the location of
these positions and the organizations to which they are assigned, and other
factors, could affect how many of them are ultimately studied for potential
contracting. We have a separate review under way that contrasts the
Department's development of this inventory with an earlier effort under a
Defense Reform Initiative Directive.

7. A complete list of recent GAO reports and testimonies dealing with DOD
competitive sourcing is included at the end of this report.

8. DOD includes all of these options in its strategic sourcing program.

9. An Office of the Secretary of Defense official told us that the inclusion
of strategic sourcing studies in fiscal years 1998 and 1999 was based on
initiatives that were ongoing but from which projected savings had not been
included in other programs.

10. See DOD Competitive Sourcing: Questions About Goals, Pace, and Risks of
Key Reform Initiative (GAO/NSIAD-99-46 , Feb. 22, 1999).

11. "Strategic Sourcing Program," Department of Defense Strategic and
Competitive Sourcing Program Interim Guidance, April 3, 2000.

12. "Strategic Sourcing: A Broader Approach−A Guide to Conducting
Functionality Assessments" (Draft) Department of the Navy Strategic Sourcing
Support Office (Jan. 2000).

13. DOD considers a study to be announced once it has given notice to
Congress of its intent to study a particular function at a particular
location.

14. The Circular A-76 Revised Supplemental Handbook provides streamlined
cost comparison procedures that may be used for activities involving 65
full-time equivalent positions or less, and permits the direct conversion of
a function with 10 full-time equivalents or less without cost comparison.
Also, military positions may be directly converted without A-76 cost
studies.

15. Only the Navy previously considered separation costs in calculating its
savings estimates.

16. A U.S. Army Audit Agency report estimated that the cost of an A-76 study
at one installation in this command was nearly $5,000 per position for the
first phase of the study. Phase I, completed from January 6, 1997, through
September 30, 1998, ended with the receipt of industry proposals. Army
officials told us these study costs are not representative of the whole
Army; therefore, results of this study should not be generalized to the
Army's entire A-76 program.

17. We are now conducting a separate review examining the accuracy of the
Department's savings estimates.

18. The Air Force, which reported savings in fiscal year 1998, accounted for
almost two-thirds of the completed studies as seen in table 3. The Air Force
began many of its studies before 1997 and has realized savings, in part,
because it is further along in the program.

19. We calculated these costs and savings from data reported in the
President's Budget for Fiscal Year 2001.

20. The Air Force intends to retain its military positions "until the
variance between military requirements and military authorizations (funding)
is minimal." Service officials do not know when this may occur.

21. See Base Operations: Challenges Confronting DOD as It Renews Emphasis on
Outsourcing (GAO/NSIAD-97-86 , Mar. 11, 1997).

22. The costs of military positions are funded through military personnel
appropriation accounts, whereas costs associated with government civilian or
contractor personnel are funded through operation and maintenance
appropriation accounts.
*** End of document. ***